<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 2, 1994
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 0-14804
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GENERAL ELECTRIC CAPITAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 06-1109503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
260 LONG RIDGE ROAD, STAMFORD, 06927
CONNECTICUT
(Address of principal executive offices) (Zip Code)
(203) 357-4000
(Registrant's telephone number, including area code)
</TABLE>
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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
At April 20, 1994, 101 shares of common stock with a par value of $10,000
were outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A)
AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
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TABLE OF CONTENTS
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PAGE
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PART I -- FINANCIAL INFORMATION.
Item 1. Financial Statements. 1
Item 2. Management's Discussion and Analysis of Results of Operations. 5
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges. 8
PART II -- OTHER INFORMATION.
Item 1. Legal Proceedings. 9
Item 2. Changes in Securities. 9
Item 3. Defaults Upon Senior Securities. 9
Item 4. Submission of Matters to a Vote of Security Holders. 9
Item 5. Other Information. 9
Item 6. Exhibits and Reports on Form 8-K. 9
Signatures. 10
Index to Exhibits. 11
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<PAGE> 3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
CONDENSED STATEMENT OF CURRENT AND RETAINED EARNINGS
(Unaudited)
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<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
APRIL 2, MARCH 27,
(In millions) 1994 1993
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EARNED INCOME $ 5,793 $ 4,763
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EXPENSES
Interest 2,191 1,422
Operating and administrative 1,902 1,528
Insurance losses and policyholder and annuity benefits 693 545
Provision for losses on financing receivables 170 255
Depreciation and amortization of buildings and equipment and
equipment on operating leases 394 350
Minority interest in net earnings of consolidated affiliates 24 19
-------- ---------
5,374 4,119
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EARNINGS
Earnings before income taxes 419 644
Provision for income taxes 89 193
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NET EARNINGS 330 451
Cash dividends paid (187) (150)
Retained earnings at beginning of period 8,212 7,015
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RETAINED EARNINGS AT END OF PERIOD $ 8,355 $ 7,316
-------- ---------
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See Notes to Condensed, Consolidated Financial Statements.
1
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS (Continued).
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
CONDENSED STATEMENT OF FINANCIAL POSITION
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<CAPTION>
APRIL 2, DECEMBER 31,
1994 1993
(In millions) ----------- ------------
(UNAUDITED)
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ASSETS
Cash and equivalents $ 1,235 $ 1,682
Trading securities 33,731 30,165
Investment securities 25,030 26,792
Securities purchased under agreements to resell 60,068 43,463
Financing receivables:
Time sales and loans, net of deferred income 41,989 40,748
Investment in financing leases, net of deferred income 25,794 24,930
----------- ------------
67,783 65,678
Allowance for losses on financing receivables (1,786) (1,730)
----------- ------------
Financing receivables--net 65,997 63,948
Other receivables--net 15,196 15,799
Equipment on operating leases (at cost), less accumulated
amortization of $3,439 and $3,238 11,337 10,650
Other assets 18,076 19,231
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TOTAL ASSETS $ 230,670 $211,730
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----------- ------------
LIABILITIES AND EQUITY
Notes payable within one year $ 61,105 $ 60,003
Senior notes payable after one year 26,186 25,126
Subordinated notes payable after one year 759 759
Securities sold under agreements to repurchase 63,470 56,669
Securities sold but not yet purchased--at market 25,152 15,332
Insurance reserves and annuity benefits 22,862 22,909
Other liabilities 14,606 13,414
Deferred income taxes 4,925 5,408
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Total liabilities 219,065 199,620
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Minority interest 1,534 1,301
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Capital stock 1 1
Additional paid-in capital 1,877 1,877
Retained earnings 8,355 8,212
Other (162) 719
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Total equity 10,071 10,809
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TOTAL LIABILITIES AND EQUITY $ 230,670 $211,730
----------- ------------
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See Notes to Condensed, Consolidated Financial Statements.
2
<PAGE> 5
ITEM 1. FINANCIAL STATEMENTS (Continued).
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
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FOR THE THREE MONTHS ENDED
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APRIL 2, MARCH 27,
(In millions) 1994 1993
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CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 330 $ 451
Adjustments to reconcile net earnings to cash provided from (used
for)
operating activities:
Provision for losses on financing receivables 170 255
Depreciation and amortization of buildings and equipment and
equipment on operating leases 394 350
Increase in securities activities of broker-dealer-net (3,551) (943)
Other--net 1,926 487
-------- ----------
Cash provided from (used for) operating activities (731) 600
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CASH FLOWS FROM INVESTING ACTIVITIES
Increase in loans to customers (6,387) (6,738)
Principal collections from customers 5,412 6,705
Net change in credit card receivables 247 627
Investment in assets on financing leases (1,348) (1,215)
Principal collections on financing leases 1,176 1,638
Buildings and equipment, and equipment on operating
leases -- additions (898) (722)
-- dispositions 42 299
Payments for principal businesses purchased,
net of cash acquired (565) --
Purchases of investment securities by insurance and annuity
affiliates (2,283) (1,786)
Dispositions and maturities of investment securities by insurance
and annuity affiliates 2,371 1,315
Other 1,084 1,602
-------- ----------
Cash provided from (used for) investing activities (1,149) 1,725
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in borrowings (less than 90-day maturities) 857 (3,736)
Newly issued debt -- short-term (91-365 days) 762 846
-- long-term senior 3,428 2,147
Repayments and other reductions -- short-term (3,194) (1,748)
-- long-term senior (286) (156)
Proceeds from sales of investment and annuity contracts 146 --
Redemption of investment and annuity contracts (234) --
Principal payments -- non-recourse, leveraged lease debt (99) (97)
Proceeds -- non-recourse, leveraged lease debt -- 35
Dividends paid to share owner (187) (150)
Issuance of preferred stock by consolidated affiliate 240 --
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Cash provided from (used for) financing activities 1,433 (2,859)
-------- ----------
DECREASE IN CASH AND EQUIVALENTS (447) (534)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,682 1,940
-------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,235 $ 1,406
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See Notes to Condensed, Consolidated Financial Statements.
3
<PAGE> 6
ITEM 1. FINANCIAL STATEMENTS (Continued).
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The condensed, consolidated financial statements represent a consolidation
of General Electric Capital Services, Inc. ("Corporation") and all
majority-owned and controlled affiliates ("consolidated affiliates"). All
significant transactions among the parent and consolidated affiliates have
been eliminated. In the opinion of management, all adjustments of a normal
recurring nature necessary to present a fair statement of financial position
as of April 2, 1994, the statement of cash flows for the three-month interim
periods ended April 2, 1994, and March 27, 1993, and the results of
operations for the three-month interim periods ended April 2, 1994, and
March 27, 1993, have been included. The condensed, consolidated financial
statements have been prepared in accordance with the instructions for Form
10-Q and therefore do not include some information and footnotes necessary
to constitute a complete and detailed presentation in conformity with annual
reporting requirements.
2. The results of operations for the three months ended April 2, 1994, should
not be regarded as necessarily indicative of the results that may be
expected for the entire year.
3. The ratio of earnings to fixed charges for the three months ended April 2,
1994, was 1.20. For purposes of computing the ratio, earnings consist of net
earnings adjusted for provision for income taxes, minority interest and
fixed charges. Fixed charges consist of interest on all indebtedness and
one-third of annual rentals, which the Corporation believes is a reasonable
approximation of the interest factor of such rentals.
4. First quarter 1994 net earnings included a $210 million ($350 million
pretax) charge resulting from the discovery of an irregular scheme engaged
in by the then head U.S. government securities trader at Kidder, Peabody &
Co. Incorporated, a subsidiary within the Corporation's securities
broker-dealer business, Kidder, Peabody Group Inc. (Kidder, Peabody).
Approximately $139 million of the charge related to periods prior to 1994.
4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS.
OVERVIEW
Net earnings for the first quarter of 1994 were $330 million, a $121
million decrease from the first quarter of 1993. First quarter 1994 net earnings
included a $210 million ($350 million pretax) charge resulting from the
discovery of an irregular scheme engaged in by the then head U.S. government
securities trader at Kidder, Peabody & Co. Incorporated, a subsidiary within the
Corporation's securities broker-dealer business, Kidder, Peabody Group Inc.
(Kidder, Peabody). Approximately $139 million of the charge related to periods
prior to 1994. The scheme had the effect of recording fictitious unrealized net
profits which exceeded certain actual losses, thereby misrepresenting the real
operating results of certain U.S. government securities trading activities. The
scheme was conducted within Kidder, Peabody and did not involve any customer or
counterparty. Kidder, Peabody reported the discovery of this scheme to the
Securities and Exchange Commission and the New York Stock Exchange, and is fully
cooperating with related investigations. In addition, Kidder, Peabody has
commenced its own comprehensive investigation into the matter, led by outside
counsel, to recommend steps to prevent recurrence.
The aforementioned $210 million one-time charge was partially offset by
higher earnings from the Corporation's financing businesses reflecting a higher
average level of invested assets and reduced provisions for losses on highly
leveraged transaction (HLT) investments.
OPERATING RESULTS
EARNED INCOME during the first quarter of 1994 increased $1,030 million
(22%) over the same period last year.
Earned income from the Corporation's specialized financing, mid-market
financing, consumer services and equipment management businesses increased $621
million (23%) over the comparable prior year period principally reflecting a
higher average level of invested assets resulting from both origination volume
and acquisitions of portfolios and businesses. Approximately $230 million of the
increase was generated by the Corporation's annuity business formed through two
acquisitions during the second and third quarters of 1993. Earned income from
the Corporation's specialty insurance businesses increased $63 million (6%) over
the 1993 first quarter principally reflecting growth in premium and investment
income in the private mortgage insurance business. Revenues of the securities
broker-dealer business were up $347 million despite the aforementioned one-time
pretax charge to revenue of $350 million, principally reflecting higher
investment income associated with higher average securities positions.
INTEREST EXPENSE for the first quarter of 1994 increased $769 million (54%)
over last year's comparable period. The increase reflected the effects of
additional borrowings required to finance the higher level of invested assets in
both the securities broker-dealer and financing businesses. The composite
interest rate incurred on borrowings for the first quarter of 1994 was 4.89%,
compared with 4.85% for the first quarter of 1993.
OPERATING AND ADMINISTRATIVE EXPENSE increased 25% to $1,902 million in the
first quarter of 1994, compared with the first quarter of 1993. This increase
reflected operating costs associated with the higher level of assets in the
Corporation's financing businesses and portfolios acquired over the past year,
as well as the higher volume of securities broker-dealer activity.
INSURANCE LOSSES AND POLICYHOLDER AND ANNUITY BENEFITS were $693 million
for the first quarter of 1994, a 27% increase over the first quarter of 1993,
principally as a result of annuity benefits credited to customers of the annuity
business which was acquired in 1993.
PROVISION FOR LOSSES ON FINANCING RECEIVABLES during the first quarter of
1994 was $170 million, $85 million (33%) lower than during the comparable prior
year period, principally reflecting lower provisions for losses on HLT
receivables.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(Continued).
DEPRECIATION AND AMORTIZATION OF BUILDINGS AND EQUIPMENT AND EQUIPMENT ON
OPERATING LEASES was $394 million in the first quarter of 1994, $44 million
higher than in the first quarter of 1993, reflecting higher levels of equipment
on operating leases as a result of portfolio growth and acquisitions.
PROVISION FOR INCOME TAXES for the first quarter of 1994 was $89 million
(an effective tax rate of 21%) compared with $193 million (30%) for the
comparable prior year period. The decrease in the provision for income taxes
reflects the reduction in earnings before income taxes, partially offset by the
1% increase in the federal income tax rate. The lower effective tax rate was
primarily attributable to a higher relative proportion of tax-exempt income in
relation to earnings before income taxes which were reduced because of the
aforementioned Kidder, Peabody pretax charge.
PORTFOLIO QUALITY
Financing revenues are directly related to the largest financing asset, the
portfolio of financing receivables. The portfolio, net of reserves, aggregated
$66.0 billion at April 2, 1994, an increase of $2.1 billion (3%) from year-end
1993. Related reserves were $1.8 billion (2.63% of receivables -- the same level
as at the end of 1993) and are, in management's judgment, appropriate given the
risk profile of the portfolio. A discussion of the portfolio quality of certain
elements of financing receivables and investments follows.
CONSUMER LOANS RECEIVABLE, primarily retailer and auto, were $17.6 billion
at April 2, 1994, an increase of $0.3 billion from the end of 1993. The
Corporation's investment in consumer auto finance lease receivables was $6.1
billion at April 2, 1994, compared with $5.6 billion at December 31, 1993.
Nonearning receivables were $384 million at April 2, 1994, compared with $391
million at December 31, 1993. The provision for losses on retailer and auto
financing receivables was $113 million for the first quarter of 1994,
approximately the same as for the first quarter of 1993.
COMMERCIAL REAL ESTATE LOANS classified as financing receivables by the
Commercial Real Estate business were $11.3 billion at April 2, 1994, compared
with $10.9 billion at December 31, 1993. In addition, the investment portfolio
of the Corporation's annuity business included approximately $1.1 billion of
commercial property loans. Commercial Real Estate's portfolio also included $2.4
billion of assets purchased from the Resolution Trust Corporation (RTC) and
other institutions for resale and $1.4 billion of investments in real estate
joint ventures, both of which are included in other assets. Commercial Real
Estate's foreclosed properties decreased to $84 million at April 2, 1994, from
$110 million at December 31, 1993. Nonearning and reduced earning receivables
declined to $218 million at April 2, 1994, from $272 million at the end of 1993.
Loss provisions for Commercial Real Estate loans and investments were $56
million for the first quarter of 1994, compared with $22 million for the first
quarter of 1993 reflecting higher write-offs in the first quarter of 1994,
compared with the first quarter of 1993.
HLT PORTFOLIO INVESTMENTS classified as financing receivables totaled $3.0
billion at April 2, 1994, a decrease of $0.3 billion from the end of 1993. The
April 2, 1994, balance of amounts that had been written down to estimated fair
value and carried in other assets aggregated $536 million, net of allowances, a
decrease of $8 million from the end of 1993. Nonearning and reduced earning
receivables were $139 million at April 2, 1994, the same as at year-end 1993. As
a result of a stronger economic climate and successful past actions, loss
provisions for HLT investments were insignificant during the first quarter of
1994. Such provisions were $145 million in the first quarter of 1993, comprised
of $114 million of receivable loss provisions and $31 million of loss provisions
for other investments.
OTHER FINANCING RECEIVABLES relate primarily to a diverse commercial,
industrial and equipment loan and lease portfolio. Nonearning and reduced
earning receivables in these portfolios were $97 million at April 2, 1994,
compared with $98 million at the end of 1993.
The Corporation's aggregate loans and leases to commercial airlines at
April 2, 1994, increased to approximately $6.9 billion from the December 31,
1993, balance of approximately $6.8 billion, principally as a result of
increased equipment on operating leases.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(Continued).
OTHER MATTERS
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," on
December 31, 1993, and designated all of its investment securities as
available-for-sale at both December 31, 1993, and April 2, 1994. Under SFAS No.
115, unrealized gains and losses, net of deferred taxes, on available-for-sale
securities are included in a separate component of equity. Equity included net
unrealized gains of $812 million at December 31, 1993, and net unrealized losses
of $76 million at April 2, 1994. This change principally reflected the adverse
effects of rising interest rates during the first quarter of 1994 on the fair
value of fixed income investments held by the Corporation's annuity and
insurance affiliates. SFAS No. 115 does not provide for recording liabilities of
these affiliates at fair value, which would have the opposite effect in a rising
interest rate environment. Such affiliates purchase securities with specific
maturities considering many factors, including the expected timing and amounts
of future payments for annuity and policyholder benefits and insurance losses.
As 1994 progresses, management continues to believe that the diversity and
strength of the Corporation's assets, along with vigilant attention to risk
management, positions it to deal effectively with a changing global economic
environment.
7
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EXHIBIT 12
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
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THREE MONTHS ENDED
(Dollar amounts in millions) APRIL 2, 1994
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Net earnings $ 330
Provision for income taxes 89
Minority interest in net earnings of consolidated affiliates 24
-------
Income before provision for income taxes and minority interest 443
-------
Fixed charges:
Interest 2,206
One-third of rentals 43
-------
Total fixed charges 2,249
Less capitalized interest, net of amortization 2
-------
Earnings before provision for income taxes and minority interest plus fixed
charges $2,690
-------
-------
Ratio of earnings to fixed charges 1.20
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</TABLE>
8
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Corporation is not involved in any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
Omitted.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. EXHIBITS.
Exhibit 12. Computation of ratio of earnings to fixed charges.
b. REPORTS ON FORM 8-K.
None.
9
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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.
GENERAL ELECTRIC CAPITAL SERVICES, INC.
(Registrant)
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Date: May 10, 1994 By /s/ J. A. PARKE
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J. A. Parke, Senior Vice President, Finance
(Principal Financial Officer)
Date: May 10, 1994 By /s/ J. P. MALFETTONE
-------------------------------------------------
J. P. Malfettone, Vice President and Comptroller
(Principal Accounting Officer)
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10
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GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
INDEX TO EXHIBITS
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EXHIBIT NO. PAGE NO.
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12 Computation of ratio of earnings to fixed charges 8
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11
