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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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)
DELAWARE 06-1109503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
260 LONG RIDGE ROAD,
STAMFORD, CONNECTICUT 06927 (203) 357-4000
(Address of principal (Zip Code) (Registrant's telephone
executive offices) number, including area code)
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SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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7 1/2% GUARANTEED SUBORDINATED NEW YORK STOCK EXCHANGE
NOTES DUE AUGUST 21, 2035
SECURITIES REGISTERED PURSUANT
TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
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COMMON STOCK, PAR VALUE $10,000 PER SHARE
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 | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
At March 24, 1999, 101 shares of voting common stock, which constitute all of
the outstanding common equity, with a par value of $10,000 were outstanding.
Aggregate market value of the outstanding common equity held by nonaffiliates of
the registrant at March 24, 1999. None.
DOCUMENTS INCORPORATED BY REFERENCE
The consolidated financial statements of General Electric Company, set forth in
the Annual Report on Form 10-K of General Electric Company for the year ended
December 31, 1998 are incorporated by reference into Part IV hereof.
Item 1. Business - Property and Casualty Reserves for Unpaid Claims and Claim
Expenses, set forth in the Annual Report on Form 10-K of GE Global Insurance
Holding Corporation for the year ended December 31, 1998 is incorporated by
reference into Part I hereof.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE
FORMAT.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business ............................................. 1
Item 2. Properties ........................................... 11
Item 3. Legal Proceedings .................................... 11
Item 4. Submission of Matters to a Vote of Security Holders .. 11
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters ......................... 12
Item 6. Selected Financial Data .............................. 12
Item 7. Management's Discussion and Analysis of
Results of Operations ............................... 12
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk ................................... 21
Item 8. Financial Statements and Supplementary Data .......... 22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .............. 47
PART III
Item 10. Directors and Executive Officers of the Registrant ... 47
Item 11. Executive Compensation ............................... 47
Item 12. Security Ownership of Certain Beneficial Owners
and Management ...................................... 47
Item 13. Certain Relationships and Related Transactions ....... 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ......................................... 48
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PART I
ITEM 1. BUSINESS.
GENERAL ELECTRIC CAPITAL SERVICES, INC.
General Electric Capital Services, Inc. (herein, together with its consolidated
affiliates, called "GE Capital Services", "the Corporation" or "GECS" unless the
context otherwise requires) was incorporated in 1984 in the State of Delaware.
Until February 1993, the name of the Corporation was General Electric Financial
Services, Inc. All outstanding common stock of GE Capital Services is owned by
General Electric Company, a New York corporation ("GE Company"). The business of
GE Capital Services consists of ownership of two principal subsidiaries which,
together with their affiliates, constitute GE Company's principal financial
services businesses. GE Capital Services is the sole owner of the common stock
of General Electric Capital Corporation ("GE Capital" or "GECC") and GE Global
Insurance Holding Corporation ("GE Global Insurance" or "GIH").
GE Capital Services' principal executive offices are located at 260 Long Ridge
Road, Stamford, Connecticut 06927 (Telephone number (203) 357-4000).
GENERAL ELECTRIC CAPITAL CORPORATION
GE Capital was incorporated in 1943 in the State of New York under the
provisions of the New York Banking Law relating to investment companies, as
successor to General Electric Contracts Corporation, which was formed in 1932.
The capital stock of GE Capital was contributed to GE Capital Services by GE
Company in June 1984. Until November 1987, the name of the corporation was
General Electric Credit Corporation. The business of GE Capital originally
related principally to financing the distribution and sale of consumer and other
products of GE Company. Currently, however, the types and brands of products
financed and the services offered are significantly more diversified. Very few
of the products financed by GE Capital are manufactured by GE Company.
GE Capital operates in five operating segments that are described below. These
operations are subject to a variety of regulations in their respective
jurisdictions.
Services of GE Capital are offered primarily in the United States, Canada,
Europe and the Pacific Basin. GE Capital's principal executive offices are
located at 260 Long Ridge Road, Stamford, Connecticut 06927. At December 31,
1998, GE Capital and affiliates employed approximately 82,600 persons.
GE GLOBAL INSURANCE HOLDING CORPORATION
GE Global Insurance, together with its affiliates, writes substantially all
lines of reinsurance and certain lines of property and casualty insurance. GE
Global Insurance has two principal subsidiaries, Employers Reinsurance
Corporation and Kemper Reinsurance Company. These affiliates, together with
their direct and indirect subsidiaries, reinsure property and casualty risks
written by more than 1,000 insurers around the world. They also write certain
specialty lines of insurance on a direct basis, principally excess workers'
compensation for self-insurers, medical malpractice coverage for physicians and
dentists, errors and omissions coverage for insurance agents and brokers, excess
indemnity for self-insurers of medical benefits, and libel and allied torts.
Other property and casualty affiliates write excess and surplus lines insurance
and provide reinsurance brokerage services. The life reinsurance affiliates are
engaged in the reinsurance of life insurance products, including term, whole and
universal life, annuities, group long-term health products and the provision of
financial reinsurance to life insurers.
During 1998, GE Global Insurance, either directly or through its affiliates,
acquired three major property and casualty reinsurance / insurance businesses
which strengthen its global presence in the Fortune 1000 commercial property
markets, the broker-serviced markets and the healthcare product lines.
Insurance and reinsurance operations are subject to regulation by various
insurance regulatory agencies.
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GE Global Insurance and its affiliates conduct business throughout the world
using a network of local offices. The world headquarters of GE Global Insurance
is located at 5200 Metcalf Avenue, Overland Park, Kansas 66201. At December 31,
1998, GE Global Insurance and affiliates employed approximately 4,300 persons.
Item 1. Business - Property and Casualty Reserves for Unpaid Claims and Claim
Expenses, set forth in the Annual Report on Form 10-K of GE Global Insurance
Holding Corporation for the year ended December 31, 1998, is incorporated by
reference hereto.
OPERATING SEGMENTS
The Corporation provides a wide variety of financing, asset management, and
insurance products and services which are organized into the following operating
segments:
o Consumer Services - private-label and bank credit card loans,
personal loans, time sales and revolving credit and inventory
financing for retail merchants, auto leasing and inventory
financing, mortgage servicing, and consumer savings and insurance
services.
o Equipment Management - leases, loans, sales and asset management
services for portfolios of commercial and transportation equipment,
including aircraft, trailers, auto fleets, modular space units,
railroad rolling stock, data processing equipment, containers used
on ocean-going vessels, and satellites.
o Mid-Market Financing - loans, financing and operating leases, and
other services for middle-market customers, including
manufacturers, distributors and end users, for a variety of
equipment that includes vehicles, corporate aircraft, data
processing equipment, medical and diagnostic equipment, and
equipment used in construction, manufacturing, office applications,
electronics and telecommunications activities.
o Specialized Financing - loans and financing leases for major
capital assets, including industrial facilities and equipment, and
energy-related facilities; commercial and residential real estate
loans and investments; and loans to and investments in public and
private entities in diverse industries.
o Specialty Insurance - U.S. and international multiple-line property
and casualty reinsurance; certain directly written specialty
insurance and life reinsurance; financial guaranty insurance,
principally on municipal bonds and structured finance issues;
private mortgage insurance; and creditor insurance covering
international customer loan repayments.
Refer to Item 7, "Management's Discussion and Analysis of Results of
Operations," in this Annual Report on Form 10-K for discussion of the
Corporation's Portfolio Quality. A description of the Corporation's principal
businesses by operating segment follows.
CONSUMER SERVICES
GE Financial Assurance
GE Financial Assurance ("GEFA") provides consumers financial security solutions
by selling a wide variety of insurance, investment and retirement products,
primarily in the United States and Japan. These products help consumers
accumulate wealth, transfer wealth, and protect their lifestyles and assets and
are sold through a family of regulated insurance and annuity companies.
GEFA's principal product lines are annuities (deferred and immediate; either
fixed or variable), life insurance (universal, term, ordinary and group),
guaranteed investment contracts, mutual funds, long-term care insurance,
supplemental accident and health insurance, personal lines of automobile
insurance and credit insurance. The distribution of these products is
accomplished through four distribution methods: intermediaries (brokerage
general agents, banks, securities brokerage firms, personal producing general
agents and specialized brokers), career or dedicated sales forces, marketing
through businesses and affinity groups and direct marketing.
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GEFA's principal operating companies include General Electric Capital Assurance
Company, First Colony Life Insurance Company, GE Life and Annuity Assurance
Company (formerly The Life Insurance Company of Virginia), Colonial Penn
Insurance Company, Union Fidelity Life Insurance Company, GE Edison Life
Insurance Company, established in Japan in 1998, and GE Capital Life Assurance
of New York.
GEFA headquarters are in Richmond, Virginia.
Auto Financial Services
GE Capital Auto Financial Services ("AFS") is a full service provider of
automobile financing for automobile dealers, manufacturers and their customers
in North America, and, to a lesser extent, Asia.
In the United States, AFS is one of the leading independent auto lessors for new
and used lease financing and, to a much lesser degree, sub-prime and prime
retail financing to customers. AFS also provides private-label financing for
American Isuzu Motors, Inc. and participates in a private-label purchase program
with Volvo of North America. In addition, AFS offers inventory financing
programs and direct loans to segments of the automotive industry, including
dealers and finance companies.
AFS' Asian activities include affiliates in Taiwan, Hong Kong, Thailand and
Japan. AFS also maintains additional presence in Asia through equity investments
in Indonesia, Taiwan, Singapore, Malaysia, Korea, and India.
AFS headquarters are in Barrington, Illinois.
Auto Financial Services Europe
GE Capital Auto Financial Services Europe ("AFS Europe") is a leading
independent provider of automobile financing products to automobile dealers and
their customers in Europe. Products include hire purchase, finance leases, loans
and insurance premium financing.
AFS Europe has a significant presence in 13 countries throughout Western and
Central Europe including the United Kingdom, Ireland, Portugal, France, Spain,
Italy, Sweden, Denmark, Poland, the Czech Republic, Hungary, Switzerland and
Austria.
AFS Europe headquarters are in Dublin, Ireland.
GE Card Services
GE Card Services ("CS") provides sales financing services to North American
retailers in a broad range of consumer industries. Details of financing plans
differ, but include customized private-label credit card programs with retailers
and inventory financing programs with manufacturers, distributors and retailers.
CS provides financing directly to customers of retailers or purchases the
retailers' customer receivables. Most of the retailers sell a variety of
products of various manufacturers on a time sales basis. The terms for these
financing plans differ according to the size of contract and credit standing of
the customer. CS generally maintains a security interest in the merchandise
financed. Financing is provided to consumers under contractual arrangements,
both with and without recourse to retailers. CS' wide range of financial
services includes application processing, sales authorization, statement
billings, customer services and collection services. CS provides inventory
financing for retailers primarily in the appliance and consumer electronics
industries. CS maintains a security interest in the inventory and retailers are
obliged to maintain insurance coverage for the merchandise financed.
CS also provides and services MasterCard(R) and Visa(R) credit card loan
products issued to retail customers throughout the United States. These loans
originate through loan portfolio acquisitions, direct mail campaigns,
private-label credit card loan conversions, telemarketing efforts and
point-of-sale applications. CS also issues and services the GE Capital Corporate
Card product, providing payment and information systems which help medium and
large-sized companies reduce travel costs, and the GE Capital Purchasing Card
product, which helps customers streamline their purchasing and accounts payable
processes.
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CS sold approximately $2 billion of its MasterCard(R) and Visa(R) credit card
loan portfolio in 1998 and intends to limit its future loan origination efforts
to portfolios that it retains. In connection with the 1998 sale, General
Electric has agreed to permit a third party to use its tradename in connection
with the offering of general-purpose credit cards in the United States.
CS has a noncontrolling investment in the common stock of Montgomery Ward
Holding Corp. ("MWHC"), which, together with its wholly-owned subsidiary,
Montgomery Ward & Co., Incorporated ("MWC"), is engaged in retail merchandising
and direct response marketing, the latter conducted primarily through Signature
Financial/Marketing, Inc. ("Signature"), which markets consumer club and
insurance products. CS also provides financing to customers of MWHC and
affiliates. As discussed on page 20 and in note 3 to the consolidated financial
statements, MWHC, MWC and certain of their affiliates (excluding Signature)
filed a bankruptcy petition for reorganization in 1997 and have announced plans
to emerge from bankruptcy protection in 1999.
CS headquarters are in Stamford, Connecticut.
Global Consumer Finance
GE Capital Global Consumer Finance ("GCF") is a leading provider of credit
services to non-U.S. retailers and consumers. GCF provides private-label credit
cards and proprietary credit services to retailers in Europe, Asia, and, to a
lesser extent, South America as well as offering a variety of direct-to-consumer
credit programs such as consumer loans, bankcards and credit insurance. GCF's
wide range of proprietary financial services includes private-label credit
cards, credit promotion and accounting services, billing (in the retailer's
name) and customer credit and collection services.
During 1998, GCF expanded its global presence through acquisitions including
Agrobanka in the Czech Republic, Prokredit Ltd. in Switzerland, and Koei Credit
and Lake Finance in Japan. In addition, GCF launched a bankcard joint venture in
India and a retail financing joint venture in Brazil.
GCF provides financing to consumers through operations in the United Kingdom,
Austria, France, Ireland, Germany, The Netherlands, Italy, Spain, Portugal,
Poland, Switzerland, the Czech Republic, Japan, Thailand, Hong Kong, China,
Brazil and Australia and joint ventures in Indonesia, India and Brazil.
GCF headquarters are in Stamford, Connecticut.
Mortgage Services
GE Capital Mortgage Services, Inc. ("GECMSI"), a wholly-owned affiliate of GE
Capital Mortgage Corporation, is engaged primarily in the business of
originating, purchasing, selling and servicing residential mortgage loans
collateralized by one-to-four-family homes located throughout the United States.
GECMSI obtains servicing through the origination and purchase of mortgage loans
and servicing rights, and primarily packages the loans it originates and
purchases into mortgage-backed securities which it sells to investors. GECMSI
also originates and services home equity loans.
GECMSI headquarters are in Cherry Hill, New Jersey.
EQUIPMENT MANAGEMENT
Aviation Services
GE Capital Aviation Services ("GECAS") is a global commercial aviation financial
services business that offers a broad range of financial products to airlines
and aircraft operators, owners, lenders and investors. Financial products
include financing leases, operating leases, and tax-advantaged and other
incentive-based financing. GECAS also provides asset management, marketing, and
technical support services to aircraft owners, lenders and investors.
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GECAS has firm orders and options for more than 250 new Boeing and Airbus
aircraft with deliveries scheduled through 2006. GECAS current fleet comprises
850 owned and managed aircraft leased to more than 175 customers in 58
countries.
During 1998, GECAS acquired a commercial aviation training business from
Raytheon Company. The training facility, located at London's Gatwick airport,
operates a wide range of full-flight motion simulators to train commercial
pilots and serves more than 100 airlines.
GECAS headquarters are in Stamford, Connecticut, with regional offices in
Shannon, Ireland; Miami, Florida; Vienna, Austria; Beijing and Hong Kong, China
and Singapore.
Fleet Services
GE Capital Fleet Services ("GECFS") is one of the leading corporate fleet
management companies with operations in North America, Europe, Australia, New
Zealand, Brazil and Japan with approximately 950,000 cars and trucks under lease
and service management. GECFS offers finance and operating leases to several
thousand customers with an average lease term of 36 months. The primary product
in North America is a Terminal Rental Adjustment Clause (TRAC) lease through
which the customer assumes the residual risk - that is, risk that the book value
will be greater than market value at lease termination. In Europe, the primary
product is a closed-end lease in which GECFS assumes residual risk. In addition
to the services directly associated with the lease, GECFS offers value-added
fleet management services designed to reduce customers' total fleet management
costs. These services include, among others, maintenance management programs,
accident services, national account purchasing programs, fuel programs and title
and licensing services. GECFS customer base is diversified with respect to
industry and geography and includes many Fortune 500 companies.
In 1998, GECFS expanded its fleet management services with acquisitions of fleet
logistics businesses in the United Kingdom, The Netherlands, Brazil and New
Zealand.
GECFS headquarters are in Eden Prairie, Minnesota.
Information Technology Solutions
GE Capital Information Technology Solutions ("IT Solutions") is a leading
worldwide provider of a broad array of information technology products and
services, including full life cycle services that provide customers with
cost-effective control and management of their information systems. Products
offered include desktop personal computers, client server systems, UNIX systems,
local and wide area network hardware, and software. Services offered include
network design, network support, asset management, help desk, disaster recovery,
enterprise management and financial services. IT Solutions serves commercial,
educational and governmental customers in over 20 countries. During 1998, the
company expanded its presence through acquisitions in the United States, France,
Canada, and Portugal.
IT Solutions headquarters are in Newport, Kentucky.
Transport International Pool
Transport International Pool ("TIP") is one of the global leaders in renting,
leasing, selling and financing transportation equipment. TIP's fleet of over
260,000 dry freight, refrigerated and double vans, flatbeds, intermodal assets,
and specialized trailers is available for rent, lease or purchase at over 240
locations in the United States, Europe, Canada, and Mexico. TIP's commercial
vehicle fleet of over 25,000 units is available for rent, lease, or purchase in
the United Kingdom. TIP also finances new and used trailers and buys trailer
fleets. During 1998, TIP acquired the operating assets of Trailer Leasing Co.,
Inc., a trailer rental and leasing company in the United States. TIP also
acquired a majority interest in Bay Cities Leasing LLC, a United States entity
predominately doing business as a lessor of intermodal equipment. TIP's customer
base comprises trucking companies, railroads, shipping lines, manufacturers and
retailers.
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TIP operates a European service center in Amsterdam, The Netherlands and a
commercial vehicle operations and administrative center in Manchester, England.
TIP headquarters are in Devon, Pennsylvania.
GE SeaCo/GE Capital Container Finance Corporation
In May 1998, GE Capital and Sea Containers Ltd. formed GE SeaCo SRL ("GE
SeaCo"), a joint venture which operates the combined marine container fleets of
Genstar Container Corporation ("Genstar") and Sea Containers. GE SeaCo is one of
the world's largest lessors of marine shipping containers with a combined fleet
of over 1,100,000 TEU ("twenty-foot equivalent units") of dry-cargo,
refrigerated and specialized containers for global cargo transport. Lessees are
primarily shipping lines which lease on a long-term or master lease basis.
Concurrent with the formation of the joint venture, GE Capital Container Finance
Corporation ("GECCF") was created to service the existing finance lease
portfolio formerly run by Genstar, and to provide traditional finance leases and
structured finance products to the global marine container industry.
GE SeaCo headquarters are in London, England. GECCF headquarters are in San
Francisco, California.
Penske Truck Leasing
GE Capital is a limited partner in Penske Truck Leasing ("Penske"), which
operates the second largest full-service truck leasing business and one of the
largest commercial and consumer truck rental businesses in the United States.
Penske operates through a national network of full-service truck leasing and
rental facilities. At December 31, 1998, Penske had a fleet of about 78,000
tractors, trucks and trailers in its leasing and rental fleets and provided
contract maintenance programs or other support services for about 32,000
additional vehicles.
Penske also provides dedicated logistics operations support which combines
company-employed drivers with its full-service lease vehicles to provide
dedicated contract carriage services. In addition, Penske offers supply chain
services such as distribution consulting, warehouse management and information
systems support.
Penske headquarters are in Reading, Pennsylvania.
GE American Communications
GE American Communications ("GE Americom") is a leading satellite service
supplier to a diverse array of customers, including the broadcast and cable TV
industries, broadcast radio, business information and integrated communications
services for government and commercial customers. GE Americom operates 13
communications satellites and maintains a supporting network of earth stations,
central terminal offices, and telemetry, tracking and control facilities.
GE Americom headquarters are in Princeton, New Jersey.
Railcar Services
GE Capital Railcar Services ("GERSCO") is one of the leading railcar leasing
companies in North America, with a fleet of 186,000 railcars in its total
portfolio. Serving Class 1 railroads, short-line railroads, and shippers
throughout North America, GERSCO offers one of the most diverse fleets in the
industry, and a variety of lease options.
GERSCO also owns and operates a network of railcar repair and maintenance
facilities located throughout North America. The repair facilities offer a
variety of services, ranging from light maintenance to heavy repair of damaged
railcars. The company also provides railcar management, administration and other
services.
In addition, GERSCO is a pan-European provider of rail transport services,
offering a broad range of railcar equipment and rail-related services to
railroads, shippers and other transport providers.
European sales offices are in England, France, Germany, Italy and Sweden. GERSCO
headquarters are in Chicago, Illinois.
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Modular Space
GE Capital Modular Space ("GECMS") provides commercial mobile and modular
structures for rental, lease and sale from over 100 facilities in the United
States, Europe, Canada and Mexico. The primary markets served include
construction, education, healthcare, financial, commercial, institutional and
government. GECMS products are available as custom mobile and modular buildings,
designed to customer specifications, or are available through the GECMS stock
fleet of approximately 120,000 mobile and modular units.
During 1998, GECMS continued its European growth through the acquisition of
certain units of the modular structure business of MVS GmbH. This acquisition
doubled the size of the European fleet to approximately 50,000 units.
GECMS has offices in North America and Europe. GECMS world headquarters are in
Malvern, Pennsylvania; its European headquarters are in Antwerp, Belgium.
MID-MARKET FINANCING
Commercial Equipment Financing
GE Capital Commercial Equipment Financing ("CEF") offers a broad line of
financial products including leases and loans to middle-market customers,
including manufacturers, distributors, dealers and end-users, as well as
municipal financing. Products are either held for CEF's own account or brokered
to third parties.
Generally, transactions range in size from $50 thousand to $50 million, with
financing terms from 36 to 180 months. CEF also maintains an asset management
operation that both redeploys off-lease equipment and monitors asset values. The
portfolio includes loans and leases for vehicles, manufacturing equipment,
corporate aircraft, construction equipment, medical diagnostic equipment, office
equipment, telecommunications equipment and electronics.
During 1998, CEF expanded through acquisitions including: Simuflite Training
International, Inc., a provider of advanced training to pilots and maintenance
professionals operating turbine-powered aircraft in corporate, government and
military service, located in Dallas, Texas; Barcom plc, a provider of
construction fleet management services to the mining and quarrying, civil
engineering, housing and industrial sectors, located in Wellingborough,
Northampton, United Kingdom; and MetLife Capital Corporation, a provider of
secured financing for middle-market businesses, located in Bellevue, Washington.
CEF operates from offices throughout the United States, Puerto Rico, Canada,
Mexico, Europe and Asia and through joint ventures in Indonesia and China. CEF
headquarters are in Danbury, Connecticut.
Vendor Financial Services
GE Capital Vendor Financial Services ("VFS") provides financing services to over
90 equipment manufacturers and more than 3,500 dealers in North America, Europe
and Asia. Customers include major U.S. and foreign manufacturers in a variety of
industries including information technology, office equipment, healthcare,
telecommunications, energy and industrial equipment. VFS establishes sales
financing in two ways - by forming captive partnerships with manufacturers that
do not have them, and by outsourcing captives from manufacturers that do. VFS
offers industry-specific knowledge, leading edge technology, leasing and
equipment expertise, and global capabilities. In addition, VFS provides an
expanding array of related financial services to customers including trade
payables financing.
In 1998, VFS acquired Colonial Pacific Leasing Corporation, the market leader in
indirect broker small-ticket leasing. In addition, VFS sold Digital Financial
Services (the financing captive for Digital Equipment Corporation.)
VFS has sales offices throughout the United States, Canada, Europe, Asia, and
Australia. VFS headquarters are in Danbury, Connecticut.
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European Equipment Finance
GE Capital European Equipment Finance ("EEF") is one of Europe's leading
diversified equipment leasing businesses, offering financial solutions on a
single-country or pan-European basis. Customers include manufacturers, vendors
and end-users in industries such as office imaging, materials handling,
corporate aircraft, information technology, broadcasting, machine tools,
telecommunications and transportation. Products and services include loans,
leases, off-balance sheet financing, master lease coordination and other
services, such as helping end-users increase purchasing power through financing
options and helping manufacturers and vendors offer leasing programs.
During 1998, EEF expanded through acquisitions that included WTB Westdeutsche
Kreditbank GmbH and its subsidiary WTB Leasing GmbH, leading German providers of
equipment financing and leasing products and services, and the equipment finance
operation of ABN AMRO, a leading provider of equipment financing solutions in
Sweden.
EEF operates from offices in the United Kingdom, Italy, France, Germany,
Belgium, Ireland, Portugal, Central Europe and the Nordic countries. EEF
headquarters are in Hounslow, England.
SPECIALIZED FINANCING
Real Estate
GE Capital Real Estate ("Real Estate") provides funds for the acquisition,
refinancing and renovation of a wide range of commercial and residential
properties located throughout the United States, and, to a lesser extent, in
Canada, Mexico, Europe, and the Far East. Real Estate also provides asset
management services to real estate investors and selected services to real
estate owners.
Lending is a major portion of Real Estate's business in the form of
intermediate-term senior or subordinated fixed and floating-rate loans secured
by existing income-producing commercial properties such as office buildings,
rental apartments, shopping centers, industrial buildings, mobile home parks,
hotels and warehouses. Loans range in amount from single-property mortgages
typically not less than $5 million to multi-property portfolios of several
hundred million dollars. Approximately 90% of all loans are senior mortgages.
Real Estate purchases and provides restructuring financing for portfolios of
real estate, mortgage loans, limited partnerships, and tax-exempt bonds. Real
Estate's business also includes the origination and securitization of low
leverage real estate loans, which are intended to be held less than one year
before outplacement. To a lesser degree, Real Estate provides equity capital for
real estate partnerships through the holding of limited partnership interests
and receives preferred returns; typically such investments range from $2 million
to $10 million.
Real Estate also offers a variety of real estate management services to outside
investors, institutions, corporations, investment banks, and others through its
real estate services subsidiaries. Asset management services include
acquisitions and dispositions, strategic asset management, asset restructuring,
and debt and equity management. Real Estate also provides investment products
and advisory and asset management services to pension fund clients through GE
Capital Investment Advisors, its registered investment advisor, as well as loan
administration and servicing through GE Capital Asset Management. In addition,
Real Estate offers owners of multi-family housing ways to reduce costs and
enhance value in properties by offering buying services (e.g., for appliances,
roofing).
Real Estate has offices throughout the United States, as well as in Canada,
Mexico, Australia, Japan, Sweden, France and the United Kingdom. Real Estate
headquarters are in Stamford, Connecticut.
Structured Finance Group
GE Capital Structured Finance Group ("SFG") provides specialized financial
products and services to clients in the commercial and industrial,
communications, energy, and transportation sectors, worldwide.
SFG combines industry and technical expertise with significant financial
capabilities to deliver a full range of sophisticated financial services and
products. Services include project finance (construction and term), corporate
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finance, acquisition finance and arrangement and placement services. Products
include a variety of debt and equity instruments, as well as structured
transactions, including leasing and partnerships.
SFG has regional offices in the United States, Australia, Brazil, Canada, China,
Hong Kong, Mexico, Singapore, and the United Kingdom. SFG headquarters are in
Stamford, Connecticut.
Commercial Finance
GE Capital Commercial Finance ("CF") is a leading provider of revolving and term
debt and equity to finance acquisitions, business expansion, bank refinancings,
recapitalizations and other special situations. Products also include asset
securitization facilities, capital expenditure lines and bankruptcy-related
facilities. Transactions typically range in size from under $5 million to over
$200 million.
CF's clients are owners, managers and buyers of both public and private
companies, principally manufacturers, distributors, retailers and diversified
service providers in the healthcare, retail and communications industries.
Through its Merchant Banking Group, CF provides senior debt, subordinated debt
and bridge financing to buyout and private equity firms, and co-invests equity
with buying groups or invests directly on a select basis.
CF has lending operations in 25 cities, including international offices in
Toronto, Mexico City, and London, and also has significant factoring operations
in France, Germany, the United Kingdom and Italy serving European companies and
U.S. exporters. CF headquarters are in Stamford, Connecticut.
GE Equity
GE Equity (formerly Equity Capital Group) purchases equity investments,
primarily convertible preferred and common stock investments including, in some
cases, stock warrants convertible into equity ownership. GE Equity's primary
objective is long-term capital appreciation. Investments include the retail,
financial services, healthcare, food and beverage, cable and broadcasting
industries.
The portfolio is geographically diversified with investments located throughout
the United States, as well as in Latin America, Europe and Asia.
GE Equity headquarters are in Stamford, Connecticut.
SPECIALTY INSURANCE
In addition to GE Global Insurance Holding Corporation (discussed above), GECS
principal specialty insurance businesses are as follows.
Financial Guaranty Insurance
FGIC Holdings ("FGIC"), through its subsidiary, Financial Guaranty Insurance
Company ("Financial Guaranty"), is an insurer of municipal bonds, including new
issues, bonds traded in the secondary market and bonds held in unit investment
trusts and mutual funds. Financial Guaranty also guarantees certain taxable
structured debt. The guaranteed principal, after reinsurance, amounted to
approximately $131 billion at December 31, 1998. Approximately 86% of the
business written to date by Financial Guaranty is municipal bond insurance.
FGIC subsidiaries provide a variety of services to state and local governments
and agencies, liquidity facilities in variable-rate transactions, municipal
investment products and other services.
FGIC headquarters are in New York, New York.
Mortgage Insurance
GE Capital Mortgage Insurance is engaged principally in providing residential
mortgage guaranty insurance. Operating in 25 field locations, GE Capital
Mortgage Insurance is licensed in 50 states, the District of Columbia and
9
<PAGE>
the Virgin Islands. At December 31, 1998, GE Capital Mortgage Insurance was the
mortgage insurance carrier for over 1,480,000 residential homes, with total
insurance in force aggregating approximately $153 billion and total risk in
force aggregating approximately $42 billion. When a claim is received, GE
Capital Mortgage Insurance proceeds by either paying up to a guaranteed
percentage based on the specified coverage, or paying the mortgage and
delinquent interest, taking title to the property and arranging for its sale. GE
Capital Mortgage Insurance also provides mortgage guaranty insurance in the
United Kingdom, Canada, and Australia.
GE Capital Mortgage Insurance headquarters are in Raleigh, North Carolina.
GE Insurance Holdings
GE Insurance Holdings (formerly Consolidated Financial Insurance) is a leading
specialty insurer with operations in 13 European countries, Australia and the
Philippines. GE Insurance Holdings is one of the leading payment protection
insurers in the United Kingdom and Europe. Payment protection insurance is
designed to protect customers' loan repayment obligations in the event of
unemployment, disability or death. The product is sold alongside most forms of
consumer credit through banks, building societies and finance houses.
GE Insurance Holdings also provides an extensive range of personal investment
products, including pension and purchased life annuities, home income plans and
investment bonds through a network of over 6,000 independent financial advisors
and a direct sales force, in the United Kingdom.
In addition, GE Insurance Holdings sells insurance administration services for
extended product warranty insurance and pet insurance, provides travel and
personal accident insurance, and offers the management of uninsured loss claims
on behalf of victims of traffic accidents.
GE Insurance Holdings headquarters are in London, England.
REGULATIONS AND COMPETITION
The Corporation's activities are subject to a variety of federal and state
regulations including, at the federal level, the Consumer Credit Protection Act,
the Equal Credit Opportunity Act and certain regulations issued by the Federal
Trade Commission. A majority of states have ceilings on rates chargeable to
customers in retail time sales transactions, installment loans and revolving
credit financing. Common carrier services of GE Americom are subject to
regulation by the Federal Communications Commission. Insurance and reinsurance
operations are subject to regulation by various state insurance commissions or
foreign regulatory authorities, as applicable. The Corporation's international
operations are subject to regulation in their respective jurisdictions. To date,
compliance with such regulations has not had a material adverse effect on the
Corporation's financial position or results of operations.
The businesses in which the Corporation engages are highly competitive. The
Corporation is subject to competition from various types of financial
institutions, including banks, thrifts, investment banks, broker-dealers, credit
unions, leasing companies, consumer loan companies, independent finance
companies, finance companies associated with manufacturers, insurance and
reinsurance companies.
10
<PAGE>
ITEM 2. PROPERTIES.
GE Capital Services and its subsidiaries conduct their businesses from various
facilities, most of which are leased.
ITEM 3. LEGAL PROCEEDINGS.
The Corporation is not involved in any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
See note 13 to the consolidated financial statements. The common stock of the
Corporation is owned entirely by GE Company and, therefore, there is no trading
market in such stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with the
financial statements of GE Capital Services and consolidated affiliates and the
related Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
(Dollar amounts in millions) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues ........................................... $ 48,694 $ 39,931 $ 32,713 $ 26,492 $ 19,875
Earnings from continuing operations ................ 3,796 3,256 2,817 2,415 2,085
Loss from discontinued operations <F1> ............. -- -- -- -- (1,189)
Net earnings ....................................... 3,796 3,256 2,817 2,415 896
Return on common equity <F2> <F3> .................. 23.46% 22.59% 22.24% 21.98% 20.14%
GECS ratio of earnings to fixed charges <F4> ....... 1.55 1.56 1.55 1.53 1.65
GECC ratio of earnings to fixed charges ............ 1.50 1.48 1.53 1.51 1.63
GECC ratio of debt to equity ....................... 7.86 7.45 7.84 7.59 8.43
Financing receivables - net ........................ $121,566 $103,799 $ 99,714 $ 93,272 $ 76,357
Total assets of continuing operations .............. 303,297 255,408 227,419 185,729 144,967
Short-term borrowings .............................. 113,162 95,274 77,945 62,808 57,087
Long-term senior notes ............................. 58,042 44,993 46,680 47,794 33,615
Long-term subordinated notes ....................... 996 996 996 996 697
Minority interest .................................. 3,459 3,113 2,530 2,522 1,465
Equity ............................................. 19,727 17,239 14,276 12,774 9,380
Insurance premiums written for the year ............ 11,865 9,396 8,185 6,158 3,962
<FN>
<F1> In 1994, the Corporation terminated the operations of Kidder, Peabody
Group Inc.
<F2> Equity excludes unrealized gains and losses on investment securities,
net of tax.
<F3> Return on common equity is calculated using earnings from continuing
operations. Earnings are adjusted for preferred stock dividends and
equity excludes preferred stock.
<F4> Ratio of earnings to fixed charges is calculated using earnings from
continuing operations.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS.
OVERVIEW
The Corporation's net earnings were $3.796 billion in 1998, up 17% from $3.256
billion in 1997, which increased 16% from 1996. The results reflected the
globalization and diversity of the Corporation's businesses, with double-digit
increases in each of its five segments in 1998. The improvement in earnings in
both 1998 and 1997 was largely attributable to the effects of continued asset
growth, principally from acquisitions of businesses and portfolios and higher
origination volume.
12
<PAGE>
OPERATING RESULTS
TOTAL REVENUES increased 22% to $48.7 billion in 1998, following a 22% increase
to $39.9 billion in 1997. The increases in both years reflected the
contributions of businesses acquired as well as growth in core volume.
INTEREST EXPENSE on borrowings in 1998 was $9.0 billion, 17% higher than in
1997, which was 4% higher than in 1996. The increases in 1998 and 1997 were
caused by higher average borrowings used to finance asset growth, partially
offset by the effects of lower average interest rates. The composite interest
rate was 5.92% in 1998, compared with 6.07% in 1997 and 6.24% in 1996. See page
17 for a discussion of interest rate risk management.
OPERATING AND ADMINISTRATIVE expenses were $13.8 billion in 1998, an increase
from $11.4 billion in 1997 and $9.6 billion in 1996. The increase in both 1998
and 1997 primarily reflected costs associated with acquired businesses and
portfolios, higher investment levels and increases in insurance commissions and
other costs that vary directly with increased revenues.
INSURANCE LOSSES AND POLICYHOLDER AND ANNUITY BENEFITS increased to $9.6 billion
in 1998, compared with $8.3 billion in 1997 and $6.7 billion in 1996, reflecting
effects of business acquisitions and growth in premium volume throughout the
period.
COST OF GOODS SOLD is associated with activities of the Corporation's computer
equipment distribution businesses. This cost amounted to $6.8 billion in 1998,
compared with $4.1 billion in 1997 and $1.7 billion in 1996, principally the
result of acquisition-related growth.
PROVISION FOR LOSSES ON FINANCING RECEIVABLES increased to $1.6 billion in 1998,
compared with $1.4 billion in 1997 and $1.0 billion in 1996. These provisions
principally related to private-label credit cards, bank credit cards, auto loans
and auto leases in the consumer services operations, all of which are discussed
on pages 19-20 under Financing Receivables. The increases principally reflected
higher average receivable balances and the effects of delinquency rates --
higher during 1997 and lower during 1998 -- consistent with industry experience.
DEPRECIATION AND AMORTIZATION OF BUILDINGS AND EQUIPMENT AND EQUIPMENT ON
OPERATING LEASES increased 6% to $2.6 billion in 1998, compared with $2.5
billion in 1997, a 14% increase over 1996. The increase in both years was the
result of additions to equipment on operating leases, primarily reflecting
acquisitions of vehicles and aircraft in 1998, and a shift in auto lease volume
from financing leases to operating leases and acquisitions of aircraft in 1997.
PROVISION FOR INCOME TAXES was $1.4 billion in 1998 (an effective tax rate of
26.4%), compared with $1.2 billion in 1997 (an effective tax rate of 26.4%) and
$1.2 billion in 1996 (an effective tax rate of 30.4%). The higher provision for
income taxes in 1998 primarily reflected increased pre-tax earnings subject to
statutory rates. The decreases in the 1997 provision for income taxes and
effective tax rate were primarily caused by increased tax credits and decreased
taxes on non-U.S. earnings.
Financing spreads (the excess of yields over interest rates on borrowings) were
essentially flat in 1998, 1997 and 1996, reflecting slightly lower yields offset
by decreases in borrowing rates.
OPERATING SEGMENTS
At year-end 1998, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and
Related Information, which requires segment data to be measured and analyzed on
a basis that is consistent with how business activities are reported internally
to management. Previously reported data have been restated as required by SFAS
No. 131. For additional information, see note 16 to the consolidated financial
statements.
13
<PAGE>
Revenues and net earnings of the Corporation, by operating segment, for the past
three years are summarized and discussed below.
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Consumer Services .......................... $ 15,948 $ 13,550 $ 11,109
Equipment Management ....................... 14,869 11,326 7,725
Mid-Market Financing ....................... 3,751 3,009 2,781
Specialized Financing ...................... 3,368 2,828 2,944
Specialty Insurance ........................ 10,594 8,836 8,185
All other .................................. 164 382 (31)
-------- -------- --------
Total revenues ............................. $ 48,694 $ 39,931 $ 32,713
======== ======== ========
NET EARNINGS
Consumer Services .......................... $ 797 $ 544 $ 791
Equipment Management ....................... 806 708 603
Mid-Market Financing ....................... 478 391 362
Specialized Financing ...................... 745 593 563
Specialty Insurance ........................ 1,166 973 852
All other .................................. (196) 47 (354)
-------- -------- --------
Total net earnings ......................... $ 3,796 $ 3,256 $ 2,817
======== ======== ========
</TABLE>
Consumer Services revenues increased 18% in 1998 and 22% in 1997. This growth --
largely acquisition related -- was led by higher premium and investment income
at GE Financial Assurance, the consumer savings and insurance business of GECS.
Asset growth in several of the other consumer services businesses also
contributed to the increase in 1998. Net earnings increased 47% in 1998,
following a 31% decrease in 1997. Comparisons of revenues and net earnings
throughout the period were affected by the operating results of Montgomery Ward
Holding Corp., which are discussed on page 20. Net earnings in 1998 also
reflected acquisition and core volume growth, led by the Global Consumer Finance
and GE Financial Assurance businesses. Overall gains on asset sales, including
securitizations, were higher in 1997 than in 1998; gains in 1998 included the
sale of certain bankcard assets. Net earnings in 1997 were affected by increased
automobile residual losses, partially offset by acquisition and core growth,
principally at GE Financial Assurance. A higher provision for losses on
financing receivables also affected earnings in both years, as discussed
previously.
Equipment Management revenues grew 31% in 1998, following a 47% increase in
1997, primarily as a result of acquisitions by IT Solutions and, to a lesser
extent, asset growth. Net earnings increased 14% in 1998, following a 17%
increase in 1997. Increases in both years reflected higher volumes in most
businesses resulting from origination growth and acquisitions of businesses and
portfolios, with those effects in 1998 partially offset by lower earnings at IT
Solutions and Modular Space, primarily the result of lower pricing from
competitive market conditions and higher operating expenses.
Mid-Market Financing revenues increased 25% in 1998, compared with an 8%
increase in 1997. Net earnings for these businesses grew 22% and 8% in 1998 and
1997, respectively. Asset growth resulting from higher volumes and acquisitions
of businesses and portfolios was the most significant contributing factor in
both years. Revenues and net earnings were also favorably affected in 1998 by
the disposition of certain assets.
Specialized Financing revenues rose 19% and net earnings increased 26% in 1998.
The increase in revenues reflected asset growth and a higher level of asset
gains, while the increase in net earnings included those factors as well as the
effects of certain tax-advantaged transactions and higher levels of tax credits.
Revenues decreased 4% in 1997, primarily as a result of lower investment levels.
Net earnings increased 5% in 1997 reflecting asset gains and lower levels of
asset write-offs.
Specialty Insurance revenues and net earnings both increased 20% in 1998,
following 8% revenue growth and 14% net earnings growth in 1997. The increases
in both years resulted from increased premium and investment income
14
<PAGE>
associated with origination volume, acquisitions and continued growth in the
investment portfolios, as well as a higher level of realized gains on investment
securities. Net earnings in both years were also favorably affected by improved
conditions in the Mortgage Insurance business, the result of improvements in
loss experience.
Within GE Global Insurance, the principal subsidiary of which is Employers
Reinsurance Corporation, net premiums earned increased in 1998, primarily as a
result of core and acquisition growth in both the property and casualty and life
businesses. GE Global Insurance property and casualty underwriting results
improved in 1998, reflecting a general reduction in incurred losses caused by a
decline in both the frequency and overall severity of claims, partially offset
by the effects of hurricane and other weather-related catastrophe losses. GE
Global Insurance net premiums earned on U.S. business increased in 1997 -- the
result of strong growth in the life reinsurance business -- while net premiums
earned on European business declined, reflecting the effects of currency
translation and market conditions. Property and casualty underwriting results at
GE Global Insurance decreased in 1997, reflecting increased underwriting and
operating expenses and adverse European market conditions, offset by growth in
the life reinsurance business.
All other revenues and net earnings in 1997 included asset gains, the largest of
which was $284 million (net of tax) from a transaction that included the
reduction of the GECS investment in the common stock of Paine Webber Group Inc.
INTERNATIONAL OPERATIONS
The Corporation's international operations include its operations located
outside the United States and certain of its operations that cannot be
meaningfully associated with specific geographic areas (for example, commercial
aircraft and shipping containers used on ocean-going vessels). The Corporation's
international revenues were $18.2 billion in 1998, an increase of 33% from $13.7
billion in 1997. International assets grew 36%, from $79.2 billion at year-end
1997 to $107.8 billion at the end of 1998. Revenues in Europe increased 38% in
1998, reflecting a mix of acquisition and core growth across all of the
Corporation's segments. At the same time, revenues in the Pacific Basin grew
51%, principally in Japan, and principally as a result of consumer financing
acquisitions by Global Consumer Finance and the acquisition of Toho Mutual
Life's infrastructure and sales force by GE Financial Assurance. International
revenues from the Americas (North and South America, except for the U.S.)
increased 21% in 1998, largely as a result of acquisitions and core growth in
Canada and Latin America. The increase in international assets occurred
primarily in Europe and the Pacific Basin (principally Japan) reflecting the
same factors discussed above. Overall, these increases reflect the Corporation's
continued expansion as a global provider of a wide range of services.
The Corporation's activities span all global regions and primarily encompass
leasing of aircraft and providing certain financial services within these
regional economies. As such, when certain countries or regions such as the
Pacific Basin and Latin America experience currency and/or economic stress, the
Corporation may have increased exposure to certain risks but also may have new
profit opportunities. Increased risks include, among other things, higher
receivables delinquencies and bad debts, delays or cancellation of sales and
orders principally related to aircraft-related equipment, higher local currency
financing costs and a slowdown in established financial services activities.
New profit opportunities include, among other things, more opportunities for
lower cost outsourcing, expansion of financial services activities through
purchases of companies or assets at reduced prices and lower U.S. debt financing
costs. Thus, while the Corporation's global activities warrant close monitoring
and significant management attention, regional economic disruptions had only a
modest adverse effect on the overall financial position, results of operations
and liquidity of the Corporation in 1998, and there is little change in the
outlook for 1999.
CAPITAL RESOURCES AND LIQUIDITY
STATEMENT OF FINANCIAL POSITION
INVESTMENT SECURITIES for each of the past two years comprised mainly
investment-grade debt securities held by the Corporation's specialty insurance
and annuity and investment businesses in support of obligations to policyholders
and annuitants. The increase of $8.1 billion during 1998 was principally related
to acquisitions and investment of premiums received. A breakdown of the
investment securities portfolio is provided in note 2 to the consolidated
financial statements.
15
<PAGE>
INVENTORIES were $744 million and $786 million at December 31, 1998 and 1997,
respectively. The decrease in 1998 primarily reflected improved inventory
management in the computer equipment distribution businesses.
FINANCING RECEIVABLES were $121.6 billion at year-end 1998, net of allowance for
doubtful accounts, up $17.8 billion over 1997. These receivables are discussed
on pages 19-20 and in notes 3 and 4 to the consolidated financial statements.
OTHER RECEIVABLES were $26.0 billion and $18.3 billion at December 31, 1998 and
1997, respectively. Of the 1998 increase, $3.6 billion was attributable to
acquisitions and the remainder resulted from core growth.
EQUIPMENT ON OPERATING LEASES was $20.9 billion at December 31, 1998, up $2.3
billion from 1997. Details by category of investment can be found in note 6 to
the consolidated financial statements. Additions to equipment on operating
leases, including business acquisitions, were $7.2 billion during 1998 ($6.8
billion during 1997), primarily reflecting acquisitions of vehicles and
aircraft.
INTANGIBLE ASSETS were $13.6 billion at year-end 1998, up from $10.3 billion at
year-end 1997. The $3.3 billion increase in intangible assets related primarily
to goodwill from acquisitions, the largest of which were the consumer finance
business of Lake Corporation ("Lake") in Japan and MetLife Capital in the United
States.
OTHER ASSETS totaled $35.5 billion at year-end 1998, compared with $25.7 billion
at the end of 1997. The $9.9 billion increase related principally to additional
investments in associated companies, increases in assets acquired for resale,
primarily residential mortgages, and increases in "separate accounts," which are
investments controlled by policyholders and are associated with identical
amounts reported as insurance liabilities.
INSURANCE LIABILITIES, RESERVES AND ANNUITY BENEFITS were $77.3 billion at
year-end 1998, $10.0 billion higher than in 1997. The increase was primarily
attributable to acquisitions and the increase in separate accounts. For
additional information on these liabilities, see note 11 to the consolidated
financial statements.
BORROWINGS were $172.2 billion at December 31, 1998, of which $113.2 billion is
due in 1999 and $59.0 billion is due in subsequent years. Comparable amounts at
the end of 1997 were $141.3 billion total, $95.3 billion due within one year and
$46.0 billion due thereafter. The Corporation's composite interest rates are
discussed on page 13. A large portion of the Corporation's borrowings ($87.0
billion and $71.2 billion at the end of 1998 and 1997, respectively) was issued
in active commercial paper markets that management believes will continue to be
a reliable source of short-term financing. Most of this commercial paper was
issued by GE Capital. The average remaining terms and interest rates of GE
Capital commercial paper were 45 days and 5.35% at the end of 1998, compared
with 44 days and 5.83% at the end of 1997. The GE Capital ratio of debt to
equity was 7.86 to 1 at the end of 1998 and 7.45 to 1 at the end of 1997.
GE Company has committed to contribute capital to GE Capital in the event of
either a decrease below a specified level in the ratio of GE Capital's earnings
to fixed charges, or a failure to maintain a specified debt-to-equity ratio in
the event certain GE Capital preferred stock is redeemed. GE Company also has
guaranteed the Corporation's subordinated debt with a face amount of $1.0
billion at December 31, 1998 and 1997. Management believes the likelihood that
GE Company will be required to contribute capital under either the commitments
or the guarantees is remote.
STATEMENT OF CASH FLOWS
One of the Corporation's primary sources of cash is financing activities
involving the continued rollover of short-term borrowings and appropriate
addition of borrowings with a reasonable balance of maturities. Over the past
three years, the Corporation's borrowings with maturities of 90 days or less
have increased by $40.9 billion. New borrowings of $85.2 billion having
maturities longer than 90 days were added during those years, while $78.4
billion of such longer-term borrowings were retired. The Corporation also
generated $26.9 billion of cash from continuing operating activities during the
last three years.
16
<PAGE>
The Corporation's principal use of cash has been investing in assets to grow its
businesses. Of the $69.6 billion that the Corporation invested in continuing
operations over the past three years, $10.5 billion was used for additions to
financing receivables; $18.5 billion was used to invest in new equipment,
principally for lease to others; and $25.4 billion was used for acquisitions of
new businesses, the largest of which were MetLife Capital and Lake in 1998.
With the financial flexibility that comes with excellent credit ratings,
management believes the Corporation should be well positioned to meet the global
needs of its customers for capital and to continue growing its diversified asset
base.
INTEREST RATE AND CURRENCY RISK MANAGEMENT
In normal operations, the Corporation must deal with effects of changes in
interest rates and currency exchange rates. The following discussion presents an
overview of how such changes are managed and a view of their potential effects.
A related discussion of recent developments in the global economy is provided on
page 15.
The Corporation uses various financial instruments, particularly interest rate
and currency swaps, but also futures, options and currency forwards, to manage
risks. The Corporation is exclusively an end user of these instruments, which
are commonly referred to as derivatives. The Corporation does not engage in any
trading, market-making or other speculative activities in the derivative
markets. More detailed information regarding these financial instruments, as
well as the strategies and policies for their use, is contained in notes 1, 10
and 20 to the consolidated financial statements.
The Corporation manages its exposure to changes in interest rates, in part, by
funding its assets with an appropriate mix of fixed and variable rate debt and
its exposure to currency fluctuations principally by funding local currency
denominated assets with debt denominated in those same currencies. It uses
interest rate swaps, currency swaps (including non-U.S. currency and cross
currency interest rate swaps) and currency forwards to achieve lower borrowing
costs. Substantially all of these derivatives have been designated as modifying
interest rates and/or currencies associated with specific debt instruments.
These financial instruments allow the Corporation to lower its cost of funds by
substituting credit risk for interest rate and currency risks. Since the
Corporation's principal use of such swaps is to optimize funding costs, changes
in interest rates and exchange rates underlying swaps would not be expected to
have a material impact on the Corporation's financial position or results of
operations. The Corporation conducts almost all activities with these
instruments in the over-the-counter markets.
The Corporation is exposed to prepayment risk in certain of its business
activities, such as in its mortgage servicing and annuities activities. In order
to hedge those exposures, the Corporation uses swaps, futures, and option-based
financial instruments. These instruments generally behave based on limits
("caps", "floors" or "collars") on interest rate movement. These swaps, futures
and option-based instruments are governed by the credit risk policies described
below and are transacted in either exchange-traded or over-the-counter markets.
In addition, as part of its ongoing customer activities, the Corporation may
enter into swaps that are integrated with investments in, loans to or guarantees
of the obligations of particular customers and do not involve assumption of
third-party credit risk beyond the risk previously approved by the Corporation
with respect to such investments, loans or guarantees. Such integrated swaps are
evaluated and monitored like their associated investments, loans or guarantees,
and are not therefore subject to the same credit criteria that would apply to a
stand-alone swap. All other swaps, forward contracts and other derivatives have
been designated as hedges of non-U.S. net investments or other assets.
Established practices require that derivative financial instruments relate to
specific asset, liability or equity transactions or to currency exposures.
Substantially all treasury actions are centrally executed by the Corporation's
Treasury Department, which maintains controls on all exposures, adheres to
stringent counterparty credit standards and actively monitors marketplace
exposures.
Given the ways in which the Corporation uses swaps, purchased options and
forwards, the principal risk is credit risk - risk that counterparties will be
financially unable to make payments in accordance with the agreements.
Associated market risk is meaningful only as it relates to how changes in the
market value affect credit exposure to individual
17
<PAGE>
counterparties. Except as noted above for positions that are integrated into
financings, all swaps, purchased options and forwards are carried out within the
following credit policy constraints.
o Once a counterparty reaches a credit exposure limit (see table below),
no additional transactions are permitted until the exposure with that
counterparty is reduced to an amount that is within the established
limit. Open contracts remain in force.
<TABLE>
<CAPTION>
COUNTERPARTY CREDIT CRITERIA CREDIT RATING
-----------------------
STANDARD &
MOODY'S POOR'S
---------- ----------
<S> <C> <C>
Term of transaction
Between one and five years ........... Aa3 AA-
Greater than five years .............. Aaa AAA
Credit exposure limits
Up to $50 million .................... Aa3 AA-
Up to $75 million .................... Aaa AAA
</TABLE>
o All swaps are executed under master swap agreements containing mutual
credit downgrade provisions that provide the ability to require
assignment or termination in the event either party is downgraded below
A3 or A-.
More credit latitude is permitted for transactions having original maturities
shorter than one year because of their lower risk.
The conversion of interest rate and currency risk into credit risk results in a
need to monitor counterparty credit risk actively. At December 31, 1998, the
notional amount of long-term derivatives for which the counterparty was rated
below Aa3/AA- was $3.1 billion. These amounts are primarily the result of (1)
counterparty downgrades, (2) transactions executed prior to the adoption of the
Corporation's current counterparty credit standards, and (3) transactions
relating to acquired assets or businesses.
Following is an analysis of credit risk exposures for the last three years.
<TABLE>
<CAPTION>
PERCENTAGE OF NOTIONAL DERIVATIVE EXPOSURE BY COUNTERPARTY CREDIT RATING
- --------------------------------------------------------------------------------
MOODY'S/STANDARD & POOR'S 1998 1997 1996
- ------------------------- -------- -------- --------
<S> <C> <C> <C>
Aaa/AAA .................................... 65% 75% 79%
Aa/AA ...................................... 33% 20% 16%
A/A and below .............................. 2% 5% 5%
</TABLE>
The optimal funding strategy is sometimes achieved by using multiple swaps. For
example, to obtain fixed rate U.S. dollar funding, several alternatives are
generally available. One alternative is a swap of non-U.S. dollar denominated
fixed rate debt into U.S. dollars. The synthetic U.S. dollar denominated debt
would be effectively created by taking the following steps: (1) issuing fixed
rate, non-U.S. currency denominated debt, (2) entering into a swap under which
fixed rate non-U.S. currency denominated interest will be received and floating
rate non-U.S. currency denominated interest will be paid, and (3) entering into
a swap under which floating rate non-U.S. currency principal and interest will
be received and fixed rate U.S. dollar denominated principal and interest will
be paid. The end result is, in every important respect, fixed rate U.S. dollar
denominated financing with an element of controlled credit risk. The Corporation
uses multiple swaps only as part of such transactions.
The interplay of the Corporation's credit risk policy with its funding
activities is seen in the following example, in which the Corporation is assumed
to have been offered three alternatives for funding five-year fixed rate U.S.
dollar assets with five-year fixed rate U.S. dollar debt.
18
<PAGE>
<TABLE>
<CAPTION>
SPREAD OVER
U.S.
TREASURIES IN
BASIS POINTS COUNTERPARTY
------------- ------------
<S> <C> <C>
1. Fixed rate five-year medium term note ..... +65 --
2. U.S. dollar commercial paper swapped into
five-year U.S. dollar fixed rate funding . +40 A
3. Swiss franc fixed rate debt swapped into
five-year U.S. dollar fixed rate funding . +35 B
</TABLE>
Counterparty A is a major brokerage house with a Aaa/AAA rated swap subsidiary
and a current exposure to the Corporation of $39 million. Counterparty B is a
Aa2/AA rated insurance company with a current exposure of $50 million.
In this hypothetical case, the Corporation would have chosen alternative 2.
Alternative 1 is unacceptably costly. Although alternative 3 would have yielded
a lower immediate cost of funds, the additional credit risk of Counterparty B
would have exceeded the Corporation's risk management limits.
The U.S. Securities and Exchange Commission requires that registrants disclose
information about potential effects of changes in interest rates and currency
exchange. Although the rules offer alternatives for presenting this information,
none of the alternatives is without limitations. The following discussion is
based on so-called "shock-tests," which model effects of interest rate and
currency shifts on the reporting company. Shock tests, while probably the most
meaningful analysis permitted, are constrained by several factors, including the
necessity to conduct the analysis based on a single point in time and by their
inability to include the complex market reactions that normally would arise from
the market shifts modeled. While the following results of shock tests for
interest rates and currencies may have some limited use as benchmarks, they
should not be viewed as forecasts.
o One means of assessing exposure to interest rate changes is a
duration-based analysis that measures the potential loss in net earnings
resulting from a hypothetical increase in interest rates of 100 basis
points across all maturities (sometimes referred to as a "parallel shift
in the yield curve"). Under this model, it is estimated that, all else
constant, such an increase, including repricing effects in the securities
portfolio, would reduce the 1999 net earnings of the Corporation based on
year-end 1998 positions by approximately $111 million. Based on
conditions at year-end 1997, the effect on 1998 net earnings of such an
increase in interest rates was estimated to be approximately $112
million.
o One means of assessing exposure to changes in currency exchange rates is
to model effects on reported earnings using a sensitivity analysis.
Year-end 1998 consolidated currency exposures, including financial
instruments designated and effective as hedges, were analyzed to identify
Corporation assets and liabilities denominated in other than their
relevant functional currency. Net unhedged exposures in each currency
were then remeasured assuming a 10% decrease (substantially greater
decreases for hyperinflationary currencies) in currency exchange rates
compared with the U.S. dollar. Under this model, it is estimated that,
all else constant, such a decrease would reduce the 1999 net earnings of
the Corporation based on year-end 1998 positions by an insignificant
amount.
PORTFOLIO QUALITY
FINANCING RECEIVABLES are the largest GECS asset and one of its primary sources
of revenues. The portfolio of financing receivables, before allowance for
losses, increased to $124.9 billion at the end of 1998 from $106.6 billion at
the end of 1997, principally reflecting acquisition growth and origination
volume that were partially offset by securitizations and other sales of
receivables. The related allowance for losses at the end of 1998 amounted to
$3.3 billion ($2.8 billion at the end of 1997) and, in management's judgment, is
appropriate given the risk profile of the portfolio.
19
<PAGE>
A discussion of the quality of certain elements of the financing receivable
portfolio follows. "Nonearning" receivables are those that are 90 days or more
delinquent (or for which collection has otherwise become doubtful) and
"reduced-earning" receivables are commercial receivables whose terms have been
restructured to a below-market yield. The following discussion of the nonearning
and reduced-earning receivable balances and write-off amounts excludes amounts
related to Montgomery Ward Holding Corp. and affiliates, which are separately
discussed below.
CONSUMER FINANCING RECEIVABLES at year-end 1998 and 1997 are shown in the
following table:
<TABLE>
<CAPTION>
(In millions) 1998 1997
-------- --------
<S> <C> <C>
Credit card and personal loans ......................... $ 28,064 $ 25,773
Auto loans ............................................. 9,496 8,973
Auto financing leases .................................. 14,063 13,346
-------- --------
Total consumer financing receivables ................. $ 51,623 $ 48,092
======== ========
Nonearning ............................................. $ 1,250 $ 1,049
- As a percentage of total ............................ 2.4% 2.2%
Receivable write-offs for the year ..................... $ 1,357 $ 1,298
</TABLE>
The increase in credit card and personal loan portfolios primarily resulted from
acquisition growth and origination volume, partially offset by securitizations
and other sales of receivables. Both the auto loan and financing lease
portfolios increased primarily as a result of acquisition growth; however, the
increase in auto financing leases was partially offset by decreases in U.S.
lease volume. A substantial amount of the nonearning consumer receivables were
private-label credit card loans that were subject to various loss-sharing
agreements that provide full or partial recourse to the originating retailer.
Increased write-offs of consumer receivables were primarily attributable to the
impact of higher average receivable balances.
OTHER FINANCING RECEIVABLES, totaling $73.3 billion at December 31, 1998,
consisted of a diverse commercial, industrial and equipment loan and lease
portfolio. This portfolio increased $14.8 billion during 1998, reflecting the
combination of acquisition growth and increased origination volume, partially
offset by sales of receivables. Related nonearning and reduced-earning
receivables were $354 million at year-end 1998, compared with $353 million at
year-end 1997.
As discussed in note 3 to the consolidated financial statements, Montgomery Ward
Holding Corp. ("MWHC") filed a bankruptcy petition for reorganization in 1997.
GECS after-tax share of the losses of MWHC and affiliates was $49 million in
1998 and $380 million in 1997. The Corporation's investment in MWHC and
affiliates at year-end was $622 million in 1998 and $795 million in 1997 (of
which $578 million and $617 million, respectively, were classified as financing
receivables). Subsequent to the filing of the petition, the Corporation
committed to provide MWHC up to $1.0 billion in debtor-in-possession financing,
a majority of which has been syndicated: the Corporation's loans under this
facility at December 31, 1998 were approximately $56 million. GECS also provides
revolving credit card financing directly to customers of MWHC and affiliates;
such receivables totaled $3.4 billion at December 31, 1998, including $1.6
billion that had been sold with recourse. The obligations of customers with
respect to these receivables are not affected by the bankruptcy filing. On
February 1, 1999, MWHC announced that it plans to emerge from bankruptcy
protection in mid-1999 as a result of an agreement reached with the creditors'
committee.
GECS loans and leases to commercial airlines amounted to $10.2 billion at the
end of 1998, up from $9.0 billion at the end of 1997. GECS commercial aircraft
positions also included financial guarantees, funding commitments and aircraft
orders as discussed in note 6 to the consolidated financial statements.
ENTERING 1999, management believes that continued vigilant attention to risk
management and controllership and a strong focus on Six Sigma quality - complete
satisfaction of customer needs - position it to deal effectively with the
increasing competition in an ever-changing economy.
20
<PAGE>
YEAR 2000
Year 2000 will test the capability of business processes to function correctly.
The Corporation has undertaken a global effort to identify and mitigate Year
2000 issues in its information systems, products and services, facilities and
suppliers, as well as to assess the extent to which Year 2000 issues will affect
its customers. Each business has a Year 2000 leader who oversees a
multifunctional remediation project team responsible for applying a Six Sigma
quality approach in four phases: (1) define/measure- identify and inventory
possible sources of Year 2000 issues; (2) analyze- determine the nature and
extent of Year 2000 issues and develop project plans to address those issues;
(3) improve- execute project plans and perform a majority of the testing; and
(4) control- complete testing, continue monitoring readiness and complete
necessary contingency plans. The progress of this program is monitored at each
business, and Company-wide reviews with senior management are conducted monthly.
The first three phases of the program have been completed for a substantial
majority of mission-critical activities. Management plans to have nearly all
significant information systems, products and services and facilities through
the control phase of the program by mid-1999.
The scope of the global Year 2000 effort encompasses many thousands of
applications and computer programs; products and services; facilities and
facilities-related equipment; suppliers and customers. Business operations are
also affected by the Year 2000 readiness of customers and infrastructure
suppliers in areas such as utilities, communications, transportation and other
services. In this environment, there will likely be instances of failure that
could cause disruptions in business processes for the Corporation's businesses,
affect their customers' ability to repay amounts owed or result in an increased
level of insurance claims activity. The likelihood and effects of failures in
the customer base, infrastructure systems and in the supply chain cannot be
estimated. However, with respect to operations under its direct control,
management does not expect, in view of its Year 2000 program efforts and the
diversity of its businesses, suppliers and customers, that occurrences of Year
2000 failures will have a material adverse effect on the financial position,
results of operations or liquidity of the Corporation.
Including amounts attributable to recent acquisitions, total Year 2000
remediation expenditures are expected to be approximately $269 million, of which
65% was spent by the end of 1998. Substantially all of the remainder is expected
to be spent in 1999. Most of these costs are not likely to be incremental costs,
but rather will represent the redeployment of existing resources. The activities
involved in the Year 2000 effort necessarily involve estimates and projections
of activities and resources that will be required in the future. These estimates
and projections could change as work progresses.
NEW ACCOUNTING STANDARDS
New accounting standards issued in 1998 are described below. Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, requires that, upon adoption, all derivative
instruments (including certain derivative instruments embedded in other
contracts) be recognized in the balance sheet at fair value, and that changes in
such fair values be recognized in earnings unless specific hedging criteria are
met. Changes in the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged items; effects of
certain changes in fair value are recorded in equity pending recognition in
earnings. The Corporation will adopt the Statement on January 1, 2000. The
impact of adoption will be determined by several factors, including the specific
hedging instruments in place and their relationships to hedged items, as well as
market conditions. Management has not estimated the effects of adoption as it
believes that such determination will not be meaningful until closer to the
adoption date. Statement of Position ("SOP") 98-5, Reporting on the Costs of
Start-Up Activities, provides guidance on accounting for start-up costs and
organization costs, which must be expensed as incurred. The SOP, which is
consistent with the Corporation's previous accounting policy, is effective for
financial statements beginning January 1, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information about potential effects of changes in interest rates and currency
exchange on the Corporation is discussed on pages 17-19.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
General Electric Capital Services, Inc.:
We have audited the consolidated financial statements of General Electric
Capital Services, Inc. and consolidated affiliates as listed in Item 14. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in Item 14. These
consolidated financial statements and financial statement schedules are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General Electric
Capital Services, Inc. and consolidated affiliates at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Stamford, Connecticut
February 12, 1999
22
<PAGE>
<TABLE>
<CAPTION>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
STATEMENT OF EARNINGS
For the years ended December 31 (In millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Time sales, loan and other income .......................................... $ 14,682 $ 12,211 $ 11,310
Operating lease rentals .................................................... 5,402 4,819 4,341
Financing leases ........................................................... 4,267 3,499 3,485
Investment income .......................................................... 5,617 5,512 3,506
Premium and commission income of insurance affiliates (Note 11) ............ 11,352 9,268 8,145
Sales of goods ............................................................. 7,374 4,622 1,926
-------- -------- --------
Total revenues .......................................................... 48,694 39,931 32,713
-------- -------- --------
EXPENSES
Interest ................................................................... 8,966 7,649 7,326
Operating and administrative (Note 14) ..................................... 13,810 11,433 9,591
Insurance losses and policyholder and annuity benefits (Note 11) ........... 9,608 8,278 6,678
Cost of goods sold ......................................................... 6,777 4,147 1,720
Provision for losses on financing receivables (Note 4) ..................... 1,609 1,421 1,033
Depreciation and amortization of buildings and equipment and
equipment on operating leases (Notes 6 & 7) ............................... 2,616 2,460 2,150
Minority interest in net earnings of consolidated affiliates ............... 148 121 167
-------- -------- --------
Total expenses .......................................................... 43,534 35,509 28,665
-------- -------- --------
Earnings before income taxes ............................................... 5,160 4,422 4,048
Provision for income taxes (Note 15) ....................................... (1,364) (1,166) (1,231)
-------- -------- --------
NET EARNINGS ............................................................... $ 3,796 $ 3,256 $ 2,817
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN SHARE OWNERS' EQUITY
(In millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CHANGES IN SHARE OWNERS' EQUITY
Balance at January 1 ....................................................... $ 17,239 $ 14,276 $ 12,774
-------- -------- --------
Dividends and other transactions with share owners (Note 13) ............... (1,519) (1,648) (979)
-------- -------- --------
Changes other than transactions with share owners:
Increases attributable to net earnings .................................... 3,796 3,256 2,817
Unrealized gains (losses) on investment securities - net (Note 13) ...... 241 1,467 (321)
Currency translation adjustments (Note 13) ................................ (30) (112) (15)
-------- -------- --------
Total changes other than transactions with share owners ................. 4,007 4,611 2,481
-------- -------- --------
Balance at December 31 ..................................................... $ 19,727 $ 17,239 $ 14,276
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
<TABLE>
<CAPTION>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
STATEMENT OF FINANCIAL POSITION
At December 31 (In millions) 1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and equivalents ................................................................... $ 3,342 $ 4,904
Investment securities (Note 2) ......................................................... 78,458 70,356
Financing receivables (Note 3):
Time sales and loans, net of deferred income ......................................... 77,283 64,832
Investment in financing leases, net of deferred income ............................... 47,571 41,769
-------- --------
124,854 106,601
Allowance for losses on financing receivables (Note 4) ............................... (3,288) (2,802)
-------- --------
Financing receivables - net ........................................................ 121,566 103,799
Other receivables - net (Note 5) ...................................................... 25,973 18,332
Inventories ............................................................................ 744 786
Equipment on operating leases (at cost), less accumulated amortization of $7,021
and $6,126 (Note 6) ................................................................... 20,941 18,689
Buildings and equipment (at cost), less accumulated depreciation of $1,733 and
$1,478 (Note 7) ....................................................................... 3,095 2,509
Intangible assets - net (Note 8) ...................................................... 13,639 10,366
Other assets (Note 9) .................................................................. 35,539 25,667
-------- --------
TOTAL ASSETS ......................................................................... $303,297 $255,408
======== ========
LIABILITIES AND SHARE OWNERS' EQUITY
Short-term borrowings (Note 10) ........................................................ $113,162 $ 95,274
Long-term borrowings (Note 10) ......................................................... 59,038 45,989
-------- --------
Total borrowings ..................................................................... 172,200 141,263
Accounts payable ....................................................................... 8,815 6,490
Insurance liabilities, reserves and annuity benefits (Note 11) ......................... 77,259 67,270
Other liabilities ...................................................................... 12,247 11,067
Deferred income taxes (Note 15) ........................................................ 9,590 8,966
-------- --------
Total liabilities .................................................................... 280,111 235,056
-------- --------
Minority interest in equity of consolidated affiliates (Note 12) ....................... 3,459 3,113
-------- --------
Cumulative preferred stock, $10,000 par value (80,000 shares authorized; 51,000
shares issued and held primarily by consolidated affiliates at December 31, 1998
and 1997) ............................................................................. 10 10
Common stock, $10,000 par value (101 shares authorized and outstanding) ................ 1 1
Additional paid-in capital ............................................................. 2,480 2,327
Retained earnings ...................................................................... 15,075 12,951
Accumulated unrealized gains on investment securities - net <F1> ...................... 2,376 2,135
Accumulated foreign currency translation adjustments <F1> .............................. (215) (185)
-------- --------
Total share owners' equity (Note 13) ................................................. 19,727 17,239
-------- --------
TOTAL LIABILITIES AND SHARE OWNERS' EQUITY ........................................... $303,297 $255,408
======== ========
<FN>
<F1> The sum of accumulated unrealized gains on investment securities and
accumulated foreign currency translation adjustments constitutes
"Accumulated nonowner changes other than earnings," as shown in Note 13,
and was $2,161 million and $1,950 million at year-end 1998 and 1997,
respectively.
</FN>
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE>
<TABLE>
<CAPTION>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
STATEMENT OF CASH FLOWS
For the years ended December 31 (In millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ............................................................... $ 3,796 $ 3,256 $ 2,817
Adjustments to reconcile net earnings to cash provided from
operating activities:
Provision for losses on financing receivables ........................... 1,609 1,421 1,033
Increase in insurance liabilities, reserves and annuity benefits ........ 3,670 1,669 1,491
Decrease (increase) in inventories ...................................... 81 (244) (58)
Increase in deferred income taxes ....................................... 549 798 1,077
Depreciation and amortization of buildings and equipment and
equipment on operating leases .......................................... 2,616 2,460 2,150
Amortization of goodwill and other intangibles .......................... 952 780 655
Increase (decrease) in accounts payable ................................. 1,673 (64) 318
Other - net ............................................................. (3,991) (3,851) 284
-------- -------- --------
Cash from operating activities ........................................... 10,955 6,225 9,767
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in financing receivables (Note 19) ............................ (6,301) (1,898) (2,278)
Buildings and equipment and equipment on operating leases
- additions .............................................................. (6,935) (6,197) (5,371)
- dispositions ........................................................... 4,037 2,212 1,333
Payments for principal businesses purchased, net of cash acquired .......... (17,155) (3,820) (4,394)
All other investing activities (Note 19) ................................... (11,078) (5,646) (6,090)
-------- -------- --------
Cash used for investing activities ....................................... (37,432) (15,349) (16,800)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in borrowings (maturities of 90 days or less) ................... 16,288 13,594 11,026
Newly issued debt (maturities longer than 90 days) (Note 19) ............... 41,440 20,825 22,901
Repayments and other reductions (maturities longer than 90 days) (Note 19) . (31,027) (22,757) (24,656)
Dividends paid ............................................................. (1,672) (1,653) (981)
All other financing activities (Note 19) ................................... (114) 785 28
-------- -------- --------
Cash from financing activities ........................................... 24,915 10,794 8,318
-------- -------- --------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING THE YEAR ................ (1,562) 1,670 1,285
CASH AND EQUIVALENTS AT BEGINNING OF YEAR .................................. 4,904 3,234 1,949
-------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR ........................................ $ 3,342 $ 4,904 $ 3,234
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - General Electric Capital Services, Inc. ("the Parent") owns all
of the common stock of General Electric Capital Corporation ("GE Capital") and
GE Global Insurance Holding Corporation ("GE Global Insurance"). All outstanding
common stock of the Parent is owned by General Electric Company ("GE Company").
The consolidated financial statements represent the adding together of the
Parent and all of its majority-owned and controlled affiliates ("consolidated
affiliates"), including GE Capital and GE Global Insurance (collectively called
"the Corporation").
All significant transactions among the Corporation and consolidated affiliates
have been eliminated. Other associated companies, generally companies that are
20% to 50% owned and over which the Corporation, directly or indirectly, has
significant influence, are included in other assets and valued at the
appropriate share of equity plus loans and advances. Certain prior-year amounts
have been reclassified to conform to the current year presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts and related disclosures. Actual results could differ
from those estimates.
METHODS OF RECORDING REVENUES FROM SERVICES (EARNED INCOME) - Income on all
loans is recognized on the interest method. Accrual of interest income is
suspended at the earlier of the time at which collection of an account becomes
doubtful or the account becomes 90 days delinquent. Interest income on impaired
loans is recognized either as cash is collected or on a cost recovery basis as
conditions warrant.
Financing lease income is recorded on the interest method so as to produce a
level yield on funds not yet recovered. Estimated unguaranteed residual values
of leased assets are based primarily on periodic independent appraisals of the
values of leased assets remaining at expiration of the lease terms.
Operating lease income is recognized on a straight-line basis over the terms of
the underlying leases.
Origination, commitment and other nonrefundable fees related to fundings are
deferred and recorded in earned income on the interest method. Commitment fees
related to loans not expected to be funded and line-of-credit fees are deferred
and recorded in earned income on a straight-line basis over the period to which
the fees relate. Syndication fees are recorded in earned income at the time
related services are performed unless significant contingencies exist.
Premium income from insurance activities is discussed under insurance accounting
policies.
SALES OF GOODS - A sale is recorded when title passes to the customer.
CASH AND EQUIVALENTS - Certificates and other time deposits are treated as cash
equivalents.
RECOGNITION OF LOSSES ON FINANCING RECEIVABLES AND INVESTMENTS - The allowance
for losses on small-balance receivables is determined principally on the basis
of actual experience during the preceding three years. Further allowances are
provided to reflect management's judgment of additional probable losses. For
other receivables, principally the larger loans and leases, the allowance for
losses is determined primarily on the basis of management's judgment of the net
probable losses, including specific allowances for known troubled accounts.
All accounts or portions thereof deemed to be uncollectible or to require an
excessive collection cost are written off to the allowance for losses.
Small-balance accounts generally are written off when 6 to 12 months delinquent,
although any such balance judged to be uncollectible, such as an account in
bankruptcy, is written down immediately to estimated realizable value.
Large-balance accounts are reviewed at least quarterly, and those accounts with
amounts that are judged to be uncollectible are written down to estimated
realizable value.
26
<PAGE>
When collateral is repossessed in satisfaction of a loan, the receivable is
written down against the allowance for losses to estimated fair value less costs
to sell, transferred to other assets and subsequently carried at the lower of
cost or estimated fair value less costs to sell. This accounting method has been
employed principally for specialized financing transactions.
INVESTMENT SECURITIES - Investments in debt and marketable equity securities are
reported at fair value. Substantially all investment securities are designated
as available for sale, with unrealized gains and losses included in equity, net
of applicable taxes and other adjustments. Unrealized losses that are other than
temporary are recognized in earnings. Realized gains and losses are accounted
for on the specific identification method.
INVENTORIES - The Corporation's inventories consist primarily of finished
products held for sale. All inventories are stated at the lower of cost or
realizable values. Cost is primarily determined on a first-in, first-out basis.
EQUIPMENT ON OPERATING LEASES - Equipment is amortized, principally on a
straight-line basis, to estimated residual value over the lease term or over the
estimated economic life of the equipment.
BUILDINGS AND EQUIPMENT - Depreciation is recorded on either a sum-of-the-years
digits formula or a straight-line basis over the lives of the assets.
INTANGIBLE ASSETS - Goodwill is amortized over its estimated period of benefit
on a straight-line basis; other intangible assets, including internal-use
software, are amortized on appropriate bases over their estimated lives. No
amortization period exceeds 40 years. Goodwill in excess of associated expected
operating cash flows is considered to be impaired and is written down to fair
value, which is determined based on either discounted future cash flows or
appraised values, depending on the nature of the assets.
INTEREST RATE AND CURRENCY RISK MANAGEMENT - As a matter of policy, the
Corporation does not engage in derivatives trading, derivatives market-making or
other speculative activities. The Corporation uses swaps primarily to optimize
funding costs. To a lesser degree, and in combination with options and limit
contracts, the Corporation uses swaps to stabilize cash flows from
mortgage-related assets.
Interest rate and currency swaps that modify borrowings or designated assets,
including swaps associated with forecasted commercial paper renewals, are
accounted for on an accrual basis. The Corporation requires all other swaps, as
well as futures, options and currency forwards, to be designated and accounted
for as hedges of specific assets, liabilities or committed transactions;
resulting payments and receipts are recognized contemporaneously with effects of
hedged transactions. A payment or receipt arising from early termination of an
effective hedge is accounted for as an adjustment to the basis of the hedged
transaction.
Instruments used as hedges must be effective at reducing the risk associated
with the exposure being hedged and must be designated as a hedge at the
inception of the contract. Accordingly, changes in market values of hedge
instruments must be highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over the life of the
hedge contract. As a matter of policy, any derivative that is either not
designated as a hedge, or is so designated but is ineffective, is marked to
market and recognized in operations immediately.
INSURANCE ACCOUNTING POLICIES - Accounting policies for insurance businesses are
as follows.
PREMIUM INCOME. Insurance premiums are reported as earned income as follows:
o For short-duration insurance contracts (including property and casualty,
accident and health, and financial guaranty insurance), premiums are
reported as earned income, generally on a pro rata basis, over the terms of
the related agreements. For retrospectively rated reinsurance contracts,
premium adjustments are recorded based on estimated losses and loss
expenses, taking into consideration both case and incurred-but-not-reported
reserves.
o For traditional long-duration insurance contracts (including term and
whole life contracts and annuities payable for the life of the annuitant),
premiums are reported as earned income when due.
27
<PAGE>
o For investment contracts and universal life contracts, premiums received
are reported as liabilities, not as revenues. Universal life contracts are
long-duration insurance contracts with terms that are not fixed and
guaranteed; for these contracts, revenues are recognized for assessments
against the policyholder's account, mostly for mortality, contract
initiation, administration and surrender. Investment contracts are
contracts that have neither significant mortality nor significant morbidity
risk, including annuities payable for a determined period; for these
contracts, revenues are recognized on the associated investments and
amounts credited to policyholder accounts are charged to expense.
DEFERRED POLICY ACQUISITION COSTS. Costs that vary with and are primarily
related to the acquisition of new and renewal insurance and investment contracts
are deferred and amortized over the respective policy terms. For short-duration
contracts, acquisition costs consist primarily of commissions, brokerage
expenses and premium taxes. For long-duration insurance contracts, these costs
consist primarily of first-year commissions in excess of recurring renewal
commissions, certain variable sales expenses and certain support costs such as
underwriting and policy issue expenses.
o For short-duration insurance contracts, these costs are amortized pro rata
over the contract periods in which the related premiums are earned.
o For traditional long-duration insurance contracts, these costs are
amortized over the respective contract periods in proportion to either
anticipated premium income or, in the case of limited-payment contracts,
estimated benefit payments.
o For investment contracts and universal life contracts, these costs are
amortized on the basis of anticipated gross profits.
Periodically, deferred policy acquisition costs are reviewed for recoverability;
anticipated investment income is considered in recoverability evaluations.
PRESENT VALUE OF FUTURE PROFITS. The actuarially determined present value of
anticipated net cash flows to be realized from insurance, annuity and investment
contracts in force at the date of acquisition of life insurance enterprises is
recorded as the present value of future profits and is amortized over the
respective policy terms in a manner similar to deferred policy acquisition
costs. Unamortized balances are adjusted to reflect experience and impairment,
if any.
28
<PAGE>
NOTE 2. INVESTMENT SECURITIES
A summary of investment securities follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
(In millions) COST GAINS LOSSES FAIR VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Debt securities:
U.S. corporate ................................................ $ 27,888 $ 1,293 $ (325) $ 28,856
State and municipal ........................................... 12,483 727 (8) 13,202
Mortgage-backed ............................................... 11,641 413 (109) 11,945
Corporate - non-U.S. .......................................... 8,692 409 (90) 9,011
Government - non-U.S. ......................................... 5,415 258 (9) 5,664
U.S. government and federal agency ............................ 2,706 207 (7) 2,906
Equity securities .............................................. 5,651 1,415 (192) 6,874
-------- -------- -------- --------
$ 74,476 $ 4,722 $ (740) $ 78,458
======== ======== ======== ========
DECEMBER 31, 1997
Debt securities:
U.S. corporate ................................................ $ 24,580 $ 1,028 $ (53) $ 25,555
State and municipal ........................................... 10,780 636 (2) 11,414
Mortgage-backed ............................................... 12,074 341 (30) 12,385
Corporate - non-U.S. .......................................... 7,683 310 (12) 7,981
Government - non-U.S. ......................................... 3,714 150 (3) 3,861
U.S. government and federal agency ............................ 2,413 103 (4) 2,512
Equity securities .............................................. 5,414 1,336 (102) 6,648
-------- -------- -------- --------
$ 66,658 $ 3,904 $ (206) $ 70,356
======== ======== ======== ========
</TABLE>
The majority of mortgage-backed securities shown in the table above are
collateralized by U.S. residential mortgages.
At December 31, 1998, contractual maturities of debt securities, other than
mortgage-backed securities, were as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
(In millions) COST FAIR VALUE
-------- --------
<S> <C> <C>
Due in:
1999 .................................................................................. $ 5,370 $ 5,574
2000-2003 ............................................................................. 14,145 14,497
2004-2008 ............................................................................. 13,068 13,538
2009 and later ........................................................................ 24,601 26,030
</TABLE>
It is expected that actual maturities will differ from contractual maturities
because borrowers have the right to call or prepay certain obligations. Proceeds
from sales of investment securities in 1998 were $16,659 million ($14,728
million in 1997 and $11,868 million in 1996). Gross realized gains were $1,126
million in 1998 ($1,018 million in 1997 and $638 million in 1996). Gross
realized losses were $303 million in 1998 ($173 million in 1997 and $190 million
in 1996).
29
<PAGE>
NOTE 3. FINANCING RECEIVABLES
Financing receivables at December 31, 1998 and 1997, are shown below.
<TABLE>
<CAPTION>
(In millions) 1998 1997
-------- --------
<S> <C> <C>
Time sales and loans:
Consumer Services ..................................................................... $ 44,680 $ 42,270
Mid-Market Financing .................................................................. 20,240 11,401
Specialized Financing ................................................................. 16,811 13,974
Equipment Management .................................................................. 1,066 469
Specialty Insurance ................................................................... 103 202
-------- --------
82,900 68,316
Deferred income ........................................................................ (5,617) (3,484)
-------- --------
Time sales and loans - net of deferred income ....................................... 77,283 64,832
-------- --------
Investment in financing leases:
Direct financing leases ............................................................... 43,730 38,616
Leveraged leases ...................................................................... 3,841 3,153
-------- --------
Investment in financing leases ...................................................... 47,571 41,769
-------- --------
124,854 106,601
Less allowance for losses (Note 4) ..................................................... (3,288) (2,802)
-------- --------
$121,566 $103,799
======== ========
</TABLE>
Time sales and loans represents transactions in a variety of forms, including
time sales, revolving charge and credit, mortgages, installment loans,
intermediate-term loans and revolving loans secured by business assets. The
portfolio includes time sales and loans carried at the principal amount on which
finance charges are billed periodically, and time sales and loans carried at
gross book value, which includes finance charges. At year-end 1998 and 1997,
specialized financing and consumer services loans included $12,980 million and
$10,503 million, respectively, for commercial real estate loans. Note 6 contains
information on commercial airline loans and leases.
At December 31, 1998, contractual maturities for time sales and loans were
$31,014 million in 1999; $14,865 million in 2000; $9,448 million in 2001; $6,675
million in 2002; $5,465 million in 2003 and $15,433 million thereafter -
aggregating $82,900 million. Experience has shown that a substantial portion of
receivables will be paid prior to contractual maturity. Accordingly, the
maturities of time sales and loans are not to be regarded as forecasts of future
cash collections.
Investment in financing leases consists of direct financing and leveraged leases
of aircraft, railroad rolling stock, autos, other transportation equipment, data
processing equipment and medical equipment, as well as other manufacturing,
power generation, commercial real estate, and commercial equipment and
facilities.
As the sole owner of assets under direct financing leases and as the equity
participant in leveraged leases, the Corporation is taxed on total lease
payments received and is entitled to tax deductions based on the cost of leased
assets and tax deductions for interest paid to third-party participants. The
Corporation generally is entitled to any residual value of leased assets.
Investment in direct financing and leveraged leases represents net unpaid
rentals and estimated unguaranteed residual values of leased equipment, less
related deferred income. The Corporation has no general obligation for principal
and interest on notes and other instruments representing third-party
participation related to leveraged leases; such notes and other instruments have
not been included in liabilities but have been offset against the related
rentals receivable. The Corporation's share of rentals receivable on leveraged
leases is subordinate to the share of other participants who also have security
interests in the leased equipment.
30
<PAGE>
The Corporation's net investment in financing leases at December 31, 1998 and
1997, is shown below.
<TABLE>
<CAPTION>
TOTAL DIRECT
FINANCING LEASES FINANCING LEASES LEVERAGED LEASES
-------------------- -------------------- --------------------
(In millions) 1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total minimum lease payments receivable $ 66,528 $ 58,543 $ 47,451 $ 42,901 $ 19,077 $ 15,642
Less principal and interest on
third-party nonrecourse debt .......... (15,176) (12,097) -- -- (15,176) (12,097)
-------- -------- -------- -------- -------- --------
Net rentals receivable ............... 51,352 46,446 47,451 42,901 3,901 3,545
Estimated unguaranteed residual value
of leased assets ...................... 6,826 5,591 5,011 4,244 1,815 1,347
Less deferred income ................... (10,607) (10,268) (8,732) (8,529) (1,875) (1,739)
-------- -------- -------- -------- -------- --------
Investment in financing leases ....... 47,571 41,769 43,730 38,616 3,841 3,153
Less: Allowance for losses ............ (619) (656) (519) (575) (100) (81)
Deferred taxes arising from
financing leases ............... (8,593) (7,909) (5,147) (4,671) (3,446) (3,238)
-------- -------- -------- -------- -------- --------
Net investment in financing leases ..... $ 38,359 $ 33,204 $ 38,064 $ 33,370 $ 295 $ (166)
======== ======== ======== ======== ======== ========
</TABLE>
At December 31, 1998, contractual maturities for net rentals receivable under
financing leases were $14,093 million in 1999; $12,087 million in 2000; $8,947
million in 2001; $4,362 million in 2002; $2,759 million in 2003 and $9,104
million thereafter - aggregating $51,352 million. As with time sales and loans,
experience has shown that a portion of these receivables will be paid prior to
contractual maturity, and these amounts should not be regarded as forecasts of
future cash flows.
The Corporation has a noncontrolling investment in the common stock of
Montgomery Ward Holding Corp. ("MWHC") which, together with certain of its
affiliates, filed a bankruptcy petition for reorganization in 1997. Loans to
MWHC, which are considered impaired (as defined below), were $578 million and
$617 million at year-end 1998 and 1997, respectively. These amounts are excluded
from the nonearning and reduced earning receivable and impaired loan discussion
below. The Corporation also provides revolving credit card financing directly to
customers of MWHC and affiliates; such receivables totaled $3.4 billion at
December 31, 1998, including $1.6 billion that had been sold with recourse. The
obligations of customers with respect to these receivables are not affected by
the bankruptcy filing.
Nonearning consumer receivables were $1,250 million and $1,049 million at
December 31, 1998 and 1997, respectively, a substantial amount of which were
U.S. private-label credit card loans subject to various loss-sharing agreements
that provide full or partial recourse to the originating retailer. Nonearning
and reduced-earning receivables other than consumer receivables were $354
million and $353 million at year-end 1998 and 1997, respectively.
"Impaired" loans are defined by generally accepted accounting principles as
loans for which it is probable that the lender will be unable to collect all
amounts due according to original contractual terms of the loan agreement. That
definition excludes, among other things, leases or large groups of
smaller-balance homogenous loans, and therefore applies principally to the
Corporation's commercial loans.
31
<PAGE>
An analysis of impaired loans at December 31, 1998 and 1997 is shown below.
<TABLE>
<CAPTION>
(In millions) 1998 1997
-------- --------
<S> <C> <C>
Loans requiring allowance for losses ................................................... $ 346 $ 339
Loans expected to be fully recoverable ................................................. 158 167
-------- --------
$ 504 $ 506
======== ========
Allowance for losses ................................................................... $ 109 $ 170
Average investment during year ......................................................... 512 647
Interest income earned while impaired <F1> ............................................. 39 32
<FN>
<F1> Principally on the cash basis.
</FN>
</TABLE>
NOTE 4. ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C> <C>
Balance at January 1 ....................................................... $ 2,802 $ 2,693 $ 2,519
Provisions charged to operations ........................................... 1,609 1,421 1,033
Net transfers primarily related to companies acquired or sold .............. 388 127 139
Amounts written off - net .................................................. (1,511) (1,439) (998)
-------- -------- --------
Balance at December 31 ..................................................... $ 3,288 $ 2,802 $ 2,693
======== ======== ========
</TABLE>
NOTE 5. OTHER RECEIVABLES
At year-end 1998 and 1997, this account included reinsurance recoverables of
$6,124 million and $5,027 million and insurance-related receivables of $7,109
million and $4,932 million, respectively. Premium receivables, funds on deposit
with reinsurers and policy loans are included in insurance-related receivables.
Also in other receivables are trade receivables, accrued investment income,
operating lease receivables and a variety of sundry items.
NOTE 6. EQUIPMENT ON OPERATING LEASES
Equipment on operating leases by type of equipment and accumulated amortization
at December 31, 1998 and 1997, are shown below.
<TABLE>
<CAPTION>
(In millions) 1998 1997
-------- --------
<S> <C> <C>
Original cost
Vehicles .............................................................................. $ 9,825 $ 9,144
Aircraft .............................................................................. 9,321 7,686
Railroad rolling stock ................................................................ 2,804 2,367
Marine shipping containers ............................................................ 2,565 2,774
Other ................................................................................. 3,447 2,844
-------- --------
27,962 24,815
Accumulated amortization ............................................................... (7,021) (6,126)
-------- --------
$ 20,941 $ 18,689
======== ========
</TABLE>
Amortization of equipment on operating leases was $2,185 million, $2,102 million
and $1,848 million in 1998, 1997 and 1996, respectively. Noncancelable future
rentals due from customers for equipment on operating leases at year-
32
<PAGE>
end 1998 totaled $12,808 million and are due as follows: $3,377 million in 1999;
$2,540 million in 2000; $1,841 million in 2001; $1,318 million in 2002; $897
million in 2003 and $2,835 million thereafter.
The Corporation acts as a lender and lessor to the commercial airline industry.
At December 31, 1998 and 1997, the balance of such loans, leases and equipment
leased to others was $10,170 million and $8,980 million, respectively. In
addition, at December 31, 1998, the Corporation had issued financial guarantees
and funding commitments of $74 million ($123 million at year-end 1997) and had
placed multiyear orders for various Boeing and Airbus aircraft with list prices
of approximately $9.4 billion ($6.2 billion at year-end 1997).
NOTE 7. BUILDINGS AND EQUIPMENT
Buildings and equipment include office buildings, satellite communications
equipment, data processing equipment, vehicles, furniture and office equipment.
Depreciation expense was $431 million in 1998, $358 million in 1997 and $302
million in 1996.
NOTE 8. INTANGIBLE ASSETS
Intangible assets at December 31, 1998 and 1997, are shown in the table below.
<TABLE>
<CAPTION>
(In millions) 1998 1997
-------- --------
<S> <C> <C>
Goodwill ............................................................................... $ 11,469 $ 8,090
Present value of future profits ("PVFP") ............................................... 1,618 1,824
Other intangibles ...................................................................... 552 452
-------- --------
$ 13,639 $ 10,366
======== ========
</TABLE>
The Corporation's intangible assets are shown net of accumulated amortization of
$3,396 million at December 31, 1998, and $2,615 million at December 31, 1997.
PVFP amortization, which is on an accelerated basis and net of interest, is
projected to range from 15% to 8% of the year-end 1998 unamortized balance for
each of the next five years.
NOTE 9. OTHER ASSETS
Other assets at December 31, 1998 and 1997, are shown in the table below.
<TABLE>
<CAPTION>
(In millions) 1998 1997
-------- --------
<S> <C> <C>
Investments:
Assets acquired for resale ............................................................ $ 6,167 $ 4,403
Investments in and advances to associated companies ................................... 7,670 4,695
Real estate ventures .................................................................. 3,131 2,326
Other ................................................................................. 3,473 2,452
-------- --------
20,441 13,876
Separate accounts ...................................................................... 6,563 4,926
Servicing assets ....................................................................... 1,625 1,713
Deferred insurance acquisition costs ................................................... 3,326 2,521
Other .................................................................................. 3,584 2,631
-------- --------
$ 35,539 $ 25,667
======== ========
</TABLE>
Separate accounts represent investments controlled by policyholders and are
associated with identical amounts reported as insurance liabilities in note 11.
33
<PAGE>
NOTE 10. BORROWINGS
Total short-term borrowings at December 31, 1998 and 1997, consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
AVERAGE AVERAGE
(Dollars in millions) AMOUNT RATE <F1> AMOUNT RATE <F1>
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial paper - U.S. ........................................ $ 83,044 5.38% $ 67,355 5.93%
Commercial paper - non-U.S. .................................... 3,953 4.80 3,879 4.18
Current portion of long-term debt .............................. 14,645 5.66 15,101 6.30
Other .......................................................... 11,520 8,939
-------- --------
$113,162 $ 95,274
======== ========
Total long-term borrowings at December 31, 1998 and 1997, were as follows:
1998
AVERAGE
RATE
(Dollars in millions) <F1> MATURITIES 1998 1997
-------- ---------- -------- --------
Senior notes ................................................... 6.07% 2000-2055 $ 58,042 $ 44,993
Subordinated notes <F2> ........................................ 7.88 2006-2035 996 996
-------- --------
$ 59,038 $ 45,989
======== ========
<FN>
<F1> Based on year-end balances and local currency interest rates, including
the effects of interest rate and currency swaps, if any, directly
associated with the original debt issuance.
<F2> Guaranteed by GE Company.
</FN>
</TABLE>
Borrowings of the Corporation are addressed below from two perspectives -
liquidity and interest rate management. Additional information about borrowings
and associated swaps can be found in note 20.
LIQUIDITY requirements of the Corporation are principally met through the credit
markets. Maturities of long-term borrowings during the next five years,
including the current portion of long-term debt, at December 31, 1998, were
$14,645 million in 1999; $13,889 million in 2000; $10,925 million in 2001;
$7,059 million in 2002 and $4,794 million in 2003.
At December 31, 1998, the Corporation held committed lines of credit aggregating
$26.7 billion with 133 banks, including $11.8 billion of revolving credit
agreements pursuant to which it has the right to borrow funds for periods
exceeding one year. A total of $1.5 billion of GE Capital's credit lines is
available for use by GE Company. Also, at December 31, 1998, substantially all
of the approximately $4.0 billion of GE Company's credit lines were available
for use by the Corporation. During 1998, amounts drawn under these lines were
not significant. The Corporation compensates banks for credit facilities in the
form of fees, which were insignificant in each of the past three years.
INTEREST RATES ARE MANAGED by the Corporation in light of the anticipated
behavior, including prepayment behavior, of assets in which debt proceeds are
invested. A variety of instruments, including interest rate and currency swaps
and currency forwards, are employed to achieve management's interest rate
objectives. Effective interest rates are lower under these "synthetic" positions
than could have been achieved by issuing debt directly.
34
<PAGE>
The following table shows the Corporation's borrowing positions at December 31,
1998 and 1997, considering the effects of swaps.
<TABLE>
<CAPTION>
(In millions) 1998 1997
-------- --------
<S> <C> <C>
EFFECTIVE BORROWINGS (INCLUDING SWAPS)
Short-term ............................................................................. $ 72,143 $ 56,961
======== ========
Long-term (including current portion)
Fixed rate <F1> ....................................................................... $ 74,226 $ 59,329
Floating rate ......................................................................... 25,831 24,973
-------- --------
Total long-term ........................................................................ $100,057 $ 84,302
======== ========
<FN>
<F1> Includes the notional amount of long-term interest rate swaps that
effectively convert the floating-rate nature of short-term borrowings to
fixed rates of interest.
</FN>
</TABLE>
At December 31, 1998, interest rate swap maturities ranged from 1999 to 2048,
and average interest rates for fixed-rate borrowings (including "synthetic"
fixed-rate borrowings) were 6.03% (6.32% at year-end 1997).
NOTE 11. INSURANCE LIABILITIES, RESERVES AND ANNUITY BENEFITS
Insurance liabilities, reserves and annuity benefits at December 31, 1998 and
1997, are shown below.
<TABLE>
<CAPTION>
(In millions) 1998 1997
-------- --------
<S> <C> <C>
Investment contracts and universal life benefits ....................................... $ 29,266 $ 28,266
Life insurance benefits and other <F1> ................................................. 16,104 14,356
Unpaid claims and claims adjustment expenses <F2> ...................................... 19,611 14,654
Unearned premiums ...................................................................... 5,715 5,068
Separate accounts (see note 9) ......................................................... 6,563 4,926
-------- --------
$ 77,259 $ 67,270
======== ========
<FN>
<F1> Life insurance benefits are accounted for mainly by a net-level-premium
method using estimated yields generally ranging from 5% to 9% in both 1998
and 1997.
<F2> Principally property and casualty reserves; includes amounts for both
reported and incurred-but-not-reported claims, reduced by anticipated
salvage and subrogation recoveries. Estimates of liabilities are reviewed
and updated continually, with changes in estimated losses reflected in
operations.
</FN>
</TABLE>
When the Corporation cedes insurance to third parties, it is not relieved of its
primary obligation to policyholders. Losses on ceded risks give rise to claims
for recovery; allowances are established for such receivables from reinsurers.
The insurance liability for unpaid claims and claims adjustment expenses related
to policies that may cover environmental, asbestos and Year 2000-related
exposures is based on known facts and an assessment of applicable law and
coverage litigation. Liabilities are recognized for both known and unasserted
claims (including the cost of related litigation) when sufficient information
has been developed to indicate that a claim has been incurred and a range of
potential losses can be reasonably estimated. Developed case law and adequate
claim history do not exist for certain claims, particularly with respect to Year
2000-related exposures, principally due to significant uncertainties as to both
the level of ultimate losses that will occur and what portion, if any, will be
deemed to be insured amounts.
35
<PAGE>
A summary of activity affecting unpaid claims and claims adjustment expenses
follows.
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C> <C>
Balance at January 1 - gross ............................................... $ 14,654 $ 13,184 $ 12,662
Less reinsurance recoverables .............................................. (2,246) (1,822) (1,853)
-------- -------- --------
Balance at January 1 - net ................................................. 12,408 11,362 10,809
Claims and expenses incurred:
Current year .............................................................. 6,330 4,494 4,087
Prior years ............................................................... (162) 146 104
Claims and expenses paid:
Current year .............................................................. (2,400) (1,780) (1,357)
Prior years ............................................................... (3,692) (2,816) (2,373)
Claim reserves related to acquired companies ............................... 3,476 1,360 309
Other ...................................................................... 168 (358) (217)
-------- -------- --------
Balance at December 31 - net ............................................... 16,128 12,408 11,362
Add reinsurance recoverables ............................................... 3,483 2,246 1,822
-------- -------- --------
Balance at December 31 - gross ............................................. $ 19,611 $ 14,654 $ 13,184
======== ======== ========
</TABLE>
Prior-year claims and expenses incurred in the preceding table resulted
principally from settling claims established in earlier accident years for
amounts that differed from expectations.
Financial guarantees and credit life risk of insurance affiliates at December
31, 1998 and 1997, are summarized below.
<TABLE>
<CAPTION>
(In millions) 1998 1997
-------- --------
<S> <C> <C>
Guarantees, principally on municipal bonds and structured finance issues ............... $171,020 $144,647
Mortgage insurance risk in force ....................................................... 43,941 46,245
Credit life insurance risk in force .................................................... 31,018 26,593
Less reinsurance ....................................................................... (37,205) (33,528)
-------- --------
$208,774 $183,957
======== ========
</TABLE>
The effects of reinsurance on premiums written and premiums and commissions
earned were as follows for the past three years.
<TABLE>
<CAPTION>
PREMIUMS WRITTEN PREMIUMS AND COMMISSIONS EARNED
-------------------------------- --------------------------------
(In millions) 1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct ................................. $ 6,237 $ 5,206 $ 3,926 $ 6,063 $ 5,138 $ 3,850
Assumed ................................ 7,470 5,501 5,455 7,151 5,386 5,353
Ceded .................................. (1,842) (1,311) (1,196) (1,862) (1,256) (1,058)
-------- -------- -------- -------- -------- --------
Net .................................... $ 11,865 $ 9,396 $ 8,185 $ 11,352 $ 9,268 $ 8,145
======== ======== ======== ======== ======== ========
</TABLE>
Reinsurance recoveries recognized as a reduction of insurance losses and
policyholder and annuity benefits amounted to $1,594 million, $903 million and
$937 million for the years ended December 31, 1998, 1997 and 1996, respectively.
36
<PAGE>
NOTE 12. MINORITY INTEREST
Minority interest in equity of consolidated affiliates includes preferred stock
issued by GE Capital and by a subsidiary of GE Capital. The preferred stock pays
cumulative dividends at variable rates. The liquidation preference of the
preferred shares at December 31, 1998 and 1997, is summarized below.
<TABLE>
<CAPTION>
(In millions) 1998 1997
-------- --------
<S> <C> <C>
GE Capital ............................................................................. $ 2,300 $ 2,230
GE Capital subsidiary .................................................................. 860 660
</TABLE>
Dividend rates on the preferred stock ranged from 3.9% to 5.2% during 1998, and
from 3.8% to 5.2% during 1997 and 1996.
NOTE 13. EQUITY
Changes in equity for each of the last three years were as follows:
<TABLE>
<CAPTION>
ACCUMULATED
NONOWNER
CHANGES
CUMULATIVE ADDITIONAL OTHER
PREFERRED COMMON PAID-IN RETAINED THAN
(In millions) STOCK STOCK CAPITAL EARNINGS EARNINGS TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ............. $ 10 $ 1 $ 2,314 $ 9,518 $ 931 $ 12,774
Capital contributions .................. -- -- 2 -- -- 2
Net unrealized losses on
investment securities <F1> ............ -- -- -- -- (321) (321)
Currency translation adjustments <F2> .. -- -- -- -- (15) (15)
Net earnings ........................... -- -- -- 2,817 -- 2,817
Dividends declared:
Common stock .......................... -- -- -- (980) -- (980)
Preferred stock ....................... -- -- -- (1) -- (1)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ........... 10 1 2,316 11,354 595 14,276
Capital contributions .................. -- -- 11 -- -- 11
Net unrealized gains on
investment securities <F1> ............ -- -- -- -- 1,467 1,467
Currency translation adjustments <F2> .. -- -- -- -- (112) (112)
Net earnings ........................... -- -- -- 3,256 -- 3,256
Dividends declared:
Common stock .......................... -- -- -- (1,658) -- (1,658)
Preferred stock ....................... -- -- -- (1) -- (1)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ........... 10 1 2,327 12,951 1,950 17,239
Capital contributions .................. -- -- 153 -- -- 153
Net unrealized gains on
investment securities <F1> ............ -- -- -- -- 775 775
Currency translation adjustments <F2> .. -- -- -- -- (30) (30)
Reclassification adjustments <F3> ...... -- -- -- -- (534) (534)
Net earnings ........................... -- -- -- 3,796 -- 3,796
Dividends declared:
Common stock .......................... -- -- -- (1,671) -- (1,671)
Preferred stock ....................... -- -- -- (1) -- (1)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1998 ........... $ 10 $ 1 $ 2,480 $ 15,075 $ 2,161 $ 19,727
======== ======== ======== ======== ======== ========
<FN>
<F1> Presented net of deferred taxes of $432 million, $860 million and ($204)
million in 1998, 1997 and 1996, respectively.
<F2> Presented net of deferred taxes of ($13) million, ($58) million and ($9)
million in 1998, 1997 and 1996, respectively.
<F3> Presented net of deferred taxes of ($293) million.
</FN>
</TABLE>
37
<PAGE>
General Electric Capital Services, Inc.'s outstanding preferred stock amounted
to $510 million at December 31, 1998, all of which was held by consolidated
affiliates with the exception of $10 million of such shares, which were
dividended to GE Company in 1994. All other equity is owned entirely by GE
Company.
Changes in fair value of available-for-sale investment securities are reflected,
net of applicable taxes and other adjustments, in equity. The changes from year
to year were primarily attributable to the effects of changes in year-end market
interest rates on the fair value of the securities.
At December 31, 1998 and 1997, the aggregate statutory capital and surplus of
the insurance businesses totaled $14.4 billion and $12.4 billion, respectively.
Accounting practices prescribed by statutory authorities are used in preparing
statutory statements.
NOTE 14. OPERATING AND ADMINISTRATIVE EXPENSES
Employees and retirees of the Corporation are covered under a number of pension,
health and life insurance plans. The principal pension plan is the GE Company
Pension Plan, a defined benefit plan, while employees of certain affiliates,
including GE Global Insurance, are covered under separate plans. The Corporation
provides health and life insurance benefits to certain of its retired employees,
principally through GE Company's benefit program, as well as through plans
sponsored by GE Global Insurance and other affiliates. The annual cost to the
Corporation of providing these benefits is not material.
Rental expense relating to equipment the Corporation leases from others for the
purposes of subleasing was $439 million in 1998, $392 million in 1997 and $269
million in 1996. Other rental expense was $450 million in 1998, $342 million in
1997 and $278 million in 1996, principally for the rental of office space and
data processing equipment. Minimum future rental commitments under noncancelable
leases at December 31, 1998, are $720 million in 1999; $636 million in 2000;
$582 million in 2001; $519 million in 2002; $468 million in 2003 and $2,243
million thereafter. The Corporation, as a lessee, has no material lease
agreements classified as capital leases.
Amortization of deferred insurance acquisition costs charged to operations in
1998, 1997 and 1996 was $1,940 million, $1,554 million and $1,671 million,
respectively.
NOTE 15. INCOME TAXES
The provision for income taxes is summarized in the following table.
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Estimated amounts payable .................................................. $ 815 $ 368 $ 164
Deferred tax expense from temporary differences ............................ 549 798 1,067
-------- -------- --------
$ 1,364 $ 1,166 $ 1,231
======== ======== ========
</TABLE>
GE Company files a consolidated U.S. federal income tax return which includes
the Corporation. The provision for estimated taxes payable includes the effect
of the Corporation on the consolidated return.
Estimated amounts payable includes amounts applicable to non-U.S. jurisdictions
of $813 million, $636 million and $614 million in 1998, 1997 and 1996,
respectively.
Deferred income tax balances reflect the impact of temporary differences between
the carrying amounts of assets and liabilities and their tax bases and are
stated at enacted tax rates expected to be in effect when taxes are actually
paid or recovered.
38
<PAGE>
Except for certain earnings that the Corporation intends to reinvest
indefinitely, provision has been made for the estimated U.S. federal income tax
liabilities applicable to undistributed earnings of affiliates and associated
companies. It is not practicable to determine the U.S. federal income tax
liability, if any, that would be payable if such earnings were not reinvested
indefinitely.
U.S. income before taxes was $3.4 billion in 1998, $2.8 billion in 1997 and $2.6
billion in 1996. The corresponding amounts for non-U.S. based operations were
$1.8 billion in 1998, $1.6 billion in 1997 and $1.5 billion in 1996.
A reconciliation of the U.S. federal statutory rate to the actual income tax
rate follows.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate ..................................... 35.0% 35.0% 35.0%
Increase (reduction) in rate resulting from:
Amortization of goodwill .................................................. 1.0 1.1 1.2
Tax-exempt income ......................................................... (4.7) (4.9) (5.4)
Foreign Sales Corporation tax benefits .................................... (0.6) (0.5) (0.3)
Dividends received, not fully taxable ..................................... (1.0) (0.9) (1.1)
Fuels credits ............................................................. (1.8) (1.6) (0.8)
Other - net ............................................................... (1.5) (1.8) 1.8
-------- -------- --------
Actual income tax rate ..................................................... 26.4% 26.4% 30.4%
======== ======== ========
</TABLE>
Principal components of the net deferred tax liability balances at December 31,
1998 and 1997, were as follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997
-------- --------
<S> <C> <C>
Assets:
Allowance for losses .................................................................. $ 1,386 $ 1,372
Insurance reserves .................................................................... 1,022 1,000
AMT credit carryforwards .............................................................. 903 354
Other ................................................................................. 1,994 1,594
-------- --------
Total deferred tax assets .............................................................. 5,305 4,320
-------- --------
Liabilities:
Financing leases ...................................................................... 8,593 7,909
Operating leases ...................................................................... 2,419 2,156
Net unrealized gains on securities .................................................... 1,369 1,264
Other ................................................................................. 2,514 1,957
-------- --------
Total deferred tax liabilities ......................................................... 14,895 13,286
-------- --------
Net deferred tax liability ............................................................. $ 9,590 $ 8,966
======== ========
</TABLE>
NOTE 16. OPERATING SEGMENT DATA
At year-end 1998, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and
Related Information, which requires segment data to be measured and analyzed on
a basis that is consistent with how business activities are reported internally
for management. Prior period amounts have been restated in accordance with the
requirements of the new standard. The Corporation's operating segments are
organized based on the nature of products and services provided. A description
of the operating segments can be found in Item 1. Business., under the heading
Operating Segments, on page 2 of this report. The accounting policies for these
segments are the same as those described for the consolidated entity.
The Corporation evaluates the performance of its operating segments primarily on
the basis of net earnings. Details of total revenues and net earnings by
operating segment are provided in Item 7. Management's Discussion and Analysis
39
<PAGE>
of Results of Operations. Operating Segments, in the tables on page 14 of this
report. Other specific information is provided below in accordance with the
requirements of SFAS 131 because they are included as a component of overall
segment net earnings or total assets.
<TABLE>
<CAPTION>
(In millions) DEPRECIATION AND AMORTIZATION <F1> PROVISION FOR INCOME TAXES
-------------------------------- --------------------------------
For the years ended December 31 1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consumer Services ...................... $ 961 $ 897 $ 571 $ 442 $ 229 $ 428
Equipment Management ................... 1,890 1,690 1,643 257 353 298
Mid-Market Financing ................... 405 398 400 239 198 174
Specialized Financing .................. 56 51 42 47 171 155
Specialty Insurance .................... 165 140 135 359 251 233
All other .............................. 91 64 14 20 (36) (57)
-------- -------- -------- -------- -------- --------
Total ................................ $ 3,568 $ 3,240 $ 2,805 $ 1,364 $ 1,166 $ 1,231
======== ======== ======== ======== ======== ========
TIME SALES, LOAN, INVESTMENT AND
OTHER INCOME <F2> INTEREST EXPENSE
-------------------------------- --------------------------------
For the years ended December 31 1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
Consumer Services ...................... $ 10,668 $ 9,586 $ 8,051 $ 3,601 $ 3,226 $ 3,004
Equipment Management ................... 2,288 2,032 1,446 1,486 1,296 1,204
Mid-Market Financing ................... 1,719 1,160 1,065 1,674 1,276 1,172
Specialized Financing .................. 2,712 2,250 2,497 1,552 1,437 1,491
Specialty Insurance .................... 2,769 2,198 1,790 704 586 475
All other .............................. 143 497 (33) (51) (172) (20)
-------- -------- -------- -------- -------- --------
Total ................................ $ 20,299 $ 17,723 $ 14,816 $ 8,966 $ 7,649 $ 7,326
======== ======== ======== ======== ======== ========
PROPERTY, PLANT AND EQUIPMENT
ADDITIONS (INCLUDING EQUIPMENT
ASSETS LEASED TO OTHERS) <F3>
At December 31 For the years ended December 31
-------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
Consumer Services <F4> ................. $130,868 $117,410 $104,701 $ 2,218 $ 1,863 $ 1,675
Equipment Management <F5> .............. 38,301 33,771 28,849 4,408 4,314 3,264
Mid-Market Financing ................... 41,802 29,315 25,991 1,316 978 696
Specialized Financing <F5> ............. 36,906 28,959 28,236 88 36 36
Specialty Insurance .................... 54,649 45,359 40,005 53 65 42
All other .............................. 771 594 (363) 27 64 49
-------- -------- -------- -------- -------- --------
Total ................................ $303,297 $255,408 $227,419 $ 8,110 $ 7,320 $ 5,762
======== ======== ======== ======== ======== ========
<FN>
<F1> Includes amortization of goodwill and other intangibles.
<F2> Principally interest income.
<F3> Additions to property, plant and equipment (including equipment leased to
others) include amounts relating to principal businesses purchased.
<F4> In 1997, the Corporation recorded its share of Montgomery Ward Holding
Corp. ("MWHC") losses of $380 million (after tax), by reducing its
investments in MWHC, resulting in the writing off of its investment in
MWHC common and preferred stock.
<F5> Total assets of the Equipment Management and Specialized Financing segments
at December 31, 1998, include investments in and advances to
non-consolidated affiliates of $2,937 million and $4,765 million,
respectively, which contributed approximately $173 million and $295
million, respectively, to segment pre-tax income for the year ended
December 31, 1998.
</FN>
</TABLE>
40
<PAGE>
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data were as follows:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER
-------------------- --------------------
(In millions) 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ....................................................... $ 11,151 $ 9,544 $ 11,801 $ 9,317
-------- -------- -------- --------
Expenses:
Interest ...................................................... 2,025 1,783 2,187 1,862
Operating and administrative and cost of goods sold ........... 4,640 3,524 4,949 3,380
Insurance losses and policyholder and annuity benefits ........ 2,213 2,244 2,400 2,012
Provision for losses on financing receivables ................. 332 312 409 337
Depreciation and amortization of buildings and equipment and
equipment on operating leases ................................ 656 570 604 567
Minority interest in net earnings of consolidated affiliates .. 33 30 33 21
-------- -------- -------- --------
Earnings before income taxes ................................... 1,252 1,081 1,219 1,138
Provision for income taxes ..................................... (371) (327) (286) (340)
-------- -------- -------- --------
Net earnings ................................................... $ 881 $ 754 $ 933 $ 798
======== ======== ======== ========
THIRD QUARTER FOURTH QUARTER
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues ....................................................... $ 12,016 $ 10,182 $ 13,726 $ 10,888
-------- -------- -------- --------
Expenses:
Interest ...................................................... 2,188 1,919 2,566 2,085
Operating and administrative and cost of goods sold ........... 4,992 4,022 6,006 4,654
Insurance losses and policyholder and annuity benefits ........ 2,239 1,980 2,756 2,042
Provision for losses on financing receivables ................. 306 371 562 401
Depreciation and amortization of buildings and equipment and
equipment on operating leases ................................ 669 628 687 695
Minority interest in net earnings of consolidated affiliates .. 38 33 44 37
-------- -------- -------- --------
Earnings before income taxes ................................... 1,584 1,229 1,105 974
Provision for income taxes ..................................... (502) (291) (205) (208)
-------- -------- -------- --------
Net earnings ................................................... $ 1,082 $ 938 $ 900 $ 766
======== ======== ======== ========
</TABLE>
NOTE 18. RESTRICTED NET ASSETS OF AFFILIATES
Certain of the Corporation's consolidated affiliates are restricted from
remitting funds to the Parent in the form of dividends or loans by a variety of
regulations, the purpose of which is to protect affected insurance
policyholders, depositors or investors. At year-end 1998, net assets of the
Corporation's regulated affiliates amounted to $25.1 billion, of which $21.9
billion was restricted.
NOTE 19. SUPPLEMENTAL CASH FLOWS INFORMATION
"Other - net operating activities" in the Statement of Cash Flows consists
principally of adjustments to other liabilities, current and noncurrent accruals
and deferrals of costs and expenses, adjustments for gains and losses on assets,
increases and decreases in assets held for sale, and adjustments to assets such
as amortization of goodwill and intangibles.
The Statement of Cash Flows excludes certain noncash transactions that had no
significant effect on the investing or financing activities of the Corporation.
41
<PAGE>
Certain supplemental information related to the Corporation's cash flows were as
follows for the past three years.
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
FINANCING RECEIVABLES
Increase in loans to customers ............................................. $(76,142) $(55,689) $(49,890)
Principal collections from customers - loans ............................... 65,573 50,679 49,923
Investment in equipment for financing leases ............................... (20,299) (16,420) (14,427)
Principal collections from customers - financing leases .................... 15,467 13,796 11,158
Net change in credit card receivables ...................................... (4,705) (4,186) (3,068)
Sales of financing receivables ............................................. 13,805 9,922 4,026
-------- -------- --------
$ (6,301) $ (1,898) $ (2,278)
======== ======== ========
ALL OTHER INVESTING ACTIVITIES
Purchases of securities by insurance and annuity businesses ................ $(23,897) $(19,274) $(15,925)
Dispositions and maturities of securities by insurance and
annuity businesses ........................................................ 20,639 17,280 14,018
Proceeds from principal business dispositions .............................. -- 241 --
Other ...................................................................... (7,820) (3,893) (4,183)
-------- -------- --------
$(11,078) $ (5,646) $ (6,090)
======== ======== ========
NEWLY ISSUED DEBT HAVING MATURITIES LONGER THAN 90 DAYS
Short-term (91 to 365 days) ................................................ $ 5,881 $ 3,502 $ 5,061
Long-term (longer than one year) ........................................... 33,453 15,566 17,245
Proceeds - nonrecourse, leveraged lease debt ............................... 2,106 1,757 595
-------- -------- --------
$ 41,440 $ 20,825 $ 22,901
======== ======== ========
REPAYMENTS AND OTHER REDUCTIONS OF DEBT HAVING MATURITIES LONGER
THAN 90 DAYS
Short-term (91 to 365 days) ................................................ $(25,901) $(21,320) $(23,355)
Long-term (longer than one year) ........................................... (4,739) (1,150) (1,025)
Principal payments - nonrecourse, leveraged lease debt ..................... (387) (287) (276)
-------- -------- --------
$(31,027) $(22,757) $(24,656)
======== ======== ========
ALL OTHER FINANCING ACTIVITIES
Proceeds from sales of investment contracts ................................ $ 5,149 $ 4,717 $ 2,561
Preferred stock issued by consolidated affiliates .......................... 270 605 155
Redemption of investment contracts ......................................... (5,533) (4,537) (2,688)
-------- -------- --------
$ (114) $ 785 $ 28
======== ======== ========
CASH PAID DURING THE YEAR FOR:
Interest ................................................................... $ (8,677) $ (7,797) $ (7,463)
Income taxes ............................................................... (947) (341) (106)
</TABLE>
Changes in operating assets and liabilities are net of acquisitions and
dispositions of businesses.
42
<PAGE>
"Payments for principal businesses purchased" in the Statement of Cash Flows is
net of cash acquired and includes debt assumed and immediately repaid in
acquisitions. In conjunction with the acquisitions, liabilities were assumed as
follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Fair value of assets acquired .............................................. $ 29,498 $ 15,190 $ 27,352
Cash paid .................................................................. (18,405) (4,736) (4,849)
-------- -------- --------
Liabilities assumed ........................................................ $ 11,093 $ 10,454 $ 22,503
======== ======== ========
</TABLE>
NOTE 20. ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS
This note contains estimated fair values of certain financial instruments to
which the Corporation is a party. Apart from the Corporation's own borrowings
and certain marketable securities, relatively few of these instruments are
actively traded. Thus, fair values must often be determined by using one or more
models that indicate value based on estimates of quantifiable characteristics as
of a particular date. Because this undertaking is, by its nature, difficult and
highly judgmental, for a limited number of instruments, alternative valuation
techniques may have produced disclosed values different from those that could
have been realized at December 31, 1998 or 1997. Assets and liabilities that, as
a matter of accounting policy, are reflected in the accompanying financial
statements at fair value are not included in the following disclosures; such
items include cash and equivalents, investment securities and separate accounts.
A description of how values are estimated follows.
BORROWINGS. Based on quoted market prices or market comparables. Fair values of
interest rate and currency swaps on borrowings are based on quoted market prices
and include the effects of counterparty creditworthiness.
TIME SALES AND LOANS. Based on quoted market prices, recent transactions and/or
discounted future cash flows, using rates at which similar loans would have been
made to similar borrowers.
INVESTMENT CONTRACT BENEFITS. Based on expected future cash flows, discounted at
currently offered discount rates for immediate annuity contracts or cash
surrender values for single premium deferred annuities.
FINANCIAL GUARANTEES AND CREDIT LIFE. Based on future cash flows, considering
expected renewal premiums, claims, refunds and servicing costs, discounted at a
market rate.
ALL OTHER INSTRUMENTS. Based on comparable transactions, market comparables,
discounted future cash flows, quoted market prices, and/or estimates of the cost
to terminate or otherwise settle obligations to counterparties.
43
<PAGE>
Information about financial instruments that were not carried at fair value at
December 31, 1998 and 1997, is shown below.
<TABLE>
<CAPTION>
1998
--------------------------------------------
ASSETS (LIABILITIES)
---------------------------------
CARRYING ESTIMATED FAIR VALUE
NOTIONAL AMOUNT --------------------
(In millions) AMOUNT (NET) HIGH LOW
-------------------- --------------------
<S> <C> <C> <C> <C>
Assets
Time sales and loans .......................................... $ <F1> $ 74,616 $ 75,474 $ 74,293
Integrated interest rate swaps ................................ 14,135 16 (102) (102)
Purchased options ............................................. 11,195 146 158 158
Mortgage-related positions
Mortgage purchase commitments ................................ 1,983 -- 15 15
Mortgage sale commitments .................................... 3,276 -- (9) (9)
Mortgages held for sale ...................................... <F1> 4,405 4,457 4,457
Options, including "floors" .................................. 21,433 91 181 181
Interest rate swaps and futures .............................. 6,662 -- 49 49
Other cash financial instruments .............................. <F1> 3,205 3,433 3,231
Liabilities
Borrowings and related instruments
Borrowings <F2> <F3> ......................................... <F1> (172,200) (174,492) (174,492)
Interest rate swaps .......................................... 46,325 -- (1,449) (1,449)
Currency swaps ............................................... 29,645 -- 252 252
Currency forwards ............................................ 23,409 -- (389) (389)
Investment contract benefits .................................. <F1> (23,893) (23,799) (23,799)
Insurance - financial guarantees and credit life .............. 208,774 (3,135) (3,339) (3,446)
Credit and liquidity support - securitizations ................ 21,703 (29) (29) (29)
Performance guarantees - principally letters of credit ........ 2,684 -- -- --
Other ......................................................... 2,888 (1,921) (1,190) (1,190)
Other firm commitments
Currency forwards ............................................. 5,072 -- (52) (52)
Currency swaps ................................................ 915 72 72 72
Ordinary course of business lending commitments ............... 9,839 -- (12) (12)
Unused revolving credit lines
Commercial ................................................... 6,401 -- -- --
Consumer - principally credit cards .......................... 132,475 -- -- --
1997
--------------------------------------------
ASSETS (LIABILITIES)
---------------------------------
CARRYING ESTIMATED FAIR VALUE
NOTIONAL AMOUNT --------------------
AMOUNT (NET) HIGH LOW
-------------------- --------------------
Assets
Time sales and loans .......................................... $ <F1> $ 62,712 $ 63,105 $ 61,171
Integrated interest rate swaps ................................ 12,323 19 (125) (125)
Purchased options ............................................. 1,992 64 39 39
Mortgage-related positions
Mortgage purchase commitments ................................ 2,082 -- 11 11
Mortgage sale commitments .................................... 2,540 -- (9) (9)
Mortgages held for sale ...................................... <F1> 2,378 2,379 2,379
Options, including "floors" .................................. 30,347 51 141 141
Interest rate swaps and futures .............................. 3,681 -- 23 23
Other cash financial instruments .............................. <F1> 2,242 2,592 2,349
Liabilities
Borrowings and related instruments
Borrowings <F2> <F3> ......................................... <F1> (141,263) (141,828) (141,828)
Interest rate swaps .......................................... 42,531 -- (250) (250)
Currency swaps ............................................... 23,382 -- (1,249) (1,249)
Currency forwards ............................................ 15,550 -- 371 371
Investment contract benefits .................................. <F1> (23,045) (22,885) (22,885)
Insurance - financial guarantees and credit life .............. 183,957 (2,897) (2,992) (3,127)
Credit and liquidity support - securitizations ................ 13,634 (46) (46) (46)
Performance guarantees - principally letters of credit ........ 2,699 (34) -- (67)
Other ......................................................... 3,147 (1,134) (1,282) (1,303)
Other firm commitments
Currency forwards ............................................. 1,744 -- 11 11
Currency swaps ................................................ 1,073 192 192 192
Ordinary course of business lending commitments ............... 7,891 -- (62) (62)
Unused revolving credit lines
Commercial ................................................... 4,850 -- -- --
Consumer - principally credit cards .......................... 134,123 -- -- --
<FN>
<F1> Not applicable.
<F2> Includes effects of interest rate and currency swaps, which also are listed
separately.
<F3> See note 10.
</FN>
</TABLE>
Additional information about certain financial instruments in the above table
follows.
44
<PAGE>
CURRENCY FORWARDS AND OPTIONS are employed by the Corporation to manage
exposures to changes in currency exchange rates associated with commercial
purchase and sale transactions and to optimize borrowing costs as discussed in
note 10. These financial instruments generally are used to fix the local
currency cost of purchased goods or services or selling prices denominated in
currencies other than the functional currency. Currency exposures that result
from net investments in affiliates are managed principally by funding assets
denominated in local currency with debt denominated in those same currencies. In
certain circumstances, net investment exposures are managed using currency
forwards and currency swaps.
OPTIONS AND INSTRUMENTS CONTAINING OPTION FEATURES that behave based on limits
("caps", "floors" or "collars") on interest rate movement are used primarily to
hedge prepayment risk in certain of the Corporation's business activities, such
as mortgage servicing and annuities.
SWAPS OF INTEREST RATES AND CURRENCIES are used by the Corporation to optimize
borrowing costs for a particular funding strategy (see note 10). Interest rate
and currency swaps, along with purchased options and futures, are used by the
Corporation to establish specific hedges of mortgage-related assets and to
manage net investment exposures. Credit risk of these positions is evaluated by
management under the credit criteria discussed below. As part of its ongoing
customer activities, the Corporation also enters into swaps that are integrated
into investments in, loans to or guarantees of the obligations of particular
customers and do not involve assumption of third-party credit risk beyond the
risk previously approved by the Corporation with respect to such investments,
loans or guarantees. Such integrated swaps are evaluated and monitored like
their associated investments, loans or guarantees, and are not therefore subject
to the same credit criteria that would apply to a stand-alone position.
COUNTERPARTY CREDIT RISK - risk that counterparties will be financially unable
to make payments according to the terms of the agreements - is the principal
risk associated with swaps, purchased options and forwards. Gross market value
of probable future receipts is one way to measure this risk, but is meaningful
only in the context of net credit exposure to individual counterparties. At
December 31, 1998 and 1997, this gross market risk amounted to $2.3 billion and
$2.0 billion, respectively. Aggregate fair values that represent associated
probable future obligations, normally associated with a right of offset against
probable future receipts, amounted to $3.6 billion and $2.9 billion at December
31, 1998 and 1997, respectively.
Except as noted above for positions that are integrated into financings, all
swaps, purchased options and forwards are carried out within the following
credit policy constraints.
o Once a counterparty exceeds a credit exposure limit (see table below),
no additional transactions are permitted until the exposure with that
counterparty is reduced to an amount that is within the established
limit. Open contracts remain in force.
<TABLE>
<CAPTION>
COUNTERPARTY CREDIT CRITERIA CREDIT RATING
-----------------------
STANDARD &
MOODY'S POOR'S
---------- ----------
<S> <C> <C>
Term of transaction
Between one and five years ........... Aa3 AA-
Greater than five years .............. Aaa AAA
Credit exposure limits
Up to $50 million .................... Aa3 AA-
Up to $75 million .................... Aaa AAA
</TABLE>
o All swaps are executed under master swap agreements containing mutual
credit downgrade provisions that provide the ability to require
assignment or termination in the event either party is downgraded below
A3 or A-.
More credit latitude is permitted for transactions having original maturities
shorter than one year because of their lower risk.
45
<PAGE>
NOTE 21. GEOGRAPHIC SEGMENT INFORMATION
The table below presents data by geographic region. Revenues shown below are
classified according to their country of origin.
<TABLE>
<CAPTION>
REVENUES LONG-LIVED ASSETS
For the years ended December 31 At December 31
-------------------------------- --------------------------------
(In millions) 1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States .......................... $ 30,498 $ 26,188 $ 21,105 $ 10,476 $ 9,714 $ 7,896
Europe ................................. 13,072 9,490 7,891 3,614 2,727 2,005
Pacific Basin .......................... 1,418 940 693 625 270 157
Global <F1> ............................ 1,682 1,669 1,651 8,160 7,543 7,094
Other <F2> ............................. 2,024 1,644 1,373 1,161 944 811
-------- -------- -------- -------- -------- --------
Total ................................ $ 48,694 $ 39,931 $ 32,713 $ 24,036 $ 21,198 $ 17,963
======== ======== ======== ======== ======== ========
<FN>
<F1> Includes operations that cannot meaningfully be associated with specific
geographic areas (for example, commercial aircraft and shipping containers
used on ocean-going vessels).
<F2> Principally the Americas other than the United States.
</FN>
</TABLE>
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted
ITEM 11. EXECUTIVE COMPENSATION.
Omitted
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS
Included in Part II of this report:
Independent Auditors' Report
Statement of Earnings for each of the years in the three-year period
ended December 31, 1998
Statement of Changes in Share Owners' Equity for each of the years
in the three-year period ended December 31, 1998
Statement of Financial Position at December 31, 1998 and 1997
Statement of Cash Flows for each of the years in the three-year
period ended December 31, 1998
Notes to Consolidated Financial Statements
Incorporated by reference:
The consolidated financial statements of General Electric
Company, set forth in the Annual Report on Form 10-K of General
Electric Company (S.E.C. File No. 001-00035) for the year ended
December 31, 1998 (pages F-1 through F-44) and Exhibit 12 (Ratio
of Earnings to Fixed Charges) of General Electric Company.
(a) 2. FINANCIAL STATEMENT SCHEDULES
Schedule I. Condensed financial information of registrant.
Schedule V. Supplemental information concerning property and
casualty insurance operations.
All other schedules are omitted because of the absence of
conditions under which they are required or because the required
information is shown in the financial statements or notes thereto.
(a) 3. EXHIBIT INDEX
The exhibits listed below, as part of Form 10-K, are numbered in
conformity with the numbering used in Item 601 of Regulation S-K of
the Securities and Exchange Commission.
48
<PAGE>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3 (i) A complete copy of the Certificate of Incorporation of the
Corporation as last amended on February 10, 1993, and currently
in effect. (Incorporated by reference to Exhibit 3(i) of the
Corporation's Form 10-K Report for the year ended December 31,
1993).
3 (ii) A complete copy of the By-Laws of the Corporation as last
amended on June 30, 1994, and currently in effect. (Incorporated
by reference to Exhibit 3(ii) of the Corporation's Form 10-K
Report for the year ended December 31, 1994).
4 (a) Agreement to furnish to the Securities and Exchange Commission
upon request a copy of instruments defining the rights of holders
of certain long-term debt of the registrant and all subsidiaries
for which consolidated or unconsolidated financial statements are
required to be filed.
12 (a) Computation of ratio of earnings to fixed charges.
12 (b) Computation of ratio of earnings to combined fixed charges and
preferred stock dividends.
23 (ii) Consent of KPMG LLP.
24 Power of Attorney.
27 Financial Data Schedule (filed electronically herewith).
99 (a) Income Maintenance Agreement dated March 28, 1991, between
General Electric Company and General Electric Capital
Corporation. (Incorporated by reference to Exhibit 28 of the
Corporation's Form 10-K Report for the year ended December 31,
1992).
99 (b) The consolidated financial statements of General Electric
Company, set forth in the Annual Report on Form 10-K of General
Electric Company (S.E.C. File No. 001-00035) for the year ended
December 31, 1998, (pages F-1 through F-44) and Exhibit 12
(Ratio of Earnings to Fixed Charges) of General Electric Company.
99 (c) Item 1. Business - Property and Casualty Reserves for Unpaid
Claims and Claim Expenses, set forth in the Annual Report on
Form 10-K of GE Global Insurance Holding Corporation (S.E.C. File
No. 0-27394) for the year ended December 31, 1998 (Pages 5
through 10).
99 (d) Letter, dated February 4, 1999, from Dennis D. Dammerman of
General Electric Company to Denis J. Nayden of General Electric
Capital Corporation pursuant to which General Electric Company
agrees to provide additional equity to General Electric Capital
Corporation in conjunction with certain redemptions by
General Electric Capital Corporation of shares of its Variable
Cumulative Preferred Stock. (Incorporated by reference to
Exhibit 99 (g) to General Electric Capital Corporation's Post-
Effective Amendment No. 1 to Registration Statement on Form S-3,
File No. 333-59707).
(b) REPORTS ON FORM 8-K
None.
49
<PAGE>
<TABLE>
<CAPTION>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GENERAL ELECTRIC CAPITAL SERVICES, INC.
CONDENSED STATEMENT OF CURRENT AND RETAINED EARNINGS
For the years ended December 31 (In millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES ................................................................... $ 1 $ 237 $ --
-------- -------- --------
EXPENSES:
Interest ................................................................. 306 289 211
Operating and administrative ............................................. 234 445 372
-------- -------- --------
Loss before income taxes and equity in earnings of affiliates .............. (539) (497) (583)
Income tax benefit ......................................................... 143 175 161
Equity in earnings of affiliates ........................................... 4,192 3,578 3,239
-------- -------- --------
NET EARNINGS ............................................................... 3,796 3,256 2,817
Dividends paid ............................................................. (1,672) (1,659) (981)
Retained earnings at January 1 ............................................. 12,951 11,354 9,518
-------- -------- --------
RETAINED EARNINGS AT DECEMBER 31 ........................................... $ 15,075 $ 12,951 $ 11,354
======== ======== ========
</TABLE>
See Notes to Condensed Financial Statements.
50
<PAGE>
<TABLE>
<CAPTION>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED)
GENERAL ELECTRIC CAPITAL SERVICES, INC.
CONDENSED STATEMENT OF FINANCIAL POSITION
At December 31 (In millions) 1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and equivalents ................................................................... $ -- $ --
Receivables - net ...................................................................... 308 208
Investment in and advances to affiliates ............................................... 26,611 21,877
-------- --------
TOTAL ASSETS ......................................................................... $ 26,919 $ 22,085
======== ========
LIABILITIES AND EQUITY
Short-term borrowings .................................................................. $ 6,018 $ 3,575
Long-term borrowings ................................................................... 299 299
Accounts payable ....................................................................... 72 34
Other liabilities ...................................................................... 303 438
-------- --------
Total liabilities .................................................................... 6,692 4,346
-------- --------
Cumulative preferred stock, $10,000 par value (80,000 shares authorized; 51,000
shares issued and held primarily by affiliates at December 31, 1998 and 1997) ......... 510 510
Common stock, $10,000 par value (101 shares authorized and outstanding) ................ 1 1
Additional paid-in capital ............................................................. 2,480 2,327
Retained earnings ...................................................................... 15,075 12,951
Accumulated unrealized gains on investment securities held by affiliates - net <F1> .... 2,376 2,135
Accumulated foreign currency translation adjustments <F1> .............................. (215) (185)
-------- --------
Total equity ......................................................................... 20,227 17,739
-------- --------
TOTAL LIABILITIES AND EQUITY ......................................................... $ 26,919 $ 22,085
======== ========
<FN>
<F1> The sum of accumulated unrealized gains on investment securities held
by affiliates and accumulated foreign currency translation adjustments
constitutes "Accumulated nonowner changes other than earnings," and was
$2,161 million and $1,950 million at year-end 1998 and 1997, respectively.
</FN>
</TABLE>
See Notes to Condensed Financial Statements.
51
<PAGE>
<TABLE>
<CAPTION>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED)
GENERAL ELECTRIC CAPITAL SERVICES, INC.
CONDENSED STATEMENT OF CASH FLOWS
For the years end December 31 (In millions) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FROM OPERATING ACTIVITIES ............................................. $ 669 $ 1,414 $ 510
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in investment and advances to affiliates ............................ (1,339) 59 79
Net change in investment securities ........................................ -- -- 70
Net change in receivables .................................................. (101) (44) (114)
-------- -------- --------
Cash from (used for) investing activities ................................ (1,440) 15 35
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in borrowings (less than 90-day maturities) ..................... 2,443 223 416
Newly issued debt - long-term subordinated ................................. -- -- --
Dividends paid ............................................................. (1,672) (1,659) (981)
-------- -------- --------
Cash from (used for) for financing activities ............................ 771 (1,436) (565)
-------- -------- --------
DECREASE IN CASH AND EQUIVALENTS DURING THE YEAR ........................... -- (7) (20)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR .................................. -- 7 27
-------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR ........................................ $ -- $ -- $ 7
======== ======== ========
</TABLE>
See Notes to Condensed Financial Statements.
52
<PAGE>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONCLUDED)
GENERAL ELECTRIC CAPITAL SERVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
INCOME TAXES
General Electric Company files a consolidated U.S. federal income tax return
which includes General Electric Capital Services, Inc. ("GE Capital Services").
Income tax benefit includes the effect of GE Capital Services on the
consolidated return.
DIVIDENDS FROM AFFILIATES
In 1998 and 1997, GE Capital Services received dividends of $363 million and
$315 million, respectively, from GE Global Insurance Holding Corporation and
$798 million and $1,468 million, respectively, from General Electric Capital
Corporation ("GE Capital").
53
<PAGE>
<TABLE>
<CAPTION>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
SCHEDULE V - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY AND CASUALTY INSURANCE OPERATIONS
(in millions)
AT DECEMBER 31 YEAR ENDED DECEMBER 31
---------------------------------------- --------------------------------------------------------------------------------
DISCOUNT
DEDUCTED
FROM
LIABILITY LIABILITY CLAIMS AND CLAIMS
FOR UNPAID FOR UNPAID ADJUSTMENT EXPENSES AMORTIZATION
DEFERRED CLAIMS AND CLAIMS AND EARNED INCURRED RELATED TO: OF DEFERRED PAID CLAIMS
POLICY CLAIMS CLAIMS PREMIUMS NET -------------------- POLICY AND CLAIMS
ACQUISITION ADJUSTMENT ADJUSTMENT UNEARNED AND INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
COSTS EXPENSES EXPENSES PREMIUMS COMMISSIONS INCOME YEAR YEARS COSTS EXPENSES WRITTEN
------ -------- ------ -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $1,079 $ 18,396 $ 354 $ 4,293 $ 7,183 $ 1,327 $ 4,508 $ (186) $ 1,635 $ 4,641 $ 7,490
====== ======== ====== ======== ======== ======== ======== ======== ======== ======== ========
1997 $ 853 $ 13,672 $ 347 $ 3,653 $ 5,702 $ 1,185 $ 3,355 $ 124 $ 1,365 $ 3,505 $ 5,645
====== ======== ====== ======== ======== ======== ======== ======== ======== ======== ========
1996 $ 817 $ 12,266 $ 397 $ 3,345 $ 5,671 $ 1,162 $ 3,619 $ 90 $ 1,087 $ 3,266 $ 5,761
====== ======== ====== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
54
<PAGE>
EXHIBIT 4(a)
March 25, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Subject: General Electric Capital Services, Inc. Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 - File No. 0-14804
Dear Sirs:
Neither General Electric Capital Services, Inc. (the "Corporation") nor any of
its subsidiaries has outstanding any instrument with respect to its long-term
debt that is not registered or filed with the Commission and under which the
total amount of securities authorized exceeds 10% of the total assets of the
registrant and its subsidiaries on a consolidated basis. In accordance with
paragraph (b) (4) (iii) of Item 601 of Regulation S-K (17 CFR ss.229.601), the
Corporation hereby agrees to furnish to the Securities and Exchange Commission,
upon request, a copy of each instrument which defines the rights of holders of
such long-term debt.
Very truly yours,
GENERAL ELECTRIC CAPITAL SERVICES, INC.
By: /s/ J.A. Parke
----------------------------------
J.A. Parke,
Senior Vice President, Finance
55
<PAGE>
EXHIBIT 12 (a)
<TABLE>
<CAPTION>
GENERAL ELECTRIC CAPITAL SERVICES, INC.
AND CONSOLIDATED AFFILIATES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31
--------------------------------------------------------
(Dollar amounts in millions) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings from continuing operations ................ $ 3,796 $ 3,256 $ 2,817 $ 2,415 $ 2,085
Provision for income taxes ......................... 1,364 1,166 1,231 1,105 864
Minority interest .................................. 148 121 167 140 139
-------- -------- -------- -------- --------
Earnings before income taxes and minority interest . 5,308 4,543 4,215 3,660 3,088
-------- -------- -------- -------- --------
Fixed charges:
Interest .......................................... 9,122 7,762 7,402 6,731 4,598
One-third of rentals .............................. 296 245 182 175 156
-------- -------- -------- -------- --------
Total fixed charges ................................ 9,418 8,007 7,584 6,906 4,754
-------- -------- -------- -------- --------
Less interest capitalized, net of amortization ..... 88 52 41 21 9
-------- -------- -------- -------- --------
Earnings before income taxes and minority
interest, plus fixed charges ...................... $ 14,638 $ 12,498 $ 11,758 $ 10,545 $ 7,833
======== ======== ======== ======== ========
Ratio of earnings to fixed charges ................. 1.55 1.56 1.55 1.53 1.65
======== ======== ======== ======== ========
</TABLE>
56
<PAGE>
EXHIBIT 12 (b)
<TABLE>
<CAPTION>
GENERAL ELECTRIC CAPITAL SERVICES, INC.
AND CONSOLIDATED AFFILIATES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
YEARS ENDED DECEMBER 31
--------------------------------------------------------
(Dollar amounts in millions) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings from continuing operations ................ $ 3,796 $ 3,256 $ 2,817 $ 2,415 $ 2,085
Provision for income taxes ......................... 1,364 1,166 1,231 1,105 864
Minority interest .................................. 148 121 167 140 139
-------- -------- -------- -------- --------
Earnings before income taxes and minority interest . 5,308 4,543 4,215 3,660 3,088
-------- -------- -------- -------- --------
Fixed charges:
Interest .......................................... 9,122 7,762 7,402 6,731 4,598
One-third of rentals .............................. 296 245 182 175 156
-------- -------- -------- -------- --------
Total fixed charges ................................ 9,418 8,007 7,584 6,906 4,754
-------- -------- -------- -------- --------
Less interest capitalized, net of amortization ..... 88 52 41 21 9
-------- -------- -------- -------- --------
Earnings before income taxes and minority
interest, plus fixed charges ...................... $ 14,638 $ 12,498 $ 11,758 $ 10,545 $ 7,833
======== ======== ======== ======== ========
Preferred stock dividend requirements .............. $ 1 $ 1 $ 1 $ 1 $ 1
Ratio of earnings from continuing operations
before provisions for income taxes to earnings
from continuing operations ........................ 1.36 1.36 1.44 1.46 1.41
-------- -------- -------- -------- --------
Preferred stock dividend factor on pre-tax basis ... 1 1 1 1 1
Fixed charges ...................................... 9,418 8,007 7,584 6,906 4,754
-------- -------- -------- -------- --------
Total fixed charges and preferred stock dividend
requirements ...................................... $ 9,419 $ 8,008 $ 7,585 $ 6,907 $ 4,755
======== ======== ======== ======== ========
Ratio of earnings to combined fixed charges and
preferred stock dividends ......................... 1.55 1.56 1.55 1.53 1.65
======== ======== ======== ======== ========
</TABLE>
57
<PAGE>
EXHIBIT 23 (ii)
To the Board of Directors
General Electric Capital Services, Inc.:
We consent to incorporation by reference in the Registration Statement (No.
33-7348) on Form S-3 of General Electric Capital Services, Inc., of our report
dated February 12, 1999, relating to the statement of financial position of
General Electric Capital Services, Inc. and consolidated affiliates as of
December 31, 1998 and 1997, and the related statements of earnings, changes in
share owners' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, and related schedules, which report appears in
the December 31, 1998 annual report on Form 10-K of General Electric Capital
Services, Inc.
/s/ KPMG LLP
Stamford, Connecticut
March 25, 1999
58
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being directors
and/or officers of General Electric Capital Services, Inc., a Delaware
corporation (the "Corporation"), hereby constitutes and appoints Dennis D.
Dammerman, James A. Parke, Joan C. Amble and Nancy E. Barton and each of them,
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead in any and all
capacities, to sign one or more Annual Reports for the Corporation's fiscal year
ended December 31, 1998, on Form 10-K under the Securities Exchange Act of 1934,
as amended, or such other form as such attorney-in-fact may deem necessary or
desirable, any amendments thereto, and all additional amendments thereto in such
form as they or any one of them may approve, and to file the same with all
exhibits thereto and other documents in connection therewith with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done to the end that such Annual Report or
Annual Reports shall comply with the Securities Exchange Act of 1934, as
amended, and the applicable Rules and Regulations of the Securities and Exchange
Commission adopted or issued pursuant thereto, as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them or their or his
substitute or resubstitute, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand this 25th
day of March, 1999.
/s/ Dennis D. Dammerman /s/ James A. Parke
- ----------------------------- ------------------------------
Dennis D. Dammerman, James A. Parke,
Chairman of the Board Senior Vice President, Finance
and Chief Executive Officer (Principal Financial Officer)
(Principal Executive Officer)
/s/ Joan C. Amble
------------------------------
Joan C. Amble,
Vice President and Controller
(Principal Accounting Officer)
(Page 1 of 2)
59
<PAGE>
/s/ Kaj Ahlmann /s/ Robert L. Nardelli
- ----------------------------- -----------------------------
Kaj Ahlmann, Robert L. Nardelli,
Director Director
/s/ Nigel D.T. Andrews /s/ Denis J. Nayden
- ----------------------------- -----------------------------
Nigel D.T. Andrews, Denis J. Nayden,
Director Director
/s/ James R. Bunt /s/ Michael A. Neal
- ----------------------------- -----------------------------
James R. Bunt, Michael A. Neal,
Director Director
/s/ David M. Cote /s/ John M. Samuels
- ----------------------------- -----------------------------
David M. Cote, John M. Samuels,
Director Director
/s/ Benjamin W. Heineman, Jr. /s/ Keith S. Sherin
- ----------------------------- -----------------------------
Benjamin W. Heineman, Jr., Keith S. Sherin,
Director Director
/s/ Jeffrey R. Immelt
- ----------------------------- -----------------------------
Jeffrey R. Immelt, Edward D. Stewart,
Director Director
/s/ W. James McNerney, Jr. /s/ John F. Welch, Jr.
- ----------------------------- -----------------------------
W. James McNerney, Jr., John F. Welch, Jr.,
Director Director
/s/ John H. Myers
- -----------------------------
John H. Myers,
Director
A MAJORITY OF THE BOARD OF DIRECTORS
(Page 2 of 2)
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 25, 1999 By: /s/ Dennis D. Dammerman
-----------------------------------
(Dennis D. Dammerman)
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Dennis D. Dammerman Chairman of the Board March 25, 1999
- ------------------------ and Chief Executive Officer
(Dennis D. Dammerman) (Principal Executive Officer)
/s/ James A. Parke Senior Vice President, Finance March 25, 1999
- ------------------------ (Principal Financial Officer)
(James A. Parke)
/s/ Joan C. Amble Vice President and Controller March 25, 1999
- ------------------------ (Principal Accounting Officer)
(Joan C. Amble)
KAJ AHLMANN* Director
NIGEL D.T. ANDREWS* Director
JAMES R. BUNT* Director
DAVID M. COTE* Director
BENJAMIN W. HEINEMAN, JR.* Director
JEFFREY R. IMMELT* Director
W. JAMES McNERNEY, JR.* Director
JOHN H. MYERS* Director
ROBERT L. NARDELLI* Director
DENIS J. NAYDEN* Director
MICHAEL A. NEAL* Director
JOHN M. SAMUELS* Director
KEITH S. SHERIN* Director
JOHN F. WELCH, JR.* Director
A MAJORITY OF THE BOARD OF DIRECTORS
*By: /s/ Joan C. Amble March 25, 1999
--------------------------
(Joan C. Amble)
Attorney-in-fact
61
<PAGE>
EXHIBIT 4(a)
March 25, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Subject: General Electric Capital Services, Inc. Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 - File No. 0-14804
Dear Sirs:
Neither General Electric Capital Services, Inc. (the "Corporation") nor any of
its subsidiaries has outstanding any instrument with respect to its long-term
debt that is not registered or filed with the Commission and under which the
total amount of securities authorized exceeds 10% of the total assets of the
registrant and its subsidiaries on a consolidated basis. In accordance with
paragraph (b) (4) (iii) of Item 601 of Regulation S-K (17 CFR ss.229.601), the
Corporation hereby agrees to furnish to the Securities and Exchange Commission,
upon request, a copy of each instrument which defines the rights of holders of
such long-term debt.
Very truly yours,
GENERAL ELECTRIC CAPITAL SERVICES, INC.
By: /s/ J.A. Parke
----------------------------------
J.A. Parke,
Senior Vice President, Finance
<PAGE>
EXHIBIT 12 (a)
<TABLE>
<CAPTION>
GENERAL ELECTRIC CAPITAL SERVICES, INC.
AND CONSOLIDATED AFFILIATES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31
--------------------------------------------------------
(Dollar amounts in millions) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings from continuing operations ................ $ 3,796 $ 3,256 $ 2,817 $ 2,415 $ 2,085
Provision for income taxes ......................... 1,364 1,166 1,231 1,105 864
Minority interest .................................. 148 121 167 140 139
-------- -------- -------- -------- --------
Earnings before income taxes and minority interest . 5,308 4,543 4,215 3,660 3,088
-------- -------- -------- -------- --------
Fixed charges:
Interest .......................................... 9,122 7,762 7,402 6,731 4,598
One-third of rentals .............................. 296 245 182 175 156
-------- -------- -------- -------- --------
Total fixed charges ................................ 9,418 8,007 7,584 6,906 4,754
-------- -------- -------- -------- --------
Less interest capitalized, net of amortization ..... 88 52 41 21 9
-------- -------- -------- -------- --------
Earnings before income taxes and minority
interest, plus fixed charges ...................... $ 14,638 $ 12,498 $ 11,758 $ 10,545 $ 7,833
======== ======== ======== ======== ========
Ratio of earnings to fixed charges ................. 1.55 1.56 1.55 1.53 1.65
======== ======== ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 12 (b)
<TABLE>
<CAPTION>
GENERAL ELECTRIC CAPITAL SERVICES, INC.
AND CONSOLIDATED AFFILIATES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
YEARS ENDED DECEMBER 31
--------------------------------------------------------
(Dollar amounts in millions) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings from continuing operations ................ $ 3,796 $ 3,256 $ 2,817 $ 2,415 $ 2,085
Provision for income taxes ......................... 1,364 1,166 1,231 1,105 864
Minority interest .................................. 148 121 167 140 139
-------- -------- -------- -------- --------
Earnings before income taxes and minority interest . 5,308 4,543 4,215 3,660 3,088
-------- -------- -------- -------- --------
Fixed charges:
Interest .......................................... 9,122 7,762 7,402 6,731 4,598
One-third of rentals .............................. 296 245 182 175 156
-------- -------- -------- -------- --------
Total fixed charges ................................ 9,418 8,007 7,584 6,906 4,754
-------- -------- -------- -------- --------
Less interest capitalized, net of amortization ..... 88 52 41 21 9
-------- -------- -------- -------- --------
Earnings before income taxes and minority
interest, plus fixed charges ...................... $ 14,638 $ 12,498 $ 11,758 $ 10,545 $ 7,833
======== ======== ======== ======== ========
Preferred stock dividend requirements .............. $ 1 $ 1 $ 1 $ 1 $ 1
Ratio of earnings from continuing operations
before provisions for income taxes to earnings
from continuing operations ........................ 1.36 1.36 1.44 1.46 1.41
-------- -------- -------- -------- --------
Preferred stock dividend factor on pre-tax basis ... 1 1 1 1 1
Fixed charges ...................................... 9,418 8,007 7,584 6,906 4,754
-------- -------- -------- -------- --------
Total fixed charges and preferred stock dividend
requirements ...................................... $ 9,419 $ 8,008 $ 7,585 $ 6,907 $ 4,755
======== ======== ======== ======== ========
Ratio of earnings to combined fixed charges and
preferred stock dividends ......................... 1.55 1.56 1.55 1.53 1.65
======== ======== ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 23 (ii)
To the Board of Directors
General Electric Capital Services, Inc.:
We consent to incorporation by reference in the Registration Statement (No.
33-7348) on Form S-3 of General Electric Capital Services, Inc., of our report
dated February 12, 1999, relating to the statement of financial position of
General Electric Capital Services, Inc. and consolidated affiliates as of
December 31, 1998 and 1997, and the related statements of earnings, changes in
share owners' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, and related schedules, which report appears in
the December 31, 1998 annual report on Form 10-K of General Electric Capital
Services, Inc.
/s/ KPMG LLP
Stamford, Connecticut
March 25, 1999
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being directors
and/or officers of General Electric Capital Services, Inc., a Delaware
corporation (the "Corporation"), hereby constitutes and appoints Dennis D.
Dammerman, James A. Parke, Joan C. Amble and Nancy E. Barton and each of them,
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead in any and all
capacities, to sign one or more Annual Reports for the Corporation's fiscal year
ended December 31, 1998, on Form 10-K under the Securities Exchange Act of 1934,
as amended, or such other form as such attorney-in-fact may deem necessary or
desirable, any amendments thereto, and all additional amendments thereto in such
form as they or any one of them may approve, and to file the same with all
exhibits thereto and other documents in connection therewith with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done to the end that such Annual Report or
Annual Reports shall comply with the Securities Exchange Act of 1934, as
amended, and the applicable Rules and Regulations of the Securities and Exchange
Commission adopted or issued pursuant thereto, as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them or their or his
substitute or resubstitute, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand this 25th
day of March, 1999.
/s/ Dennis D. Dammerman /s/ James A. Parke
- ----------------------------- ------------------------------
Dennis D. Dammerman, James A. Parke,
Chairman of the Board Senior Vice President, Finance
and Chief Executive Officer (Principal Financial Officer)
(Principal Executive Officer)
/s/ Joan C. Amble
------------------------------
Joan C. Amble,
Vice President and Controller
(Principal Accounting Officer)
(Page 1 of 2)
<PAGE>
/s/ Kaj Ahlmann /s/ Robert L. Nardelli
- ----------------------------- -----------------------------
Kaj Ahlmann, Robert L. Nardelli,
Director Director
/s/ Nigel D.T. Andrews /s/ Denis J. Nayden
- ----------------------------- -----------------------------
Nigel D.T. Andrews, Denis J. Nayden,
Director Director
/s/ James R. Bunt /s/ Michael A. Neal
- ----------------------------- -----------------------------
James R. Bunt, Michael A. Neal,
Director Director
/s/ David M. Cote /s/ John M. Samuels
- ----------------------------- -----------------------------
David M. Cote, John M. Samuels,
Director Director
/s/ Benjamin W. Heineman, Jr. /s/ Keith S. Sherin
- ----------------------------- -----------------------------
Benjamin W. Heineman, Jr., Keith S. Sherin,
Director Director
/s/ Jeffrey R. Immelt
- ----------------------------- -----------------------------
Jeffrey R. Immelt, Edward D. Stewart,
Director Director
/s/ W. James McNerney, Jr. /s/ John F. Welch, Jr.
- ----------------------------- -----------------------------
W. James McNerney, Jr., John F. Welch, Jr.,
Director Director
/s/ John H. Myers
- -----------------------------
John H. Myers,
Director
A MAJORITY OF THE BOARD OF DIRECTORS
(Page 2 of 2)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000797463
<NAME> GENERAL ELECTRIC CAPITAL SERVICES, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,342
<SECURITIES> 78,458
<RECEIVABLES> 124,854
<ALLOWANCES> 3,288
<INVENTORY> 744
<CURRENT-ASSETS> 0
<PP&E> 32,790
<DEPRECIATION> 8,754
<TOTAL-ASSETS> 303,297
<CURRENT-LIABILITIES> 0
<BONDS> 59,038
0
10
<COMMON> 1
<OTHER-SE> 19,716
<TOTAL-LIABILITY-AND-EQUITY> 303,297
<SALES> 7,374
<TOTAL-REVENUES> 48,694
<CGS> 6,777
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,810
<LOSS-PROVISION> 1,609
<INTEREST-EXPENSE> 8,966
<INCOME-PRETAX> 5,160
<INCOME-TAX> 1,364
<INCOME-CONTINUING> 3,796
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,796
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<PAGE>
F-1
ANNUAL REPORT PAGE 25
- ---------------------
FINANCIAL SECTION
CONTENTS
32 INDEPENDENT AUDITORS' REPORT
AUDITED FINANCIAL STATEMENTS
26 Earnings
26 Changes in Share Owners' Equity
28 Financial Position
30 Cash Flows
48 Notes to Consolidated Financial Statements
MANAGEMENT'S DISCUSSION
32 Financial Responsibility
33 Operations
33 Consolidated Operations
35 Segment Operations
40 International Operations
42 Financial Resources and Liquidity
46 Selected Financial Data
[CHART HERE]
CONSOLIDATED REVENUES
- -----------------------------------------------------------------------------
(IN BILLIONS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
$60.109 $70.028 $79.179 $90.840 $100.469
- -----------------------------------------------------------------------------
[CHART HERE]
EARNINGS PER SHARE FROM CONTINUING OPERATIONS
- -----------------------------------------------------------------------------
(IN DOLLARS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
$1.71 $1.93 $2.16 $2.46 $2.80
- -----------------------------------------------------------------------------
[CHART HERE]
DIVIDENDS DECLARED PER SHARE
- -----------------------------------------------------------------------------
(IN DOLLARS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
$0.745 $0.845 $0.95 $1.08 $1.25
- -----------------------------------------------------------------------------
<PAGE>
F-2
ANNUAL REPORT PAGE 26
- ---------------------
<TABLE>
STATEMENT OF EARNINGS
<CAPTION>
General Electric Company
and consolidated affiliates
----------------------------------
For the years ended December 31 (In millions;
per-share amounts in dollars) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Sales of goods $ 43,749 $ 40,675 $ 36,106
Sales of services 14,938 12,729 11,791
Other income (note 2) 649 2,300 638
Earnings of GECS -- -- --
GECS revenues from services (note 3) 41,133 35,136 30,644
----------------------------------
Total revenues 100,469 90,840 79,179
----------------------------------
COSTS AND EXPENSES (note 4)
Cost of goods sold 31,772 30,889 26,298
Cost of services sold 10,508 9,199 8,293
Interest and other financial charges 9,753 8,384 7,904
Insurance losses and policyholder and annuity benefits 9,608 8,278 6,678
Provision for losses on financing receivables (note 7) 1,609 1,421 1,033
Other costs and expenses 23,477 21,250 17,898
Minority interest in net earnings of consolidated affiliates 265 240 269
----------------------------------
Total costs and expenses 86,992 79,661 68,373
----------------------------------
EARNINGS BEFORE INCOME TAXES 13,477 11,179 10,806
Provision for income taxes (note 8) (4,181) (2,976) (3,526)
----------------------------------
NET EARNINGS $ 9,296 $ 8,203 $ 7,280
===================================================================================================
PER-SHARE AMOUNTS (note 9)
Diluted earnings per share $ 2.80 $ 2.46 $ 2.16
Basic earnings per share $ 2.84 $ 2.50 $ 2.20
- ---------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER SHARE $ 1.25 $ 1.08 $ 0.95
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
F-3
ANNUAL REPORT PAGE 27
- ---------------------
<TABLE>
STATEMENT OF EARNINGS (continued)
<CAPTION>
GE GECS
For the years ended December 31 (In millions; ------------------------------ -------------------------------
per-share amounts in dollars) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Sales of goods $ 36,376 $ 36,059 $ 34,196 $ 7,374 $ 4,622 $ 1,926
Sales of services 15,170 12,893 11,923 -- -- --
Other income (note 2) 684 2,307 629 -- -- --
Earnings of GECS 3,796 3,256 2,817 -- -- --
GECS revenues from services (note 3) -- -- -- 41,320 35,309 30,787
------------------------------- -------------------------------
Total revenues 56,026 54,515 49,565 48,694 39,931 32,713
------------------------------- -------------------------------
COSTS AND EXPENSES (note 4)
Cost of goods sold 24,996 26,747 24,594 6,777 4,147 1,720
Cost of services sold 10,740 9,363 8,425 -- -- --
Interest and other financial charges 883 797 595 8,966 7,649 7,326
Insurance losses and policyholder and annuity benefits -- -- -- 9,608 8,278 6,678
Provision for losses on financing receivables (note 7) -- -- -- 1,609 1,421 1,033
Other costs and expenses 7,177 7,476 6,274 16,426 13,893 11,741
Minority interest in net earnings of consolidated affiliates 117 119 102 148 121 167
------------------------------- -------------------------------
Total costs and expenses 43,913 44,502 39,990 43,534 35,509 28,665
------------------------------- -------------------------------
EARNINGS BEFORE INCOME TAXES 12,113 10,013 9,575 5,160 4,422 4,048
Provision for income taxes (note 8) (2,817) (1,810) (2,295) (1,364) (1,166) (1,231)
------------------------------- -------------------------------
NET EARNINGS $ 9,296 $ 8,203 $ 7,280 $ 3,796 $ 3,256 $ 2,817
====================================================================================================================================
<FN>
In the consolidating data on this page, "GE" means the basis of consolidation as
described in note 1 to the consolidated financial statements; "GECS" means
General Electric Capital Services, Inc. and all of its affiliates and associated
companies. Transactions between GE and GECS have been eliminated from the
"General Electric Company and consolidated affiliates" columns on page 26.
1997 restructuring and other special charges are included in the following GE
captions: "Cost of goods sold" -- $1,364 million; "Cost of services sold" --
$250 million; and "Other costs and expenses" -- $708 million.
</FN>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHARE OWNERS' EQUITY
<CAPTION>
-------------------------------
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CHANGES IN SHARE OWNERS' EQUITY
Balance at January 1 $ 34,438 $ 31,125 $ 29,609
-------------------------------
Dividends and other transactions with share owners (note 25) (5,178) (5,615) (5,318)
-------------------------------
Changes other than transactions with share owners
Increases attributable to net earnings 9,296 8,203 7,280
Unrealized gains (losses) on investment securities-- net (note 25) 264 1,467 (329)
Currency translation adjustments (note 25) 60 (742) (117)
-------------------------------
Total changes other than transactions with share owners 9,620 8,928 6,834
-------------------------------
Balance at December 31 $ 38,880 $ 34,438 $ 31,125
======================================================================================================
<FN>
The notes to consolidated financial statements on pages 48-68 are an integral
part of these statements.
</FN>
</TABLE>
<PAGE>
F-4
ANNUAL REPORT PAGE 28
- ---------------------
<TABLE>
STATEMENT OF FINANCIAL POSITION
<CAPTION>
General Electric Company
and consolidated affiliates
---------------------------
At December 31 (In millions) 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and equivalents $ 4,317 $ 5,861
Investment securities (note 10) 78,717 70,621
Current receivables (note 11) 8,224 8,924
Inventories (note 12) 6,049 5,895
Financing receivables (investments in time sales, loans and
financing leases) -- net (notes 7 and 13) 121,566 103,799
Other GECS receivables (note 14) 24,789 17,655
Property, plant and equipment (including equipment leased
to others) -- net (note 15) 35,730 32,316
Investment in GECS -- --
Intangible assets -- net (note 16) 23,635 19,121
All other assets (note 17) 52,908 39,820
---------------------------
TOTAL ASSETS $ 355,935 $ 304,012
===========================================================================================
LIABILITIES AND EQUITY
Short-term borrowings (note 19) $ 115,378 $ 98,075
Accounts payable, principally trade accounts 12,502 10,407
Progress collections and price adjustments accrued 2,765 2,316
Dividends payable 1,146 979
All other GE current costs and expenses accrued (note 18) 9,788 8,891
Long-term borrowings (note 19) 59,663 46,603
Insurance liabilities, reserves and annuity benefits (note 20) 77,259 67,270
All other liabilities (note 21) 24,939 22,700
Deferred income taxes (note 22) 9,340 8,651
---------------------------
Total liabilities 312,780 265,892
---------------------------
Minority interest in equity of consolidated
affiliates (note 23) 4,275 3,682
---------------------------
Accumulated unrealized gains on investment securities-- net (a) 2,402 2,138
Accumulated currency translation adjustments (a) (738) (798)
Common stock (3,271,296,000 and 3,264,592,000 shares outstanding
at year-end 1998 and 1997, respectively) 594 594
Other capital 6,808 4,434
Retained earnings 48,553 43,338
Less common stock held in treasury (18,739) (15,268)
---------------------------
Total share owners' equity (notes 25 and 26) 38,880 34,438
---------------------------
TOTAL LIABILITIES AND EQUITY $ 355,935 $ 304,012
===========================================================================================
<FN>
The notes to consolidated financial statements on pages 48-68 are an integral
part of this statement.
(a) The sum of accumulated unrealized gains on investment securities and
accumulated currency translation adjustments constitutes "Accumulated
nonowner changes other than earnings," as shown in note 25, and was $1,664
million and $1,340 million at year-end 1998 and 1997, respectively.
</FN>
</TABLE>
<PAGE>
F-5
ANNUAL REPORT PAGE 29
- ---------------------
<TABLE>
STATEMENT OF FINANCIAL POSITION (continued)
<CAPTION>
GE GECS
------------------------ ----------------------
At December 31 (In millions) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents $ 1,175 $ 1,157 $ 3,342 $ 4,904
Investment securities (note 10) 259 265 78,458 70,356
Current receivables (note 11) 8,483 9,054 -- --
Inventories (note 12) 5,305 5,109 744 786
Financing receivables (investments in time sales, loans and
financing leases) -- net (notes 7 and 13) -- -- 121,566 103,799
Other GECS receivables (note 14) -- -- 25,973 18,332
Property, plant and equipment (including equipment leased
to others) -- net (note 15) 11,694 11,118 24,036 21,198
Investment in GECS 19,727 17,239 -- --
Intangible assets -- net (note 16) 9,996 8,755 13,639 10,366
All other assets (note 17) 18,031 14,729 35,539 25,667
------------------------ ----------------------
TOTAL ASSETS $ 74,670 $ 67,426 $ 303,297 $ 255,408
====================================================================================================================================
LIABILITIES AND EQUITY
Short-term borrowings (note 19) $ 3,466 $ 3,629 $ 113,162 $ 95,274
Accounts payable, principally trade accounts 4,845 4,779 8,815 6,490
Progress collections and price adjustments accrued 2,765 2,316 -- --
Dividends payable 1,146 979 -- --
All other GE current costs and expenses accrued (note 18) 9,708 8,763 -- --
Long-term borrowings (note 19) 681 729 59,038 45,989
Insurance liabilities, reserves and annuity benefits (note 20) -- -- 77,259 67,270
All other liabilities (note 21) 12,613 11,539 12,247 11,067
Deferred income taxes (note 22) (250) (315) 9,590 8,966
------------------------ ----------------------
Total liabilities 34,974 32,419 280,111 235,056
------------------------ ----------------------
Minority interest in equity of consolidated affiliates (note 23) 816 569 3,459 3,113
------------------------ ----------------------
Accumulated unrealized gains on investment securities -- net (a) 2,402 2,138 2,376 2,135
Accumulated currency translation adjustments (a) (738) (798) (215) (185)
Common stock (3,271,296,000 and 3,264,592,000 shares outstanding
at year-end 1998 and 1997, respectively) 594 594 1 1
Other capital 6,808 4,434 2,490 2,337
Retained earnings 48,553 43,338 15,075 12,951
Less common stock held in treasury (18,739) (15,268) -- --
------------------------ ----------------------
Total share owners' equity (notes 25 and 26) 38,880 34,438 19,727 17,239
------------------------ ----------------------
TOTAL LIABILITIES AND EQUITY $ 74,670 $ 67,426 $ 303,297 $ 255,408
====================================================================================================================================
<FN>
In the consolidating data on this page, "GE" means the basis of consolidation as
described in note 1 to the consolidated financial statements; "GECS" means
General Electric Capital Services, Inc. and all of its affiliates and associated
companies. Transactions between GE and GECS have been eliminated from the
"General Electric Company and consolidated affiliates" columns on page 28.
</FN>
</TABLE>
<PAGE>
F-6
ANNUAL REPORT PAGE 30
- ---------------------
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
General Electric Company
and consolidated affiliates
---------------------------------
For the years ended December 31 (In millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 9,296 $ 8,203 $ 7,280
Adjustments to reconcile net earnings to cash provided
from operating activities
Depreciation and amortization of property, plant and equipment 4,377 4,082 3,785
Amortization of goodwill and other intangibles 1,483 1,187 983
Earnings retained by GECS -- -- --
Deferred income taxes 1,143 284 1,145
Decrease in GE current receivables 649 250 118
Decrease (increase) in inventories 150 (386) (134)
Increase (decrease) in accounts payable 1,576 200 641
Increase in insurance liabilities, reserves and annuity benefits 3,670 1,669 1,491
Provision for losses on financing receivables 1,609 1,421 1,033
All other operating activities (4,593) (2,670) 1,509
---------------------------------
CASH FROM OPERATING ACTIVITIES 19,360 14,240 17,851
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (8,982) (8,388) (7,760)
Dispositions of property, plant and equipment 4,043 2,251 1,363
Net increase in GECS financing receivables (6,301) (1,898) (2,278)
Payments for principal businesses purchased (18,610) (5,245) (5,516)
All other investing activities (10,283) (4,995) (6,021)
---------------------------------
CASH USED FOR INVESTING ACTIVITIES (40,133) (18,275) (20,212)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in borrowings (maturities of 90 days or less) 16,881 13,684 11,827
Newly issued debt (maturities longer than 90 days) 42,008 21,249 23,153
Repayments and other reductions (maturities longer than 90 days) (32,814) (23,787) (25,906)
Net purchase of GE shares for treasury (2,819) (2,815) (2,323)
Dividends paid to share owners (3,913) (3,411) (3,050)
All other financing activities (114) 785 28
---------------------------------
CASH FROM (USED FOR) FINANCING ACTIVITIES 19,229 5,705 3,729
---------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR (1,544) 1,670 1,368
Cash and equivalents at beginning of year 5,861 4,191 2,823
---------------------------------
Cash and equivalents at end of year $ 4,317 $ 5,861 $ 4,191
=========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest $ (9,297) $ (8,264) $ (7,874)
Cash paid during the year for income taxes (2,098) (1,937) (1,392)
=========================================================================================================
<FN>
The notes to consolidated financial statements on pages 48-68 are an integral
part of this statement.
</FN>
</TABLE>
<PAGE>
F-7
ANNUAL REPORT PAGE 31
- ---------------------
<TABLE>
STATEMENT OF CASH FLOWS (continued)
<CAPTION>
GE GECS
----------------------------- -------------------------------
For the years ended December 31 (In millions) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 9,296 $ 8,203 $ 7,280 $ 3,796 $ 3,256 $ 2,817
Adjustments to reconcile net earnings to cash provided
from operating activities
Depreciation and amortization of property, plant and equipment 1,761 1,622 1,635 2,616 2,460 2,150
Amortization of goodwill and other intangibles 531 407 328 952 780 655
Earnings retained by GECS (2,124) (1,597) (1,836) -- -- --
Deferred income taxes 594 (514) 68 549 798 1,077
Decrease in GE current receivables 520 215 152 -- -- --
Decrease (increase) in inventories 69 (145) (76) 81 (244) (58)
Increase (decrease) in accounts payable 199 237 197 1,673 (64) 318
Increase in insurance liabilities, reserves and annuity benefits -- -- -- 3,670 1,669 1,491
Provision for losses on financing receivables -- -- -- 1,609 1,421 1,033
All other operating activities (814) 889 1,319 (3,991) (3,851) 284
----------------------------- -------------------------------
CASH FROM OPERATING ACTIVITIES 10,032 9,317 9,067 10,955 6,225 9,767
----------------------------- -------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (2,047) (2,191) (2,389) (6,935) (6,197) (5,371)
Dispositions of property, plant and equipment 6 39 30 4,037 2,212 1,333
Net increase in GECS financing receivables -- -- -- (6,301) (1,898) (2,278)
Payments for principal businesses purchased (1,455) (1,425) (1,122) (17,155) (3,820) (4,394)
All other investing activities 477 483 (106) (11,078) (5,646) (6,090)
----------------------------- -------------------------------
CASH USED FOR INVESTING ACTIVITIES (3,019) (3,094) (3,587) (37,432) (15,349) (16,800)
----------------------------- -------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in borrowings (maturities of 90 days or less) 1,015 809 974 16,288 13,594 11,026
Newly issued debt (maturities longer than 90 days) 509 424 252 41,440 20,825 22,901
Repayments and other reductions (maturities longer than 90 days) (1,787) (1,030) (1,250) (31,027) (22,757) (24,656)
Net purchase of GE shares for treasury (2,819) (2,815) (2,323) -- -- --
Dividends paid to share owners (3,913) (3,411) (3,050) (1,672) (1,653) (981)
All other financing activities -- -- -- (114) 785 28
----------------------------- -------------------------------
CASH FROM (USED FOR) FINANCING ACTIVITIES (6,995) (6,023) (5,397) 24,915 10,794 8,318
----------------------------- -------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR 18 200 83 (1,562) 1,670 1,285
Cash and equivalents at beginning of year 1,157 957 874 4,904 3,234 1,949
----------------------------- -------------------------------
Cash and equivalents at end of year $ 1,175 $ 1,157 $ 957 $ 3,342 $ 4,904 $ 3,234
====================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest $ (620) $ (467) $ (411) $ (8,677) $ (7,797) $ (7,463)
Cash paid during the year for income taxes (1,151) (1,596) (1,286) (947) (341) (106)
====================================================================================================================================
<FN>
In the consolidating data on this page, "GE" means the basis of consolidation as
described in note 1 to the consolidated financial statements; "GECS" means
General Electric Capital Services, Inc. and all of its affiliates and associated
companies. Transactions between GE and GECS have been eliminated from the
"General Electric Company and consolidated affiliates" columns on page 30.
</FN>
</TABLE>
<PAGE>
F-8
ANNUAL REPORT PAGE 32
- ---------------------
MANAGEMENT'S DISCUSSION OF FINANCIAL RESPONSIBILITY
The financial data in this report, including the audited financial statements,
have been prepared by management using the best available information and
applying judgment. Accounting principles used in preparing the financial
statements are those that are generally accepted in the United States.
Management believes that a sound, dynamic system of internal financial
controls that balances benefits and costs provides a vital ingredient for the
Company's Six Sigma quality program as well as the best safeguard for Company
assets. Professional financial managers are responsible for implementing and
overseeing the financial control system, reporting on management's stewardship
of the assets entrusted to it by share owners and maintaining accurate records.
GE is dedicated to the highest standards of integrity, ethics
and social responsibility. This dedication is reflected in written policy
statements covering, among other subjects, environmental protection, potentially
conflicting outside interests of employees, compliance with antitrust laws,
proper business practices, and adherence to the highest standards of conduct and
practices in transactions with the U.S. government. Management continually
emphasizes to all employees that even the appearance of impropriety can erode
public confidence in the Company. Ongoing education and communication programs
and review activities, such as those conducted by the Company's Policy
Compliance Review Board, are designed to create a strong compliance culture --
one that encourages employees to raise their policy questions and concerns and
that prohibits retribution for doing so.
KPMG LLP provides an objective, independent review of management's discharge
of its obligations relating to the fairness of reporting of operating results
and financial condition. Their report for 1998 appears below.
The Audit Committee of the Board (consisting solely of Directors from outside
GE) maintains an ongoing appraisal -- on behalf of share owners -- of the
activities and independence of the Company's independent auditors, the
activities of its internal audit staff, financial reporting process, internal
financial controls and compliance with key Company policies.
John F. Welch, Jr. Keith S. Sherin
Chairman of the Board and Senior Vice President, Finance, and
Chief Executive Officer Chief Financial Officer
February 12, 1999
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
TO SHARE OWNERS AND BOARD OF DIRECTORS OF
GENERAL ELECTRIC COMPANY
We have audited the financial statements of General Electric Company and
consolidated affiliates as listed in Item 14 (a)1 on page 22. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of General Electric Company and
consolidated affiliates at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Stamford, Connecticut
February 12, 1999
<PAGE>
F-9
ANNUAL REPORT PAGE 33
- ---------------------
MANAGEMENT'S DISCUSSION OF OPERATIONS
OVERVIEW
General Electric Company's consolidated financial statements represent the
combination of the Company's manufacturing and nonfinancial services businesses
("GE") and the accounts of General Electric Capital Services, Inc. ("GECS"). See
note 1 to the consolidated financial statements, which explains how the various
financial data are presented.
Management's Discussion of Operations is presented in three parts:
Consolidated Operations, Segment Operations and International Operations.
CONSOLIDATED OPERATIONS
GE achieved record revenues, earnings and cash generation in 1998. This year's
performance again demonstrated the benefits of GE's continuing emphasis on
growth in services, Six Sigma quality and globalization.
Revenues, including acquisitions, rose to a record $100.5 billion in 1998, up
11% from 1997. This increase was primarily attributable to continued growth from
global activities and product services. Revenues were $90.8 billion in 1997, a
15% increase from 1996 attributable primarily to increased global activities and
higher sales of product services.
Earnings increased to a record $9.296 billion, a 13% increase from $8.203
billion reported in 1997. Earnings per share increased to $2.80 during 1998, up
14% from the prior year's $2.46. Except as otherwise noted, earnings per share
are presented on a diluted basis. Earnings in 1997 rose 13% from $7.280 billion
reported in 1996. In 1997, earnings per share increased 14% from $2.16 per share
in 1996. Growth rates in earnings per share exceeded growth rates in earnings as
a result of the ongoing repurchase of shares under the six-year, $17 billion
share repurchase plan initiated in December 1994.
A consolidated statement of changes in share owners' equity is provided on
page 26, summarizing information about movements in equity from transactions
with share owners and other sources. Additional information about such changes
is provided in note 25.
NEW ACCOUNTING STANDARDS issued in 1998 are described below.
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, requires that, upon adoption, all
derivative instruments (including certain derivative instruments embedded in
other contracts) be recognized in the balance sheet at fair value, and that
changes in such fair values be recognized in earnings unless specific hedging
criteria are met. Changes in the values of derivatives that meet these hedging
criteria will ultimately offset related earnings effects of the hedged items;
effects of certain changes in fair value are recorded in equity pending
recognition in earnings. GE will adopt the Statement on January 1, 2000. The
impact of adoption will be determined by several factors, including the specific
hedging instruments in place and their relationships to hedged items, as well as
market conditions. Management has not estimated the effects of adoption as it
believes that such determination will not be meaningful until closer to the
adoption date.
Statement of Position (SOP) 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES, provides guidance on accounting for start-up costs and organization
costs, which must be expensed as incurred. The SOP, which is consistent with
GE's previous accounting policy, is effective for financial statements beginning
January 1, 1999.
DIVIDENDS DECLARED IN 1998 AMOUNTED TO $4.081 BILLION. Per-share dividends of
$1.25 were up 16% from 1997, following a 14% increase from the preceding year.
GE has rewarded its share owners with 23 consecutive years of dividend growth.
The chart below illustrates that GE's dividend growth for the past five years
has significantly outpaced dividend growth of companies in the Standard & Poor's
500 stock index.
RETURN ON AVERAGE SHARE OWNERS' EQUITY reached 25.7% in 1998, up from 25.0% and
24.0% in 1997 and 1996, respectively.
[CHART HERE]
GE/S&P CUMULATIVE DIVIDEND GROWTH SINCE 1993
- -----------------------------------------------------------------------------
1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
GE 14.09% 26.41% 40.24% 58.25% 83.53%
S&P 500 4.77 9.62 18.44 23.21 28.78
- -----------------------------------------------------------------------------
<PAGE>
F-10
ANNUAL REPORT PAGE 34
- ---------------------
Except as otherwise noted, the analysis in the remainder of this section
presents GE results with GECS on an equity basis.
GE TOTAL REVENUES were $56.0 billion in 1998, compared with $54.5 billion in
1997 and $49.6 billion in 1996.
o GE sales of goods and services were $51.5 billion in 1998, an increase of 5%
from 1997, which in turn was 6% higher than in 1996. Volume was about 8%
higher in 1998, including acquisitions, reflecting growth in most businesses
during the year. While overall selling prices were down slightly in 1998,
the effects of selling prices on sales in various businesses differed
markedly. Revenues were also negatively affected by exchange rates for sales
denominated in other than U.S. dollars. Volume in 1997 was about 9% higher
than in 1996, with selling price and currency effects both slightly
negative.
For purposes of the required financial statement display of GE sales and
costs of sales on pages 26 and 27, "goods" refers to tangible products, and
"services" refers to all other sales, including broadcasting and information
services activities. An increasingly important element of GE sales relates
to product services, including both spare parts (goods) as well as repair
services. Sales of product services were $12.6 billion in 1998, including
acquisitions, a strong double-digit increase over 1997. Nearly all
businesses reported increases in product services revenues, led by
double-digit increases at Aircraft Engines, Transportation Systems and Power
Systems. Operating margin from product services was approximately $2.8
billion, up from $2.5 billion in 1997. This improvement was primarily
attributable to strong growth at Aircraft Engines and Power Systems.
o GE other income, earned from a wide variety of sources, was $0.7 billion in
1998, $2.3 billion in 1997 and $0.6 billion in 1996. The decrease in other
income in 1998 was primarily attributable to the lack of a current-year
counterpart to the $1,538 million after-tax gain realized in 1997 from
exchanging preferred stock in Lockheed Martin Corporation (Lockheed Martin)
for the stock of a newly formed subsidiary as described in note 2.
o Earnings of GECS were up 17% in 1998, following a 16% increase the year
before. See page 37 for an analysis of these earnings.
PRINCIPAL COSTS AND EXPENSES FOR GE are those classified as costs of goods and
services sold, and selling, general and administrative expenses.
The Six Sigma quality initiative is an important factor affecting GE's cost
structure. The benefits of Six Sigma quality are reflected in both variable and
base cost productivity (discussed on page 35) as well as in lower direct
material costs.
[CHART HERE]
GE OPERATING MARGIN AS A PERCENTAGE OF SALES
- -----------------------------------------------------------------------------
1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
AS REPORTED 13.6% 14.4% 14.8% 11.0% 16.7%
RESTRUCTURING AND
OTHER SPECIAL
CHARGES - - - 4.7 -
---------------------------------------------------
OPERATING MARGIN
BEFORE RESTRUCTURING
AND OTHER SPECIAL
CHARGES 13.6% 14.4% 14.8% 15.7% 16.7%
- -----------------------------------------------------------------------------
Comparisons between 1998 and 1997 costs and expenses are affected by
restructuring and other special charges amounting to $2,322 million recorded in
the fourth quarter of 1997. Aggregate restructuring charges of $1,243 million
covered certain costs of plans that will enhance GE's global competitiveness
through rationalization of certain production, service and administration
activities of its worldwide industrial businesses; among these charges were $577
million of special early retirement pension, health and life benefit costs,
including a one-time voluntary early retirement program that was provided to the
U.S. work force in the 1997 labor contracts. Also included in restructuring
charges were other severance costs as well as certain costs of exiting affected
properties, including site demolitions, asset write-offs and expected losses on
subleases.
Other special charges amounting to $1,079 million were also recorded in 1997,
principally associated with strategic decisions to enhance the long-term
competitiveness of certain industrial businesses and fourth-quarter developments
arising from past activities at several current and former manufacturing sites
not associated with any current business segments. Such special charges included
$275 million to reflect higher estimated manufacturing costs to fill firm
customer orders for an aircraft engine program and $261 million that related
principally to gas turbine warranty costs and costs arising from renegotiation
and resolution of certain disputes in the Power Systems business.
As discussed on page 35, restructuring and other special charges are not
allocated to segments for purposes of measuring segment profit.
OPERATING MARGIN is sales of goods and services less the costs of goods and
services sold, and selling, general and administrative expenses. GE operating
margin reached a record 16.7% of sales in 1998, compared with 15.7% achieved in
1997 before the effects of restructuring and other special charges, and 14.8% in
1996. Including restructuring and other special charges, GE reported operating
margin of 11.0% of sales in 1997. The improvement in ongoing operating margin in
<PAGE>
F-11
ANNUAL REPORT PAGE 35
- ---------------------
1998 was broad-based, with improvements in a majority of GE's businesses
reflecting the increasing benefits from GE's product services and Six Sigma
quality initiatives.
TOTAL COST PRODUCTIVITY (sales in relation to costs, both on a constant dollar
basis) has paralleled the significant improvement in GE's ongoing operating
margin. Total cost productivity in 1998 was 4.4%, reflecting benefits from the
Six Sigma quality initiative as well as higher volume. Three businesses --
Medical Systems, Power Systems and NBC -- achieved productivity in excess of 5%.
Total cost productivity was 4.2% in 1997, reflecting Six Sigma benefits and the
positive effects of higher volume. In 1997, three businesses -- Power Systems,
NBC and Plastics -- reported productivity in excess of 5%. The total
contribution of productivity in the last two years offset not only the negative
effects of total cost inflation, but also the effects of selling price
decreases.
GE INTEREST AND OTHER FINANCIAL CHARGES in 1998 amounted to $883 million,
compared with $797 million in 1997 and $595 million in 1996. Lower interest
rates in 1998 and 1997 were more than offset by higher average levels of
borrowings and other financing activities.
INCOME TAXES on a consolidated basis were 31.0% of pretax earnings in 1998,
compared with 26.6% in 1997 and 32.6% in 1996. The most significant factor
explaining 1997's lower effective tax rate was the 4.8% decrease attributable to
the realized gain on the tax-free exchange of Lockheed Martin Corporation
preferred stock. A more detailed analysis of the differences between the U.S.
federal statutory rate and the consolidated rate, as well as other information
about income tax provisions, is provided in note 8.
RETURN ON AVERAGE TOTAL CAPITAL INVESTED was 23.9% at year-end 1998, compared
with 23.6% in 1997 and 22.2% in 1996.
SEGMENT OPERATIONS
REVENUES AND SEGMENT PROFIT FOR OPERATING SEGMENTS are shown on page 36. At
year-end 1998, GE adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which requires segment data to be measured
and analyzed on a basis that is consistent with how business activities are
reported internally to management. The most significant change from previous
Annual Reports is that restructuring and other special charges are not included
in the measure of segment profit. Previously reported data have been restated as
required by SFAS No. 131. For additional information, including a description of
the products and services included in each segment, see note 28.
AIRCRAFT ENGINES achieved a 32% increase in revenues in 1998, following a 24%
increase in 1997, on higher volume in commercial engines and product services,
including acquisitions, in both years. Operating profit increased 30% in 1998,
and 13% in 1997, largely as a result of strong growth in product services as
well as good volume growth in commercial engines.
In 1998, $1.6 billion of Aircraft Engines revenues were from sales to the
U.S. government, an increase of $0.1 billion from 1997, which was $0.3 billion
lower than in 1996.
Aircraft Engines received orders of $10.8 billion in 1998, up $1.9 billion
from 1997. The backlog at year-end 1998 was $9.7 billion ($9.5 billion at the
end of 1997). Of the total, $7.5 billion related to products, about 52% of which
was scheduled for delivery in 1999, and the remainder related to 1999 product
services.
APPLIANCES revenues were 3% lower than a year ago, reflecting primarily selling
price decreases and, to a lesser extent, lower volume. Operating profit was 2%
lower as the decreases in selling prices and volume more than offset
productivity from Six Sigma. Revenues in 1997 were 4% higher than in 1996,
reflecting primarily acquisition-related volume. Operating profit increased 3%
in 1997, primarily as a result of productivity and higher volume, partially
offset by lower selling prices.
INDUSTRIAL PRODUCTS AND SYSTEMS revenues increased 2% in 1998, primarily as a
result of volume increases at Transportation Systems and Industrial Systems that
were partially offset by lower selling prices across most businesses in the
segment. Operating profit increased 5%, reflecting productivity from Six Sigma
and the improvement in volume, which more than offset the effects of selling
price decreases. Revenues rose 6% in 1997 as improved volume more than offset
weaker pricing across all businesses in the segment. Operating profit increased
13% in 1997, the result of Six Sigma-based productivity and volume improvements
across the segment, which more than offset the effects of lower selling prices.
Transportation Systems received orders of $2.4 billion in 1998, about the
same as in 1997. The backlog at year-end 1998 was $2.3 billion ($2.0 billion at
the end of 1997). Of the total, $2.1 billion related to products, about 83% of
which was scheduled for shipment in 1999, and the remainder related to 1999
product services.
NBC revenues increased 2% in 1998, reflecting higher revenues in NBC's
owned-and-operated stations, including revenues from station acquisitions and
growth in cable operations, the combination of which more than offset lower
network revenues. Operating profit was 11% higher than a year ago as improved
results in international, cable operations and owned-and-operated stations, as
well as cost reductions across NBC, more than offset higher license fees for
certain prime-time programs that were renewed. Revenues decreased 2% in 1997 as
a strong advertising marketplace was more than offset by the absence of a 1997
counterpart to NBC's broadcast of the 1996 Summer Olympic Games. Operating
profit increased 19% in 1997, reflecting improved prime-time pricing, strong
<PAGE>
F-12
ANNUAL REPORT PAGE 36
- ---------------------
<TABLE>
SUMMARY OF OPERATING SEGMENTS
<CAPTION>
General Electric Company and consolidated affiliates
------------------------------------------------------------------
For the years ended December 31 (In millions) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
GE
Aircraft Engines $ 10,294 $ 7,799 $ 6,302 $ 6,098 $ 5,830
Appliances 5,619 5,801 5,586 5,137 5,204
Industrial Products and Systems 11,222 10,984 10,401 10,209 9,375
NBC 5,269 5,153 5,232 3,919 3,361
Plastics 6,633 6,695 6,509 6,647 5,681
Power Systems 8,466 7,915 7,643 6,962 6,357
Technical Products and Services 5,323 4,861 4,700 4,430 4,285
All Other 264 308 291 292 253
Eliminations (1,367) (1,176) (1,032) (1,082) (1,068)
------------------------------------------------------------------
Total GE segment revenues 51,723 48,340 45,632 42,612 39,278
Corporate items <F1> 507 2,919 1,116 1,154 1,135
GECS net earnings from continuing operations 3,796 3,256 2,817 2,415 2,085
------------------------------------------------------------------
Total GE revenues 56,026 54,515 49,565 46,181 42,498
GECS segment revenues 48,694 39,931 32,713 26,492 19,875
Eliminations <F2> (4,251) (3,606) (3,099) (2,645) (2,264)
------------------------------------------------------------------
CONSOLIDATED REVENUES $ 100,469 $ 90,840 $ 79,179 $ 70,028 $ 60,109
====================================================================================================================================
SEGMENT PROFIT
GE
Aircraft Engines $ 1,769 $ 1,366 $ 1,214 $ 1,135 $ 987
Appliances 755 771 748 682 704
Industrial Products and Systems 1,880 1,789 1,587 1,488 1,305
NBC 1,349 1,216 1,020 797 540
Plastics 1,584 1,500 1,443 1,435 981
Power Systems 1,306 1,203 1,124 782 1,354
Technical Products and Services 1,109 988 855 810 806
All Other 271 310 282 285 245
------------------------------------------------------------------
Total GE operating profit 10,023 9,143 8,273 7,414 6,922
GECS net earnings from continuing operations 3,796 3,256 2,817 2,415 2,085
------------------------------------------------------------------
Total segment profit 13,819 12,399 11,090 9,829 9,007
Corporate items and eliminations <F3> (823) (1,589) (920) (548) (800)
GE interest and other financial charges (883) (797) (595) (649) (410)
GE provision for income taxes (2,817) (1,810) (2,295) (2,059) (1,882)
------------------------------------------------------------------
CONSOLIDATED NET EARNINGS FROM
CONTINUING OPERATIONS $ 9,296 $ 8,203 $ 7,280 $ 6,573 $ 5,915
====================================================================================================================================
<FN>
The notes to consolidated financial statements on pages 48-68 are an integral
part of this statement. "GE" means the basis of consolidation as described in
note 1 to the consolidated financial statements; "GECS" means General Electric
Capital Services, Inc. and all of its affiliates and associated companies.
<F1> Includes revenues of $944 million, $789 million, $796 million and $761
million in 1997, 1996, 1995 and 1994, respectively, from an appliance
distribution affiliate that was deconsolidated in 1998. Also includes
$1,538 million in 1997 from an exchange of preferred stock in Lockheed
Martin Corporation for the stock of a newly formed subsidiary.
<F2> Principally the elimination of GECS net earnings.
<F3> Includes 1997 restructuring and other special charges of $2,322 million. Of
the total, restructuring and other special charges that relate to
activities of GE operating segments were as follows: Aircraft Engines --
$342 million, Appliances -- $330 million, Industrial Products and Systems
-- $352 million, NBC -- $161 million, Plastics -- $63 million, Power
Systems -- $437 million and Technical Products and Services -- $157
million. Also included in 1997 is $1,538 million associated with the
Lockheed Martin Corporation transaction described in (F1) above.
</FN>
</TABLE>
<PAGE>
F-13
ANNUAL REPORT PAGE 37
- ---------------------
growth in both owned-and-operated stations and cable operations, and increased
international distribution of programming, the combination of which more than
offset the absence of a 1997 counterpart to the Olympics broadcast and higher
license fees for certain prime-time programs that were renewed.
PLASTICS revenues decreased 1% in 1998 as lower selling prices and adverse
currency exchange rates offset slightly higher volume. Operating profit in 1998
improved by 6% as lower material costs and productivity from Six Sigma more than
offset lower selling prices. Revenues grew 3% in 1997, reflecting an increase in
volume that was largely offset by lower selling prices and adverse currency
exchange rates. Operating profit increased 4% as Six Sigma-based productivity
and higher volume more than offset lower selling prices.
POWER SYSTEMS revenues increased 7% in 1998, reflecting primarily higher volume
in product services, including acquisitions, which was partially offset by lower
selling prices. Operating profit increased 9% in 1998 as growth in product
services and productivity more than offset the effects of lower selling prices.
Revenues in 1997 were 4% higher than in 1996, primarily as a result of higher
volume in gas turbines and product services. Operating profit increased by 7%,
the result of strong productivity and higher volume, which more than offset
lower selling prices.
Power Systems orders were $10.5 billion for 1998, an increase of more than
50% over 1997, reflecting strong U.S. market growth. The backlog of unfilled
orders at year-end 1998 was $12.4 billion ($10.5 billion at the end of 1997). Of
the total, $11.3 billion related to products, about 45% of which was scheduled
for delivery in 1999, and the remainder related to 1999 product services.
TECHNICAL PRODUCTS AND SERVICES revenues rose 10% in 1998, following a 3%
increase in 1997. The improvement in revenues in both years was primarily
attributable to growth at Medical Systems, the result of higher equipment volume
and continued growth in product services, partially offset by lower selling
prices across the segment. Operating profit increased 12% in 1998 as
productivity from Six Sigma and volume increases, particularly at Medical
Systems, more than offset lower selling prices. Operating profit increased 16%
in 1997 as productivity and higher volume more than offset the effects of lower
selling prices.
Orders received by Medical Systems in 1998 were $4.8 billion, up $0.5 billion
from 1997. The backlog of unfilled orders at year-end 1998 was $2.6 billion
($2.4 billion at the end of 1997). Of the total, $1.5 billion related to
products, about 80% of which was scheduled for delivery in 1999, and the
remainder related to 1999 product services.
[CHART HERE]
OPERATING PROFIT OF GE SEGMENTS
- -----------------------------------------------------------------------------
(IN BILLIONS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
$6.922 $7.414 $8.273 $9.143 $10.023
- -----------------------------------------------------------------------------
ALL OTHER GE revenues and operating profit consist primarily of residual royalty
payments and other fees earned from licensing the use of GE technology to
others. Effective January 1, 1999, GE transferred certain licenses and
intellectual property pursuant to an agreement to sell the former RCA Consumer
Electronics business. Details of licensing income derived from these assets is
provided in note 2.
GECS consists of 28 businesses that, for purposes of the analysis that follows,
are grouped into five operating activities: consumer services, equipment
management, mid-market financing, specialized financing and specialty insurance.
GECS net earnings were $3.796 billion in 1998, up 17% from $3.256 billion in
1997, which increased 16% from 1996. Each operating activity achieved a
double-digit earnings increase in 1998. The improvement in earnings in both 1998
and 1997 was largely attributable to the effects of continued asset growth,
principally from acquisitions of businesses and portfolios and higher
origination volume.
o GECS total revenues increased 22% to $48.7 billion in 1998, following a 22%
increase to $39.9 billion in 1997. The increases in both years reflected
the contributions of businesses acquired as well as growth in core volume.
o GECS cost of goods sold is associated with activities of its computer
equipment distribution businesses. This cost amounted to $6.8 billion in
1998, compared with $4.1 billion in 1997 and $1.7 billion in 1996,
principally the result of acquisition-related growth.
o GECS interest on borrowings in 1998 was $9.0 billion, 17% higher than in
1997, which was 4% higher than in 1996. The increases in 1998 and 1997 were
caused by higher average borrowings used to finance asset growth, partially
offset by the effects of lower average interest rates. The composite
<PAGE>
F-14
ANNUAL REPORT PAGE 38
- ---------------------
interest rate was 5.92% in 1998, compared with 6.07% in 1997 and 6.24% in
1996. See page 43 for a discussion of interest rate risk management.
o GECS insurance losses and policyholder and annuity benefits increased to
$9.6 billion in 1998, compared with $8.3 billion in 1997 and $6.7 billion
in 1996, reflecting effects of business acquisitions and growth in premium
volume throughout the period.
o GECS provision for losses on financing receivables increased to $1.6
billion in 1998, compared with $1.4 billion in 1997 and $1.0 billion in
1996. These provisions principally related to private-label credit cards,
bank credit cards, auto loans and auto leases in the consumer services
operations, all of which are discussed on page 39 under financing
receivables. The increases principally reflected higher average receivable
balances and the effects of delinquency rates -- higher during 1997 and
lower during 1998 -- consistent with industry experience.
o GECS other costs and expenses were $16.4 billion in 1998, an increase from
$13.9 billion in 1997 and $11.7 billion in 1996. The increase in both 1998
and 1997 primarily reflected costs associated with acquired businesses and
portfolios, higher investment levels and increases in insurance commissions
and other costs that vary directly with increased revenues. Financing
spreads (the excess of yields over interest rates on borrowings) were
essentially flat in 1998, 1997 and 1996, reflecting slightly lower yields
offset by decreases in borrowing rates.
Revenues and net earnings from operating activities within the GECS segment
for the past three years are summarized and discussed below.
----------------------------------------
(In millions) 1998 1997 1996
----------------------------------------
REVENUES
Consumer services $ 15,948 $ 13,550 $ 11,109
Equipment management 14,869 11,326 7,725
Mid-market financing 3,751 3,009 2,781
Specialized financing 3,368 2,828 2,944
Specialty insurance 10,594 8,836 8,185
All other 164 382 (31)
----------------------------------------
Total revenues $ 48,694 $ 39,931 $ 32,713
----------------------------------------
NET EARNINGS
Consumer services $ 797 $ 544 $ 791
Equipment management 806 708 603
Mid-market financing 478 391 362
Specialized financing 745 593 563
Specialty insurance 1,166 973 852
All other (196) 47 (354)
----------------------------------------
Total net earnings $ 3,796 $ 3,256 $ 2,817
================================================================================
[CHART HERE]
GECS REVENUES
- -----------------------------------------------------------------------------
(IN BILLIONS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
$19.875 $26.492 $32.713 $39.931 $48.694
- -----------------------------------------------------------------------------
CONSUMER SERVICES revenues increased 18% in 1998 and 22% in 1997. This
growth -- largely acquisition related -- was led by higher premium and
investment income at GE Financial Assurance, the consumer savings and insurance
business of GECS. Asset growth in several of the other consumer services
businesses also contributed to the increase in 1998. Net earnings increased 47%
in 1998, following a 31% decrease in 1997. Comparisons of revenues and net
earnings throughout the period were affected by the operating results of
Montgomery Ward Holding Corp., which are discussed on page 40. Net earnings in
1998 also reflected acquisition and core volume growth, led by the Global
Consumer Finance and GE Financial Assurance businesses. Overall gains on asset
sales, including securitizations, were higher in 1997 than in 1998; gains in
1998 included the sale of certain bankcard assets. Net earnings in 1997 were
affected by increased automobile residual losses, partially offset by
acquisition and core growth, principally at GE Financial Assurance. A higher
provision for losses on financing receivables also affected earnings in both
years, as discussed previously.
EQUIPMENT MANAGEMENT revenues grew 31% in 1998, following a 47% increase in
1997, primarily as a result of acquisitions by IT Solutions and, to a lesser
extent, asset growth. Net earnings increased 14% in 1998, following a 17%
increase in 1997. Increases in both years reflected higher volumes in most
businesses resulting from origination growth and acquisitions of businesses and
portfolios, with those effects in 1998 partially offset by lower earnings at IT
Solutions and Modular Space, primarily the result of lower pricing from
competitive market conditions and higher operating expenses.
<PAGE>
F-15
ANNUAL REPORT PAGE 39
- ---------------------
MID-MARKET FINANCING revenues increased 25% in 1998, compared with an 8%
increase in 1997. Net earnings for these businesses grew 22% and 8% in 1998 and
1997, respectively. Asset growth resulting from higher volumes and acquisitions
of businesses and portfolios was the most significant contributing factor in
both years. Revenues and net earnings were also favorably affected in 1998 by
the disposition of certain assets.
SPECIALIZED FINANCING revenues rose 19% and net earnings increased 26% in
1998. The increase in revenues reflected asset growth and a higher level of
asset gains, while the increase in net earnings included those factors as well
as the effects of certain tax-advantaged transactions and higher levels of tax
credits. Revenues decreased 4% in 1997, primarily as a result of lower
investment levels. Net earnings increased 5% in 1997, reflecting asset gains and
lower levels of asset write-offs.
SPECIALTY INSURANCE revenues and net earnings both increased 20% in 1998,
following 8% revenue growth and 14% net earnings growth in 1997. The increases
in both years resulted from increased premium and investment income associated
with origination volume, acquisitions and continued growth in the investment
portfolios, as well as a higher level of realized gains on investment
securities. Net earnings in both years were also favorably affected by improved
conditions in the Mortgage Insurance business, the result of improvements in
loss experience.
Within GE Global Insurance, the principal subsidiary of which is Employers
Reinsurance Corporation, net premiums earned increased in 1998, primarily as a
result of core and acquisition growth in both the property and casualty and life
businesses. GE Global Insurance property and casualty underwriting results
improved in 1998, reflecting a general reduction in incurred losses caused by a
decline in both the frequency and overall severity of claims, partially offset
by the effects of hurricane and other weather-related catastrophe losses. GE
Global Insurance net premiums earned on U.S. business increased in 1997 -- the
result of strong growth in the life reinsurance business -- while net premiums
earned on European business declined, reflecting the effects of currency
translation and market conditions. Property and casualty underwriting results at
GE Global Insurance decreased in 1997, reflecting increased underwriting and
operating expenses and adverse European market conditions, offset by growth in
the life reinsurance business.
ALL OTHER GECS revenues and net earnings in 1997 included asset gains, the
largest of which was $284 million (net of tax) from a transaction that included
the reduction of the GECS investment in the common stock of Paine Webber Group
Inc.
[CHART HERE]
GECS NET EARNINGS FROM CONTINUING OPERATIONS
- -----------------------------------------------------------------------------
(IN BILLIONS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
$2.085 $2.415 $2.817 $3.256 $3.796
- -----------------------------------------------------------------------------
FINANCING RECEIVABLES are the largest GECS asset and one of its primary
sources of revenues. The portfolio of financing receivables, before allowance
for losses, increased to $124.9 billion at the end of 1998 from $106.6 billion
at the end of 1997, principally reflecting acquisition growth and origination
volume that were partially offset by securitizations and other sales of
receivables. The related allowance for losses at the end of 1998 amounted to
$3.3 billion ($2.8 billion at the end of 1997) and, in management's judgment, is
appropriate given the risk profile of the portfolio.
A discussion of the quality of certain elements of the financing receivable
portfolio follows. "Nonearning" receivables are those that are 90 days or more
delinquent (or for which collection has otherwise become doubtful) and
"reduced-earning" receivables are commercial receivables whose terms have been
restructured to a below-market yield. The following discussion of the nonearning
and reduced-earning receivable balances and write-off amounts excludes amounts
related to Montgomery Ward Holding Corp. and affiliates, which are separately
discussed on page 40.
Consumer financing receivables at year-end 1998 and 1997 are shown in the
following table.
-----------------------
(In millions) 1998 1997
- --------------------------------------------------------------------------------
Credit card and personal loans $28,064 $25,773
Auto loans 9,496 8,973
Auto financing leases 14,063 13,346
-----------------------
Total consumer financing receivables $51,623 $48,092
-----------------------
Nonearning $ 1,250 $ 1,049
-- As percentage of total 2.4% 2.2%
Receivable write-offs for the year $ 1,357 $ 1,298
================================================================================
The increase in credit card and personal loan portfolios primarily resulted
from acquisition growth and origination volume, partially offset by
securitizations and other sales of receivables. Both the auto loan and financing
<PAGE>
F-16
ANNUAL REPORT PAGE 40
- ---------------------
lease portfolios increased primarily as a result of acquisition growth; however,
the increase in auto financing leases was partially offset by decreases in U.S.
lease volume. A substantial amount of the nonearning consumer receivables were
private-label credit card loans that were subject to various loss-sharing
agreements that provide full or partial recourse to the originating retailer.
Increased write-offs of consumer receivables were primarily attributable to the
impact of higher average receivable balances.
Other financing receivables, totaling $73.3 billion at December 31, 1998,
consisted of a diverse commercial, industrial and equipment loan and lease
portfolio. This portfolio increased $14.8 billion during 1998, reflecting the
combination of acquisition growth and increased origination volume, partially
offset by sales of receivables. Related nonearning and reduced-earning
receivables were $354 million at year-end 1998, compared with $353 million at
year-end 1997.
As discussed in note 13, Montgomery Ward Holding Corp. (MWHC) filed a
bankruptcy petition for reorganization in 1997. The GECS after-tax share of the
losses of MWHC and affiliates was $49 million in 1998 and $380 million in 1997.
The GECS investment in MWHC and affiliates at year-end was $622 million in 1998
and $795 million in 1997 (of which $578 million and $617 million, respectively,
were classified as financing receivables). GECS also provides revolving credit
card financing directly to customers of MWHC and affiliates; such receivables
totaled $3.4 billion at December 31, 1998, including $1.6 billion that had been
sold with recourse. The obligations of customers with respect to these
receivables are not affected by the bankruptcy filing. On February 1, 1999, MWHC
announced that it plans to emerge from bankruptcy protection in mid-1999 as a
result of an agreement reached with the creditors' committee.
GECS loans and leases to commercial airlines amounted to $10.2 billion at the
end of 1998, up from $9.0 billion at the end of 1997. GECS commercial aircraft
positions also included financial guarantees, funding commitments and aircraft
orders as discussed in note 17.
INTERNATIONAL OPERATIONS
Estimated results of international activities include the results of GE and GECS
operations located outside the United States, plus all U.S. exports. Certain
GECS operations that cannot meaningfully be associated with specific geographic
areas are classified as "other international" for this purpose.
[CHART HERE]
CONSOLIDATED INTERNATIONAL REVENUES
- -----------------------------------------------------------------------------
(IN BILLIONS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
INTERNATIONAL
OPERATIONS $14.205 $20.768 $25.447 $29.328 $33.756
EXPORTS AND LICENSING
INCOME 6.755 7.480 7.846 9.199 9.001
- -----------------------------------------------------------------------------
International revenues in 1998 were $42.8 billion (43% of consolidated
revenues), compared with $38.5 billion in 1997 and $33.3 billion in 1996. The
chart above depicts the growth in international revenues over the past five
years.
- --------------------------------------------------------------------------------
CONSOLIDATED INTERNATIONAL REVENUES
-------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Europe (a) $21,665 $18,166 $15,964
Pacific Basin 5,166 4,742 4,343
Americas 5,030 4,632 3,443
Other 1,895 1,788 1,697
-------------------------------
33,756 29,328 25,447
RCA residual licensing income 250 287 265
Exports from the U.S. to
external customers 8,751 8,912 7,581
-------------------------------
$42,757 $38,527 $33,293
================================================================================
(a) Includes $944 million and $789 million in 1997 and 1996, respectively, from
an appliance distribution affiliate that was deconsolidated in 1998.
- --------------------------------------------------------------------------------
GE international revenues were $24.6 billion in 1998, an increase of $0.7
billion from the comparable figure in 1997, which was $2.9 billion higher than
in 1996. Over the three-year period, international revenues were slightly less
than half of total revenues. The increase in revenues during 1998 reflected
sales growth in operations based outside the United States, partially offset by
lower U.S. exports. European revenues were 11% higher in 1998, reflecting
increases in both local operations and in exports to the region, with
particularly strong growth at Aircraft Engines. As expected, Pacific Basin
revenues were 6% lower in 1998, reflecting primarily a decrease in exports to
the region. Further information about the activities of GE and GECS in Asia is
provided on page 41. International revenues from the Americas (North and South
America, except for the United States) increased 8%, primarily as a result of
strong growth in exports, particularly at Transportation Systems and Power
Systems, and slightly higher revenues from local operations.
<PAGE>
F-17
ANNUAL REPORT PAGE 41
- ---------------------
[CHART HERE]
CONSOLIDATED INTERNATTIONAL REVENUES BY REGION
- -----------------------------------------------------------------------------
(IN BILLIONS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
EUROPE $9.043 $14.062 $18.030 $20.634 $24.353
PACIFIC BASIN 5.976 7.183 7.573 7.981 8.058
AMERICAS 3.441 4.110 4.706 6.196 6.907
OTHER 2.500 2.893 2.984 3.716 3.439
- -----------------------------------------------------------------------------
GECS international revenues were $18.2 billion in 1998, an increase of 33%
from $13.7 billion in 1997. International assets grew 36%, from $79.2 billion at
year-end 1997 to $107.8 billion at the end of 1998. Revenues in Europe increased
38% in 1998, reflecting a mix of acquisition and core growth across all GECS
operating activities. At the same time, revenues in the Pacific Basin grew 51%,
principally in Japan, and principally as a result of consumer financing
acquisitions by Global Consumer Finance and the acquisition of Toho Mutual
Life's infrastructure and sales force by GE Financial Assurance. International
revenues from the Americas increased 21% in 1998, largely as a result of
acquisitions and core growth in Canada and Latin America. Overall, these
increases reflect the continued expansion of GECS as a global provider of a wide
range of services.
Consolidated international operating profit was $5.4 billion in 1998,
compared with $5.1 billion in 1997 and $3.8 billion in 1996. International
activities accounted for 36% of consolidated operating profit, about the same as
in 1997 on a comparable basis. Additional information is provided in note 29.
Total assets of international operations were $128.8 billion in 1998 (36% of
consolidated assets), an increase of 32% over 1997, reflecting double-digit
growth in both GE and GECS activities outside the United States. The increase
reflected sharp growth in Asia, where current economic conditions continue to
provide a favorable environment for strategic investments. GE and GECS also had
strong asset growth in operations based in Europe and the Americas.
The activities of GE and GECS span all global regions and primarily
encompass manufacturing for local and export markets, import and sale of
products produced in other regions, leasing of aircraft, sourcing for GE plants
domiciled in other global regions and provision of financial services within
these regional economies. As such, when certain countries such as Russia or
regions such as the Pacific Basin and Latin America experience currency and/or
economic stress, GE may have increased exposure to certain risks but also may
have new profit opportunities. Increased risks include, among other things,
higher receivables delinquencies and bad debts, delays or cancellation of sales
and orders principally related to power and aircraft-related equipment, higher
local currency financing costs and a slowdown in established financial services
activities. New profit opportunities include, among other things, lower costs of
goods sourced from countries with weakened currencies, more opportunities for
lower cost outsourcing, expansion of industrial and financial services
activities through purchases of companies or assets at reduced prices and lower
U.S. debt financing costs. Thus, while GE's global activities warrant close
monitoring and significant management attention, regional economic disruptions
had only a modest adverse effect on the overall financial position, results of
operations and liquidity of GE and GECS in 1998, and there is little change in
the outlook for 1999.
As discussed previously, GE's international activities are diverse. Financial
results of those activities reported in U.S. dollars are affected by currency
exchange. A number of techniques are used to manage the effects of currency
exchange, including selective borrowings in local currencies and selective
hedging of significant cross-currency transactions. Principal currencies are the
major European currencies, including the euro, as well as the Japanese yen and
the Canadian dollar.
[CHART HERE]
TOTAL ASSETS OF INTERNATTIONAL OPERATIONS
- -----------------------------------------------------------------------------
(IN BILLIONS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
EUROPE $21.5869 $44.1072 $55.1956 $66.7401 $84.5179
PACIFIC BASIN 4.4908 6.4424 8.1245 8.8814 18.4266
AMERICAS 5.6118 6.5591 7.2265 8.6168 11.2481
OTHER 11.6541 12.2167 12.4287 13.3090 14.6307
- -----------------------------------------------------------------------------
<PAGE>
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ANNUAL REPORT PAGE 42
- ---------------------
MANAGEMENT'S DISCUSSION OF FINANCIAL RESOURCES AND LIQUIDITY
OVERVIEW
This discussion of financial resources and liquidity addresses the Statement of
Financial Position (page 28) and the Statement of Cash Flows (page 30).
GECS is not a "captive finance company" or a vehicle for "off-balance-sheet
financing" for GE. Only a small portion of GECS business is directly related to
other GE operations. The fundamental differences between GE and GECS are
reflected in the measurements commonly used by investors, rating agencies and
financial analysts. These differences will become clearer in the discussion that
follows with respect to the more significant items in the financial statements.
STATEMENT OF FINANCIAL POSITION
Because GE and GECS share certain significant elements of their Statements of
Financial Position -- property, plant and equipment, and borrowings, for example
- -- the following discussion addresses significant captions in the "consolidated"
statement. Within the following discussions, however, distinction is drawn
between GE and GECS activities in order to permit analysis of each individual
statement.
INVESTMENT SECURITIES for each of the past two years comprised mainly
investment-grade debt securities held by the specialty insurance and annuity and
investment businesses of GECS in support of obligations to policyholders and
annuitants. GE investment securities were $259 million at year-end 1998, about
the same as at the end of 1997. The increase of $8.1 billion at GECS during 1998
was principally related to acquisitions and investment of premiums received. A
breakdown of the investment securities portfolio is provided in note 10.
CURRENT RECEIVABLES for GE were $8.5 billion at the end of 1998, a decrease of
$0.6 billion from year-end 1997, and included $5.4 billion due from customers at
the end of 1998, which was $0.7 billion lower than the amount due at the end of
1997. As a measure of asset management, turnover of customer receivables from
sales of goods and services was 8.8 in 1998, compared with 7.7 in 1997. Other
current receivables are primarily amounts that did not originate from sales of
GE goods or services, such as advances to suppliers in connection with large
contracts.
INVENTORIES for GE were $5.3 billion at December 31, 1998, up $0.2 billion from
the end of 1997. GE inventory turnover improved to 8.3 in 1998, compared with
7.8 in 1997, reflecting continuing improvements in inventory management.
Last-in, first-out (LIFO) revaluations decreased $87 million in 1998, compared
with decreases of $119 million in 1997 and $128 million in 1996. Included in
these changes were decreases of $29 million, $59 million and $58 million in
1998, 1997 and 1996, respectively, that resulted from lower LIFO inventory
levels. There were net cost decreases in each of the last three years.
[CHART HERE]
GE INVENTORY TURNOVER
- -----------------------------------------------------------------------------
1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
6.86 6.90 7.57 7.75 8.25
- -----------------------------------------------------------------------------
Inventories (at FIFO) and customer receivables from sales of goods or
services are two key components of GE's working capital turnover measurement.
Working capital turnover increased from 6.3 turns in 1996 to 7.4 and 9.2 turns
in 1997 and 1998, respectively. Working capital also includes trade accounts
payable and progress collections.
GECS inventories were $744 million and $786 million at December 31, 1998 and
1997, respectively. The decrease in 1998 primarily reflected improved inventory
management in the computer equipment distribution businesses.
FINANCING RECEIVABLES of GECS were $121.6 billion at year-end 1998, net of
allowance for doubtful accounts, up $17.8 billion over 1997. These receivables
are discussed on pages 39 and 40 and in notes 7 and 13.
OTHER RECEIVABLES of GECS were $26.0 billion and $18.3 billion at December 31,
1998 and 1997, respectively. Of the 1998 increase, $3.6 billion was attributable
to acquisitions and the remainder resulted from core growth.
PROPERTY, PLANT AND EQUIPMENT (including equipment leased to others) was $35.7
billion at December 31, 1998, up $3.4 billion from 1997. GE property, plant and
equipment consists of investments for its own productive use, whereas the
largest element for GECS is in equipment provided to third parties on operating
leases. Details by category of investment can be found in note 15.
GE total expenditures for new plant and equipment during 1998 totaled $2.0
billion, down $0.2 billion from 1997. Total expenditures for the past five years
were $10.2 billion, of which 38% was investment for growth through new capacity
and product development; 32% was investment in productivity through new
<PAGE>
F-19
ANNUAL REPORT PAGE 43
- ---------------------
equipment and process improvements; and 30% was investment for such other
purposes as improvement of research and development facilities and safety and
environmental protection.
GECS additions to equipment leased to others, including business
acquisitions, were $7.2 billion during 1998 ($6.8 billion during 1997),
primarily reflecting acquisitions of vehicles and aircraft.
INTANGIBLE ASSETS were $23.6 billion at year-end 1998, up from $19.1 billion at
year-end 1997. GE intangibles increased to $10.0 billion from $8.8 billion at
the end of 1997, principally as a result of goodwill from a number of
acquisitions, the largest of which was the equipment services division of
Stewart & Stevenson. The $3.3 billion increase in GECS intangibles also related
primarily to goodwill from acquisitions, the largest of which were the consumer
finance business of Lake Corporation (Lake) in Japan and Metlife Capital in the
United States.
ALL OTHER ASSETS totaled $52.9 billion at year-end 1998, an increase of $13.1
billion from the end of 1997. GE other assets increased $3.3 billion,
principally reflecting an increase in the prepaid pension asset and investments
in certain newly acquired affiliates that were not yet consolidated. The
increase in GECS other assets of $9.9 billion related principally to additional
investments in associated companies, increases in assets acquired for resale,
primarily residential mortgages, and increases in "separate accounts," which are
investments controlled by policyholders and are associated with identical
amounts reported as insurance liabilities.
CONSOLIDATED BORROWINGS aggregated $175.0 billion at December 31, 1998, compared
with $144.7 billion at the end of 1997. The major debt-rating agencies evaluate
the financial condition of GE and of GE Capital (the major public borrowing
entity of GECS) differently because of their distinct business characteristics.
Using criteria appropriate to each and considering their combined strength,
those major rating agencies continue to give the highest ratings to debt of both
GE and GE Capital.
[CHART HERE]
GE WORKING CAPITAL TURNOVER
- -----------------------------------------------------------------------------
1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
5.75 5.56 6.30 7.42 9.22
- -----------------------------------------------------------------------------
GE has committed to contribute capital to GE Capital in the event of either a
decrease below a specified level in the ratio of GE Capital's earnings to fixed
charges, or a failure to maintain a specified debt-to-equity ratio in the event
certain GE Capital preferred stock is redeemed. GE also has guaranteed
subordinated debt of GECS with a face amount of $1.0 billion at December 31,
1998 and 1997. Management believes the likelihood that GE will be required to
contribute capital under either the commitments or the guarantees is remote.
GE total borrowings were $4.1 billion at year-end 1998 ($3.4 billion
short-term, $0.7 billion long-term), a decrease of $0.3 billion from year-end
1997. GE total debt at the end of 1998 equaled 9.5% of total capital, down from
11.1% at the end of 1997.
GECS total borrowings were $172.2 billion at December 31, 1998, of which
$113.2 billion is due in 1999 and $59.0 billion is due in subsequent years.
Comparable amounts at the end of 1997 were $141.3 billion total, $95.3 billion
due within one year and $46.0 billion due thereafter. A large portion of GECS
borrowings ($87.0 billion and $71.2 billion at the end of 1998 and 1997,
respectively) was issued in active commercial paper markets that management
believes will continue to be a reliable source of short-term financing. Most of
this commercial paper was issued by GE Capital. The average remaining terms and
interest rates of GE Capital commercial paper were 45 days and 5.35% at the end
of 1998, compared with 44 days and 5.83% at the end of 1997. The GE Capital
ratio of debt to equity was 7.86 to 1 at the end of 1998 and 7.45 to 1 at the
end of 1997.
INTEREST RATE AND CURRENCY RISK MANAGEMENT is important in the normal
operations of both GE and GECS. The following discussion presents an overview of
such management. A related discussion of recent developments in the global
economy is provided on page 41.
GE and GECS use various financial instruments, particularly interest rate and
currency swaps, but also futures, options and currency forwards, to manage their
respective interest rate and currency risks. GE and GECS are exclusively end
users of these instruments, which are commonly referred to as derivatives;
neither GE nor GECS engages in trading, market-making or other speculative
activities in the derivatives markets. Established practices require that
derivative financial instruments relate to specific asset, liability or equity
transactions or to currency exposures. More detailed information about these
financial instruments, as well as the strategies and policies for their use, is
provided in notes 1, 19 and 30.
The U.S. Securities and Exchange Commission requires that registrants
include information about potential effects of changes in interest rates and
currency exchange in their financial statements. Although the rules offer
alternatives for presenting this information, none of the alternatives is
<PAGE>
F-20
ANNUAL REPORT PAGE 44
- ---------------------
without limitations. The following discussion is based on so-called "shock
tests," which model effects of interest rate and currency shifts on the
reporting company. Shock tests, while probably the most meaningful analysis
permitted, are constrained by several factors, including the necessity to
conduct the analysis based on a single point in time and by their inability to
include the complex market reactions that normally would arise from the market
shifts modeled. While the following results of shock tests for interest rates
and currencies may have some limited use as benchmarks, they should not be
viewed as forecasts.
o One means of assessing exposure to interest rate changes is a
duration-based analysis that measures the potential loss in net earnings
resulting from a hypothetical increase in interest rates of 100 basis
points across all maturities (sometimes referred to as a "parallel shift in
the yield curve"). Under this model, it is estimated that, all else
constant, such an increase, including repricing effects in the securities
portfolio, would reduce the 1999 net earnings of GECS based on year-end
1998 positions by approximately $111 million; the pro forma effect for GE
was approximately $17 million. Based on conditions at year-end 1997, the
effect on 1998 net earnings of such an increase in interest rates was
estimated to be approximately $112 million for GECS.
o As shown in the chart above right, the geographic distribution of GE and
GECS operations is diverse. One means of assessing exposure to changes in
currency exchange rates is to model effects on reported earnings using a
sensitivity analysis. Year-end 1998 consolidated currency exposures,
including financial instruments designated and effective as hedges, were
analyzed to identify GE and GECS assets and liabilities denominated in
other than their relevant functional currency. Net unhedged exposures in
each currency were then remeasured assuming a 10% decrease (substantially
greater decreases for hyperinflationary currencies) in currency exchange
rates compared with the U.S. dollar. Under this model, it is estimated
that, all else constant, such a decrease would reduce the 1999 net earnings
of GE based on year-end 1998 positions by approximately $11 million; the
pro forma effect for GECS was insignificant. Based on conditions at
year-end 1997, the effect on 1998 net earnings of such a decrease in
exchange rates was estimated to be approximately $10 million for GE.
INSURANCE LIABILITIES, RESERVES AND ANNUITY BENEFITS were $77.3 billion, $10.0
billion higher than in 1997. The increase was primarily attributable to
acquisitions and the increase in separate accounts. For additional information
on these liabilities, see note 20.
[CHART HERE]
CONSOLIDATED TOTAL ASSETS
- -----------------------------------------------------------------------------
(IN BILLIONS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
UNITED STATES $142.527 $158.710 $189.427 $206.465 $227.112
INTERNATIONAL 43.344 69.325 82.975 97.547 128.823
- -----------------------------------------------------------------------------
YEAR 2000 will test the capability of business processes to function correctly.
GE and GECS have undertaken a global effort to identify and mitigate Year 2000
issues in their information systems, products, facilities and suppliers. Each
business has a Year 2000 leader who oversees a multifunctional remediation
project team responsible for applying a Six Sigma quality approach in four
phases: (1) DEFINE/MEASURE - identify and inventory possible sources of Year
2000 issues; (2) ANALYZE - determine the nature and extent of Year 2000 issues
and develop project plans to address those issues; (3) IMPROVE - execute project
plans and perform a majority of the testing; and (4) CONTROL - complete testing,
continue monitoring readiness and complete necessary contingency plans. The
progress of this program is monitored at each business, and Company-wide reviews
with senior management are conducted quarterly. The first three phases of the
program have been completed for a substantial majority of mission-critical
activities. Management plans to have nearly all significant information systems,
products and facilities through the control phase of the program by mid-1999.
The scope of the global Year 2000 effort encompasses approximately 170,000
applications and computer programs; 8,000 types of installed-base products and
services; up to 35,000 pieces of equipment in facilities; and 30,000 direct
suppliers. Business operations are also affected by the Year 2000 readiness of
customers and infrastructure suppliers in areas such as utilities,
communications, transportation and other services. In this environment, there
will likely be instances of failure that could cause disruptions in business
processes for GE and GECS businesses, affect their customers' ability to repay
amounts owed or result in an increased level of insurance claims activity. The
likelihood and effects of failures in the customer base, infrastructure systems
and in the supply chain cannot be estimated. However, with respect to operations
<PAGE>
F-21
ANNUAL REPORT PAGE 45
- ---------------------
under its direct control, management does not expect, in view of its Year 2000
program efforts and the diversity of its businesses, suppliers and customers,
that occurrences of Year 2000 failures will have a material adverse effect on
the financial position, results of operations or liquidity of GE or GECS.
Including amounts attributable to recent acquisitions, total Year 2000
remediation expenditures are expected to be approximately $575 million, of which
60% was spent by the end of 1998. Substantially all of the remainder is expected
to be spent in 1999. Most of these costs are not likely to be incremental costs,
but rather will represent the redeployment of existing resources. The activities
involved in the Year 2000 effort necessarily involve estimates and projections
of activities and resources that will be required in the future. These estimates
and projections could change as work progresses.
STATEMENT OF CASH FLOWS
Because cash management activities of GE and GECS are separate and distinct, it
is more useful to review their cash flows separately.
GE CASH AND EQUIVALENTS aggregated $1.2 billion at the end of 1998, about the
same as at year-end 1997. During 1998, GE generated a record $10.0 billion in
cash from operating activities, an increase of $0.7 billion over 1997. The
increase reflected improvements in earnings and working capital, including cash
from monetization of receivables. The 1998 cash generation provided most of the
resources needed to repurchase $3.6 billion of GE common stock under the share
repurchase program, to pay $3.9 billion in dividends to share owners, to invest
$2.0 billion in new plant and equipment and to make $1.5 billion in
acquisitions.
Operating activities are the principal source of GE's cash flows. Over the
past three years, operating activities have provided more than $28 billion of
cash. The principal application of this cash was distributions of approximately
$21 billion to share owners, both through payment of dividends ($10.4 billion)
and through the share repurchase program ($10.4 billion) described below. Other
applications included investment in new plant and equipment ($6.6 billion) and
acquisitions ($4.0 billion).
The GE Board of Directors has authorized repurchase of $17 billion of common
stock under the share repurchase program. This buyback will continue through the
year 2000 at an annual rate of about $2 billion. Funds used for the share
repurchase are expected to be generated largely from operating cash flow.
[CHART HERE]
GE CUMULATIVE CASH FLOWS SINCE 1993
- -----------------------------------------------------------------------------
(IN BILLIONS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
CASH FLOWS FROM
OPERATING
ACTIVITIES $6.071 $12.136 $21.203 $30.520 $40.552
SHARES REPURCHASED 1.073 4.175 7.441 10.933 14.579
DIVIDENDS PAID 2.462 5.232 8.282 11.693 15.606
- -----------------------------------------------------------------------------
Based on past performance and current expectations, in combination with the
financial flexibility that comes with a strong balance sheet and the highest
credit ratings, management believes that GE is in a sound position to complete
the share repurchase program, to grow dividends in line with earnings, and to
continue making selective investments for long-term growth. Expenditures for new
plant and equipment are expected to be about $2.0 billion in 1999, principally
for productivity and growth. The expected level of expenditures was moderated by
the Six Sigma quality program's success in freeing capacity.
GECS CASH AND EQUIVALENTS aggregated $3.3 billion at the end of 1998, down from
$4.9 billion at year-end 1997. One of the primary sources of cash for GECS is
financing activities involving the continued rollover of short-term borrowings
and appropriate addition of borrowings with a reasonable balance of maturities.
Over the past three years, GECS borrowings with maturities of 90 days or less
have increased by $40.9 billion. New borrowings of $85.2 billion having
maturities longer than 90 days were added during those years, while $78.4
billion of such longer-term borrowings were retired. GECS also generated $26.9
billion from continuing operating activities.
The principal use of cash by GECS has been investing in assets to grow its
businesses. Of the $69.6 billion that GECS invested over the past three years,
$10.5 billion was used for additions to financing receivables; $18.5 billion was
used to invest in new equipment, principally for lease to others; and $25.4
billion was used for acquisitions of new businesses, the largest of which were
Metlife Capital and Lake in 1998.
With the financial flexibility that comes with excellent credit ratings,
management believes that GECS should be well positioned to meet the global needs
of its customers for capital and to continue providing GE share owners with good
returns.
<PAGE>
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ANNUAL REPORT PAGE 46
- ---------------------
MANAGEMENT'S DISCUSSION OF SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA summarizes on the following page some data frequently
requested about General Electric Company. The data are divided into three
sections: upper portion -- consolidated data; middle portion -- GE data that
reflect various conventional measurements for such enterprises; and lower
portion -- GECS data that reflect key information pertinent to financial
services businesses.
GE'S TOTAL RESEARCH AND DEVELOPMENT expenditures were $1,930 million in 1998, up
slightly from 1997 and 1996. In 1998, expenditures from GE's own funds were
$1,537 million, an increase of 4% over 1997, reflecting continuing research and
development work related to new product, service and process technologies.
Product technology efforts in 1998 included continuing development work on the
next generation of gas turbines, further advances in state-of-the-art diagnostic
imaging technologies, and development of more fuel-efficient, cost-effective
aircraft engine designs. Services technologies include advances in diagnostic
applications, including remote diagnostic capabilities related to repair and
maintenance of medical equipment, aircraft engines, power generation equipment
and locomotives. Process technologies -- vital to Six Sigma quality programs --
provided improved product quality and performance and increased capacity for
manufacturing engineered materials. Expenditures from funds provided by
customers (mainly the U.S. government) were $393 million in 1998, down $18
million from 1997.
GE'S TOTAL BACKLOG of firm unfilled orders at the end of 1998 was $28.5 billion,
compared with $26.4 billion at the end of 1997. Of the total, $23.9 billion
related to products, about 56% of which was scheduled for delivery in 1999.
Services orders are included in this reported backlog for only the succeeding 12
months; such backlog at the end of 1998 was $4.6 billion. Orders constituting
this backlog may be canceled or deferred by customers, subject in certain cases
to cancellation penalties. See Segment Operations beginning on page 35 for
further discussion on unfilled orders of relatively long-cycle manufacturing
businesses.
REGARDING ENVIRONMENTAL MATTERS, GE's operations, like operations of other
companies engaged in similar businesses, involve the use, disposal and cleanup
of substances regulated under environmental protection laws.
In 1998, GE expended about $81 million for capital projects related to the
environment. The comparable amount in 1997 was $80 million. These amounts
exclude expenditures for remediation actions, which are principally expensed and
are discussed below. Capital expenditures for environmental purposes have
included pollution control devices -- such as wastewater treatment plants,
groundwater monitoring devices, air strippers or separators, and incinerators --
at new and existing facilities constructed or upgraded in the normal course of
business. Consistent with policies stressing environmental responsibility,
average annual capital expenditures other than for remediation projects are
presently expected to be about $85 million over the next two years. This level
is in line with existing levels for new or expanded programs to build facilities
or modify manufacturing processes to minimize waste and reduce emissions.
GE also is involved in a sizable number of remediation actions to clean up
hazardous wastes as required by federal and state laws. Such statutes require
that responsible parties fund remediation actions regardless of fault, legality
of original disposal or ownership of a disposal site. Expenditures for site
remediation actions amounted to approximately $127 million in 1998, compared
with $84 million in 1997. It is presently expected that such remediation actions
will require average annual expenditures in the range of $90 million to $170
million over the next two years.
[CHART HERE]
YEAR-END MARKET CAPITALIZATION
- -----------------------------------------------------------------------------
(IN BILLIONS) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------
$87.004 $119.989 $162.604 $239.539 $333.762
- -----------------------------------------------------------------------------
[CHART HERE]
GE SHARE PRICE ACTIVITY
- ------------------------------------------------------------------------------
(IN DOLLARS) 1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------
HIGH $27 7/16 $36 9/16 $53 1/16 $76 9/16 $103 15/16
LOW 22 1/2 24 1/2 34 3/4 47 15/16 69
CLOSE 25 1/2 36 49 7/16 73 3/8 102
- ------------------------------------------------------------------------------
<PAGE>
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ANNUAL REPORT PAGE 47
- ---------------------
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
------------------------------------------------------------------------
(Dollar amounts in millions; per-share amounts in dollars) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES
Revenues $ 100,469 $ 90,840 $ 79,179 $ 70,028 $ 60,109
Earnings from continuing operations 9,296 8,203 7,280 6,573 5,915
Loss from discontinued operations -- -- -- -- (1,189)
Net earnings 9,296 8,203 7,280 6,573 4,726
Dividends declared 4,081 3,535 3,138 2,838 2,546
Earned on average share owners' equity 25.7% 25.0% 24.0% 23.5% 18.1%
Per share
Earnings from continuing operations-- basic $ 2.84 $ 2.50 $ 2.20 $ 1.95 $ 1.73
Loss from discontinued operations -- -- -- -- (0.35)
Net earnings-- basic 2.84 2.50 2.20 1.95 1.38
Net earnings-- diluted 2.80 2.46 2.16 1.93 1.37
Dividends declared 1.25 1.08 0.95 0.845 0.745
Stock price range 103 5/16-69 76 9/16- 53 1/16- 36 9/16- 27 7/16-
47 15/16 34 3/4 24 15/16 22 1/2
Year-end closing stock price 102 73 3/8 49 7/16 36 25 1/2
Total assets of continuing operations 355,935 304,012 272,402 228,035 185,871
Long-term borrowings 59,663 46,603 49,246 51,027 36,979
Shares outstanding-- average (in thousands) 3,268,998 3,274,692 3,307,394 3,367,624 3,417,476
Share owner accounts-- average 534,000 509,000 486,000 460,000 458,000
Employees at year end
United States 163,000 165,000 155,000 150,000 156,000
Other countries 130,000 111,000 84,000 72,000 60,000
Discontinued operations (primarily U.S.) -- -- -- -- 5,000
------------------------------------------------------------------------
Total employees 293,000 276,000 239,000 222,000 221,000
====================================================================================================================================
GE DATA
Short-term borrowings $ 3,466 $ 3,629 $ 2,339 $ 1,666 $ 906
Long-term borrowings 681 729 1,710 2,277 2,699
Minority interest 816 569 477 434 382
Share owners' equity 38,880 34,438 31,125 29,609 26,387
------------------------------------------------------------------------
Total capital invested $ 43,843 $ 39,365 $ 35,651 $ 33,986 $ 30,374
========================================================================
Return on average total capital invested 23.9% 23.6% 22.2% 21.3% 15.9%
Borrowings as a percentage of total capital invested 9.5% 11.1% 11.4% 11.6% 11.9%
Working capital (a) $ 5,038 $ 5,990 $ 6,598 $ 7,405 $ 6,552
Additions to property, plant and equipment 2,047 2,191 2,389 1,831 1,743
====================================================================================================================================
GECS DATA
Revenues $ 48,694 $ 39,931 $ 32,713 $ 26,492 $ 19,875
Earnings from continuing operations 3,796 3,256 2,817 2,415 2,085
Loss from discontinued operations -- -- -- -- (1,189)
Net earnings 3,796 3,256 2,817 2,415 896
Share owner's equity 19,727 17,239 14,276 12,774 9,380
Minority interest 3,459 3,113 2,530 2,522 1,465
Borrowings from others 172,200 141,263 125,621 111,598 91,399
Ratio of debt to equity at GE Capital 7.86:1 7.45:1 7.84:1 7.59:1 8.43:1
Total assets of continuing operations $ 303,297 $ 255,408 $ 227,419 $ 185,729 $ 144,967
Insurance premiums written 11,865 9,396 8,185 6,158 3,962
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
Discontinued operations reflect the results of Kidder, Peabody, the discontinued
GECS securities broker-dealer, in 1994. Transactions between GE and GECS have
been eliminated from the consolidated information. (a) Working capital is
defined as the sum of receivables from the sales of goods and services plus
inventories less trade accounts payable and progress collections.
</FN>
</TABLE>
<PAGE>
F-24
ANNUAL REPORT PAGE 48
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements represent the adding
together of all affiliates -- companies that General Electric directly or
indirectly controls. Results of associated companies -- generally companies that
are 20% to 50% owned and over which GE, directly or indirectly, has significant
influence -- are included in the financial statements on a "one-line" basis.
FINANCIAL STATEMENT PRESENTATION. Financial data and related measurements are
presented in the following categories.
o GE. This represents the adding together of all affiliates other than
General Electric Capital Services, Inc. (GECS), whose operations are
presented on a one-line basis.
o GECS. This affiliate owns all of the common stock of General Electric
Capital Corporation (GE Capital) and GE Global Insurance Holding
Corporation (GE Global Insurance). GE Capital, GE Global Insurance and
their respective affiliates are consolidated in the GECS columns and
constitute its business.
o CONSOLIDATED. This represents the adding together of GE and GECS.
The effects of transactions among related companies within and between each of
the above-mentioned groups are eliminated. Transactions between GE and GECS are
not material.
Certain prior-year amounts have been reclassified to conform to the 1998
presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
SALES OF GOODS AND SERVICES. A sale is recorded when title passes to the
customer or when services are performed in accordance with contracts.
GECS REVENUES FROM SERVICES (EARNED INCOME). Income on all loans is recognized
on the interest method. Accrual of interest income is suspended at the earlier
of the time at which collection of an account becomes doubtful or the account
becomes 90 days delinquent. Interest income on impaired loans is recognized
either as cash is collected or on a cost-recovery basis as conditions warrant.
Financing lease income is recorded on the interest method so as to produce a
level yield on funds not yet recovered. Estimated unguaranteed residual values
of leased assets are based primarily on periodic independent appraisals of the
values of leased assets remaining at expiration of the lease terms.
Operating lease income is recognized on a straight-line basis over the terms
of underlying leases.
Origination, commitment and other nonrefundable fees related to fundings are
deferred and recorded in earned income on the interest method. Commitment fees
related to loans not expected to be funded and line-of-credit fees are deferred
and recorded in earned income on a straight-line basis over the period to which
the fees relate. Syndication fees are recorded in earned income at the time
related services are performed unless significant contingencies exist.
Premium income from insurance activities is discussed under GECS insurance
accounting policies on page 49.
DEPRECIATION AND AMORTIZATION. The cost of most of GE's manufacturing plant and
equipment is depreciated using an accelerated method based primarily on a
sum-of-the-years digits formula.
The cost of GECS equipment leased to others on operating leases is amortized,
principally on a straight-line basis, to estimated residual value over the lease
term or over the estimated economic life of the equipment. Depreciation of
property and equipment used by GECS is recorded on either a sum-of-the-years
digits formula or a straight-line basis over the lives of the assets.
RECOGNITION OF LOSSES ON FINANCING RECEIVABLES AND INVESTMENTS. The allowance
for losses on small-balance receivables is determined principally on the basis
of actual experience during the preceding three years. Further allowances are
provided to reflect management's judgment of additional probable losses. For
other receivables, principally the larger loans and leases, the allowance for
losses is determined primarily on the basis of management's judgment of net
probable losses, including specific allowances for known troubled accounts.
All accounts or portions thereof deemed to be uncollectible or to require
an excessive collection cost are written off to the allowance for losses.
Small-balance accounts generally are written off when 6 to 12 months delinquent,
although any such balance judged to be uncollectible, such as an account in
bankruptcy, is written down immediately to estimated realizable value.
Large-balance accounts are reviewed at least quarterly, and those accounts with
amounts that are judged to be uncollectible are written down to estimated
realizable value.
When collateral is repossessed in satisfaction of a loan, the receivable is
written down against the allowance for losses to estimated fair value of the
asset less costs to sell, transferred to other assets and subsequently carried
at the lower of cost or estimated fair value less costs to sell. This accounting
method has been employed principally for specialized financing transactions.
<PAGE>
F-25
ANNUAL REPORT PAGE 49
- ---------------------
CASH AND EQUIVALENTS. Debt securities with original maturities of three months
or less are included in cash equivalents unless designated as available for sale
and classified as investment securities.
INVESTMENT SECURITIES. Investments in debt and marketable equity securities are
reported at fair value. Substantially all investment securities are designated
as available for sale, with unrealized gains and losses included in share
owners' equity, net of applicable taxes and other adjustments. Unrealized losses
that are other than temporary are recognized in earnings. Realized gains and
losses are accounted for on the specific identification method.
INVENTORIES. All inventories are stated at the lower of cost or realizable
values. Cost for virtually all of GE's U.S. inventories is determined on a
last-in, first-out (LIFO) basis. Cost of other GE inventories is primarily
determined on a first-in, first-out (FIFO) basis.
GECS inventories consist primarily of finished products held for sale. Cost
is primarily determined on a FIFO basis.
INTANGIBLE ASSETS. Goodwill is amortized over its estimated period of benefit on
a straight-line basis; other intangible assets, including internal-use software,
are amortized on appropriate bases over their estimated lives. No amortization
period exceeds 40 years. Goodwill in excess of associated expected operating
cash flows is considered to be impaired and is written down to fair value, which
is determined based on either discounted future cash flows or appraised values,
depending on the nature of the asset.
INTEREST RATE AND CURRENCY RISK MANAGEMENT. As a matter of policy, neither GE
nor GECS engages in derivatives trading, derivatives market-making or other
speculative activities.
GE and GECS use swaps primarily to optimize funding costs. To a lesser
degree, and in combination with options and limit contracts, GECS uses swaps to
stabilize cash flows from mortgage-related assets.
Interest rate and currency swaps that modify borrowings or designated assets,
including swaps associated with forecasted commercial paper renewals, are
accounted for on an accrual basis. Both GE and GECS require all other swaps, as
well as futures, options and currency forwards, to be designated and accounted
for as hedges of specific assets, liabilities or committed transactions;
resulting payments and receipts are recognized contemporaneously with effects of
hedged transactions. A payment or receipt arising from early termination of an
effective hedge is accounted for as an adjustment to the basis of the hedged
transaction.
Instruments used as hedges must be effective at reducing the risk associated
with the exposure being hedged and must be designated as a hedge at the
inception of the contract. Accordingly, changes in market values of hedge
instruments must be highly correlated with changes in market values of
underlying hedged items, both at inception of the hedge and over the life of the
hedge contract.
As a matter of policy, any derivative that is either not designated as a
hedge, or is so designated but is ineffective, is marked to market and
recognized in operations immediately.
GECS INSURANCE ACCOUNTING POLICIES. Accounting policies for GECS insurance
businesses follow.
PREMIUM INCOME. Insurance premiums are reported as earned income as follows:
o For short-duration insurance contracts (including property and casualty,
accident and health, and financial guaranty insurance), premiums are
reported as earned income, generally on a pro rata basis, over the terms of
the related agreements. For retrospectively rated reinsurance contracts,
premium adjustments are recorded based on estimated losses and loss
expenses, taking into consideration both case and incurred-but-not-reported
reserves.
o For traditional long-duration insurance contracts (including term and whole
life contracts and annuities payable for the life of the annuitant),
premiums are reported as earned income when due.
o For investment contracts and universal life contracts, premiums received
are reported as liabilities, not as revenues. Universal life contracts are
long-duration insurance contracts with terms that are not fixed and
guaranteed; for these contracts, revenues are recognized for assessments
against the policyholder's account, mostly for mortality, contract
initiation, administration and surrender. Investment contracts are
contracts that have neither significant mortality nor significant morbidity
risk, including annuities payable for a determined period; for these
contracts, revenues are recognized on the associated investments and
amounts credited to policyholder accounts are charged to expense.
DEFERRED POLICY ACQUISITION COSTS. Costs that vary with and are primarily
related to the acquisition of new and renewal insurance and investment contracts
are deferred and amortized over the respective policy terms. For short-duration
insurance contracts, acquisition costs consist primarily of commissions,
<PAGE>
F-26
ANNUAL REPORT PAGE 50
- ---------------------
brokerage expenses and premium taxes. For long-duration insurance contracts,
these costs consist primarily of first-year commissions in excess of recurring
renewal commissions, certain variable sales expenses and certain support costs
such as underwriting and policy issue expenses.
o For short-duration insurance contracts, these costs are amortized pro rata
over the contract periods in which the related premiums are earned.
o For traditional long-duration insurance contracts, these costs are
amortized over the respective contract periods in proportion to either
anticipated premium income or, in the case of limited-payment contracts,
estimated benefit payments.
o For investment contracts and universal life contracts, these costs are
amortized on the basis of anticipated gross profits.
Periodically, deferred policy acquisition costs are reviewed for recoverability;
anticipated investment income is considered in recoverability evaluations.
PRESENT VALUE OF FUTURE PROFITS. The actuarially determined present value of
anticipated net cash flows to be realized from insurance, annuity and investment
contracts in force at the date of acquisition of life insurance enterprises is
recorded as the present value of future profits and is amortized over the
respective policy terms in a manner similar to deferred policy acquisition
costs. Unamortized balances are adjusted to reflect experience and impairment,
if any.
2 GE OTHER INCOME
------------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Residual licensing and
royalty income
RCA Licensing $ 250 $ 287 $ 265
Other 51 54 60
Associated companies (9) 50 50
Marketable securities and
bank deposits 114 78 72
Customer financing 19 26 29
Other investments
Dividends 8 62 79
Interest 8 1 18
Other items 243 1,749 56
------------------------------------
$ 684 $ 2,307 $ 629
================================================================================
Effective January 1, 1999, GE transferred certain licenses and intellectual
property pursuant to an agreement to sell the former RCA Consumer Electronics
business. Licensing income from these assets is shown under the caption "RCA
Licensing" in the table above.
Included in the "Other items" caption for 1997 is a gain of $1,538 million
related to a tax-free exchange between GE and Lockheed Martin Corporation
(Lockheed Martin). In exchange for its investment in Lockheed Martin Series A
preferred stock, GE acquired a Lockheed Martin subsidiary containing two
businesses, an equity interest and cash to the extent necessary to equalize the
value of the exchange, a portion of which was subsequently loaned to Lockheed
Martin.
3 GECS REVENUES FROM SERVICES
-----------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Time sales, loan and
other income $14,682 $12,211 $11,310
Operating lease rentals 5,402 4,819 4,341
Financing leases 4,267 3,499 3,485
Investment income 5,617 5,512 3,506
Premium and commission
income of insurance
businesses 11,352 9,268 8,145
------------------------------------
$41,320 $35,309 $30,787
================================================================================
For insurance businesses, the effects of reinsurance on premiums written and
premium and commission income were as follows:
---------------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------
PREMIUMS WRITTEN
Direct $ 6,237 $ 5,206 $ 3,926
Assumed 7,470 5,501 5,455
Ceded (1,842) (1,311) (1,196)
---------------------------------------
$ 11,865 $ 9,396 $ 8,185
=======================================
PREMIUM AND COMMISSION
INCOME
Direct $ 6,063 $ 5,138 $ 3,850
Assumed 7,151 5,386 5,353
Ceded (1,862) (1,256) (1,058)
---------------------------------------
$ 11,352 $ 9,268 $ 8,145
================================================================================
Reinsurance recoveries recognized as a reduction of insurance losses and
policyholder and annuity benefits amounted to $1,594 million, $903 million and
$937 million for the years ended December 31, 1998, 1997 and 1996, respectively.
<PAGE>
F-27
ANNUAL REPORT PAGE 51
- ---------------------
4 SUPPLEMENTAL COST DETAILS
Total expenditures for research and development were $1,930 million, $1,891
million and $1,886 million in 1998, 1997 and 1996, respectively. The
Company-funded portion aggregated $1,537 million in 1998, $1,480 million in 1997
and $1,421 million in 1996.
Rental expense under operating leases is shown below.
----------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------
GE $568 $536 $512
GECS 889 734 547
- --------------------------------------------------------------------------------
At December 31, 1998, minimum rental commitments under noncancelable
operating leases aggregated $2,479 million and $5,168 million for GE and GECS,
respectively. Amounts payable over the next five years follow.
------------------------------------------------
(In millions) 1999 2000 2001 2002 2003
- --------------------------------------------------------------------------------
GE $453 $375 $296 $223 $187
GECS 720 636 582 519 468
- --------------------------------------------------------------------------------
GE's selling, general and administrative expense totaled $7,177 million in
1998, $7,476 million in 1997 and $6,274 million in 1996. Insignificant amounts
of interest were capitalized by GE and GECS in 1998, 1997 and 1996.
5 PENSION BENEFITS
GE and its affiliates sponsor a number of pension plans. Principal pension plans
are discussed below; other pension plans are not significant individually or in
the aggregate.
PRINCIPAL PENSION PLANS are the GE Pension Plan and the GE Supplementary Pension
Plan.
The GE Pension Plan covers substantially all GE employees in the United
States as well as approximately two-thirds of GECS employees in the United
States. Generally, benefits are based on the greater of a formula recognizing
career earnings or a formula recognizing length of service and final average
earnings. Benefit provisions are subject to collective bargaining. At the end of
1998, the GE Pension Plan covered approximately 466,000 participants, including
127,000 employees, 149,000 former employees with vested rights to future
benefits, and 190,000 retirees and beneficiaries receiving benefits.
The GE Supplementary Pension Plan is a pay-as-you-go plan providing
supplementary retirement benefits primarily to higher-level, longer-service U.S.
employees.
The effect on operations of principal pension plans is as follows:
- --------------------------------------------------------------------------------
EFFECT ON OPERATIONS
--------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Expected return on plan assets $ 3,024 $ 2,721 $ 2,587
Service cost for benefits earned (a) (625) (596) (550)
Interest cost on benefit obligation (1,749) (1,686) (1,593)
Prior service cost (153) (145) (99)
SFAS No. 87 transition gain 154 154 154
Net actuarial gain recognized 365 295 210
Special early retirement cost -- (412) --
--------------------------------
Total pension plan income $ 1,016 $ 331 $ 709
================================================================================
(a) Net of participant contributions.
- --------------------------------------------------------------------------------
FUNDING POLICY for the GE Pension Plan is to contribute amounts sufficient to
meet minimum funding requirements as set forth in employee benefit and tax laws
plus such additional amounts as GE may determine to be appropriate. GE has not
made contributions since 1987 because the fully funded status of the GE Pension
Plan precludes current tax deduction and because any GE contribution would
require payment of annual excise taxes.
Changes in the projected benefit obligation for principal pension plans
follow.
- --------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION
-------------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
Balance at January 1 $ 25,874 $ 23,251
Service cost for benefits earned (a) 625 596
Interest cost on benefit obligation 1,749 1,686
Participant contributions 112 120
Plan amendments -- 136
Actuarial loss 1,050 1,388
Benefits paid (1,838) (1,715)
Special early retirement cost -- 412
-------------------------
Balance at December 31 $ 27,572 $ 25,874
================================================================================
(a) Net of participant contributions.
- --------------------------------------------------------------------------------
Changes in the fair value of assets for principal pension plans follow.
- --------------------------------------------------------------------------------
FAIR VALUE OF ASSETS
---------------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
Balance at January 1 $ 38,742 $ 33,686
Actual return on plan assets 6,363 6,587
Employer contributions 68 64
Participant contributions 112 120
Benefits paid (1,838) (1,715)
---------------------------
Balance at December 31 $ 43,447 $ 38,742
================================================================================
Plan assets are held in trust and consist mainly of common stock and
fixed-income investments. GE common stock represented about 7% and 6% of trust
assets at year-end 1998 and 1997, respectively.
<PAGE>
F-28
ANNUAL REPORT PAGE 52
- ---------------------
GE recorded assets and liabilities for principal pension plans as follows:
- --------------------------------------------------------------------------------
PREPAID PENSION ASSET
---------------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
Fair value of plan assets $ 43,447 $ 38,742
Add (deduct) unrecognized balances
SFAS No. 87 transition gain (308) (462)
Net actuarial gain (9,462) (7,538)
Prior service cost 850 1,003
Projected benefit obligation (27,572) (25,874)
Pension liability 797 703
---------------------------
Prepaid pension asset $ 7,752 $ 6,574
================================================================================
ACTUARIAL ASSUMPTIONS used to determine costs and benefit obligations for
principal pension plans follow.
- --------------------------------------------------------------------------------
ACTUARIAL ASSUMPTIONS
-------------------------------
December 31 1998 1997 1996
- --------------------------------------------------------------------------------
Discount rate 6.75% 7.0% 7.5%
Compensation increases 5.0 4.5 4.5
Return on assets for the year 9.5 9.5 9.5
================================================================================
Experience gains and losses, as well as the effects of changes in actuarial
assumptions and plan provisions, are amortized over the average future service
period of employees.
6 RETIREE HEALTH AND LIFE BENEFITS
GE and its affiliates sponsor a number of retiree health and life insurance
benefit plans. Principal retiree benefit plans are discussed below; other such
plans are not significant individually or in the aggregate.
PRINCIPAL RETIREE BENEFIT PLANS generally provide health and life insurance
benefits to employees who retire under the GE Pension Plan (see note 5) with 10
or more years of service. Retirees share in the cost of health care benefits.
Benefit provisions are subject to collective bargaining. At the end of 1998,
these plans covered approximately 250,000 retirees and dependents.
The effect on operations of principal retiree benefit plans is shown in the
following table.
- --------------------------------------------------------------------------------
EFFECT ON OPERATIONS
------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------
RETIREE HEALTH PLANS
Service cost for benefits earned $ 79 $ 90 $ 77
Interest cost on benefit obligation 205 183 166
Prior service cost 14 (3) (20)
Net actuarial loss recognized 28 16 20
Special early retirement cost -- 152 --
------------------------------
Retiree health plan cost 326 438 243
------------------------------
RETIREE LIFE PLANS
Expected return on plan assets (149) (137) (132)
Service cost for benefits earned 17 17 16
Interest cost on benefit obligation 114 116 106
Prior service cost (6) (8) (11)
Net actuarial loss recognized 11 16 23
Special early retirement cost -- 13 --
------------------------------
Retiree life plan cost (income) (13) 17 2
------------------------------
Total cost $ 313 $ 455 $ 245
================================================================================
FUNDING POLICY for retiree health benefits is generally to pay covered expenses
as they are incurred. GE funds retiree life insurance benefits at its
discretion.
Changes in the accumulated postretirement benefit obligation for retiree
benefit plans follow.
- --------------------------------------------------------------------------------
ACCUMULATED POSTRETIREMENT
BENEFIT OBLIGATION Health plans Life plans
-------------------- --------------------
December 31 (In millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Balance at January 1 $ 3,098 $ 2,415 $ 1,677 $ 1,539
Service cost for
benefits earned 79 90 17 17
Interest cost on
benefit obligation 205 183 114 116
Participant
contributions 24 21 -- --
Plan amendments -- 325 -- 44
Actuarial loss 177 245 91 56
Benefits paid (363) (333) (112) (108)
Special early
retirement cost -- 152 -- 13
-------------------- --------------------
Balance at
December 31 $ 3,220 $ 3,098 $ 1,787 $ 1,677
================================================================================
Changes in the fair value of assets for retiree benefit plans follow.
- --------------------------------------------------------------------------------
FAIR VALUE OF ASSETS Health plans Life plans
-------------------- --------------------
December 31 (In millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Balance at January 1 $ -- $ -- $ 1,917 $ 1,682
Actual return on plan
assets -- -- 316 343
Employer
contributions 339 312 -- --
Participant
contributions 24 21 -- --
Benefits paid (363) (333) (112) (108)
-------------------- --------------------
Balanace at
December 31 $ -- $ -- $ 2,121 $ 1,917
================================================================================
<PAGE>
F-29
ANNUAL REPORT PAGE 53
- ---------------------
Plan assets are held in trust and consist mainly of common stock and
fixed-income investments. GE common stock represented about 5% and 4% of trust
assets at year-end 1998 and 1997, respectively.
GE recorded assets and liabilities for retiree benefit plans as follows:
- --------------------------------------------------------------------------------
RETIREE BENEFIT LIABILITY/ASSET Health plans Life plans
-------------------- --------------------
December 31 (In millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Accumulated
postretirement
benefit obligation $ 3,220 $ 3,098 $ 1,787 $ 1,677
Add (deduct)
unrecognized
balances
Net actuarial
gain/(loss) (572) (423) 214 127
Prior service cost (157) (171) 49 55
Fair value of
plan assets -- -- (2,121) (1,917)
-------------------- --------------------
Retiree benefit liability/
(asset) $ 2,491 $ 2,504 $ (71) $ (58)
================================================================================
ACTUARIAL ASSUMPTIONS used to determine costs and benefit obligations for
principal retiree benefit plans are shown below.
- --------------------------------------------------------------------------------
ACTUARIAL ASSUMPTIONS
-------------------------------
December 31 1998 1997 1996
- --------------------------------------------------------------------------------
Discount rate 6.75% 7.0% 7.5%
Compensation increases 5.0 4.5 4.5
Health care cost trend (a) 7.8 7.8 8.0
Return on assets for the year 9.5 9.5 9.5
================================================================================
(a) For 1998, gradually declining to 5.0% after 2003.
- --------------------------------------------------------------------------------
Increasing or decreasing the health care cost trend rates by one percentage
point would not have had a material effect on the December 31, 1998, accumulated
postretirement benefit obligation or the annual cost of retiree health plans.
Experience gains and losses, as well as the effects of changes in actuarial
assumptions and plan provisions, are amortized over the average future service
period of employees.
7 GECS ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES
----------------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Balance at January 1 $ 2,802 $ 2,693 $ 2,519
Provisions charged to operations 1,609 1,421 1,033
Net transfers primarily related to
companies acquired or sold 388 127 139
Amounts written off-- net (1,511) (1,439) (998)
----------------------------------
Balance at December 31 $ 3,288 $ 2,802 $ 2,693
================================================================================
8 PROVISION FOR INCOME TAXES
----------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------
GE
Estimated amounts payable $ 2,227 $ 2,332 $ 2,235
Deferred tax expense (benefit)
from temporary differences 590 (522) 60
----------------------------------
2,817 1,810 2,295
----------------------------------
GECS
Estimated amounts payable 815 368 164
Deferred tax expense from
temporary differences 549 798 1,067
----------------------------------
1,364 1,166 1,231
----------------------------------
CONSOLIDATED
Estimated amounts payable 3,042 2,700 2,399
Deferred tax expense from
temporary differences 1,139 276 1,127
----------------------------------
$ 4,181 $ 2,976 $ 3,526
================================================================================
GE includes GECS in filing a consolidated U.S. federal income tax return. The
GECS provision for estimated taxes payable includes its effect on the
consolidated return.
Estimated consolidated amounts payable includes amounts applicable to U.S.
federal income taxes of $1,459 million, $1,176 million and $971 million in 1998,
1997 and 1996, respectively, and amounts applicable to non-U.S. jurisdictions of
$1,335 million, $1,298 million and $1,204 million in 1998, 1997 and 1996,
respectively. Deferred tax expense related to U.S. federal income taxes was $971
million, $354 million and $1,081 million in 1998, 1997 and 1996, respectively.
Deferred income tax balances reflect the impact of temporary differences
between the carrying amounts of assets and liabilities and their tax bases and
are stated at enacted tax rates expected to be in effect when taxes are actually
paid or recovered. See note 22 for details.
Except for certain earnings that GE intends to reinvest indefinitely,
provision has been made for the estimated U.S. federal income tax liabilities
applicable to undistributed earnings of affiliates and associated companies. It
is not practicable to determine the U.S. federal income tax liability, if any,
that would be payable if such earnings were not reinvested indefinitely.
Consolidated U.S. income before taxes was $9.7 billion in 1998, $8.2 billion
in 1997 and $8.0 billion in 1996. The corresponding amounts for non-U.S.-based
operations were $3.8 billion in 1998, $3.0 billion in 1997 and $2.8 billion in
1996.
A reconciliation of the U.S. federal statutory tax rate to the actual tax
rate is provided on the following page.
<PAGE>
F-30
ANNUAL REPORT PAGE 54
- ---------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF U.S. FEDERAL
STATUTORY TAX RATE TO ACTUAL RATE Consolidated GE GECS
------------------------- -------------------------- -------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
========================= ========================== =========================
Increase (reduction) in rate
resulting from:
Inclusion of after-tax earnings
of GECS in before-tax
earnings of GE -- -- -- (11.0) (11.4) (10.3) -- -- --
Lockheed Martin exchange (note 2) -- (4.8) -- -- (5.4) -- -- -- --
Amortization of goodwill 1.1 1.1 1.1 0.7 0.8 0.8 1.0 1.1 1.2
Tax-exempt income (1.8) (1.9) (2.0) -- -- -- (4.7) (4.9) (5.4)
Foreign Sales Corporation
tax benefits (1.2) (1.0) (0.7) (1.0) (0.9) (0.6) (0.6) (0.5) (0.3)
Dividends received, not fully taxable (0.4) (0.5) (0.6) -- (0.2) (0.2) (1.0) (0.9) (1.1)
All other -- net (1.7) (1.3) (0.2) (0.4) 0.2 (0.7) (3.3) (3.4) 1.0
------------------------- -------------------------- -------------------------
(4.0) (8.4) (2.4) (11.7) (16.9) (11.0) (8.6) (8.6) (4.6)
------------------------- -------------------------- -------------------------
Actual income tax rate 31.0% 26.6% 32.6% 23.3% 18.1% 24.0% 26.4% 26.4% 30.4%
====================================================================================================================================
</TABLE>
9 Earnings Per Share Information
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
(In millions; per-share amounts in dollars) Diluted Basic Diluted Basic Diluted Basic
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS
Net earnings available to common share owners $9,296 $9,296 $8,203 $8,203 $7,280 $7,280
Dividend equivalents -- net of tax 13 -- 10 -- 9 --
------------------- ------------------- -------------------
Net earnings available for per-share calculation $9,309 $9,296 $8,213 $8,203 $7,289 $7,280
------------------- ------------------- -------------------
AVERAGE EQUIVALENT SHARES
Shares of GE common stock outstanding 3,269 3,269 3,275 3,275 3,307 3,307
Employee compensation-related shares,
including stock options 61 -- 70 -- 64 --
------------------- ------------------- -------------------
Total average equivalent shares 3,330 3,269 3,345 3,275 3,371 3,307
------------------- ------------------- -------------------
Net earnings per share $ 2.80 $ 2.84 $ 2.46 $ 2.50 $ 2.16 $ 2.20
====================================================================================================================================
</TABLE>
<PAGE>
F-31
ANNUAL REPORT PAGE 55
- ---------------------
10 INVESTMENT SECURITIES
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
(In millions) cost gains losses fair value
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
GE
Equity securities $ 233 $ 26 $ -- $ 259
----------------------------------------------
GECS
Debt securities
U.S. corporate 27,888 1,293 (325) 28,856
State and municipal 12,483 727 (8) 13,202
Mortgage-backed 11,641 413 (109) 11,945
Corporate-- non-U.S 8,692 409 (90) 9,011
Government
-- non-U.S 5,415 258 (9) 5,664
U.S. government and
federal agency 2,706 207 (7) 2,906
Equity securities 5,651 1,415 (192) 6,874
----------------------------------------------
74,476 4,722 (740) 78,458
----------------------------------------------
CONSOLIDATED TOTALS $ 74,709 $ 4,748 $ (740) $ 78,717
================================================================================
DECEMBER 31, 1997
GE
Equity securities $ 257 $ 13 $ (5) $ 265
----------------------------------------------
GECS
Debt securities
U.S. corporate 24,580 1,028 (53) 25,555
State and municipal 10,780 636 (2) 11,414
Mortgage-backed 12,074 341 (30) 12,385
Corporate-- non-U.S 7,683 310 (12) 7,981
Government
-- non-U.S 3,714 150 (3) 3,861
U.S. government and
federal agency 2,413 103 (4) 2,512
Equity securities 5,414 1,336 (102) 6,648
----------------------------------------------
66,658 3,904 (206) 70,356
----------------------------------------------
CONSOLIDATED TOTALS $ 66,915 $ 3,917 $ (211) $ 70,621
================================================================================
The majority of mortgage-backed securities shown in the table above are
collateralized by U.S. residential mortgages.
At December 31, 1998, contractual maturities of debt securities, other than
mortgage-backed securities, were as follows:
- --------------------------------------------------------------------------------
CONTRACTUAL MATURITIES OF DEBT SECURITIES
(EXCLUDING MORTGAGE-BACKED SECURITIES)
----------------------------
Amortized Estimated
(In millions) cost fair value
- --------------------------------------------------------------------------------
Due in
1999 $ 5,370 $ 5,574
2000-2003 14,145 14,497
2004-2008 13,068 13,538
2009 and later 24,601 26,030
================================================================================
It is expected that actual maturities will differ from contractual maturities
because borrowers have the right to call or prepay certain obligations. Proceeds
from sales of investment securities by GE and GECS in 1998 were $16,707 million
($14,728 million in 1997 and $11,868 million in 1996). Gross realized gains were
$1,126 million in 1998 ($1,018 million in 1997 and $638 million in 1996). Gross
realized losses were $308 million in 1998 ($173 million in 1997 and $190 million
in 1996).
11 GE CURRENT RECEIVABLES
-------------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
Aircraft Engines $ 1,722 $ 2,118
Appliances 299 300
Industrial Products and Systems 1,274 1,645
NBC 261 362
Plastics 1,070 1,037
Power Systems 2,620 2,376
Technical Products and Services 904 786
All Other 141 130
Corporate 495 538
-------------------------
8,786 9,292
Less allowance for losses (303) (238)
-------------------------
$ 8,483 $ 9,054
================================================================================
Receivables balances at December 31, 1998 and 1997, before allowance for
losses, included $5,447 million and $6,125 million, respectively, from sales of
goods and services to customers, and $350 million and $285 million,
respectively, from transactions with associated companies.
Current receivables of $305 million at year-end 1998 and $303 million at
year-end 1997 arose from sales, principally of aircraft engine goods and
services, on open account to various agencies of the U.S. government, which is
GE's largest single customer. About 4% of GE's sales of goods and services were
to the U.S. government in 1998 and 1997, compared with about 5% in 1996.
12 INVENTORIES
-------------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
GE
Raw materials and work in process $ 3,154 $ 3,070
Finished goods 2,967 2,895
Unbilled shipments 195 242
-------------------------
6,316 6,207
Less revaluation to LIFO (1,011) (1,098)
-------------------------
5,305 5,109
-------------------------
GECS
Finished goods 744 786
-------------------------
$ 6,049 $ 5,895
================================================================================
LIFO revaluations decreased $87 million in 1998, compared with decreases of
$119 million in 1997 and $128 million in 1996. Included in these changes were
decreases of $29 million, $59 million and $58 million in 1998, 1997 and 1996,
respectively, that resulted from lower LIFO inventory levels. There were net
cost decreases in each of the last three years. As of December 31, 1998, GE is
obligated to acquire certain raw materials at market prices through the year
2008 under various take-or-pay or similar arrangements. Annual minimum
commitments under these arrangements are insignificant.
<PAGE>
F-32
ANNUAL REPORT PAGE 56
- ---------------------
13 GECS FINANCING RECEIVABLES (INVESTMENTS IN TIME SALES, LOANS AND FINANCING
LEASES)
---------------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
TIME SALES AND LOANS
Consumer services $ 44,680 $ 42,270
Mid-market financing 20,240 11,401
Specialized financing 16,811 13,974
Equipment management 1,066 469
Specialty insurance 103 202
---------------------------
82,900 68,316
Deferred income (5,617) (3,484)
---------------------------
Time sales and loans-- net 77,283 64,832
---------------------------
INVESTMENT IN FINANCING LEASES
Direct financing leases 43,730 38,616
Leveraged leases 3,841 3,153
---------------------------
Investment in financing leases 47,571 41,769
---------------------------
124,854 106,601
Less allowance for losses (3,288) (2,802)
---------------------------
$ 121,566 $ 103,799
================================================================================
Time sales and loans represents transactions in a variety of forms, including
time sales, revolving charge and credit, mortgages, installment loans,
intermediate-term loans and revolving loans secured by business assets. The
portfolio includes time sales and loans carried at the principal amount on which
finance charges are billed periodically, and time sales and loans carried at
gross book value, which includes finance charges. At year-end 1998 and 1997,
specialized financing and consumer services loans included $12,980 million and
$10,503 million, respectively, for commercial real estate loans. Note 17
contains information on airline loans and leases.
At December 31, 1998, contractual maturities for time sales and loans were
$31,014 million in 1999; $14,865 million in 2000; $9,448 million in 2001; $6,675
million in 2002; $5,465 million in 2003; and $15,433 million thereafter --
aggregating $82,900 million. Experience has shown that a substantial portion of
receivables will be paid prior to contractual maturity. Accordingly, the
maturities of time sales and loans are not to be regarded as forecasts of future
cash collections.
Investment in financing leases consists of direct financing and leveraged
leases of aircraft, railroad rolling stock, autos, other transportation
equipment, data processing equipment and medical equipment, as well as other
manufacturing, power generation, commercial real estate, and commercial
equipment and facilities.
As the sole owner of assets under direct financing leases and as the equity
participant in leveraged leases, GECS is taxed on total lease payments received
and is entitled to tax deductions based on the cost of leased assets and tax
deductions for interest paid to third-party participants. GECS generally is
entitled to any residual value of leased assets.
Investment in direct financing and leveraged leases represents net unpaid
rentals and estimated unguaranteed residual values of leased equipment, less
related deferred income. GECS has no general obligation for principal and
interest on notes and other instruments representing third-party participation
related to leveraged leases; such notes and other instruments have not been
included in liabilities but have been offset against the related rentals
receivable. The GECS share of rentals receivable on leveraged leases is
subordinate to the share of other participants who also have security interests
in the leased equipment.
At December 31, 1998, contractual maturities for net rentals receivable under
financing leases were $14,093 million in 1999; $12,087 million in 2000; $8,947
million in 2001; $4,362 million in 2002; $2,759 million in 2003; and $9,104
million thereafter -- aggregating $51,352 million. As with time sales and loans,
experience has shown that a portion of these receivables will be paid prior to
contractual maturity, and these amounts should not be regarded as forecasts of
future cash flows.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT IN FINANCING LEASES
Total financing leases Direct financing leases Leveraged leases
---------------------- ----------------------- ---------------------
December 31 (In millions) 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total minimum lease payments receivable $ 66,528 $ 58,543 $ 47,451 $ 42,901 $ 19,077 $ 15,642
Less principal and interest on third-party nonrecourse debt (15,176) (12,097) -- -- (15,176) (12,097)
---------------------- ----------------------- ---------------------
Net rentals receivable 51,352 46,446 47,451 42,901 3,901 3,545
Estimated unguaranteed residual value of leased assets 6,826 5,591 5,011 4,244 1,815 1,347
Less deferred income (10,607) (10,268) (8,732) (8,529) (1,875) (1,739)
---------------------- ----------------------- ---------------------
INVESTMENT IN FINANCING LEASES (as shown above) 47,571 41,769 43,730 38,616 3,841 3,153
Less amounts to arrive at net investment
Allowance for losses (619) (656) (519) (575) (100) (81)
Deferred taxes (8,593) (7,909) (5,147) (4,671) (3,446) (3,238)
---------------------- ----------------------- ---------------------
NET INVESTMENT IN FINANCING LEASES $ 38,359 $ 33,204 $ 38,064 $ 33,370 $ 295 $ (166)
====================================================================================================================================
</TABLE>
<PAGE>
F-33
ANNUAL REPORT PAGE 57
- ---------------------
GECS has a noncontrolling interest in Montgomery Ward Holding Corp. (MWHC)
which, together with certain of its affiliates, filed a bankruptcy petition for
reorganization in 1997. Loans to MWHC, which are considered impaired (as defined
below), were $578 million and $617 million at year-end 1998 and 1997,
respectively. These amounts are excluded from the nonearning and reduced-earning
receivable and impaired loan discussions below. GECS also provides revolving
credit card financing directly to customers of MWHC and affiliates; such
receivables totaled $3.4 billion at December 31, 1998, including $1.6 billion
that had been sold with recourse. The obligations of customers with respect to
these receivables are not affected by the bankruptcy filing.
Nonearning consumer receivables were $1,250 million and $1,049 million at
December 31, 1998 and 1997, respectively, a substantial amount of which were
private-label credit card loans subject to various loss-sharing agreements that
provide full or partial recourse to the originating retailer. Nonearning and
reduced-earning receivables other than consumer receivables were $354 million
and $353 million at year-end 1998 and 1997, respectively.
"Impaired" loans are defined by generally accepted accounting principles as
loans for which it is probable that the lender will be unable to collect all
amounts due according to original contractual terms of the loan agreement. That
definition excludes, among other things, leases or large groups of
smaller-balance homogenous loans and therefore applies principally to commercial
loans held by GECS. An analysis of impaired loans follows.
----------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
Loans requiring allowance for losses $346 $339
Loans expected to be fully recoverable 158 167
----------------
$504 $506
----------------
Allowance for losses $109 $170
Average investment during year 512 647
Interest income earned while impaired (a) 39 32
================================================================================
(a) Principally on the cash basis.
- --------------------------------------------------------------------------------
14 OTHER GECS RECEIVABLES
At year-end 1998 and 1997, this account included reinsurance recoverables of
$6,124 million and $5,027 million and insurance-related receivables of $7,109
million and $4,932 million, respectively. Premium receivables, funds on deposit
with reinsurers and policy loans are included in insurance-related receivables.
Also in "Other GECS receivables" are trade receivables, accrued investment
income, operating lease receivables and a variety of sundry items.
15 PROPERTY, PLANT AND EQUIPMENT (INCLUDING EQUIPMENT LEASED TO OTHERS)
----------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
ORIGINAL COST
GE
Land and improvements $ 459 $ 459
Buildings, structures and related
equipment 6,579 6,375
Machinery and equipment 19,491 18,376
Leasehold costs and manufacturing
plant under construction 1,757 1,621
Other 24 24
----------------------
28,310 26,855
----------------------
GECS
Buildings and equipment 4,828 3,987
Equipment leased to others
Vehicles 9,825 9,144
Aircraft 9,321 7,686
Railroad rolling stock 2,804 2,367
Marine shipping containers 2,565 2,774
Other 3,447 2,844
----------------------
32,790 28,802
----------------------
$61,100 $55,657
======================
ACCUMULATED DEPRECIATION
AND AMORTIZATION
GE $16,616 $15,737
GECS
Buildings and equipment 1,733 1,478
Equipment leased to others 7,021 6,126
----------------------
$25,370 $23,341
================================================================================
Amortization of GECS equipment leased to others was $2,185 million, $2,102
million and $1,848 million in 1998, 1997 and 1996, respectively. Noncancelable
future rentals due from customers for equipment on operating leases at year-end
1998 totaled $12,808 million and are due as follows: $3,377 million in 1999;
$2,540 million in 2000; $1,841 million in 2001; $1,318 million in 2002; $897
million in 2003; and $2,835 million thereafter.
<PAGE>
F-34
ANNUAL REPORT PAGE 58
- ---------------------
16 INTANGIBLE ASSETS
--------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
GE
Goodwill $ 9,203 $ 8,046
Other intangibles 793 709
--------------------
9,996 8,755
--------------------
GECS
Goodwill 11,469 8,090
Present value of future profits (PVFP) 1,618 1,824
Other intangibles 552 452
--------------------
13,639 10,366
--------------------
$23,635 $19,121
================================================================================
GE intangible assets are shown net of accumulated amortization of $2,923
million in 1998 and $2,976 million in 1997. GECS intangible assets are net of
accumulated amortization of $3,396 million in 1998 and $2,615 million in 1997.
PVFP amortization, which is on an accelerated basis and net of interest, is
projected to range from 15% to 8% of the year-end 1998 unamortized balance for
each of the next five years.
17 ALL OTHER ASSETS
-------------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
GE
Investments
Associated companies (a) $ 2,336 $ 1,692
Other 474 735
-------------------------
2,810 2,427
Prepaid pension asset 7,752 6,574
Long-term receivables, including notes 2,379 2,389
Prepaid broadcasting rights 929 595
Other 4,161 2,744
-------------------------
18,031 14,729
-------------------------
GECS
Investments
Assets acquired for resale 6,167 4,403
Associated companies (a) 7,670 4,695
Real estate ventures 3,131 2,326
Other 3,473 2,452
-------------------------
20,441 13,876
Separate accounts 6,563 4,926
Servicing assets 1,625 1,713
Deferred insurance acquisition costs 3,326 2,521
Other 3,584 2,631
-------------------------
35,539 25,667
-------------------------
ELIMINATIONS (662) (576)
-------------------------
$ 52,908 $ 39,820
================================================================================
(a) Includes advances
- --------------------------------------------------------------------------------
In line with industry practice, sales of commercial jet aircraft engines
often involve long-term customer financing commitments. In making such
commitments, it is GE's general practice to require that it have or be able to
establish a secured position in the aircraft being financed. Under such airline
financing programs, GE had issued loans and guarantees (principally guarantees)
amounting to $1,473 million at year-end 1998 and $1,590 million at year-end
1997; and it had entered into commitments totaling $1,519 million and $1,794
million at year-end 1998 and 1997, respectively, to provide financial assistance
on future aircraft engine sales. Estimated fair values of the aircraft securing
these receivables and associated guarantees exceeded the related account
balances and guaranteed amounts at December 31, 1998. GECS acts as a lender and
lessor to the commercial airline industry. At December 31, 1998 and 1997, the
balance of such GECS loans, leases and equipment leased to others was $10,170
million and $8,980 million, respectively. In addition, at December 31, 1998,
GECS had issued financial guarantees and funding commitments of $74 million
($123 million at year-end 1997) and had placed multiyear orders for various
Boeing and Airbus aircraft with list prices of approximately $9.4 billion ($6.2
billion at year-end 1997).
At year-end 1998, the National Broadcasting Company had $9,376 million of
commitments to acquire broadcast material and the rights to broadcast television
programs, including U.S. television rights to future Olympic Games, and
commitments under long-term television station affiliation agreements that
require payments through the year 2009.
In connection with numerous projects, primarily power generation bids and
contracts, GE had issued various bid and performance bonds and guarantees
totaling $3,740 million at year-end 1998 and $2,895 million at year-end 1997.
Separate accounts represent investments controlled by policyholders and are
associated with identical amounts reported as insurance liabilities in note 20.
18 GE ALL OTHER CURRENT COSTS AND EXPENSES ACCRUED
At year-end 1998 and 1997, this account included taxes accrued of $3,415 million
and $2,866 million and compensation and benefit accruals of $1,487 million and
$1,321 million, respectively. Also included are amounts for product warranties,
restructuring, estimated costs on shipments billed to customers and a variety of
sundry items.
An analysis of changes in the restructuring liability follows.
----------------------------------------
Termination Exit
(In millions) benefits costs Total
- --------------------------------------------------------------------------------
1997 provision $ 778 $ 465 $ 1,243
Charges (672) (395) (1,067)
Reversed to operations -- (28) (28)
----------------------------------------
Balance at December 31, 1998 $ 106 $ 42 $ 148
================================================================================
Substantially all of the 1997 provision is expected to be utilized by
year-end 1999.
<PAGE>
F-35
ANNUAL REPORT PAGE 59
- ---------------------
19 BORROWINGS
- --------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
----------------------------------------------
1998 1997
----------------------- ---------------------
Average Average
December 31 (In millions) Amount rate (a) Amount rate (a)
- --------------------------------------------------------- ---------------------
GE
Commercial paper (U.S.) $ 2,339 5.29% $ 1,835 5.88%
Payable to banks,
principally non-U.S 465 11.15 348 8.38
Current portion of
long-term debt 50 5.08 1,099 5.85
Other 612 347
----------------------------------------------
3,466 3,629
----------------------------------------------
GECS
Commercial paper
U.S 83,044 5.38 67,355 5.93
Non-U.S 3,953 4.80 3,879 4.18
Current portion of
long-term debt 14,645 5.66 15,101 6.30
Other 11,520 8,939
----------------------------------------------
113,162 95,274
----------------------------------------------
ELIMINATIONS (1,250) (828)
----------------------------------------------
$115,378 $98,075
================================================================================
- --------------------------------------------------------------------------------
LONG-TERM BORROWINGS
----------------------------------------------
1998
Average --------------------
December 31 (In millions) rate (a) Maturities 1998 1997
- --------------------------------------------------------------------------------
GE
Industrial development/
pollution control bonds 3.78% 2003-2027 $ 327 $ 270
Payable to banks,
principally non-U.S 9.56 2000-2006 230 195
Other (b) 124 264
---------------------
681 729
---------------------
GECS
Senior notes 6.07 2000-2055 58,042 44,993
Subordinated notes (c) 7.88 2006-2035 996 996
---------------------
59,038 45,989
---------------------
ELIMINATIONS (56) (115)
---------------------
$59,663 $ 46,603
================================================================================
(a) Based on year-end balances and local currency interest rates, including the
effects of interest rate and currency swaps, if any, directly associated
with the original debt issuance.
(b) A variety of obligations having various interest rates and maturities,
including certain borrowings by parent operating components and affiliates.
(c) Guaranteed by GE.
- --------------------------------------------------------------------------------
Borrowings of GE and GECS are addressed below from two perspectives --
liquidity and interest rate management. Additional information about borrowings
and associated swaps can be found in note 30.
LIQUIDITY requirements of GE and GECS are principally met through the credit
markets. Maturities of long-term borrowings during the next five years follow.
---------------------------------------------------
(In millions) 1999 2000 2001 2002 2003
- --------------------------------------------------------------------------------
GE $ 50 $ 137 $ 132 $ 33 $ 48
GECS 14,645 13,889 10,925 7,059 4,794
- --------------------------------------------------------------------------------
Confirmed credit lines of $4.0 billion had been extended to GE by 23 banks
at year-end 1998. Substantially all of GE's credit lines are available to GECS
and its affiliates in addition to their own credit lines.
At year-end 1998, GECS and its affiliates held committed lines of credit
aggregating $26.7 billion, including $11.8 billion of revolving credit
agreements pursuant to which it has the right to borrow funds for periods
exceeding one year. Amounts drawn by GECS under these lines at December 31,
1998, were not significant. A total of $1.5 billion of GE Capital credit lines
is available for use by GE. Both GE and GECS compensate certain banks for credit
facilities in the form of fees, which were insignificant in each of the past
three years.
INTEREST RATES ARE MANAGED by GECS in light of the anticipated behavior,
including prepayment behavior, of assets in which debt proceeds are invested. A
variety of instruments, including interest rate and currency swaps and currency
forwards, are employed to achieve management's interest rate objectives.
Effective interest rates are lower under these "synthetic" positions than could
have been achieved by issuing debt directly.
The following table shows GECS borrowing positions considering the effects of
swaps.
- --------------------------------------------------------------------------------
EFFECTIVE BORROWINGS (INCLUDING SWAPS)
-----------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
Short-term $ 72,143 $ 56,961
-----------------------
Long-term (including current portion)
Fixed rate (a) $ 74,226 $ 59,329
Floating rate 25,831 24,973
-----------------------
Total long-term $100,057 $ 84,302
================================================================================
(a) Includes the notional amount of long-term interest rate swaps that
effectively convert the floating-rate nature of short-term borrowings to
fixed rates of interest.
- --------------------------------------------------------------------------------
At December 31, 1998, swap maturities ranged from 1999 to 2048, and average
interest rates for fixed-rate borrowings (including "synthetic" fixed-rate
borrowings) were 6.03% (6.32% at year-end 1997).
<PAGE>
F-36
ANNUAL REPORT PAGE 60
- ---------------------
20 GECS INSURANCE LIABILITIES, RESERVES AND ANNUITY BENEFITS
-----------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
Investment contracts and universal
life benefits $29,266 $28,266
Life insurance benefits and other (a) 16,104 14,356
Unpaid claims and claims adjustment
expenses (b) 19,611 14,654
Unearned premiums 5,715 5,068
Separate accounts (see note 17) 6,563 4,926
-----------------------
$77,259 $67,270
================================================================================
(a) Life insurance benefits are accounted for mainly by a net-level-premium
method using estimated yields generally ranging from 5% to 9% in both 1998
and 1997.
(b) Principally property and casualty reserves; includes amounts for both
reported and incurred-but-not-reported claims, reduced by anticipated
salvage and subrogation recoveries. Estimates of liabilities are reviewed
and updated continually, with changes in estimated losses reflected in
operations.
- --------------------------------------------------------------------------------
When GECS cedes insurance to third parties, it is not relieved of its
primary obligation to policyholders. Losses on ceded risks give rise to claims
for recovery; allowances are established for such receivables from reinsurers.
The insurance liability for unpaid claims and claims adjustment expenses
related to policies that may cover environmental, asbestos and Year 2000-related
exposures is based on known facts and an assessment of applicable law and
coverage litigation. Liabilities are recognized for both known and unasserted
claims (including the cost of related litigation) when sufficient information
has been developed to indicate that a claim has been incurred and a range of
potential losses can be reasonably estimated. Developed case law and adequate
claim history do not exist for certain claims, particularly with respect to Year
2000-related exposures, principally due to significant uncertainties as to both
the level of ultimate losses that will occur and what portion, if any, will be
deemed to be insured amounts.
A summary of activity affecting unpaid claims and claims adjustment expenses
follows.
-------------------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Balance at January 1 -- gross $ 14,654 $ 13,184 $ 12,662
Less reinsurance recoverables (2,246) (1,822) (1,853)
-------------------------------------
Balance at January -- net 12,408 11,362 10,809
Claims and expenses incurred
Current year 6,330 4,494 4,087
Prior years (162) 146 104
Claims and expenses paid
Current year (2,400) (1,780) (1,357)
Prior years (3,692) (2,816) (2,373)
Claim reserves related to
acquired companies 3,476 1,360 309
Other 168 (358) (217)
-------------------------------------
Balance at December 31 -- net 16,128 12,408 11,362
Add reinsurance recoverables 3,483 2,246 1,822
-------------------------------------
Balance at December 31 -- gross $ 19,611 $ 14,654 $ 13,184
================================================================================
Prior-year claims and expenses incurred in the preceding table resulted
principally from settling claims established in earlier accident years for
amounts that differed from expectations.
Financial guarantees and credit life risk of insurance affiliates are
summarized below.
--------------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
Guarantees, principally on municipal
bonds and structured finance issues $ 171,020 $ 144,647
Mortgage insurance risk in force 43,941 46,245
Credit life insurance risk in force 31,018 26,593
Less reinsurance (37,205) (33,528)
--------------------------
$ 208,774 $ 183,957
================================================================================
21 GE ALL OTHER LIABILITIES
This account includes noncurrent compensation and benefit accruals at year-end
1998 and 1997 of $5,594 million and $5,484 million, respectively. Also included
are amounts for deferred incentive compensation, deferred income, product
warranties and a variety of sundry items.
GE is involved in numerous remediation actions to clean up hazardous wastes
as required by federal and state laws. Liabilities for remediation costs at each
site are based on management's best estimate of undiscounted future costs,
excluding possible insurance recoveries. When there appears to be a range of
possible costs with equal likelihood, liabilities are based on the lower end of
such range. Uncertainties about the status of laws, regulations, technology and
information related to individual sites make it difficult to develop a
meaningful estimate of the reasonably possible aggregate environmental
remediation exposure. However, even in the unlikely event that remediation costs
amounted to the high end of the range of costs for each site, the resulting
additional liability would not be material to GE's financial position, results
of operations or liquidity.
<PAGE>
F-37
ANNUAL REPORT PAGE 61
- ---------------------
22 DEFERRED INCOME TAXES
Aggregate deferred tax amounts are summarized below.
------------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
ASSETS
GE $ 5,309 $ 4,891
GECS 5,305 4,320
------------------------
10,614 9,211
------------------------
LIABILITIES
GE 5,059 4,576
GECS 14,895 13,286
------------------------
19,954 17,862
------------------------
NET DEFERRED TAX LIABILITY $ 9,340 $ 8,651
================================================================================
Principal components of the net deferred tax balances for GE and GECS are as
follows:
-------------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
GE
Provisions for expenses (a) $(3,809) $(3,367)
Retiree insurance plans (847) (856)
Prepaid pension asset 2,713 2,301
Depreciation 935 955
Other-- net 758 652
-------------------------
(250) (315)
-------------------------
GECS
Financing leases 8,593 7,909
Operating leases 2,419 2,156
Net unrealized gains
on securities 1,369 1,264
Allowance for losses (1,386) (1,372)
Insurance reserves (1,022) (1,000)
AMT credit carryforwards (903) (354)
Other -- net 520 363
-------------------------
9,590 8,966
-------------------------
NET DEFERRED TAX LIABILITY $ 9,340 $ 8,651
================================================================================
(a) Represents the tax effects of temporary differences related to expense
accruals for a wide variety of items, such as employee compensation and
benefits, interest on tax deficiencies, product warranties and other
provisions for sundry losses and expenses that are not currently
deductible.
- --------------------------------------------------------------------------------
23 GECS MINORITY INTEREST IN EQUITY OF CONSOLIDATED AFFILIATES
Minority interest in equity of consolidated GECS affiliates includes preferred
stock issued by GE Capital and by an affiliate of GE Capital. The preferred
stock pays cumulative dividends at variable rates. Value of the preferred shares
is summarized below.
-----------------------
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------------
GE Capital $2,300 $2,230
GE Capital affiliate 860 660
================================================================================
Dividend rates on the preferred stock ranged from 3.9% to 5.2% during 1998
and from 3.8% to 5.2% during 1997 and 1996.
24 RESTRICTED NET ASSETS OF GECS AFFILIATES
Certain GECS consolidated affiliates are restricted from remitting funds to GECS
in the form of dividends or loans by a variety of regulations, the purpose of
which is to protect affected insurance policyholders, depositors or investors.
At year-end 1998, net assets of regulated GECS affiliates amounted to $25.1
billion, of which $21.9 billion was restricted.
At December 31, 1998 and 1997, the aggregate statutory capital and surplus of
the insurance businesses totaled $14.4 billion and $12.4 billion, respectively.
Accounting practices prescribed by statutory authorities are used in preparing
statutory statements.
25 SHARE OWNERS' EQUITY
-----------------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------=
COMMON STOCK ISSUED $ 594 $ 594 $ 594
===================================
ACCUMULATED NONOWNER
CHANGES OTHER THAN EARNINGS
Balance at January 1 $ 1,340 $ 615 $ 1,061
Unrealized gains (losses) on
investment securities -- net
of deferred taxes of $430,
$860 and ($204) 795 1,467 (329)
Currency translation
adjustments -- net of deferred
taxes of ($13), ($58) and ($9) 60 (742) (117)
Reclassification adjustments--
net of deferred taxes of ($291) (531) -- --
-----------------------------------
Balance at December 31 $ 1,664 $ 1,340 $ 615
===================================
OTHER CAPITAL
Balance at January 1 $ 4,434 $ 2,554 $ 1,602
Gains on treasury stock
dispositions (a) 2,374 1,880 952
-----------------------------------
Balance at December 31 $ 6,808 $ 4,434 $ 2,554
===================================
RETAINED EARNINGS
Balance at January 1 $ 43,338 $ 38,670 $ 34,528
Net earnings 9,296 8,203 7,280
Dividends (a) (4,081) (3,535) (3,138)
-----------------------------------
Balance at December 31 $ 48,553 $ 43,338 $ 38,670
===================================
COMMON STOCK HELD IN TREASURY
Balance at January 1 $ 15,268 $ 11,308 $ 8,176
Purchases (a) 6,475 6,392 4,842
Dispositions (a) (3,004) (2,432) (1,710)
-----------------------------------
Balance at December 31 $ 18,739 $ 15,268 $ 11,308
================================================================================
(a) Total dividends and other transactions with share owners reduced equity by
$5,178 million, $5,615 million and $5,318 million in 1998, 1997 and 1996,
respectively.
- --------------------------------------------------------------------------------
The GE Board of Directors has authorized repurchase of $17 billion of
common stock under the share repurchase program. This buyback will continue
through the year 2000 at an annual rate of about $2 billion. Funds used for the
share repurchase are expected to be generated largely from operating cash flow.
<PAGE>
F-38
ANNUAL REPORT PAGE 62
- ---------------------
Through year-end 1998, a total of 287 million shares having an aggregate cost of
$13.6 billion had been repurchased under this program and placed into treasury.
Common shares issued and outstanding are summarized in the following table.
- --------------------------------------------------------------------------------
SHARES OF GE COMMON STOCK
------------------------------------------
December 31 (In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Issued 3,714,068 3,714,026 3,714,026
In treasury (442,772) (449,434) (424,942)
------------------------------------------
Outstanding 3,271,296 3,264,592 3,289,084
================================================================================
GE has 50 million authorized shares of preferred stock ($1.00 par value), but
no such shares have been issued.
The effects of translating to U.S. dollars the financial statements of
non-U.S. affiliates whose functional currency is the local currency are included
in share owners' equity. Asset and liability accounts are translated at year-end
exchange rates, while revenues and expenses are translated at average rates for
the period.
26 OTHER STOCK-RELATED INFORMATION
- --------------------------------------------------------------------------------
Average per share
------------------------------------
Shares
subject Exercise Market
(Shares in thousands) to option price price
- --------------------------------------------------------------------------------
Balance at December 31, 1995 144,874 $21.60 $36.00
Options granted 19,034 42.39 42.39
Replacement options 8,622 26.34 26.34
Options exercised (18,278) 17.70 43.25
Options terminated (4,707) 26.18 --
------------------------------------
Balance at December 31, 1996 149,545 24.86 49.44
Options granted (a) 13,795 68.07 68.07
Replacement options 30 24.16 24.16
Options exercised (21,746) 18.47 61.22
Options terminated (2,721) 31.10 --
------------------------------------
Balance at December 31, 1997 138,903 30.03 73.38
Options granted 7,707 79.86 79.86
Options exercised (23,955) 20.76 84.45
Options terminated (2,727) 44.46 --
------------------------------------
Balance at December 31, 1998 119,928 34.76 102.00
================================================================================
(a) Without adjusting for the effect of the 2-for-1 stock split in April 1997,
the number of options granted during 1997 would have been 13,476.
- --------------------------------------------------------------------------------
Stock option plans, stock appreciation rights (SARs), restricted stock and
restricted stock units are described in GE's current Proxy Statement. With
certain restrictions, requirements for stock option shares can be met from
either unissued or treasury shares.
The replacement options replaced canceled SARs and have identical terms
thereto. At year-end 1998, there were 1.4 million SARs outstanding at an average
exercise price of $22.14. There were 9.2 million restricted stock shares and
restricted stock units outstanding at year-end 1998.
There were 121.0 million and 92.8 million additional shares available for
grants of options, SARs, restricted stock and restricted stock units at December
31, 1998 and 1997, respectively. Under the 1990 Long-Term Incentive Plan, 0.95%
of the Company's issued common stock (including treasury shares) as of the first
day of each calendar year during which the Plan is in effect becomes available
for granting awards in such year. Any unused portion, in addition to shares
allocated to awards that are canceled or forfeited, is available for later
years.
Outstanding options and SARs expire on various dates through December 18,
2008. Restricted stock grants vest on various dates up to normal retirement of
grantees.
The following table summarizes information about stock options outstanding at
December 31, 1998.
- --------------------------------------------------------------------------------
STOCK OPTIONS OUTSTANDING
(Shares in thousands)
Outstanding Exercisable
----------------------------- --------------------
Average Average
Exercise Average exercise exercise
price range Shares life (a) price Shares price
- --------------------------------------------------------------------------------
$12 1/8 - 21 9/16 20,690 2.7 $ 17.80 20,690 $ 17.80
$21 5/8 - 31 15/16 61,600 5.5 25.72 47,372 25.16
$36 3/16 - 51 1/2 17,565 7.6 42.65 4,436 41.19
$51 3/4 - 73 12,475 8.8 68.88 75 60.15
$77 1/2 - 96 7/8 7,598 9.7 79.88 22 78.30
----------------------------------------------------
Total 119,928 5.9 34.76 72,595 24.09
================================================================================
At year-end 1997, options with an average exercise price of $21.11 were
exercisable on 72 million shares; at year-end 1996, options with an average
exercise price of $19.58 were exercisable on 81 million shares.
(a) Average contractual life remaining in years.
- --------------------------------------------------------------------------------
Stock options expire 10 years from the date they are granted; options vest
over service periods that range from one to five years.
Disclosures required by Statement of Financial Accounting Standards (SFAS)
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, are as follows:
- --------------------------------------------------------------------------------
OPTION VALUE INFORMATION (a)
-----------------------------------
(In dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Fair value per option (b) $18.98 $17.81 $9.34
Valuation assumptions
Expected option term (years) 6.2 6.3 6.2
Expected volatility 21.7% 20.0% 20.1%
Expected dividend yield 1.8% 1.5% 2.3%
Risk-free interest rate 4.9% 6.1% 6.6%
================================================================================
(a) Weighted averages of option grants during each period.
(b) Estimated using Black-Scholes option pricing model.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRO FORMA EFFECTS (a)
December 31 (In millions;
per-share amounts in dollars) -----------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Net earnings $9,196 $8,129 $7,235
Earnings per share -- diluted 2.77 2.43 2.15
-- basic 2.81 2.48 2.19
================================================================================
(a) Valuations only of grants made after January 1, 1995; thus, the pro forma
effect increased over the periods presented.
- --------------------------------------------------------------------------------
<PAGE>
F-39
ANNUAL REPORT PAGE 63
- ---------------------
27 SUPPLEMENTAL CASH FLOWS INFORMATION
Changes in operating assets and liabilities are net of acquisitions and
dispositions of principal businesses.
"Payments for principal businesses purchased" in the Statement of Cash Flows
is net of cash acquired and includes debt assumed and immediately repaid in
acquisitions.
"All other operating activities" in the Statement of Cash Flows consists
primarily of adjustments to current and noncurrent accruals and deferrals of
costs and expenses, increases and decreases in progress collections, adjustments
for gains and losses on assets, increases and decreases in assets held for sale,
and adjustments to assets.
Noncash transactions include the 1998 acquisition of Marquette Medical
Systems for 9.4 million shares of GE common stock valued at $829 million and the
1997 exchange transaction described in note 2. Other noncash transactions did
not have a significant effect on the investing or financing activities of GE or
GECS.
Certain supplemental information related to GE and GECS cash flows is shown
below.
<TABLE>
<CAPTION>
---------------------------------
For the years ended December 31 (In millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GE
NET PURCHASE OF GE SHARES FOR TREASURY
Open market purchases under share repurchase program $ (3,646) $ (3,492) $ (3,266)
Other purchases (2,829) (2,900) (1,576)
Dispositions (mainly to employee and dividend reinvestment plans) 3,656 3,577 2,519
---------------------------------
$ (2,819) $ (2,815) $ (2,323)
=================================
GECS
FINANCING RECEIVABLES
Increase in loans to customers $(76,142) $(55,689) $(49,890)
Principal collections from customers -- loans 65,573 50,679 49,923
Investment in equipment for financing leases (20,299) (16,420) (14,427)
Principal collections from customers -- financing leases 15,467 13,796 11,158
Net change in credit card receivables (4,705) (4,186) (3,068)
Sales of financing receivables 13,805 9,922 4,026
---------------------------------
$ (6,301) $ (1,898) $ (2,278)
=================================
ALL OTHER INVESTING ACTIVITIES
Purchases of securities by insurance and annuity businesses $(23,897) $(19,274) $(15,925)
Dispositions and maturities of securities by insurance and annuity businesses 20,639 17,280 14,018
Proceeds from principal business dispositions -- 241 --
Other (7,820) (3,893) (4,183)
---------------------------------
$(11,078) $ (5,646) $ (6,090)
=================================
NEWLY ISSUED DEBT HAVING MATURITIES LONGER THAN 90 DAYS
Short-term (91 to 365 days) $ 5,881 $ 3,502 $ 5,061
Long-term (longer than one year) 33,453 15,566 17,245
Proceeds -- nonrecourse, leveraged lease debt 2,106 1,757 595
---------------------------------
$ 41,440 $ 20,825 $ 22,901
=================================
REPAYMENTS AND OTHER REDUCTIONS OF DEBT HAVING MATURITIES LONGER THAN 90 DAYS
Short-term (91 to 365 days) $(25,901) $(21,320) $(23,355)
Long-term (longer than one year) (4,739) (1,150) (1,025)
Principal payments -- nonrecourse, leveraged lease debt (387) (287) (276)
---------------------------------
$(31,027) $(22,757) $(24,656)
=================================
ALL OTHER FINANCING ACTIVITIES
Proceeds from sales of investment contracts $ 5,149 $ 4,717 $ 2,561
Preferred stock issued by GECS affiliates 270 605 155
Redemption of investment contracts (5,533) (4,537) (2,688)
---------------------------------
$ (114) $ 785 $ 28
====================================================================================================================
</TABLE>
<PAGE>
F-40
ANNUAL REPORT PAGE 64
- ---------------------
28 OPERATING SEGMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES
For the years ended December 31
Total revenues Intersegment revenues External revenues
-------------------------------- ------------------------ ------------------------------
(In millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GE
Aircraft Engines $ 10,294 $ 7,799 $ 6,302 $ 292 $ 101 $ 86 $ 10,002 $ 7,698 $ 6,216
Appliances 5,619 5,801 5,586 12 12 5 5,607 5,789 5,581
Industrial Products and Systems 11,222 10,984 10,401 479 491 453 10,743 10,493 9,948
NBC 5,269 5,153 5,232 -- -- -- 5,269 5,153 5,232
Plastics 6,633 6,695 6,509 20 24 22 6,613 6,671 6,487
Power Systems 8,466 7,915 7,643 166 80 67 8,300 7,835 7,576
Technical Products and Services 5,323 4,861 4,700 14 18 23 5,309 4,843 4,677
All Other 264 308 291 -- -- -- 264 308 291
Eliminations (1,367) (1,176) (1,032) (983) (726) (656) (384) (450) (376)
-------------------------------- ------------------------ ------------------------------
Total GE segment revenues 51,723 48,340 45,632 -- -- -- 51,723 48,340 45,632
Corporate items <F1> 507 2,919 1,116 -- -- -- 507 2,919 1,116
GECS net earnings 3,796 3,256 2,817 -- -- -- 3,796 3,256 2,817
-------------------------------- ------------------------ ------------------------------
Total GE 56,026 54,515 49,565 -- -- -- 56,026 54,515 49,565
GECS 48,694 39,931 32,713 -- -- -- 48,694 39,931 32,713
Eliminations (4,251) (3,606) (3,099) -- -- -- (4,251) (3,606) (3,099)
-------------------------------- ------------------------ ------------------------------
CONSOLIDATED REVENUES $100,469 $90,840 $79,179 $ -- $ -- $ -- $100,469 $90,840 $79,179
====================================================================================================================================
<FN>
GE revenues include income from sales of goods and services to customers and
other income. Sales from one Company component to another generally are priced
at equivalent commercial selling prices.
<F1> Includes revenues of $944 million and $789 million in 1997 and 1996,
respectively, from an appliance distribution affiliate that was
deconsolidated in 1998. Also includes $1,538 million in 1997 from exchanging
preferred stock in Lockheed Martin Corporation for the stock of a newly
formed subsidiary.
- --------------------------------------------------------------------------------
</FN>
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS PROPERTY, PLANT AND DEPRECIATION AND
EQUIPMENT ADDITIONS AMORTIZATION (INCLUDING
(INCLUDING EQUIPMENT GOODWILL AND OTHER
LEASED TO OTHERS) INTANGIBLES)
For the years ended For the years ended
At December 31 December 31 December 31
---------------------------------- ------------------------ -----------------------
(In millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GE
Aircraft Engines $ 8,866 $ 8,895 $ 5,423 $ 480 $ 729 $ 551 $ 398 $ 292 $ 282
Appliances 2,436 2,354 2,399 150 83 168 137 131 123
Industrial Products and Systems 6,466 6,672 6,574 428 487 450 440 408 362
NBC 3,264 3,050 3,007 105 116 176 127 142 121
Plastics 9,813 8,890 9,130 722 618 748 591 494 552
Power Systems 7,253 6,182 6,322 246 215 185 215 199 184
Technical Products and Services 3,858 2,438 2,245 254 189 154 143 137 123
All Other 189 224 239 -- -- -- 52 46 40
---------------------------------- ------------------------ -----------------------
Total GE segments 42,145 38,705 35,339 2,385 2,437 2,432 2,103 1,849 1,787
Investment in GECS 19,727 17,239 14,276 -- -- -- -- -- --
Corporate items and eliminations (a) 12,798 11,482 10,310 158 129 114 189 180 176
---------------------------------- ------------------------ -----------------------
Total GE 74,670 67,426 59,925 2,543 2,566 2,546 2,292 2,029 1,963
GECS 303,297 255,408 227,419 8,110 7,320 5,762 3,568 3,240 2,805
Eliminations (22,032) (18,822) (14,942) -- -- -- -- -- --
---------------------------------- ------------------------ -----------------------
CONSOLIDATED TOTALS $ 355,935 $ 304,012 $ 272,402 $10,653 $9,886 $8,308 $5,860 $5,269 $4,768
====================================================================================================================================
<FN>
Additions to property, plant and equipment include amounts relating to principal
businesses purchased.
(a) Depreciation and amortization includes $64 million of unallocated RCA
goodwill amortization in 1998, 1997 and 1996 that relates to NBC.
- --------------------------------------------------------------------------------
</FN>
</TABLE>
At year=end 1998, GE adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. Prior-period amounts have been restated in
accordance with the requirements of the new standard.
BASIS FOR PRESENTATION. The Company's operating businesses are organized based
on the nature of products and services provided. Certain GE businesses do not
meet the definition of a reportable operating segment and have been aggregated.
The Industrial Products and Systems segment consists of Industrial Systems,
Lighting, Transportation Systems and GE Supply. The Technical Products and
Services segment consists of Medical Systems and Information Services.
Segment accounting policies are the same as policies described in note 1.
<PAGE>
F-41
ANNUAL REPORT PAGE 65
- ---------------------
Details of segment profit by operating segment can be found on page 36 of this
report. A description of operating segments for General Electric Company and
consolidated affiliates follows.
AIRCRAFT ENGINES. Jet engines and replacement parts and repair and maintenance
services for all categories of commercial aircraft (short/medium, intermediate
and long-range); for a wide variety of military aircraft, including fighters,
bombers, tankers and helicopters; and for executive and commuter aircraft. Sold
worldwide to airframe manufacturers, airlines and government agencies. Also
includes aircraft engine derivatives, reported both in this segment and in Power
Systems, used as marine propulsion and industrial power sources.
APPLIANCES. Major appliances and related services for products such as
refrigerators, freezers, electric and gas ranges, dishwashers, clothes washers
and dryers, microwave ovens, room air conditioners and residential water system
products. Sold in North America and in global markets under various GE and
private-label brands. Distributed to retail outlets, mainly for the replacement
market, and to building contractors and distributors for new installations.
INDUSTRIAL PRODUCTS AND SYSTEMS. Lighting products (including a wide variety of
lamps, lighting fixtures, wiring devices and quartz products); electrical
distribution and control equipment (including power delivery and control
products such as transformers, meters, relays, capacitors and arresters);
transportation systems products (including diesel-electric locomotives, transit
propulsion equipment and motorized wheels for off-highway vehicles); electric
motors and related products; a broad range of electrical and electronic
industrial automation products (including drive systems); installation,
engineering and repair services, which includes management and technical
expertise for large projects such as process control systems; and GE Supply, a
network of electrical supply houses. Markets are extremely diverse. Products are
sold to commercial and industrial end users, including utilities, to original
equipment manufacturers, to electrical distributors, to retail outlets, to
railways and to transit authorities. Increasingly, products are developed for
and sold in global markets.
NBC. Principal businesses are the furnishing of U.S. network television services
to more than 200 affiliated stations, production of television programs,
operation of 13 VHF and UHF television broadcasting stations, operation of six
cable/satellite networks around the world, and investment and programming
activities in the Internet, multimedia and cable television.
PLASTICS. High-performance engineered plastics used in applications such as
automobiles and housings for computers and other business equipment; ABS resins;
silicones; superabrasive industrial diamonds; and laminates. Sold worldwide to a
diverse customer base consisting mainly of manufacturers.
POWER SYSTEMS. Power plant products and services, including design,
installation, operation and maintenance services. Markets and competition are
global. Gas turbines are sold separately and as part of packaged power plants
for electric utilities, independent power producers and for industrial
cogeneration and mechanical drive applications. Steam turbine-generators are
sold to electric utilities and, for cogeneration, to industrial and other power
customers. Also includes nuclear reactors and fuel and support services for GE's
new and installed boiling water reactors and aircraft engine derivatives, also
reported in the Aircraft Engines segment, used as industrial power sources.
TECHNICAL PRODUCTS AND SERVICES. Medical imaging systems such as magnetic
resonance (MR) and computed tomography (CT) scanners, x-ray, nuclear imaging and
ultrasound, as well as diagnostic cardiology and patient monitoring devices;
related services, including equipment monitoring and repair, computerized data
management and customer productivity services. Products and services are sold
worldwide to hospitals and medical facilities. Also includes a full range of
computer-based information and data interchange services for both internal and
external use to commercial and industrial customers.
GECS. The operating activities of the GECS segment follow.
CONSUMER SERVICES -- private-label and bank credit card loans, personal
loans, time sales and revolving credit and inventory financing for retail
merchants, auto leasing and inventory financing, mortgage servicing, and
consumer savings and insurance services.
EQUIPMENT MANAGEMENT -- leases, loans, sales and asset management services
for portfolios of commercial and transportation equipment, including aircraft,
trailers, auto fleets, modular space units, railroad rolling stock, data
processing equipment, containers used on ocean-going vessels, and satellites.
MID-MARKET FINANCING -- loans, financing and operating leases and other
services for middle-market customers, including manufacturers, distributors and
end users, for a variety of equipment that includes vehicles, corporate
aircraft, data processing equipment, medical and diagnostic equipment, and
equipment used in construction, manufacturing, office applications, electronics
and telecommunications activities.
SPECIALIZED FINANCING -- loans and financing leases for major capital assets,
including industrial facilities and equipment, and energy-related facilities;
commercial and residential real estate loans and investments; and loans to and
investments in public and private entities in diverse industries.
SPECIALTY INSURANCE -- U.S. and international multiple-line property and
casualty reinsurance; certain directly written specialty insurance and life
reinsurance; financial guaranty insurance, principally on municipal bonds and
structured finance issues; private mortgage insurance; and creditor insurance
covering international customer loan repayments.
Very few of the products financed by GECS are manufactured by GE.
<PAGE>
F-42
ANNUAL REPORT PAGE 66
- ---------------------
29 GEOGRAPHIC SEGMENT INFORMATION (CONSOLIDATED)
The table below presents data by geographic region. Operating profit data by
geographic segment have been restated on a basis consistent with operating
segment information presented on page 36.
Revenues and operating profit shown below are classified according to their
country of origin (including exports from such areas). Revenues and operating
profit classified under the caption "United States" include royalty and
licensing income from non-U.S. sources.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
REVENUES
For the years ended December 31
Total revenues Intersegment revenues External revenues
- --------------------------------------------------------------- ---------------------------------- -------------------------------
(In millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996
---------------------------------- ---------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $ 71,799 $ 66,330 $ 58,110 $ 2,608 $ 2,471 $ 2,292 $ 69,191 $ 63,859 $ 55,818
Europe <F1> 21,665 18,166 15,964 837 787 714 20,828 17,379 15,250
Pacific Basin 5,166 4,742 4,343 951 880 796 4,215 3,862 3,547
Other <F2> 6,925 6,420 5,140 690 680 576 6,235 5,740 4,564
Intercompany eliminations (5,086) (4,818) (4,378) (5,086) (4,818) (4,378) -- -- --
---------------------------------- ---------------------------------- -------------------------------
Total $ 100,469 $ 90,840 $ 79,179 $ -- $ -- $ -- $ 100,469 $ 90,840 $ 79,179
====================================================================================================================================
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT <F3> ASSETS LONG-LIVED ASSETS <F4>
For the years ended
December 31 At December 31 At December 31
----------------------------- ---------------------------------- -------------------------------
(In millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $ 11,558 $ 10,249 $ 9,745 $ 227,311 $ 206,655 $ 189,593 $ 18,048 $ 17,074 $ 15,016
Europe 2,393 2,271 1,724 84,518 66,740 55,196 6,334 5,180 4,483
Pacific Basin 431 355 269 18,427 8,881 8,125 1,326 971 881
Other <F2> 810 713 576 25,878 21,926 19,655 10,057 9,119 8,442
Intercompany eliminations (9) (23) 7 (199) (190) (167) (35) (28) (26)
----------------------------- ---------------------------------- -------------------------------
Total $ 15,183 $ 13,565 $12,321 $ 355,935 $ 304,012 $ 272,402 $ 35,730 $ 32,316 $ 28,796
====================================================================================================================================
<FN>
<F1> Includes $944 million and $789 million in 1997 and 1996, respectively, from
an appliance distribution affiliate that was deconsolidated in 1998.
<F2> Includes the Americas other than the United States and operations that
cannot meaningfully be associated with specific geographic areas (for
example, shipping containers used on ocean-going vessels).
<F3> Excludes GECS income taxes of $1,364 million, $1,166 million and $1,231
million in 1998, 1997 and 1996, respectively, which are included in the
measure of segment profit reported on page 36.
<F4> Property, plant and equipment (including equipment leased to others).
- --------------------------------------------------------------------------------
</FN>
</TABLE>
30 ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS
This note contains estimated fair values of certain financial instruments to
which GE and GECS are parties. Apart from borrowings by GE and GECS and certain
marketable securities, relatively few of these instruments are actively traded.
Thus, fair values must often be determined by using one or more models that
indicate value based on estimates of quantifiable characteristics as of a
particular date. Because this undertaking is, by its nature, difficult and
highly judgmental, for a limited number of instruments, alternative valuation
techniques may have produced disclosed values different from those that could
have been realized at December 31, 1998 or 1997. Assets and liabilities that, as
a matter of accounting policy, are reflected in the accompanying financial
statements at fair value are not included in the following disclosures; such
items include cash and equivalents, investment securities and separate accounts.
A description of how values are estimated follows.
BORROWINGS. Based on quoted market prices or market comparables. Fair values of
interest rate and currency swaps on borrowings are based on quoted market prices
and include the effects of counterparty creditworthiness.
TIME SALES AND LOANS. Based on quoted market prices, recent transactions and/or
discounted future cash flows, using rates at which similar loans would have been
made to similar borrowers.
INVESTMENT CONTRACT BENEFITS. Based on expected future cash flows, discounted at
currently offered discount rates for immediate annuity contracts
or cash surrender values for single premium deferred annuities.
FINANCIAL GUARANTEES AND CREDIT LIFE. Based on future cash flows, considering
expected renewal premiums, claims, refunds and servicing costs, discounted at a
market rate.
ALL OTHER INSTRUMENTS. Based on comparable transactions, market comparables,
discounted future cash flows, quoted market prices, and/or estimates of the cost
to terminate or otherwise settle obligations to counterparties.
<PAGE>
F-43
ANNUAL REPORT PAGE 67
- ---------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS
---------------------------------------- ---------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
Assets (liabilities) Assets (liabilities)
------------------------------- -----------------------------
Estimated Estimated
Carrying fair value Carrying fair value
Notional amount ------------------ Notional amount ------------------
December 31 (In millions) amount (net) High Low amount (net) High Low
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GE
Investment related
Investments and notes receivable $ <F1> $ 1,764 $ 1,810 $ 1,793 $ <F1> $ 1,909 $ 1,915 $ 1,908
Cancelable interest rate swap 1,221 17 1 1 1,421 25 19 19
Borrowings and related instruments
Borrowings<F2><F3> <F1> (4,147) (4,155) (4,155) <F1> (4,358) (4,377) (4,377)
Interest rate swaps 951 -- (60) (60) 531 -- (12) (12)
Recourse obligations for receivables sold 441 (32) (32) (32) 427 (23) (23) (23)
Financial guarantees 2,172 -- -- -- 2,141 -- -- --
Other firm commitments
Currency forwards and options 7,914 72 114 114 6,656 82 270 270
Financing commitments 1,519 -- -- -- 1,794 -- -- --
GECS
Assets
Time sales and loans <F1> 74,616 75,474 74,293 <F1> 62,712 63,105 61,171
Integrated interest rate swaps 14,135 16 (102) (102) 12,323 19 (125) (125)
Purchased options 11,195 146 158 158 1,992 64 39 39
Mortgage-related positions
Mortgage purchase commitments 1,983 -- 15 15 2,082 -- 11 11
Mortgage sale commitments 3,276 -- (9) (9) 2,540 -- (9) (9)
Mortgages held for sale <F1> 4,405 4,457 4,457 <F1> 2,378 2,379 2,379
Options, including "floors" 21,433 91 181 181 30,347 51 141 141
Interest rate swaps and futures 6,662 -- 49 49 3,681 -- 23 23
Other cash financial instruments <F1> 3,205 3,433 3,231 <F1> 2,242 2,592 2,349
Liabilities
Borrowings and related instruments
Borrowings<F2> <F3> <F1> (172,200) (174,492) (174,492) <F1> (141,263) (141,828)(141,828)
Interest rate swaps 46,325 -- (1,449) (1,449) 42,531 -- (250) (250)
Currency swaps 29,645 -- 252 252 23,382 -- (1,249) (1,249)
Currency forwards 23,409 -- (389) (389) 15,550 -- 371 371
Investment contract benefits <F1> (23,893) (23,799) (23,799) <F1> (23,045) (22,885) (22,885)
Insurance -- financial guarantees and credit life 208,774 (3,135) (3,339) (3,446) 183,957 (2,897) (2,992) (3,127)
Credit and liquidity support -- securitizations 21,703 (29) (29) (29) 13,634 (46) (46) (46)
Performance guarantees -- principally
letters of credit 2,684 -- -- -- 2,699 (34) -- (67)
Other 2,888 (1,921) (1,190) (1,190) 3,147 (1,134) (1,282) (1,303)
Other firm commitments
Currency forwards 5,072 -- (52) (52) 1,744 -- 11 11
Currency swaps 915 72 72 72 1,073 192 192 192
Ordinary course of business
lending commitments 9,839 -- (12) (12) 7,891 -- (62) (62)
Unused revolving credit lines
Commercial 6,401 -- -- -- 4,850 -- -- --
Consumer -- principally credit cards 132,475 -- -- -- 134,123 -- -- --
====================================================================================================================================
<FN>
<F1> Not applicable.
<F2> Includes effects of interest rate and currency swaps, which also are listed
separately.
<F3> See note 19.
- --------------------------------------------------------------------------------
</FN>
</TABLE>
Additional information about certain financial instruments in the table above
follows.
CURRENCY FORWARDS AND OPTIONS are employed by GE and GECS to manage exposures to
changes in currency exchange rates associated with commercial purchase and sale
transactions and by GECS to optimize borrowing costs as discussed in note 19.
These financial instruments generally are used to fix the local currency cost of
purchased goods or services or selling prices denominated in currencies other
than the functional currency. Currency exposures that result from net
investments in affiliates are managed principally by funding assets denominated
in local currency with debt denominated in those same currencies. In certain
circumstances, net investment exposures are managed using currency forwards and
currency swaps.
<PAGE>
F-44
ANNUAL REPORT PAGE 68
- ---------------------
OPTIONS AND INSTRUMENTS CONTAINING OPTION FEATURES that behave based on limits
("caps," "floors" or "collars") on interest rate movement are used primarily to
hedge prepayment risk in certain GECS business activities, such as mortgage
servicing and annuities.
SWAPS OF INTEREST RATES AND CURRENCIES are used by GE and GECS to optimize
borrowing costs for a particular funding strategy (see note 19). A cancelable
interest rate swap was used by GE to hedge an investment position. Interest rate
and currency swaps, along with purchased options and futures, are used by GECS
to establish specific hedges of mortgage-related assets and to manage net
investment exposures. Credit risk of these positions is evaluated by management
under the credit criteria discussed below. As part of its ongoing customer
activities, GECS also enters into swaps that are integrated into investments in
or loans to particular customers and do not involve assumption of third-party
credit risk. Such integrated swaps are evaluated and monitored like their
associated investments or loans and are not therefore subject to the same credit
criteria that would apply to a stand-alone position.
COUNTERPARTY CREDIT RISK -- risk that counterparties will be financially unable
to make payments according to the terms of the agreements -- is the principal
risk associated with swaps, purchased options and forwards. Gross market value
of probable future receipts is one way to measure this risk, but is meaningful
only in the context of net credit exposure to individual counterparties. At
December 31, 1998 and 1997, this gross market risk amounted to $2.3 billion and
$2.0 billion, respectively. Aggregate fair values that represent associated
probable future obligations, normally associated with a right of offset against
probable future receipts, amounted to $3.6 billion and $2.9 billion at December
31, 1998 and 1997, respectively.
Except as noted above for positions that are integrated into financings, all
swaps, purchased options and forwards are carried out within the following
credit policy constraints.
o Once a counterparty exceeds credit exposure limits (see table below), no
additional transactions are permitted until the exposure with that
counterparty is reduced to an amount that is within the established limit.
Open contracts remain in force.
- --------------------------------------------------------------------------------
COUNTERPARTY CREDIT CRITERIA
-----------------------------
Credit rating
-----------------------------
Moody's Standard & Poor's
- --------------------------------------------------------------------------------
Term of transaction
Between one and five years Aa3 AA-
Greater than five years Aaa AAA
Credit exposure limits
Up to $50 million Aa3 AA-
Up to $75 million Aaa AAA
================================================================================
o All swaps are executed under master swap agreements containing mutual credit
downgrade provisions that provide the ability to require assignment or
termination in the event either party is downgraded below A3 or A-.
More credit latitude is permitted for transactions having original maturities
shorter than one year because of their lower risk.
31 QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First quarter Second quarter Third quarter Fourth quarter
(Dollar amounts in millions; ------------------ ------------------ ------------------ ------------------
per-share amounts in dollars) 1998 1997 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS
Net earnings $ 1,891 $ 1,677 $ 2,450 $ 2,162 $ 2,284 $ 2,014 $ 2,671 $ 2,350
Earnings per share -- diluted 0.57 0.50 0.74 0.65 0.69 0.60 0.80 0.70
-- basic 0.58 0.51 0.75 0.66 0.70 0.62 0.82 0.72
SELECTED DATA
GE
Sales of goods and services 11,408 10,522 13,217 12,620 12,075 11,698 14,846 14,112
Gross profit from sales 3,366 2,970 4,216 3,886 3,630 3,368 4,598 2,618
GECS
Total revenues 11,151 9,544 11,801 9,317 12,016 10,182 13,726 10,888
Operating profit 1,252 1,081 1,219 1,138 1,584 1,229 1,105 974
Net earnings 881 754 933 798 1,082 938 900 766
====================================================================================================================================
</TABLE>
For GE, gross profit from sales is sales of goods and services less costs of
goods and services sold. For GECS, operating profit is "Earnings before income
taxes."
Fourth-quarter gross profit from sales in 1997 was reduced by restructuring
and other special charges. Such charges, including amounts shown in "Other costs
and expenses," were $2,322 million before tax. Also in the fourth quarter of
1997, GE completed an exchange transaction with Lockheed Martin as described in
note 2.
Earnings-per-share amounts for each quarter are required to be computed
independently. As a result, with the exception of 1998 diluted earnings per
share, their sum does not equal the total year earnings-per-share amounts for
1998 and 1997.
<PAGE>
<TABLE>
EXHIBIT 12
GENERAL ELECTRIC COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
(DOLLARS IN MILLIONS) Year ended December 31
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
GE EXCEPT GECS
Earnings <F1> $ 7,828 $ 8,696 $ 9,677 $ 10,132 $ 12,230
Less: Equity in undistributed earnings of General Electric
Capital Services, Inc. <F2> (1,181) (1,324) (1,836) (1,597) (2,124)
Plus: Interest and other financial
charges included in expense 410 649 595 797 883
One-third of rental expense <F3> 171 174 171 179 189
-------- -------- -------- -------- --------
Adjusted "earnings" $ 7,228 $ 8,195 $ 8,607 $ 9,511 $ 11,178
======== ======== ======== ======== ========
Fixed Charges:
Interest and other financial charges $ 410 $ 649 $ 595 $ 797 $ 883
Interest capitalized 21 13 19 31 38
One-third of rental expense <F3> 171 174 171 179 189
-------- -------- -------- -------- --------
Total fixed charges $ 602 $ 836 $ 785 $ 1,007 $ 1,110
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 12.01 9.80 10.96 9.44 10.07
======== ======== ======== ======== ========
GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES
Earnings <F1> $ 8,831 $ 9,941 $ 11,075 $ 11,419 $ 13,742
Plus: Interest and other financial charges
included in expense 4,994 7,336 7,939 8,445 9,821
One-third of rental expense <F3> 327 349 353 423 486
-------- -------- -------- -------- --------
Adjusted "earnings" $ 14,152 $ 17,626 $ 19,367 $ 20,287 $ 24,049
======== ======== ======== ======== ========
Fixed Charges:
Interest and other financial charges $ 4,994 $ 7,336 $ 7,939 $ 8,445 $ 9,821
Interest capitalized 30 34 60 83 126
One-third of rental expense <F3> 327 349 353 423 486
-------- -------- -------- -------- --------
Total fixed charges $ 5,351 $ 7,719 $ 8,352 $ 8,951 $ 10,433
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.64 2.28 2.32 2.27 2.31
======== ======== ======== ======== ========
<FN>
<F1> Earnings before income taxes and minority interest.
<F2> Earnings after income taxes, net of dividends.
<F3> Considered to be representative of interest factor in rental expense.
</FN>
</TABLE>
<PAGE>
Property and Casualty Reserves for Unpaid Claims and Claim Expenses
Domestic. The Company's domestic subsidiaries maintain reserves to cover their
estimated ultimate liability for unpaid claims and claim expenses with respect
to reported and unreported claims incurred as of the end of each accounting
period (net of estimated related salvage and subrogation claims). These reserves
are estimates that involve actuarial and statistical projections of the expected
cost of the ultimate settlement and administration of unpaid claims based on
facts and circumstances then known, estimates of future trends in claims
severity and other variable factors such as inflation and new concepts of
liability. The inherent uncertainties of estimating claim reserves are
exacerbated for reinsurers by the significant periods of time that often elapse
between the occurrence of an insured claim, the reporting of the claim to the
primary insurer and, ultimately, to the reinsurer, and the primary insurer's
payment of that claim and subsequent indemnification by the reinsurer (the
"tail"). As a consequence, actual claims and claim expenses paid may deviate,
perhaps substantially, from estimates reflected in the insurance companies'
reserves in their financial statements. Adjustments to previously reported
reserves for net claims and claim expenses are reflected in the financial
statements in the period in which the adjustment occurs.
<PAGE>
When a claim is reported to a ceding company, the ceding company's claims
personnel establish a "case reserve" for the estimated amount of the ultimate
payment. The estimate reflects the informed judgment of such personnel based on
general insurance reserving practices and on the experience and knowledge of
such personnel regarding the nature and value of the specific type of claim. The
Company, in turn, typically establishes a case reserve when it receives notice
of a claim from the ceding company. Such reserves are based on an independent
evaluation by the Company's claims departments, taking into consideration
coverage, liability, severity of injury or damage, jurisdiction, an assessment
of the ceding company's ability to evaluate and handle the claim and the amount
of reserves recommended by the ceding company. Case reserves are adjusted
periodically by the claims departments based on subsequent developments and
audits of ceding companies.
In accordance with industry practice, the Company maintains reserves for claims
incurred but not reported ("IBNR"). Such reserves are established to provide for
future case reserves and loss payments on incurred claims that have not yet been
reported to an insurer or reinsurer. In calculating IBNR reserves, the Company
uses generally accepted actuarial reserving techniques that take into account
quantitative loss experience data, together with, where appropriate, qualitative
factors. IBNR reserves are based on claim experience and are grouped both by
class of business and by accident year. IBNR reserves are also adjusted to take
into account certain additional factors, such as changes in the volume of
business written, reinsurance contract terms and conditions, the mix of
business, claims processing and inflation, that can be expected to affect the
Company's liability for claims over time.
International. The Company's international property and casualty reinsurance
operations establish their reserves using analytical techniques similar to those
utilized by GE Global Insurance's domestic subsidiaries. They also maintain IBNR
reserves using actuarial and statistical projections. The potential for adverse
development of the Company's reserves for its international business, as
compared to that of its domestic business, is reduced because the international
operations have a relatively low proportion of longer tail exposures. As of
December 31, 1998, approximately 2% of the Company's net international reserves
($69 million) related to business acquired by the Company from Assurance
Compagniet Baltica Aktiesellskab ("Baltica") in 1988. At the time of the
acquisition, the Company obtained from Baltica a 90% loss development guarantee,
pursuant to which Baltica is obligated to pay the Company 90% of the amount of
claim reserve development (adjusted for certain income and expenses) from 1988
through December 31, 1997. The Company is currently negotiating the settlement
of this loss development guarantee with Baltica.
Reserve Development. The development of the Company's net balance sheet property
and casualty liabilities for unpaid claims and claim expenses for accident years
1988 through 1998 is summarized in the following table:
Net Liability. The first row of data shows the estimated net liability for
unpaid claims and claim expenses at December 31 for each year from 1988 to 1998.
The liability includes both case and IBNR reserves as of each year-end date, net
of anticipated recoveries from other reinsurers. The rows immediately following
the first row of data show cumulative paid data at December 31, as of one year,
two years, ..., 10 years of subsequent payments.
Net Liability Re-estimated. The middle rows of data show the re-estimated amount
for previously reported net liability based on experience as of the end of each
subsequent calendar year's results. This estimate is changed as more information
becomes known about the underlying claims for individual years. The cumulative
redundancy (deficiency) shown in the table is the aggregate net change in
estimates over the period of years subsequent to the calendar year reflected at
the top of the respective columns. The amount in the line titled "Redundancy
(Deficiency) at December 31, 1998", represents for each calendar year (the "Base
Year") the aggregate change in (i) the Company's original estimate of net
liability for unpaid claims and claim expenses for all years prior to and
including the Base Year compared to (ii) the Company's re-estimate as of
December 31, 1998, of net liability for unpaid claims and claim expenses for all
years prior to and including the Base Year. A redundancy means that the original
estimate was greater than the re-estimate and a deficiency means that the
original estimate was less than the re-estimate. By way of example, the
deficiency for the year 1994, calculated as of December 31, 1998, represents a
deficiency in the Company's original estimate of unpaid claims and claim
expenses for 1994 and prior years.
The last seven lines of data present the development of reserves on a "gross of
reinsurance" basis, reconciled to the "net of reinsurance" basis shown in the
immediately preceding table.
<PAGE>
<TABLE>
<CAPTION>
Changes in Historical Reserves for Unpaid Claims and Claim Expenses
For the Last Ten Years - GAAP Basis as of December 31, 1998
Year ended December 31,
--------------------------------------------------------------------------------------------------------
(In millions) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid
claims and claim
expenses $3,087 $3,338 $3,579 $3,596 $ 3,991 $ 4,525 $ 5,071 $ 9,351 $ 9,458 $ 9,114 $12,495
Paid (cumulative) as of:
One year later......... 681 706 747 665 802 949 1,115 1,964 1,949 2,176 ---
Two years later........ 1,064 1,125 1,119 1,103 1,274 1,602 1,804 3,130 3,189 --- ---
Three years later...... 1,432 1,469 1,524 1,499 1,739 2,054 2,341 3,933 --- --- ---
Four years later....... 1,687 1,746 1,772 1,784 2,036 2,424 2,708 --- --- --- ---
Five years later....... 1,919 1,929 1,989 2,008 2,293 2,690 --- --- --- --- ---
Six years later........ 2,065 2,072 2,173 2,208 2,485 --- --- --- --- --- ---
Seven years later...... 2,221 2,229 2,348 2,362 --- --- --- --- --- --- ---
Eight years later...... 2,347 2,380 2,482 --- --- --- --- --- --- --- ---
Nine years later....... 2,478 2,495 --- --- --- --- --- --- --- --- ---
Ten years later........ 2,581 --- --- --- --- --- --- --- --- --- ---
Net liability
re-estimated as of:
One year later......... $3,134 $3,390 $3,616 $3,625 $ 3,919 $ 4,612 $ 5,173 $ 9,192 $ 9,229 $ 9,179 ---
Two years later........ 3,220 3,482 3,583 3,587 4,066 4,656 5,313 8,959 9,127 --- ---
Three years later...... 3,346 3,462 3,564 3,701 4,095 4,793 5,256 8,907 --- --- ---
Four years later....... 3,360 3,472 3,654 3,687 4,238 4,747 5,155 --- --- --- ---
Five years later....... 3,406 3,537 3,635 3,818 4,154 4,668 --- --- --- --- ---
Six years later........ 3,470 3,521 3,758 3,771 4,075 --- --- --- --- --- ---
Seven years later...... 3,494 3,626 3,734 3,711 --- --- --- --- --- --- ---
Eight years later...... 3,582 3,608 3,674 --- --- --- --- --- --- --- ---
Nine years later....... 3,575 3,567 --- --- --- --- --- --- --- --- ---
Ten years later........ 3,549 --- --- --- --- --- --- --- --- --- ---
Redundancy (Deficiency)
at December 31, 1998 (462) (229) (95) (115) (84) (143) (84) 444 331 (65) ---
Effect of foreign
exchange (1) 7 16 (16) (20) 4 26 11 (309) (228) 81 ---
------ ------ ------ ------ ------- ------- ------- ------- ------- ------- -------
Redundancy (Deficiency)
at December 31, 1998,
excluding foreign
exchange $ (455) $ (213) $ (111) $ (135) $ (80) $ (117) $ (73) $ 135 $ 103 $ 16 $ ---
====== ====== ====== ====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
(In millions) 1992 1993 1994 1995 1996 1997 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31 - gross............................... $ 4,815 $ 5,312 $ 6,020 $11,145 $10,869 $10,936 $15,342
Less reinsurance recoverables................................ (824) (787) (949) (1,794) (1,411) (1,822) (2,847)
------- ------- ------- ------- ------- ------- -------
Balance at December 31 - net................................. 3,991 4,525 5,071 9,351 9,458 9,114 12,495
------- ------- ------- ------- ------- ------- -------
Latest re-estimated liability - gross........................ 5,179 5,726 6,298 10,630 10,797 11,065 ---
Latest re-estimated reinsurance recoverables................. (1,104) (1,058) (1,143) (1,723) (1,670) (1,886) ---
------- ------- ------- ------- ------- ------- -------
Latest re-estimated liability - net.......................... 4,075 4,668 5,155 8,907 9,127 9,179 ---
------- ------- ------- ------- ------- ------- -------
Gross redundancy (deficiency)................................ (364) (414) (278) 515 72 (129) ---
Effect of foreign exchange (1)............................... 4 27 11 (377) (271) 101 ---
------- ------- ------- ------- ------- ------- -------
Gross redundancy (deficiency), excluding foreign exchange.... $ (360) $ (387) $ (267) $ 138 $ (199) $ (28) $ ---
======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) The results of the Company's international operations translated from
functional currencies into U.S. dollars are included with the Company's
U.S. underwriting operations in this table. The foreign currency
translation impact on the cumulative redundancy (deficiency) arises from
the difference between reserve developments translated at the exchange
rates at the end of the year in which the liabilities were originally
estimated and the exchange rates at the end of the year in which the
liabilities were re-estimated.
Note: For a description of the purpose of the above table and the various table
sections, please refer to the immediately preceding section entitled "Reserve
Development."
<PAGE>
A number of major trends that occurred within the insurance industry, the
economy in general and several Company-specific factors have had a significant
effect on the Company's liabilities for unpaid claims and claim expenses during
the period covered by the preceding table. The claims and claim expense reserve
deficiencies developed to December 31, 1998, as reflected in the preceding
table, included reserve deficiencies of approximately $130 million in 1988, $79
million in 1989, $48 million in 1990 and $23 million in 1991 related to the
general liability business on the books of Puritan Excess and Surplus Lines
Insurance Company ("PESLIC") before the Company's acquisition of PESLIC in 1994.
Prior to 1994, PESLIC was owned by GE Capital Corporation. Additionally,
beginning in 1985, the Company strengthened the reserves for its excess
liability and workers' compensation business for qualified self-insured
employers. Claims and claim expense reserve development in the mid 1980's in
these businesses reflected the inadequate premium rates which resulted from
intense competition in the market during that period.
In the late 1980's, the reinsurance market generally reacted to the rate
deficiencies and the resulting claims and claim expense reserve development by
increasing rates and strengthening claims and claim expense reserves. This is
reflected, with respect to the Company, in the significant reductions in the
reserve deficiencies in recent years.
To a lesser degree, development of asbestos and environmental claims has
affected the Company's results. Higher than anticipated levels of inflation in
certain lines of reinsurance businesses has also had an adverse effect on
liabilities for claims and claim expenses, particularly in excess of loss
reinsurance. Partially offsetting the above factors is favorable development in
recent years in medical professional liability and facultative casualty
businesses, as well as an increase in net retentions by ceding companies.
The Company's reconciliation of its beginning and ending property and casualty
reserves for unpaid claims and claim expenses on a GAAP basis is summarized as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
(In millions) 1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Balance at January 1 - gross.................... $10,936 $10,869 $11,145
Less reinsurance recoverables................... (1,822) (1,411) (1,794)
------- ------- -------
Balance at January 1 - net...................... 9,114 9,458 9,351
------- ------- -------
Claims and expenses incurred:
Current year................................. 3,286 2,438 2,763
Prior years.................................. (126) 71 106
------- ------- -------
3,160 2,509 2,869
------- ------- -------
Claims and expenses paid:
Current year................................. (1,074) (612) (485)
Prior years.................................. (2,176) (1,949) (1,990)
------- ------- -------
(3,250) (2,561) (2,475)
------- ------- -------
Claim reserves related to acquired companies.... 3,470 - -
Foreign exchange and other...................... 1 (292) (287)
------- ------- -------
Balance at December 31 - net.................... 12,495 9,114 9,458
Add reinsurance recoverables.................... 2,847 1,822 1,411
------- ------- -------
Balance at December 31 - gross.................. $15,342 $10,936 $10,869
======= ======= =======
</TABLE>
The liabilities for claims and claim expenses in the preceding table include
long-term disability claims that are discounted at a 6% rate. As a result of
discounting the Company's long-term disability claims, total liabilities for
claims and claim expenses have been reduced by an estimated 2% and 3% at
December 31, 1998 and 1997, respectively. The amortization of discount is
included in current operating results as part of the development of prior year
liabilities.
<PAGE>
Long-term disability discounts accrued as a percentage of claims, claim expenses
and policy benefits were less than 1%, approximately 1% and 5% for the years
ended December 31, 1998, 1997 and 1996, respectively. Discounts amortized as a
percentage of claims, claim expenses and policy benefits were less than 1%,
approximately 1% and 2% for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company's reconciliation of its property and casualty reserves for unpaid
claims and claim expenses between statutory basis and GAAP basis is summarized
as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
(In millions) 1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Statutory basis reserves for U.S. companies - net.... $ 7,679 $ 5,527 $ 5,875
Adjustments to GAAP basis (1)........................ 667 (118) (435)
------- ------- -------
GAAP basis reserves for U.S. companies - net......... 8,346 5,409 5,440
GAAP basis reserves for non-U.S. companies - net..... 4,149 3,705 4,018
------- ------- -------
Total GAAP basis reserves - net...................... 12,495 9,114 9,458
Add reinsurance recoverables......................... 2,847 1,822 1,411
------- ------- -------
GAAP basis reserves - gross.......................... $15,342 $10,936 $10,869
======= ======= =======
</TABLE>
(1) Statutory basis reserve offsets and reserves reclassified to contract
deposit assets or liabilities based on risk transfer provisions of FAS No.
113.
Environmental and Asbestos Exposure. Included in the Company's liability for
claims and claim expenses are liabilities for environmental and asbestos
exposures. These claims and claim expenses are primarily related to policies
written prior to 1986 as the policies written since 1986 have tended to
explicitly exclude environmental and asbestos risks from coverage and most of
the environmental and asbestos exposures arise from risks located in the United
States. During 1997, the Company's international operations completed the
initial process of identifying environmental and asbestos claims that had been
reserved in prior periods but were initially aggregated and coded under other
general lines of business rather than being specifically identified as
environmental or asbestos claims.
The three-year development of claims and claim expense reserves associated with
the Company's asbestos and environmental claims, including case and IBNR
reserves, is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
(In millions) 1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Balance at January 1 - gross.................... $ 462 $ 368 $ 436
Less reinsurance recoverables................... (193) (174) (240)
----- ----- -----
Balance at January 1 - net...................... 269 194 196
Claims and expenses incurred.................... 35 54 19
Claim identification and IBNR allocation........ - 43 (1) -
Claims and expenses paid........................ (39) (22) (21)
Claim reserves related to acquired companies.... 524 - -
----- ----- -----
Balance at December 31 - net.................... 789 269 194
Add reinsurance recoverables.................... 206 193 174
----- ----- -----
Balance at December 31 - gross.................. $ 995 $ 462 $ 368
===== ===== =====
</TABLE>
(1) Prior to 1997, the Company's international operations were unable to
identify and segregate recorded claim reserves that related to asbestos and
environmental exposures as they were grouped with claim reserves in various
lines of business such as general liability. Beginning in 1997, the Company
began identifying and segregating the asbestos and environmental claims
related to its international operations.
These amounts are management's best estimate, based on currently available
information, of claims and claim expense payments and recoveries that are
expected to develop in future years.
<PAGE>
The Company monitors evolving case law and its effect on asbestos-related
illness and toxic waste cleanup claims. Changing domestic and foreign government
regulations and legislation, including continuing congressional consideration of
federal Superfund law, newly reported claims, new contract interpretations and
other factors could significantly affect future claim development. While the
Company has recorded its best estimate of its liabilities for asbestos-related
illness and toxic waste cleanup claims based on currently available information,
it is possible that additional liabilities may arise in the future. It is not
possible to estimate with any certainty the amount of additional net claims and
claim expenses, or the range of net claims and claim expenses, if any, that is
reasonably possible; therefore, there can be no assurance that future
liabilities will not materially affect the Company's results of operations,
financial position or cash flows.
Breast Implant Exposure. The Company has minimal exposure to products liability
claims involving silicone breast implants. The Company has, in the past,
generally avoided the products liability reinsurance business, specifically
pharmaceutical and chemical exposures.
Year 2000 Exposure. The Company has evaluated the possibility of experiencing an
increase in property and casualty insurance and reinsurance claims and claim
expenses arising as a result of Year 2000-related exposures. Management is
unable to reasonably estimate the amount or range of loss that may occur due to
the uncertainty surrounding the likelihood of computer system failures and what
portion, if any, will be deemed to be insured losses. Accordingly, the Company
is unable to determine whether such losses may have an adverse effect on its
results of operations, financial position or cash flows. The Company's loss
mitigation strategy includes adding Year 2000 considerations to its underwriting
guidelines, as well as its decisions to purchase retrocessional coverage. In
addition, the Company employs an active claims management strategy which will
include the coordinated handling of any Year 2000-related claims.
