UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-14804
GENERAL ELECTRIC CAPITAL SERVICES, INC.
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(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
(Address of principal executive offices) (Zip Code)
(203) 357-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No
At October 25, 2000, 1,012 shares of common stock with a par value of $1,000
were outstanding.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Results of Operations 5
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges
and Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . 9
Signatures 10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
CONDENSED STATEMENT OF CURRENT AND RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
(In millions) September 30, September 25, September 30, September 25,
2000 1999 2000 1999
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES
Revenue from services $ 14,052 $ 11,650 $ 41,565 $ 33,810
Sales of goods 2,392 2,352 7,030 5,953
-------- -------- -------- --------
16,444 14,002 48,595 39,763
-------- -------- -------- --------
EXPENSES
Interest 2,765 2,291 8,146 6,641
Operating and administrative 4,377 4,010 13,913 11,507
Cost of goods sold 2,207 2,124 6,515 5,441
Insurance losses and policyholder and annuity benefits 3,731 2,764 10,513 8,088
Provision for losses on financing receivables 463 227 1,405 1,048
Depreciation and amortization of buildings and
equipment and equipment on operating leases 825 792 2,481 2,300
Minority interest in net earnings of consolidated
affiliates 56 49 159 132
-------- -------- -------- --------
14,424 12,257 43,132 35,157
-------- -------- -------- --------
EARNINGS
Earnings before income taxes 2,020 1,745 5,463 4,606
Provision for income taxes (542) (483) (1,498) (1,220)
-------- -------- -------- --------
NET EARNINGS 1,478 1,262 3,965 3,386
Dividends (510) (473) (1,392) (1,268)
Retained earnings at beginning of period 19,457 16,404 17,852 15,075
-------- -------- -------- --------
RETAINED EARNINGS AT END OF PERIOD $ 20,425 $ 17,193 $ 20,425 $ 17,193
======== ======== ======== ========
<FN>
See Notes to Condensed, Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
CONDENSED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
(In millions) 2000 1999
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and equivalents $ 7,132 $ 6,931
Investment securities 88,157 80,485
Financing receivables:
Time sales and loans, net of deferred income 89,163 90,140
Investment in financing leases, net of deferred income 48,658 47,783
--------- ---------
137,821 137,923
Allowance for losses on financing receivables (3,710) (3,708)
--------- ---------
Financing receivables - net 134,111 134,215
Other receivables - net 39,468 34,095
Inventories 1,642 1,209
Equipment on operating leases (at cost), less accumulated amortization of
$7,764 and $7,392 23,285 23,605
Intangible assets 15,198 14,748
Other assets 57,006 49,730
--------- ---------
TOTAL ASSETS $ 365,999 $ 345,018
========= =========
LIABILITIES AND SHARE OWNERS' EQUITY
Short-term borrowings $ 124,071 $ 129,259
Long-term borrowings:
Senior 74,080 69,770
Subordinated 996 996
Insurance liabilities, reserves and annuity benefits 107,183 86,776
Other liabilities 24,893 24,550
Deferred income taxes 8,459 8,955
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Total liabilities 339,682 320,306
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Minority interest in equity of consolidated affiliates 3,956 4,391
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Accumulated unrealized (losses) / gains on investment securities - net (104) 170
Accumulated foreign currency translation adjustments (713) (384)
--------- ---------
Accumulated non-owner changes in share owners' equity (817) (214)
Capital stock 11 11
Additional paid-in capital 2,742 2,672
Retained earnings 20,425 17,852
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Total share owners' equity 22,361 20,321
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TOTAL LIABILITIES AND SHARE OWNERS' EQUITY $ 365,999 $ 345,018
========= =========
<FN>
See Notes to Condensed, Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
Condensed Statement of Cash Flows(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
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September 30, September 25,
(In millions) 2000 1999
----------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 3,965 $ 3,386
Adjustments to reconcile net earnings to cash provided from operating
activities:
Provision for losses on financing receivables 1,405 1,048
Depreciation and amortization of buildings and equipment and equipment on 2,481 2,300
operating leases
Other - net (4,846) 3,812
-------- --------
Cash from operating activities 3,005 10,546
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in loans to customers (70,851) (68,452)
Principal collections from customers - loans 71,483 59,128
Investment in equipment for financing leases (14,416) (12,591)
Principal collections from customers - financing leases 11,017 13,403
Net change in credit card receivables (408) 2,156
Buildings and equipment and equipment on operating leases:
- additions (7,883) (7,559)
- dispositions 4,919 4,408
Payments for principal businesses purchased, net of cash acquired (403) (6,674)
Purchases of securities by insurance and annuity businesses (24,669) (20,932)
Dispositions and maturities of securities by insurance and annuity businesses 16,841 20,222
Other - net (7,069) (3,304)
-------- --------
Cash used for investing activities (21,439) (20,195)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in borrowings (maturities 90 days or less) 6,819 (5,339)
Newly issued debt - short-term (maturities 91-365 days) 5,160 3,515
- long-term (longer than one year) 20,789 23,073
Proceeds - non-recourse, leveraged lease debt 1,112 559
Repayments and other reductions:
- short-term (maturities 91-365 days) (24,878) (8,205)
- long-term (longer than one year) (1,667) (1,302)
Principal payments - non-recourse, leveraged lease debt (154) (248)
Proceeds from sales of investment contracts 6,905 5,768
Cash received upon assumption of Toho Mutual Life Insurance Company insurance
liabilities 13,177 --
Redemption of investment contracts (7,236) (5,537)
Dividends paid (1,392) (1,268)
Issuance of variable cumulative preferred stock by consolidated affiliates -- 400
-------- --------
Cash from financing activities 18,635 11,416
-------- --------
INCREASE IN CASH AND EQUIVALENTS 201 1,767
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 6,931 3,342
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 7,132 $ 5,109
======== ========
<FN>
See Notes to Condensed, Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
GENERAL ELECTRIC CAPITAL SERVICES, INC. AND CONSOLIDATED AFFILIATES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed quarterly financial statements represent the
consolidation of General Electric Capital Services, Inc. and all
majority-owned and controlled affiliates (collectively called "the
Corporation" or "GECS"). All significant transactions among the parent and
consolidated affiliates have been eliminated. Certain prior period data
have been reclassified to conform to the current period presentation.
2. The condensed consolidated quarterly financial statements are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) considered necessary by management to present a fair statement of
the results of operations, financial position and cash flows. The results
reported in these condensed consolidated financial statements should not be
regarded as necessarily indicative of results that may be expected for the
entire year.
3. The Financial Accounting Standards Board ("FASB") has issued, then
subsequently amended, Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities,
effective for GECS on January 1, 2001. Upon adoption, all derivative
instruments (including certain derivative instruments embedded in other
contracts) will be recognized in the balance sheet at their fair values;
changes in such fair values must be recognized immediately in earnings
unless specific hedging criteria are met. Effects of qualifying changes in
fair value will be recorded in equity pending recognition in earnings as
offsets to the related earnings effects of the hedged items. Management
estimates that, at September 30, 2000, the effects on its financial
statements of adopting SFAS No. 133, as amended, would have been to reduce
net earnings and share owners' equity by less than $100 million and $300
million, respectively. However, the transition effect as of January 1,
2001, cannot be estimated at this time because it is subject to the
following unknown variables as of that date: (1) actual derivatives and
related hedged positions, (2) market values of derivatives and hedged
positions, and (3) further interpretation of SFAS No. 133 by the FASB.
4. A summary of changes in share owners' equity that do not result directly
from transactions with share owners is provided below.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
September 30, September 25,
(In millions) 2000 1999
---------------- ---------------
<S> <C> <C>
Net earnings $ 1,478 $ 1,262
Unrealized gains/(losses) on investment securities - net 566 (553)
Foreign currency translation adjustments (119) 31
------- -------
Total $ 1,925 $ 740
======= =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 25,
2000 1999
---------------- ---------------
<S> <C> <C>
Net earnings $ 3,965 $ 3,386
Unrealized losses on investment securities - net (274) (2,442)
Foreign currency translation adjustments (329) (68)
------- -------
Total $ 3,362 $ 876
======= =======
</TABLE>
5. On March 1, 2000, the insurance policies and related assets of Toho Mutual
Life Insurance Company were transferred to GE Edison Life Insurance Company
("GE Edison"), a subsidiary of GE Financial Assurance Holdings, Inc., a
wholly-owned, indirect subsidiary of GECS. Total cash, investment
securities and other receivables acquired by GE Edison was $19.7 billion,
and restructured insurance contracts and other liabilities assumed were
$21.5 billion.
6. Revenues and net earnings of the Corporation, by operating segment, for the
three and nine months ended September 30, 2000 and September 25, 1999 can
be found on page 6 of this report.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
OVERVIEW
Net earnings for the first nine months of 2000 were $3,965 million, a $579
million (17%) increase over the first nine months of 1999. The results reflected
the globalization and diversity of the Corporation's businesses. The improvement
in earnings was largely attributable to a higher level of asset gains and the
effects of continued asset growth, principally from acquisitions of businesses
and portfolios.
OPERATING RESULTS
TOTAL REVENUES from all sources increased $8,832 million (22%) to $48,595
million for the first nine months of 2000, compared with $39,763 million for the
first nine months of 1999. The increase included a pretax gain of $369 million
on the portion of the Corporation's holdings of the common stock of PaineWebber
Group, Inc. (PaineWebber) classified as trading securities. See discussion of
Significant Pending Transaction below. The remaining increase primarily
reflected a combination of acquisition and core growth in the Consumer Services
segment, asset gains and core growth in the Specialized Financing segment, core
growth in the Specialty Insurance and Mid-Market Financing segments, and the
consolidation of the retail operations.
INTEREST EXPENSE for the first nine months of 2000 was $8,146 million, 23%
higher than for the first nine months of 1999. The increase reflected higher
interest rates and higher average borrowings used to finance asset growth. The
composite interest rate on the Corporation's borrowings for the first nine
months of 2000 was 5.81% compared with 5.16% in the first nine months of 1999.
OPERATING AND ADMINISTRATIVE EXPENSES were $13,913 million for the first nine
months of 2000, a 21% increase over the first nine months of 1999. The increase
included unusual pretax charges of $326 million for asset writedowns, employee
severance and other facilities costs in connection with third quarter decisions
to rationalize certain information technology and mortgage servicing operations.
The remaining increase primarily reflected increases in insurance commissions
and other costs associated with businesses and portfolios acquired over the past
year. Excluding the effects of current year acquisitions and the unusual
charges, operating and administrative expenses would have increased less than
2%.
COST OF GOODS SOLD is associated with activities of the Corporation's computer
equipment distribution business and retail operations. This cost amounted to
$6,515 million for the first nine months of 2000, compared with $5,441 million
for the first nine months of 1999. The increase primarily reflected the
consolidation of the retail operations.
INSURANCE LOSSES AND POLICYHOLDER AND ANNUITY BENEFITS increased $2,425 million
to $10,513 million for the first nine months of 2000, compared with the first
nine months of 1999. The increase primarily reflected the effects of growth in
premium volume, and a higher loss ratio within the reinsurance business
attributable to an increase in property-related incurred losses, partially
offset by improved market conditions in the mortgage insurance business.
PROVISION FOR LOSSES ON FINANCING RECEIVABLES was $1,405 million for the first
nine months of 2000 compared with $1,048 million for the first nine months of
1999. This provision principally related to credit cards, personal loans and
auto loans and leases in the Consumer Services segment, which are discussed
below under Portfolio Quality.
DEPRECIATION AND AMORTIZATION OF BUILDINGS AND EQUIPMENT AND EQUIPMENT ON
OPERATING LEASES increased to $2,481 million for the first nine months of 2000,
compared with $2,300 million for the first nine months of 1999. The increase was
principally the result of higher shorter-lived levels of equipment on operating
leases, primarily reflecting acquisition growth.
PROVISION FOR INCOME TAXES was $1,498 million for the first nine months of 2000
(an effective tax rate of 27.4%), compared with $1,220 million for the first
nine months of 1999 (an effective tax rate of 26.5%). The higher effective tax
rate primarily reflected increased earnings taxed at statutory rates.
<PAGE>
OPERATING SEGMENTS
Revenues and net earnings of the Corporation, by operating segment, for the
three and nine months ended September 30, 2000, and September 25, 1999, are
summarized and discussed below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- ---------------------------------
September 30, September 25, September 30, September 25,
(In millions) 2000 1999 2000 1999
---------------- ----------------- ------------------ --------------
<S> <C> <C> <C> <C>
REVENUES
Consumer Services $ 6,126 $ 4,719 $ 17,900 $ 13,562
Equipment Management 3,616 3,851 11,013 11,498
Mid-Market Financing 1,392 1,153 3,955 3,280
Specialized Financing 1,393 1,042 4,515 2,854
Specialty Insurance 2,802 2,671 8,429 7,890
All other 1,115 566 2,783 679
-------- -------- -------- --------
Total revenues $ 16,444 $ 14,002 $ 48,595 $ 39,763
======== ======== ======== ========
NET EARNINGS
Consumer Services $ 497 $ 416 $ 1,133 $ 866
Equipment Management 245 165 563 597
Mid-Market Financing 218 165 517 407
Specialized Financing 374 255 1,386 733
Specialty Insurance 217 342 708 999
All other (73) (81) (342) (216)
-------- -------- -------- --------
Total net earnings $ 1,478 $ 1,262 $ 3,965 $ 3,386
======== ======== ======== ========
</TABLE>
CONSUMER SERVICES revenues increased 32% and net earnings increased 31% for the
first nine months of 2000 compared with the first nine months of 1999. The
increase in revenues was led by acquisition-related and core growth in the
consumer savings and insurance, U.S. consumer credit card, and non-U.S. consumer
finance businesses, partially offset by the effects of asset reductions in
automobile financing activities. The increase in net earnings was led by a
combination of core growth in the U.S. consumer credit card business and
acquisition-related growth in the consumer savings and insurance business,
partially offset by the effects of asset reductions in automobile financing
activities.
EQUIPMENT MANAGEMENT revenues decreased 4% for the first nine months of 2000,
compared with the corresponding period in 1999, primarily as a result of volume
declines in the European information technology products and services business,
partially offset by core growth in the aviation services and transportation
equipment management businesses. Net earnings decreased 6% for the first nine
months of 2000, compared with the corresponding period in 1999, primarily
attributable to volume declines in the European information technology products
services business, partially offset by core growth in aviation services.
MID-MARKET FINANCING revenues grew 21% and net earnings increased 27% for the
first nine months of 2000, compared with the corresponding period in 1999,
primarily as a result of core growth from increased originations.
SPECIALIZED FINANCING revenues rose 58%, while net earnings increased 89%, in
the first nine months of 2000 compared with the first nine months of 1999.
Revenue growth principally reflects increases in asset gains as well as
origination growth. Net earnings growth is principally the result of operating
strength led by gains on sale of equity investments.
SPECIALTY INSURANCE revenues grew 7% in the first nine months of 2000, compared
with the corresponding period in 1999, as a result of increased premium income
associated with origination volume. Net earnings decreased 29% in the first nine
months of 2000, compared with the corresponding period in 1999, principally
reflecting increased frequency and severity of property-related losses in the
reinsurance business.
ALL OTHER revenues in the first nine months of 2000 include a pretax gain on
PaineWebber securities of $369 million. Net loss in the first nine months of
2000 includes the related after tax gain of $226 million and unusual charges
after tax of $239 million, which were $160 million for the information
technology business in the Equipment Management segment and $79 million for the
mortgage servicing business in the Consumer Services segment. The remaining
growth in revenues and increase in net loss, compared with the corresponding
period in 1999, were primarily the result of the consolidation of the retail
operations.
<PAGE>
PORTFOLIO QUALITY
FINANCING RECEIVABLES are the financing businesses' largest asset and their
primary source of revenues. The portfolio of financing receivables, before
allowance for losses, decreased to $137.8 billion at September 30, 2000, from
$137.9 billion at the end of 1999, primarily reflecting the effects of foreign
currency translation on European financing receivables, partially offset by
acquisition growth and higher origination volume. The related allowance for
losses at September 30, 2000 amounted to $3.7 billion ($3.7 billion at the end
of 1999) and represents management's best estimate of probable losses inherent
in the portfolio given its strength and diversity and current economic
circumstances. A discussion about the quality of certain elements of the
portfolio of financing receivables 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.
CONSUMER FINANCING RECEIVABLES, primarily credit card and personal loans and
auto loans and leases, were $46.1 billion at September 30, 2000, a decrease of
$6.2 billion from the end of 1999. Nonearning receivables were $1.0 billion,
2.1% of total consumer financing receivables, at September 30, 2000, compared
with $0.9 billion, 1.8% of total consumer financing receivables at December 31,
1999. Write-offs of consumer receivables increased to $1.2 billion for the first
nine months of 2000 compared with $1.1 billion for the first nine months of
1999. This increase was primarily attributable to the effects of higher average
revolving receivable balances resulting from acquisitions.
OTHER FINANCING RECEIVABLES, totaling $91.7 billion at September 30, 2000 ($85.6
billion at December 31, 1999), consisted of a diverse commercial, industrial and
equipment loan and lease portfolio. Related nonearning and reduced-earning
receivables were $1.0 billion at September 30, 2000, compared with $0.9 billion
at year-end 1999.
STATEMENT OF FINANCIAL POSITION
The Corporation's assets increased by $21.0 billion from the end of 1999,
largely a result of acquisition of certain assets and the assumption of
liabilities of Toho Mutual Life Insurance Company ("Toho"). That acquisition
included approximately $13.2 billion in cash, as well as investment securities
and other receivables, in exchange for assuming Toho's existing policyholder
liabilities. The significant cash position of Toho at the date of acquisition
reflected the liquidity needs of the business including policyholder redemptions
that have occurred through September 30, 2000.
STATEMENT OF CASH FLOWS
The Corporation's cash and equivalents increased by $0.2 billion during the
first nine months of 2000 to $7.1 billion, principally as a result of cash
acquired in connection with the Toho acquisition. Cash provided from operating
activities amounted to $3.0 billion during the first nine months of 2000,
compared with $10.5 billion during the first nine months of 1999. The decrease
in cash from operating activities compared with last year was largely
attributable to policyholder redemptions associated with the Toho acquisition
and a smaller decrease in mortgages held for resale. Cash from financing
activities totaled $18.6 billion, primarily as a result of policyholder
liabilities assumed in the Toho acquisition. The principal use of cash during
the period was for investing activities ($21.4 billion), a majority of which was
attributable to investments in securities, financing receivables and equipment
on operating leases.
SIGNIFICANT PENDING TRANSACTION
On July 12, 2000, Union Bank of Switzerland (UBS) and PaineWebber announced they
had entered into a definitive merger agreement (the UBS merger agreement). The
Corporation holds 31,523,600 shares of PaineWebber common stock and has voted in
favor of the merger. Fifty percent of the Corporation's holdings of PaineWebber
securities are classified as trading securities; the increase in the share price
of those securities through September 30, 2000, has thus been recognized as a
pretax gain of $369 million. If the merger is completed under the terms of the
UBS merger agreement, the Corporation would realize an additional pretax gain of
approximately $1.0 billion. The UBS merger agreement is subject to a number of
conditions that are not within the control of the Corporation, resolution of
which will affect the amount and timing of proceeds realized from the
transaction.
FORWARD LOOKING STATEMENTS
This document includes certain "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
based on management's current expectations and are subject to uncertainty and
changes in circumstances. Actual results may differ materially from these
expectations due to changes in global economic, business, competitive market and
regulatory factors.
<PAGE>
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. EXHIBITS.
Exhibit 12. Computation of ratio of earnings to fixed charges and
computation of ratio of earnings to combined fixed charges
and preferred stock dividends.
Exhibit 27. Financial Data Schedule (filed electronically only).
b. REPORTS ON FORM 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL ELECTRIC CAPITAL SERVICES, INC.
---------------------------------------
(Registrant)
Date: October 26, 2000 By: /s/ J.A. Parke
----------------------------------------------------
J.A. Parke,
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: October 26, 2000 By: /s/ J.C. Amble
----------------------------------------------------
J.C. Amble,
Vice President and Controller
(Principal Accounting Officer)
