-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KnHkXhMIrqT2xiVs2nMtBdwAPTRZojv+qFQcPlK9viM5dtp0tMr31k8DwanOS3gf qVGkNCt+9ynyF6XgVbeafA== 0000040554-98-000017.txt : 19980331 0000040554-98-000017.hdr.sgml : 19980331 ACCESSION NUMBER: 0000040554-98-000017 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL ELECTRIC CAPITAL CORP CENTRAL INDEX KEY: 0000040554 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 131500700 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-22265 FILM NUMBER: 98577076 BUSINESS ADDRESS: STREET 1: 260 LONG RIDGE RD CITY: STAMFORD STATE: CT ZIP: 06927 BUSINESS PHONE: 2033574000 MAIL ADDRESS: STREET 1: 260 LONG RIDGE ROAD CITY: STAMFORD STATE: CT ZIP: 06927 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL ELECTRIC CREDIT CORP DATE OF NAME CHANGE: 19871216 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-K ------------- |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ ------------------------- COMMISSION FILE NUMBER 1-6461 ------------------------- GENERAL ELECTRIC CAPITAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 13-1500700 (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) ------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED -------------------------- ------------------------------ 7 7/8% GUARANTEED SUBORDINATED NEW YORK STOCK EXCHANGE NOTES DUE DECEMBER 1, 2006 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE. 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, 1998, 3,837,825 shares of voting common stock, which constitute all of the outstanding common equity, with a par value of $200 were outstanding. Aggregate market value of the outstanding common equity held by nonaffiliates of the registrant at March 24, 1998. 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, 1997 are incorporated by reference into Part IV 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. TABLE OF CONTENTS PAGE -------- 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 .. 12 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 .............................. 13 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 ........................................ 47 PART I ITEM 1. BUSINESS. GENERAL General Electric Capital Corporation (herein, together with its consolidated affiliates, called "the Corporation" or "GE Capital" unless the context otherwise requires) 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. Until November 1987, the name of the Corporation was General Electric Credit Corporation. All outstanding common stock of the Corporation is owned by General Electric Capital Services, Inc. ("GE Capital Services"), formerly General Electric Financial Services, Inc., the common stock of which is in turn wholly owned by General Electric Company ("GE Company"). The business of the Corporation 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. The Corporation operates in four financing industry segments and in a specialty insurance industry segment. GE Capital's financing activities include a full range of leasing, lending, equipment management sales and services, and consumer savings and insurance services. The Corporation's specialty insurance activities include providing financial guaranty insurance, principally on municipal bonds and structured finance issues, private mortgage insurance and creditor insurance covering international customer loan repayments. The Corporation is an equity investor in Montgomery Ward Holding Corp. ("MWHC"), a retail organization, and certain other service and financial services organizations. As discussed on page 20 and in note 3 to the consolidated financial statements, MWHC filed a bankruptcy petition for reorganization in 1997. GE Capital's operations are subject to a variety of regulations in their respective jurisdictions. Services of the Corporation are offered primarily throughout the United States, Canada, Europe and the Pacific Basin. The Corporation's principal executive offices are located at 260 Long Ridge Road, Stamford, Connecticut 06927 (Telephone number (203) 357-4000). At December 31, 1997, the Corporation employed approximately 65,000 persons. The Corporation's principal assets are classified as time sales and loans, investment in financing leases, equipment on operating leases and investment securities. The following table presents, by industry segment, these principal financing products which, together with other assets, constitute the Corporation's total assets at December 31, 1997 and 1996. 1
TOTAL ASSETS BY SEGMENT (In millions) 1997 -------------------------------------------------------------------- NET TIME INVESTMENT ALLOWANCE SALES AND NET IN FOR LOANS, INVESTMENT EQUIPMENT LOSSES NET OF IN ON AND ALL DEFERRED FINANCING OPERATING INVESTMENT OTHER TOTAL INCOME LEASES LEASES SECURITIES ASSETS ASSETS -------- -------- -------- -------- -------- -------- CONSUMER SERVICES GE Financial Assurance ................. $ 2,724 $ -- $ -- $ 35,692 $ 13,251 $ 51,667 Auto Financial Services ................ 8,973 12,594 2,773 61 3,041 27,442 Retailer Financial Services ............ 12,443 -- -- 12 1,057 13,512 Global Consumer Finance ................ 8,622 675 -- 25 645 9,967 Mortgage Services ...................... 1,013 -- -- 689 4,474 6,176 Consumer Financial Services ............ 4,704 -- -- 28 52 4,784 Other .................................. 1,888 9 -- 750 105 2,752 -------- -------- -------- -------- -------- -------- Total ................................. 40,367 13,278 2,773 37,257 22,625 116,300 EQUIPMENT MANAGEMENT Aviation Services ...................... 256 3,162 5,525 374 822 10,139 Fleet Services ......................... 1 3,036 1,498 -- 1,200 5,735 IT Solutions ........................... 38 232 47 -- 3,752 4,069 Transport International Pool ........... 31 62 2,433 -- 1,208 3,734 Genstar Container ...................... -- 330 1,951 -- 252 2,533 Penske Truck Leasing ................... -- -- -- 30 2,129 2,159 Satellite Telecommunications Services .. -- -- -- -- 2,132 2,132 Railcar Services ....................... -- 270 1,595 -- 148 2,013 Modular Space .......................... 16 82 797 -- 469 1,364 Technology Management Services ......... -- 24 -- -- 231 255 Other .................................. -- -- 163 -- 95 258 -------- -------- -------- -------- -------- -------- Total ................................. 342 7,198 14,009 404 12,438 34,391 MID-MARKET FINANCING Commercial Equipment Financing ......... 7,397 10,496 1,124 114 1,010 20,141 Vendor Financial Services .............. 1,662 5,602 247 2 823 8,336 GE Capital - Hawaii .................... 1,055 89 3 9 30 1,186 Other .................................. 72 -- -- 7 82 161 -------- -------- -------- -------- -------- -------- Total ................................. 10,186 16,187 1,374 132 1,945 29,824 SPECIALIZED FINANCING Commercial Real Estate ................. 7,779 42 -- 303 4,634 12,758 Structured Finance Group ............... 1,334 5,049 533 1,412 1,306 9,634 Commercial Finance ..................... 4,467 15 -- 173 329 4,984 Equity Capital Group ................... 53 -- -- 35 970 1,058 Other .................................. 102 -- -- 729 37 868 -------- -------- -------- -------- -------- -------- Total ................................. 13,735 5,106 533 2,652 7,276 29,302 SPECIALTY INSURANCE .................... 202 -- -- 12,583 5,114 17,899 CORPORATE AND OTHER .................... -- -- -- 75 986 1,061 -------- -------- -------- -------- -------- -------- TOTAL ................................ $ 64,832 $ 41,769 $ 18,689 $ 53,103 $ 50,384 $228,777 ======== ======== ======== ======== ======== ======== (In millions) 1996 -------------------------------------------------------------------- NET TIME INVESTMENT ALLOWANCE SALES AND NET IN FOR LOANS, INVESTMENT EQUIPMENT LOSSES NET OF IN ON AND ALL DEFERRED FINANCING OPERATING INVESTMENT OTHER TOTAL INCOME LEASES LEASES SECURITIES ASSETS ASSETS -------- -------- -------- -------- -------- -------- CONSUMER SERVICES GE Financial Assurance ................ $ 2,483 $ -- $ -- $ 32,735 $ 10,702 $ 45,920 Auto Financial Services ............... 5,915 13,113 1,502 544 972 22,046 Retailer Financial Services ........... 15,846 -- -- 10 528 16,384 Global Consumer Finance ............... 7,586 -- -- 7 1,078 8,671 Mortgage Services ..................... 1,124 -- -- 651 3,504 5,279 Consumer Financial Services ........... 3,697 -- -- 21 17 3,735 Other ................................. 1,891 -- -- 228 184 2,303 -------- -------- -------- -------- -------- -------- Total ................................ 38,542 13,113 1,502 34,196 16,985 104,338 EQUIPMENT MANAGEMENT Aviation Services ..................... 223 3,205 4,774 344 373 8,919 Fleet Services ........................ 27 2,667 1,443 -- 1,172 5,309 IT Solutions .......................... 60 409 315 -- 2,321 3,105 Transport International Pool .......... 35 92 1,745 -- 509 2,381 Genstar Container ..................... -- 292 2,262 -- 286 2,840 Penske Truck Leasing .................. -- -- -- 31 1,934 1,965 Satellite Telecommunications Services . -- -- -- -- 1,589 1,589 Railcar Services ...................... -- 296 1,409 -- 94 1,799 Modular Space ......................... 2 48 651 -- 316 1,017 Technology Management Services ........ -- 32 210 -- 273 515 Other ................................. -- 2 110 -- 107 219 -------- -------- -------- -------- -------- -------- Total ................................ 347 7,043 12,919 375 8,974 29,658 MID-MARKET FINANCING Commercial Equipment Financing ........ 6,362 9,291 1,037 43 718 17,451 Vendor Financial Services ............. 1,388 4,856 185 -- 667 7,096 GE Capital - Hawaii ................... 1,094 84 2 10 31 1,221 Other ................................. 55 -- -- 7 118 180 -------- -------- -------- -------- -------- -------- Total ................................ 8,899 14,231 1,224 60 1,534 25,948 SPECIALIZED FINANCING Commercial Real Estate ................ 9,591 42 -- 394 3,937 13,964 Structured Finance Group .............. 1,334 5,130 489 993 918 8,864 Commercial Finance .................... 3,685 16 -- 214 270 4,185 Equity Capital Group .................. 68 -- -- 114 577 759 Other ................................. 28 -- -- 3 44 75 -------- -------- -------- -------- -------- -------- Total ................................ 14,706 5,188 489 1,718 5,746 27,847 SPECIALTY INSURANCE .................... 338 -- -- 7,886 3,580 11,804 CORPORATE AND OTHER .................... -- -- -- 105 1,116 1,221 -------- -------- -------- -------- -------- -------- TOTAL ................................ $ 62,832 $ 39,575 $ 16,134 $ 44,340 $ 37,935 $200,816 ======== ======== ======== ======== ======== ========
2 INDUSTRY SEGMENTS The Corporation provides a wide variety of financing, asset management, and insurance products and services which are organized into the following industry 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 and financing and operating leases for middle-market customers, including manufacturers, distributors and end users, for a variety of equipment that includes data processing equipment, medical and diagnostic equipment, and equipment used in construction, manufacturing, office applications 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 management buyouts, including those with high leverage, and corporate recapitalizations. o Specialty Insurance - financial guaranty insurance, principally on municipal bonds and structured finance issues; private mortgage insurance; and creditor insurance covering international customer loan repayments. Insurance services, previously included within the Specialty Insurance segment, has been combined with the consumer savings and insurance operations in the Consumer Services segment. Prior-year information has been reclassified to reflect this and certain other organizational changes. Refer to Item 7, "Management's Discussion and Analysis of Results of Operations," in this Form 10-K for discussion of the Corporation's Portfolio Quality. A description of the Corporation's principal businesses by industry 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, which help consumers accumulate wealth, transfer wealth, and protect their lifestyles and assets. It achieves this through its family of 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. GEFA's principal operating companies include General Electric Capital Assurance Company, First Colony Life Insurance Company, The Life Insurance Company of Virginia, Colonial Penn Insurance Company, Union Fidelity Life Insurance Company and GE Capital Life Assurance of New York. GEFA headquarters are in Richmond, Virginia. 3 Auto Financial Services Auto Financial Services ("AFS") is a full service provider of automobile financing for automobile dealers, manufacturers and their customers in North America, Europe and, to a lesser extent, Asia. In the United States, AFS is one of the leading independent auto lessors and offers leasing, retail financing and, to a lesser degree, sub-prime financing to customers. AFS also provides the 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, rental car companies and leasing companies. AFS is active in the European markets through affiliates in France, the United Kingdom, and Italy. AFS also provides automobile financing through businesses located in Austria, Spain, Sweden, Poland, and Switzerland. In 1997, AFS expanded its presence in Europe to include Ireland, Portugal, Denmark, and Czechoslovakia through acquisitions. 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. Retailer Financial Services Retailer Financial Services ("RFS") 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. RFS 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. RFS generally maintains a security interest in the merchandise financed. Financing is provided to consumers under contractual arrangements, both with and without recourse to retailers. RFS' wide range of financial services includes application processing, sales authorization, statement billings, customer services and collection services. RFS provides inventory financing for retailers primarily in the appliance and consumer electronics industries. RFS maintains a security interest in the inventory and retailers are obliged to maintain insurance coverage for the merchandise financed. RFS 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. RFS 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. RFS headquarters are in Stamford, Connecticut. Global Consumer Finance 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 and Asia, as well as offering a variety of direct-to-consumer credit programs such as consumer loans, bankcards and credit insurance. 4 During 1997, GCF expanded its European presence through acquisitions including Multiservis AS in the Czech Republic, Bank Aufina Ltd. in Switzerland, and AVA Bank in Austria. GCF provides financing to consumers through operations in the United Kingdom, Austria, France, Ireland, Germany, The Netherlands, Italy, Spain, Portugal, Poland, Switzerland, Czech Republic, Japan, Thailand, Hong Kong, China, Brazil and Australia and joint ventures in Indonesia and India. 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. GCF headquarters are in Stamford, Connecticut. Mortgage Services GE Capital Mortgage Corporation, through its wholly-owned affiliate GE Capital Mortgage Services, Inc. ("GECMSI"), is engaged in the business of wholesale originations and servicing residential mortgage loans collateralized by one-to-four-family homes located throughout the United States. GECMSI obtains servicing through the purchase of mortgage loans and servicing rights, and packages the loans it 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. Consumer Financial Services Consumer Financial Services ("CFS") primarily 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. During 1997, CFS acquired two large loan portfolios, totaling $1,419 million, and suspended active participation in the consumer home equity loan market by selling loans totaling $594 million. CFS also issues and services the GE Capital Corporate Card, providing payment and information systems which help medium and large-size companies reduce travel costs, and the GE Capital Purchasing Card, which helps customers streamline their purchasing and accounts payable processes. CFS has offices in Canton, Ohio and Salt Lake City, Utah. CFS headquarters are in Mason, Ohio. 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. GECAS has firm orders and options for more than 270 new Boeing and Airbus aircraft with deliveries scheduled through 2003. GECAS current fleet comprises 850 owned and managed aircraft leased to more than 150 customers in 55 countries. GECAS headquarters are in Stamford, Connecticut, with regional offices in Miami, Florida; Shannon, Ireland; Beijing and Hong Kong, China; Singapore; and Vienna, Austria. 5 Fleet Services GE Capital Fleet Services ("GECFS") is one of the leading corporate fleet management companies with operations in North America, Europe, Australia and Japan with approximately 900,000 cars and trucks under lease and service management. GECFS offers finance and operating leases to several thousand customers with an average lease term of 33 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. During 1997, GECFS completed acquisitions of ARO Lease in The Netherlands and BRS Leasing in the United Kingdom. GECFS headquarters are in Eden Prairie, Minnesota. IT Solutions GE Capital IT 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. Included among the services offered are 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 around the world. During 1997, the company expanded its global presence through acquisitions in the United States, Canada, Mexico, Brazil, the United Kingdom, Portugal, Austria and Denmark. IT Solutions headquarters are in Stamford, Connecticut. Transport International Pool Transport International Pool ("TIP") is one of the leading trailer specialists offering diverse trailer programs and associated services. TIP's fleet of over 150,000 dry freight, refrigerated and double vans, flatbeds, intermodal assets, and specialized trailers is available for rent, lease or purchase at over 200 locations in the United States, Europe, Canada, and Mexico. TIP's commercial vehicle fleet of over 20,000 units is available for rent, lease, or purchase in the United Kingdom. TIP also finances new and used trailers and buys trailer fleets. During 1997, TIP acquired two publicly traded companies in Europe: Central Transport Rental Group plc, a pan-European trailer rental and leasing business, and TLS plc, a United Kingdom commercial vehicle rental and leasing business. TIP's customer base comprises trucking companies, manufacturers and retailers. TIP operates a European service center in Amsterdam, The Netherlands. TIP headquarters are in Devon, Pennsylvania. Genstar Container Genstar Container Corporation ("Genstar") is one of the world's largest lessors of marine shipping containers. Genstar maintains a 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. 6 In September 1997, a memorandum of understanding was signed with Sea Containers Ltd. to form GE SeaCo Ltd., a joint venture to operate the combined marine container fleet of Genstar and Sea Containers Ltd. The joint venture is expected to be formed in 1998. Genstar 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 is 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, 1997, Penske had a fleet of about 73,000 tractors, trucks and trailers in its leasing and rental fleets and provided contract maintenance programs or other support services for about 28,500 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. Satellite Telecommunications Services 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 12 communications satellites and maintains a supporting network of earth stations, central terminal offices, and telemetry, tracking and control facilities. GE Americom's GE Capital Spacenet Services business offers a full range of global one-way and two-way Very Small Aperture Terminal (VSAT) network products and services. 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 over 180,000 railcars in its portfolio. Serving Class I 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, Cargowaggon, GERSCO's pan-European business acquired during 1997, provides rail transport services and rail wagons to the automotive, steel and paper industries in Eastern and Western Europe. Cargowaggon is based in Frankfurt, Germany and has offices in the United Kingdom, Italy, Sweden and France. GERSCO headquarters are in Chicago, Illinois. Modular Space GE Capital Modular Space ("GECMS") provides non-residential relocatable 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 tailored as much as possible to client specifications, accomplished through either custom modular units or through GECMS stock fleet of approximately 103,200 modular units. In addition, GECMS operating leases range from a few months to sixty months, with an average term of 12-18 months. 7 During 1997, GECMS continued its European growth through acquisitions including Bacon B.V. in The Netherlands, Adco & Dixi GmbH and ACB GmbH in Germany, AFIBAT in France, and DBS Nationwide plc in the United Kingdom. GECMS has offices in North America and Europe. GECMS headquarters are in Malvern, Pennsylvania. Technology Management Services GE Capital Technology Management Services ("TMS") has provided services that enable customers to use information technology more efficiently by combining consulting and other services, including data center outsourcing services. During 1997, TMS sold its test equipment rental, repair and calibrations services businesses, as well as certain assets of its computer rental business. Effective January 1, 1998, operational control of the TMS consulting business was transferred to IT Solutions. In addition, in March 1998, TMS announced the sale of its data center outsourcing business. TMS headquarters are in Alpharetta, Georgia. 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 120 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. CEF operates from offices throughout the United States, Puerto Rico, Canada, Mexico, Europe, India 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 captive 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 captives 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 and inventory financing. In 1997, VFS acquired Transleasing Inc., expanding its presence in the healthcare industry. VFS also expanded its European financing capabilities with the acquisition of Fimacom Financiere Matra Comm, S.A., a French telecommunications captive, and through GE Capital's acquisition of Woodchester Investments plc with locations in Ireland, Portugal and the United Kingdom. VFS has sales offices throughout the United States, Canada, Mexico, Europe, Asia, and Australia. VFS headquarters are in Danbury, Connecticut. 8 GE Capital Hawaii GE Capital Hawaii Inc. ("GECH") operates in the states of Hawaii and Alaska and in the territory of Guam. Through a network of 8 branch offices, GECH offers commercial and residential real estate loans, auto and equipment leasing, inventory financing, equity lines of credit and modular space rental and sales. GECH headquarters are in Honolulu, Hawaii. SPECIALIZED FINANCING Commercial Real Estate Commercial Real Estate Financing and Services ("CRE") 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 and Europe. CRE also provides asset management services to real estate investors and selected services to real estate owners. Lending is a major portion of CRE'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. CRE purchases and provides restructuring financing for portfolios of real estate, mortgage loans, limited partnerships, and tax-exempt bonds. CRE'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, CRE provides equity capital for real estate partnerships through the holding of limited partnership interests and receives preferred returns; typical such investments range from $2 million to $10 million. CRE 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. CRE also provides loan administration and servicing through GE Capital Asset Management. In addition, CRE offers owners of multi-family housing ways to reduce costs and enhance value in properties by offering buying services (e.g., for appliances, roofing) and bundled telecommunications and video services. CRE has offices throughout the United States, as well as in Canada, Mexico, Singapore, Sweden, France and the United Kingdom. CRE headquarters are in Stamford, Connecticut. Structured Finance Group Structured Finance Group ("SFG") develops specialized financial products and services to meet the specific transaction requirements of corporate and government clients. SFG provides capital, capital market services and financial advisory services for major infrastructure, energy, telecommunications, and industrial development worldwide. The range of financial services includes project finance (construction and term), corporate finance, acquisition finance and arrangement and placement services. Products include a variety of debt and equity instruments, with particular concentration in structured finance transactions, including leasing and partnerships. SFG has offices in the United States, Australia, Brazil, Canada, China, Hong Kong, India, Mexico, Singapore, and the United Kingdom. SFG headquarters are in Stamford, Connecticut. 9 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, Montreal, Mexico City, and London, and also has significant factoring operations in France and Italy serving European companies and U.S. exporters. CF headquarters are in Stamford, Connecticut. Equity Capital Group Equity Capital Group ("ECG") purchases equity investments, primarily convertible preferred and common stock investments including, in some cases, stock warrants convertible into equity ownership. ECG'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. ECG headquarters are in Stamford, Connecticut. SPECIALTY INSURANCE 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 $108 billion at December 31, 1997. Approximately 85% of the business written to date by Financial Guaranty is municipal bond insurance. During 1997, FGIC acquired a Chicago-based specialty property and casualty insurer serving the public entity market. 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 the Virgin Islands. At December 31, 1997, 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 $40 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 and Canada, and commencing in 1998, in Australia. 10 GE Capital Mortgage Insurance headquarters are in Raleigh, North Carolina. Creditor Insurance Consolidated Financial Insurance ("CFI") is one of the leading providers of payment protection insurance in the United Kingdom and has insurance operations in 11 countries in Europe and in Australia. 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. CFI also offers personal accident insurance, which is distributed through financial institutions, and personal investment products, which are distributed through a network of over 6,000 independent financial advisors in the United Kingdom. CFI is also a leading administrator of extended product warranty insurance in the United Kingdom. During 1997, CFI expanded its product and distribution with acquisitions including Pet Protect Ltd., a pet insurance administrator; First Call Accident Assistance Ltd., offering management and recovery of uninsured loss claims on behalf of victims of road traffic accidents; World Cover and Accident & General, travel insurance brokers and administrators; and Stalwart Group Ltd., a provider of compulsory purchase annuities and home income products. CFI 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. ITEM 2. PROPERTIES. The Corporation conducts its business from various facilities, most of which are leased. ITEM 3. LEGAL PROCEEDINGS. The Corporation is not involved in any material pending legal proceedings. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Omitted. 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 Capital Services 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 and consolidated affiliates and the related Notes to Consolidated Financial Statements.
YEAR ENDED DECEMBER 31 -------------------------------------------------------- (Dollar amounts in millions) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Revenues ........................................... $ 33,404 $ 26,570 $ 21,179 $ 16,923 $ 14,444 Net earnings ....................................... 2,729 2,632 2,261 1,918 1,478 Return on common equity .................. 18.62% 20.18% 19.89% 19.59% 17.14% Ratio of earnings to fixed charges ................. 1.48 1.53 1.51 1.63 1.62 Ratio of earnings to combined fixed charges and preferred stock dividends ............. 1.46 1.51 1.49 1.62 1.60 Ratio of debt to equity ....................... 7.94 7.92 7.89 7.94 7.96 Financing receivables - net ........................ $103,799 $ 99,714 $ 93,272 $ 76,357 $ 63,948 Percent of allowance for losses on financing receivables to total financing receivables ....................................... 2.63% 2.63% 2.63% 2.63% 2.63% Total assets ....................................... $228,777 $200,816 $160,825 $130,904 $117,939 Short-term borrowings .............................. 91,680 74,971 59,264 54,579 52,903 Long-term senior notes ............................. 44,437 46,124 47,794 33,615 25,112 Long-term subordinated notes ....................... 697 697 697 697 697 Minority interest .................................. 860 679 703 615 426 Equity ............................................. 18,373 15,526 14,202 10,540 10,370 Equity excludes unrealized gains and losses on investment securities, net of tax. Earnings are adjusted for preferred stock dividends and equity excludes preferred stock.
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS. OVERVIEW The Corporation's net earnings for 1997 were $2,729 million, which, after payment of dividends on its variable cumulative preferred stock, resulted in a contribution of $2,651 million to GE Capital Services' 1997 net earnings, an increase of 4% over 1996. The Corporation's net earnings for 1996 were $2,632 million, which, after payment of dividends on its variable cumulative preferred stock, resulted in a contribution to GE Capital Services' 1996 net earnings of $2,556 million, an increase of 16% over 1995. The increase in net earnings in both 1997 and 1996 was largely attributable to the effects of continued asset growth, principally from acquisitions of businesses and portfolios throughout the period and higher origination volume in 1997. The increase in earnings in both years reflected strong performances in most of the financing segments. Earnings in 1997 were affected by higher losses associated with the Corporation's investment in Montgomery Ward Holding Corp., discussed on page 20, as well as by increased automobile residual losses. These matters were partially offset by asset gains, including securitizations. Financing spreads (the excess of yields over interest rates on borrowings) were essentially flat in 1997 and 1996 as the reduction in yields was offset by decreases in borrowing rates. Increased investment income was caused by the combination of ongoing growth in the investment portfolios and a higher level of gains on investment securities. Earnings in the Specialty Insurance segment also grew in 1997 and 1996. The increases in both years primarily reflected higher investment income, the result of continued growth in investment portfolios and higher gains on investment securities, improved earnings in the mortgage insurance business, the result of improved market conditions, as well as contributions of acquired businesses. Higher insurance losses, reserves and other costs and expenses partially offset these increases. OPERATING RESULTS REVENUES from all sources increased 26% to $33.4 billion in 1997, following a 25% increase to $26.6 billion in 1996. Significant portions of the revenue increase of the financing segments arose from the computer equipment distribution businesses acquired during 1997 and 1996 and from the consumer savings and insurance businesses acquired during 1996 and 1995. Asset growth contributed to increased revenues in both years, but was partially offset by lower yields. Financing segments revenues were negatively affected by higher losses associated with the investment in Montgomery Ward Holding Corp. That effect was partially offset by gains on asset transactions, including securitizations. Gains on sales of warrants and other equity interests obtained in connection with certain loans and sales of certain assets, including real estate investments, contributed $768 million to pre-tax income in 1997, compared with $482 million in 1996 and $381 million in 1995. Specialty Insurance revenues increased 36% to $2.8 billion in 1997 from $2.1 billion in 1996, which was up 18% over 1995. The increase in both years resulted from increased premium and investment income associated with origination volume, acquisitions and continued growth in the investment portfolios. INTEREST EXPENSE on borrowings in 1997 was $7.3 billion, 4% higher than in 1996, which was 9% higher than in 1995. The increases in 1997 and 1996 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 on the Corporation's borrowings was 6.05% in 1997, compared with 6.24% in 1996 and 6.77% in 1995. See pages 17-19 for an analysis of interest rate sensitivities. OPERATING AND ADMINISTRATIVE EXPENSES were $9.5 billion in 1997, a 25% increase over 1996, which was 32% higher than 1995. The increase in both 1997 and 1996 primarily reflected costs associated with acquired businesses and portfolios and higher investment levels. 13 INSURANCE LOSSES AND POLICYHOLDER AND ANNUITY BENEFITS increased 52% to $4.8 billion in 1997, compared with a 57% increase to $3.2 billion in 1996. These increases were primarily driven by the consumer savings and insurance businesses acquired in 1996 and 1995 and growth in originations throughout the period. COST OF GOODS SOLD was associated with the computer equipment distribution businesses. This cost amounted to $4.1 billion in 1997, compared with $1.7 billion in 1996 and $0.4 billion in 1995, the result of acquisition-related growth in 1997 and 1996. PROVISION FOR LOSSES ON FINANCING RECEIVABLES increased to $1,421 million in 1997, compared with $1,033 million in 1996 and $1,117 million in 1995. These provisions principally related to private-label credit cards, bank credit cards, auto loans and auto leases in the Consumer Services segment, all of which are discussed below under Portfolio Quality. The increase in 1997 principally reflected higher average receivable balances as well as increased delinquencies in the consumer portfolio, consistent with industry experience. Higher portfolio growth from originations resulted in higher provisions in 1995 than in 1996. DEPRECIATION AND AMORTIZATION OF BUILDINGS AND EQUIPMENT AND EQUIPMENT ON OPERATING LEASES increased 14% to $2,443 million in 1997 compared with $2,137 million in 1996, a 7% increase over 1995. The increase in both years was the result of additions to equipment on operating leases, primarily reflecting a shift in auto lease volume from financing leases to operating leases and increased volume in aircraft. PROVISION FOR INCOME TAXES was $997 million in 1997 (an effective tax rate of 26.8%), compared with $1,172 million in 1996 (an effective tax rate of 30.8%) and $1,071 million in 1995 (an effective tax rate of 32.2%). 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. The provision for income taxes increased in 1996, reflecting increased pre-tax earnings subject to statutory tax rates; the lower effective tax rate resulted primarily from increased tax credits and decreased taxes on non-U.S. earnings. OPERATING PROFIT BY INDUSTRY SEGMENT Operating profit of the Corporation, by industry segment, is summarized in note 17 to the consolidated financial statements and discussed below. CONSUMER SERVICES operating profit was $563 million in 1997, compared with $1,269 million in 1996 and $1,044 million in 1995. As indicated above, 1997 operating profit included higher losses associated with the investment in Montgomery Ward Holding Corp. ("MWHC"), increased automobile residual losses and a higher provision for losses on financing receivables, reflecting higher average receivable balances and increased delinquencies, consistent with industry experience. These items were partially offset by acquisition and core growth, principally from the consumer savings and insurance businesses, as well as gains on asset transactions, including securitizations. The increase in 1996 was led by strong performances from the auto finance, consumer savings and insurance and non-U.S. private-label credit card businesses, resulting from both acquisition growth and higher origination volume. The 1996 increase also reflected improved market conditions in the mortgage servicing business. The 1996 increases were partially offset by a higher provision for losses, also reflecting higher average receivable balances and increased delinquencies, consistent with industry experience, and higher losses associated with the investment in MWHC. EQUIPMENT MANAGEMENT operating profit increased to $1,062 million in 1997 from $892 million in 1996, which was up from $869 million in 1995. Increases in both years reflected higher volume in most businesses resulting from originations and acquisitions of businesses and portfolios. The 1996 increase included the effects of the computer equipment distribution businesses acquired, which was partially offset by absence of a counterpart to the 1995 gain on sale of an outdoor media business. SPECIALIZED FINANCING operating profit increased to $1,036 million in 1997 from $742 million in 1996, which increased 13% over 1995. Increased operating profit in 1997 primarily reflected higher asset gains, including increased gains on sales of warrants and other equity interests obtained in connection with certain loans and sales of certain assets, including real estate investments, as discussed above. The increase in 1996 principally reflected lower provisions for losses, primarily related to lower investment levels from sales of receivables and loan repayments and 14 improved conditions in commercial real estate, and higher sales of warrants and other equity interests. These increases were offset in part by a reduction in earnings related to the lower investment levels and increased operating expenses. MID-MARKET FINANCING operating profit increased to $622 million in 1997, compared with $558 million in 1996, which was up from $467 million in 1995. Asset growth from higher volumes and acquisitions of businesses and portfolios was the most significant contributing factor in both years. SPECIALTY INSURANCE operating profit increased to $434 million in 1997 from $348 million in 1996, which increased from $325 million in 1995. The increases in both years primarily reflected higher investment income, the result of continued growth in investment portfolios and higher gains on investment securities, improved earnings in the mortgage insurance business, the result of improved market conditions, as well as contributions of acquired businesses. Higher insurance losses, reserves and other costs and expenses partially offset these increases. 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, shipping containers used on ocean-going vessels). The Corporation's international revenues were $10.7 billion in 1997, an increase of 31% from $8.1 billion in 1996, while international assets grew 35% from $50.9 billion at December 31, 1996, to $68.5 billion at the end of 1997. This revenue and asset growth occurred primarily in Europe and, to a lesser extent, in Canada and the Pacific Basin. These increases were attributable to the Corporation's continued expansion as a global provider of a wide range of services. Recent economic developments in parts of Asia have altered somewhat the risks and opportunities of the Corporation's activities in affected economies. These activities encompass primarily leasing of aircraft and providing certain financial services within those Asian economies. As such, exposure exists to, among other things, increased receivable delinquencies and potential bad debts, delays in orders, principally related to aircraft-related equipment, and a slowdown in financial services activities. Conversely, new sourcing opportunities may arise and liberalization of financial regulations opens new opportunities to penetrate Asian financial services markets. Taken as a whole, while this situation bears close monitoring and increased management attention, the current situation is not expected to have a material adverse effect on the Corporation's financial position, results of operations or liquidity in 1998. 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 $8.8 billion during 1997 was principally related to acquisitions and increases in fair value as well as investment of premiums received. A breakdown of the investment securities portfolio is provided in note 2 to the consolidated financial statements. INVENTORIES were $786 million and $376 million at December 31, 1997 and 1996, respectively. The increase in 1997 primarily reflected acquisitions in the computer equipment distribution businesses. FINANCING RECEIVABLES were $103.8 billion at year-end 1997, net of allowance for doubtful accounts, up $4.1 billion over 1996. These receivables are discussed on page 19 and in notes 3 and 4 to the consolidated financial statements. OTHER RECEIVABLES were $11.9 billion and $8.5 billion at December 31, 1997 and 1996, respectively. Of the 1997 increase, $1.2 billion was attributable to acquisitions and the remainder resulted from core growth. EQUIPMENT ON OPERATING LEASES was $18.7 billion at December 31, 1997, up $2.6 billion from 1996. Details by category of investment can be found in note 6 to the consolidated financial statements. Additions to equipment on 15 operating leases were $6.8 billion during 1997 versus $5.3 billion during 1996, principally reflecting a shift in auto lease volume from financing leases to operating leases and increased acquisitions of new aircraft. INTANGIBLE ASSETS were $9.5 billion at year-end 1997, up from $7.6 billion at year-end 1996. The $1.9 billion increase in intangible assets related primarily to goodwill from acquisitions. OTHER ASSETS totaled $24.0 billion at year-end 1997, compared with $19.5 billion at the end of 1996. The $4.5 billion increase related principally to increases in assets acquired for resale, primarily residential mortgages, and increased "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 $50.2 billion at year-end 1997, $6.9 billion higher than in 1996. The increase was primarily attributable to acquisitions in 1997 and the increase in separate accounts. For additional information on these liabilities, see note 11 to the consolidated financial statements. BORROWINGS were $136.8 billion at December 31, 1997, of which $91.7 billion is due in 1998 and $45.1 billion is due in subsequent years. Comparable amounts at the end of 1996 were $121.8 billion total, $75.0 billion due within one year and $46.8 billion due thereafter. The Corporation's composite interest rates are discussed on page 13. A large portion of the Corporation's borrowings ($67.6 billion and $51.2 billion at the end of 1997 and 1996, respectively) was issued in active commercial paper markets that management believes will continue to be a reliable source of short-term financing. The average remaining terms and interest rates of the Corporation's commercial paper were 44 days and 5.83% at the end of 1997, compared with 42 days and 5.58% at the end of 1996. GE Capital leverage (ratio of debt to equity, excluding from equity net unrealized gains on investment securities) was 7.94 to 1 at the end of 1997 and 7.92 to 1 at the end of 1996. By comparison, including in equity net unrealized gains on investment securities, the GE Capital ratio of debt to equity was 7.45 to 1 at the end of 1997 and 7.84 to 1 at the end of 1996. 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 $700 million at December 31, 1997 and 1996. 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 $18.4 billion. New borrowings of $79.7 billion having maturities longer than 90 days were added during those years, while $63.9 billion of such longer-term borrowings were retired. The Corporation also generated $23.7 billion of cash from continuing operating activities during the last three years. The Corporation's principal use of cash has been investing in assets to grow its businesses. Of the $52.6 billion that the Corporation invested in continuing operations over the past three years, $15.5 billion was used for additions to financing receivables; $16.1 billion was used to invest in new equipment, principally for lease to others; and $12.8 billion was used for acquisitions of new businesses. 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. 16 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. 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 derivatives 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 21 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 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 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 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. 17 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.
COUNTERPARTY CREDIT CRITERIA CREDIT RATING -------------------- STANDARD & MOODY'S 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. The conversion of interest rate and currency risk into credit risk results in a need to monitor counterparty credit risk actively. At December 31, 1997, the notional amount of long-term derivatives for which the counterparty was rated below Aa3/AA- was $5.1 billion. These amounts are 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.
PERCENTAGE OF NOTIONAL DERIVATIVE EXPOSURE BY COUNTERPARTY CREDIT RATING - ------------------------------------------------------------------------------- MOODY'S/STANDARD & POOR'S 1997 1996 1995 - ------------------------- -------- -------- -------- Aaa/AAA .................................... 75% 78% 75% Aa/AA ...................................... 20% 17% 22% A/A and below .............................. 5% 5% 3%
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
SPREAD OVER U.S. TREASURIES IN BASIS POINTS COUNTERPARTY ----------- ------------ 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
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 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 extraordinarily 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 1998 net earnings of the Corporation based on year-end 1997 positions by approximately $100 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 1997 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 1998 net earnings of the Corporation based on year-end 1997 positions by an insignificant amount. PORTFOLIO QUALITY FINANCING RECEIVABLES are the Financing segment's largest asset and its primary source of revenues. The portfolio of financing receivables, before allowance for losses, increased to $106.6 billion at the end of 1997 from $102.4 billion at the end of 1996, principally reflecting acquisition growth and origination volume that were partially offset by securitizations of receivables. The related allowance for losses at the end of 1997 amounted to $2.8 billion (2.63% of receivables - the same as 1996 and 1995) and, in management's judgment, is appropriate given the risk profile of the portfolio. A discussion of the quality of certain elements of the portfolio of financing receivables follows. Further details are included in notes 3, 4 and 6 to the consolidated financial statements. "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 19 to a below-market yield. The following discussion of 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 1997 and 1996 are shown in the following table:
(In millions) 1997 1996 -------- -------- Credit card and personal loans ......................... $ 25,773 $ 27,127 Auto loans ............................................. 8,973 5,915 Auto financing leases .................................. 13,346 13,113 -------- -------- Total consumer financing receivables ................. $ 48,092 $ 46,155 ======== ======== Nonearning ............................................. $ 1,049 $ 926 - As a percentage of total ........................... 2.2% 2.0% Receivable write-offs for the year ..................... $ 1,298 $ 870
The decrease in credit card and personal loan portfolios primarily resulted from securitization of receivables, partially offset by portfolio acquisitions and origination volume. Both the auto loan and financing lease portfolios increased as a result of acquisition growth; however, the increase in auto financing leases was partially offset by a shift in U.S. lease volume from financing leases to operating leases. Nonearning receivables did not change significantly during 1997. A substantial amount of the nonearning consumer receivables were U.S. private-label credit card loans which were subject to various loss-sharing arrangements that provide full or partial recourse to the originating retailer. Increased write-offs of consumer receivables were primarily attributable to the impact of higher delinquencies and personal bankruptcies on the credit card loan portfolios in the United States, consistent with overall industry experience, as well as higher average receivable balances worldwide. OTHER FINANCING RECEIVABLES, totaling $58.5 billion at December 31, 1997, consisted of a diverse commercial, industrial and equipment loan and lease portfolio. This portfolio increased $2.3 billion during 1997, primarily because of increased origination volume, partially offset by sales of receivables. Related nonearning and reduced-earning receivables were $353 million at year-end 1997, compared with $471 million at year-end 1996. As discussed in note 3 to the consolidated financial statements, Montgomery Ward Holding Corp. ("MWHC") filed a bankruptcy petition for reorganization in 1997. MWHC reported losses from operations during 1997, and the Corporation's share of such losses was $380 million (after tax). The Corporation recorded its share of losses by reducing its investments in MWHC, resulting in the writing off of its investments in MWHC common and preferred stock. In addition to those equity investments, the Corporation has other investments, primarily inventory financing, that resulted from ordinary course of business transactions with MWHC and affiliates. Such investments, after reduction for the Corporation's share of losses as discussed above, amounted to approximately $795 million at December 31, 1997 ($617 million classified as financing receivables). Income recognition had been suspended on these pre-bankruptcy investments. Subsequent to the petition, the Corporation committed to provide MWHC up to $1.0 billion in debtor-in-possession financing, subject to certain conditions, in order to fund working capital requirements and general corporate expenses. A majority of this facility has been syndicated; total borrowings under this facility at December 31, 1997, were insignificant. The Corporation also provides financing to customers of MWHC and affiliates through the Corporation's wholly-owned affiliates, Montgomery Ward Credit Corporation and Monogram Credit Card Bank of Georgia. These receivables, which represent revolving credit card transactions directly with customers of MWHC and affiliates, aggregated approximately $4,232 million at December 31, 1997, including $1,755 million that have been sold with recourse by the Corporation's affiliates. The obligations of customers with respect to these receivables are not affected by the bankruptcy filing. MWHC and its affiliates, under new management in 1997, are continuing their restructuring efforts as well as developing a plan of reorganization. The Corporation held loans and leases to commercial airlines amounting to $9.0 billion at the end of 1997, up from $8.2 billion at the end of 1996. The Corporation's commercial aircraft positions also included financial guarantees, funding commitments and aircraft orders as discussed in note 6 to the consolidated financial statements. 20 ENTERING 1998, management believes that continued vigilant attention to risk management and controllership and a strong focus on quality - complete satisfaction of customer needs - position it to deal effectively with the increasing competition in an ever-changing economy. YEAR 2000 Year 2000 compliance programs and information systems modifications have been initiated in an attempt to ensure that these systems and key processes will remain functional. This objective is expected to be achieved either by modifying present systems using existing internal and external programming resources or by installing new systems, including enterprise systems, and by monitoring supplier and other third-party interfaces. While there can be no assurance that all such modifications will be successful, management does not expect that either costs of modifications or consequences of any unsuccessful modifications should have a material adverse effect on the Corporation's financial position, results of operations or liquidity. NEW ACCOUNTING STANDARDS New accounting standards issued in 1997 are described below. Neither of these standards will have any effect on the financial position or results of operations of the Corporation. The Financial Accounting Standards Board issued two Statements of Financial Accounting Standards ("SFAS") that will affect presentation in the Corporation's 1998 Annual Report on Form 10-K. SFAS No. 130, Reporting Comprehensive Income, will require display of certain information about adjustments to equity - most notably, adjustments arising from market value changes in marketable securities. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, will require additional information about industry segments. 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 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEPENDENT AUDITORS' REPORT To the Board of Directors General Electric Capital Corporation: We have audited the consolidated financial statements of General Electric Capital Corporation 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 schedule listed in Item 14. These consolidated financial statements and the financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule 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 Corporation and consolidated affiliates at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP Stamford, Connecticut February 13, 1998 22
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES STATEMENT OF CURRENT AND RETAINED EARNINGS For the years ended December 31 (In millions) 1997 1996 1995 -------- -------- -------- REVENUES Time sales, loan and other income (Note 14) ................................ $ 11,877 $ 11,305 $ 10,006 Operating lease rentals .................................................... 4,819 4,341 4,079 Financing leases ........................................................... 3,499 3,485 3,176 Investment income .......................................................... 4,071 2,377 1,631 Premium and commission income of insurance affiliates (Note 11) ............ 4,516 3,136 1,820 Sales of goods ............................................................. 4,622 1,926 467 -------- -------- -------- Total revenues ........................................................... 33,404 26,570 21,179 -------- -------- -------- EXPENSES Interest ................................................................... 7,330 7,042 6,455 Operating and administrative (Note 15) ..................................... 9,472 7,565 5,747 Insurance losses and policyholder and annuity benefits (Note 11) ........... 4,825 3,183 2,031 Cost of goods sold ......................................................... 4,147 1,720 415 Provision for losses on financing receivables (Note 4) ..................... 1,421 1,033 1,117 Depreciation and amortization of buildings and equipment and equipment on operating leases (Notes 6 & 7) ........................... 2,443 2,137 2,001 Minority interest in net earnings of consolidated affiliates ............... 40 86 81 -------- -------- -------- Total expenses ........................................................... 29,678 22,766 17,847 -------- -------- -------- Earnings before income taxes ............................................... 3,726 3,804 3,332 Provision for income taxes (Note 16) ....................................... (997) (1,172) (1,071) -------- -------- -------- NET EARNINGS ............................................................... 2,729 2,632 2,261 Dividends paid (Note 13) ................................................... (1,546) (891) (1,645) Retained earnings at January 1 ............................................. 10,678 8,937 8,321 -------- -------- -------- RETAINED EARNINGS AT DECEMBER 31 ........................................... $ 11,861 $ 10,678 $ 8,937 ======== ======== ========
See Notes to Consolidated Financial Statements. 23
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES STATEMENT OF FINANCIAL POSITION At December 31 (In millions) 1997 1996 -------- -------- ASSETS Cash and equivalents ................................................................... $ 4,648 $ 3,074 Investment securities (Note 2) ......................................................... 53,103 44,340 Financing receivables (Note 3): Time sales and loans, net of deferred income ......................................... 64,832 62,832 Investment in financing leases, net of deferred income ............................... 41,769 39,575 -------- -------- 106,601 102,407 Allowance for losses on financing receivables (Note 4) ............................... (2,802) (2,693) -------- -------- Financing receivables - net ........................................................ 103,799 99,714 Other receivables - net (Note 5) ....................................................... 11,925 8,456 Equipment on operating leases (at cost), less accumulated amortization of $6,126 and $5,625 (Note 6) .................................................................. 18,689 16,134 Buildings and equipment (at cost), less accumulated depreciation of $1,421 and $1,188 (Note 7) .................................................................. 2,335 1,647 Intangible assets (Note 8) ............................................................. 9,459 7,594 Inventory .............................................................................. 786 376 Other assets (Note 9) .................................................................. 24,033 19,481 -------- -------- TOTAL ASSETS ......................................................................... $228,777 $200,816 ======== ======== LIABILITIES AND EQUITY Short-term borrowings (Note 10) ........................................................ $ 91,680 $ 74,971 Long-term borrowings (Note 10) ......................................................... 45,134 46,821 -------- -------- Total borrowings ..................................................................... 136,814 121,792 Accounts payable ....................................................................... 6,003 5,618 Insurance liabilities, reserves and annuity benefits (Note 11) ........................ 50,248 43,263 Other liabilities ...................................................................... 8,312 6,466 Deferred income taxes (Note 16) ........................................................ 8,167 7,472 -------- -------- Total liabilities .................................................................... 209,544 184,611 -------- -------- Minority interest in equity of consolidated affiliates (Note 12) ....................... 860 679 -------- -------- Variable cumulative preferred stock, $100 par value, liquidation preference $100,000 per share (23,000 shares authorized at December 31, 1997 and 1996; 22,300 shares and 18,000 shares outstanding at December 31, 1997 and 1996, respectively) ........................................................................ 2 2 Common stock, $200 par value (3,866,000 shares authorized and 3,837,825 shares outstanding at December 31, 1997 and 1996) ........................................... 768 768 Additional paid-in capital ............................................................. 4,744 4,024 Retained earnings ...................................................................... 11,861 10,678 Unrealized gains on investment securities .............................................. 1,145 149 Foreign currency translation adjustments ............................................... (147) (95) -------- -------- Total equity (Note 13) ............................................................... 18,373 15,526 -------- -------- TOTAL LIABILITIES AND EQUITY ......................................................... $228,777 $200,816 ======== ========
See Notes to Consolidated Financial Statements. 24
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES STATEMENT OF CASH FLOWS For the years ended December 31 (In millions) 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings ............................................................... $ 2,729 $ 2,632 $ 2,261 Adjustments to reconcile net earnings to cash provided from operating activities: Provision for losses on financing receivables ............................ 1,421 1,033 1,117 Increase in insurance liabilities, reserves and annuity benefits ......... 1,825 1,373 1,006 Increase in inventories .................................................. (244) (58) (15) Increase in deferred income taxes ........................................ 588 1,025 653 Depreciation and amortization of buildings and equipment and equipment on operating leases .......................................... 2,443 2,137 2,001 Increase in accounts payable ............................................. 138 422 720 Other - net .............................................................. (2,782) 853 372 -------- -------- -------- Cash from operating activities ............................................ 6,118 9,417 8,115 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in financing receivables (Note 20) ............................ (1,898) (2,278) (11,309) Buildings and equipment and equipment on operating leases - additions ............................................................... (6,160) (5,348) (4,628) - dispositions ............................................................ 2,209 1,326 1,495 Payments for principal businesses purchased, net of cash acquired .......... (3,820) (4,385) (4,600) All other investing activities (Note 20) ................................... (5,163) (5,405) (2,617) -------- -------- -------- Cash used for investing activities ........................................ (14,832) (16,090) (21,659) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in borrowings (maturities of 90 days or less) ................... 12,964 10,996 (5,547) Newly issued debt (maturities longer than 90 days) (Note 20) ............... 20,825 22,345 36,480 Repayments and other reductions (maturities longer than 90 days) (Note 20) . (22,757) (24,056) (17,045) Dividends paid ............................................................. (1,540) (891) (961) Issuance of preferred stock in excess of par value ......................... 430 -- 924 Issuance of variable cumulative preferred stock by consolidated affiliate .. 175 125 120 All other financing activities (Note 20) ................................... 191 (88) 177 -------- -------- -------- Cash from financing activities ............................................ 10,288 8,431 14,148 -------- -------- -------- INCREASE IN CASH AND EQUIVALENTS DURING THE YEAR ........................... 1,574 1,758 604 CASH AND EQUIVALENTS AT BEGINNING OF YEAR .................................. 3,074 1,316 712 -------- -------- -------- CASH AND EQUIVALENTS AT END OF YEAR ........................................ $ 4,648 $ 3,074 $ 1,316 ======== ======== ========
See Notes to Consolidated Financial Statements. 25 GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION - The consolidated financial statements represent the adding together of General Electric Capital Corporation ("the Parent") and all of its majority-owned and controlled affiliates ("consolidated affiliates"), (collectively called "the Corporation"). All outstanding common stock of the Parent is owned by General Electric Capital Services, Inc. ("GE Capital Services"), all of whose common stock is owned by General Electric Company ("GE Company"). All significant transactions among the Parent 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. ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES AND INVESTMENTS - The Corporation maintains an allowance for losses on financing receivables at an amount that it believes is sufficient to provide adequate protection against future losses in the portfolio. 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 26 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 net salvage value over the lease term or 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 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, 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. Any instrument designated but ineffective as a hedge 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. 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. 27 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. 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 making 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 ("PVFP"). PVFP 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. NOTE 2. INVESTMENT SECURITIES A summary of investment securities follows:
(In millions) GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED DECEMBER 31, 1997 COST GAINS LOSSES FAIR VALUE -------- -------- -------- -------- Debt securities: U.S. corporate ................................................ $ 22,308 $ 972 $ (49) $ 23,231 State and municipal ........................................... 5,235 290 (l) 5,524 Mortgage-backed ............................................... 9,777 255 (27) 10,005 Corporate - non-U.S. .......................................... 5,953 258 (6) 6,205 Government - non-U.S. ......................................... 1,257 30 -- 1,287 U.S. government and federal agency ............................ 1,838 86 (3) 1,921 Equity securities .............................................. 4,617 367 (54) 4,930 -------- -------- -------- -------- $ 50,985 $ 2,258 $ (140) $ 53,103 ======== ======== ======== ======== DECEMBER 31, 1996 Debt securities: U.S. corporate ................................................ $ 21,093 $ 294 $ (637) $ 20,750 State and municipal ........................................... 4,366 120 (26) 4,460 Mortgage-backed ............................................... 9,139 240 (100) 9,279 Corporate - non-U.S. .......................................... 3,140 53 (11) 3,182 Government - non-U.S. ......................................... 779 5 (1) 783 U.S. government and federal agency ............................ 1,824 31 (5) 1,850 Equity securities .............................................. 3,728 325 (17) 4,036 -------- -------- -------- -------- $ 44,069 $ 1,068 $ (797) $ 44,340 ======== ======== ======== ========
The majority of mortgage-backed securities shown in the table above are collateralized by U.S. residential mortgages. 28 At December 31, 1997, contractual maturities of debt securities, other than mortgage-backed securities, were as follows:
AMORTIZED ESTIMATED (In millions) COST FAIR VALUE -------- -------- Due in: 1998 .................................................. $ 1,568 $ 1,575 1999-2002 ............................................. 10,272 10,528 2003-2007 ............................................. 9,289 9,638 2008 and later ........................................ 15,462 16,427
It is expected that actual maturities will differ from contractual maturities because borrowers have the right to call or prepay certain obligations, sometimes without call or prepayment penalties. Proceeds from sales of investment securities in 1997 were $8,485 million ($5,375 million in 1996 and $6,225 million in 1995). Gross realized gains were $618 million in 1997 ($321 million in 1996 and $241 million in 1995). Gross realized losses were $81 million in 1997 ($96 million in 1996 and $86 million in 1995). NOTE 3. FINANCING RECEIVABLES Financing receivables at December 31, 1997 and 1996, are shown below.
(In millions) 1997 1996 -------- -------- Time sales and loans: Consumer Services ..................................... $ 42,270 $ 40,479 Specialized Financing ................................. 13,974 14,832 Mid-Market Financing .................................. 11,401 9,978 Equipment Management .................................. 469 448 Specialty Insurance ................................... 202 339 -------- -------- 68,316 66,076 Deferred income ........................................ (3,484) (3,244) -------- -------- Time sales and loans - net of deferred income ........ 64,832 62,832 -------- -------- Investment in financing leases: Direct financing leases ............................... 38,616 36,576 Leveraged leases ...................................... 3,153 2,999 -------- -------- Investment in financing leases ....................... 41,769 39,575 -------- -------- 106,601 102,407 Less allowance for losses (Note 4) ..................... (2,802) (2,693) -------- -------- $103,799 $ 99,714 ======== ========
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 1997 and 1996, specialized financing and consumer services loans included $10,503 million and $12,075 million, respectively, for commercial real estate loans. Note 6 contains information on commercial airline loans and leases. At December 31, 1997, contractual maturities for time sales and loans were $28,983 million in 1998; $12,792 million in 1999; $7,967 million in 2000; $5,156 million in 2001; $3,985 million in 2002 and $9,433 million thereafter - 29 aggregating $68,316 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, mining 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 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. The Corporation's net investment in financing leases at December 31, 1997 and 1996, is shown below.
TOTAL DIRECT FINANCING LEASES FINANCING LEASES LEVERAGED LEASES -------------------- -------------------- -------------------- (In millions) 1997 1996 1997 1996 1997 1996 -------- -------- -------- -------- -------- -------- Total minimum lease payments receivable $ 58,543 $ 54,009 $ 42,901 $ 40,555 $ 15,642 $ 13,454 Less principal and interest on third-party nonrecourse debt .......... (12,097) (10,213) -- -- (12,097) (10,213) -------- -------- -------- -------- -------- -------- Net rentals receivable ................ 46,446 43,796 42,901 40,555 3,545 3,241 Estimated unguaranteed residual value of leased assets ...................... 5,591 6,248 4,244 4,906 1,347 1,342 Less deferred income ................... (10,268) (10,469) (8,529) (8,885) (1,739) (1,584) -------- -------- -------- -------- -------- -------- Investment in financing leases ........ 41,769 39,575 38,616 36,576 3,153 2,999 Less: Allowance for losses ............ (656) (720) (575) (641) (81) (79) Deferred taxes arising from financing leases ............... (7,909) (7,488) (4,671) (4,077) (3,238) (3,411) -------- -------- -------- -------- -------- -------- Net investment in financing leases ..... $ 33,204 $ 31,367 $ 33,370 $ 31,858 $ (166) $ (491) ======== ======== ======== ======== ======== ========
At December 31, 1997, contractual maturities for net rentals receivable under financing leases were $12,820 million in 1998; $10,616 million in 1999; $8,395 million in 2000; $3,871 million in 2001; $2,371 million in 2002 and $8,373 million thereafter - aggregating $46,446 million. As with time sales and loans, experience has shown that a portion of 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 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. On July 7, 1997, MWHC, MWC and certain of their affiliates (excluding Signature) filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result, inventory financing loans to MWHC and affiliates became "impaired" loans (as defined below) because, due to the automatic stay in bankruptcy, the Corporation is not receiving current interest payment on its loans and, in management's judgment, it is therefore probable that the Corporation will be unable to collect all amounts due according to original contractual terms of the loan agreements. The total amount of such 30 loans was $617 million at December 31, 1997. The nonearning and reduced-earning receivable balances and the impaired loan balances discussed below exclude amounts related to MWHC and affiliates. Nonearning consumer receivables were $1,049 million and $926 million at December 31, 1997 and 1996, 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 $353 million and $471 million at year-end 1997 and 1996, 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. Under these principles, the Corporation has two types of "impaired" loans as of December 31, 1997 and 1996: loans requiring allowances for losses ($339 million and $583 million, respectively) and loans expected to be fully recoverable because the carrying amount has been reduced previously through charge-offs or deferral of income recognition ($167 million and $187 million, respectively) - allowances for losses on these loans were $170 million and $222 million, respectively. Average investment in these loans during 1997 and 1996 was $647 million and $842 million, respectively, before allowance for losses; interest income earned, principally on the cash basis, while they were considered impaired was $32 million and $30 million in 1997 and 1996, respectively. NOTE 4. ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES 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 loss potential. 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 loss potential, including specific allowances for known troubled accounts. The table below shows the activity in the allowance for losses on financing receivables during each of the past three years.
(In millions) 1997 1996 1995 -------- -------- -------- Balance at January 1 ....................................................... $ 2,693 $ 2,519 $ 2,062 Provisions charged to operations ........................................... 1,421 1,033 1,117 Net transfers primarily related to companies acquired or sold .............. 127 139 217 Amounts written off - net .................................................. (1,439) (998) (877) -------- -------- -------- Balance at December 31 ..................................................... $ 2,802 $ 2,693 $ 2,519 ======== ======== ========
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 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. NOTE 5. OTHER RECEIVABLES This account includes reinsurance recoverables of $2,206 million and $1,691 million and insurance-related receivables of $1,830 million and $1,267 million at year-end 1997 and 1996, 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. 31 NOTE 6. EQUIPMENT ON OPERATING LEASES Equipment on operating leases by type of equipment and accumulated amortization at December 31, 1997 and 1996, are shown below.
(In millions) 1997 1996 -------- -------- Original cost Vehicles .............................................................................. $ 9,144 $ 6,789 Aircraft .............................................................................. 7,686 6,647 Marine shipping containers ............................................................ 2,774 3,053 Railroad rolling stock ................................................................ 2,367 2,093 Other ................................................................................. 2,844 3,177 -------- -------- 24,815 21,759 Accumulated amortization ............................................................... (6,126) (5,625) -------- -------- $ 18,689 $ 16,134 ======== ========
Amortization of equipment on operating leases was $2,102 million, $1,848 million and $1,702 million in 1997, 1996 and 1995, respectively. Noncancelable future rentals due from customers for equipment on operating leases at year-end 1997 totaled $10,438 million and are due as follows: $3,247 million in 1998; $2,243 million in 1999; $1,473 million in 2000; $935 million in 2001; $628 million in 2002 and $1,912 million thereafter. The Corporation acts as a lender and lessor to the commercial airline industry. At December 31, 1997 and 1996, the balance of such loans, leases and equipment leased to others was $8,980 million and $8,240 million, respectively. In addition, at December 31,1997, the Corporation had issued financial guarantees and funding commitments of $123 million ($221 million at year-end 1996) and had placed multiyear orders for various Boeing and Airbus aircraft with list prices of approximately $6.2 billion ($6.5 billion at year-end 1996). 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 $341 million in 1997, $289 million in 1996 and $299 million in 1995. NOTE 8. INTANGIBLE ASSETS Intangible assets at December 31, 1997 and 1996, are shown in the table below.
(In millions) 1997 1996 -------- -------- Goodwill ............................................................................... $ 7,368 $ 5,031 Present value of future profits ("PVFP") ............................................... 1,671 2,271 Other intangibles ...................................................................... 420 292 -------- -------- $ 9,459 $ 7,594 ======== ========
The Corporation's intangible assets are shown net of accumulated amortization of $2,098 million at December 31, 1997, and $1,518 million at December 31, 1996. PVFP amortization, which is on an accelerated basis and net of interest, is projected to range from 13% to 8% of the year-end 1997 unamortized balance for each of the next five years. 32 NOTE 9. OTHER ASSETS Other assets at December 31, 1997 and 1996, are shown in the table below.
(In millions) 1997 1996 -------- -------- Investments: Assets acquired for resale ............................................................ $ 4,403 $ 2,993 Investments in and advances to associated companies ................................... 4,626 4,841 Real estate ventures .................................................................. 2,326 2,469 Other ................................................................................. 1,986 1,022 -------- -------- 13,341 11,325 Separate accounts ...................................................................... 4,851 3,447 Servicing assets ....................................................................... 1,710 1,663 Deferred insurance acquisition costs ................................................... 1,671 940 Other .................................................................................. 2,460 2,106 -------- -------- $ 24,033 $ 19,481 ======== ========
Separate accounts represent investments controlled by policyholders and are associated with identical amounts reported as insurance liabilities in note 11. NOTE 10. BORROWINGS Total short-term borrowings at December 31, 1997 and 1996, consisted of the following:
1997 1996 -------------------- -------------------- AVERAGE AVERAGE (Dollars in millions) AMOUNT RATE AMOUNT RATE -------- -------- -------- -------- Commercial paper - U.S. ........................................ $ 63,819 5.93% $ 47,511 5.68% Commercial paper - non-U.S. .................................... 3,879 4.18 3,737 4.30 Current portion of long-term debt .............................. 15,101 6.30 16,471 6.17 Other .......................................................... 8,881 7,252 -------- -------- $ 91,680 $ 74,971 ======== ======== Includes the effects of associated interest rate and currency swaps.
Total long-term borrowings at December 31, 1997 and 1996, were as follows:
1997 AVERAGE RATE (Dollars in millions) MATURITIES 1997 1996 -------- -------- -------- -------- Senior notes ................................................... 6.58% 1999-2055 $ 44,437 $ 46,124 Subordinated notes ........................................ 8.04 2006-2012 697 697 -------- -------- $ 45,134 $ 46,821 ======== ======== Includes the effects of associated interest rate and currency swaps. Guaranteed by GE Company.
33 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 21. 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, 1997, were $15,101 million in 1998; $9,801 million in 1999; $6,927 million in 2000; $5,763 million in 2001 and $4,816 million in 2002. At December 31, 1997, the Corporation held committed lines of credit aggregating $20.9 billion with 113 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 $6.9 billion and $1.4 billion of these credit lines were also available for use by GE Capital Services and GE Company, respectively. Also, at December 31, 1997, substantially all of the approximately $3.9 billion of GE Company's credit lines were available for use by the Corporation or GE Capital Services. During 1997, neither the Corporation, GE Capital Services nor GE Company borrowed under any of these credit lines. 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. The following table shows the Corporation's borrowing positions at December 31, 1997 and 1996, considering the effects of swaps.
(In millions) 1997 1996 -------- -------- EFFECTIVE BORROWINGS (INCLUDING SWAPS) Short-term ............................................................................. $ 53,366 $ 45,076 ======== ======== Long-term (including current portion) Fixed rate ....................................................................... $ 58,474 $ 53,735 Floating rate ......................................................................... 24,974 22,981 -------- -------- Total long-term ........................................................................ $ 83,448 $ 76,716 ======== ======== 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, 1997, interest rate swap maturities ranged from 1998 to 2029, and average interest rates for "synthetic" fixed-rate borrowings were 6.29% (6.43% at year-end 1996). 34 NOTE 11. INSURANCE LIABILITIES, RESERVES AND ANNUITY BENEFITS Insurance liabilities, reserves and annuity benefits at December 31, 1997 and 1996, are shown below.
(In millions) 1997 1996 -------- -------- Investment contracts and universal life benefits ....................................... $ 25,961 $ 24,038 Life insurance benefits and other ................................................. 11,967 10,974 Unpaid claims and claims adjustment expenses ........................................... 3,670 1,907 Unearned premiums ...................................................................... 3,799 2,897 Separate accounts (see note 9) ......................................................... 4,851 3,447 -------- -------- $ 50,248 $ 43,263 ======== ======== Life insurance benefits are accounted for mainly by a net-level-premium method using estimated yields generally ranging from 5% to 9% in both 1997 and 1996.
The liability for unpaid claims and claims adjustment expenses, principally property and casualty reserves, consists of both case and incurred-but-not-reported reserves. Where experience is not sufficient to determine reserves, industry averages are used. Estimated amounts of salvage and subrogation recoverable on paid and unpaid losses are deducted from outstanding losses. Activity in the liability for unpaid claims and claims adjustment expenses is summarized below.
(In millions) 1997 1996 1995 -------- -------- -------- Balance at January 1 - gross ............................................... $ 1,907 $ 1,432 $ 999 Less reinsurance recoverables .............................................. (117) (76) (138) -------- -------- -------- Balance at January 1 - net ................................................. 1,790 1,356 861 Claims and expenses incurred: Current year .............................................................. 1,989 1,230 838 Prior years ............................................................... 61 29 51 Claims and expenses paid: Current year .............................................................. (1,144) (541) (359) Prior years ............................................................... (902) (614) (394) Claim reserves related to acquired companies ............................... 1,360 309 364 Other ...................................................................... 78 21 (5) -------- -------- -------- Balance at December 31 - net ............................................... 3,232 1,790 1,356 Add reinsurance recoverables ............................................... 438 117 76 -------- -------- -------- Balance at December 31 - gross ............................................. $ 3,670 $ 1,907 $ 1,432 ======== ======== ========
Prior-year claims and expenses incurred in the above table resulted principally from settling claims established in earlier accident years for amounts that differed from expectations. 35 Financial guarantees and credit life risk of insurance affiliates at December 31, 1997 and 1996, are summarized below.
(In millions) 1997 1996 -------- -------- Guarantees, principally on municipal bonds and structured finance issues ............... $140,077 $135,148 Mortgage insurance risk in force ....................................................... 46,243 36,279 Credit life insurance risk in force .................................................... 26,593 19,468 Less reinsurance ....................................................................... (33,503) (32,369) -------- -------- $179,410 $158,526 ======== ========
Insurance risk is ceded on both a pro rata and excess basis. 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 effects of reinsurance on premiums written and premiums and commissions earned were as follows for the past three years.
PREMIUMS WRITTEN PREMIUMS AND COMMISSIONS EARNED -------------------------------- -------------------------------- (In millions) 1997 1996 1995 1997 1996 1995 -------- -------- -------- -------- -------- -------- Direct ................................. $ 4,541 $ 3,175 $ 2,053 $ 4,500 $ 3,126 $ 1,839 Assumed ................................ 502 534 154 479 380 124 Ceded .................................. (493) (493) (270) (463) (370) (143) -------- -------- -------- -------- -------- -------- Net .................................... $ 4,550 $ 3,216 $ 1,937 $ 4,516 $ 3,136 $ 1,820 ======== ======== ======== ======== ======== ========
Reinsurance recoveries recognized as a reduction of insurance losses and policyholder and annuity benefits amounted to $334 million, $286 million and $113 million for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 12. MINORITY INTEREST Minority interest in equity of consolidated affiliates includes preferred stock issued by a subsidiary with a liquidation preference value of $660 million and $485 million as of December 31, 1997 and 1996, respectively. Dividend rates on the preferred stock ranged from 3.8% to 4.5% during 1997, from 3.8% to 4.3% during 1996, and from 4.2% to 4.6% during 1995. 36 NOTE 13. EQUITY Changes in equity for each of the last three years were as follows:
UNREALIZED VARIABLE GAINS FOREIGN CUMULATIVE ADDITIONAL (LOSSES) ON CURRENCY PREFERRED COMMON PAID-IN RETAINED INVESTMENT TRANSLATION (In millions) STOCK STOCK CAPITAL EARNINGS SECURITIES ADJUSTMENTS TOTAL -------- -------- -------- -------- -------- -------- -------- Balance at January 1, 1995 . $ 1 $ 768 $ 2,172 $ 8,321 $ (655) $ (67) $ 10,540 Capital contributions ...... -- -- 926 -- -- -- 926 Preferred stock issued ..... 1 -- 924 -- -- -- 925 Net unrealized gains on investment securities ..... -- -- -- -- 1,198 -- 1,198 Currency translation adjustments ............... -- -- -- -- -- (3) (3) Net earnings ............... -- -- -- 2,261 -- -- 2,261 Dividends declared: Common stock .............. -- -- -- (1,588) -- -- (1,588) Preferred stock ........... -- -- -- (57) -- -- (57) -------- -------- -------- -------- -------- -------- -------- Balance at December 31, 1995 2 768 4,022 8,937 543 (70) 14,202 Capital contributions ...... -- -- 2 -- -- -- 2 Net unrealized losses on investment securities ..... -- -- -- -- (394) -- (394) Currency translation adjustments ............... -- -- -- -- -- (25) (25) Net earnings ............... -- -- -- 2,632 -- -- 2,632 Dividends declared: Common stock .............. -- -- -- (815) -- -- (815) Preferred stock ........... -- -- -- (76) -- -- (76) -------- -------- -------- -------- -------- -------- -------- Balance at December 31, 1996 2 768 4,024 10,678 149 (95) 15,526 Capital contributions ...... -- -- 290 -- -- -- 290 Preferred stock issued ..... -- -- 430 -- -- -- 430 Net unrealized gains on investment securities ..... -- -- -- -- 996 -- 996 Currency translation adjustments ............... -- -- -- -- -- (52) (52) Net earnings ............... -- -- -- 2,729 -- -- 2,729 Dividends declared: Common stock .............. -- -- -- (1,468) -- -- (1,468) Preferred stock ........... -- -- -- (78) -- -- (78) -------- -------- -------- -------- -------- -------- -------- Balance at December 31, 1997 $ 2 $ 768 $ 4,744 $ 11,861 $ 1,145 $ (147) $ 18,373 ======== ======== ======== ======== ======== ======== ========
All common stock is owned by GE Capital Services, all of the common stock of which is in turn wholly owned by GE Company. In 1995, GE Company contributed to GE Capital Services certain assets of Caribe GE Products, Inc. GE Capital Services in turn contributed the assets of Caribe GE Products, Inc. to the Corporation. Also in 1995, the Corporation distributed certain assets to GE Capital Services by way of a dividend and in turn received an equal capital contribution. During 1997, GE Capital Services contributed certain assets to the Corporation, the largest of which were assets of Consolidated Insurance Group, a component of Consolidated Financial Insurance. These contributions increased the Corporation's additional paid-in capital by $926 million and $290 million at December 31, 1995 and 1997, respectively. 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. 37 During 1997 and 1995, the Corporation issued 4,300 and 9,250 additional shares of its variable cumulative preferred stock, respectively. Dividend rates on the preferred stock ranged from 3.8% to 5.2% during 1997 and 1996, and from 4.2% to 5.2% during 1995. At December 31, 1997 and 1996, the aggregate statutory capital and surplus of the insurance businesses totaled $7.8 billion and $5.8 billion, respectively. In preparing statutory statements, no significant permitted accounting practices are used that differ from prescribed accounting practices. NOTE 14. REVENUES Time sales, loan and other income includes the Corporation's share of losses from equity investments of approximately $586 million in 1997 and earnings from equity investments of approximately $85 million and $113 million for 1996 and 1995, respectively. NOTE 15. 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 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. 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 $392 million in 1997, $269 million in 1996 and $273 million in 1995. Other rental expense was $327 million in 1997, $263 million in 1996 and $237 million in 1995, principally for the rental of office space and data processing equipment. Minimum future rental commitments under noncancelable leases at December 31, 1997 are $640 million in 1998; $562 million in 1999; $502 million in 2000; $480 million in 2001; $449 million in 2002 and $2,411 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 1997, 1996 and 1995 was $543 million, $365 million and $252 million, respectively. NOTE 16. INCOME TAXES The provision for income taxes is summarized in the following table.
(In millions) 1997 1996 1995 -------- -------- -------- Estimated amounts payable .................................................. $ 409 $ 157 $ 425 Deferred tax expense from temporary differences ............................ 588 1,015 646 -------- -------- -------- $ 997 $ 1,172 $ 1,071 ======== ======== ========
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 and its affiliates on the consolidated return. Estimated amounts payable includes amounts applicable to non-U.S. jurisdictions of $573 million, $485 million and $158 million in 1997, 1996 and 1995, 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 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. U.S. income before taxes was $2.4 billion in 1997, and $2.7 billion in 1996 and 1995. The corresponding amounts for non-U.S. based operations were $1.3 billion in 1997, $1.1 billion in 1996 and $0.6 billion in 1995. A reconciliation of the U.S. federal statutory rate to the actual income tax rate follows.
1997 1996 1995 -------- -------- -------- Statutory U.S. federal income tax rate ..................................... 35.0% 35.0% 35.0% Increase (reduction) in rate resulting from: Amortization of goodwill .................................................. 1.1 1.0 1.0 Tax-exempt income ......................................................... (3.2) (3.0) (3.0) Foreign Sales Corporation tax benefits .................................... (0.6) (0.4) -- Dividends received, not fully taxable ..................................... (1.8) (1.7) (1.6) Other - net ............................................................... (3.7) (0.1) 0.8 -------- -------- -------- Actual income tax rate ..................................................... 26.8% 30.8% 32.2% ======== ======== ========
Principal components of the net deferred tax liability balances at December 31, 1997 and 1996, were as follows:
(In millions) 1997 1996 -------- -------- Assets: Allowance for losses .................................................................. $ 1,360 $ 1,173 Insurance reserves .................................................................... 1,243 647 AMT credit carryforwards .............................................................. 354 561 Other ................................................................................. 2,100 1,190 -------- -------- Total deferred tax assets .............................................................. 5,057 3,571 -------- -------- Liabilities: Financing leases ...................................................................... 7,909 7,488 Operating leases ...................................................................... 2,156 1,833 Net unrealized gains on securities .................................................... 760 97 Other ................................................................................. 2,399 1,625 -------- -------- Total deferred tax liabilities ......................................................... 13,224 11,043 -------- -------- Net deferred tax liability ............................................................. $ 8,167 $ 7,472 ======== ========
39 NOTE 17. INDUSTRY SEGMENT DATA Industry segment operating data and identifiable assets are shown below. Insurance services, previously included within the Specialty Insurance segment, has been combined with the consumer savings and insurance operations in the Consumer Services segment. Prior-year information has been reclassified to reflect this and certain other organizational changes.
(In millions) 1997 1996 1995 -------- -------- -------- Revenues: Consumer Services ......................................................... $ 13,266 $ 11,028 $ 7,989 Equipment Management ...................................................... 11,446 7,909 6,090 Mid-Market Financing ...................................................... 2,952 2,626 2,268 Specialized Financing ..................................................... 2,985 2,935 3,047 Specialty Insurance ....................................................... 2,839 2,084 1,770 -------- -------- -------- Total segment revenues ..................................................... 33,488 26,582 21,164 Corporate and other ....................................................... (84) (12) 15 -------- -------- -------- Total revenues ............................................................. $ 33,404 $ 26,570 $ 21,179 ======== ======== ======== Segment operating profit: Consumer Services ......................................................... $ 563 $ 1,269 $ 1,044 Equipment Management ...................................................... 1,062 892 869 Mid-Market Financing ...................................................... 622 558 467 Specialized Financing ..................................................... 1,036 742 659 Specialty Insurance ....................................................... 434 348 325 -------- -------- -------- Total segment operating profit ............................................. 3,717 3,809 3,364 Corporate and other ....................................................... 9 (5) (32) -------- -------- -------- Earnings before income taxes ............................................... $ 3,726 $ 3,804 $ 3,332 ======== ======== ======== Identifiable assets at December 31: Consumer Services ......................................................... $116,300 $104,338 $ 74,313 Equipment Management ...................................................... 34,391 29,658 24,378 Mid-Market Financing ...................................................... 29,824 25,948 22,438 Specialized Financing ..................................................... 29,302 27,847 30,102 Specialty Insurance ....................................................... 17,899 11,804 8,760 -------- -------- -------- Total segment identifiable assets .......................................... 227,716 199,595 159,991 Corporate and other ....................................................... 1,061 1,221 834 -------- -------- -------- Total assets ............................................................... $228,777 $200,816 $160,825 ======== ======== ========
40 NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data were as follows:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER -------------------- -------------------- -------------------- -------------------- (In millions) 1997 1996 1997 1996 1997 1996 1997 1996 -------- -------- -------- -------- -------- -------- -------- -------- Revenues ......... $ 7,773 $ 5,620 $ 7,658 $ 6,068 $ 8,377 $ 7,008 $ 9,596 $ 7,874 -------- -------- -------- -------- -------- -------- -------- -------- Expenses: Interest ........ 1,711 1,668 1,780 1,722 1,832 1,685 2,007 1,967 Operating, administrative and cost of goods sold ..... 3,025 1,716 2,855 1,906 3,567 2,583 4,172 3,080 Insurance losses and policyholder and annuity benefits ....... 1,149 615 1,106 777 1,227 821 1,343 970 Provision for losses on financing receivables .... 312 213 337 228 371 254 401 338 Depreciation and amortization of buildings and equipment and equipment on operating leases ......... 565 489 563 524 623 556 692 568 Minority interest in net earnings of consolidated affiliates ..... 13 25 1 17 13 17 13 27 -------- -------- -------- -------- -------- -------- -------- -------- Earnings before income taxes ... 998 894 1,016 894 744 1,092 968 924 Provision for income taxes ... (301) (289) (298) (267) (176) (344) (222) (272) -------- -------- -------- -------- -------- -------- -------- -------- Net earnings ..... $ 697 $ 605 $ 718 $ 627 $ 568 $ 748 $ 746 $ 652 ======== ======== ======== ======== ======== ======== ======== ========
NOTE 19. 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 1997, net assets of the Corporation's regulated affiliates amounted to $16.6 billion, of which $13.2 billion was restricted. NOTE 20. 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 Certain supplemental information related to the Corporation's cash flows were as follows for the past three years.
(In millions) 1997 1996 1995 -------- -------- -------- FINANCING RECEIVABLES Increase in loans to customers ............................................. $(55,689) $(49,890) $(46,154) Principal collections from customers ....................................... 50,679 49,923 44,840 Investment in equipment for financing leases ............................... (16,420) (14,427) (17,182) Principal collections on financing leases .................................. 13,796 11,158 8,821 Net change in credit card receivables ...................................... (4,186) (3,068) (3,773) Sales of financing receivables ............................................. 9,922 4,026 2,139 -------- -------- -------- $ (1,898) $ (2,278) $(11,309) ======== ======== ======== ALL OTHER INVESTING ACTIVITIES Purchases of securities by insurance and annuity businesses ................ $(11,700) $ (8,244) $ (6,409) Dispositions and maturities of securities by insurance and annuity businesses ........................................................ 10,261 6,736 5,866 Proceeds from principal business dispositions .............................. 241 -- 575 Other ...................................................................... (3,965) (3,897) (2,649) -------- -------- -------- $ (5,163) $ (5,405) $ (2,617) ======== ======== ======== NEWLY ISSUED DEBT HAVING MATURITIES LONGER THAN 90 DAYS Short-term (91 to 365 days) ................................................ $ 3,502 $ 5,061 $ 2,545 Long-term (longer than one year) ........................................... 15,566 16,689 32,507 Proceeds - nonrecourse, leveraged lease debt ............................... 1,757 595 1,428 -------- -------- -------- $ 20,825 $ 22,345 $ 36,480 ======== ======== ======== REPAYMENTS AND OTHER REDUCTIONS OF DEBT HAVING MATURITIES LONGER THAN 90 DAYS Short-term (91 to 365 days) ................................................ $(21,320) $(22,755) $(16,075) Long-term (longer than one year) ........................................... (1,150) (1,025) (678) Principal payments - nonrecourse, leveraged lease debt ..................... (287) (276) (292) -------- -------- -------- $(22,757) $(24,056) $(17,045) ======== ======== ======== ALL OTHER FINANCING ACTIVITIES Proceeds from sales of investment and annuity contracts .................... $ 4,462 $ 2,341 $ 1,554 Redemption of investment and annuity contracts ............................. (4,453) (2,429) (2,061) Capital contributions from parent company .................................. 182 -- 684 -------- -------- -------- $ 191 $ (88) $ 177 ======== ======== ======== CASH RECOVERED (PAID) DURING THE YEAR FOR Interest ................................................................... $ (7,471) $ (7,166) $ (5,970) Income taxes ............................................................... (502) (87) 217
Changes in operating assets and liabilities are net of acquisitions and dispositions of businesses. 42 "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:
(In millions) 1997 1996 1995 -------- -------- -------- Fair value of assets acquired .............................................. $ 15,190 $ 27,341 $ 15,496 Cash paid .................................................................. (4,736) (4,839) (4,749) -------- -------- -------- Liabilities assumed ........................................................ $ 10,454 $ 22,502 $ 10,747 ======== ======== ========
NOTE 21. 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, 1997 or 1996. Moreover, the disclosed values are representative of fair values only as of the dates indicated. 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. Values are estimated as follows. 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. 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. 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 Information about financial instruments that were not carried at fair value at December 31, 1997 and 1996, is shown below.
1997 ------------------------------------------- ASSETS (LIABILITIES) -------------------------------- CARRYING ESTIMATED FAIR VALUE NOTIONAL AMOUNT -------------------- (In millions) AMOUNT (NET) HIGH LOW -------------------- -------- -------- Assets Time sales and loans .......................................... $ $ 62,712 $ 63,105 $ 61,171 Integrated interest rate swaps ................................ 11,378 19 (128) (128) Purchased options ............................................. 1,617 31 31 31 Mortgage-related positions Mortgage purchase commitments ................................ 2,082 -- 11 11 Mortgage sale commitments .................................... 2,540 -- (9) (9) Mortgages held for sale ...................................... 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 .............................. 2,242 2,592 2,349 Liabilities Borrowings and related instruments Borrowings ......................................... (136,814) (137,360) (137,360) Interest rate swaps .......................................... 40,880 -- (170) (170) Currency swaps ............................................... 23,382 -- (1,249) (1,249) Currency forwards ............................................ 14,483 -- 367 367 Purchased options ............................................ 362 23 (22) (22) Investment contract benefits .................................. (21,703) (21,556) (21,556) Insurance - financial guarantees and credit life .............. 179,410 (2,837) (2,936) (3,052) Credit and liquidity support - securitizations ................ 10,008 (46) (46) (46) Performance guarantees - principally letters of credit ........ 2,553 (34) -- (67) Other ......................................................... 3,288 (1,134) (1,282) (1,303) Other firm commitments Currency forwards ............................................. 1,744 -- 11 11 Currency swaps ................................................ -- -- -- -- Ordinary course of business lending commitments ............... 7,891 -- (62) (62) Unused revolving credit lines Commercial ................................................... 4,850 -- -- -- Consumer - principally credit cards .......................... 134,123 -- -- -- 1996 ------------------------------------------- ASSETS (LIABILITIES) -------------------------------- CARRYING ESTIMATED FAIR VALUE NOTIONAL AMOUNT -------------------- (In millions) AMOUNT (NET) HIGH LOW -------------------- -------- -------- Assets Time sales and loans .......................................... $ $ 60,859 $ 61,632 $ 60,544 Integrated interest rate swaps ................................ 3,604 -- 82 82 Purchased options ............................................. 1,938 11 12 12 Mortgage-related positions Mortgage purchase commitments ................................ 1,193 -- 2 2 Mortgage sale commitments .................................... 1,417 -- 3 3 Mortgages held for sale ...................................... 1,112 1,165 1,165 Options, including "floors" .................................. 27,422 78 81 81 Interest rate swaps and futures .............................. 1,731 -- (29) (29) Other cash financial instruments .............................. 1,347 1,630 1,382 Liabilities Borrowings and related instruments Borrowings ......................................... (106,836) (106,849) (106,849) Interest rate swaps .......................................... 32,891 -- (551) (551) Currency swaps ............................................... 24,588 -- 368 368 Currency forwards ............................................ 6,165 -- 69 68 Purchased options ............................................ 1,882 10 1 1 Investment contract benefits .................................. (18,499) (18,227) (18,227) Insurance - financial guarantees and credit life .............. 158,526 (3,089) (2,907) (3,297) Credit and liquidity support - securitizations ................ 4,684 (73) (72) (72) Performance guarantees - principally letters of credit ........ 3,142 (55) (134) (134) Other ......................................................... 3,060 (1,434) (1,049) (1,050) Other firm commitments Currency forwards ............................................. 1,224 -- -- -- Currency swaps ................................................ 99 -- (7) (7) Ordinary course of business lending commitments ............... 4,950 -- (27) (27) Unused revolving credit lines Commercial ................................................... 3,375 -- -- -- Consumer - principally credit cards .......................... 116,878 -- -- -- Not applicable. Includes effects of interest rate and currency swaps, which also are listed separately. See note 10.
Additional information about certain financial instruments in the above table follows. 44 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 the mortgage servicing and annuities businesses. SWAPS OF INTEREST RATES AND CURRENCIES are used by the Corporation to optimize borrowing costs for a particular funding strategy (see note 10). In addition, 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 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, 1997 and 1996, this gross market risk amounted to $1.9 billion and $0.6 billion, respectively. Aggregate fair values that represent associated probable future obligations, normally associated with a right of offset against probable future receipts, amounted to $2.8 billion at year-end 1997 and $0.6 billion at year-end 1996. 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.
COUNTERPARTY CREDIT CRITERIA CREDIT RATING -------------------- STANDARD & MOODY'S 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. 45 NOTE 22. GEOGRAPHIC SEGMENT INFORMATION Geographic segment operating data and total assets were as follows:
REVENUES OPERATING PROFIT -------------------------------- -------------------------------- For the years ended December 31 1997 1996 1995 1997 1996 1995 -------- -------- -------- -------- -------- -------- (In millions) United States .......................... $ 22,737 $ 18,424 $ 15,306 $ 2,599 $ 2,889 $ 2,740 Europe ................................. 6,414 4,429 2,729 680 507 293 Pacific Basin .......................... 940 693 403 51 57 33 Other ............................. 3,313 3,024 2,741 396 351 266 -------- -------- -------- -------- -------- -------- Total ................................ $ 33,404 $ 26,570 $ 21,179 $ 3,726 $ 3,804 $ 3,332 ======== ======== ======== ======== ======== ======== TOTAL ASSETS -------------------------------- December 31 1997 1996 1995 -------- -------- -------- (In millions) United States .......................... $160,276 $149,901 $121,078 Europe ................................. 43,064 28,710 19,895 Pacific Basin .......................... 5,785 5,060 3,567 Other ............................. 19,652 17,145 16,285 -------- -------- -------- Total ................................ $228,777 $200,816 $160,825 ======== ======== ======== Principally the Americas other than the United States, but also includes operations that cannot meaningfully be associated with specific geographic areas (for example, shipping containers used on ocean-going vessels).
46 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 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 Current and Retained Earnings for each of the years in the three-year period ended December 31, 1997 Statement of Financial Position at December 31, 1997 and 1996 Statement of Cash Flows for each of the years in the three-year period ended December 31, 1997 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, 1997 (pages F-1 through F-42) and Exhibit 12 (Ratio of Earnings to Fixed Charges) of General Electric Company. (a)2. FINANCIAL STATEMENT SCHEDULES I. Condensed financial information of registrant. 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. 47 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3(i) A complete copy of the Organization Certificate of the Corporation as last amended as of February 17, 1998 and currently in effect, consisting of the following: (a) the Organization Certificate of the Corporation as in effect immediately prior to the filing of the Certificate of Amendment as of April 21, 1995 (Incorporated by reference to Exhibit 3(i) to the Corporation's Form 10-K Report for the year ended December 31, 1993); (b) a Certificate of Amendment filed in the Office of the Superintendent of Banks of the State of New York (the "Office of the Superintendent") as of April 21, 1995 (Incorporated by reference to Exhibit 4(b) to the Corporation's Registration Statement on Form S-3, File No. 33-58771; (c) a Certificate of Amendment filed in the Office of the Superintendent as of May 11, 1995 (Incorporated by reference to Exhibit 4(c) to the Corporation's Registration Statement on form S-3, File No. 33-61257); (d) a Certificate of Amendment filed in the Office of the Superintendent as of June 28, 1995 (Incorporated by reference to Exhibit 4(d) to the Corporation's Registration Statement on Form S-3, File No. 33-61257); (e) a Certificate of Amendment filed in the Office of the Superintendent as of July 17, 1995 (Incorporated by reference to Exhibit 4(e) to the Corporation's Registration Statement on Form S-3, File No. 33-61257); (f) a Certificate of Amendment filed in the Office of the Superintendent as of November 1, 1995 (Incorporated by reference to Exhibit 3(i) to the Corporation's Form 10-K Report for the year ended December 31, 1995); (g) a Certificate of Amendment filed in the Office of the Superintendent as of September 27, 1996 (Incorporated by reference to Exhibit 4(g) to the Corporation's Registration Statement on Form S-3, File No. 333-13195); (h) a Certificate of Amendment filed in the Office of the Superintendent as of December 9, 1997 (Incorporated by reference to Exhibit 4(g) to the Corporation's Post-Effective Amendment No. 1 to Registration Statement on Form S-3, File No. 333-13195); (i) a Certificate of Amendment filed in the Office of the Superintendent as of December 19, 1997 (Incorporated by reference to Exhibit 4(h) to the Corporation's Post-Effective Amendment No. 1 to Registration Statement on Form S-3, File No. 333-13195); and (j) a Certificate of Amendment filed in the Office of the Superintendent as of February 17, 1998 (Incorporated by reference to Exhibit 4(i) to the Corporation's Post-Effective Amendment No. 1 to Registration Statement on Form S-3, File No. 333-13195). 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(iii) 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 Peat Marwick 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 the Corporation. (Incorporated by reference to Exhibit 28(a) 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, 1997, (pages F-1 through F-42) and Exhibit 12 (Ratio of Earnings to Fixed Charges) of General Electric Company. 48 99(c) Letter, dated September 26, 1996 from Dennis D. Dammerman of General Electric Company to Gary C. Wendt 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 the Corporation's Registration Statement on Form S-3, File No. 333-13195). (b) REPORTS ON FORM 8-K None. 49
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT GENERAL ELECTRIC CAPITAL CORPORATION CONDENSED STATEMENT OF CURRENT AND RETAINED EARNINGS For the years ended December 31 (In millions) 1997 1996 1995 -------- -------- -------- REVENUES ................................................................... $ 4,867 $ 6,631 $ 5,721 -------- -------- -------- EXPENSES: Interest, net of allocations .............................................. 3,548 3,871 3,094 Operating and administrative .............................................. 1,765 1,573 1,217 Provision for losses on financing receivables ............................. 4 65 206 Depreciation and amortization ............................................. 345 255 209 -------- -------- -------- 5,662 5,764 4,726 -------- -------- -------- Earnings (loss) before income taxes and equity in earnings of affiliates ... (795) 867 995 Income tax (provision) benefit ............................................. 439 (218) (291) Equity in earnings of affiliates ........................................... 3,085 1,983 1,557 -------- -------- -------- NET EARNINGS ............................................................... 2,729 2,632 2,261 Dividends paid ............................................................. (1,546) (891) (1,645) Retained earnings at January 1 ............................................. 10,678 8,937 8,321 -------- -------- -------- RETAINED EARNINGS AT DECEMBER 31 ........................................... $ 11,861 $ 10,678 $ 8,937 ======== ======== ========
See Notes to Condensed Financial Statements. 50
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED) GENERAL ELECTRIC CAPITAL CORPORATION CONDENSED STATEMENT OF FINANCIAL POSITION At December 31 (In millions) 1997 1996 -------- -------- ASSETS Cash and equivalents ................................................................... $ 249 $ 203 Investment securities .................................................................. 3,916 3,641 Financing receivables: Time sales and loans .................................................................. 19,509 21,622 Investment in financing leases ........................................................ 11,817 10,851 -------- -------- 31,326 32,473 Allowance for losses on financing receivables ......................................... (786) (875) -------- -------- Financing receivables - net .......................................................... 30,540 31,598 Investments in and advances to affiliates .............................................. 95,578 82,676 Equipment on operating leases (at cost), less accumulated amortization of $726 and $583 .............................................................................. 3,477 3,000 Other assets ........................................................................... 6,240 5,629 -------- -------- TOTAL ASSETS ......................................................................... $140,000 $126,747 ======== ======== LIABILITIES AND EQUITY Short-term borrowings .................................................................. $ 79,755 $ 66,435 Long-term borrowings ................................................................... 35,189 38,373 Other liabilities ...................................................................... 3,938 3,684 Deferred income taxes .................................................................. 2,745 2,729 -------- -------- Total liabilities .................................................................... 121,627 111,221 -------- -------- Capital stock .......................................................................... 770 770 Additional paid-in capital ............................................................. 4,744 4,024 Retained earnings ...................................................................... 11,861 10,678 Unrealized gains on investment securities .............................................. 1,145 149 Foreign currency translation adjustments ............................................... (147) (95) -------- -------- Total equity ......................................................................... 18,373 15,526 -------- -------- TOTAL LIABILITIES AND EQUITY ......................................................... $140,000 $126,747 ======== ========
See Notes to Condensed Financial Statements. 51
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED) GENERAL ELECTRIC CAPITAL CORPORATION CONDENSED STATEMENT OF CASH FLOWS For the years ended December 31 (In millions) 1997 1996 1995 -------- -------- -------- CASH FROM OPERATING ACTIVITIES ............................................. $ (872) $ 1,243 $ 1,489 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Increase in loans to customers ............................................. (42,575) (40,381) (41,650) Principal collections from customers ....................................... 42,486 44,447 39,664 Investment in assets on financing leases ................................... (4,589) (2,206) (2,976) Principal collections on financing leases .................................. 2,665 2,127 1,587 Net change in credit card receivables ...................................... 1,805 (269) 1,566 Buildings, equipment and equipment on operating leases - additions .............................................................. (900) (1,111) (810) - dispositions ........................................................... 350 335 78 Payments for principal businesses purchased, net of cash acquired .......... (4,736) (4,839) (3,866) Proceeds from principal business dispositions .............................. 209 -- 575 Change in investment in and advances to affiliates ........................ (5,290) (6,436) (11,377) Other - net ................................................................ 1,348 (1,863) 1,984 -------- -------- -------- Cash used for investing activities ....................................... (9,227) (10,196) (15,225) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in borrowings (less than 90-day maturities) ..................... 15,537 13,249 (3,544) Newly issued debt - short-term (91-365 days) ............................................... 4,066 5,061 2,545 - long-term senior ....................................................... 9,700 11,065 25,654 Proceeds - non-recourse, leveraged lease debt .............................. 1,043 219 783 Repayments and other reductions - short-term ............................................................. (18,379) (18,846) (11,710) - long-term senior ....................................................... (787) (583) (638) Principal payments - non-recourse, leveraged lease debt .................... (107) (130) (134) Dividends paid ............................................................. (1,540) (891) (961) Contributions to additional paid-in capital ................................ 182 -- 684 Issuance of preferred stock in excess of par ............................... 430 -- 924 -------- -------- -------- Cash from financing activities ........................................... 10,145 9,144 13,603 -------- -------- -------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING THE YEAR ................ 46 191 (133) CASH AND EQUIVALENTS AT BEGINNING OF YEAR .................................. 203 12 145 -------- -------- -------- CASH AND EQUIVALENTS AT END OF YEAR ........................................ $ 249 $ 203 $ 12 ======== ======== ========
See Notes to Condensed Financial Statements. 52 GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONCLUDED) GENERAL ELECTRIC CAPITAL CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS BORROWINGS Total long-term borrowings at December 31, 1997 and 1996 are shown below.
1997 AVERAGE (Dollars in millions) RATE MATURITIES 1997 1996 -------- --------- -------- -------- Senior notes ................................................... 6.53% 1999-2055 $ 34,492 $ 37,676 Subordinated notes ........................................ 8.04 2006-2012 697 697 -------- -------- $ 35,189 $ 38,373 ======== ======== Includes the effects of associated interest rate and currency swaps. Guaranteed by General Electric Company.
At December 31, 1997, long-term borrowing maturities during the next five years, including the current portion of long-term notes payable, are $12,218 million in 1998, $6,795 million in 1999, $5,064 million in 2000, $4,770 million in 2001, and $2,998 million in 2002. INTEREST RATES ARE MANAGED by General Electric Capital Corporation ("GE Capital") 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. At December 31, 1997 and 1996, interest rate swap maturities ranged from 1998 to 2029, and average interest rates of "synthetic" fixed-rate borrowings were 6.32% and 6.37%, respectively. Interest expense on the Condensed Statement of Current and Retained Earnings is net of interest income on loans and advances to majority owned affiliates of $2,971 million, $2,332 million and $2,310 million for 1997, 1996 and 1995, respectively. INCOME TAXES General Electric Company files a consolidated U.S. federal income tax return which includes GE Capital. Income tax (provision) benefit includes the effect of GE Capital on the consolidated return. 53 EXHIBIT 4(iii) March 25, 1998 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Subject: General Electric Capital Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1997 - File No. 1-6461 Dear Sirs: Neither General Electric Capital Corporation (the "Corporation") nor any of its subsidiaries has outstanding any instrument with respect to its long-term debt that is not registered 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 CFRss. 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 CORPORATION By: /s/ J.A. Parke ------------------------- J.A. Parke, Senior Vice President, Finance 54 EXHIBIT 12 (a)
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES YEARS ENDED DECEMBER 31 -------------------------------------------------------- (Dollar amounts in millions) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Net earnings ....................................... $ 2,729 $ 2,632 $ 2,261 $ 1,918 $ 1,478 Provision for income taxes ......................... 997 1,172 1,071 896 664 Minority interest .................................. 40 86 81 109 114 -------- -------- -------- -------- -------- Earnings before income taxes and minority interest . 3,766 3,890 3,413 2,923 2,256 -------- -------- -------- -------- -------- Fixed charges: Interest .......................................... 7,440 7,114 6,520 4,464 3,503 One-third of rentals .............................. 240 177 170 153 138 -------- -------- -------- -------- -------- Total fixed charges ................................ 7,680 7,291 6,690 4,617 3,641 -------- -------- -------- -------- -------- Less interest capitalized, net of amortization ..... 52 41 21 9 4 -------- -------- -------- -------- -------- Earnings before income taxes and minority interest plus fixed charges ....................... $ 11,394 $ 11,140 $ 10,082 $ 7,531 $ 5,893 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges ................. 1.48 1.53 1.51 1.63 1.62 ======== ======== ======== ======== ========
55 EXHIBIT 12 (b)
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS YEARS ENDED DECEMBER 31 -------------------------------------------------------- (Dollar amounts in millions) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Net earnings ....................................... $ 2,729 $ 2,632 $ 2,261 $ 1,918 $ 1,478 Provision for income taxes ......................... 997 1,172 1,071 896 664 Minority interest .................................. 40 86 81 109 114 -------- -------- -------- -------- -------- Earnings before income taxes and minority interest . 3,766 3,890 3,413 2,923 2,256 -------- -------- -------- -------- -------- Fixed charges: Interest .......................................... 7,440 7,114 6,520 4,464 3,503 One-third of rentals .............................. 240 177 170 153 138 -------- -------- -------- -------- -------- Total fixed charges ................................ 7,680 7,291 6,690 4,617 3,641 -------- -------- -------- -------- -------- Less interest capitalized, net of amortization ..... 52 41 21 9 4 -------- -------- -------- -------- -------- Earnings before income taxes and minority interest plus fixed charges ....................... $ 11,394 $ 11,140 $ 10,082 $ 7,531 $ 5,893 ======== ======== ======== ======== ======== Preferred stock dividend requirements .............. $ 78 $ 76 $ 57 $ 30 $ 22 Ratio of earnings before provision for income taxes to net earnings ............................. 1.37 1.45 1.47 1.47 1.45 -------- -------- -------- -------- -------- Preferred stock dividend factor on pre-tax basis ... 107 110 84 44 32 Fixed charges ...................................... 7,680 7,291 6,690 4,617 3,641 -------- -------- -------- -------- -------- Total fixed charges and preferred stock dividend requirements ...................................... $ 7,787 $ 7,401 $ 6,774 $ 4,661 $ 3,673 ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges and preferred stock dividends ........................ 1.46 1.51 1.49 1.62 1.60 ======== ======== ======== ======== ========
56 EXHIBIT 23 (ii) To the Board of Directors General Electric Capital Corporation: We consent to incorporation by reference in the Registration Statements (Nos. 33-43420, 33-51793, 33-60723, 333-07469, 333-13195 and 333-22265) on Form S-3 of General Electric Capital Corporation, and in the Registration Statement (No. 33-39596) on Form S-3 jointly filed by General Electric Capital Corporation and General Electric Company, of our report dated February 13, 1998, relating to the statement of financial position of General Electric Capital Corporation and consolidated affiliates as of December 31, 1997 and 1996 and the related statements of current and retained earnings and cash flows for each of the years in the three-year period ended December 31, 1997, and the related schedule, which report appears in the December 31, 1997 annual report on Form 10-K of General Electric Capital Corporation. /s/ KPMG Peat Marwick LLP Stamford, Connecticut March 26, 1998 57 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 Corporation, a New York corporation (the "Corporation"), hereby constitutes and appoints Gary C. Wendt, 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, 1997, 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 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, 1998. /s/ Gary C. Wendt /s/ James A. Parke - ----------------------- ----------------------- Gary C. Wendt, James A. Parke, Chairman of the Board Director and Senior Vice President, and Chief Executive Officer Finance (Principal Executive Officer) (Principal Financial Officer) /s/ Joan C. Amble ----------------------- Joan C. Amble, Vice President and Controller (Principal Accounting Officer) (Page 1 of 2) 58 /s/ Nigel D.T. Andrews - ----------------------------- ----------------------------- Nigel D.T. Andrews, W. James McNerney, Jr., Director Director /s/ Nancy E. Barton /s/ John H. Myers - ----------------------------- ----------------------------- Nancy E. Barton, John H. Myers, Director Director /s/ James R. Bunt /s/ Robert L. Nardelli - ----------------------------- ----------------------------- James R. Bunt, Robert L. Nardelli, Director Director /s/ David M. Cote /s/ Denis J. Nayden - ----------------------------- ----------------------------- David M. Cote, Denis J. Nayden, Director Director /s/ Dennis D. Dammerman - ----------------------------- ----------------------------- Dennis D. Dammerman, Michael A. Neal, Director Director /s/ John M. Samuels - ----------------------------- ----------------------------- Paolo Fresco, John M. Samuels, Director Director /s/ Benjamin W. Heineman, Jr. /s/ Edward D. Stewart - ----------------------------- ----------------------------- Benjamin W. Heineman, Jr., Edward D. Stewart, Director Director /s/ Jeffrey R. Immelt /s/ John F. Welch, Jr. - ----------------------------- ----------------------------- Jeffrey R. Immelt, John F. Welch, Jr., Director Director A MAJORITY OF THE BOARD OF DIRECTORS (Page 2 of 2) 59 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 CORPORATION March 25, 1998 By: /s/ Gary C. Wendt ------------------------- (Gary C. Wendt) Chairman of the Board and Chief Executive Officer 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/ Gary C. Wendt Chairman of the Board and March 25, 1998 - ------------------ Chief Executive Officer (Gary C. Wendt) (Principal Executive Officer) /s/ James A. Parke Director and March 25, 1998 - ------------------ Senior Vice President, Finance (James A. Parke) (Principal Financial Officer) /s/ Joan C. Amble Vice President and Controller March 25, 1998 - ------------------ (Principal Accounting Officer) (Joan C. Amble) NIGEL D.T. ANDREWS* Director NANCY E. BARTON* Director JAMES R. BUNT* Director DAVID M. COTE* Director DENNIS D. DAMMERMAN* Director BENJAMIN W. HEINEMAN, JR.* Director JEFFREY R. IMMELT* Director JOHN H. MYERS* Director ROBERT L. NARDELLI* Director DENIS J. NAYDEN* Director JOHN M. SAMUELS* Director EDWARD D. STEWART* Director JOHN F. WELCH, JR.* Director A MAJORITY OF THE BOARD OF DIRECTORS *By: /s/ Joan C. Amble March 25, 1998 ------------------ (Joan C. Amble) Attorney-in-fact 60 EX-4.III 2 AGREEMENT TO FURNISH COPIES OF INSTRUMENTS TO SEC EXHIBIT 4(iii) March 25, 1998 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Subject: General Electric Capital Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1997 - File No. 1-6461 Dear Sirs: Neither General Electric Capital Corporation (the "Corporation") nor any of its subsidiaries has outstanding any instrument with respect to its long-term debt that is not registered 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 CFRss. 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 CORPORATION By: /s/ J.A. Parke ------------------------- J.A. Parke, Senior Vice President, Finance EX-12.A 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 (a)
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES YEARS ENDED DECEMBER 31 -------------------------------------------------------- (Dollar amounts in millions) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Net earnings ....................................... $ 2,729 $ 2,632 $ 2,261 $ 1,918 $ 1,478 Provision for income taxes ......................... 997 1,172 1,071 896 664 Minority interest .................................. 40 86 81 109 114 -------- -------- -------- -------- -------- Earnings before income taxes and minority interest . 3,766 3,890 3,413 2,923 2,256 -------- -------- -------- -------- -------- Fixed charges: Interest .......................................... 7,440 7,114 6,520 4,464 3,503 One-third of rentals .............................. 240 177 170 153 138 -------- -------- -------- -------- -------- Total fixed charges ................................ 7,680 7,291 6,690 4,617 3,641 -------- -------- -------- -------- -------- Less interest capitalized, net of amortization ..... 52 41 21 9 4 -------- -------- -------- -------- -------- Earnings before income taxes and minority interest plus fixed charges ....................... $ 11,394 $ 11,140 $ 10,082 $ 7,531 $ 5,893 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges ................. 1.48 1.53 1.51 1.63 1.62 ======== ======== ======== ======== ========
EX-12.B 4 COMPUTATION OF RATIO OF EARNINGS TO CFC AND PSD EXHIBIT 12 (b)
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS YEARS ENDED DECEMBER 31 -------------------------------------------------------- (Dollar amounts in millions) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Net earnings ....................................... $ 2,729 $ 2,632 $ 2,261 $ 1,918 $ 1,478 Provision for income taxes ......................... 997 1,172 1,071 896 664 Minority interest .................................. 40 86 81 109 114 -------- -------- -------- -------- -------- Earnings before income taxes and minority interest . 3,766 3,890 3,413 2,923 2,256 -------- -------- -------- -------- -------- Fixed charges: Interest .......................................... 7,440 7,114 6,520 4,464 3,503 One-third of rentals .............................. 240 177 170 153 138 -------- -------- -------- -------- -------- Total fixed charges ................................ 7,680 7,291 6,690 4,617 3,641 -------- -------- -------- -------- -------- Less interest capitalized, net of amortization ..... 52 41 21 9 4 -------- -------- -------- -------- -------- Earnings before income taxes and minority interest plus fixed charges ....................... $ 11,394 $ 11,140 $ 10,082 $ 7,531 $ 5,893 ======== ======== ======== ======== ======== Preferred stock dividend requirements .............. $ 78 $ 76 $ 57 $ 30 $ 22 Ratio of earnings before provision for income taxes to net earnings ............................. 1.37 1.45 1.47 1.47 1.45 -------- -------- -------- -------- -------- Preferred stock dividend factor on pre-tax basis ... 107 110 84 44 32 Fixed charges ...................................... 7,680 7,291 6,690 4,617 3,641 -------- -------- -------- -------- -------- Total fixed charges and preferred stock dividend requirements ...................................... $ 7,787 $ 7,401 $ 6,774 $ 4,661 $ 3,673 ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges and preferred stock dividends ........................ 1.46 1.51 1.49 1.62 1.60 ======== ======== ======== ======== ========
EX-23.II 5 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23 (ii) To the Board of Directors General Electric Capital Corporation: We consent to incorporation by reference in the Registration Statements (Nos. 33-43420, 33-51793, 33-60723, 333-07469, 333-13195 and 333-22265) on Form S-3 of General Electric Capital Corporation, and in the Registration Statement (No. 33-39596) on Form S-3 jointly filed by General Electric Capital Corporation and General Electric Company, of our report dated February 13, 1998, relating to the statement of financial position of General Electric Capital Corporation and consolidated affiliates as of December 31, 1997 and 1996 and the related statements of current and retained earnings and cash flows for each of the years in the three-year period ended December 31, 1997, and the related schedule, which report appears in the December 31, 1997 annual report on Form 10-K of General Electric Capital Corporation. /s/ KPMG Peat Marwick LLP Stamford, Connecticut March 26, 1998 EX-24 6 POWER OF ATTORNEY 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 Corporation, a New York corporation (the "Corporation"), hereby constitutes and appoints Gary C. Wendt, 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, 1997, 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 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, 1998. /s/ Gary C. Wendt /s/ James A. Parke - ----------------------- ----------------------- Gary C. Wendt, James A. Parke, Chairman of the Board Director and Senior Vice President, and Chief Executive Officer Finance (Principal Executive Officer) (Principal Financial Officer) /s/ Joan C. Amble ----------------------- Joan C. Amble, Vice President and Controller (Principal Accounting Officer) (Page 1 of 2) /s/ Nigel D.T. Andrews - ----------------------------- ----------------------------- Nigel D.T. Andrews, W. James McNerney, Jr., Director Director /s/ Nancy E. Barton /s/ John H. Myers - ----------------------------- ----------------------------- Nancy E. Barton, John H. Myers, Director Director /s/ James R. Bunt /s/ Robert L. Nardelli - ----------------------------- ----------------------------- James R. Bunt, Robert L. Nardelli, Director Director /s/ David M. Cote /s/ Denis J. Nayden - ----------------------------- ----------------------------- David M. Cote, Denis J. Nayden, Director Director /s/ Dennis D. Dammerman - ----------------------------- ----------------------------- Dennis D. Dammerman, Michael A. Neal, Director Director /s/ John M. Samuels - ----------------------------- ----------------------------- Paolo Fresco, John M. Samuels, Director Director /s/ Benjamin W. Heineman, Jr. /s/ Edward D. Stewart - ----------------------------- ----------------------------- Benjamin W. Heineman, Jr., Edward D. Stewart, Director Director /s/ Jeffrey R. Immelt /s/ John F. Welch, Jr. - ----------------------------- ----------------------------- Jeffrey R. Immelt, John F. Welch, Jr., Director Director A MAJORITY OF THE BOARD OF DIRECTORS (Page 2 of 2) EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000040554 GENERAL ELECTRIC CAPITAL CORPORATION 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 4,648 53,103 106,601 2,802 786 0 28,571 7,547 228,777 0 45,134 0 2 768 17,603 228,777 4,622 33,404 4,147 0 9,472 1,421 7,330 3,726 997 2,729 0 0 0 2,729 0.00 0.00
EX-99.B 8 FINANCIAL STATEMENTS OF GENERAL ELECTRIC COMPANY F-1 ANNUAL REPORT PAGE 25 FINANCIAL SECTION CONTENTS 46 INDEPENDENT AUDITORS' REPORT AUDITED FINANCIAL STATEMENTS 26 Earnings 28 Financial Position 30 Cash Flows 47 Notes to Consolidated Financial Statements MANAGEMENT'S DISCUSSION 32 Operations 32 Consolidated Operations 33 GE Operations 34 Industry Segments 36 GECS Operations 39 International Operations 40 Financial Resources and Liquidity 44 Selected Financial Data 46 Financial Responsibility [CHART HERE] CONSOLIDATED REVENUES - ----------------------------------------------------------------------------- (IN BILLIONS) 1993 1994 1995 1996 1997 - ----------------------------------------------------------------------------- $55.701 $60.109 $70.028 $79.179 $90.840 - ----------------------------------------------------------------------------- [CHART HERE] EARNINGS PER SHARE FROM CONTINUING OPERATIONS BEFORE ACCOUNTING CHANGE - ----------------------------------------------------------------------------- (IN DOLLARS) 1993 1994 1995 1996 1997 - ----------------------------------------------------------------------------- BASIC $1.220 $1.730 $1.950 $2.200 $2.500 DILUTED 1.210 1.710 1.930 2.160 2.460 - ----------------------------------------------------------------------------- [CHART HERE] DIVIDENDS PER SHARE - ----------------------------------------------------------------------------- (IN DOLLARS) 1993 1994 1995 1996 1997 - ----------------------------------------------------------------------------- $0.6525 $0.745 $0.845 $0.950 $1.080 - ----------------------------------------------------------------------------- F-2 ANNUAL REPORT PAGE 26 STATEMENT OF EARNINGS
General Electric Company and consolidated affiliates --------------------------------- For the years ended December 31 (In millions) 1997 1996 1995 - --------------------------------------------------------------------------------------------------- REVENUES Sales of goods $ 40,675 $ 36,106 $ 33,624 Sales of services 12,729 11,791 9,733 Other income (note 2) 2,300 638 752 Earnings of GECS -- -- -- GECS revenues from services (note 3) 35,136 30,644 25,919 --------------------------------- Total revenues 90,840 79,179 70,028 --------------------------------- COSTS AND EXPENSES (note 4) Cost of goods sold 30,889 26,298 24,703 Cost of services sold 9,199 8,293 6,682 Interest and other financial charges 8,384 7,904 7,286 Insurance losses and policyholder and annuity benefits 8,278 6,678 5,285 Provision for losses on financing receivables (note 7) 1,421 1,033 1,117 Other costs and expenses 21,250 17,898 15,014 Minority interest in net earnings of consolidated affiliates 240 269 204 --------------------------------- Total costs and expenses 79,661 68,373 60,291 --------------------------------- EARNINGS BEFORE INCOME TAXES 11,179 10,806 9,737 Provision for income taxes (note 8) (2,976) (3,526) (3,164) --------------------------------- NET EARNINGS $ 8,203 $ 7,280 $ 6,573 =================================================================================================== PER-SHARE AMOUNTS (in dollars) Basic earnings per share (note 9) $ 2.50 $ 2.20 $ 1.95 Diluted earnings per share (note 9) $ 2.46 $ 2.16 $ 1.93 =================================================================================================== DIVIDENDS DECLARED PER SHARE (in dollars) $ 1.08 $ 0.95 $ 0.845 =================================================================================================== The notes to consolidated financial statements on pages 47-66 are an integral part of this statement. Per-share amounts have been adjusted for the 2-for-1 stock split effective on April 28, 1997.
F-3 ANNUAL REPORT PAGE 27 STATEMENT OF EARNINGS (Continued)
GE GECS ------------------------------ ------------------------------- For the years ended December 31 (In millions) 1997 1996 1995 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- REVENUES Sales of goods $ 36,059 $ 34,196 $ 33,177 $ 4,622 $ 1,926 $ 467 Sales of services 12,893 11,923 9,836 -- -- -- Other income (note 2) 2,307 629 753 -- -- -- Earnings of GECS 3,256 2,817 2,415 -- -- -- GECS revenues from services (note 3) -- -- -- 35,309 30,787 26,025 ------------------------------ ------------------------------- Total revenues 54,515 49,565 46,181 39,931 32,713 26,492 ------------------------------ ------------------------------- COSTS AND EXPENSES (note 4) -- Cost of goods sold 26,747 24,594 24,308 4,147 1,720 415 Cost of services sold 9,363 8,425 6,785 -- -- -- Interest and other financial charges 797 595 649 7,649 7,326 6,661 Insurance losses and policyholder and annuity benefits -- -- -- 8,278 6,678 5,285 Provision for losses on financing receivables (note 7) -- -- -- 1,421 1,033 1,117 Other costs and expenses 7,476 6,274 5,743 13,893 11,741 9,354 Minority interest in net earnings of consolidated affiliates 119 102 64 121 167 140 ------------------------------ ------------------------------- Total costs and expenses 44,502 39,990 37,549 35,509 28,665 22,972 ------------------------------ ------------------------------- EARNINGS BEFORE INCOME TAXES -- 10,013 9,575 8,632 4,422 4,048 3,520 Provision for income taxes (note 8) (1,810) (2,295) (2,059) (1,166) (1,231) (1,105) ------------------------------ ------------------------------- NET EARNINGS $ 8,203 $ 7,280 $ 6,573 $ 3,256 $ 2,817 $ 2,415 ================================================================================================================================== 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.
F-4 ANNUAL REPORT PAGE 28 STATEMENT OF FINANCIAL POSITION
General Electric Company and consolidated affiliates ---------------------------- At December 31 (In millions) 1997 1996 - --------------------------------------------------------------------------------------------- ASSETS Cash and equivalents $ 5,861 $ 4,191 Investment securities (note 10) 70,621 59,889 Current receivables (note 11) 8,924 8,704 Inventories (note 12) 5,895 4,849 Financing receivables (investments in time sales, loans and financing leases) -- net (notes 7 and 13) 103,799 99,714 Other GECS receivables (note 14) 17,655 15,418 Property, plant and equipment (including equipment leased to others) -- net (note 15) 32,316 28,795 Investment in GECS -- -- Intangible assets (note 16) 19,121 16,007 All other assets (note 17) 39,820 34,835 ----------------------- TOTAL ASSETS $ 304,012 $ 272,402 ============================================================================================= LIABILITIES AND EQUITY Short-term borrowings (note 19) $ 98,075 $ 80,200 Accounts payable, principally trade accounts 10,407 10,205 Progress collections and price adjustments accrued 2,316 2,161 Dividends payable 979 855 All other GE current costs and expenses accrued (note 18) 8,891 7,086 Long-term borrowings (note 19) 46,603 49,246 Insurance liabilities, reserves and annuity benefits (note 20) 67,270 61,327 All other liabilities (note 21) 22,700 18,917 Deferred income taxes (note 22) 8,651 8,273 ----------------------- Total liabilities 265,892 238,270 ----------------------- Minority interest in equity of consolidated affiliates (note 23) 3,682 3,007 ----------------------- Common stock (3,714,026,000 shares issued) 594 594 Unrealized gains on investment securities -- net 2,138 671 Other capital 3,636 2,498 Retained earnings 43,338 38,670 Less common stock held in treasury (15,268) (11,308) ----------------------- Total share owners' equity (notes 25 and 26) 34,438 31,125 ----------------------- TOTAL LIABILITIES AND EQUITY $ 304,012 $ 272,402 ============================================================================================= The notes to consolidated financial statements on pages 47-66 are an integral part of this statement. Share data have been adjusted for the 2-for-1 stock split effective on April 28, 1997.
F-5 ANNUAL REPORT PAGE 29 STATEMENT OF FINANCIAL POSITION (Continued)
GE GECS ---------------------- ---------------------- At December 31 (In millions) 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and equivalents $ 1,157 $ 957 $ 4,904 $ 3,234 Investment securities (note 10) 265 17 70,356 59,872 Current receivables (note 11) 9,054 8,826 -- -- Inventories (note 12) 5,109 4,473 786 376 Financing receivables (investments in time sales, loans and financing leases) -- net (notes 7 and 13) -- -- 103,799 99,714 Other GECS receivables (note 14) -- -- 18,332 15,962 Property, plant and equipment (including equipment leased to others) -- net (note 15) 11,118 10,832 21,198 17,963 Investment in GECS 17,239 14,276 -- -- Intangible assets (note 16) 8,755 7,367 10,366 8,640 All other assets (note 17) 14,729 13,177 25,667 21,658 ---------------------- ---------------------- TOTAL ASSETS $ 67,426 $ 59,925 $255,408 $227,419 ---------------------- ---------------------- LIABILITIES AND EQUITY Short-term borrowings (note 19) $ 3,629 $ 2,339 $ 95,274 $ 77,945 Accounts payable, principally trade accounts 4,779 4,195 6,490 6,787 Progress collections and price adjustments accrued 2,316 2,161 -- -- Dividends payable 979 855 -- -- All other GE current costs and expenses accrued (note 18) 8,763 6,870 -- -- Long-term borrowings (note 19) 729 1,710 45,989 47,676 Insurance liabilities, reserves and annuity benefits (note 20) -- -- 67,270 61,327 All other liabilities (note 21) 11,539 9,660 11,067 9,138 Deferred income taxes (note 22) (315) 533 8,966 7,740 ---------------------- ---------------------- Total liabilities 32,419 28,323 235,056 210,613 ---------------------- ---------------------- Minority interest in equity of consolidated affiliates (note 23) 569 477 3,113 2,530 ---------------------- ---------------------- Common stock (3,714,026,000 shares issued) 594 594 1 1 Unrealized gains on investment securities -- net 2,138 671 2,135 668 Other capital 3,636 2,498 2,152 2,253 Retained earnings 43,338 38,670 12,951 11,354 Less common stock held in treasury (15,268) (11,308) -- -- ---------------------- ---------------------- Total share owners' equity (notes 25 and 26) 34,438 31,125 17,239 14,276 ---------------------- ---------------------- TOTAL LIABILITIES AND EQUITY $ 67,426 $ 59,925 $255,408 $227,419 =========================================================================================================================== 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.
F-6 ANNUAL REPORT PAGE 30 STATEMENT OF CASH FLOWS
General Electric Company and consolidated affiliates ----------------------------------------- For the years ended December 31 (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 8,203 $ 7,280 $ 6,573 Adjustments to reconcile net earnings to cash provided from operating activities Depreciation and amortization 4,082 3,785 3,594 Earnings retained by GECS -- -- -- Deferred income taxes 284 1,145 1,047 Decrease (increase) in GE current receivables 250 118 (632) Decrease (increase) in inventories (386) (134) 40 Increase (decrease) in accounts payable 200 641 244 Increase in insurance liabilities, reserves and annuity benefits 1,669 1,491 2,490 Provision for losses on financing receivables 1,421 1,033 1,117 All other operating activities (1,483) 2,492 473 ------------------------------------------ CASH FROM OPERATING ACTIVITIES 14,240 17,851 14,946 ------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (8,388) (7,760) (6,447) Dispositions of property, plant and equipment 2,251 1,363 1,542 Net increase in GECS financing receivables (1,898) (2,278) (11,309) Payments for principal businesses purchased (5,245) (5,516) (5,641) All other investing activities (4,995) (6,021) (3,362) ------------------------------------------ CASH USED FOR INVESTING ACTIVITIES (18,275) (20,212) (25,217) ------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net change in borrowings (maturities of 90 days or less) 13,684 11,827 (3,487) Newly issued debt (maturities longer than 90 days) 21,249 23,153 37,604 Repayments and other reductions (maturities longer than 90 days) (23,787) (25,906) (18,580) Net purchase of GE shares for treasury (2,815) (2,323) (2,523) Dividends paid to share owners (3,411) (3,050) (2,770) All other financing activities 785 28 259 ------------------------------------------ CASH FROM (USED FOR) FINANCING ACTIVITIES 5,705 3,729 10,503 ------------------------------------------ INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR 1,670 1,368 232 Cash and equivalents at beginning of year 4,191 2,823 2,591 ------------------------------------------ Cash and equivalents at end of year $ 5,861 $ 4,191 $ 2,823 ==================================================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Cash paid during the year for interest $ (8,264) $ (7,874) $ (6,645) Cash recovered (paid) during the year for income taxes (1,937) (1,392) (1,483) ==================================================================================================================================== The notes to consolidated financial statements on pages 47-66 are an integral part of this statement.
F-7 ANNUAL REPORT PAGE 31 STATEMENT OF CASH FLOWS (Continued)
GE GECS -------------------------------- --------------------------------- For the years ended December 31 (In millions) 1997 1996 1995 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 8,203 $ 7,280 $ 6,573 $ 3,256 $ 2,817 $ 2,415 Adjustments to reconcile net earnings to cash provided from operating activities Depreciation and amortization 1,622 1,635 1,581 2,460 2,150 2,013 Earnings retained by GECS (1,597) (1,836) (1,324) -- -- -- Deferred income taxes (514) 68 369 798 1,077 678 Decrease (increase) in GE current receivables 215 152 (739) -- -- -- Decrease (increase) in inventories (145) (76) 55 (244) (58) (15) Increase (decrease) in accounts payable 237 197 462 (64) 318 418 Increase in insurance liabilities, reserves -- -- -- 1,669 1,491 2,490 and annuity benefits Provision for losses on financing receivables -- -- -- 1,421 1,033 1,117 All other operating activities 1,296 1,647 (912) (3,071) 939 961 -------------------------------- --------------------------------- CASH FROM OPERATING ACTIVITIES 9,317 9,067 6,065 6,225 9,767 10,077 -------------------------------- --------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (2,191) (2,389) (1,831) (6,197) (5,371) (4,616) Dispositions of property, plant and equipment 39 30 38 2,212 1,333 1,504 Net increase in GECS financing receivables -- -- -- (1,898) (2,278) (11,309) Payments for principal businesses purchased (1,425) (1,122) (238) (3,820) (4,394) (5,403) All other investing activities 483 (106) 408 (5,646) (6,090) (3,913) -------------------------------- --------------------------------- CASH USED FOR INVESTING ACTIVITIES (3,094) (3,587) (1,623) (15,349) (16,800) (23,737) -------------------------------- --------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in borrowings (maturities of 90 days or less) 809 974 1,061 13,594 11,026 (4,510) Newly issued debt (maturities longer than 90 days) 424 252 826 20,825 22,901 36,778 Repayments and other reductions (maturities longer than 90 days) (1,030) (1,250) (1,535) (22,757) (24,656) (17,045) Net purchase of GE shares for treasury (2,815) (2,323) (2,523) -- -- -- Dividends paid to share owners (3,411) (3,050) (2,770) (1,653) (981) (1,091) All other financing activities -- -- -- 785 28 259 -------------------------------- --------------------------------- CASH FROM (USED FOR) FINANCING ACTIVITIES (6,023) (5,397) (4,941) 10,794 8,318 14,391 -------------------------------- --------------------------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR 200 83 (499) 1,670 1,285 731 Cash and equivalents at beginning of year 957 874 1,373 3,234 1,949 1,218 -------------------------------- --------------------------------- Cash and equivalents at end of year $ 1,157 $ 957 $ 874 $ 4,904 $ 3,234 $ 1,949 ================================================================================================================================ SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Cash paid during the year for interest $ (467) $ (411) $ (468) $ (7,797) $ (7,463) $ (6,177) Cash recovered (paid) during the year for income taxes (1,596) (1,286) (1,651) (341) (106) 168 ================================================================================================================================ 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.
F-8 ANNUAL REPORT PAGE 32 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 four parts: Consolidated Operations; GE Operations, including Industry Segments; GECS Operations; and International Operations. CONSOLIDATED OPERATIONS GE achieved record revenues, earnings and cash generation in 1997. This year's performance again demonstrated the ability of GE's diverse mix of leading global businesses to deliver top-line growth and increased margins. Revenues, including acquisitions, rose to a record $90.8 billion in 1997, up 15% from 1996. This increase was primarily attributable to increased global activities, particularly at GECS, stronger aircraft engine shipments, and higher sales of spare parts and services by GE's equipment businesses. Revenues increased at ten of GE's twelve businesses, led by double-digit growth at GE Capital Services, Aircraft Engines and Transportation Systems. Revenues in 1996 were $79.2 billion, a 13% increase attributable primarily to increased international activities. In 1996, nine of GE's twelve businesses increased revenues, with GE Capital Services, NBC and Power Systems reporting double-digit increases. Basic earnings per share increased to $2.50 during 1997, up 14% from the prior year's $2.20. On a diluted basis, earnings per share also increased 14%, to $2.46 from $2.16. Earnings increased 13% to a record $8.203 billion. In 1996, basic earnings per share increased 13% from $1.95 per share in 1995 (12% from $1.93 on a diluted basis). For 1996, earnings of $7.280 billion were up 11% from $6.573 billion in 1995. Growth rates in earnings per share exceeded growth rates in earnings as a result of the ongoing repurchase of shares under the five-year, $17 billion share repurchase plan initiated in December 1994. In 1997, GE realized an after-tax gain of $1,538 million from exchanging preferred stock in Lockheed Martin Corporation (Lockheed Martin) for the stock of a newly formed subsidiary as described in note 2. Also in 1997, GE recorded restructuring and other special charges amounting to $2,322 million, which are included in costs and expenses in the following captions: "Cost of goods sold" -- $1,364 million; "Cost of services sold" -- $250 million; and "Other costs and expenses" -- $708 million. These charges are discussed below and, as relevant, in Industry Segments beginning on page 34. Aggregate restructuring charges of $1,243 million cover 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 is $577 million of special early retirement pension, health and life benefit costs, including a fourth-quarter, 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 are other severance costs as well as certain costs of exiting affected properties, including site demolitions, asset write-offs and expected losses on subleases. Future cash outlays, including capital expenditures, amounting to approximately $555 million will be incurred in order to execute these restructuring programs. 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. The largest such special charge related to contracts on existing orders for an aircraft engine program and is discussed on page 34. NEW ACCOUNTING STANDARDS issued in 1997 are described below. Neither of these standards will have any effect on the financial position or results of operations of GE or GECS. The Financial Accounting Standards Board issued two Statements of Financial Accounting Standards (SFAS) that will affect presentation in GE's 1998 Annual Report to Share Owners. SFAS No. 130, REPORTING COMPREHENSIVE INCOME, will require display of certain information about adjustments to equity -- most notably, adjustments arising from market value changes in marketable securities. SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, will require additional information about industry segments. ================================================================================ [CHART HERE] GE/S&P CUMULATIVE DIVIDEND GROWTH SINCE 1992 - -------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- GE 12.27% 28.08% 41.91% 57.44% 77.66% S&P 500 1.62 6.46 11.39 20.36 25.12 ================================================================================ F-9 ANNUAL REPORT PAGE 33 DIVIDENDS DECLARED IN 1997 AMOUNTED TO $3.535 BILLION. Per-share dividends of $1.08 were up 14% from 1996, following a 12% increase from the preceding year. GE has rewarded its share owners with 22 consecutive years of dividend growth. The chart on the previous page 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 25.0% in 1997, up from 24.0% and 23.5% in 1996 and 1995, respectively. GE OPERATIONS GE total revenues were $54.5 billion in 1997, compared with $49.6 billion in 1996 and $46.2 billion in 1995. o GE sales of goods and services were $49.0 billion in 1997, an increase of 6% from 1996, which in turn was 7% higher than in 1995. The improvement in 1997 was led by Aircraft Engines, Transportation Systems and Power Systems. Volume was about 9% higher in 1997, reflecting growth in most businesses during the year. While overall selling prices were down slightly in 1997, 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 1996 was about 9% higher than in 1995, 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. Such product services sales amounted to $9.7 billion in 1997 and were up 16% from 1996, which was 11% higher than 1995. o GE other income, earned from a wide variety of sources, was $2.3 billion in 1997, $0.6 billion in 1996 and $0.8 billion in 1995. The increase in other income in 1997 was primarily attributable to the Lockheed Martin transaction described in note 2, which also provides details of GE other income. o Earnings of GECS were up 16% in 1997, following a 17% increase the year before. See page 36 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. OPERATING MARGIN is sales of goods and services less the costs of goods and services sold, and selling, general and administrative expenses. GE reported ================================================================================ [CHART HERE] GE OPERATING MARGIN AS A PERCENTAGE OF SALES - -------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- AS REPORTED 9.9% 13.6% 14.4% 14.8% 11.0% RESTRUCTURING AND OTHER SPECIAL CHARGES 2.6 - - - 4.7 ================================================================================ operating margin as 11.0% of sales in 1997, after the effects of restructuring and other special charges. GE ongoing operating margin (before such charges) reached a record 15.7% of sales, up from 14.8% in 1996 and 14.4% in 1995. The improvement in operating margin in 1997 -- with ten businesses, led by Power Systems, Aircraft Engines, Medical Systems and NBC, reporting higher operating margins -- showed 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 recent significant improvement in GE's ongoing operating margin and accelerated over the period. Productivity in 1997 was 4.2%, reflecting sharp improvements associated with variable costs, largely attributable to the Six Sigma quality program, as well as base costs, associated largely with higher volume. Four businesses -- Power Systems, NBC, Plastics and Information Services -- achieved productivity in excess of 5%. Total productivity was 2.9% in 1996, principally on the positive effects of higher volume. In 1996, three businesses -- Power Systems, NBC and Aircraft Engines -- reported productivity in excess of 5%. The total contribution of productivity in the last two years offset not only the negative effects of cost inflation, but also the effects of selling price decreases. GE INTEREST AND OTHER FINANCIAL CHARGES in 1997 amounted to $797 million, compared with $595 million in 1996 and $649 million in 1995, as interest rates trended lower over the period. Lower rates in 1997 were more than offset by higher levels of average borrowings and other interest-bearing obligations. INCOME TAXES on a consolidated basis were 26.6% of pretax earnings in 1997, compared with 32.6% in 1996 and 32.5% in 1995. The 1997 decrease in effective tax rate was primarily attributable to the realized gain on the tax-free F-10 ANNUAL REPORT PAGE 34 exchange of Lockheed Martin preferred stock. That gain accounted for 4.8% of the difference between the expected and actual tax rates shown in note 8. 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 also provided in note 8. GE INDUSTRY SEGMENT REVENUES AND OPERATING PROFIT for the past five years are shown in the table on page 35. For additional information, including a description of the products and services included in each segment, see note 28. AIRCRAFT ENGINES achieved a 24% increase in revenues in 1997, following a 3% increase in 1996, on higher volume in commercial engines and product services. Operating profit decreased 14% in 1997, primarily as a result of $342 million of charges. The largest charge followed Boeing Co.'s fourth-quarter announcement that development of longer-range derivatives of the 777 jetliner would be slowed. It was concluded at that time that development of a higher-thrust derivative of the GE90 engine was not justified, resulting in charges of $275 million to reflect higher estimated manufacturing costs to fill firm customer orders. An additional charge of $67 million was recorded for restructuring, covering costs associated with closing certain redundant manufacturing and warehousing facilities. Excluding these charges, operating profit increased 14%, reflecting the effects of volume increases in commercial engines and product services and improved product services pricing, the combination of which more than offset cost increases. Operating profit increased by 4% in 1996 as a result of improvements in the product services business and productivity, offset somewhat by reduced selling prices and cost inflation. In 1997, $1.5 billion of revenues were from sales to the U.S. government, down $0.3 billion from 1996, which was $0.1 billion higher than in 1995. Aircraft Engines received orders of $8.9 billion in 1997, up $1.8 billion from 1996. The backlog at year-end 1997 was $9.8 billion ($9.0 billion at the end of 1996). Of the total, $7.5 billion related to products, about 50% of which was scheduled for delivery in 1998, and the remainder related to 1998 product services. APPLIANCES revenues were 6% higher than a year ago, reflecting primarily acquisition-related volume. Operating profit decreased 39%, primarily as a result of restructuring and other special charges of $330 million, principally for severance costs related to work force reductions and facility closing costs. Excluding such charges, operating profit increased 5%, reflecting productivity and improved volume, partially offset by lower selling prices. Revenues in 1996 were 7% higher than in 1995, reflecting industry growth and U.S. market share gains across core product lines. Operating profit increased 8% in 1996, primarily as a result of productivity and higher volume, partially offset by lower selling prices. BROADCASTING revenues decreased 2% in 1997 as a strong advertising marketplace was more than offset by the absence of a current-year counterpart to NBC's broadcast of the 1996 Summer Olympic Games. Operating profit increased 5% in 1997, despite restructuring charges of $161 million associated with certain broadcast properties, primarily international properties, and including asset write-offs, expected losses on subleases from excess capacity, and severance costs. Excluding the effects of such charges, operating profit increased 22%, reflecting improved prime-time pricing, strong growth in both owned-and-operated stations and cable programming services, and increased international distribution of programming, the combination of which more than offset the absence of a current-year counterpart to the Olympics broadcast and higher license fees for certain prime-time programs that were renewed. Revenues increased 34% in 1996, reflecting a strong advertising market, excellent ratings, strong growth in the owned-and-operated stations and the Olympics broadcast. Operating profit increased 29% in 1996 as the combination of excellent ratings, sharply higher results in owned-and-operated stations and profitable Olympics coverage more than offset higher license fees for certain prime-time programs that were renewed. INDUSTRIAL PRODUCTS AND SYSTEMS revenues rose 5% in 1997, with improved volume more than offsetting weaker pricing across all businesses in the segment. Operating profit declined 8%, reflecting $352 million of charges, essentially all of which were related to restructuring -- mostly for severance costs related to work force reductions and for facility closing costs. Excluding these charges, operating profit increased 14% 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. Revenues increased 2% in 1996, reflecting volume increases in Lighting, Electrical Distribution and Control, and Industrial Control Systems. Operating profit increased 6% as productivity improvements across the segment more than offset the effects of cost inflation and lower selling prices for certain products. Transportation Systems received orders of $2.4 billion in 1997, an increase of 20% from 1996. The backlog at year-end 1997 was $2.0 billion, an increase of $0.5 billion from 1996. Of the total, $1.8 billion related to products, about 82% of which was scheduled for shipment in 1998, and the remainder related to 1998 product services. F-11 ANNUAL REPORT PAGE 35 SUMMARY OF INDUSTRY SEGMENTS
General Electric Company and consolidated affiliates -------------------------------------------------------- For the years ended December 31 (In millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- REVENUES GE Aircraft Engines $ 7,799 $ 6,302 $ 6,098 $ 5,714 $ 6,580 Appliances 6,745 6,375 5,933 5,965 5,555 Broadcasting 5,153 5,232 3,919 3,361 3,102 Industrial Products and Systems 10,954 10,412 10,194 9,406 8,575 Materials 6,695 6,509 6,647 5,681 5,042 Power Generation 7,495 7,257 6,545 5,933 5,530 Technical Products and Services 4,917 4,692 4,424 4,285 4,174 All Other 3,564 3,108 2,707 2,348 1,803 Corporate items and eliminations 1,193 (322) (286) (195) (242) --------------------------------------------------------- Total GE 54,515 49,565 46,181 42,498 40,119 --------------------------------------------------------- GECS Financing 31,165 24,554 19,446 15,064 12,454 Specialty Insurance 8,844 8,155 7,042 4,794 4,807 All Other (78) 4 4 17 15 --------------------------------------------------------- Total GECS 39,931 32,713 26,492 19,875 17,276 --------------------------------------------------------- Eliminations (3,606) (3,099) (2,645) (2,264) (1,694) --------------------------------------------------------- CONSOLIDATED REVENUES $ 90,840 $ 79,179 $ 70,028 $ 60,109 $ 55,701 ============================================================================================================= OPERATING PROFIT GE Aircraft Engines $ 1,051 $ 1,225 $ 1,176 $ 935 $ 798 Appliances 458 750 697 683 372 Broadcasting 1,002 953 738 500 264 Industrial Products and Systems 1,490 1,617 1,519 1,328 901 Materials 1,476 1,466 1,465 967 834 Power Generation 758 1,068 769 1,238 1,024 Technical Products and Services 828 849 801 787 706 All Other 3,558 3,088 2,683 2,309 1,725 --------------------------------------------------------- Total GE 10,621 11,016 9,848 8,747 6,624 --------------------------------------------------------- GECS Financing 3,736 3,460 3,062 2,671 1,733 Specialty Insurance 1,293 1,238 1,002 580 764 All Other (607) (650) (544) (302) (288) --------------------------------------------------------- Total GECS 4,422 4,048 3,520 2,949 2,209 -------------------------------------------------------- Eliminations (3,209) (2,795) (2,396) (2,072) (1,554) --------------------------------------------------------- CONSOLIDATED OPERATING PROFIT 11,834 12,269 10,972 9,624 7,279 GE interest and other financial charges-- net of eliminations (782) (600) (644) (417) (529) GE items not traceable to segments 127 (863) (591) (546) (614) --------------------------------------------------------- EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND ACCOUNTING CHANGE $ 11,179 $ 10,806 $ 9,737 $ 8,661 $ 6,136 ============================================================================================================= Operating profit for 1997 and 1993 included significant restructuring and other special charges. The 1997 effects for individual segments are discussed on pages 34 and 36. The notes to consolidated financial statements on pages 47-66 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. Operating profit of GE segments excludes "Interest and other financial charges"; operating profit of GECS includes "Interest and other financial charges," which is one of the largest elements of GECS' operating costs. The 1993 accounting change represents adoption of Statement of Financial Accounting Standards (SFAS) No. 112, EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS.
F-12 ANNUAL REPORT PAGE 36 MATERIALS 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 by 1%, including restructuring charges amounting to $63 million for severance costs related to work force reductions and outsourcing. Excluding such charges, operating profit increased 5%, as Six Sigma-based productivity and higher volume more than offset lower selling prices. Materials revenues decreased 2% in 1996 and operating profit was about the same as the previous year, primarily as a result of lower selling prices. The adverse effects of lower selling prices on operating profit were offset in part by reductions in material costs, volume improvements and productivity. POWER GENERATION revenues were 3% higher than in 1996, reflecting higher volume in gas turbines and in product services. Operating profit decreased 29% in 1997, reflecting aggregate charges of $437 million, including $261 million that was principally a combination of gas turbine warranty costs and costs arising from renegotiation and resolution of certain disputes. Additionally, $176 million was recognized for restructuring, covering costs of exiting certain facilities, including severance benefits, site demolitions and associated write-offs. Absent such charges, operating profit increased by 12%, the result of strong Six Sigma-based productivity and higher volume, which more than offset lower selling prices. Revenues increased 11% in 1996, reflecting primarily strong growth at Nuovo Pignone and higher product services volume. Operating profit increased 39% in 1996 as productivity more than offset cost inflation and lower selling prices. Power Generation orders were $6.6 billion for 1997, compared with $8.0 billion in 1996. The backlog of unfilled orders at year-end 1997 was $9.8 billion ($10.9 billion at the end of 1996). Of the total, $8.9 billion related to products, about 41% of which was scheduled for delivery in 1998, and the remainder related to 1998 product services. TECHNICAL PRODUCTS AND SERVICES revenues rose 5% in 1997, following a 6% increase in 1996. Medical Systems reported higher revenues in both years, reflecting higher equipment volume and continued growth in product services, partially offset by lower selling prices. Information Services revenues were up slightly in 1997 and were essentially flat in 1996, as declines in selling prices offset increased volume in electronic commerce. Operating profit for the segment decreased 2% in 1997, reflecting aggregate charges of $157 million principally for severance costs related to work force reductions and facility closing costs. Excluding such costs, segment operating profit increased 16% as productivity and higher volume more than offset the effects of lower selling ================================================================================ [CHART HERE] GECS REVENUES - -------------------------------------------------------------------------------- (IN BILLIONS) 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- $17.276 $19.875 $26.492 $32.713 $39.931 ================================================================================ prices. Operating profit for the segment increased 6% in 1996 as productivity, growth in services at Medical Systems and volume improvements more than offset selling price decreases. Orders received by Medical Systems in 1997 were $4.3 billion, up $0.4 billion from 1996. The backlog of unfilled orders at year-end 1997 was $2.4 billion, about the same as at the end of 1996. Of the total, $1.3 billion related to products, about 91% of which was scheduled for delivery in 1998, and the remainder related to 1998 product services. ALL OTHER consists primarily of GECS earnings, which are discussed in the next section. Also included are revenues derived from licensing the use of GE technology to others. GECS OPERATIONS GECS conducts its operations in two segments -- Financing and Specialty Insurance. The Financing segment includes the financing and consumer savings and insurance operations of General Electric Capital Corporation (GE Capital). The consumer savings and insurance operations, conducted primarily by GE Financial Assurance Holdings, Inc., provide consumers financial security solutions through a wide variety of insurance, investment and retirement products, primarily in the United States. The Specialty Insurance segment includes operations of GE Global Insurance Holding Corporation (GE Global Insurance), the principal subsidiary of which is Employers Reinsurance Corporation, and the other insurance businesses described on page 63. o GECS total revenues from operations were $39.9 billion in 1997, up 22% from 1996, which was up 23% from 1995. The 1997 increase reflected primarily the contribution of businesses acquired in 1997 and 1996. o GECS earnings were $3.3 billion in 1997, up 16% from 1996, which was up 17% from 1995. The improved operating results for 1997 and 1996 were attributable to continued asset growth, with business and portfolio F-13 ANNUAL REPORT PAGE 37 acquisitions throughout the period and higher origination volume in 1997. Earnings in 1997 were affected by higher losses associated with the investment in Montgomery Ward Holding Corp., discussed on page 38, as well as by increased automobile residual losses. These matters were more than offset by 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. Increased investment income was the result of ongoing growth in the investment portfolios and a higher level of gains on investment securities. o GECS cost of goods sold was associated with the computer equipment distribution businesses. This cost amounted to $4.1 billion in 1997, compared with $1.7 billion in 1996 and $0.4 billion in 1995, the result of acquisition-related growth in 1997 and 1996. o GECS interest on borrowings in 1997 was $7.6 billion, 4% higher than in 1996, which was 10% higher than in 1995. The increases in 1997 and 1996 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 on GECS borrowings was 6.07% in 1997, compared with 6.24% in 1996 and 6.76% in 1995. See page 42 for an analysis of interest rate sensitivities. o GECS insurance losses and policyholder and annuity benefits increased to $8.3 billion during 1997, compared with $6.7 billion in 1996 and $5.3 billion in 1995, primarily because of business acquisitions and growth in originations throughout the period. o GECS other costs and expenses increased to $13.9 billion in 1997 from $11.7 billion in 1996 and $9.4 billion in 1995 on increased costs associated with acquired businesses and portfolios as well as higher investment levels. GECS INDUSTRY SEGMENT revenues and operating profit for the past five years are shown in the table on page 35. Revenues from services are detailed in note 3. FINANCING SEGMENT revenues from operations increased 27% to $31.2 billion in 1997, following a 26% increase in 1996. Significant portions of the revenue increase arose from the computer equipment distribution businesses acquired during 1997 and 1996 and from the consumer savings and insurance businesses acquired during 1996 and 1995. Asset growth contributed to increased revenues in both years, but was partially offset by lower yields. Financing segment revenues were negatively affected by higher losses associated with the investment in Montgomery Ward Holding Corp. That effect was more than offset by gains on asset transactions, including securitizations. ================================================================================ [CHART HERE] GECS EARNINGS FROM CONTINUING OPERATIONS - -------------------------------------------------------------------------------- (IN BILLIONS) 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- $1.567 $2.085 $2.415 $2.817 $3.256 ================================================================================ Operating profit was $3.7 billion in 1997, 8% higher than in 1996. As previously noted, 1997 operating profit included higher losses associated with the investment in Montgomery Ward Holding Corp. as well as increased automobile residual losses. These items were more than offset by acquisition and core growth as well as gains on asset transactions, including securitizations. Operating profit increased 13% in 1996, primarily because of asset growth. Financing spreads (the excess of yields over interest rates on borrowings) were essentially flat in 1997 and 1996 as the reduction in yields was offset by decreases in borrowing rates. Cost of goods sold associated with the computer equipment distribution businesses increased significantly in both years, primarily because of acquisitions. The provision for losses on financing receivables increased in 1997 on higher average receivable balances as well as increased delinquencies, consistent with industry experience, in the consumer portfolio. Higher portfolio growth from originations resulted in higher provisions in 1995 than in 1996. Insurance losses and policyholder and annuity benefits associated with the consumer savings and insurance operations increased during 1997 and 1996 as a result of acquisitions. Other costs and expenses increased in both years, the result of costs associated with acquired businesses and portfolios and higher levels of investment. Financing receivables are the Financing segment's largest asset and its primary source of revenues. The portfolio of financing receivables, before allowance for losses, increased to $106.6 billion at the end of 1997 from $102.4 billion at the end of 1996, principally reflecting acquisition growth and origination volume that were partially offset by securitizations of receivables. The related allowance for losses at the end of 1997 amounted to $2.8 billion (2.63% of receivables -- the same as 1996 and 1995) and, in management's judgment, is appropriate given the risk profile of the portfolio. F-14 ANNUAL REPORT PAGE 38 A discussion of the quality of certain elements of the Financing segment 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 1997 and 1996 are shown in the following table: ---------------------------- (In millions) 1997 1996 - -------------------------------------------------------------------------------- Credit card and personal loans $25,773 $27,127 Auto loans 8,973 5,915 Auto financing leases 13,346 13,113 ----------------------- Total consumer financing receivables $48,092 $46,155 ======================= Nonearning $ 1,049 $ 926 -- As percentage of total 2.2% 2.0% Receivable write-offs for the year $ 1,298 $ 870 ================================================================================ The decrease in credit card and personal loan portfolios primarily resulted from securitization of receivables, partially offset by portfolio acquisitions and origination volume. Both the auto loan and financing lease portfolios increased as a result of acquisition growth; however, the increase in auto financing leases was partially offset by a shift in U.S. lease volume from financing leases to operating leases. Nonearning receivables did not change significantly during 1997. A substantial amount of the nonearning consumer receivables were U.S. 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 delinquencies and personal bankruptcies on the credit card loan portfolios in the United States, consistent with overall industry experience, as well as higher average receivable balances worldwide. Other financing receivables, totaling $58.5 billion at December 31, 1997, consisted of a diverse commercial, industrial and equipment loan and lease portfolio. This portfolio increased $2.3 billion during 1997, primarily because of increased origination volume, partially offset by sales of receivables. Related nonearning and reduced-earning receivables were $353 million at year-end 1997, compared with $471 million at year-end 1996. As discussed in note 13, Montgomery Ward Holding Corp. (MWHC) filed a bankruptcy petition for reorganization in 1997. GECS' share of the losses of MWHC and affiliates in 1997 was $380 million (after tax). The GECS investment in MWHC and affiliates at December 31, 1997, was $795 million ($617 million classified as financing receivables). Income recognition had been suspended on these pre-bankruptcy investments. Subsequent to the petition, GECS committed to provide MWHC up to $1.0 billion in debtor-in-possession financing, subject to certain conditions, in order to fund working capital requirements and general corporate expenses. A majority of this facility has been syndicated; total borrowings under this facility at December 31, 1997, were insignificant. GECS loans and leases to commercial airlines amounted to $9.0 billion at the end of 1997, up from $8.2 billion at the end of 1996. GECS commercial aircraft positions also included financial guarantees, funding commitments and aircraft orders as discussed in note 17. SPECIALTY INSURANCE SEGMENT revenues from operations were $8.8 billion in 1997, an increase of 8% from 1996, which increased 16% over 1995. The increase in 1997 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 gains on investment securities. 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. The increase in 1996 resulted primarily from inclusion of a full year's results for the European property and casualty reinsurance businesses acquired in 1995. GE Global Insurance net premiums earned on U.S. business declined in 1996 on lower industry-wide pricing and the exit of certain unprofitable reinsurance contracts. Revenues from the other insurance businesses of GECS increased during 1997 and 1996 as a result of both origination volume and acquisitions. Specialty Insurance operating profit increased 4% to $1.3 billion in 1997 from $1.2 billion in 1996. The increase in 1997 primarily reflected higher investment income, the result of continued growth in investment portfolios and higher gains on investment securities, as well as improved earnings in the mortgage insurance business, the result of improved market conditions. Higher insurance losses, reserves and other costs and expenses partially offset these increases. Operating profit increased 24% in 1996 as the year included a full year's results of the European reinsurance acquisitions: higher premium and investment income, partially offset by increases in insurance losses and other costs and expenses. F-15 ANNUAL REPORT PAGE 39 INTERNATIONAL OPERATIONS Estimated results of international operations include all exports from the United States, plus the results of GE and GECS operations located outside the United States. Certain GECS operations that cannot meaningfully be associated with specific geographic areas were classified as "other international" for this purpose. International revenues in 1997 were $38.5 billion (42% of consolidated revenues), compared with $33.3 billion in 1996 and $28.2 billion in 1995. In 1997, about 48% of GE's revenues were international, which was about 2% higher than in 1996 and 1995. The chart below left depicts the growth in international revenues in relation to total revenues over the past five years. International operating profit was $4.8 billion (41% of consolidated operating profit) in 1997, compared with $4.0 billion in 1996 and $3.2 billion in 1995. GE international revenues were $24.8 billion in 1997, an increase of 14% from 1996, reflecting sales growth in operations based outside the United States and in U.S. exports. European revenues were 10% higher in 1997, reflecting increases in both local operations and in exports to the region, with particularly strong growth at Aircraft Engines. Pacific Basin revenues increased by 2% in 1997, reflecting primarily increased revenues from local operations, led by Plastics and Lighting. Revenues from the Americas increased 37%, primarily as a result of strong growth in local operations, particularly at Appliances and Aircraft Engines, and increased exports. GECS international revenues were $13.7 billion in 1997, an increase of 18% from $11.6 billion in 1996, while international assets grew 21% from $65.3 billion at December 31, 1996, to $79.2 billion at the end of 1997. This revenue and asset growth occurred primarily in Europe and, to a lesser extent, in Canada and the Pacific Basin. These increases were attributable to continued expansion of GECS as a global provider of a wide range of services. Financial results 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. International activity is diverse, as shown in the international revenues chart at the bottom right of this page. Principal currencies include major European currencies as well as the Japanese yen and the Canadian dollar. GE's total exports from the United States follow. - -------------------------------------------------------------------------------- GE'S TOTAL EXPORTS FROM THE UNITED STATES ---------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Pacific Basin $ 3,176 $ 3,180 $ 3,397 Europe 2,423 2,060 1,701 Americas 1,553 1,257 1,023 Other 1,641 1,025 964 ---------------------------------- Exports to external customers 8,793 7,522 7,085 Exports to affiliates 2,471 2,292 2,123 ---------------------------------- Total exports $11,264 $ 9,814 $ 9,208 ================================================================================ GE made a positive 1997 contribution of approximately $6.3 billion to the U.S. balance of trade. Total exports in 1997 were $11.3 billion, direct imports from external suppliers were $3.0 billion and imports from GE affiliates were $2.0 billion. ================================================================================ [CHART HERE] CONSOLIDATED REVENUES - -------------------------------------------------------------------------------- (IN BILLIONS) 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- UNITED STATES $36.447 $39.149 $41.780 45.886 $52.513 INTERNATIONAL 19.254 20.960 28.248 33.293 38.527 ================================================================================ [CHART HERE] CONSOLIDATED INTERNATIONAL REVENUES - -------------------------------------------------------------------------------- (IN BILLIONS) 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- EUROPE $9.037 $8.994 $13.993 $18.024 $20.589 PACIFIC BASIN 4.474 5.922 7.122 7.523 7.918 AMERICAS 3.073 3.437 4.105 4.700 6.185 OTHER 2.670 2.607 3.028 3.046 3.835 ================================================================================ F-16 ANNUAL REPORT PAGE 40 MANAGEMENT'S DISCUSSION OF FINANCIAL RESOURCES AND LIQUIDITY OVERVIEW This discussion of financial resources and liquidity focuses on the Statement of Financial Position (page 28) and the Statement of Cash Flows (page 30). Throughout the discussion, it is important to understand the differences between the businesses of GE and GECS. Although manufacturing and services activities involve a variety of GE businesses, their underlying characteristics are development, preparation for market and delivery of tangible goods and services. Risks and rewards are directly related to the ability to manage and finance those activities. The principal businesses of GECS provide financing, asset management, consumer savings and insurance, and other insurance and services to third parties. The underlying characteristics of most of these businesses involve the management of financial risk. Risks and rewards stem from the abilities of its businesses to continue to design and provide a wide range of services in a competitive marketplace and to receive adequate compensation for such services. GECS is not a "captive finance company" or a vehicle for "off-balance-sheet financing" for GE; a small portion of GECS business is directly related to other GE operations. Despite the different business profiles of GE and GECS, the global commercial airline industry is one significant example of an important source of business for both. GE assumes financing positions primarily in support of engine sales, whereas GECS is a significant source of lease and loan financing for the industry (see details in note 17). Management believes that these financing positions are reasonably protected by collateral values and by its ability to control assets, either by ownership or security interests. 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. YEAR 2000 compliance programs and information systems modifications have been initiated in an attempt to ensure that these systems and key processes will remain functional. This objective is expected to be achieved either by modifying present systems using existing internal and external programming resources or by installing new systems, including enterprise systems, and by monitoring supplier and other third-party interfaces. While there can be no assurance that all such modifications will be successful, management does not expect that either costs of modifications or consequences of any unsuccessful modifications should have a material adverse effect on the financial position, results of operations or liquidity of GE or GECS. ================================================================================ [CHART HERE] GE ANNUAL INTERNAL WORKING CAPITAL TURNOVER - -------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- 5.070 5.750 5.560 6.300 7.420 ================================================================================ STATEMENT OF FINANCIAL POSITION 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 $265 million at year-end 1997, up $248 million over 1996. The increase in 1997 primarily reflected an equity security acquired as part of the Lockheed Martin transaction discussed previously. The increase of $10.5 billion at GECS during 1997 was principally related to acquisitions and increases in fair value as well as investment of premiums received. A breakdown of the investment securities portfolio is provided in note 10. GE CURRENT RECEIVABLES were $9.1 billion at the end of 1997, an increase of $0.2 billion from year-end 1996, and included $6.1 billion due from customers at the end of 1997, which was $0.5 billion lower than the amount due at the end of 1996. As a measure of asset management, customer receivables turnover was 7.7 in 1997, compared with 6.8 in 1996. 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. GE INVENTORIEs were $5.1 billion at December 31, 1997, up $0.6 billion from the end of 1996. Inventory turnover improved to 7.8 in 1997, compared with 7.6 in 1996, reflecting continuing improvements in inventory management. Last-in, first-out (LIFO) revaluations decreased $119 million in 1997, compared with decreases of $128 million in 1996 and $87 million in 1995. Included in these changes were decreases of $59 million, $58 million and $88 million in 1997, 1996 and 1995, respectively, that resulted from lower LIFO inventory levels. There were net cost decreases in 1997 and 1996, and no cost change in 1995. F-17 ANNUAL REPORT PAGE 41 Customer receivables and inventories (at FIFO) are two key components of GE's internal working capital measurement. Internal working capital turnover increased as shown in the chart on the facing page: from 5.6 turns in 1995 to 6.3 and 7.4 turns in 1996 and 1997, respectively. Internal working capital also includes trade accounts payable and progress collections. GECS INVENTORIES were $786 million and $376 million at December 31, 1997 and 1996, respectively. The increase in 1997 primarily reflected acquisitions in the computer equipment distribution businesses. GECS FINANCING RECEIVABLES were $103.8 billion at year-end 1997, net of allowance for doubtful accounts, up $4.1 billion over 1996. These receivables are discussed on pages 37 and 38 and in notes 7 and 13. GECS OTHER RECEIVABLES were $18.3 billion and $16.0 billion at December 31, 1997 and 1996, respectively. Of the 1997 increase, $1.2 billion was attributable to acquisitions and the remainder resulted from core growth. PROPERTY, PLANT AND EQUIPMENT (including equipment leased to others) was $32.3 billion at December 31, 1997, up $3.5 billion from 1996. 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 1997 totaled $2.2 billion, down $0.2 billion from 1996. Total expenditures for the past five years were $9.7 billion, of which 38% was investment for growth through new capacity and product development; 33% was investment in productivity through new equipment and process improvements; and 29% 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 $6.8 billion during 1997 ($5.3 billion during 1996), principally reflecting a shift in auto lease volume from financing leases to operating leases and increased acquisitions of new aircraft. INTANGIBLE ASSETS were $19.1 billion at year-end 1997, up from $16.0 billion at year-end 1996. GE intangibles increased to $8.8 billion from $7.4 billion at the end of 1996, principally as a result of goodwill related to the purchase of Greenwich Air Services/UNC and a number of smaller acquisitions. The $1.7 billion increase in GECS intangibles also related primarily to goodwill from acquisitions. ALL OTHER ASSETS totaled $39.8 billion at year-end 1997, an increase of $5.0 billion from the end of 1996. GE other assets increased $1.6 billion, principally reflecting consideration received in exchange for GE's investment in Lockheed Martin preferred stock and an increase in the prepaid pension asset. In connection with the exchange transaction, a portion of such consideration was subsequently loaned to Lockheed Martin. The increase in GECS other assets of $4.0 billion related principally to increases in assets acquired for resale, primarily residential mortgages, and increased "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 $67.3 billion, $5.9 billion higher than in 1996. The increase was primarily attributable to acquisitions in 1997 and the increase in separate accounts. For additional information on these liabilities, see note 20. CONSOLIDATED BORROWINGS aggregated $144.7 billion at December 31, 1997, compared with $129.4 billion at the end of 1996. 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. 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, 1997 and 1996. Management believes the likelihood that GE will be required to contribute capital under either the commitments or the guarantees is remote. ================================================================================ [CHART HERE] GE CASH FLOWS FROM OPERATING ACTIVITIES - -------------------------------------------------------------------------------- (IN BILLIONS) 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- $5.201 $6.071 $6.065 $9.067 $9.317 ================================================================================ F-18 ANNUAL REPORT PAGE 42 GE total borrowings were $4.4 billion at year-end 1997 ($3.6 billion short-term, $0.8 billion long-term), an increase of about $0.3 billion from year-end 1996. GE total debt at the end of 1997 equaled 11.1% of total capital, down from 11.4% at the end of 1996. GECS total borrowings were $141.3 billion at December 31, 1997, of which $95.3 billion is due in 1998 and $46.0 billion is due in subsequent years. Comparable amounts at the end of 1996 were $125.6 billion total, $77.9 billion due within one year and $47.7 billion due thereafter. A large portion of GECS borrowings ($71.2 billion and $54.2 billion at the end of 1997 and 1996, 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 44 days and 5.83% at the end of 1997, compared with 42 days and 5.58% at the end of 1996. GE Capital leverage (ratio of debt to equity, excluding from equity net unrealized gains on investment securities) was 7.94 to 1 at the end of 1997 and 7.92 to 1 at the end of 1996. By comparison, including in equity net unrealized gains on investment securities, the GE Capital ratio of debt to equity was 7.45 to 1 at the end of 1997 and 7.84 to 1 at the end of 1996. INTEREST RATE AND CURRENCY RISK MANAGEMENT In normal operations, both GE and GECS 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, a view of their potential effects, and, finally, what considerations arise from recent developments in Asia. 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 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 ================================================================================ [CHART HERE] GE CUMULATIVE CASH FLOWS - -------------------------------------------------------------------------------- (IN BILLIONS) 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES $5.201 $11.272 $17.337 $26.404 $35.721 DIVIDENDS PAID 2.153 4.615 7.385 10.435 13.846 SHARES REPURCHASED 0.707 1.780 4.882 8.148 11.640 ================================================================================ 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 extraordinarily 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 1998 net earnings of GECS based on year-end 1997 positions by approximately $112 million; the pro forma effect for GE was insignificant. 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 1997 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 1998 net earnings of GE based on year-end 1997 positions by approximately $10 million; the pro forma effect for GECS was insignificant. F-19 ANNUAL REPORT PAGE 43 Recent economic developments in parts of Asia have altered somewhat the risks and opportunities of the GE and GECS activities in affected economies. These activities encompass primarily manufacturing for local and export markets, import and sale of products produced outside the area, leasing of aircraft, sourcing for GE plants domiciled in other global regions and providing certain financial services within those Asian economies. As such, exposure exists to, among other things, increased receivables delinquencies and potential bad debts, delays in sales and orders principally related to power and aircraft-related equipment, and a slowdown in financial services activities. Conversely, costs of sourced goods may decline and new sourcing opportunities may arise, sales of products such as plastics to now more-competitive Asian manufacturers of products destined for export should remain strong and liberalization of financial regulations opens new opportunities to penetrate Asian financial services markets. Taken as a whole, while this situation bears close monitoring and increased management attention, the current situation is not expected to have a material adverse effect on the financial position, results of operations or liquidity of GE or GECS in 1998. 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 GE cash and equivalents aggregated $1.2 billion at the end of 1997, an increase of $0.2 billion from 1996. During 1997, GE generated a record $9.3 billion in cash from operating activities, an increase of $0.2 billion over 1996, principally as a result of improvements in earnings, working capital and higher dividends from GECS. The 1997 cash generation provided most of the resources needed to repurchase $3.5 billion of GE common stock under the share repurchase program, to pay $3.4 billion in dividends to share owners, to invest $2.2 billion in new plant and equipment and to make $1.4 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 $24 billion of cash. The principal application of this cash was distributions of more than $19 billion to share owners, both through payment of dividends ($9.2 billion) and through the share repurchase program ($9.9 billion) described below. Other applications included investment in new plant and equipment ($6.4 billion) and acquisitions ($2.8 billion). In December 1997, the GE Board of Directors increased the authorization to repurchase common stock to $17 billion and authorized the program to continue through 1999. Funds used for the share repurchase are expected to be generated largely from free cash flow. 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 1998, principally for productivity and growth. The expected level of expenditures was moderated by the Six Sigma quality program's success in freeing capacity. GECS 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 $20.1 billion. New borrowings of $80.5 billion having maturities longer than 90 days were added during those years, while $64.5 billion of such longer-term borrowings were retired. GECS also generated $26.1 billion from continuing operating activities. The principal use of cash by GECS has been investing in assets to grow its businesses. Of the $55.9 billion that GECS invested over the past three years, $15.5 billion was used for additions to financing receivables; $16.2 billion was used to invest in new equipment, principally for lease to others; and $13.6 billion was used for acquisitions of new businesses. 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. F-20 ANNUAL REPORT PAGE 44 MANAGEMENT'S DISCUSSION OF SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA summarizes on the opposite 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 industrial enterprises; and lower portion -- GECS data that reflect key information pertinent to financial services businesses. GE'S TOTAL RESEARCH AND DEVELOPMENT expenditures were $1,891 million in 1997, about the same as in 1996 and 1995. In 1997, expenditures from GE's own funds were $1,480 million, an increase of 4% over 1996, reflecting continuing research and development work related to new product, service and process technologies. Product technology efforts in 1997 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. New 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. New 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 $411 million in 1997, down $54 million from 1996, primarily reflecting transition of the F414 program at Aircraft Engines from development to production. GE'S TOTAL BACKLOG of firm unfilled orders at the end of 1997 was $26.4 billion, compared with $26.2 billion at the end of 1996. Of the total, $22.0 billion related to products, about 55% of which was scheduled for delivery in 1998. Services orders are included in backlog for only the succeeding 12 months; such backlog at the end of 1997 was $4.4 billion. Orders constituting this backlog may be canceled or deferred by customers, subject in certain cases to cancellation penalties. See Industry Segments beginning on page 34 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 1997, GE expended about $80 million for capital projects related to the environment. The comparable amount in 1996 was $87 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 $84 million in 1997, compared with $76 million in 1996. It is presently expected that remediation actions will require average annual expenditures in the range of $80 million to $140 million over the next two years. ================================================================================ [CHART HERE] YEAR-END MARKET CAPITALIZATION - -------------------------------------------------------------------------------- (IN BILLIONS) 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- $89.527 $87.004 $119.989 $162.604 $239.539 ================================================================================ [CHART HERE] GE SHARE PRICE ACTIVITY - -------------------------------------------------------------------------------- (IN DOLLARS) 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- HIGH $26.7500 $27.4375 $36.5625 $53.0625 76.5627 LOW 20.1875 22.5000 24.9375 34.7500 47.9375 CLOSE 26.2500 25.5000 36.0000 49.4375 73.3750 ================================================================================ F-21 ANNUAL REPORT PAGE 45 SELECTED FINANCIAL DATA
(Dollar amounts in millions; --------------------------------------------------------------------------- per-share amounts in dollars) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES Revenues $ 90,840 $ 79,179 $ 70,028 $ 60,109 $ 55,701 Earnings from continuing operations 8,203 7,280 6,573 5,915 4,184 Earnings (loss) from discontinued operations -- -- -- (1,189) 993 Effect of accounting change -- -- -- -- (862) Net earnings 8,203 7,280 6,573 4,726 4,315 Dividends declared 3,535 3,138 2,838 2,546 2,229 Earned on average share owners' equity 25.0% 24.0% 23.5% 18.1% 17.5% Per share Earnings from continuing operations -- basic $ 2.50 $ 2.20 $ 1.95 $ 1.73 $ 1.22 Earnings (loss) from discontinued operations -- -- -- (0.35) 0.29 Effect of accounting change -- -- -- -- (0.25) Net earnings -- basic 2.50 2.20 1.95 1.38 1.26 Net earnings -- diluted 2.46 2.16 1.93 1.37 1.25 Dividends declared 1.08 0.95 0.845 0.745 0.6525 Stock price range 76 9/16- 53 1/16- 36 9/16- 27 7/16- 26 3/4- 47 15/16 34 3/4 24 15/16 22 1/2 20 3/16 Total assets of continuing operations 304,012 272,402 228,035 185,871 166,413 Long-term borrowings 46,603 49,246 51,027 36,979 28,194 Shares outstanding-- average (in thousands) 3,274,692 3,307,394 3,367,624 3,417,476 3,415,958 Share owner accounts-- average 509,000 486,000 460,000 458,000 464,000 Employees at year end United States 165,000 155,000 150,000 156,000 157,000 Other countries 111,000 84,000 72,000 60,000 59,000 Discontinued operations (primarily U.S.) -- -- -- 5,000 6,000 --------------------------------------------------------------------------- Total employees 276,000 239,000 222,000 221,000 222,000 ================================================================================================================================== GE DATA Short-term borrowings $ 3,629 $ 2,339 $ 1,666 $ 906 $ 2,391 Long-term borrowings 729 1,710 2,277 2,699 2,413 Minority interest 569 477 434 382 355 Share owners' equity 34,438 31,125 29,609 26,387 25,824 --------------------------------------------------------------------------- Total capital invested $ 39,365 $ 35,651 $ 33,986 $ 30,374 $ 30,983 =========================================================================== Return on average total capital invested 23.6% 22.2% 21.3% 15.9% 15.2% Borrowings as a percentage of total capital invested 11.1% 11.4% 11.6% 11.9% 15.5% Working capital $ (4,881) $ (2,147) $ 204 $ 544 $ (419) Additions to property, plant and equipment 2,191 2,389 1,831 1,743 1,588 ================================================================================================================================== GECS DATA Revenues $ 39,931 $ 32,713 $ 26,492 $ 19,875 $ 17,276 Earnings from continuing operations 3,256 2,817 2,415 2,085 1,567 Earnings (loss) from discontinued operations -- -- -- (1,189) 240 Net earnings 3,256 2,817 2,415 896 1,807 Share owner's equity 17,239 14,276 12,774 9,380 10,809 Minority interest 3,113 2,530 2,522 1,465 1,301 Borrowings from others 141,263 125,621 111,598 91,399 81,052 Ratio of debt to equity at GE Capital 7.94:1 7.92:1 7.89:1 7.94:1 7.96:1 Total assets of GE Capital $ 228,777 $ 200,816 $ 160,825 $ 130,904 $ 117,939 Reserve coverage on financing receivables 2.63% 2.63% 2.63% 2.63% 2.63% Insurance premiums written $ 9,396 $ 8,185 $ 6,158 $ 3,962 $ 3,956 ================================================================================================================================== Equity excludes net unrealized gains/losses on investment securities. Discontinued operations reflect the results of Kidder, Peabody, the discontinued GECS securities broker-dealer, in 1994 and 1993, and the results of discontinued GE Aerospace businesses in 1993. The 1993 accounting change represents the adoption of SFAS No. 112, EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS. "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 consolidated information. Share data and per-share amounts have been adjusted to reflect the 2-for-1 stock split effective on April 28, 1997.
F-22 ANNUAL REPORT PAGE 46 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 Peat Marwick LLP provide an objective, independent review of management's discharge of its obligations relating to the fairness of reporting operating results and financial condition. Their report for 1997 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. Dennis D. Dammerman Chairman of the Board and Senior Vice President, Finance, and Chief Executive Officer Chief Financial Officer February 13, 1998 - -------------------------------------------------------------------------------- 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 19. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 14 (a)2 on page 19. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Stamford, Connecticut February 13, 1998 F-23 ANNUAL REPORT PAGE 47 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. These data represent 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 1997 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 48. 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 net salvage 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. GECS maintains an allowance for losses on financing receivables at an amount that it believes is sufficient to provide adequate protection against future losses in the portfolio. 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. CASH AND EQUIVALENTS. Marketable 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 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. F-24 ANNUAL REPORT PAGE 48 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 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, 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. Any instrument designated but ineffective as a hedge 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. 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 making 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 (PVFP). PVFP 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. F-25 ANNUAL REPORT PAGE 49 2 GE OTHER INCOME ------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Royalty and technical agreements $ 405 $ 391 $ 453 Associated companies 50 50 111 Marketable securities and bank deposits 78 72 70 Customer financing 26 29 26 Other investments Dividends 62 79 62 Interest 1 18 18 Other items 1,685 (10) 13 ------------------------------- $2,307 $ 629 $ 753 ================================================================================ Included in the "Other items" caption is a gain of $1,538 million related to a tax-free exchange between GE and Lockheed Martin Corporation (Lockheed Martin) in the fourth quarter of 1997. 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) 1997 1996 1995 - -------------------------------------------------------------------------------- Time sales, loan and other income $12,211 $11,310 $ 9,995 Operating lease rentals 4,819 4,341 4,080 Financing leases 3,499 3,485 3,176 Investment income 5,512 3,506 2,542 Premium and commission income of insurance affiliates 9,268 8,145 6,232 --------------------------------- $35,309 $30,787 $26,025 ================================================================================ 4 SUPPLEMENTAL COST DETAILS Total expenditures for research and development were $1,891 million, $1,886 million and $1,892 million in 1997, 1996 and 1995, respectively. The Company-funded portion aggregated $1,480 million in 1997, $1,421 million in 1996 and $1,299 million in 1995. Rental expense under operating leases is shown below. ---------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------- GE $536 $512 $523 GECS 734 547 524 - -------------------------------------------------------------------------------- At December 31, 1997, minimum rental commitments under noncancelable operating leases aggregated $2,368 million and $5,097 million for GE and GECS, respectively. Amounts payable over the next five years are shown below. ------------------------------------------------ (In millions) 1998 1999 2000 2001 2002 - -------------------------------------------------------------------------------- GE $433 $360 $260 $213 $166 GECS 652 574 512 487 452 - -------------------------------------------------------------------------------- GE's selling, general and administrative expense totaled $7,476 million in 1997, $6,274 million in 1996 and $5,743 million in 1995. Insignificant amounts of interest were capitalized by GE and GECS in 1997, 1996 and 1995. 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 such GECS employees. 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 1997, the GE Pension Plan covered approximately 466,000 participants, including 132,000 employees, 148,000 former employees with vested rights to future benefits, and 186,000 retirees and beneficiaries receiving benefits. The GE Supplementary Pension Plan is an unfunded plan providing supplementary retirement benefits primarily to higher-level, longer-service U.S. employees. Details of income for principal pension plans follow. - -------------------------------------------------------------------------------- PENSION PLAN INCOME -------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Actual return on plan assets $ 6,587 $ 4,916 $ 5,439 Unrecognized portion of return (3,866) (2,329) (3,087) Service cost for benefits earned (a) (596) (550) (469) Interest cost on benefit obligation (1,686) (1,593) (1,580) Amortization 304 265 394 Special early retirement cost (412) -- -- -------------------------------- Total pension plan income $ 331 $ 709 $ 697 ================================================================================ (a) Net of employee contributions. - -------------------------------------------------------------------------------- Actual return on trust assets in 1997 was 19.8%, compared with the 9.5% assumed return on such assets. The effect of this higher return will be recognized in future years. F-26 ANNUAL REPORT PAGE 50 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 Company contribution would require payment of annual excise taxes. - -------------------------------------------------------------------------------- FUNDED STATUS OF PENSION PLANS ----------------------- December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- Market-related value of assets $32,638 $29,402 Projected benefit obligation 25,874 23,251 - -------------------------------------------------------------------------------- The market-related value of pension assets recognizes market appreciation or depreciation in the portfolio over five years, a method that reduces the short-term impact of market fluctuations. Plan assets are held in trust and consist mainly of common stock and fixed-income investments. GE common stock represented about 6% and 5% of trust assets at year-end 1997 and 1996, respectively. An analysis of amounts shown in the Statement of Financial Position is presented below. - -------------------------------------------------------------------------------- PREPAID PENSION ASSET ------------------------- December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- Current value of trust assets $ 38,742 $ 33,686 Add (deduct) unamortized balances SFAS No. 87 transition gain (462) (615) Experience gains (7,538) (5,357) Plan amendments 1,003 1,012 Projected benefit obligation (25,874) (23,251) Pension liability 703 637 ------------------------- PREPAID PENSION ASSET $ 6,574 $ 6,112 ================================================================================ The accumulated benefit obligation was $24,675 million and $22,176 million at year-end 1997 and 1996, respectively; the vested benefit obligation was approximately equal to the accumulated benefit obligation at the end of both years. ACTUARIAL ASSUMPTIONS AND TECHNIQUES used to determine costs and benefit obligations for principal pension plans follow. - -------------------------------------------------------------------------------- ACTUARIAL ASSUMPTIONS --------------------- December 31 1997 1996 - -------------------------------------------------------------------------------- Discount rate 7.0% 7.5% Compensation increases 4.5 4.5 Return on assets for the year 9.5 9.5 - -------------------------------------------------------------------------------- Experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions, are amortized over employees' average future service period. 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 with 10 or more years of service. Retirees share in the cost of their health care benefits. Benefit provisions are subject to collective bargaining. At the end of 1997, these plans covered approximately 250,000 retirees and dependents. Details of cost for principal retiree benefit plans follow. - -------------------------------------------------------------------------------- COST OF RETIREE BENEFIT PLANS ------------------------------ (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------- RETIREE HEALTH PLANS Service cost for benefits earned $ 90 $ 77 $ 73 Interest cost on benefit obligation 183 166 189 Amortization 13 -- (12) Special early retirement cost 152 -- -- ------------------------------ Retiree health plan cost 438 243 250 ------------------------------ RETIREE LIFE PLANS Service cost for benefits earned 17 16 13 Interest cost on benefit obligation 116 106 108 Actual return on plan assets (343) (225) (329) Unrecognized portion of return 206 93 206 Amortization 8 12 1 Special early retirement cost 13 -- -- ------------------------------ Retiree life plan cost (income) 17 2 (1) ------------------------------ TOTAL COST $ 455 $ 245 $ 249 ================================================================================ 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 and within limits imposed by tax laws. - -------------------------------------------------------------------------------- FUNDED STATUS OF RETIREE BENEFIT PLANS --------------------- December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- Market-related value of assets $1,621 $1,487 Accumulated postretirement benefit obligation 4,775 3,954 - -------------------------------------------------------------------------------- The market-related value of assets of retiree life plans recognizes market appreciation or depreciation in the portfolio over five years, a method that reduces the short-term impact of market fluctuations. Plan assets are held in trust and consist mainly of common stock and fixed-income investments. GE common stock represented about 4% and 3% of trust assets at year-end 1997 and 1996, respectively. F-27 ANNUAL REPORT PAGE 51 An analysis of amounts shown in the Statement of Financial Position is presented below. - -------------------------------------------------------------------------------- RETIREE BENEFIT LIABILITY/ASSET Health plans Life plans -------------------- --------------------- December 31 (In millions) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation Retirees and dependents $ 2,445 $ 1,889 $ 1,417 $ 1,305 Employees eligible to retire 104 86 45 45 Other employees 549 440 215 189 -------------------- --------------------- 3,098 2,415 1,677 1,539 Add (deduct) unamortized balances Experience (losses) gains (423) (195) 127 (41) Plan amendments (171) 157 55 109 Current value of trust assets -- -- (1,917) (1,682) -------------------- --------------------- RETIREE BENEFIT LIABILITY (PREPAID ASSET) $ 2,504 $ 2,377 $ (58) $ (75) ================================================================================ ACTUARIAL ASSUMPTIONS AND TECHNIQUES used to determine costs and benefit obligations for principal retiree benefit plans are shown below. - -------------------------------------------------------------------------------- ACTUARIAL ASSUMPTIONS --------------------- December 31 1997 1996 - -------------------------------------------------------------------------------- Discount rate 7.0% 7.5% Compensation increases 4.5 4.5 Health care cost trend (a) 7.8 8.0 Return on assets for the year 9.5 9.5 - -------------------------------------------------------------------------------- (a) Gradually declining to 5.0% after 2002. - -------------------------------------------------------------------------------- Increasing the health care cost trend rates by one percentage point would not have had a material effect on the December 31, 1997, 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 employees' average future service period. 7 GECS ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES 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 loss potential. 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 loss potential, including specific allowances for known troubled accounts. The table below shows the activity in the allowance for losses on financing receivables during each of the past three years. ---------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Balance at January 1 $ 2,693 $ 2,519 $ 2,062 Provisions charged to operations 1,421 1,033 1,117 Net transfers primarily related to companies acquired or sold 127 139 217 Amounts written off-- net (1,439) (998) (877) ---------------------------------- Balance at December 31 $ 2,802 $ 2,693 $ 2,519 ================================================================================ 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 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. 8 PROVISION FOR INCOME TAXES ---------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------- GE Estimated amounts payable $ 2,332 $ 2,235 $ 1,696 Deferred tax expense (benefit) from temporary differences (522) 60 363 ---------------------------------- 1,810 2,295 2,059 ---------------------------------- GECS Estimated amounts payable 368 164 434 Deferred tax expense from temporary differences 798 1,067 671 ---------------------------------- 1,166 1,231 1,105 ---------------------------------- CONSOLIDATED Estimated amounts payable 2,700 2,399 2,130 Deferred tax expense from temporary differences 276 1,127 1,034 ---------------------------------- $ 2,976 $ 3,526 $ 3,164 ================================================================================ 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. F-28 ANNUAL REPORT PAGE 52 Estimated consolidated amounts payable includes amounts applicable to non-U.S. jurisdictions of $1,298 million, $1,204 million and $721 million in 1997, 1996 and 1995, 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. Consolidated U.S. income before taxes was $8.2 billion in 1997, $8.0 billion in 1996 and $7.6 billion in 1995. The corresponding amounts for non-U.S.-based operations were $3.0 billion in 1997, $2.8 billion in 1996 and $2.1 billion in 1995.
- ------------------------------------------------------------------------------------------------------------------------------- RECONCILIATION OF U.S. FEDERAL Consolidated GE GECS STATUTORY TAX RATE TO ACTUAL RATE ------------------------ ------------------------ ------------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- 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 -- -- -- (11.4) (10.3) (9.8) -- -- -- Lockheed Martin exchange (note 2) (4.8) -- -- (5.4) -- -- -- -- -- Amortization of goodwill 1.1 1.1 1.1 0.8 0.8 0.8 1.1 1.2 1.1 Tax-exempt income (1.9) (2.0) (2.1) -- -- -- (4.9) (5.4) (5.8) Foreign Sales Corporation tax benefits (1.0) (0.7) (0.9) (0.9) (0.6) (1.1) (0.5) (0.3) -- Dividends received, not fully taxable (0.5) (0.6) (0.5) (0.2) (0.2) (0.2) (0.9) (1.1) (0.8) All other -- net (1.3) (0.2) (0.1) 0.2 (0.7) (0.8) (3.4) 1.0 1.9 ------------------------ ------------------------- ------------------------- (8.4) (2.4) (2.5) (16.9) (11.0) (11.1) (8.6) (4.6) (3.6) ------------------------ ------------------------- ------------------------- Actual income tax rate 26.6% 32.6% 32.5% 18.1% 24.0% 23.9% 26.4% 30.4% 31.4% ===============================================================================================================================
9 EARNINGS PER SHARE INFORMATION
- ------------------------------------------------------------------------------------------------------- 1997 1996 1995 (Dollar amounts and shares in millions; --------------- ---------------- ---------------- per-share amounts in dollars) Basic Diluted Basic Diluted Basic Diluted - ------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS Net earnings available to common share owners $8,203 $8,203 $7,280 $7,280 $6,573 $6,573 Dividend equivalents -- net of tax -- 10 -- 9 -- 9 --------------- ---------------- ---------------- Net earnings available for per-share calculation $8,203 $8,213 $7,280 $7,289 $6,573 $6,582 --------------- ---------------- ---------------- AVERAGE EQUIVALENT SHARES Shares of GE common stock outstanding 3,275 3,275 3,307 3,307 3,368 3,368 Employee compensation-related shares, including stock options -- 70 -- 64 -- 46 --------------- ---------------- ---------------- Total average equivalent shares 3,275 3,345 3,307 3,371 3,368 3,414 --------------- ---------------- ---------------- Net earnings per share $ 2.50 $ 2.46 $ 2.20 $ 2.16 $ 1.95 $ 1.93 ======================================================================================================= Share data and per-share amounts have been adjusted for the 2-for-1 stock split effective on April 28, 1997. - -------------------------------------------------------------------------------------------------------
10 INVESTMENT SECURITIES GE held equity securities with an estimated fair value of $265 million (amortized cost of $257 million) and $17 million (amortized cost of $17 million) at December 31, 1997 and 1996, respectively. Gross unrealized gains and losses at December 31, 1997 were $13 million and $5 million, respectively. There were no unrealized gains or losses at December 31, 1996. An analysis of GECS investment securities follows on the next page. F-29 ANNUAL REPORT PAGE 53 - -------------------------------------------------------------------------------- GECS INVESTMENT SECURITIES Gross Gross Amortized unrealized unrealized Estimated (In millions) cost gains losses fair value - -------------------------------------------------------------------------------- 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 ================================================================================ DECEMBER 31, 1996 Debt securities U.S. corporate $ 22,080 $ 308 $ (641) $ 21,747 State and municipal 10,232 399 (34) 10,597 Mortgage-backed 11,072 297 (108) 11,261 Corporate -- non-U.S 5,587 142 (13) 5,716 Government -- non-U.S 3,347 99 (2) 3,444 U.S. government and federal agency 2,340 34 (7) 2,367 Equity securities 4,117 677 (54) 4,740 ------------------------------------------------ $ 58,775 $ 1,956 $ (859) $ 59,872 ================================================================================ The majority of mortgage-backed securities shown in the table above are collateralized by U.S. residential mortgages. At December 31, 1997, contractual maturities of debt securities, other than mortgage-backed securities, were as follows: - -------------------------------------------------------------------------------- GECS CONTRACTUAL MATURITIES OF DEBT SECURITIES (EXCLUDING MORTGAGE-BACKED SECURITIES) ----------------------------- Amortized Estimated (In millions) cost fair value - -------------------------------------------------------------------------------- Due in 1998 $ 2,570 $ 2,583 1999-2002 13,329 13,653 2003-2007 12,881 13,406 2008 and later 20,390 21,681 - -------------------------------------------------------------------------------- It is expected that actual maturities will differ from contractual maturities because borrowers have the right to call or prepay certain obligations, sometimes without call or prepayment penalties. Proceeds from sales of investment securities in 1997 were $14,728 million ($11,868 million in 1996 and $11,017 million in 1995). Gross realized gains were $1,018 million in 1997 ($638 million in 1996 and $503 million in 1995). Gross realized losses were $173 million in 1997 ($190 million in 1996 and $157 million in 1995). 11 GE CURRENT RECEIVABLES ------------------------- December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- Aircraft Engines $ 2,118 $ 1,389 Appliances 479 713 Broadcasting 362 698 Industrial Products and Systems 1,638 1,574 Materials 1,037 1,068 Power Generation 2,206 2,463 Technical Products and Services 787 698 All Other 131 86 Corporate 534 377 ------------------------- 9,292 9,066 Less allowance for losses (238) (240) ------------------------- $ 9,054 $ 8,826 ================================================================================ Receivables balances at December 31, 1997 and 1996, before allowance for losses, included $6,125 million and $6,629 million, respectively, from sales of goods and services to customers, and $285 million and $290 million, respectively, from transactions with associated companies. Current receivables of $303 million at year-end 1997 and $326 million at year-end 1996 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 1997 (about 5% in 1996 and 1995). 12 INVENTORIES ------------------------ December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- GE Raw materials and work in process $ 3,070 $ 3,028 Finished goods 2,895 2,404 Unbilled shipments 242 258 ------------------------ 6,207 5,690 Less revaluation to LIFO (1,098) (1,217) ------------------------ 5,109 4,473 ------------------------ GECS Finished goods 786 376 ------------------------ $ 5,895 $ 4,849 ================================================================================ LIFO revaluations decreased $119 million in 1997, compared with decreases of $128 million in 1996 and $87 million in 1995. Included in these changes were decreases of $59 million, $58 million and $88 million in 1997, 1996 and 1995, respectively, that resulted from lower LIFO inventory levels. There were net cost decreases in 1997 and 1996, and no cost change in 1995. As of December 31, 1997, GE is obligated to acquire certain raw materials at market prices through the year 2003 under various take-or-pay or similar arrangements. Annual minimum commitments under these arrangements are insignificant. F-30 ANNUAL REPORT PAGE 54 13 GECS FINANCING RECEIVABLES (INVESTMENTS IN TIME SALES, LOANS AND FINANCING LEASES) --------------------------- December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- TIME SALES AND LOANS Consumer services $ 42,270 $ 40,479 Specialized financing 13,974 14,832 Mid-market financing 11,401 9,978 Equipment management 469 448 Specialty insurance 202 339 --------------------------- 68,316 66,076 Deferred income (3,484) (3,244) --------------------------- Time sales and loans-- net 64,832 62,832 --------------------------- INVESTMENT IN FINANCING LEASES Direct financing leases 38,616 36,576 Leveraged leases 3,153 2,999 --------------------------- Investment in financing leases 41,769 39,575 --------------------------- 106,601 102,407 Less allowance for losses (2,802) (2,693) --------------------------- $ 103,799 $ 99,714 ================================================================================ 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 1997 and 1996, specialized financing and consumer services loans included $10,503 million and $12,075 million, respectively, for commercial real estate loans. Note 17 contains information on airline loans and leases. At December 31, 1997, contractual maturities for time sales and loans were $28,983 million in 1998; $12,792 million in 1999; $7,967 million in 2000; $5,156 million in 2001; $3,985 million in 2002; and $9,433 million thereafter -- aggregating $68,316 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, mining 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 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. 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, 1997, contractual maturities for net rentals receivable under financing leases were $12,820 million in 1998; $10,616 million in 1999; $8,395 million in 2000; $3,871 million in 2001; $2,371 million in 2002; and $8,373 million thereafter -- aggregating $46,446 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.
- ------------------------------------------------------------------------------------------------------------------------------------ NET INVESTMENT IN FINANCING LEASES Total financing leases Direct financing leases Leveraged leases ---------------------- ----------------------- ---------------- December 31 (In millions) 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Total minimum lease payments receivable $ 58,543 $ 54,009 $ 42,901 $ 40,555 $ 15,642 $ 13,454 Less principal and interest on third-party nonrecourse debt (12,097) (10,213) -- -- (12,097) (10,213) -------------------- -------------------- -------------------- Net rentals receivable 46,446 43,796 42,901 40,555 3,545 3,241 Estimated unguaranteed residual value of leased assets 5,591 6,248 4,244 4,906 1,347 1,342 Less deferred income (10,268) (10,469) (8,529) (8,885) (1,739) (1,584) -------------------- -------------------- -------------------- INVESTMENT IN FINANCING LEASES (as shown above) 41,769 39,575 38,616 36,576 3,153 2,999 Less amounts to arrive at net investment Allowance for losses (656) (720) (575) (641) (81) (79) Deferred taxes arising from financing leases (7,909) (7,488) (4,671) (4,077) (3,238) (3,411) -------------------- -------------------- -------------------- NET INVESTMENT IN FINANCING LEASES $ 33,204 $ 31,367 $ 33,370 $ 31,858 $ (166) $ (491) ====================================================================================================================================
F-31 ANNUAL REPORT PAGE 55 GECS 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. On July 7, 1997, MWHC, MWC and certain of their affiliates (excluding Signature) filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result, inventory financing loans to MWHC and affiliates became "impaired" loans (as defined below) because, due to the automatic stay in bankruptcy, GECS is not receiving current interest payment on its loans and, in management's judgment, it is therefore probable that GECS will be unable to collect all amounts due according to original contractual terms of the loan agreements. The total amount of such loans was $617 million at December 31, 1997. The nonearning and reduced-earning receivable balances and the impaired loan balances discussed below exclude amounts related to MWHC and affiliates. Nonearning consumer receivables were $1,049 million and $926 million at December 31, 1997 and 1996, 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 $353 million and $471 million at year-end 1997 and 1996, 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 GECS commercial loans. Under these principles, GECS has two types of "impaired" loans as of December 31, 1997 and 1996: loans requiring allowances for losses ($339 million and $583 million, respectively); and loans expected to be fully recoverable because the carrying amount has been reduced previously through charge-offs or deferral of income recognition ($167 million and $187 million, respectively) -- allowances for losses on these loans were $170 million and $222 million, respectively. Average investment in these loans during 1997 and 1996 was $647 million and $842 million, respectively, before allowance for losses; interest income earned, principally on the cash basis, while they were considered impaired was $32 million and $30 million in 1997 and 1996, respectively. 14 OTHER GECS RECEIVABLES This account includes reinsurance recoverables of $5,027 million and $4,403 million and insurance-related receivables of $4,932 million and $4,833 million at year-end 1997 and 1996, 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) 1997 1996 - -------------------------------------------------------------------------------- ORIGINAL COST GE Land and improvements $ 459 $ 476 Buildings, structures and related equipment 6,375 6,315 Machinery and equipment 18,376 17,824 Leasehold costs and manufacturing plant under construction 1,621 1,308 Other 24 27 ---------------------- 26,855 25,950 ---------------------- GECS Buildings and equipment 3,987 3,075 Equipment leased to others Vehicles 9,144 6,789 Aircraft 7,686 6,647 Marine shipping containers 2,774 3,053 Railroad rolling stock 2,367 2,093 Other 2,844 3,177 ---------------------- 28,802 24,834 ---------------------- $55,657 $50,784 ====================== ACCUMULATED DEPRECIATION AND AMORTIZATION GE $15,737 $15,118 GECS Buildings and equipment 1,478 1,246 Equipment leased to others 6,126 5,625 ---------------------- $23,341 $21,989 ================================================================================ Amortization of GECS equipment leased to others was $2,102 million, $1,848 million and $1,702 million in 1997, 1996 and 1995, respectively. Noncancelable future rentals due from customers for equipment on operating leases at year-end 1997 totaled $10,438 million and are due as follows: $3,247 million in 1998; $2,243 million in 1999; $1,473 million in 2000; $935 million in 2001; $628 million in 2002; and $1,912 million thereafter. F-32 ANNUAL REPORT PAGE 56 16 INTANGIBLE ASSETS --------------------- December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- GE Goodwill $ 8,046 $ 6,676 Other intangibles 709 691 --------------------- 8,755 7,367 --------------------- GECS Goodwill 8,090 5,847 Present value of future profits (PVFP) 1,824 2,438 Other intangibles 452 355 --------------------- 10,366 8,640 --------------------- $19,121 $16,007 ================================================================================ GE intangible assets are shown net of accumulated amortization of $2,976 million in 1997 and $2,637 million in 1996. GECS intangible assets are net of accumulated amortization of $2,615 million in 1997 and $1,988 million in 1996. PVFP amortization, which is on an accelerated basis and net of interest, is projected to range from 13% to 8% of the year-end 1997 unamortized balance for each of the next five years. 17 ALL OTHER ASSETS ------------------------ December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- GE Investments Associated companies (a) $ 1,288 $ 1,526 Other 1,139 1,591 ------------------------ 2,427 3,117 Prepaid pension asset 6,574 6,112 Notes receivable 1,412 26 Other 4,316 3,922 ------------------------ 14,729 13,177 ------------------------ GECS Investments Assets acquired for resale 4,403 2,993 Associated companies (a) 4,695 4,916 Real estate ventures 2,326 2,469 Other 2,452 2,095 ------------------------ 13,876 12,473 Separate accounts 4,926 3,516 Servicing assets 1,713 1,663 Deferred insurance acquisition costs 2,521 1,720 Other 2,631 2,286 ------------------------ 25,667 21,658 ------------------------ ELIMINATIONS (576) -- ------------------------ $ 39,820 $ 34,835 ================================================================================ (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 $1,590 million at year-end 1997 and $1,514 million at year-end 1996; and it had entered into commitments totaling $1,794 million and $1,554 million at year-end 1997 and 1996, 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, 1997. GECS acts as a lender and lessor to the commercial airline industry. At December 31, 1997 and 1996, the balance of such GECS loans, leases and equipment leased to others was $8,980 million and $8,240 million, respectively. In addition, at December 31, 1997, GECS had issued financial guarantees and funding commitments of $123 million ($221 million at year-end 1996) and had placed multiyear orders for various Boeing and Airbus aircraft with list prices of approximately $6.2 billion ($6.5 billion at year-end 1996). At year-end 1997, the National Broadcasting Company had $9,388 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 2008. In connection with numerous projects, primarily power generation bids and contracts, GE had issued various bid and performance bonds and guarantees totaling $2,895 million at year-end 1997 and $3,250 million at year-end 1996. 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 1997 and 1996, this account included taxes accrued of $2,866 million and $2,487 million, respectively, and compensation and benefit accruals of $1,321 million and $1,315 million, respectively. Also included are amounts for product warranties, estimated costs on shipments billed to customers and a variety of sundry items. F-33 ANNUAL REPORT PAGE 57 19 BORROWINGS - -------------------------------------------------------------------------------- SHORT-TERM BORROWINGS ---------------------------------------------------- 1997 1996 ----------------------- ------------------------- Average Average December 31 (In millions) Amount rate Amount rate - -------------------------------------------------------------------------------- GE Commercial paper (U.S) $ 1,835 5.88% $ 914 5.41% Payable to banks 348 8.38 204 8.58 Current portion of long-term debt 1,099 5.85(a) 551 6.39(a) Other 347 670 ----------------------------------------------------- 3,629 2,339 ----------------------------------------------------- GECS Commercial paper U.S 67,355 5.93 50,435 5.68 Non-U.S 3,879 4.18 3,737 4.30 Current portion of long-term debt 15,101 6.30(a) 16,471 6.17(a) Other 8,939 7,302 ----------------------------------------------------- 95,274 77,945 ----------------------------------------------------- ELIMINATIONS (828) (84) ----------------------------------------------------- $98,075 $80,200 ================================================================================ - -------------------------------------------------------------------------------- LONG-TERM BORROWINGS ------------------------------------------------ Average December 31 (In millions) rate (a) Maturities 1997 1996 - -------------------------------------------------------------------------------- GE Industrial development/ pollution control bonds 3.82% 1999-2021 $ 270 $ 244 Payable to banks 7.60 1999-2005 195 312 Senior notes -- 500 Other (b) 264 654 -------------------- 729 1,710 -------------------- GECS Senior notes 6.59 1999-2055 44,993 46,680 Subordinated notes (c) 7.88 2006-2035 996 996 -------------------- 45,989 47,676 -------------------- Eliminations (115) (140) -------------------- $ 46,603 $ 49,246 ================================================================================ (a) Includes the effects of associated interest rate and currency swaps. (b) Includes 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) 1998 1999 2000 2001 2002 - -------------------------------------------------------------------------------- GE $ 1,099 $ 97 $ 69 $ 57 $ 38 GECS 15,101 9,801 6,927 5,763 4,816 - -------------------------------------------------------------------------------- Confirmed credit lines of $3.9 billion had been extended to GE by 22 banks at year-end 1997. Substantially all of GE's credit lines are available to GECS and its affiliates in addition to their own credit lines. At year-end 1997, GECS and its affiliates held committed lines of credit aggregating $20.9 billion, 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 $1.4 billion of GE Capital credit lines is available for use by GE. During 1997, neither GE nor GECS borrowed under any of these credit lines. 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) 1997 1996 - -------------------------------------------------------------------------------- Short-term $56,961 $46,450 ===================== Long-term (including current portion) Fixed rate (a) $59,329 $56,190 Floating rate 24,973 22,981 --------------------- Total long-term $84,302 $79,171 ================================================================================ (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, 1997, interest rate swap maturities ranged from 1998 to 2029, and average interest rates for "synthetic" fixed-rate borrowings were 6.32% (6.45% at year-end 1996). F-34 ANNUAL REPORT PAGE 58 20 GECS INSURANCE LIABILITIES, RESERVES AND ANNUITY BENEFITS ---------------------- December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- Investment contracts and universal life benefits $28,266 $26,140 Life insurance benefits and other (a) 14,356 13,854 Unpaid claims and claims adjustment expenses 14,654 13,184 Unearned premiums 5,068 4,633 Separate accounts (see note 17) 4,926 3,516 ---------------------- $67,270 $61,327 ================================================================================ (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 1997 and 1996. - -------------------------------------------------------------------------------- The liability for unpaid claims and claims adjustment expenses, principally property and casualty reserves, consists of both case and incurred-but-not- reported reserves. Where experience is not sufficient to determine reserves, industry averages are used. Estimated amounts of salvage and subrogation recoverable on paid and unpaid losses are deducted from outstanding losses. A summary of activity for this liability follows. ------------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Balance at January 1-- gross $ 13,184 $ 12,662 $ 7,032 Less reinsurance recoverables (1,822) (1,853) (1,084) ------------------------------------- Balance at January 1-- net 11,362 10,809 5,948 Claims and expenses incurred Current year 4,494 4,087 3,268 Prior years 146 104 492 Claims and expenses paid Current year (1,780) (1,357) (706) Prior years (2,816) (2,373) (1,908) Claim reserves related to acquired companies 1,360 309 3,696 Other (358) (217) 19 ------------------------------------- Balance at December 31-- net 12,408 11,362 10,809 Add reinsurance recoverables 2,246 1,822 1,853 ------------------------------------- Balance at December 31-- gross $ 14,654 $ 13,184 $ 12,662 ================================================================================ Prior-year claims and expenses incurred in the above 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) 1997 1996 - -------------------------------------------------------------------------------- Guarantees, principally on municipal bonds and structured finance issues $ 144,647 $ 140,575 Mortgage insurance risk in force 46,245 36,279 Credit life insurance risk in force 26,593 25,961 Less reinsurance (33,528) (32,413) -------------------------- $ 183,957 $ 170,402 ================================================================================ Insurance risk is ceded on both a pro rata and an excess basis. 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 effects of reinsurance on premiums written and premiums and commissions earned were as follows: ------------------------------------ (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------- PREMIUMS WRITTEN Direct $ 5,206 $ 3,926 $ 2,984 Assumed 5,501 5,455 3,978 Ceded (1,311) (1,196) (804) ------------------------------------ $ 9,396 $ 8,185 $ 6,158 ==================================== PREMIUMS AND COMMISSIONS EARNED Direct $ 5,138 $ 3,850 $ 2,604 Assumed 5,386 5,353 4,414 Ceded (1,256) (1,058) (786) ------------------------------------ $ 9,268 $ 8,145 $ 6,232 ================================================================================ Reinsurance recoveries recognized as a reduction of insurance losses and policyholder and annuity benefits amounted to $903 million, $937 million and $459 million for the years ended December 31, 1997, 1996 and 1995, respectively. 21 GE ALL OTHER LIABILITIES This account includes noncurrent compensation and benefit accruals at year-end 1997 and 1996 of $5,484 million and $5,177 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. F-35 ANNUAL REPORT PAGE 59 22 DEFERRED INCOME TAXES Aggregate deferred tax amounts are summarized below. ------------------------ December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- ASSETS GE $ 4,891 $ 4,097 GECS 4,320 3,310 ------------------------ 9,211 7,407 ------------------------ LIABILITIES GE 4,576 4,630 GECS 13,286 11,050 ------------------------ 17,862 15,680 ------------------------ NET DEFERRED TAX LIABILITY $ 8,651 $ 8,273 ================================================================================ Principal components of the net deferred tax balances for GE and GECS are as follows: ------------------------- December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- GE Provisions for expenses $(3,367) $(2,740) Retiree insurance plans (856) (806) Prepaid pension asset 2,301 2,139 Depreciation 955 836 Other -- net 652 1,104 ------------------------- (315) 533 ------------------------- GECS Financing leases 7,909 7,488 Operating leases 2,156 1,833 Net unrealized gains on securities 1,264 404 Allowance for losses (1,372) (1,184) Insurance reserves (1,000) (787) AMT credit carryforwards (354) (561) Other -- net 363 547 ------------------------- 8,966 7,740 ------------------------- NET DEFERRED TAX LIABILITY $ 8,651 $ 8,273 ================================================================================ The GE provisions for expenses category 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. The liquidation preference of the preferred shares is summarized below. ----------------------- December 31 (In millions) 1997 1996 - -------------------------------------------------------------------------------- GE Capital $2,230 $1,800 GE Capital affiliate 660 485 - -------------------------------------------------------------------------------- Dividend rates on the preferred stock ranged from 3.8% to 5.2% during 1997 and 1996, and from 4.2% to 5.2% during 1995. 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 1997, net assets of regulated GECS affiliates amounted to $22.9 billion, of which $19.4 billion was restricted. At December 31, 1997 and 1996, the aggregate statutory capital and surplus of the insurance businesses totaled $12.4 billion and $10.2 billion, respectively. In preparing statutory statements, no significant permitted accounting practices are used that differ from prescribed accounting practices. 25 SHARE OWNERS' EQUITY -------------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------- COMMON STOCK ISSUED $ 594 $ 594 $ 594 ====================================== UNREALIZED GAINS ON INVESTMENT SECURITIES-- NET $ 2,138 $ 671 $ 1,000 ====================================== OTHER CAPITAL Balance at January 1 $ 2,498 $ 1,663 $ 1,122 Currency translation adjustments (742) (117) 127 Gains on treasury stock dispositions 1,880 952 414 -------------------------------------- Balance at December 31 $ 3,636 $ 2,498 $ 1,663 ====================================== RETAINED EARNINGS Balance at January 1 $ 38,670 $ 34,528 $ 30,793 Net earnings 8,203 7,280 6,573 Dividends declared (3,535) (3,138) (2,838) -------------------------------------- Balance at December 31 $ 43,338 $ 38,670 $ 34,528 ====================================== COMMON STOCK HELD IN TREASURY Balance at January 1 $ 11,308 $ 8,176 $ 5,312 Purchases 6,392 4,842 4,016 Dispositions (2,432) (1,710) (1,152) -------------------------------------- Balance at December 31 $ 15,268 $ 11,308 $ 8,176 ================================================================================ In December 1997, GE's Board of Directors increased the authorization to repurchase Company common stock to $17 billion and authorized the program to continue through 1999. Funds used for the share repurchase will be generated largely from free cash flow. Through year-end 1997, a total of 244 million shares having an aggregate cost of $9.9 billion had been repurchased under this program and placed into treasury. In April 1997, share owners authorized (a) an increase in the number of authorized shares of common stock from 2,200,000,000 shares each with a par value of $0.32 to 4,400,000,000 shares each with a par value of $0.16 and (b) the split of each unissued and issued common share, including shares held in treasury, into two shares of common stock each with a par value of $0.16. All share data and per-share amounts have been adjusted to reflect this change. F-36 ANNUAL REPORT PAGE 60 Common shares issued and outstanding are summarized in the following table. - -------------------------------------------------------------------------------- SHARES OF GE COMMON STOCK ------------------------------------------- December 31 (In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Issued 3,714,026 3,714,026 3,714,026 In treasury (449,434) (424,942) (381,002) ------------------------------------------- Outstanding 3,264,592 3,289,084 3,333,024 ================================================================================ 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 other capital. Asset and liability accounts are translated at year-end exchange rates, while revenues and expenses are translated at average rates for the period. Cumulative currency translation adjustments represented reductions of other capital of $798 million and $56 million in 1997 and 1996, respectively, and an addition to other capital of $61 million in 1995. 26 OTHER STOCK-RELATED INFORMATION - -------------------------------------------------------------------------------- STOCK OPTION ACTIVITY Average per share Shares -------------------- subject Exercise Market (Shares in thousands) to option price price - -------------------------------------------------------------------------------- Balance at December 31, 1994 138,996 $19.91 $25.50 Options granted 24,179 27.94 27.94 Replacement options 1,506 20.91 20.91 Options exercised (15,568) 15.72 29.61 Options terminated (4,239) 23.67 -- ----------------------------------- 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 ================================================================================ (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 1997, there were 3.2 million SARs outstanding at an average exercise price of $21.02. There were 9.6 million restricted stock shares and restricted stock units outstanding at year-end 1997. There were 92.8 million and 62.1 million additional shares available for grants of options, SARs, restricted stock and restricted stock units at December 31, 1997 and 1996, 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 19, 2007. 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, 1997. - -------------------------------------------------------------------------------- STOCK OPTIONS OUTSTANDING (Shares in thousands) Outstanding Exercisable -------------------------------- ----------------- Average Average Exercise Average exercise exercise price range Shares life (a) price Shares price - -------------------------------------------------------------------------------- $10 13/16 - 21 9/16 34,059 3.6 $17.45 34,059 $17.45 $21 5/8 - 31 15/16 72,754 6.4 25.61 37,441 24.31 $36 3/16 - 51 1/2 18,867 8.5 42.59 205 47.20 $51 3/4 - 73 13,223 9.8 68.80 -- -- ---------------------------------------------------- Total 138,903 6.3 30.03 71,705 21.11 ================================================================================ (a) Average contractual life remaining in years. At year-end 1996, options with an average exercise price of $19.58 were exercisable on 81 million shares; at year-end 1995, options with an average exercise price of $17.61 were exercisable on 74 million shares. - -------------------------------------------------------------------------------- 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 SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, are as follows: ---------------------------------- December 31 1997 1996 1995 - -------------------------------------------------------------------------------- Weighted average fair value per option (a) $17.81 $ 9.34 $ 5.98 Valuation assumptions Expected option term (years) 6.3 6.2 5.5 Expected volatility 20.0% 20.1% 20.0% Expected dividend yield 1.5% 2.3% 3.1% Risk-free interest rate 6.1% 6.6% 7.0% PRO FORMA EFFECTS (b)(c) Net earnings $8,129 $7,235 $6,557 Earnings per share-- basic 2.48 2.19 1.95 -- diluted 2.43 2.15 1.92 - -------------------------------------------------------------------------------- (a) Estimated using Black-Scholes option pricing model. (b) Valuations only of grants made after January 1, 1995; thus, the pro forma effect increased over the periods presented. (c) Net earnings in millions; per-share amounts in dollars. - -------------------------------------------------------------------------------- F-37 ANNUAL REPORT PAGE 61 27 SUPPLEMENTAL CASH FLOWS INFORMATION Changes in operating assets and liabilities are net of acquisitions and dispositions of 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 principally 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 such as amortization of goodwill and intangibles. The Statement of Cash Flows excludes certain noncash transactions that, except for the exchange transaction described in note 2, had no significant effects on the investing or financing activities of GE or GECS. Certain supplemental information related to GE and GECS cash flows is shown below.
--------------------------------------- For the years ended December 31 (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ GE NET PURCHASE OF GE SHARES FOR TREASURY Open market purchases under share repurchase program $ (3,492) $ (3,266) $ (3,101) Other purchases (2,900) (1,576) (915) Dispositions (mainly to employee and dividend reinvestment plans) 3,577 2,519 1,493 --------------------------------------- $ (2,815) $ (2,323) $ (2,523) ======================================= GECS FINANCING RECEIVABLES Increase in loans to customers $(55,689) $(49,890) $(46,154) Principal collections from customers -- loans 50,679 49,923 44,840 Investment in equipment for financing leases (16,420) (14,427) (17,182) Principal collections from customers -- financing leases 13,796 11,158 8,821 Net change in credit card receivables (4,186) (3,068) (3,773) Sales of financing receivables 9,922 4,026 2,139 --------------------------------------- $ (1,898) $ (2,278) $(11,309) ======================================= ALL OTHER INVESTING ACTIVITIES Purchases of securities by insurance and annuity businesses $(19,274) $(15,925) $(14,452) Dispositions and maturities of securities by insurance and annuity businesses 17,280 14,018 12,460 Proceeds from principal business dispositions 241 -- 575 Other (3,893) (4,183) (2,496) --------------------------------------- $ (5,646) $ (6,090) $ (3,913) ======================================= NEWLY ISSUED DEBT HAVING MATURITIES LONGER THAN 90 DAYS Short-term (91 to 365 days) $ 3,502 $ 5,061 $ 2,545 Long-term (longer than one year) 15,566 17,245 32,507 Long-term subordinated -- -- 298 Proceeds -- nonrecourse, leveraged lease debt 1,757 595 1,428 --------------------------------------- $ 20,825 $ 22,901 $ 36,778 ======================================= REPAYMENTS AND OTHER REDUCTIONS OF DEBT HAVING MATURITIES LONGER THAN 90 DAYS Short-term (91 to 365 days) $(21,320) $(23,355) $(16,075) Long-term (longer than one year) (1,150) (1,025) (678) Principal payments - nonrecourse, leveraged lease debt (287) (276) (292) --------------------------------------- $(22,757) $(24,656) $(17,045) ======================================= ALL OTHER FINANCING ACTIVITIES Proceeds from sales of investment and annuity contracts $ 4,717 $ 2,561 $ 1,754 Preferred stock issued by GECS affiliates 605 155 1,045 Redemption of investment and annuity contracts (4,537) (2,688) (2,540) --------------------------------------- $ 785 $ 28 $ 259 ====================================================================================================================================
F-38 ANNUAL REPORT PAGE 62 28 INDUSTRY SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------ REVENUES For the years ended December 31 Total revenues Intersegment revenues External revenues ---------------------------- -------------------------- ---------------------------- (In millions) 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ GE Aircraft Engines $ 7,799 $ 6,302 $ 6,098 $ 101 $ 86 $ 115 $ 7,698 $ 6,216 $ 5,983 Appliances 6,745 6,375 5,933 12 5 4 6,733 6,370 5,929 Broadcasting 5,153 5,232 3,919 -- -- -- 5,153 5,232 3,919 Industrial Products and Systems 10,954 10,412 10,194 490 455 436 10,464 9,957 9,758 Materials 6,695 6,509 6,647 24 22 19 6,671 6,487 6,628 Power Generation 7,495 7,257 6,545 81 65 57 7,414 7,192 6,488 Technical Products and Services 4,917 4,692 4,424 18 23 19 4,899 4,669 4,405 All Other 3,564 3,108 2,707 -- -- -- 3,564 3,108 2,707 Corporate items and eliminations 1,193 (322) (286) (726) (656) (650) 1,919 334 364 ---------------------------- -------------------------- ---------------------------- Total GE 54,515 49,565 46,181 -- -- -- 54,515 49,565 46,181 ---------------------------- -------------------------- ---------------------------- GECS Financing 31,165 24,554 19,446 -- -- -- 31,165 24,554 19,446 Specialty Insurance 8,844 8,155 7,042 -- -- -- 8,844 8,155 7,042 All Other (78) 4 4 -- -- -- (78) 4 4 ---------------------------- -------------------------- ---------------------------- Total GECS 39,931 32,713 26,492 -- -- -- 39,931 32,713 26,492 ---------------------------- -------------------------- ---------------------------- Eliminations (3,606) (3,099) (2,645) -- -- -- (3,606) (3,099) (2,645) ---------------------------- -------------------------- ---------------------------- CONSOLIDATED REVENUES $90,840 $ 79,179 $ 70,028 $ -- $ -- $ -- $90,840 $79,179 $70,028 ==================================================================================================================================== 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. "All Other" GE revenues consists primarily of GECS earnings. - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ ASSETS PROPERTY, PLANT AND EQUIPMENT (INCLUDING EQUIPMENT LEASED TO OTHERS) At December 31 For the years ended December 31 Additions Depreciation and amortization ---------------------------- -------------------------- ----------------------------- (In millions) 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ GE Aircraft Engines $ 8,895 $ 5,423 $ 4,890 $ 729 $ 551 $ 266 $ 255 $ 260 $ 273 Appliances 2,533 2,569 2,304 83 168 143 112 104 93 Broadcasting 4,877 4,899 3,915 116 176 97 96 86 64 Industrial Products and Systems 6,658 6,580 6,117 487 450 446 368 340 308 Materials 8,890 9,130 9,095 618 748 521 427 475 478 Power Generation 5,605 5,741 5,679 176 185 155 161 165 166 Technical Products and Services 2,438 2,246 2,200 189 154 110 115 113 109 All Other 17,496 14,556 13,113 -- -- 1 2 2 1 Corporate items and eliminations 10,034 8,781 8,403 168 114 113 86 90 89 ---------------------------- -------------------------- --------------------------- Total GE 67,426 59,925 55,716 2,566 2,546 1,852 1,622 1,635 1,581 ---------------------------- -------------------------- --------------------------- GECS Financing 211,139 188,472 151,952 7,188 5,663 5,143 2,411 2,111 1,963 Specialty Insurance 44,048 38,575 33,714 65 35 133 35 29 23 All Other 221 372 63 67 64 36 14 10 27 ---------------------------- -------------------------- --------------------------- Total GECS 255,408 227,419 185,729 7,320 5,762 5,312 2,460 2,150 2,013 ---------------------------- -------------------------- --------------------------- Eliminations (18,822) (14,942) (13,410) -- -- -- -- -- -- ---------------------------- -------------------------- --------------------------- CONSOLIDATED TOTALS $304,012 $272,402 $228,035 $9,886 $8,308 $7,164 $ 4,082 $ 3,785 $ 3,594 ==================================================================================================================================== "All Other" GE assets consists primarily of investment in GECS. Additions to property, plant and equipment include amounts relating to principal businesses purchased. - ------------------------------------------------------------------------------------------------------------------------------------
F-39 ANNUAL REPORT PAGE 63 Details of operating profit by industry segment can be found on page 35 of this report. A description of industry 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, aircraft engine derivatives 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 and room air conditioning equipment. 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. BROADCASTING. Primarily NBC. Principal businesses are the furnishing of U.S. network television services to more than 200 affiliated stations, production of television programs, operation of 12 VHF and UHF television broadcasting stations, operation of four cable/satellite networks around the world, and investment and programming activities in multimedia and cable television. 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. MATERIALS. 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 GENERATION. Power plant products and services, including design, installation, operation and maintenance services. Markets and competition are global. Gas turbines are sold principally as part of packaged power plants for electric utilities and for industrial cogeneration and mechanical drive applications. Steam turbine-generators are sold to electric utilities, to the U.S. Navy and, for cogeneration, to industrial and other power customers. Power Generation also includes nuclear reactors and fuel and support services for GE's new and installed boiling water reactors. TECHNICAL PRODUCTS AND SERVICES. Medical systems such as magnetic resonance (MR) and computed tomography (CT) scanners, x-ray, nuclear imaging, ultrasound, other diagnostic equipment and related services sold worldwide to hospitals and medical facilities. Also includes a full range of computer-based information and data interchange services for internal use and external commercial and industrial customers. GECS FINANCING. Operations of GE Capital, as follows: 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. Insurance services, previously included within the Specialty Insurance segment, has been combined with the consumer savings and insurance operations in this segment. Prior-year information has been reclassified to reflect this change. 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 management buyouts, including those with high leverage, and corporate recapitalizations. 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 and financing and operating leases for middle-market customers, including manufacturers, distributors and end users, for a variety of equipment that includes data processing equipment, medical and diagnostic equipment, and equipment used in construction, manufacturing, office applications and telecommunications activities. Very few of the products financed by GE Capital are manufactured by GE. GECS 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. F-40 ANNUAL REPORT PAGE 64 29 GEOGRAPHIC SEGMENT INFORMATION (CONSOLIDATED) 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. U.S. exports to international customers by major areas of the world are shown on page 39.
- ---------------------------------------------------------------------------------------------------------------------------- REVENUES For the years ended December 31 Total revenues Intersegment revenues External revenues ---------------------------- ------------------------------- ----------------------------- (In millions) 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- United States $66,330 $58,110 $52,935 $ 2,471 $ 2,292 $ 2,123 $63,859 $55,818 $50,812 Europe 18,166 15,964 12,293 787 714 656 17,379 15,250 11,637 Pacific Basin 4,742 4,343 3,725 880 796 457 3,862 3,547 3,268 Other 6,420 5,140 4,750 680 576 439 5,740 4,564 4,311 Intercompany eliminations (4,818) (4,378) (3,675) (4,818) (4,378) (3,675) -- -- -- ---------------------------- ------------------------------- ----------------------------- Total $90,840 $79,179 $70,028 $ -- $ -- $ -- $90,840 $79,179 $70,028 ============================================================================================================================ - ------------------------------------------------------------------------------------------------------------------------------- OPERATING PROFIT ASSETS NON-U.S. NET ASSETS For the years ended December 31 At December 31 At December 31 ---------------------------- -------------------------------- ------------------------------ (In millions) 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- United States $ 8,825 $ 9,693 $ 9,002 $206,655 $189,593 $158,884 $ $ $ Europe 2,024 1,724 1,043 66,740 55,196 44,107 31,076 23,021 20,059 Pacific Basin 302 269 375 8,881 8,125 6,442 6,237 5,082 3,740 Other 706 576 543 21,926 19,655 18,776 12,233 11,439 11,472 Intercompany eliminations (23) 7 9 (190) (167) (174) (72) (62) (51) ---------------------------- -------------------------------- ------------------------------ Total $11,834 $12,269 $10,972 $304,012 $272,402 $228,035 $49,474 $39,480 $35,220 =============================================================================================================================== Principally the Americas other than the United States, but also includes operations that cannot meaningfully be associated with specific geographic areas (for example, shipping containers used on ocean-going vessels). Net of 1997 restructuring and other special charges. Not applicable. - -------------------------------------------------------------------------------------------------------------------------------
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, 1997 or 1996. Moreover, the disclosed values are representative of fair values only as of the dates indicated. 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. Values are estimated as 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. F-41 ANNUAL REPORT PAGE 65
- ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL INSTRUMENTS 1997 1996 ---------------------------------------- ---------------------------------------- Assets (liabilities) Assets (liabilities) ----------------------------- ----------------------------- Carrying Estimated fair value Carrying Estimated fair value Notional amount -------------------- Notional amount -------------------- December 31 (In millions) amount (net) High Low amount (net) High Low - ------------------------------------------------------------------------------------------------------------------------------------ GE Investment related Investments and notes receivable $ $ 1,909 $ 1,915 $ 1,908 $ $ 1,675 $ 3,127 $ 3,127 Cancelable interest rate swap 1,421 25 19 19 -- -- -- -- Borrowings and related instruments Borrowings (4,358) (4,377) (4,377) (4,049) (4,058) (4,058) Interest rate swaps 531 -- (12) (12) 536 -- (11) (11) Currency swaps -- -- -- -- 180 -- 25 25 Recourse obligations for receivables sold 427 (23) (23) (23) 424 -- -- -- Financial guarantees 2,141 -- -- -- 1,805 -- -- -- Other firm commitments Currency forwards and options 6,656 82 270 270 5,476 70 150 150 Financing commitments 1,794 -- -- -- 1,554 -- -- -- GECS Assets Time sales and loans 62,712 63,105 61,171 60,859 61,632 60,544 Integrated interest rate swaps 12,323 19 (125) (125) 4,376 -- 91 91 Purchased options 1,617 31 31 31 1,938 11 12 12 Mortgage-related positions Mortgage purchase commitments 2,082 -- 11 11 1,193 -- 2 2 Mortgage sale commitments 2,540 -- (9) (9) 1,417 -- 3 3 Mortgages held for sale 2,378 2,379 2,379 1,112 1,165 1,165 Options, including "floors" 30,347 51 141 141 27,422 78 81 81 Interest rate swaps and futures 3,681 -- 23 23 1,731 -- (29) (29) Other cash financial instruments 2,242 2,592 2,349 2,240 2,735 2,487 Liabilities Borrowings and related instruments Borrowings (141,263) (141,828) (141,828) (125,621) (125,648) (125,648) Interest rate swaps 42,531 -- (250) (250) 34,491 -- (575) (575) Currency swaps 23,382 -- (1,249) (1,249) 24,588 -- 368 368 Currency forwards 15,550 -- 371 371 6,165 -- 72 72 Purchased options 375 33 8 8 1,882 10 1 1 Investment contract benefits (23,045) (22,885) (22,885) (20,210) (19,953) (19,953) Insurance-- financial guarantees and credit life 183,957 (2,897) (2,992) (3,127) 170,402 (3,801) (3,614) (4,025) Credit and liquidity support -- securitizations 13,634 (46) (46) (46) 6,842 (73) (9) (9) Performance guarantees -- principally letters of credit 2,699 (34) -- (67) 3,470 (55) (132) (133) Other 3,147 (1,134) (1,282) (1,303) 2,901 (1,560) (1,175) (1,176) Other firm commitments Currency forwards 1,744 -- 11 11 1,823 -- 3 2 Currency swaps 1,073 192 192 192 1,134 -- (38) (38) Ordinary course of business lending commitments 7,891 -- (62) (62) 4,950 -- (27) (27) Unused revolving credit lines Commercial 4,850 -- -- -- 3,375 -- -- -- Consumer-- principally credit cards 134,123 -- -- -- 116,878 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Not applicable. Includes effects of interest rate and currency swaps, which also are listed separately. See note 19. - ------------------------------------------------------------------------------------------------------------------------------------
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 F-42 ANNUAL REPORT PAGE 66 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 GECS business activities, such as the mortgage servicing and annuities businesses. 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, 1997 and 1996, this gross market risk amounted to $2.0 billion and $0.9 billion, respectively. Aggregate fair values that represent associated probable future obligations, normally associated with a right of offset against probable future receipts, amounted to $2.9 billion and $0.7 billion at December 31, 1997 and 1996, 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)
First quarter Second quarter Third quarter Fourth quarter (Dollar amounts in millions; ----------------- ----------------- ----------------- ------------------ per-share amounts in dollars) 1997 1996 1997 1996 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS Net earnings $ 1,677 $ 1,517 $ 2,162 $ 1,908 $ 2,014 $ 1,788 $ 2,350 $ 2,067 Earnings per share -- basic 0.51 0.46 0.66 0.58 0.62 0.54 0.72 0.63 -- diluted 0.50 0.45 0.65 0.57 0.60 0.53 0.70 0.62 SELECTED DATA GE Sales of goods and services 10,522 9,742 12,620 11,520 11,698 11,478 14,112 13,379 Gross profit from sales 2,970 2,781 3,886 3,475 3,368 3,060 2,618 3,784 GECS Total revenues 9,544 7,245 9,317 7,457 10,182 8,449 10,888 9,562 Operating profit 1,081 973 1,138 951 1,229 1,179 974 945 - ---------------------------------------------------------------------------------------------------------------
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 and, as a result, their sum does not equal the total year earnings-per-share amounts for 1997 and 1996. Per-share amounts have been adjusted for the 2-for-1 stock split effective on April 28, 1997. EXHIBIT 12 GENERAL ELECTRIC COMPANY RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS) Year ended December 31 --------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- GE EXCEPT GECS Earnings $ 5,511 $ 7,828 $ 8,696 $ 9,677 $ 10,132 Less: Equity in undistributed earnings of General Electric Capital Services, Inc. (957) (1,181) (1,324) (1,836) (1,597) Plus: Interest and other financial charges included in expense 525 410 649 595 797 One-third of rental expense 212 171 174 171 179 -------- -------- -------- -------- -------- Adjusted "earnings" $ 5,291 $ 7,228 $ 8,195 $ 8,607 $ 9,511 ======== ======== ======== ======== ======== Fixed Charges: Interest and other financial charges $ 525 $ 410 $ 649 $ 595 $ 797 Interest capitalized 21 21 13 19 31 One-third of rental expense 212 171 174 171 179 -------- -------- -------- -------- -------- Total fixed charges $ 758 $ 602 $ 836 $ 785 $ 1,007 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 6.98 12.01 9.80 10.96 9.44 ======== ======== ======== ======== ======== GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES Earnings $ 6,287 $ 8,831 $ 9,941 $ 11,075 $ 11,419 Plus: Interest and other financial charges included in expense 4,096 4,994 7,336 7,939 8,445 One-third of rental expense 349 327 349 353 423 -------- -------- -------- -------- -------- Adjusted "earnings" $ 10,732 $ 14,152 $ 17,626 $ 19,367 $ 20,287 ======== ======== ======== ======== ======== Fixed Charges: Interest and other financial charges $ 4,096 $ 4,994 $ 7,336 $ 7,939 $ 8,445 Interest capitalized 26 30 34 60 83 One-third of rental expense 349 327 349 353 423 -------- -------- -------- -------- -------- Total fixed charges $ 4,471 $ 5,351 $ 7,719 $ 8,352 $ 8,951 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 2.40 2.64 2.28 2.32 2.27 ======== ======== ======== ======== ======== Earnings before income taxes and minority interest. For 1993, earnings are before cumulative effect of a change in accounting principle. Earnings after income taxes, net of dividends. Considered to be representative of interest factor in rental expense.
-----END PRIVACY-ENHANCED MESSAGE-----