To Our Share Owners

GE had a great year in 1994, with the notable exception of the Kidder, Peabody issue. By any other measure, our 221,000 associates turned in their best performance in the Company's history. Earnings and earnings per share from ongoing operations were up 22%. Nine of our 12 businesses saw double-digit earnings growth; five of them were up more than 20%. Only Aircraft Engines, saddled with a weak commercial market and declining defense spending, saw a modest earnings decline, but the business still managed to produce more than one-half billion dollars in net income. GE revenues from outside the United States continued to outpace our domestic growth. In Europe, they totaled more than $9 billion in 1994. More importantly, our businesses are well positioned for another year of significant net income growth as the European economy continues to recover. In Japan, we expanded our already substantial presence with a major financial services acquisition and the significant growth of our existing partnerships. Globalization continued with double-digit top-line growth in the key emerging markets of Mexico, India, China and Southeast Asia. While there will, no doubt, be temporary setbacks on their road to full development, these countries represent the key growth markets of the next century, and we are committed to continue investing in them. NBC's cable assets continued their growth, with a valuation now exceeding $1.5 billion. Using the reach and resources of GE, the globalization of the network continued, with well over 60 million homes throughout Europe and the Middle East now being reached through NBC Super Channel. In Asia, NBC's new network is currently distributing programs from the United States and Europe, and, later in 1995, locally produced programming will come on stream from our new Hong Kong studio and be available in more than 25 Asian nations. A series of initiatives enabled the businesses to generate more than $2 billion in free cash flow for the third straight year. This enabled GE to undertake a second $5 billion stock buyback in five years, while still retaining our triple-A debt rating. In April 1994, the share owners approved a two-for-one stock split, the seventh split since the founding of the Company and the third in the past 12 years. In December, a 14% dividend increase was declared, making 1994 the 19th consecutive year of dividend increases. These strong operating results, and the actions to enhance share owner value that they permit, are the result of the Company's commitment to involving everyone, a philosophy that is the core of our vision for the future. Boundarylessness... Boundaryless behavior has become the "right" behavior at GE. Since the early 1980s, as the Company downsized in order to become more globally competitive, we often heard the question, "How much more can be squeezed from the lemon?" This zero-sum-thinking did not foresee the immense reservoir of creativity and energy that flows from an engaged work force that increasingly embraces three fundamental operating behaviors. We've described these three behaviors in past letters: boundarylessness, speed and stretch. They have evolved from philosophical, "soft" concepts into behaviors that deliver hard results, and they are the reason for both today's success and the enormous potential we see for tomorrow. A few examples of where these soft concepts have delivered top- and bottom-line results: Boundaryless behavior, an odd, awkward phrase just a few years ago, is increasingly a way of life at GE. It has led to an obsession for finding a better way -- a better idea -- be its source a colleague, another GE business, or another company across the street or on the other side of the globe that will share its ideas and practices with us. American Standard, a customer of our Motors and Industrial Systems business, has been using a technique called "Demand Flow Technology" to double and triple inventory turn rates and move toward a goal of zero working capital. GE teams have learned from American Standard and are obtaining dramatic results from Power Systems to Plastics to Medical Systems, producing a second consecutive year of double-digit improvement in working capital turnover. Yokogawa, our partner in the Medical Systems business, has been using "Bullet Train Thinking" to take 30-50% out of product costs over a two-year period. This technique, which employs "out-of-the-box" thinking and cross-functional teams dedicated to removing obstacles to cost reduction, is now fully operational in our Aircraft Engines business. This effort should lead this business to double-digit profitability growth in 1995, despite less-than-robust market conditions. "Quick Market Intelligence," the weekly direct customer feedback technique, was originally learned from Wal-Mart and implemented with great success in our Appliances business to improve asset turnover. "QMI" has now been adopted by a service business -- GE Capital's Retailer Financial Services -- in this instance to drive the quality of customer service in its credit card operations and help grow earnings more than 25% in 1994, with double-digit growth expectations for 1995. Caterpillar has dramatically reduced its service cost structure and new product introduction time through part standardization disciplines. The implementation of these disciplines is becoming key to the rapid new product introduction successes in our Appliances and Power Systems businesses, where product introduction cycle times have been cut by more than half. From Toshiba we have learned of its "Half-Movement" -- half the parts, half the weight, in half the time -- and tomorrow it will become a key element of engineering design philosophy at each of our businesses. Boundaryless behavior has become the "right" behavior at GE, and aligned with this behavior is a rewards system that recognizes the adapter or implementer of an idea as much as its originator. Creating this open, sharing climate magnifies the enormous and unique advantage of a multibusiness GE, as our wide diversity of service and industrial businesses exchange an endless stream of new ideas and best practices. Speed... From decision-making to deal-making to communications to product introduction, speed, more often than not, ends up being the competitive differentiator. Speed. Today's global environment, with its virtually real-time information exchanges, demands that an institution embrace speed. Faster, in almost every case, is better. From decision-making to deal-making to communications to product introduction, speed, more often than not, ends up being the competitive differentiator. In new product introduction, a clear gauge with which to quantify speed, there are several important examples: The Lighting business introduced hundreds of new products, ranging from the expansion of its Halogen IR line, to a whole new range of compact fluorescents, to the introduction of GE/Motorola brand electronic fluorescent ballasts. Power Systems, a long-cycle business that used to be characterized by glacial product development, completed design of, and brought to market, three new gas turbine-generators in 1994. CNBC brought America's Talking, 14 hours a day of original programming, from a concept to on-the-air in less than six months. Product development in Medical Systems has gone from a two-year cycle to less than one, and now 70% of our computed tomography products are less than one year old. In locomotive manufacturing, the change from "DC" technology -- the standard diesel locomotive propulsion for 30 years or so -- to "AC" is, in many respects, as profound a change as from steam to diesel. This "traditional," century-old, long-cycle business had an AC model locomotive on the tracks within 18 months, is changing out its entire product line and, in 1995, will be selling very little that it sold as recently as 1993. Across every business, the focus on shorter cycles -- on simply getting faster -- has been the driver of our improved asset turnover rate and strong cash flow. In an organization where boundarylessness, openness, informality and the use of ideas from anywhere -- and speed -- with its bias for action -- are increasingly a way of life, the third operating principle -- stretch -- is a natural outgrowth. Stretch... A stretch atmosphere replaces a grim, heads-down determination to be as good as you have to be, and asks, instead, how good can you be? Stretch, in its simplest form, says, "Nothing is impossible," and the setting of stretch targets inspires people and captures their imaginations. Target setting at GE begins when business leaders at the beginning of the year set their stretch goals for things like income, cash flow and market share -- given the contemporary circumstances of competition, the economy and all other external variables. Because this management team has been together for a long time, trust has grown, and trust is an indispensable ingredient that allows a business to set big stretch targets. GE business leaders do not walk around all year regretting the albatross of an impossible number they hung around their own necks. At the end of the year, the business is measured, not on whether it hit the stretch target, but on how well it did against the prior year, given the circumstances. Performance is measured against the world as it turned out to be: how well a business anticipated change and dealt with it, rather than against some "plan" or internal number negotiated a year earlier. Stretch does not mean "commitments are out." Stretch can only occur in an environment where everyone is totally committed to a rigid set of core values -- integrity, trust, quality, boundaryless behavior -- and to outperforming every one of our global competitors in every market environment. Stretch does mean we are not fixated on a meaningless, internally derived, annual budget number that does nothing but make bureaucrats comfortable. A stretch atmosphere replaces a grim, heads-down determination to be as good as you have to be, and asks, instead, how good can you be? "How good can we be?" was the question in 1991 when the Company set two big stretch targets: 10 inventory turns and 15% operating margins by the end of 1995. At that time, those two numbers represented big stretches -- after all, it had taken over a century -- since Edison's time -- and we still hadn't reached five turns and had barely achieved an 11% operating margin. Well, 1995 is upon us, and 10 turns may be just beyond our reach, but by year's end we'll be over nine. In GE today, this is not a "miss," a "broken commitment" or a "black eye" -- but a triumph to be celebrated, an achievement that is providing the cash to finance the acquisitions we want and a stock buyback. As for the 15% operating margin stretch target by 1995, it's possible, and we're all focused on reaching for it. The point is, whether we hit our targets or not is not the issue. What does matter is that we've broken out of a 110-year pattern with stretch thinking, and we're on to new targets. The point is made even clearer when we read our letters to share owners from just a few years back. We now cringe at numbers we once crowed about, as they pale beside today's. And the most exciting thing is knowing that tomorrow's "stretches" will make today's numbers look anemic in light of where the Company will be at the time of the 1996 or 1997 letter. Simplification... We are going to de-complicate everything we do and make at GE. As we look to 1995, we have launched a Company-wide campaign to overlay our three initiatives, and everything else we do, with something we've talked about for years: Simplification. We are going to de-complicate everything we do and make at GE. Our communications with each other will be increasingly straightforward; our presentations to each other and to our customers will be simpler. Their richness will come from the dialogue, not the complexity of the charts. Our engineers will use less-convoluted processes, and fewer parts, to produce designs whose elegance will be measured by their simplicity; and that simplicity will improve their quality, their cost and their speed in reaching the marketplace. Competitiveness... What we have done has barely scratched the surface. It turns out that there is, in fact, unlimited juice in that lemon. The fact is that none of this is about squeezing anything at all -- it is about tapping an ocean of creativity, passion and energy that, as far as we can see, has no bottom and no shores. The unfortunate part of 1994 was that the many achievements and terrific performance of GE people were often overshadowed by the well-chronicled problems with Kidder, Peabody. The Kidder story, and its $1.2 billion loss, is not a pleasant one; and it is tempting to simply relegate it to the past -- but we can't. Whether or not it was a good idea to buy Kidder in 1986 is academic -- in the end, it simply didn't work out. In 1994, weak trading markets lowered Wall Street earnings by billions of dollars from the levels of 1993, and Kidder was not immune to the weaknesses in these markets. But Kidder had another problem: a phantom trading scheme by a single employee, directed not against customers but against the firm itself, which cost it $210 million in net income. The combination of the two circumstances -- a downturn in earnings, and an employee's wrongdoing -- made it clear to us that it was time to get out; thus the sale of the brokerage assets of Kidder to PaineWebber, in return for 25% equity in that firm, and the liquidation of the trading operation. None of this is to say it couldn't have been done better, but the bottom line is that the type of business Kidder had become -- a cyclical trading business -- was simply not the place for GE to be. The tragedy of businesses that are not market leaders, that don't have a broadly based competitive edge -- be they brokerage houses or manufacturing plants -- is exactly the same; and it goes beyond "one-time charges" -- dollars and cents. It's the people -- the factory or office workers -- who can't just "go down the street" -- like traders and managers can -- for another job. This human toll reminds us, once again, that nothing we do is more important than staying competitive-- keeping that winning edge. Nothing. Increasing our competitiveness is at the heart of all this "soft stuff" -- boundaryless behavior, increasing our speed and stretch, with an overlay of simplification. And the excitement they produce is, obviously, in the hard results they generate, but even more importantly, it is in the knowledge that what we have done has barely scratched the surface. It turns out that there is, in fact, unlimited juice in that lemon. The fact is that none of this is about squeezing anything at all -- it is about tapping an ocean of creativity, passion and energy that, as far as we can see, has no bottom and no shores. Using 100% of the minds and passion of 100% of our people in implementing the best ideas from everywhere in the world is a formula, we believe, for endless excitement, endless growth and endless renewal. We now have a Company that is faster, more confident and higher-spirited than at any time in its history -- a Company of people who believe in themselves, in each other and in their infinite capacity to improve everything. Clearly, our best days are ahead -- starting with 1995. John F. Welch, Jr. Chief Executive Officer Paolo Fresco Vice Chairman of the Board and Executive Officer February 10, 1995

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