-----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, N/lRHpHncxNr4nt0/kd97x5i4H4qyCOUESvzinme06qFd2EDmnmr4TbDmnpcG4gB k/y9UPycVIyNUPKlVWjEIg== 0000808450-97-000011.txt : 19971223 0000808450-97-000011.hdr.sgml : 19971223 ACCESSION NUMBER: 0000808450-97-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19971222 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAVISTAR INTERNATIONAL CORP /DE/NEW CENTRAL INDEX KEY: 0000808450 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 363359573 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09618 FILM NUMBER: 97742519 BUSINESS ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3128362032 MAIL ADDRESS: STREET 2: 455 N CITYFRONT PLAZA DRIVE CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: NAVISTAR HOLDING INC DATE OF NAME CHANGE: 19870528 10-K 1 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 (FEE REQUIRED) For the fiscal year ended October 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 1-9618 N A V I S T A R I N T E R N A T I O N A L C O R P O R A T I O N --------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3359573 ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 455 North Cityfront Plaza Drive, Chicago, Illinois 60611 -------------------------------------------------- -------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (312) 836-2000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - --------------------------------------- ----------------------- Common stock, par value $0.10 per share New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange $6.00 cumulative convertible preferred stock, Series G (with $1.00 par value) New York Stock Exchange Cumulative convertible junior preference stock, Series D (with $1.00 par value) New York Stock Exchange 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 and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- As of December 15, 1997 the aggregate market value of Common Stock (excluding Class B Common Stock) held by non-affiliates of the registrant was $1,126,267,804. As of December 15, 1997 the number of shares outstanding of the registrant's Common Stock was 49,235,751 and the Class B Common Stock was 23,090,905. Documents Incorporated by Reference ----------------------------------- 1997 Annual Report to Shareowners (Parts I, II and IV) 1997 Proxy Statement (Parts I and III) Navistar Financial Corporation 1997 Annual Report on Form 10-K (Part IV) NAVISTAR INTERNATIONAL CORPORATION FORM 10-K Year Ended October 31, 1997 INDEX 10-K Page --------- PART I Item 1. Business ......................................... 3 Item 2. Properties ....................................... 8 Item 3. Legal Proceedings ................................ 9 Executive Officers of the Registrant ............. 10 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 and Financial Condition. 12 Item 8. Financial Statements and Supplementary Data ...... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......... 12 PART III Item 10. Directors and Executive Officers of the Registrant .............................. 13 Item 11. Executive Compensation ........................... 13 Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 13 Item 13. Certain Relationships and Related Transactions ... 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................ 13 SIGNATURES Principal Accounting Officer .............................. 15 Directors ................................................. 16 POWER OF ATTORNEY ......................................... 16 INDEPENDENT AUDITORS' REPORT .............................. 18 INDEPENDENT AUDITORS' CONSENT ............................. 18 SCHEDULE .................................................. F-1 EXHIBITS .................................................. E-1 PART I ITEM 1. BUSINESS Navistar International Corporation is a holding company and its principal operating subsidiary is Navistar International Transportation Corp. referred to as "Transportation". As used hereafter, "Navistar" or "company" refers to Navistar International Corporation and its subsidiaries. Navistar, through its wholly owned subsidiary Transportation, operates in two principal industry segments: manufacturing and financial services. Manufacturing operations are responsible for the manufacture and marketing of medium and heavy trucks, including school buses, mid-range diesel engines and service parts primarily in the United States and Canada as well as in selected export markets. Based on assets and revenues, manufacturing operations represent the majority of the company's business activities. The financial services operations consist of Navistar Financial Corporation (NFC), its domestic insurance subsidiary and the company's foreign finance and insurance subsidiaries. NFC's primary business is the retail and wholesale financing of products sold by the manufacturing operations and its dealers within the United States and the providing of commercial physical damage and liability insurance to the manufacturing operations' dealers and retail customers and to the general public through an independent insurance agency system. Industry segment data for 1997, 1996, and 1995 is summarized in Note 14 to the Financial Statements, which is incorporated herein by reference. THE MEDIUM AND HEAVY TRUCK INDUSTRY The market in which Navistar competes is subject to considerable volatility as it moves in response to cycles in the overall business environment and is particularly sensitive to the industrial sector which generates a significant portion of the freight tonnage hauled. Government regulation has impacted and will continue to impact trucking operations and efficiency and the specifications of equipment. The following table shows industry retail deliveries in the combined United States and Canadian markets for the five years ended October 31, in thousands of units: YEARS ENDED OCTOBER 31, --------------------------- 1997 1996 1995 1994 1993 ----- ----- ----- ----- ----- Class 5, 6 and 7 medium trucks and school buses ................... 150.6 145.8 151.8 134.2 122.5 Class 8 heavy trucks ............. 196.8 195.4 228.8 205.4 166.4 ----- ----- ----- ----- ----- Total .......................... 347.4 341.2 380.6 339.6 288.9 ===== ===== ====== ===== ===== Source: Monthly data provided by the American Automobile Manufacturers Associations (AAMA) in the United States and Canada, and other sources. The Class 5 through 8 truck market in the United States and Canada is highly competitive. Major domestic competitors include PACCAR, Ford and General Motors, as well as foreign-controlled manufacturers, such as Freightliner, Mack and Volvo GM. In addition, manufacturers from Japan (Hino, Isuzu, Nissan and Mitsubishi) are competing in the United States and Canadian markets. The intensity of this competition results in price discounting and margin pressures throughout the industry. In addition to the influence of price, market position is driven by product quality, engineering, styling, utility and distribution. TRANSPORTATION MARKET SHARE Transportation delivered 99,500 Class 5 through 8 trucks, including school buses, in the United States and Canada in fiscal 1997, a 6% increase from the 94,000 units delivered in 1996. Navistar's combined share of the Class 5 through 8 truck market was 28.6% in 1997 and 27.5% in 1996. Transportation has been the leader in combined market share for Class 5 through 8 trucks, including school buses, in the United States and Canada in each of its last 17 fiscal years based on data obtained from the American Automobile Manufacturers Association, the United States Motor Vehicle Manufacturers Association and R.L. Polk & Company. PRODUCTS The following table illustrates the percentage of the company's manufacturing sales by class of product based on dollar amount: YEARS ENDED OCTOBER 31, --------------------------- PRODUCT CLASS 1997 1996 1995 - ------------- ----- ----- ----- Class 5, 6 and 7 medium trucks and school buses ................... 34% 35% 32% Class 8 heavy trucks ............. 37 35 42 Service parts .................... 13 14 12 Engines .......................... 16 16 14 --- --- --- Total .......................... 100% 100% 100% === === === Transportation manufactures a full line of products in the common carrier, private carrier, government/service, leasing, construction, energy/petroleum and student transportation markets. Transportation offers diesel-powered trucks and buses because of their improved fuel economy, ease of serviceability and greater durability over gasoline- powered vehicles. Transportation's Class 8 heavy trucks generally use diesel engines purchased from outside suppliers while Class 5, 6 and 7 medium trucks are powered by a proprietary line of mid-range diesel engines manufactured by Transportation. Based upon information published by R.L. Polk & Company, diesel-powered Class 5, 6 and 7 medium truck shipments represented 87% of all medium truck shipments for fiscal year 1997 in the United States and Canada. Transportation's truck and bus manufacturing operations in the United States and Canada consist principally of the assembly of components manufactured by its suppliers, although Transportation produces its own mid-range diesel truck engines, sheet metal components (including cabs) and miscellaneous other parts. During 1997, the company announced plans for approximately $350 million in capital spending and $300 million in development expense over the next six years for development of the next generation truck. ENGINE AND FOUNDRY Transportation builds diesel engines for use in its Class 5, 6 and 7 medium trucks, school buses, selected Class 8 heavy truck models and for sale to original equipment manufacturers in the United States and Canada. Transportation also sells engines for industrial, agricultural and marine applications. Transportation is the leading supplier of mid- range diesel engines in the 160-300 horsepower range according to data supplied by Power Systems Research of Minneapolis, Minnesota. Transportation has an agreement to supply its 7.3 liter (7.3L) electronically controlled diesel engine to Ford Motor Company (Ford) through the year 2002 for use in all of its diesel-powered light trucks and vans. Sales of this engine to Ford currently account for approximately 87% of Transportation's 7.3L sales. Shipments of engines to all original equipment manufacturers totaled a record 184,000 units in 1997, an increase of 13% from the 163,200 units shipped in 1996. During 1997, Transportation entered into a ten-year agreement, effective with model year 2003, to supply Ford with a 7.3L replacement product for use in its diesel-powered light trucks and vans. SERVICE PARTS In the United States and Canada, Transportation operates 7 regional parts distribution centers, which allows it to offer 24-hour availability and same day shipment of the parts most frequently requested by customers. The company also operates a parts distribution center in Mexico. Transportation's service parts program is vital to the maintenance of the relationship with its customers and dealers. The sale of replacement parts does not represent a separate and distinct business of Transportation. Transportation's truck group makes decisions about the pricing of trucks and replacement parts based upon a variety of factors which integrally link the pricing and sale of replacement parts with the sale of medium and heavy trucks, including school buses. The acceptable price for dealers and fleet truck sales is determined by not only looking at the market price of the individual trucks themselves, but also by analyzing the amount of future replacements parts that will be purchased from Transportation over the truck's life cycle and the total expected profit contribution, including future replacement parts, expected to be realized on each sale. Accordingly, the pricing of trucks and replacement parts is not independently determined. MARKETING AND DISTRIBUTION Transportation's truck products are distributed in virtually all key markets in the United States and Canada. Transportation's truck distribution and service network in these countries was composed of 954, 957 and 958 dealers and retail outlets at October 31, 1997, 1996 and 1995, respectively. Included in these totals were 514, 504 and 490 secondary and associate locations at October 31, 1997, 1996 and 1995, respectively. The company also has a dealer network in Mexico composed of 38 and 23 dealer locations at October 31, 1997 and 1996, respectively. Retail dealer activity is supported by 5 regional operations in the United States and general offices in Canada and Mexico. Transportation has a national account sales group, responsible for 99 major national account customers. Transportation's network of 16 Used Truck Centers in the United States provides trade-in support to the company's dealers and national accounts group, and markets all makes and models of reconditioned used trucks to owner-operators and fleet buyers. Trucks, components and service parts are exported for wholesale and retail sale to more than 70 countries around the world. FINANCIAL SERVICES NFC is a financial services organization that provides wholesale, retail and lease financing of new and used trucks sold by Transportation and its dealers in the United States. NFC also finances wholesale accounts and selected retail accounts receivable of Transportation. Sales of new products (including trailers) of other manufacturers are also financed regardless of whether designed or customarily sold for use with Transportation's truck products. During 1997 and 1996, NFC provided wholesale financing for 94% of the new truck units sold by Transportation to its dealers and distributors in the United States and retail and lease financing for 13% and 16%, respectively, of all new truck units sold or leased by Transportation to retail customers. NFC's wholly owned domestic insurance subsidiary, Harco National Insurance Company, provides commercial physical damage and liability insurance coverage to Transportation's dealers and retail customers, and to the general public through an independent insurance agency system. Harbour Assurance Company of Bermuda Limited offers a variety of programs to the company, including general liability insurance, ocean cargo coverage for shipments to and from foreign distributors, and reinsurance coverage for various Transportation policies. IMPORTANT SUPPORTING OPERATIONS In the United States, Transportation has a third party sales financing agreement with Associates Commercial Corporation to provide wholesale financing to certain of its truck dealers and retail financing to their customers. Navistar International Corporation Canada also has an agreement with a subsidiary of General Electric Capital Canada, Inc. to provide financing for Canadian dealers and customers. RESEARCH AND DEVELOPMENT Research and development activities, which are directed toward the introduction of new products and improvements of existing products and processes used in their manufacture, totaled $92 million, $101 million, and $91 million for 1997, 1996 and 1995, respectively. BACKLOG The backlog of unfilled truck orders (subject to cancellation or return in certain events) at October 31, 1997, 1996 and 1995 was $2,360 million, $1,254 million and $2,581 million, respectively. Although the backlog of unfilled orders is one of many indicators of market demand, other factors such as changes in production rates, available capacity, new product introductions and competitive pricing actions may affect point-in-time comparisons. EMPLOYEES The company employed 16,168, 14,187 and 16,079 individuals at October 31, 1997, 1996 and 1995, respectively. LABOR RELATIONS At October 31, 1997, the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represented 8,079 of the company's active employees in the United States, and the Canadian Auto Workers (CAW) represented 2,142 of the company's active employees in Canada. Other unions represented 955 of the company's active employees in the United States and Canada. The company entered into a collective bargaining agreement with the UAW in 1995, which would have expired on October 1, 1998. During August 1997, the company's collective bargaining agreement with the UAW was extended through October 1, 2002. This contract allows the company to focus its assembly plants, simplify current product lines, invest in new product development, and achieve more competitive wage, benefit and productivity levels. In addition, the company entered into a collective bargaining agreement with the CAW in 1996, which expires on October 24, 1999. PATENTS AND TRADEMARKS Transportation continuously obtains patents on its inventions and, thus, owns a significant patent portfolio. Additionally, many of the components which Transportation purchases for its products are protected by patents that are owned or controlled by the component manufacturer. Transportation has licenses under third-party patents relating to its products and their manufacture, and Transportation grants licenses under its patents. The royalties paid or received under these licenses are not significant. No particular patent or group of patents is considered by Transportation to be essential to its business as a whole. Like all businesses which offer well-known products or services, Transportation's primary trademarks are an important part of its worldwide sales and marketing efforts, and provide instant identification of its products and services in the marketplace. To support these efforts, Transportation maintains, or has pending, registrations of its primary trademarks in those countries in which it does business or expects to do business. RAW MATERIALS AND ENERGY SUPPLIES Transportation purchases raw materials, parts and components from numerous outside suppliers but relies upon some suppliers for a substantial number of components for its truck and engine products. A majority of Transportation's requirements for raw materials and supplies is filled by single-source suppliers. The impact of an interruption in supply will vary by commodity. Some parts are generic to the industry while others are of a proprietary design requiring unique tooling which would require time to recreate. However, the company's exposure to a disruption in production as a result of an interruption of raw materials and supplies is no greater than the industry as a whole. In order to remedy any losses resulting from an interruption in supply, the company maintains contingent business interruption insurance for storms, fire and water damage. While the company believes that it has adequate assurances of continued supply, the inability of a supplier to deliver could have an adverse effect on production at certain of the company's manufacturing locations. IMPACT OF GOVERNMENT REGULATION Truck and engine manufacturers continue to face increasing governmental regulation of their products, especially in the areas of environment and safety. The company believes its products comply with all applicable environmental and safety regulations. As a diesel engine manufacturer, the company has incurred research and tooling costs to redesign its engine product lines to meet the United States Environmental Protection Agency (U.S. EPA) and California Air Resources Board (CARB) emission standards effective for the 1998 model year. In addition to the 1998 standards, the company, along with other engine manufacturers, has signed a voluntary agreement (Statement of Principles) with U.S. EPA and CARB to achieve new reductions in ozone-causing exhaust emissions by 2004. In October 1997, as a result of the Statement of Principles, the U.S. EPA issued a final rule defining heavy-duty emission requirements for the 2004 model year. The company will also provide engines that satisfy 1998 Clean Fuel Fleet Vehicle requirements and must also satisfy California's emission standards in 2002 for engines used in medium-size vehicles (which includes vehicles up to 14,000 lbs. Gross Vehicle Weight Rating). The company expects that its diesel engines will be able to meet all of these standards within the required time frame. Effective with the 1998 model year, Canada's emission standards mirror those of the U.S. EPA and require the sale of low-sulfur diesel fuel effective October 1, 1997. Mexico has adopted the U.S. heavy diesel engine emission standards as of the 1994 model year but has conditioned compliance on the availability of low-sulfur diesel fuel. Truck manufacturers are also subject to various noise standards imposed by federal, state and local regulations. The engine is one of a truck's primary noise sources, and the company, therefore, works closely with original equipment manufacturers to develop strategies to reduce engine noise. The company is also subject to the National Traffic and Motor Vehicle Safety Act (Safety Act) and Federal Motor Vehicle Safety Standards (Safety Standards) promulgated by the National Highway Traffic Safety Administration. The company believes it is in compliance with the Safety Act and the Safety Standards. Expenditures to comply with various environmental regulations relating to the control of air, water and land pollution at production facilities and to control noise levels and emissions from Transportation's products have not been material except for two sites formerly owned by the company, Wisconsin Steel in Chicago, Illinois, and Solar Turbine in San Diego, California. In 1994, Transportation recorded a $20 million after-tax charge as a loss of discontinued operations for environmental liabilities and cleanup cost at these two sites. It is not expected that the costs of compliance with foreseeable environmental requirements will have a material effect on the company's financial position or operating results. ITEM 2. PROPERTIES In the United States and Canada, Transportation owns and operates eight manufacturing and assembly operations, which contain approximately nine million square feet of floor space. Four facilities manufacture and assemble trucks, two plants manufacture diesel engines and two locations produce gray iron castings. The company also manufactures trucks at a facility owned and operated through a joint venture in the U.S. and is constructing a truck assembly facility in Mexico. In addition, Transportation owns or leases other significant properties in the United States and Canada including vehicle and parts distribution centers, sales offices, an engineering center and its headquarters in Chicago. Transportation's principal research and engineering facilities are located in Fort Wayne, Indiana, and Melrose Park, Illinois. In addition, certain research is conducted at its manufacturing plants. All of Transportation's plants are being utilized and have been maintained adequately, are in good operating condition and are suitable for its current needs through productive utilization of the facilities. These facilities, together with planned capital expenditures, are expected to meet Transportation's manufacturing needs in the foreseeable future. A majority of the activity of the financial services operations is conducted from its leased headquarters in Rolling Meadows, Illinois. The financial services operations also lease six other office locations in the United States. ITEM 3. LEGAL PROCEEDINGS The company and its subsidiaries are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings which constitute ordinary routine litigation incidental to the business of the company and its subsidiaries. In the opinion of the company's management, none of these proceedings or claims are material to the business or the financial condition of the company. EXECUTIVE OFFICERS The following selected information for each of the company's current executive officers was prepared as of December 16, 1997. OFFICERS AND POSITIONS WITH NAME AGE NAVISTAR AND OTHER INFORMATION - ---- --- ------------------------------ John R. Horne 59 Chairman, President and Chief Executive Officer since 1996 and a Director since 1990. Mr. Horne also is Chairman, President and Chief Executive Officer of Transportation since 1995 and a Director since 1987. Prior to this, Mr. Horne served as President and Chief Executive Officer, 1995-1996, President and Chief Operating Officer, 1990-1995, Group Vice President and General Manager, Engine and Foundry, 1990, and Vice President and General Manager, Engine and Foundry, 1983-1990. Donald DeFosset, Jr. 49 Executive Vice President and President, Truck Group since 1996. Mr. DeFosset also is Executive Vice President and President, Truck Group of Transportation since 1996. Prior to this, Mr. DeFosset served as President, Allied Signal Safety Restraints Systems of Allied Signal Inc., 1993 - 1996, Group Executive and General Manager, Allied Signal Turbocharging and Truck Brake Systems, 1992 - 1993, and Vice President, Planning and Business Development in 1992 and served as Executive Vice President, Operations for Mack Trucks, 1989 - 1992. Robert C. Lannert 57 Executive Vice President and Chief Financial Officer and a Director since 1990. Mr. Lannert also is Executive Vice President and Chief Financial Officer of Transportation since 1990 and a Director since 1987. Prior to this, Mr. Lannert served as Vice President and Treasurer, 1987-1990, and Vice President and Treasurer of Transportation, 1979-1990. Robert A. Boardman 50 Senior Vice President and General Counsel since 1990. Mr. Boardman also is Senior Vice President and General Counsel of Transportation since 1990. Prior to this, Mr. Boardman served as Vice President of Manville Corporation, 1988-1990, and Corporate Secretary, 1983-1990. EXECUTIVE OFFICERS (continued) OFFICERS AND POSITIONS WITH NAME AGE NAVISTAR AND OTHER INFORMATION - ---- --- ------------------------------ Thomas M. Hough 52 Vice President and Treasurer since 1992. Mr. Hough also is Vice President and Treasurer of Transportation since 1992. Prior to this, Mr. Hough served as Assistant Treasurer 1987-1992, and Assistant Treasurer of Transportation, 1987-1992. Mr. Hough also served as Assistant Controller, Accounting and Financial Systems, 1987, and Controller of Navistar Financial Corporation, 1982-1987. J. Steven Keate 41 Vice President and Controller since 1995. Mr. Keate also is Vice President and Controller of Transportation since 1995. Prior to this, Mr. Keate served as Vice President and Controller of General Dynamics Corporation, 1991-1995, and Corporate Manager, Financial Planning and Analysis, 1989-1991. Steven K. Covey 46 Corporate Secretary since 1990. Mr. Covey also is Associate General Counsel of Transportation since 1992. Prior to this, Mr. Covey served as General Attorney, Finance and Securities of Transportation, 1989-1992, Senior Counsel, Finance and Securities of Transportation, 1986-1989, and Senior Attorney, Corporate Operations 1984-1986. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Navistar International Corporation Common Stock is listed on the New York, Chicago and Pacific Stock Exchanges under the abbreviated stock symbol "NAV." Information regarding high and low market price per share of Common Stock for each quarter of 1997 and 1996 is incorporated by reference from the 1997 Annual Report to Shareowners, page 41, filed as Exhibit 13 to this Form 10-K. There were approximately 57,949 owners of Common Stock at October 31, 1997. All shares of Common Stock and Class B Common Stock share equally in dividends except that stock dividends are payable in shares of Common Stock to holders of that class and in Class B Common Stock to holders of that class. Upon liquidation, all shares of Common Stock and Class B Common Stock are entitled to share equally in the assets of the company available for distribution to the holders of such shares. Dividends may be paid out of surplus as defined under Delaware corporation law. ITEMS 6, 7 AND 8 The information required by Items 6-8 is incorporated herein by reference from the 1997 Annual Report to Shareowners, filed as Exhibit 13 to this Form 10-K as follows: 1997 Annual Report Page ------ ITEM 6. SELECTED FINANCIAL DATA .................... 44 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ...... 3 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 14 With the exception of the aforementioned information (Part II; Items 5-8) and the information specified under Items 1 and 14 of this report, the 1997 Annual Report to Shareowners is not to be deemed filed as part of this report. ---------------------------------------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEMS 10, 11 AND 12. Information required by Items 10, 11 and 12 of this Form is incorporated herein by reference from Navistar's definitive Proxy Statement for the March 24, 1998 Annual Meeting of Shareowners. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Information required by Part IV (Item 14) of this form is incorporated herein by reference from Navistar International Corporation's 1997 Annual Report to Shareowners, filed as Exhibit 13 to this Form 10-K as follows: 1997 Annual Report Page ------ Financial Statements - -------------------- Independent Auditors' Report ........................ 13 Statement of Income for the years ended October 31, 1997, 1996 and 1995 14 Statement of Financial Condition as of October 31, 1997 and 1996 ................... 15 Statement of Cash Flow for the years ended October 31, 1997, 1996 and 1995 16 Notes to Financial Statements ....................... 17 Form 10-K Schedule Page - -------- ---- II - Valuation and Qualifying Accounts and Reserves F-1 All other schedules are omitted because of the absence of the conditions under which they are required or because information called for is shown in the financial statements and notes thereto in the 1997 Annual Report to Shareowners. Finance and Insurance Subsidiaries: The financial statements of Navistar Financial Corporation for the years ended October 31, 1997, 1996 and 1995 appearing on pages 8 through 34 in the Annual Report on Form 10-K for Navistar Financial Corporation for the fiscal year ended October 31, 1997, Commission File No. 1-4146- 1, are incorporated herein by reference and filed as Exhibit 28 to this Form 10-K. Exhibits, Including Those Incorporated by Reference Form 10-K Page - --------------------------------------------------- -------------- (3) Articles of Incorporation and By-Laws ......... E-1 (4) Instruments Defining the Rights of Security Holders, Including Indentures ...... E-2 (10) Material Contracts ............................ E-3 (11) Computation of Net Income Per Common Share .... E-9 (13) Navistar International Corporation 1997 Annual Report to Shareowners ........... N/A (21) Subsidiaries of the Registrant ................ E-10 (23) Independent Auditors' Consent ................. 18 (24) Power of Attorney ............................. 16 (27) Financial Data Schedule ....................... N/A (28) Navistar Financial Corporation Annual Report on Form 10-K for the fiscal year ended October 31, 1997 ............................ N/A All exhibits other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information called for is shown in the financial statements and notes thereto in the 1997 Annual Report to Shareowners. Reports on Form 8-K - ------------------- No reports on Form 8-K were filed for the three months ended October 31, 1997. SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES --------------------------------- SIGNATURE Pursuant to the requirements of Section 13 and 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. NAVISTAR INTERNATIONAL CORPORATION - ---------------------------------- (Registrant) /s/ J. Steven Keate - ---------------------------------- J. Steven Keate December 22, 1997 Vice President and Controller (Principal Accounting Officer) EXHIBIT 24 SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- POWER OF ATTORNEY Each person whose signature appears below does hereby make, constitute and appoint John R. Horne and J. Steven Keate and each of them acting individually, true and lawful attorneys-in-fact and agents with power to act without the other and with full power of substitution, to execute, deliver and file, for and on such person's behalf, and in such person's name and capacity or capacities as stated below, any amendment, exhibit or supplement to the Form 10-K Report making such changes in the report as such attorney-in-fact deems appropriate. SIGNATURES 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 dates indicated: Signature Title Date - ---------------------- ----------------------------- ----------------- /s/ John R. Horne - ---------------------- John R. Horne Chairman of the Board, December 22, 1997 President and Chief Executive Officer, and Director (Principal Executive Officer) /s/ Robert C. Lannert - ---------------------- Robert C. Lannert Executive Vice President December 22, 1997 and Chief Financial Officer and Director (Principal Financial Officer) /s/ J. Steven Keate - ---------------------- J. Steven Keate Vice President and Controller December 22, 1997 (Principal Accounting Officer) /s/ William F. Andrews - ----------------------- William F. Andrews Director December 22, 1997 EXHIBIT 24 (CONTINUED) SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- SIGNATURES (Continued) /s/ Andrew F. Brimmer - ---------------------- Andrew F. Brimmer Director December 22, 1997 /s/ John D. Correnti - ---------------------- John D. Correnti Director December 22, 1997 /s/ William C. Craig - ----------------------- William C. Craig Director December 22, 1997 /s/ Jerry E. Dempsey - ----------------------- Jerry E. Dempsey Director December 22, 1997 /s/ John F. Fiedler - ----------------------- John F. Fiedler Director December 22, 1997 /s/ Mary Garst - ----------------------- Mary Garst Director December 22, 1997 /s/ Michael N. Hammes - ----------------------- Michael N. Hammes Director December 22, 1997 /s/ Allen J. Krowe - ----------------------- Allen J. Krowe Director December 22, 1997 /s/ Walter J. Laskowski - ------------------------ Walter J. Laskowski Director December 22, 1997 /s/ William F. Patient - ------------------------ William F. Patient Director December 22, 1997 SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ----------------------------------- INDEPENDENT AUDITORS' REPORT Navistar International Corporation: We have audited the Statement of Financial Condition of Navistar International Corporation and Consolidated Subsidiaries as of October 31, 1997 and 1996, and the related Statements of Income and Cash Flow for each of the three years in the period ended October 31, 1997, and have issued our report thereon, dated December 15, 1997; such consolidated financial statements and report are included in your 1997 Annual Report to Shareowners and are incorporated herein by reference. Our audits also included the financial statement schedule of Navistar International Corporation and Consolidated Subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such 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. Deloitte & Touche LLP December 15, 1997 Chicago, Illinois ---------------------------------- EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT Navistar International Corporation: We consent to the incorporation by reference in the Registration Statements, including post-effective amendments, No. 2-70979, No. 33- 26847, No. 333-25783, No. 333-29735, No. 333-29739 and No.333-29301 of Navistar International Corporation all on Form S-8 of our reports on Navistar International Corporation and Navistar Financial Corporation, dated December 15, 1997, appearing and incorporated by reference in this Annual Report on Form 10-K of Navistar International Corporation for the year ended October 31, 1997. Deloitte & Touche LLP December 22, 1997 Chicago, Illinois
SCHEDULE II NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ============ VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 (MILLIONS OF DOLLARS) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- BALANCE DEDUCTIONS FROM DESCRIPTION AT RESERVES BALANCE DESCRIPTION BEGINNING ADDITIONS CHARGED AT END OF RESERVES DEDUCTED FROM OF YEAR TO INCOME DESCRIPTION AMOUNT OF YEAR ----------- ------------- --------- ----------------- ----------- ------ ------- Reserves deducted from assets to which they apply: 1997 ---- Uncollectible notes and accounts Allowance for written off and losses on Notes and accounts reserve adjustment, receivables .... receivable .... $ 31 $ 14 less recoveries ... $ 14 $ 31 ===== ===== ===== ===== 1996 ---- Uncollectible notes and accounts Allowance for written off and losses on Notes and accounts reserve adjustment, receivables .... receivable .... $ 28 $ 21 less recoveries ... $ 18 $ 31 ===== ===== ===== ===== 1995 ---- Uncollectible notes and accounts Allowance for written off and losses on Notes and accounts reserve adjustment, receivables .... receivable .... $ 25 $ 4 less recoveries ... $ 1 $ 28 ===== ===== ===== =====
F-1 EX-3 2 EXHIBIT 3 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- ARTICLES OF INCORPORATION AND BY-LAWS The following documents of Navistar International Corporation are incorporated herein by reference: 3.1 Restated Certificate of Incorporation of Navistar International Corporation effective July 1, 1993, filed as Exhibit 3.2 to Form 10-K dated October 31, 1993, which was filed on January 27, 1994, Commission File No. 1-9618. 3.2 The By-Laws of Navistar International Corporation effective April 14, 1995, filed as Exhibit 3.2 on Annual Report on Form 10-K dated October 31, 1995, which was filed on January 26, 1996, on Commission File No. 1-9618. E-1 EX-4 3 EXHIBIT 4 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES The following instruments of Navistar International Corporation and its principal subsidiary Navistar International Transportation Corp. and its principal subsidiary Navistar Financial Corporation defining the rights of security holders are incorporated herein by reference. 4.1 Indenture, dated as of March 1, 1968, between Navistar International Transportation Corp. and Manufacturers Hanover Trust Company, as Trustee, and succeeded by FIDATA Trust Company of New York, as successor Trustee, for 6 1/4% Sinking Fund Debentures due 1998 for $50,000,000. Filed on Registration No. 2-28150. 4.2 Indenture, dated as of June 15, 1974, between Navistar International Transportation Corp. and Harris Trust and Savings Bank, as Trustee, and succeeded by Commerce Union Bank, now known as Sovran Bank/Central South, as successor Trustee, for 9% Sinking Fund Debentures due 2004 for $150,000,000. Filed on Registration No. 2-51111. 4.3 Indenture, dated as of November 15, 1993, between Navistar Financial Corporation and Bank of America, Illinois formerly known as Continental Bank, National Association, as Trustee, for 8 7/8% Senior Subordinated Notes due 1998 for $100,000,000. Filed on Registration No. 33-50541. 4.4 Indenture, dated as of May 30, 1997, by and between Navistar Financial Corporation and The Fuji Bank and Trust Company, as Trustee, for 9% Senior Subordinated Notes due 2002 for $100,000,000. Filed on Registration No. 333-30167. ====== Instruments defining the rights of holders of other unregistered long-term debt of Navistar and its subsidiaries have been omitted from this exhibit index because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its consolidated subsidiaries. The Registrant agrees to furnish a copy of any such instrument to the Commission upon request. E-2 EX-10 4 EXHIBIT 10 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- MATERIAL CONTRACTS The following documents of Navistar International Corporation and its affiliate Navistar Financial Corporation are incorporated herein by reference. 10.1 Navistar International Corporation 1984 Stock Option Plan. Filed as Exhibit A to Proxy Statement dated February 6, 1984. Commission File No. 1-5236. 10.2 Pooling and Servicing Agreement dated as of December 1, 1990, among Navistar Financial Corporation as Servicer, Navistar Financial Securities Corporation as Seller, and Manufacturers Hanover Trust Company, as Trustee. Filed on Registration No. 33-36767. 10.3 Navistar 1994 Performance Incentive Plan. Filed as Appendix to Proxy Statement dated January 27, 1994. Commission File No. 1-9618. 10.4 Indenture dated as of May 3, 1994 between Navistar Financial 1994-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994-A Owner Trust. Filed on Registration No. 33-50291. 10.5 Indenture dated as of August 3, 1994 between Navistar Financial 1994-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994-B Owner Trust. Filed on Registration No. 33-50291. 10.6 Amended and Restated Credit Agreement dated as of November 4, 1994 among Navistar Financial Corporation, certain banks, certain Co-Arranger banks, and Morgan Guaranty Trust Company of New York, as Administrative Agent. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.7 Liquidity Agreement dated as of November 7, 1994 among NFC Asset Trust, as Borrower, Chemical Bank, Bank of America Illinois, The Bank of Nova Scotia, and Morgan Guaranty Trust Company of New York, as Co-Arrangers, and Chemical Bank, as Administrative Agent. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.8 Indenture dated as of December 15, 1994 between Navistar Financial 1994-C Owner Trust and the Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994-C Owner Trust. Filed on Registration No. 33-55865. 10.9 Indenture dated as of May 25, 1995 between Navistar Financial 1995-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1995-A Owner Trust. Filed on Registration No. 33-55865. E-3 EXHIBIT 10 (CONTINUED) NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- MATERIAL CONTRACTS 10.10 Indenture dated as of November 1, 1995 between Navistar Financial 1995-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1995-B Owner Trust. Filed on Registration No. 33-55865. 10.11 Amendment No. 2 dated as of March 29, 1996, to the Amended and Restated Credit Agreement dated as of November 4, 1994, as amended by Amendment No. 1 dated as of December 15, 1995, among Navistar Financial, certain banks, certain Co-Arranger banks, and Morgan Guaranty Trust Company of New York, as Administrative Agent filed on Form 8-K dated June 5, 1996. Commission File No. 1-4146-1. 10.12 Indenture dated as of May 30, 1996, between Navistar Financial 1996-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996-A Owner Trust. Filed on Registration No. 33-55865. 10.13 Indenture dated as of November 6, 1996, between Navistar Financial 1996-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996-B Owner Trust. Filed on Registration No. 33-55865. 10.14 Indenture dated as of May 7, 1997, between Navistar Financial 1997-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1997-A Owner Trust. Filed on Registration No. 33-55865. 10.15 Amendment No. 3 dated as of May 27, 1997, to the Amended and Restated Credit Agreement dated as of November 4, 1994, as amended by Amendment No. 1 dated as of December 15, 1995 and Amendment No. 2 dated as of March 29, 1996, among the Navistar Financial Corporation, certain banks, certain Co-Arranger banks, and Morgan Guaranty Trust Company of New York, as Administrative Agent filed on Form 8-K dated June 17, 1997. Commission File No. 1-4146-1. 10.16 Form of Executive Severance Agreement which is executed with all executive officers dated June 16, 1997. Filed as Exhibit 10.5 to Form 10-Q dated September 12, 1997. Commission File No. 1-9618. 10.17 Navistar International Corporation Stock Ownership Program. Filed as Exhibit 10.20 to Form 10-Q dated September 12, 1997. Commission File No. 1-9618. 10.18 Indenture dated as of November 5, 1997, between Navistar Financial 1997-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1997-B Owner Trust. Filed on Registration No. 33-64249. The following documents of Navistar International Corporation are included herein: Form 10-K Page -------------- 10.19 Navistar 1988 Non-Employee Director E-5 Stock Option Plan amended as of March 20, 1996. E-4 EX-10.19 5 EXHIBIT 10.19 NAVISTAR 1988 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Amended As Of March 20, 1996 I. Administration The Navistar 1988 Non-Employee Director Stock Option Plan (the "Plan") will be administered by the Board of Directors ("Board") of Navistar International Corporation ("Corporation"). The granting of an option pursuant to the Plan will take place the business day following the day on which the Board approves the grant of such option at its regularly scheduled December meeting, provided that, such grant will expire if a written option agreement is not signed by the optionee and delivered to the Corporation within thirty (30) days of the date of the grant. Subject to the express provisions of the Plan, the Board will have complete authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of the respective option agreements (which need not be identical) and to make all other determinations necessary or advisable for the administration of the Plan. The Board's determinations on the matters referred to in this paragraph 1 will be conclusive. 2. Stock Subject to the Plan Such shares may be in whole or in part, as the Board will from time to time determine, authorized and unissued shares of Common Stock or issued shares of Common Stock which shall have been reacquired by the Corporation. If any option granted under the Plan shall expire or terminate for any reason without having been exercised or earned in full, the shares subject thereto will again be available for the purposes of the Plan. 3. Effectiveness of the Plan The Plan will become effective upon the effective date of its adoption by the Board and options may be granted immediately thereafter, but no option may be exercised under the Plan unless and until the Plan shall have been approved by the vote of the holders of a majority of the outstanding shares of Common Stock present and voting at a meeting of the shareowners within six (6) months after the date of adoption of the Plan by the Board. 4. Eligibility Options may be granted only to non-employee directors of the Board. No individual who is, at the time of the grant, an employee of the Corporation or of any subsidiary of the Corporation will be eligible to receive an option under the Plan. 5. Number of Shares To Be Granted At each regularly scheduled December meeting of the Board, an option will be granted to each non-employee director for two thousand (2,000) shares of Common Stock. E-5 6. Option Prices The purchase price of the Common Stock under each option will be 100% of the fair market value of the Common Stock on the business day following the day of grant by the Board. Such fair market value will be determined by the average of the high and low prices of the Common Stock in the New York Stock Exchange--Composite Transactions listing published in the Midwest Edition of The Wall Street Journal or equivalent financial publication. 7. Exercise Options An option granted under the Plan will become exercisable in whole or in part after the commencement of the second year of the term of the option. The Board is authorized to establish the manner and the effective date of the exercise of an option. Each option will become immediately exercisable in the event of death, total and permanent disability, retirement in accordance with the Board's policy or a "change in control" of the Corporation. A "change in control" shall be deemed to have occurred, if (A) any "person" or "group" (as such terms are used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934 other than employee or retiree benefit plans or trusts sponsored or established by the Corporation or Navistar International Transportation Corp. ("NITC") is or becomes the "beneficial owner" (as defined Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Corporation representing 25% or more the combined voting power of the Corporation's then outstanding securities, (B) as the result of, or in connection with, any cash tender offer, exchange offer, merger or other business combination, sale of assets, proxy or consent solicitation, contested election or substantial stock accumulation (a "Control Transaction"), the members of the Board of Directors of the Corporation immediately prior to the first public announcement relating to such Control Transaction shall immediately thereafter, or within two years, cease to constitute a majority of the Board of Directors of the Corporation or (C) any dissolution or liquidation of the Corporation or NITC or an agreement for the sale or disposition of all or substantially all (more than 50%) of the assets of the Corporation or of NITC occurs. Notwithstanding the foregoing, the sale or disposition of any or all of the assets or stock of Navistar Financial Corporation shall not be deemed a Change in Control. The purchase price is to be paid in full to the Corporation upon the exercise of the option either (i) by cash including a personal check payable to the order of the Corporation or (ii) by delivering at fair market value Common Stock already owned by the optionee or any combination of cash and Common Stock. The fair market value of the Common Stock so delivered will be the average of the high and low prices of the Common Stock on the day prior to delivery as published in the New York Stock Exchange--Composite Transactions listed in the Midwest Edition of the Wall Street Journal or equivalent financial publication. An option granted under the Plan will be exercisable for a term of ten (10) years from the date of the grant, and will be subject to earlier termination as hereinafter provided. Except as provided in paragraphs 10 and 11 hereof, no option may exercised at any time unless the holder thereof is then a director of the Corporation. The holder of an option will have none of the rights of a stockholder with respect to the shares subject to option until such shares are issued upon the exercise of the option. Shares which otherwise would be delivered to the holder of an option may be delivered, at the election of the holder, to the Corporation in payment of any Federal, state and/or local withholding taxes due in connection with an exercise. E-6 8. Non-Transferability of Options No option granted under the Plan will be transferable other than by will or the laws of descent and distribution, and an option may be exercised, during the life time of the holder thereof, only by the holder. 9. Agreement to Serve Each individual receiving an option will, as one of the terms of the option agreement, agree to remain as a director of the Corporation for a period of at least one (1) year from the date of granting the option except as provided in the immediately following sentence. In the event of retirement in accordance with the Board's policy prior to the end of the one year service period, each holder will, as one of the terms of the option agreement, agree to serve as a consultant to the Board for any remaining portion of such one year service period. Such service will (subject to the provisions of paragraph 10 hereof) be at the pleasure of the Corporation and at such compensation as the Corporation will reasonably determine from time to time. 10. Termination of Service In the event of the termination of the service of the holder of any option, other than by reason of a retirement, permanent and total disability or death as set forth in paragraph 11, the holder may (unless the option shall have been previously terminated pursuant to the provisions of paragraph 9 above or unless otherwise provided in the option agreement) exercise the option at any time within three (3) months after such termination, but not after the date identified in the option agreement as the date the options expire. Nothing in the Plan or in any option granted pursuant to the Plan will confer on any individual any right to continue in the service of the Corporation or interfere in any way with the right of the Board to terminate service at any time. 11. Retirement, Total and Permanent Disability or Death of Holder of Option In the event of retirement in accordance with the Board's policy or in the event of total and permanent disability, the holder may exercise the option at any time within three (3) years after such retirement or such disability but not after the date identified in the option agreement as the date the options expire. In the event of the death of an individual to whom an option has been granted under the Plan, while the option is outstanding, the option theretofore granted to the holder may be exercised by a legatee or legatees of the option holder, or by the personal representative or distributees, at any time within a period of one (1) year after death, but not after the date identified in the option as the date the options expire. E-7 12. Adjustments upon Changes in Capitalization Notwithstanding any other provision of the Plan, the option agreements may contain such provisions as the Board shall determine to be appropriate for the adjustment of the number and class of shares subject to each outstanding option and the option prices in the event of changes in, or distributions with respect to, the outstanding Common Stock by reason of stock dividends, recapitalizations, mergers, consolidations, split-ups, combinations or exchanges of shares, spin-offs and the like, and, in the event of any such change in, or distribution with respect to, the outstanding Common Stock, the aggregate number and class of shares available under the Plan shall be appropriately adjusted by the committee, whose determination shall be conclusive. 13. No Loans to Holders of Options Neither the Corporation, nor any of its subsidiaries, may directly or indirectly lend money to any individual for the purpose of assisting the individual to acquire or carry shares of Common Stock issued upon the exercise of options granted under the Plan. 14. Amendment and Termination Unless the Plan shall theretofore have been terminated as hereinafter provided, the Plan will terminate on, and no option will be granted after December 17, 1997. The Plan may be terminated, modified or amended by the shareowners of the Corporation. The Board may also terminate the Plan, or modify or amend the Plan in such respects as it shall deem advisable to conform to any change in any law or regulations applicable thereto, or in other respects which will not change (i) the maximum number of shares as to which benefits may be granted under the Plan or the amount of the annual grant of shares subject to the option, (ii) the classes of individuals eligible to receive options, (iii) the manner of determining the minimum options prices other than to change the manner of determining the fair market value of the Common Stock, as set forth in paragraph 5 above, to conform to any then applicable provisions of the Code or regulations thereunder or (iv) the period during which options may be granted or exercised. No termination, modification or amendment of the Plan may, without the consent of the optionee to whom any option or award shall theretofore have been granted, adversely affect the rights of such optionee. E-8 EX-11 6 EXHIBIT 11 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- COMPUTATION OF NET INCOME PER COMMON SHARE A. Primary: See the Statement of Income contained in the Navistar International Corporation 1997 Annual Report to Shareowners incorporated herein by reference. B. Full Dilution: YEARS ENDED OCTOBER 31 Millions of Dollars, ----------------------------- except per share data 1997 1996 1995 - ------------------------------------------------------------------- Net income .................. $ 150 $ 65 $ 164 Less dividends on Series G Preferred stock ........... 29 29 29 ------ ------ ------ Net income applicable to common stock .............. $ 121 $ 36 $ 135 ====== ====== ====== Fully diluted average common and dilutive common equivalent shares outstanding ........ 74.1 73.8 74.3 ====== ====== ====== Fully diluted earnings per share ................. $ 1.64 $ .49 $ 1.83 ====== ====== ====== - --------------- This calculation is submitted in accordance with Regulation S-K item 601(b)(11) of the Securities Exchange Act and excludes the effects of the conversion of the Series G preferred stock as such conversion would produce anti-dilutive results. E-9 EX-13 7 EXHIBIT 13 NAVISTAR INTERNATIONAL CORPORATION 1997 ANNUAL REPORT TO SHAREOWNERS FINANCIAL SUMMARY Millions of dollars, except per share data 1997 1996 - -------------------------------------------------------------------- FOR THE YEARS ENDED OCTOBER 31 Sales and revenues ............... $6,371 $5,754 Income before income taxes ....... $ 242 $ 105 Net income ....................... $ 150 $ 65 Net income per common share ...... $ 1.65 $ .49 Manufacturing gross margin ....... 14.2% 12.5% Return on equity ................. 14.7% 7.1% Cash and marketable securities ... $ 965 $ 881 FINANCIAL INFORMATION Financial Summary ............................................. 1 Management's Discussion and Analysis of Results of Operations and Financial Condition ....................... 3 Statement of Financial Reporting Responsibility ............... 12 Independent Auditors' Report .................................. 13 Financial Statements Statement of Income ......................................... 14 Statement of Financial Condition ............................ 15 Statement of Cash Flow ...................................... 16 Notes to Financial Statements 1 Summary of accounting policies ....................... 17 2 Postretirement benefits .............................. 20 3 Income taxes ......................................... 24 4 Marketable securities ................................ 27 5 Receivables .......................................... 28 6 Inventories .......................................... 29 7 Property and equipment ............................... 29 8 Debt ................................................. 30 9 Other liabilities .................................... 32 10 Financial instruments ................................ 33 11 Commitments, contingencies, restricted assets, concentrations and leases .......................... 35 12 Legal proceedings .................................... 36 13 Environmental matters ................................ 36 14 Industry segment data ................................ 37 15 Preferred and preference stocks ...................... 38 16 Common shareowners' equity ........................... 39 17 Stock compensation plans ............................. 40 18 Selected quarterly financial data (unaudited) ........ 41 19 Supplemental financial information (unaudited) ....... 42 Five -Year Summary of Selected Financial and Statistical Data . 44 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Certain statements under this caption constitute "forward-looking statements" under the Reform Act, which involve risks and uncertainties. Navistar International Corporation's actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under the caption "Business Environment." Navistar International Corporation is a holding company and its principal operating subsidiary is Navistar International Transportation Corp. (Transportation). In this discussion and analysis, "company" refers to Navistar International Corporation and its consolidated subsidiaries. The company's manufacturing operations are engaged in the manufacture and marketing of Class 5 through 8 trucks, including school buses, mid-range diesel engines and service parts primarily in the United States and Canada. These products are also sold to distributors in selected export markets. The financial services operations of the company provide wholesale, retail and lease financing, and commercial physical damage and liability insurance coverage to the company's dealers and retail customers and to the general public through an independent insurance agency system. The discussion and analysis reviews the operating and financial results, and liquidity and capital resources of manufacturing operations and financial services operations. Manufacturing operations include the financial results of the financial services operations included on a one- line basis under the equity method of accounting. Financial services operations include Navistar Financial Corporation (NFC), its domestic insurance subsidiary as well as the company's foreign finance and insurance companies. See Note 1 to the Financial Statements. RESULTS OF OPERATIONS The company reported net income of $150 million for 1997, or $1.65 per common share, reflecting higher sales of manufactured products. Net income was $65 million, or $0.49 per common share, in 1996 and $164 million, or $1.83 per common share, in 1995. Net income in 1996 included a one-time $35 million pretax charge for costs related to the termination of the next generation truck (NGT) program. In August 1997, the company and the United Auto Workers reached agreement on a master contract extension that enabled the company to reinstate this program. The remaining accrual for the 1996 charge at the time of the announcement was not material. The company's manufacturing operations reported income before income taxes of $164 million in 1997 compared with pretax income of $22 million in 1996 and $200 million in 1995. The increase in 1997 reflects higher sales of trucks and diesel engines as well as the effects of improved pricing and various cost improvement initiatives. The decrease in 1996 from 1995 reflects a decline in demand for trucks as well as the charge for termination of the company's next generation truck program. The company's financial services operations had income before income taxes of $78 million, $83 million and $62 million in 1997, 1996 and 1995, respectively. NFC's pretax income in 1997 was $75 million, a 7% decrease from $81 million in 1996. The change is primarily a result of lower income on sales of retail receivables and a decline in wholesale financing activity. The reduced gains on sales resulted from lower margins on retail notes reflecting higher market interest rates prior to the date of sale. NFC's pretax income increased $22 million in 1996 from the $59 million reported in 1995 primarily due to higher income on sales of retail notes and an increased volume of wholesale financing. Earnings from the foreign finance and insurance subsidiaries were $3 million, $2 million and $3 million in 1997, 1996 and 1995, respectively. Sales and Revenues. Industry retail sales of Class 5 through 8 trucks totaled 347,400 units in 1997, a 2% increase from the 341,200 units sold in 1996, but 9% lower than the 380,600 units sold in 1995. Class 8 heavy truck sales totaled 196,800 units, comparable to the 195,400 units sold in 1996 but a decrease of 14% from the 228,800 units sold in 1995. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, totaled 150,600 units in 1997, a 3% increase from 1996 when 145,800 units were sold, and comparable to the 151,800 units sold in 1995. Industry sales of school buses, which accounted for 22% of the medium truck market, increased slightly from 1996 to 33,200 units. Sales and revenues of $6,371 million in 1997 were 11% higher than the $5,754 million reported in 1996 and comparable to the $6,342 million reported in 1995. Sales of trucks, mid-range diesel engines and service parts totaled $6,147 million in 1997, 12% above the $5,508 million reported for 1996 and comparable to the $6,125 million reported in 1995. The company maintained its position as sales leader in the combined United States and Canadian Class 5 through 8 truck market in 1997 with a 28.6% market share, an increase from the 27.5% share in 1996 and the 26.7% share in 1995. (Sources: American Automobile Manufacturer's Association, the United States Motor Vehicle Manufacturer's Association and R. L. Polk & Company.) In 1997, the company's share of the Class 8 heavy truck market increased to 18.6% from 17.1% in 1996 and 18.4% in 1995. Shipments of mid-range diesel engines by the company to other original equipment manufacturers during 1997 were a record 184,000 units, a 13% increase from 1996 and a 19% improvement over 1995. Higher shipments to Ford Motor Company to meet consumer demand for the light trucks and vans which use this engine was the primary reason for the increase. Service parts sales of $806 million in 1997 increased from the $760 million reported in 1996 and were 10% higher than the $730 million reported in 1995 as a result of dealer and national account volume growth. Finance and insurance revenue for 1997 was $174 million, 12% lower than the $197 million reported in 1996 primarily as a result of a decline in wholesale financing activity. Revenues from financial services operations increased 18% between 1996 and 1995 primarily as a result of higher income on sales of retail notes. Costs and Expenses. Manufacturing gross margin was 14.2% of sales in 1997, compared with 12.5% in 1996 and 13.8% in 1995. The increase in gross margin is primarily due to lower production costs and improved pricing offset by a provision for employee profit sharing. Factors which contributed to the change in gross margin between 1996 and 1995 included lower sales volumes, more competitive pricing and the costs of terminating the next generation truck program. Engineering and research expense was $124 million in 1997, $129 million in 1996 and $113 million in 1995, reflecting continuing investment in new truck and engine products as well as improvements to existing products. Marketing and administrative expense was $365 million in 1997 compared with $319 million in 1996 and $307 million in 1995. The change between 1997 and 1996 is the result of higher sales and distribution costs, and an increase in the provision for payment to employees as provided by the company's performance incentive programs. The $12 million increase in the expense between 1996 and 1995 reflects investment in the implementation of the company's strategy to reduce costs and complexity in its manufacturing processes. Interest expense decreased to $74 million in 1997 from $83 million in 1996 and $87 million in 1995. The decreases in 1997 and 1996 were the result of lower wholesale note funding requirements and declining interest rates. Finance service charges on sold receivables were $23 million in 1997, 4% lower than in 1996 and 21% lower than in 1995. LIQUIDITY AND CAPITAL RESOURCES Cash flow is generated from the manufacture and sale of trucks, mid- range diesel engines and service parts as well as product financing and insurance coverage provided to Transportation's dealers and retail customers by the financial services operations. Historically, funds to finance Transportation's products are obtained from a combination of commercial paper, short- and long-term bank borrowings, medium- and long-term debt issues, sales of finance receivables and equity capital. NFC's current debt ratings have made bank borrowings and sales of finance receivables the most economic sources of cash. Insurance operations are funded through internal operations. Total cash, cash equivalents and marketable securities of the company amounted to $965 million at October 31, 1997, $881 million at October 31, 1996 and $1,040 million at October 31, 1995. Cash provided by operations during 1997 totaled $380 million, primarily from net income of $150 million, $82 million of noncash deferred income taxes, and $59 million of other noncash items, principally depreciation and a net change in operating assets and liabilities of $89 million. Income tax expense for 1997 was $92 million, of which $10 million was cash payments to federal and certain state and local governments, while the remaining $82 million of federal and other taxes reduced the deferred tax asset. The net change in operating assets and liabilities of $89 million includes a $195 million increase in receivables, reflecting continued strong demand for the company's products, offset by a $288 million increase in accounts payable as a result of increased production in the fourth quarter. Investment programs included a net decrease in marketable securities, as sales of securities exceeded purchases by $45 million. During 1997, the purchase of $970 million of retail notes and lease receivables was funded with $958 million in proceeds from the sale of receivables and principal collections of $94 million. Other investment activities used $42 million for an increase in property and equipment leased to others and $172 million to fund capital expenditures. Capital expenditures included $82 million for construction of a truck assembly facility in Mexico, $42 million to increase mid-range diesel engine capacity and additional funds for truck product improvements. Financing activities used cash to pay $29 million in dividends on the Series G Preferred shares, $46 million for principal payments on long-term debt, and $285 million to reduce notes and debt outstanding under the bank revolving credit facility and asset-backed and other commercial paper programs offset by an increase of $209 million in long-term debt. During 1997 and 1996, NFC supplied 94% of the wholesale financing of new trucks sold to Transportation's dealers compared with 93% in 1995. NFC's share of the retail financing of new trucks sold in the United States decreased to 13% in 1997 from 16% in 1996 and 14% in 1995 due to the highly competitive commercial financing market. The sale of finance receivables is a significant source of funding for the financial services operations. During 1997, 1996 and 1995, NFC sold $987 million, $985 million and $740 million, respectively, of retail notes through Navistar Financial Retail Receivables Corporation (NFRRC), a wholly owned subsidiary. The net proceeds from these sales were used for general working capital purposes. In November 1997, NFC sold an additional $500 million of retail notes through NFRRC. NFRRC has filed registration statements with the Securities and Exchange Commission which provide for the issuance of up to $5,000 million of asset-backed securities. At October 31, 1997, the remaining shelf registration available to NFRRC for issuance of asset-backed securities was $1,473 million. See Note 8 to the Financial Statements. NFC has a $925 million contractually committed bank revolving credit facility and a $400 million asset-backed commercial paper program supported by a bank liquidity facility which mature in March 2001. NFC also utilizes a $600 million revolving wholesale note trust that provides for the continuous sale of eligible wholesale notes on a daily basis. The trust is comprised of two $100 million tranches of investor certificates maturing serially from 1998 to 1999, and two $200 million tranches maturing in 2003 and 2004. At October 31, 1997 the remaining shelf registration available for issuance of investor certificates was $200 million. At October 31, 1997, available funding under NFC's amended and restated credit facility and the asset-backed commercial paper facility was $532 million and $14 million, respectively, of which $141 million was used to back short-term debt at October 31, 1997. The company finances capital expenditures principally through internally generated cash. Capital leasing is used to fund selected projects based on economic and operating factors. The company had outstanding capital commitments of $137 million at October 31, 1997 primarily for increased manufacturing capacity at the Indianapolis engine plant and construction of a truck assembly facility in Mexico. The company has announced plans for approximately $350 million in capital spending over the next six years for the NGT program. Capital expenditures for 1998 are expected to be approximately double the current year's level. Approximately $25 million is to be spent in 1998 for the NGT program. Additional capital expenditures are planned for the completion of the truck assembly facility in Mexico, increased manufacturing capacity at the Indianapolis engine plant, commencement of truck operations in Brazil and improvements to existing facilities and products. The company's investment in the NGT program will also include $300 million in development expense over the next six years, of which approximately $50 million is planned for 1998. In November 1997, the company contributed $200 million to the Retiree Health Care Base Plan Trust and contributed $100 million to the hourly pension plan. NFC's maximum exposure under all receivable sale recourse provisions at October 31, 1997 was $246 million; however, management believes that the allowance for credit losses on sold receivables is adequate. At October 31, 1997, the Canadian operating subsidiary was contingently liable for retail customers' contracts and leases financed by a third party. The company is subject to maximum recourse of $261 million on retail contracts and $13 million on retail leases. In addition, as of October 31, 1997, the company is contingently liable for approximately $49 million for various guarantees and buyback programs; however, based on historical loss trends, the company's exposure is not considered material. The Canadian operating subsidiary, NFC and certain other subsidiaries included in financial services operations are parties to agreements which result in the restriction of amounts which can be distributed to Transportation in the form of dividends, loans or advances. At October 31, 1997, the maximum amount of dividends which were available for distribution under the most restrictive covenants was $62 million. The company and Transportation are obligated under certain agreements with public and private lenders of NFC to maintain the subsidiary's income before interest expense and income taxes at not less than 125% of its total interest expense. No income maintenance payments were required for the three years ended October 31, 1997. During November 1997, the company arranged financing for $125 million of funds denominated in U.S. dollars and Mexican pesos to be used for development of the company's Mexican operations. Management continues to evaluate current and forecasted cash flow as a basis for financing operating requirements, capital expenditures and anticipated payments of preferred dividends. Management believes that collections on the outstanding receivables portfolios as well as funds available from various funding sources will permit the financial services operations to meet the financing requirements of the company's dealers and customers. ENVIRONMENTAL MATTERS In the fourth quarter of 1994, Transportation recorded a $20 million charge, net of $13 million of income taxes, as a loss of discontinued operations related to environmental liabilities at production facilities of two formerly owned businesses, Wisconsin Steel and Solar Turbine, Inc. Included in the charge was an anticipated $11 million payment to the Economic Development Administration, a division of the U.S. Department of Commerce, in settlement of commercial and environmental disputes related to the Wisconsin Steel property. In 1997, the U.S. Department of Justice and Transportation approved the final consent decree related to the Wisconsin Steel property and the company paid $11 million to the Economic Development Administration. The company has been named a potentially responsible party (PRP), in conjunction with other parties, in a number of cases arising under an environmental protection law known as the Superfund law. These cases involve sites which allegedly have received wastes from current or former company locations. Based on information available to the company, which in most cases consists of data related to quantities and characteristics of material generated at or shipped to each site as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable estimate is calculated of the company's share, if any, of the probable costs and is provided for in the financial statements. These obligations generally are recognized no later than completion of the remedial feasibility study and are not discounted to their present value. The company reviews its accruals on a regular basis and believes that, based on these calculations, its share of the potential additional costs for the cleanup of each site will not have a material effect on the company's financial results. DERIVATIVE FINANCIAL INSTRUMENTS As disclosed in Notes 1 and 10 to the Financial Statements, the company uses derivative financial instruments to transfer or reduce the risks of foreign exchange and interest rate volatility, and potentially increase the return on invested funds. Company policy does not allow the use of derivatives for speculative purposes. The company's manufacturing operations, as conditions warrant, hedge foreign exchange exposure on the purchase of parts and materials from foreign countries and its exposure from sales of manufactured products in other countries. Contracted purchases of commodities for manufacturing may be hedged up to one year. The manufacturing operations had no foreign exchange exposure at October 31, 1997. NFC uses interest rate caps, interest rate swaps and forward interest rate contracts when needed to convert floating rate funds to fixed and vice versa to match its asset portfolio. NFC also uses forward interest rate contracts to manage its exposure to fluctuations in funding costs from the anticipated securitization and sale of retail notes. During 1997, NFC entered into $500 million of interest rate hedge agreements in anticipation of the November 1997 sale of retail receivables. These hedge agreements were closed in conjunction with the pricing of the sale, and the loss at October 31, 1997, which was not material, was deferred and reduced the gain recognized on the sale of receivables in November 1997. Both manufacturing operations and NFC purchase collateralized mortgage obligations that have relatively stable cash flow patterns in relation to interest rate changes. YEAR 2000 The company has made and will make certain investments in its software systems and applications to ensure that the company is Year 2000 compliant. The financial impact to the company has not been and is not anticipated to be material to its financial position or results of operations. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This statement specifies the computation, presentation and disclosure requirements for earnings per share and is effective for financial statements issued for periods ending after December 15, 1997. The standard is not expected to have a material effect on the company's net income per common share computation. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130 establishes standards for reporting and display of comprehensive income and its components. SFAS 131 establishes standards for reporting information about operating segments, and related disclosures about products and services, geographic areas and major customers. These statements are effective for fiscal years beginning after December 15, 1997. These standards expand or modify disclosures and, accordingly, will have no impact on the company's reported financial position, results of operations and cash flows. The company is assessing the impact of SFAS 131 on its reported segments. INCOME TAXES The Statement of Financial Condition at October 31, 1997 and 1996 includes a deferred tax asset of $934 million and $1,030 million, respectively, net of valuation allowances of $309 million related to future tax benefits. The deferred tax assets are net of valuation allowances since it is more likely than not that some portion of the deferred tax asset may not be realized in the future. The deferred tax asset includes the tax benefits associated with cumulative tax losses of $1,808 million and temporary differences, which represent the cumulative expense of $1,413 million recorded in the Statement of Income that has not been deducted on the company's tax returns. The valuation allowance at October 31, 1997 assumes that it is more likely than not that approximately $815 million of cumulative tax losses will not be realized before their expiration date. Realization of the net deferred tax asset is dependent on the generation of approximately $2,500 million of future taxable income, of which an average of approximately $75 million would need to be generated annually for the 14- year period 1998 through 2011. The remaining taxable income, which represents the realization of tax benefits associated with temporary differences, does not need to be generated until subsequent to 2011. Until the company has utilized its significant NOL carryforwards, the cash payment of federal income taxes will be minimal. See Note 3 to the Financial Statements. Extensive analysis is performed to determine the amount of the deferred tax asset. Such analysis is based on the premise that the company is and will continue to be a going concern and that it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Management reviews all available evidence, both positive and negative, to assess the long-term earnings potential of the company using a number of alternatives to evaluate financial results in economic cycles at various industry volume conditions based upon the company's current operating structure. Other factors considered are the company's 17-consecutive-year leadership in the combined market share of Class 5 through 8 trucks and recognition as a worldwide leading producer of mid-range diesel engines. The projected availability of taxable income to realize the tax benefit from net operating loss carryforwards and the reversal of temporary differences before expiration of these benefits are also considered. The valuation allowance may be adjusted in the future as a result of changes in business and industry conditions, operating structure, company strategies or other significant transactions. Management believes that, with the combination of available tax planning strategies and the maintenance of significant market share, earnings are achievable in order to realize the net deferred tax asset of $934 million. Reconciliation of the company's income before income taxes for financial statement purposes to United States taxable income for the years ended October 31 is as follows: Millions of dollars 1997 1996 1995 - -------------------------------------------------------------------- Income before income taxes ...... $ 242 $ 105 $ 262 Exclusion of (income) loss of foreign subsidiaries ...... (3) 3 (11) State income taxes .............. (2) (2) (2) Temporary differences ........... 151 (284) 69 Other ........................... 6 - (4) ------ ------ ------ Taxable income (loss) ......... $ 394 $ (178) $ 314 ------ ------ ------ The company contributed approximately $215 million to its hourly and salaried pension plans in fiscal 1997. The timing of these contributions allowed for their deduction on the company's 1996 tax return, which resulted in a tax loss of $178 million as compared to the $37 million of taxable income previously reported. BUSINESS ENVIRONMENT Sales of Class 5 through 8 trucks are cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates and the earnings and cash flow of dealers and customers. Reflecting the stability of the general economy, demand for new trucks remained strong during 1997. An improvement in the number of new truck orders has increased the company's order backlog to 45,300 units at October 31, 1997 from 20,900 units at October 31, 1996. Retail deliveries in 1998 continue to be highly dependent on the rate at which new truck orders are received. The company will evaluate order receipts and backlog throughout the year and will balance production with demand as appropriate. The company currently projects 1998 United States and Canadian Class 8 heavy truck demand to be 195,000 units, a slight decrease from 1997. Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast at 116,000 units, slightly lower than in 1997. Demand for school buses is expected to decrease 8% in 1998 to 30,500 units. Mid-range diesel engine shipments by the company to original equipment manufacturers in 1998 are expected to be 215,700 units, 17% higher than in 1997. The company's service parts sales are projected to grow 9% to approximately $875 million. An independent trust, created in 1993 for the benefit of the company's current and future retirees and administered by a five person trust committee, owned all of the outstanding Class B Common Stock at October 31, 1997 which is approximately one-third of the company's outstanding common stock. The Class B Common Stock has restricted voting rights and transfer provisions but, on June 30, 1998, will convert into Common Stock with full voting rights and no transfer restrictions. During August 1997, the company's current master contract with the United Auto Workers (UAW) was extended through October 1, 2002. This contract allows the company to focus its assembly plants, simplify current product lines, invest in new product development, and achieve more competitive wage, benefit and productivity levels. During 1997, the company entered into a ten-year agreement, effective with model year 2003, to supply newly designed, advanced technology engines through the year 2012 to Ford Motor Company for use in its diesel- powered light trucks and vans. The company's current engine agreement with Ford was extended through model year 2002. STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY Management of Navistar International Corporation and its subsidiaries is responsible for the preparation and for the integrity and objectivity of the accompanying financial statements and other financial information in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based on management's estimates and judgments. The accompanying financial statements have been audited by Deloitte & Touche LLP, independent auditors, whose appointment is ratified by shareowner vote at the Annual Meeting. Management has made available to Deloitte & Touche LLP all the company's financial records and related data, as well as the minutes of the Board of Directors' meetings. Management believes that all representations made to Deloitte & Touche LLP during its audit were valid and appropriate. Management is responsible for establishing and maintaining a system of internal controls throughout its operations that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use and the execution and recording of transactions in accordance with management's authorization. The system of internal controls which provides for appropriate division of responsibility is supported by written policies and procedures that are updated by management, as necessary. The system is tested and evaluated regularly by the company's internal auditors as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their audit in accordance with generally accepted auditing standards and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the company's system of internal controls and takes the necessary actions that are cost-effective in the circumstances to respond appropriately to the recommendations presented. Management believes that the company's system of internal controls accomplishes the objectives set forth in the first sentence of this paragraph. The Audit Committee of the Board of Directors, composed of six non- employee Directors, meets periodically with the independent auditors, management, general counsel and internal auditors to satisfy itself that such persons are properly discharging their responsibilities regarding financial reporting and auditing. In carrying out these responsibilities, the Committee has full access to the independent auditors, internal auditors, general counsel and financial management in scheduled joint sessions or private meetings as in the Committee's judgment seem appropriate. Similarly, the company's independent auditors, internal auditors, general counsel and financial management have full access to the Committee and to the Board of Directors and each is responsible for bringing before the Committee or its Chair, in a timely manner, any matter deemed appropriate to the discharge of the Committee's responsibility. John R. Horne Chairman, President and Chief Executive Officer Robert C. Lannert Executive Vice President and Chief Financial Officer INDEPENDENT AUDITORS' REPORT Navistar International Corporation, Its Directors and Shareowners: We have audited the Statement of Financial Condition of Navistar International Corporation and Consolidated Subsidiaries as of October 31, 1997 and 1996, and the related Statements of Income and of Cash Flow for each of the three years in the period ended October 31, 1997. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 accompanying consolidated financial statements present fairly, in all material respects, the financial position of Navistar International Corporation and Consolidated Subsidiaries at October 31, 1997 and 1996, and the results of their operations and their cash flow for each of the three years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. Deloitte & Touche LLP December 15, 1997 Chicago, Illinois STATEMENT OF INCOME
Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- For the Years Ended October 31 (Millions of dollars, except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------------- Sales and revenues Sales of manufactured products ............... $ 6,147 $ 5,508 $ 6,125 Finance and insurance revenue ................ 174 197 167 Other income ................................. 50 49 50 -------- -------- -------- Total sales and revenues ................... 6,371 5,754 6,342 -------- -------- -------- Costs and expenses Cost of products and services sold ........... 5,292 4,827 5,288 Postretirement benefits ...................... 215 220 206 Engineering and research expense ............. 124 129 113 Marketing and administrative expense ......... 365 319 307 Interest expense ............................. 74 83 87 Financing charges on sold receivables ........ 23 24 29 Insurance claims and underwriting expense .... 36 47 50 -------- -------- -------- Total costs and expenses ................... 6,129 5,649 6,080 -------- -------- -------- Income before income taxes ............... 242 105 262 Income tax expense ....................... 92 40 98 -------- -------- -------- Net income ................................... 150 65 164 Less dividends on Series G preferred stock ... 29 29 29 -------- -------- -------- Net income applicable to common stock ........ $ 121 $ 36 $ 135 ======== ======== ======== - -------------------------------------------------------------------------------------- Net income per common share .................. $ 1.65 $ .49 $ 1.83 ======== ======== ======== Average number of common and dilutive common equivalent shares outstanding (millions) ... 73.6 73.8 74.3 - -------------------------------------------------------------------------------------- See Notes to Financial Statements.
STATEMENT OF FINANCIAL CONDITION
Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- As of October 31 (Millions of dollars) 1997 1996 - ----------------------------------------------------------------------------------- ASSETS Cash and cash equivalents .......................... $ 609 $ 487 Marketable securities .............................. 356 394 -------- ------- 965 881 Receivables, net ................................... 1,755 1,655 Inventories ........................................ 483 463 Property and equipment, net ........................ 835 770 Investments and other assets ....................... 332 213 Intangible pension assets .......................... 212 314 Deferred tax asset, net ............................ 934 1,030 -------- -------- Total assets ....................................... $ 5,516 $ 5,326 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Liabilities Accounts payable, principally trade ................ $ 1,100 $ 820 Debt: Manufacturing operations ......................... 92 115 Financial services operations .................... 1,224 1,305 Postretirement benefits liability .................. 1,186 1,351 Other liabilities .................................. 894 819 -------- -------- Total liabilities .............................. 4,496 4,410 -------- -------- Commitments and contingencies Shareowners' equity Series G convertible preferred stock (liquidation preference $240 million) ............ 240 240 Series D convertible junior preference stock (liquidation preference $4 million) .............. 4 4 Common stock (52.2 million and 51.0 million shares issued)........................................... 1,659 1,642 Class B Common stock (23.1 million and 24.3 million shares issued) ...... 471 491 Retained earnings (deficit) - balance accumulated after the deficit reclassification as of October 31, 1987 ................................. (1,301) (1,431) Common stock held in treasury, at cost (2.9 million and 1.6 million shares held) ......... (53) (30) -------- -------- Total shareowners' equity ...................... 1,020 916 -------- -------- Total liabilities and shareowners' equity .......... $ 5,516 $ 5,326 ======== ======== - ----------------------------------------------------------------------------------- See Notes to Financial Statements.
STATEMENT OF CASH FLOW
Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- For the Years Ended October 31 (Millions of dollars) 1997 1996 1995 - -------------------------------------------------------------------------------------- Cash flow from operations Net income ...................................... $ 150 $ 65 $ 164 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization ............... 120 105 86 Deferred income taxes ....................... 82 37 89 Other, net .................................. (61) (13) (9) Change in operating assets and liabilities: Receivables ................................. (195) 186 (91) Inventories ................................. (25) (47) 35 Prepaid and other current assets ............ 4 1 10 Accounts payable ............................ 288 (110) 63 Other liabilities ........................... 17 (106) 70 -------- -------- -------- Cash provided by operations ................... 380 118 417 -------- -------- -------- Cash flow from investment programs Purchase of retail notes and lease receivables .. (970) (1,108) (1,099) Collections/sales of retail notes and lease receivables ......................... 1,052 1,107 850 Purchase of marketable securities ............... (512) (585) (722) Sales or maturities of marketable securities .... 557 752 480 Capital expenditures ............................ (172) (117) (139) Property and equipment leased to others ......... (42) (73) (19) Other investment programs, net .................. 3 (8) 8 -------- -------- -------- Cash used in investment programs .............. (84) (32) (641) -------- -------- -------- Cash flow from financing activities Issuance of debt ................................ 209 - - Principal payments on debt ...................... (46) (136) (121) Net increase (decrease)in notes and debt outstanding under bank revolving credit facility and asset-backed and other commercial paper programs ..................... (285) 81 312 Dividends paid .................................. (29) (29) (29) Repurchase of common stock ...................... (23) - (10) -------- -------- -------- Cash (used in) provided by financing activities (174) (84) 152 -------- -------- -------- Cash and cash equivalents Increase (decrease) during the year ........... 122 2 (72) At beginning of the year ...................... 487 485 557 -------- -------- -------- Cash and cash equivalents at end of the year .... $ 609 $ 487 $ 485 ======== ======== ======== - -------------------------------------------------------------------------------------- See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 1997 1. SUMMARY OF ACCOUNTING POLICIES Basis of Consolidation Navistar International Corporation is a holding company, whose principal operating subsidiary is Navistar International Transportation Corp. (Transportation). As used hereafter, "company" refers to Navistar International Corporation and its consolidated subsidiaries. The consolidated financial statements include the results of the company's manufacturing operations and its wholly owned financial services subsidiaries. The effects of transactions between the manufacturing and financial services operations have been eliminated to arrive at the consolidated totals. The distinction between current and long-term assets and liabilities in the Statement of Financial Condition is not meaningful when finance, insurance and manufacturing operations are combined; therefore, the company has adopted an unclassified presentation. Certain 1996 and 1995 amounts have been reclassified to conform with the presentation used in the 1997 financial statements. The company operates in two principal industry segments: manufacturing and financial services. Manufacturing operations are responsible for the manufacture and marketing of medium and heavy trucks, including school buses, mid-range diesel engines and service parts primarily in the United States and Canada as well as in selected export markets. Based on assets and revenues, manufacturing operations represent the majority of the company's business activities. The financial services operations consist of Navistar Financial Corporation (NFC), its domestic insurance subsidiary and the company's foreign finance and insurance subsidiaries. NFC's primary business is the retail and wholesale financing of products sold by the manufacturing operations and its dealers within the United States and the providing of commercial physical damage and liability insurance to the manufacturing operations' dealers and retail customers and to the general public through an independent insurance agency system. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Manufacturing operations recognize shipments of new trucks and service parts to independent dealers and retail customers as sales. Price allowances, expected in the normal course of business, and the cost of special incentive programs are recorded at the time of sale. Engine sales are recognized at the time of shipment to original equipment manufacturers. An allowance for losses on receivables is maintained at an amount that management considers appropriate in relation to the outstanding receivables portfolio and it is charged when receivables are determined to be uncollectible. NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) Revenue Recognition (continued) Financial services operations recognize finance charges on retail notes and finance leases as income over the term of the receivables utilizing the interest method. Interest due from interest-bearing notes and accounts is recognized on the accrual basis. Operating lease revenues are recognized on a straight-line basis over the life of the lease. Selected receivables are sold and securitized to public and private investors with limited recourse. Gains or losses on sales of receivables are credited or charged to revenue in the period in which the sale occurs. Financial services operations continue to service the sold receivables and receive a fee for such services from the investor. An allowance for losses is maintained at a level deemed appropriate based on such factors as overall portfolio quality, historical loss experience and current economic conditions. Insurance premiums are earned on a prorata basis over the terms of the policies. Underwriting losses and outstanding loss reserve balances are based on individual case estimates of the ultimate cost of settlement, including actual losses, and determinations of amounts required for losses incurred but not reported. Cash and Cash Equivalents All highly liquid financial instruments with maturities of three months or less from date of purchase, consisting primarily of bankers' acceptances, commercial paper, United States government securities and floating rate notes, are classified as cash equivalents in the Statement of Financial Condition and Statement of Cash Flow. Marketable Securities Marketable securities are classified as available-for-sale securities and are reported at fair value. The difference between amortized cost and fair value is recorded as an adjustment to shareowners' equity, net of applicable deferred taxes. Inventories Inventories are valued at the lower of average cost or market. Property and Other Long-Lived Assets Significant expenditures for replacement of equipment, tooling and pattern equipment, and major rebuilding of machine tools are capitalized. Depreciation and amortization are generally provided on the straight-line basis over the estimated useful lives of the assets, which average 35 years for buildings and improvements and eight years for machinery and equipment. Gains and losses on property disposals are included in other income and expense. The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long- lived assets and the projected, undiscounted cash flows of the operations in which the long-lived assets are deployed. NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) Engineering and Research Expense Engineering and research expense includes research and development expenses and routine ongoing costs associated with improving existing products and manufacturing processes. Research and development expenses, which include activities for the introduction of new truck and diesel engine products and major improvements to existing products and processes, totaled $92 million, $101 million and $91 million in 1997, 1996 and 1995, respectively. Product Related Costs The company accrues warranty expense at the time of end product sale. Product liability expense is accrued based on the estimate of total future payments to settle product liability claims. Derivative Financial Instruments The company uses derivatives to transfer or reduce risks of foreign exchange and interest rate volatility and to potentially increase the return on invested funds. NFC, a wholly owned subsidiary of Transportation, uses derivatives such as forward contracts and interest rate swaps to reduce its exposure to interest rate volatility. NFC's primary use of such financial instruments is to hedge the fair value of its fixed rate receivables against changes in market interest rates in anticipation of securitization and sale of such receivables. The anticipated transactions are probable of occurrence and their significant terms and characteristics have been identified. All derivative financial instruments are held for purposes other than trading, and company policy prohibits the use of derivatives for speculative purposes. Gains or losses related to hedges of anticipated sales of receivables are deferred and are recognized in income when the receivables are sold. At all times, the principal balance of receivables owned and expected to be sold by NFC exceeds the notional amount of open derivative contracts. Stock-Based Compensation Effective November 1, 1996, the company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, the company elected to continue to account for stock-based compensation plans consistent with prior years. NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) New Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This statement specifies the computation, presentation and disclosure requirements for earnings per share and is effective for financial statements issued for periods ending after December 15, 1997. The standard is not expected to have a material effect on the company's net income per common share computation. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130 establishes standards for reporting and display of comprehensive income and its components. SFAS 131 establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. These statements are effective for fiscal years beginning after December 15, 1997. These standards expand or modify current disclosures and, accordingly, will have no impact on the company's reported financial position, results of operations and cash flows. The company is assessing the impact of SFAS 131 on its reported segments. 2. POSTRETIREMENT BENEFITS The company provides postretirement benefits to substantially all of its employees. Costs associated with postretirement benefits include pension expense for employees, retirees and surviving spouses, and postretirement health care and life insurance expense for employees, retirees, surviving spouses and dependents. In addition, as part of the 1993 restructured retiree health care and life insurance plans, profit sharing payments to an independent retiree trust are required. The cost of postretirement benefits is segregated as a separate component in the Statement of Income and is as follows: Millions of dollars 1997 1996 1995 - -------------------------------------------------------------------- Pension expense ................... $ 129 $ 160 $ 110 Health/life insurance ............. 66 60 70 Profit sharing provision to Trust 20 - 26 ------ ------ ------ Total postretirement benefits expense ................ $ 215 $ 220 $ 206 ====== ====== ====== In the Statement of Financial Condition, the postretirement benefits liability of $1,186 million in 1997 and $1,351 million in 1996 includes $445 million and $607 million, respectively, for pension and $741 million and $744 million, respectively, for postretirement health care and life insurance benefits. Included in investments and other assets in the Statement of Financial Condition is a prepaid pension asset of $120 million in 1997 and $38 million in 1996. NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS (continued) Pension Benefits Generally, the pension plans are noncontributory with benefits related to an employee's length of service and compensation rate. The company's policy is to fund its pension plans in accordance with applicable United States and Canadian government regulations and to make additional payments as funds are available to achieve full funding of the vested accumulated benefit obligation. The pension plans vary in the extent to which they are funded, but, for plan years which ended during the current year, all legal funding requirements have been met. Plan assets are invested primarily in dedicated portfolios of long-term fixed income securities with more recent contributions invested in equity securities. Pension Expense Net pension expense included in the Statement of Income is composed of the following: Millions of dollars 1997 1996 1995 - -------------------------------------------------------------------- Service cost for benefits earned during the period ........ $ 34 $ 34 $ 24 Interest on projected benefit obligation .............. 238 231 232 Net amortization costs and other .. 99 104 57 Less expected return on assets .... (242) (209) (203) ------ ------ ------ Net pension expense ............... $ 129 $ 160 $ 110 ====== ====== ====== Actual return on assets ........... $ 505 $ 188 $ 398 ====== ====== ====== "Amortization costs" include amortization of cumulative gains and losses over the expected remaining service life of employees, amortization of the initial transition liability over 15 years, the expense related to yearly lump-sum payments to retirees required by negotiated labor contracts and amortization of plan amendments, recognized over the remaining service life of employees, except for those plan amendments arising from negotiated labor contracts, which are amortized over the length of the contract. NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS (continued) Pension Assets and Liabilities Included in the Statement of Financial Condition is the minimum pension liability for certain unfunded pension plans. The adjustment for the minimum pension liability in the amounts of $504 million and $623 million are offset by intangible pension assets of $212 million and $314 million and accumulated reductions in shareowners' equity of $195 million and $206 million at October 31, 1997 and October 31, 1996, respectively. The changes in shareowners' equity are net of deferred income taxes of $97 million at October 31, 1997 and $103 million at October 31, 1996. The minimum pension liability will change from year to year as a result of revisions to actuarial assumptions, experience gains or losses and settlement rate changes. The funded status of the company's plans as of October 31, 1997 and 1996 and a reconciliation with amounts recognized in the Statement of Financial Condition are provided below. Plans in Which Plans in Which Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets -------------------- -------------------- Millions of dollars 1997 1996 1997 1996 - ------------------------------------------------------------------------ Actuarial present value of: Vested benefits ........ $(1,122) $ (59) $(1,857) $(2,672) Nonvested benefits ..... (80) (7) (207) (270) ------- ------- ------- ------- Accumulated benefit obligation ......... (1,202) (66) (2,064) (2,942) Effect of projected future compensation levels ................. (30) (3) (3) (23) ------- ------- ------- ------- Projected benefit obligation ............. (1,232) (69) (2,067) (2,965) Plan assets at fair value. 1,279 91 1,621 2,336 ------- ------- ------- ------- Funded status at October 31 .......... 47 22 (446) (629) Unamortized pension costs: Net losses ........... 29 11 293 332 Prior service costs .. 12 6 77 113 (Asset) liability at date of transition 32 (1) 135 200 Adjustment for the minimum liability - - (504) (623) ------- ------- ------- ------- Net asset (liability) .... $ 120 $ 38 $ (445) $ (607) ======= ======= ======= ======= The weighted average rate assumptions used in determining pension costs and the projected benefit obligation were: 1997 1996 1995 - -------------------------------------------------------------------- Discount rate used to determine present value of projected benefit obligation at end of year 7.3% 8.1% 7.8% Expected long-term rate of return on plan assets for the year ..... 9.8% 9.0% 9.9% Expected rate of increase in future compensation levels ............. 3.5% 3.5% 3.5% NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS (continued) Other Postretirement Benefits In addition to providing pension benefits, the company provides health care and life insurance for a majority of its retired employees, spouses and certain dependents in the United States and Canada. In 1993, a trust was established to provide a vehicle for funding the health care liability through company contributions and retiree premiums. The funds in this trust are invested primarily in equity securities. The company was required to make a prefunding contribution of $200 million to the trust on or prior to June 30, 1998. This contribution was made during November 1997. The components of expense for other postretirement benefits included in the Statement of Income are as follows: Millions of dollars 1997 1996 1995 - -------------------------------------------------------------------- Service cost for benefits earned during the year .......... $ 13 $ 14 $ 10 Interest cost on the accumulated benefit obligation and other ....................... 96 84 90 Less expected return on assets .... (43) (38) (30) ------ ------ ------ Net other postretirement benefits expense ................ $ 66 $ 60 $ 70 ====== ====== ====== Actual return on assets ........... $ 102 $ 46 $ 65 ====== ====== ====== The funded status of other postretirement benefits as of October 31 is as follows: Millions of dollars 1997 1996 - -------------------------------------------------------------------- Accumulated other postretirement benefit obligation (APBO): Retirees and their dependents . $ (952) $ (773) Active employees eligible to retire ................... (221) (244) Other active participants ......... (201) (208) ------ ------ Total APBO ........................ (1,374) (1,225) Plan assets at fair value ......... 486 401 ------ ------ APBO in excess of plan assets ..... (888) (824) Unamortized prior service cost .... (5) (6) Unrecognized net loss ............ 152 86 ------ ------ Net liability ..................... $ (741) $ (744) ====== ====== The weighted average expected return on plan assets was 11.1% for 1997, 10.5% for 1996 and 10% for 1995. The weighted average of discount rates used to determine the accumulated other postretirement benefit obligation was 7.4% and 8.2% at October 31, 1997 and 1996, respectively. For 1998, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 8.2%. The rate is projected to decrease to 5.0% by the year 2004 and remain at that level each year thereafter. If the cost trend rate assumptions were increased by one percentage point for each year, the accumulated postretirement benefit obligation would increase by approximately $167 million and the associated expense recognized for the year ended October 31, 1997 would increase by an estimated $16 million. NOTES TO FINANCIAL STATEMENTS (Continued) 3. INCOME TAXES The domestic and foreign components of income (loss) before income taxes consist of the following: Millions of dollars 1997 1996 1995 - -------------------------------------------------------------------- Domestic .......................... $ 239 $ 108 $ 251 Foreign ........................... 3 (3) 11 ------ ------ ------ Total income before income taxes .. $ 242 $ 105 $ 262 ====== ====== ====== The components of income tax expense consist of the following: Millions of dollars 1997 1996 1995 - -------------------------------------------------------------------- Current: Federal ........................ $ 8 $ 1 $ 7 State and local ................ 2 2 2 ------ ------ ------ Total current expense .......... 10 3 9 ------ ------ ------ Deferred: Federal ........................ 71 32 77 State and local ................ 11 5 12 ------ ------ ------ Total deferred expense ......... 82 37 89 ------ ------ ------ Total income tax expense ......... $ 92 $ 40 $ 98 ====== ====== ====== The deferred tax expense does not represent cash payment of income taxes and was primarily generated by the utilization of net operating loss (NOL) carryforwards and the increase of temporary differences, and will not require future cash payments. Consolidated tax payments made during 1997, 1996 and 1995 were $10 million, $3 million and $9 million, respectively. NOTES TO FINANCIAL STATEMENTS (Continued) 3. INCOME TAXES (continued) The relationship of the tax expense to income before taxes for 1997, 1996 and 1995 differs from the U.S. statutory rate (35%) because of state income taxes and the benefit of NOLs in foreign countries. The effective tax rates for the years 1997, 1996 and 1995 were 38.0%, 38.1% and 37.4%, respectively. Undistributed earnings of foreign subsidiaries were $35 million and $30 million at October 31, 1997 and 1996, respectively. Taxes have not been provided on these earnings because no withholding taxes are applicable upon repatriation and U.S. tax would be substantially offset by utilization of NOL carryforwards. Taxpaying entities of the company offset all deferred tax assets and liabilities within each tax jurisdiction and present them in a single amount in the Statement of Financial Condition. The components of the deferred tax asset (liability) at October 31 are as follows: Millions of dollars 1997 1996 - -------------------------------------------------------------------- United States - ------------- Deferred tax assets: Net operating loss carryforwards . $ 680 $ 753 Alternative minimum tax .......... 19 11 Product liability and warranty ... 97 100 Other liabilities ................ 168 143 Postretirement benefits .......... 353 363 ------ ------ Total deferred tax assets ........ 1,317 1,370 ------ ------ Deferred tax liabilities: Prepaid pension assets ............ (58) (12) Depreciation ...................... (37) (40) ------ ------ Total deferred tax liabilities .... (95) (52) ------ ------ Total deferred tax asset .......... 1,222 1,318 Less valuation allowance .......... (288) (288) ------ ------ Net deferred tax asset ............ $ 934 $1,030 ====== ====== Foreign - ------- Deferred tax assets: Net operating loss carryforwards . $ 2 $ 2 Postretirement benefits .......... 19 19 ------ ------ Total deferred tax assets ........ 21 21 Less valuation allowance ......... (21) (21) ------ ------ Net deferred tax assets .......... - - Deferred tax liabilities --prepaid pension assets ....... (16) (16) ------ ------ Net deferred tax liabilities ..... $ (16) $ (16) ====== ====== NOTES TO FINANCIAL STATEMENTS (Continued) 3. INCOME TAXES (continued) A valuation allowance has been provided for those NOL carryforwards and temporary differences which are estimated to expire before they are utilized. Because the foreign tax carryforward period is relatively short, an allowance has been provided against the total deferred tax assets. At October 31, 1997, the company had $1,802 million of domestic and $6 million of foreign NOL carryforwards available to offset future taxable income. Such carryforwards reflect income tax losses incurred which will expire as follows, in millions of dollars: 2000 ................... $ 174 2001 ................... 143 2002 ................... 47 2004 ................... 238 2005 ................... 7 2006 through 2011 ...... 1,199 ------ Total .................. $1,808 ====== Additionally, the reversal of net temporary differences of $1,413 million as of October 31, 1997 will create net tax deductions which, if not utilized previously, will expire subsequent to 2011. NOTES TO FINANCIAL STATEMENTS (Continued) 4. MARKETABLE SECURITIES The fair value of marketable securities is estimated based on quoted market prices, when available. If a quoted price is not available, fair value is estimated using quoted market prices for similar financial instruments. Information related to the company's marketable securities at October 31 is as follows: 1997 1996 ------------------ ------------------- Amortized Fair Amortized Fair Millions of dollars Cost Value Cost Value - -------------------------------------------------------------------- Corporate securities . $ 150 $ 150 $ 127 $ 126 U.S. government securities ......... 88 89 152 152 Mortgage and asset-backed securities ......... 86 86 94 94 Foreign government securities ......... 10 10 5 5 ------ ------ ------ ------ Total debt securities 334 335 378 377 Equity securities .... 16 21 14 17 ------ ------ ------ ------ Total marketable securities ......... $ 350 $ 356 $ 392 $ 394 ====== ====== ====== ====== Contractual maturities of marketable debt securities at October 31 are as follows: 1997 1996 ------------------ ------------------- Amortized Fair Amortized Fair Millions of dollars Cost Value Cost Value - -------------------------------------------------------------------- Due in one year or less ............ $ 113 $ 114 $ 66 $ 66 Due after one year through five years . 100 100 189 188 Due after five years through ten years .. 25 25 23 23 Due after ten years .. 10 10 6 6 ------ ------ ------ ------ 248 249 284 283 Mortgage and asset-backed securities ......... 86 86 94 94 ------ ------ ------ ------ Total debt securities. $ 334 $ 335 $ 378 $ 377 ====== ====== ====== ====== Gross gains and losses realized on sales or maturities of marketable securities were not material for each of the two years. At October 31, 1997 and 1996, a domestic insurance subsidiary had $15 million and $17 million, respectively, of marketable securities which were on deposit with various state departments of insurance or otherwise not available. These securities are included in total marketable securities balances at October 31, 1997 and 1996. NOTES TO FINANCIAL STATEMENTS (Continued) 5. RECEIVABLES Receivables at October 31 are summarized by major classification as follows: Millions of dollars 1997 1996 - -------------------------------------------------------------------- Accounts receivable .............. $ 671 $ 560 Retail notes and lease financing . 706 733 Wholesale notes .................. 46 101 Amounts due from sales of receivables ................. 233 264 Notes receivable ................. 101 - Other ............................ 29 28 Allowance for losses ............. (31) (31) ------ ------ Total receivables, net ........ $1,755 $1,655 ====== ====== NFC purchases the majority of the wholesale notes receivable and some retail notes and accounts receivable arising from Transportation's operations in the United States. A portion of NFC's funding for retail and wholesale notes comes from sales of receivables by NFC to third parties with limited recourse. Proceeds from sales of retail notes receivable, net of underwriting costs, were $958 million in 1997, $982 million in 1996 and $727 million in 1995. Uncollected sold retail and wholesale receivable balances totaled $1,968 million and $1,866 million as of October 31, 1997 and 1996, respectively. Contractual maturities of accounts receivable, retail notes and lease financing and wholesale notes, including unearned finance income, at October 31, 1997 were: 1998 - $950 million, 1999 - $195 million, 2000 - $161 million, 2001 - $131 million, 2002 - $91 million, and 2003 and thereafter - $18 million. Unearned finance income totaled $123 million at October 31, 1997. Notes receivable are due upon demand from a limited partnership that invests in S&P 500 stock index arbitrage. NOTES TO FINANCIAL STATEMENTS (Continued) 6. INVENTORIES Inventories at October 31 are as follows: Millions of dollars 1997 1996 - -------------------------------------------------------------------- Finished products ................ $ 212 $ 242 Work in process .................. 106 97 Raw materials and supplies ....... 165 124 ------ ------ Total inventories ................ $ 483 $ 463 ====== ====== 7. PROPERTY AND EQUIPMENT At October 31, property and equipment includes the following: Millions of dollars 1997 1996 - -------------------------------------------------------------------- Land ............................ $ 18 $ 12 ------ ------ Buildings, machinery and equipment at cost: Plants ...................... 1,200 1,241 Distribution ................ 86 79 Construction in progress .... 117 58 Other ....................... 261 222 ------ ------ Subtotal .................. 1,664 1,600 ------ ------ Total property ................ 1,682 1,612 Less accumulated depreciation and amortization ............ (847) (842) ------ ------ Total property and equipment, net ........ $ 835 $ 770 ====== ====== Total property includes property under capitalized lease obligations of $25 million at October 31, 1997 and 1996. In addition, other property includes vehicles under operating leases to third parties of $150 million at October 31, 1997 and $116 million at October 31, 1996. NOTES TO FINANCIAL STATEMENTS (Continued) 8. DEBT Millions of dollars 1997 1996 - -------------------------------------------------------------------- Manufacturing operations Notes payable and current maturities of long-term debt . $ 13 $ 14 ------ ------ 9% Sinking Fund Debentures, due 2004 ..................... 45 53 8% Secured Note, due 2002, secured by plant assets ...... 21 26 Capitalized leases and other ... 13 22 ------ ------ Total long-term debt ....... 79 101 ------ ------ Manufacturing operations debt .... 92 115 ------ ------ Financial services operations Commercial paper ............... 141 99 Capitalized leases ............. 13 - ------ ------ Total short-term debt ...... 154 99 ------ ------ Asset-backed commercial paper program, variable rate, due 2001 ..................... 400 402 Bank revolver, variable rate, due 2001 ..................... 393 704 ------ ------ Total senior debt .......... 793 1,106 ------ ------ 8 7/8% Subordinated Senior Notes due 1998 ..................... 94 100 9% Subordinated Senior Notes due 2002 ..................... 100 - ------ ------ Total subordinated term debt 194 100 ------ ------ Capitalized leases, 5.2% to 5.6%, due 2002 ..................... 83 - ------ ------ Total long-term debt ....... 1,070 1,206 ------ ------ Financial services operations debt 1,224 1,305 ------ ------ Total debt ....................... $1,316 $1,420 ====== ====== The effective annual interest rate on Manufacturing notes payable was 8.3% in 1997 and 8.9% in 1996. Consolidated interest payments were $66 million, $83 million and $82 million in 1997, 1996 and 1995, respectively. NFC issues commercial paper with varying terms and has short-term borrowings with various banks on a noncommitted basis. Compensating cash balances and commitment fees are not required under these borrowings. NOTES TO FINANCIAL STATEMENTS (Continued) 8. DEBT (continued) The aggregate annual maturities and sinking fund requirements for debt for the years ended October 31 are as follows: Financial Manufacturing Services Millions of dollars Operations Operations Total - -------------------------------------------------------------------- 1998 ................ $ 13 $ 154 $ 167 1999 ................ 15 111 126 2000 ................ 15 25 40 2001 ................ 15 820 835 2002 ................ 14 114 128 Thereafter .......... 20 - 20 Weighted average interest rate on total debt, including short-term, and the effect of discounts and related amortization for the years ended: October 31, 1997. 10.3% 6.4% 6.8% October 31, 1996. 9.7% 6.5% 6.8% At October 31, 1997, NFC has a $925 million contractually committed bank revolving credit facility and a $400 million asset-backed commercial paper (ABCP) program supported by a bank liquidity facility. Available funding under the ABCP program is comprised of a $400 million liquidity facility plus $14 million of trust certificates issued in connection with the formation of the ABCP trust. Available funding under the amended and restated credit facility and the ABCP program was $546 million, of which $141 million provided funding backup for the outstanding short-term debt at October 31, 1997. The remaining $405 million when combined with unrestricted cash and cash equivalents made $416 million available to fund the general business purposes of NFC at October 31, 1997. NFC's wholly owned subsidiaries, Navistar Financial Retail Receivables Corporation (NFRRC) and Navistar Financial Securities Corporation (NFSC), have a limited purpose of purchasing retail and wholesale receivables, respectively, and transferring an undivided ownership interest in such notes to investors in exchange for pass-through notes and certificates. The subsidiaries have limited recourse on the sold receivables and their assets are available to satisfy the claims of their creditors prior to such assets becoming available to NFC or affiliated companies. NOTES TO FINANCIAL STATEMENTS (Continued) 8. DEBT (continued) NFSC has in place a $600 million revolving wholesale note trust that provides for the continuous sale of eligible wholesale notes on a daily basis. The trust is comprised of two $100 million tranches of investor certificates maturing in 1998 and 1999 and two $200 million tranches maturing in 2003. At October 31, 1997, the remaining shelf registration available to NFSC for issuance of investor certificates was $200 million. During 1997, NFC sold $987 million of retail notes, net of unearned finance income, through NFRRC to two individual owner trusts. The owner trusts in turn sold notes and certificates to investors. The net proceeds, after underwriting costs and credit enhancements, were used by NFC for general working capital purposes. At October 31, 1997, the remaining shelf registration available to NFRRC for issuance of asset-backed securities was $1,473 million. In November 1997, NFC sold $500 million of retail notes, net of unearned finance income, through NFRRC. The net proceeds were used for general working capital purposes. During 1997, NFC entered into sale/leaseback agreements involving vehicles that were already subject to retail finance and operating leases with end users. The remaining balance as of October 31, 1997 is classified under Financial Services operations as capitalized leases. These agreements grant a security interest in the underlying vehicles and lease receivables to the purchasers. During November 1997, the company arranged financing for $125 million of funds denominated in U.S. dollars and Mexican pesos to be used for development of the company's Mexican operations. 9. OTHER LIABILITIES Major classifications of other liabilities at October 31 are as follows: Millions of dollars 1997 1996 - -------------------------------------------------------------------- Product liability and warranty ... $ 285 $ 293 Loss reserves and unearned premiums .......... 99 113 Employee incentive programs ...... 93 10 Payroll, commissions and employee related benefits .. 83 73 Long-term disability and workers' compensation ...... 54 55 Taxes ............................ 59 44 Environmental .................... 27 23 Interest ......................... 13 9 Other ............................ 181 199 ------ ------ Total other liabilities ........ $ 894 $ 819 ====== ====== During the fourth quarter of 1996, the company recorded a one-time $35 million pretax charge for costs related to the termination of its next generation truck program. In August 1997, the company and the United Auto Workers reached agreement on a master contract extension that enabled the company to reinstate its next generation truck program. The remaining accrual at the time of the announcement was not material. NOTES TO FINANCIAL STATEMENTS (Continued) 10. FINANCIAL INSTRUMENTS Fair Value of Financial Instruments The carrying amounts of financial instruments, as reported in the Statement of Financial Condition and described in various Notes to the Financial Statements, and their fair values at October 31 are as follows: 1997 1996 ------------------ ------------------- Carrying Fair Carrying Fair Millions of dollars Amount Value Amount Value - -------------------------------------------------------------------- Receivables, net ..... $1,755 $1,764 $1,655 $1,658 Investments and other assets ... 332 343 213 221 Debt ................. 1,316 1,321 1,420 1,414 Cash and cash equivalents approximate fair value. The cost and fair value of marketable securities are disclosed in Note 4. Customer receivables, wholesale notes, retail and wholesale accounts, notes receivable, and other variable-rate retail notes approximate fair value as a result of the short-term maturities of the financial instruments. The fair value of truck retail notes is estimated based on quoted market prices of similar sold receivables. The fair value of amounts due from sales of receivables is estimated by discounting expected cash flows at estimated current market rates. The fair value of investments and other assets is estimated based on quoted market prices or by discounting future cash flows. The short-term debt and variable-rate borrowings under NFC's bank revolving credit agreement, which is repriced frequently, approximate fair value. The fair value of long-term debt is estimated based on quoted market prices, when available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar financial instruments or discounting future cash flows. NOTES TO FINANCIAL STATEMENTS (Continued) 10. FINANCIAL INSTRUMENTS (continued) Derivatives Held or Issued for Purposes Other Than Trading The company uses derivatives to transfer or reduce risks of foreign exchange and interest rate volatility and to potentially increase the return on invested funds. NFC manages its exposure to fluctuations in interest rates by limiting the amount of fixed rate assets funded with variable rate debt, by selling fixed rate retail receivables on a fixed rate basis and, to a lesser extent, by utilizing derivative financial instruments. These instruments may include interest rate swaps, interest rate caps and forward interest rate contracts. NFC manages exposure to counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. Notional amounts are used to measure the volume of derivative financial instruments and do not represent exposure to credit loss. NFC enters into forward interest rate contracts to manage its exposure to fluctuations in the fair value and resulting funding costs from the anticipated securitization and sale of retail notes. NFC manages interest rate risk by entering into either forward contracts to sell fixed debt securities or interest rate swaps whose fair values are highly correlated with the fair value of NFC's receivables. Gains or losses incurred with the closing of these agreements are included as a component of the gain or loss on sale of receivables. During 1997, NFC entered into $500 million of interest rate hedge agreements in anticipation of the November 1997 sale of retail receivables. These hedge agreements were closed in conjunction with the pricing of the sale, and the loss at October 31, 1997, which was not material, was deferred and reduced the gain recognized on the sale of receivables in November 1997. NOTES TO FINANCIAL STATEMENTS (Continued) 11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS, AND LEASES Commitments, contingencies and restricted assets At October 31, 1997, commitments for capital expenditures in progress were approximately $137 million. NFC's maximum exposure under all receivable sale recourse provisions at October 31, 1997 was $246 million; however, management believes that the allowance for credit losses on sold receivables is adequate. At October 31, 1997, the Canadian operating subsidiary was contingently liable for retail customers' contracts and leases financed by a third party. The company is subject to maximum recourse of $261 million on retail contracts and $13 million on retail leases. In addition, as of October 31, 1997, the company is contingently liable for approximately $49 million for various guarantees and buyback programs; however, based on historical loss trends, the company's exposure is not considered material. The Canadian operating subsidiary, NFC and certain other subsidiaries included in financial services operations are parties to agreements that may result in the restriction of amounts which can be distributed to Transportation in the form of dividends or loans and advances. At October 31, 1997, the maximum amount of dividends which were available for distribution under the most restrictive covenants was $62 million. The company and Transportation are obligated under certain agreements with public and private lenders of NFC to maintain the subsidiary's income before interest expense and income taxes at not less than 125% of its total interest expense. No income maintenance payments were required for the three years ended October 31, 1997. Concentrations At October 31, 1997, the company employed 10,593 hourly workers and 5,434 salaried workers in the United States and Canada. Approximately 93% of the hourly employees and 23% of the salaried employees are represented by unions. Of these represented employees, 91% of the hourly workers and 94% of the salaried workers are represented by the United Automobile, Aerospace, and Agricultural Implement Workers of America (UAW) or the National Automobile, Aerospace, and Agricultural Implement Workers of Canada (CAW). During August 1997, the company's current master contract with the UAW was extended from October 1, 1998 to October 1, 2002. The collective bargaining agreement with the CAW expires on October 24, 1999. Reflecting higher consumer demand for light trucks and vans, sales of mid-range diesel engines to Ford Motor Company were 14% of consolidated sales and revenues in 1997 and 1996 and 12% in 1995. During 1997, the company entered into a ten-year agreement, effective with model year 2003, to continue supplying Ford Motor Company with diesel engines for use in its diesel-powered light trucks and vans. NOTES TO FINANCIAL STATEMENTS (Continued) 11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS, AND LEASES (continued) Leases The company has long-term noncancellable leases for use of various equipment and facilities. Lease terms are generally for five to 25 years and, in many cases, provide for renewal options. The company is generally obligated for the cost of property taxes, insurance and maintenance. The company leases office buildings, distribution centers, furniture and equipment, machinery and equipment, and computer equipment. The majority of the company's lease payments are for operating leases. At October 31, 1997, future minimum lease payments under operating leases having lease terms in excess of one year are: 1998 - $36 million, 1999 - $34 million, 2000 - $33 million, 2001 - $20 million, 2002 - - $15 million and thereafter - $42 million. Total operating lease expense was $40 million in 1997, $35 million in 1996 and $42 million in 1995. Income received from sublease rentals was $6 million in 1997, 1996 and 1995, respectively. 12. LEGAL PROCEEDINGS The company and its subsidiaries are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings which constitute ordinary routine litigation incidental to the business of the company and its subsidiaries. In the opinion of the company's management, none of these proceedings or claims is material to the business or the financial condition of the company. 13. ENVIRONMENTAL MATTERS In the fourth quarter of 1994, Transportation recorded a $20 million charge, net of $13 million of income taxes, as a loss of discontinued operations related to environmental liabilities at production facilities of two formerly owned businesses, Wisconsin Steel and Solar Turbine, Inc. Included in the charge was an anticipated $11 million payment to the Economic Development Administration, a division of the U.S. Department of Commerce, in settlement of commercial and environmental disputes related to the Wisconsin Steel property. In 1997, the U.S. Department of Justice and Transportation approved the final consent decree related to the Wisconsin Steel property and the company paid the $11 million to the Economic Development Administration. The company has been named a potentially responsible party (PRP), in conjunction with other parties, in a number of cases arising under an environmental protection law known as the Superfund law. These cases involve sites which allegedly have received wastes from current or former company locations. Based on information available to the company, which in most cases consists of data related to quantities and characteristics of material generated at or shipped to each site as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable estimate is calculated of the company's share, if any, of the probable costs and is provided for in the financial statements. These obligations generally are recognized no later than completion of the remedial feasibility study and are not discounted to their present value. The company reviews its accruals on a regular basis and believes that, based on these calculations, its share of the potential additional costs for the cleanup of each site will not have a material effect on the company's financial results. NOTES TO FINANCIAL STATEMENTS (Continued) 14. INDUSTRY SEGMENT DATA Information concerning operations by industry segment is as follows: Financial Manufacturing Services Millions of dollars Operations Operations Consolidated - ------------------------------------------------------------------------- October 31, 1997 - ---------------- Total sales and revenues ....... $6,191 $ 239 $6,371 Operating profit ..... 873 101 924 Depreciation and amortization ... 97 23 120 Capital expenditures . 172 - 172 Identifiable assets .. 4,111 1,857 5,516 October 31, 1996 - ---------------- Total sales and revenues ....... $5,550 $ 258 $5,754 Operating profit ..... 690 109 755 Depreciation and amortization ... 90 15 105 Capital expenditures . 117 - 117 Identifiable assets .. 3,815 1,843 5,326 October 31, 1995 - ---------------- Total sales and revenues ....... $6,168 $ 235 $6,342 Operating profit ..... 845 80 870 Depreciation and amortization ... 75 11 86 Capital expenditures . 139 - 139 Identifiable assets .. 4,018 1,922 5,566 Intersegment sales and revenues were not material in 1997, 1996 or 1995. Transactions between manufacturing operations and financial services operations have been eliminated from the consolidated column. NOTES TO FINANCIAL STATEMENTS (Continued) 15. PREFERRED AND PREFERENCE STOCKS The company's Nonconvertible Junior Preference Stock Series A is held for the Retiree Supplemental Benefit Program by the Supplemental Trust which is currently entitled to elect two members to the company's Board of Directors. The UAW holds the Nonconvertible Junior Preference Stock Series B and is currently entitled to elect one member of the company's Board of Directors. At October 31, 1997, there was one share each of Series A and Series B Preference stock authorized and outstanding. The value of the preference shares is minimal. Other information pertaining to preferred and preference stocks outstanding is summarized as follows: Series G Convertible Series D Convertible Cumulative Preferred Junior Preference - --------------------------------------------------------------------- Number authorized and issued ............. 4,800,000 3,000,000 Number outstanding ....... 4,800,000 175,000 Optional redemption price and liquidation preference ............. $50 per share $25 per share plus accrued plus accrued dividends dividends Conversion rate per share into Common Stock (subject to adjustment in certain circumstances) 0.133 shares 0.3125 shares Ranking as to dividends and upon liquidation .. Senior to all other Senior to Common; equity securities junior to Series G Dividend rate ............ Annual rate of $6.00 120% of the cash per share, dividends payable quarterly on Common Stock as declared on a common equivalent basis Dividends may be paid out of surplus as defined under Delaware corporation law. At October 31, 1997, the company had such defined surplus of $1,007 million. - ------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Continued) 16. COMMON SHAREOWNERS' EQUITY Changes in the common shareowners' equity accounts are as follows: Millions of dollars 1997 1996 1995 - -------------------------------------------------------------------- Common Stock Beginning of year ................ $ 1,642 $ 1,641 $ 1,628 Conversion of Class B Common Stock and other ......... 17 1 13 ------- ------- ------- End of year ...................... $ 1,659 $ 1,642 $ 1,641 ------- ------- ------- Class B Common Stock Beginning of year ................ $ 491 $ 491 $ 501 Repurchase of stock .............. (20) - (10) ------- ------- ------- End of year ...................... $ 471 $ 491 $ 491 ------- ------- ------- Retained Earnings (Deficit) Beginning of year ................ $(1,431) $(1,478) $(1,538) Net income ....................... 150 65 164 Preferred dividends .............. (29) (29) (22) Minimum pension liability adjustments and other .......... 9 11 (82) ------- ------- ------- End of year ...................... $(1,301) $(1,431) $(1,478) ------- ------- ------- Common Stock Held in Treasury Beginning of year ................ $ (30) $ (28) $ (18) Repurchase of Common Stock and other ...................... (23) (2) (10) ------- ------- ------- End of year ...................... $ (53) $ (30) $ (28) ------- ------- ------- Common Stock The company has authorized 110 million shares of Common Stock with a par value of $.10 per share and 26 million shares of Class B Common Stock with a par value of $.10 per share and restricted voting rights and transfer provisions. At October 31, 1997 and 1996, there were 49.3 million and 49.4 million shares of Common Stock outstanding, net of Common Stock held in Treasury, respectively. The number of shares of Class B Common Stock outstanding at October 31, 1997 and 1996 was 23.1 million and 24.3 million, respectively. The remaining Class B Common Stock will convert into Common Stock on June 30, 1998. NOTES TO FINANCIAL STATEMENTS (Continued) 17. STOCK COMPENSATION PLANS The company has stock-based compensation plans, approved by the Committee on Organization of the Board of Directors, which provide for granting of stock options to employees for purchase of Common Stock at the fair market value of the stock on the date of grant. The grants are generally exercisable after one year and generally have a ten-year life. The company has elected to continue to account for stock option grants in accordance with Accounting Principles Board Opinion No. 25 and related Interpretations. Accordingly, no compensation cost has been recognized for fixed stock options because the exercise prices of the stock options equal the market value of the company's Common Stock at the date of grant. Had compensation cost for the plans been determined based upon the fair value at the grant date consistent with SFAS 123, pro forma net income would have been $147 million in 1997 and $63 million in 1996 and pro forma earnings per share would have been $1.61 in 1997 and $0.46 in 1996. The pro forma effect on net income for 1997 and 1996 may not be representative of the pro forma effect on net income of future years because it does not take into consideration pro forma compensation expense relating to grants made prior to November 1, 1995. The weighted-average fair values at date of grant for options granted during 1997 and 1996 were $5.71 and $5.34, respectively, and were estimated using the Black-Scholes option-pricing model with the following assumptions: 1997 1996 ---- ---- Risk-free interest rate 6.6% 6.1% Dividend yield 0% 0% Expected volatility 29.8% 30.9% Expected life in years 10 10 The following summarizes stock option activity for the years ended October 31:
1997 1996 1995 -------------------- -------------------- ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares in Thousands Shares Price Shares Price Shares Price - ------------------- ------ -------- ------ -------- ------ -------- Options outstanding at beginning of period ....... 2,346 $20.34 1,762 $24.25 1,163 $30.08 Granted ........... 876 10.13 718 10.45 642 13.58 Exercised ......... (715) 12.45 - - - - Canceled .......... (77) 28.52 (134) 18.75 (43) 22.46 ----- ------ ------ ------ ------ ------ Options outstanding at year end ..... 2,430 $18.73 2,346 $20.34 1,762 $24.25 ====== ====== ====== ====== ====== ====== Options exercisable at year end ..... 1,579 $23.35 1,682 $24.25 1,140 $30.07 ====== ====== ====== ====== ====== ====== Options available for grant at year end ........ - - - ====== ====== ======
NOTES TO FINANCIAL STATEMENTS (Continued) 17. STOCK COMPENSATION PLANS (continued) The following table summarizes information about stock options outstanding and exercisable at October 31, 1997.
Outstanding Options Options Exercisable ---------------------------------------- ---------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices (in thousands) Life Price (in thousands) Price ---------------- -------------- - ----------- -------- -------------- -------- $ 9.31 - $13.75 1,448 8.5 $10.70 649 $12.11 17.40 - 25.63 686 6.5 $23.52 642 23.93 27.96 - 37.50 113 5.5 $36.78 105 37.43 43.75 - 61.88 156 3.5 $49.49 156 49.49 68.12 - 91.25 27 1.1 $73.09 27 73.09
18. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (Millions of dollars except per share data) 1997 1996 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------ Sales and revenues $1,296 $1,432 $1,551 $1,480 $1,586 $1,391 $1,938 $1,451 ====== ====== ====== ====== ====== ====== ====== ====== Manufactur- ing gross margin 13.6% 12.2% 13.8% 13.7% 13.8% 12.6% 15.2% 11.6% ====== ====== ====== ====== ====== ====== ====== ====== Net income $ 15 $ 22 $ 30 $ 26 $ 35 $ 17 $ 70 $ - Net income (loss) per common share $ .10 $ .20 $ .31 $ .26 $ .38 $ .13 $ .85 $ (.10) Market price range - Common Stock High $10 3/8 $12 1/8 $11 3/8 $12 $21 5/16 $12 $29 1/2 $10 3/8 Low $ 9 $ 9 1/2 $ 9 1/8 $ 9 1/2 $11 1/4 $9 1/8 $17 1/4 $ 8 1/2
Net income per common share is computed independently based on the weighted average number of Common and Class B Common shares at the end of each quarter. NOTES TO FINANCIAL STATEMENTS (Continued) 19. SUPPLEMENTAL FINANCIAL INFORMATION AS OF OCTOBER 31 AND FOR THE YEARS THEN ENDED(Unaudited) Navistar International Corporation (with financial services operations on an equity basis) in millions of dollars:
Condensed Statement of Income 1997 1996 1995 - ----------------------------- --------- -------- -------- Sales of manufactured products ... $ 6,147 $ 5,508 $ 6,125 Other income ..................... 44 42 43 -------- -------- -------- Total sales and revenues .... 6,191 5,550 6,168 -------- -------- -------- Cost of products sold ............ 5,274 4,818 5,280 Postretirement benefits .......... 214 219 205 Engineering and research expense . 124 129 113 Marketing and administrative expense 332 282 277 Other expenses .................... 83 80 93 -------- -------- -------- Total costs and expenses .......... 6,027 5,528 5,968 -------- -------- -------- Income before income taxes Manufacturing operations ........ 164 22 200 Financial services operations ... 78 83 62 -------- -------- -------- Income before income taxes .... 242 105 262 Income tax expense ................ 92 40 98 -------- -------- -------- Net income ........................ $ 150 $ 65 $ 164 ======== ======== ========
Condensed Statement of Financial Condition 1997 1996 - ------------------------ -------- ------- Cash, cash equivalents and marketable securities ....... $ 802 $ 707 Inventories ....................... 483 463 Property and equipment, net ....... 706 666 Equity in nonconsolidated subsidiaries .................... 322 306 Other assets ...................... 864 643 Deferred tax asset, net ........... 934 1,030 -------- -------- Total assets ................. $ 4,111 $ 3,815 -------- -------- Accounts payable .................. $ 1,060 $ 771 Postretirement benefits liabilities 1,178 1,344 Other liabilities ................. 853 784 Shareowners' equity ............... 1,020 916 -------- -------- Total liabilities and shareowners' equity .... $ 4,111 $ 3,815 ======== ========
NOTES TO FINANCIAL STATEMENTS (Continued) 19. SUPPLEMENTAL FINANCIAL INFORMATION AS OF OCTOBER 31 AND FOR THE YEARS THEN ENDED(Unaudited) (Continued)
Condensed Statement of Cash Flow 1997 1996 1995 - -------------------------------- --------- -------- -------- Cash flow from operations Net income ....................... $ 150 $ 65 $ 164 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization 97 90 75 Equity in earnings of nonconsolidated companies, net of dividends received . (8) (24) (28) Deferred income taxes ....... 82 37 89 Other, net .................. (26) 4 (66) Change in operating assets and liabilities ................ 143 (172) 166 -------- -------- -------- Cash provided by operations ...... 438 - 400 -------- -------- -------- Cash flow from investment programs Purchase of marketable securities. (428) (501) (646) Sales or maturities of marketable securities ....... 454 665 399 Capital expenditures ............. (172) (117) (139) Loan to NFC ...................... (99) - - Other investment programs, net ... 4 (8) 8 -------- -------- -------- Cash (used in) provided by investment programs ........... (241) 39 (378) -------- -------- -------- Cash flow from financing activities (76) (48) (60) -------- -------- -------- Cash and cash equivalents Increase (decrease) during the year ............. 121 (9) (38) At beginning of the year ...... 452 461 499 -------- -------- -------- Cash and cash equivalents at end of the year ............ $ 573 $ 452 $ 461 ======== ======== ========
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL AND STATISTICAL DATA - ---------------------------------------------------------------------------------------------------------- For the Years Ended October 31 (Millions of dollars, except per share data market share, and units shipped) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Total sales and revenues ....................... $6,371 $5,754 $6,342 $5,337 $4,721 Income (loss) of continuing operations ......... 150 65 164 102 (273) Net income (loss)(a) ........................... 150 65 164 82 (501) Income (loss) per common share of continuing operations ..................... 1.65 .49 1.83 .99 (8.63) Net income (loss) per common share ............. 1.65 .49 1.83 .72 (15.19) Average number of Common, Class B Common and dilutive common equivalent shares outstanding (millions) ...................... 73.6 73.8 74.3 74.6 34.9 - ----------------------------------------------------------------------------------------------------------- FINANCIAL DATA Total assets ................................... 5,516 5,326 5,566 5,047 5,060 Debt Manufacturing operations .................... 92 115 127 127 175 Financial services operations ............... 1,224 1,305 1,330 1,091 1,199 ------ ------ ------ ------ ------ Total debt ..................................... 1,316 1,420 1,457 1,218 1,374 Shareowners' equity ............................ 1,020 916 870 817 775 Total manufacturing operations debt as a percent of total manufacturing capitalization. 8.3% 11.2% 12.7% 13.4% 18.4% Return on equity (b) ........................... 14.7% 7.1% 18.9% 12.5% (35.2)% - ----------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Capital expenditures ........................... 172 117 139 87 110 Engineering and research expense ............... 124 129 113 97 94 - ----------------------------------------------------------------------------------------------------------- OPERATING DATA United States and Canadian market share (c) .... 28.6% 27.5% 26.7% 27.0% 27.6% Unit shipments Trucks ....................................... 104,400 95,200 112,200 95,000 87,200 OEM engines .................................. 184,000 163,200 154,200 130,600 118,200 Service parts sales ............................ 806 760 730 714 632 (a) In the third quarter of 1993, the company adopted SFAS 106 and SFAS 109 retroactive to November 1, 1992. (b) Return on equity is calculated based on income of continuing operations. (c) Based on retail deliveries of medium trucks (Classes 5, 6 and 7), including school buses, and heavy trucks (Class 8).
INFORMATION FOR OUR INVESTORS About Your Stock Navistar International Corporation Common Stock is listed on the New York, Chicago and Pacific Stock Exchanges and is quoted as "Navistar" in stock table listings in daily newspapers. The abbreviated stock symbol is "NAV." The stock transfer agent who can answer inquiries about your Navistar International Corporation Common Stock such as name changes, changes of address or missing certificates is: Harris Trust and Savings Bank, 311 West Monroe Street, 11th Floor, Chicago, Illinois 60606; Telephone: (312) 360-5101. For information about other shareowner matters, contact: Investor Relations, Navistar International Corporation, 455 North Cityfront Plaza Drive, Chicago, Illinois 60611; Telephone: (312) 836-2143. There were approximately 57,949 owners of Common Stock at October 31, 1997. Annual Meeting The 1998 Annual Meeting of Shareowners is scheduled to take place at 10:15 a.m., CST on March 24, 1998, at the Art Institute of Chicago in the Arthur Rubloff Auditorium. Shareowners are invited to attend this meeting, take part in discussions of company affairs and meet personally with the directors and officers responsible for the operations of Navistar. A Proxy Statement and Form of Proxy will be mailed to each shareowner on or about February 2, 1998. Commitment to Equal Employment Opportunity Navistar International Corporation has a long-standing commitment to equal employment opportunity dating back to 1919 when the company issued its first written statement against discrimination in the workplace. Today, Navistar continues to be a leader in the industry in complying with all state and federal laws, local municipal laws and regulations governing employment. Navistar has continuously and aggressively implemented measures to ensure that all individuals regardless of age, race, sex, religion, national origin, disability, or veteran status are not discriminated against in regard to career opportunities within the company. Navistar has adopted policy standards and assurances for all employees and qualified applicants, pledging terms and conditions of employment to be equal for all individuals. Corporate Headquarters The corporate offices of Navistar International Corporation and its principal subsidiary, Navistar International Transportation Corp., are located at 455 North Cityfront Plaza Drive, Chicago, Illinois 60611; Telephone: (312) 836-2000. Reports and Publications A copy of the company's 1997 Annual Report on Form 10-K to the Securities and Exchange Commission will be provided, without charge, to shareowners upon written request to the Corporate Secretary, Corporate Headquarters, after January 31, 1998. In order to provide shareowners with immediate access to financial information and news about the company, Navistar distributes its corporate news releases through PR Newswire, an electronic news service, and files its financial statements with the Securities and Exchange Commission electronically through the EDGAR system. PR Newswire and EDGAR can be accessed by computer via the Internet, and through such services as America On-Line and CompuServe. In addition, this information can be accessed through such databases and information services as Lexis/Nexus, Dow Jones and Bloomberg which frequently are available at libraries and brokerage firms. Navistar also offers a toll-free, "Company News on Call" service, which allows shareowners to receive copies of recent Navistar corporate news releases via telefax. To access this service, call (800) 758-5804, and enter Navistar's six digit code when prompted: 103895. Using a touch- tone phone, shareowners can select from a menu of news releases and request specific news releases to be faxed directly to them. Navistar encourages shareowners to take advantage of these electronic databases and the "Company News on Call" service to access the company's quarterly financial results on the same day that the results are announced. Navistar's 1998 quarterly financial results will be announced on the following dates: First quarter February 12, 1998 Second quarter May 14, 1998 Third quarter August 13, 1998 Fourth quarter December 3, 1998 News releases, Form 10-Qs, Navistar's Annual Environmental Health & Safety Report, and other publications are available by writing: Corporate Communications Navistar International Corporation 455 North Cityfront Plaza Drive Chicago, Illinois 60611 Navistar also encourages shareowners to visit its home page on the World Wide Web at http://www.navistar.com. Trademarks Navistar logotype and Navistar are registered trademarks of Navistar International Corporation. The Diamond Road symbol and International are registered trademarks of Navistar International Transportation Corp. Additional registered trademarks include Eagle, Fleet Charge, Fleetrite, Skyrise, Paystar and Pro Sleeper. Diamond SPEC, Diamond PLUS and Diamond Services are trademarks of Navistar International Transportation Corp.
Directors and Officers Navistar International Corporation (As of December 19, 1997) - ------------------------------------------------------------------------------------------------------------------------------------ Board of Directors Principal Officers John R. Horne Jerry E. Dempsey Michael N. Hammes John R. Horne Chairman, President Retired Chairman and Former Chairman and Chairman, President and Chief Executive Officer Chief Executive Officer Chief Executive Officer and Chief Executive Officer Navistar International Corporation PPG Industries, Inc. The Coleman Company, Inc. Donald DeFosset, Jr. Committees: 1[Chair] Diversified Global Manufacturer Manufacturer and Distributor Executive Vice President of Glass, Protective Coatings of Camping and Outdoor and President, Truck Group William F. Andrews and Chemicals Recreational Products Robert C. Lannert Chairman Committees: 1, 2 [Chair] and Hardware/Home Products Executive Vice President Schrader-Bridgeport 3, 6 [Chair] Committees: 3, 5 and Chief Financial Officer International Inc. Robert A. Boardman Manufacturer of Tire Valves John F. Fiedler Allen J. Krowe Senior Vice President and Valve Accessories Chairman, President and Retired Vice Chairman and General Counsel Chairman Chief Executive Officer Texaco, Inc. Thomas M. Hough Scovill Fasteners, Inc. Borg-Warner Automotive, Inc. Global Energy Company Vice President and Treasurer Manufacturers of Apparel Supplier of Engineered Committees: 3, 4 J. Steven Keate and Industrial Fasteners Components and Systems Vice President and Controller Committees: 1, 2, 3 [Chair], 6 Committees: 2, 5, 6 Robert C. Lannert Steven K. Covey Executive Vice President Corporate Secretary Dr. Andrew F. Brimmer Mary Garst and Chief Financial Officer President Manager, Cattle Division Navistar International Corporation Brimmer & Company, Inc. Garst Company Economic and Financial Agri-Business Company Walter J. Laskowski Committees: Consulting Committees: 1, 4, 5 [Chair] International Vice President 1 Executive Committees: 1, 3, 4 [Chair], of the UAW 2 Organization 5, 6 John T. Grigsby Committees: 1, 3, 4 3 Finance President 4 Audit John D. Correnti John Grigsby and William F. Patient 5 Public Policy Chief Executive Officer, Associates, Inc. Chairman of the Board, President 6 Strategic Initiatives President and Vice Chairman Provider of Strategic and Chief Executive Officer Nucor Corporation and Operational The Geon Company Steel Manufacturer Consulting to Manufacturer of Polyvinyl Committees: 2, 4, 6 Financially Chloride (PVC) Resins and Distressed Compounds William C. Craig Companies Committees: 2, 4 Former Executive Vice President Committees: 4, 5 Mack Trucks Manufacturer of Trucks Committees: 1, 2, 3 Navistar International Transportation Corp. __________________________________________________________________________________________________________________________________ Principal Officers Group Vice Presidents Senior Vice Presidents Vice Presidents John R. Horne John J. Bongiorno Robert A. Boardman Thomas M. Hough Chairman, President General Manager General Counsel Treasurer and Chief Executive Officer Financial Services Joseph V. Thompson J. Steven Keate Donald DeFosset, Jr. R. Gary Diaz Employee Relations Controller Executive Vice President Chief Technical Officer and Administration James L. Simonton and President Truck Group Truck Group Purchasing and Robert C. Lannert David J. Johanneson Secretary Supplier Development Executive Vice President Truck Businesses Gregory Lennes Brian B. Whalen and Chief Financial Officer James T. O'Dare, Jr. Public Affairs Sales and Distribution Daniel C. Ustian General Manager Engine and Foundry Dennis W. Webb International Operations
EX-21 8 EXHIBIT 21 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- SUBSIDIARIES OF THE REGISTRANT AS OF OCTOBER 31, 1997 STATE OR COUNTRY IN WHICH SUBSIDIARY ORGANIZED ---------- Subsidiary included in the financial statements, which is 100% owned: Navistar International Transportation Corp. Delaware Subsidiaries that are 100% owned by Navistar International Transportation Corp.: Navistar International Corporation Canada Canada Navistar Financial Corporation Delaware Subsidiaries and corporate joint ventures not shown by name in the above listing, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. E-10 EX-27 9
5 1000000 YEAR OCT-31-1997 OCT-31-1997 609 356 1786 (31) 483 0 1682 (847) 5516 0 1316 0 244 2130 (1354) 5516 6147 6371 5292 6129 215 14 74 242 (92) 150 0 0 0 150 1.65 1.65 The company has adopted an unclassified presentation in the Statement of Financial Condition.
EX-28 10 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 October 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 1-4146-1 ----------------- NAVISTAR FINANCIAL CORPORATION (Exact name of Registrant as specified in its charter) Delaware 36-2472404 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2850 West Golf Road Rolling Meadows, Illinois 60008 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 847-734-4000 Securities registered pursuant to Section 12(b) of the Act: None 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ As of November 30, 1997, the number of shares outstanding of the registrant's common stock was 1,600,000. THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL TRANSPORTATION CORP. AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-K Year Ended October 31, 1997
INDEX 10-K Page PART I Item 1. Business (A)................................................ 1 Item 2. Properties (A).............................................. 1 Item 3. Legal Proceedings........................................... 1 Item 4. Submission of Matters to a Vote of Security Holders (A)..................................... 1 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................. 1 Item 6. Selected Financial Data (A)................................. 1 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (A)..................... 2 Item 8. Financial Statements........................................ 8 Independent Auditors' Report................................ 31 Supplementary Financial Data................................ 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 35 PART III Item 10. Directors and Executive Officers of the Registrant (A).............................................. 35 Item 11. Executive Compensation (A).................................. 35 Item 12. Security Ownership of Certain Beneficial Owners and Management (A).......................................... 35 Item 13. Certain Relationships and Related Transactions (A)............................................ 35 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................... 35 SIGNATURES- Principal Accounting Officer ............................... 36 - Directors.............................................. 37 POWER OF ATTORNEY....................................................... 37 EXHIBITS ......................................................... E-1 (A) - Omitted or amended as the registrant is a wholly-owned subsidiary of Navistar International Transportation Corp. and meets the conditions set forth in General Instructions I(1) (a) and (b) of Form 10-K and is, therefore, filing this Form with the reduced disclosure format.
PART I Item 1. Business The registrant, Navistar Financial Corporation ("NFC"), was incorporated in Delaware in 1949 and is a wholly-owned subsidiary of Navistar International Transportation Corp. ("Transportation"), which is wholly-owned by Navistar International Corporation ("Navistar"). As used herein, the "Corporation" refers to Navistar Financial Corporation and its wholly-owned subsidiaries unless the context otherwise requires. The Corporation is a financial services organization that provides wholesale, retail and lease financing in the United States for sales of new and used trucks sold by Transportation and Transportation's dealers. The Corporation also finances wholesale accounts and selected retail accounts receivable of Transportation. Sales of new products (including trailers) of other manufacturers are also financed regardless of whether designed or customarily sold for use with Transportation's truck products. Harco National Insurance Company, NFC's wholly-owned insurance subsidiary, provides commercial physical damage and liability insurance coverage to Transportation's dealers and retail customers, and to the general public through an independent insurance agency system. Item 2. Properties The Corporation's properties principally consist of office equipment and leased office space in Rolling Meadows, Illinois; Columbus, Ohio; Atlanta, Georgia; Plano, Texas; Mt. Laurel, New Jersey; and San Ramon, California. The office equipment owned and in use by the Corporation is not significant in relation to the total assets of the Corporation. Item 3. Legal Proceedings There were no material pending legal proceedings other than ordinary, routine litigation incidental to the business of the Corporation. Item 4. Submission of Matters to a Vote of Security Holders Intentionally omitted. See the index page of this Report for explanation. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters See Note 13 to Consolidated Financial Statements. Item 6. Selected Financial Data Intentionally omitted. See the index page to this Report for explanation. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements under this caption constitute "forward-looking statements" under the Securities Reform Act, which involve risks and uncertainties. Navistar Financial Corporation's actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under the heading "Business Outlook". Financing Volume In fiscal 1997 industry demand for Class 5 through 8 trucks was slightly higher than 1996 and 9% lower than 1995. Financing support provided to retail customers over the last three years was as follows:
1997 1996 1995 Retail and Lease Financing: ($ millions) Finance market share of new International trucks sold in the U.S. 13.2% 16.3% 14.4% Purchases of receivables and equipment leased to others $1,036 $1,135 $1,113 Serviced retail notes and lease financing balances (including sold notes) at October 31 $2,253 $2,200 $1,960
During 1997, the Corporation's finance market share fell below 1996 performance due to the highly competitive commercial financing market. As a result of the lower finance market share, purchases of receivables and equipment leased to others in 1997 were below 1996. Purchases of receivables and equipment leased to others in 1996 were consistent with those of 1995 as the increase in finance market share was offset by the lower industry demand for Class 5 through 8 trucks. Financing support provided to Transportation's dealers over the last three years was as follows:
1997 1996 1995 Wholesale Financing: ($ millions) Percent of wholesale financing of new International trucks sold to Transportation's dealers in the U.S. 94% 94% 93% Purchases of receivables $2,773 $2,706 $2,979 Serviced wholesale note balances (including sold notes) at October 31 $ 691 $ 685 $ 854
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Financing Volume (continued) In spite of the strong liquidity in the commercial financing market, the Corporation's finance percentage of new International trucks sold to Transportation's dealers remained at 94%. In 1997 the volume of receivables purchased was slightly higher than 1996 and 7% below 1995 in response to the truck industry demand. Although dealer inventory levels at October 31, 1997 were comparable to the 1996 year end levels, fiscal 1997 average dealer inventory levels were approximately 22% below 1996. In response to the continued strong customer demand, Transportation's dealers significantly increased the level of truck inventory during the fourth quarter of fiscal 1997. Wholesale note balances at October 31, 1996 were 25% below 1995 year end balances. This significant decline occurred primarily in the fourth quarter of fiscal 1996 as average dealer inventory levels during fiscal 1996 were approximately 22% higher than fiscal 1995. Results of Operations The components of net income over the last three years were as follows:
1997 1996 1995 Income before income taxes: ($ millions) Finance operations $68.6 $74.2 $53.1 Insurance operations 6.0 6.3 5.6 Income before taxes 74.6 80.5 58.7 Taxes on income 28.9 31.1 22.5 Net income $45.7 $49.4 $36.2 Return on average equity 16.1% 18.1% 15.0%
The Corporation's 1997 return on average equity of 16.1% was below its record 18.1% in 1996 primarily due to lower average dealer inventory levels and gains on sales of retail notes, partially offset by lower borrowing costs and provision for losses. Income in 1996 was 37% higher than 1995 primarily as a result of higher gains on sales of retail notes and higher average wholesale note balances. Finance Operations: Retail note and lease financing revenue for 1997 was $106 million compared with $98 million and $73 million in 1996 and 1995, respectively. Included in these amounts is operating lease revenue of $29 million, $14 million and $9 million in 1997, 1996 and 1995, respectively. The higher operating lease revenue is the result of an increase in operating lease balances due to a market shift toward lease financing. For operating leases, the Corporation recognizes the entire lease payment as revenue and records depreciation expense on the assets under lease. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations - Finance Operations (Continued) Also included in retail note and lease finance revenue are gains on sales of retail note receivables of $13 million, $20 million and $5 million in 1997, 1996 and 1995, respectively, on sales of $987 million, $985 million and $740 million, respectively. The higher gains on sales in fiscal 1996 resulted from higher margins on retail notes due to declining market interest rates prior to the sale in November 1995. During a declining interest rate environment, NFC's acquisition spreads may improve as the Corporation's cost of borrowing differs from the time when interest rates are quoted to borrowers and the time when such notes are acquired. In addition, unless hedged, the effective interest rate for each sale is based on a market interest rate at the time of the sale, which may be up to six months after the Corporation acquired the retail notes. In fiscal 1997 wholesale note revenue decreased 36.2% from 1996 primarily as a result of lower average outstanding note balances and lower yields in response to the competitive commercial financing market. Wholesale note revenue increased 5% in 1996 to $57 million as a result of higher average outstanding note balances offset in part by lower average yields relating to a lower prime interest rate. Borrowing costs decreased 10.6% in 1997 to $73 million from $82 million in 1996 primarily due to lower wholesale funding requirements and lower borrowing rates. During 1997 the Corporation's weighted average interest rate on all debt declined to 6.4% from 6.5% in 1996. The Corporation's 1996 borrowing costs of $82 million were slightly less than the $84 million in 1995 due to a decline in the Corporation's weighted average interest rate offset in part by higher debt balances to support receivable balances. During 1996, the Corporation's weighted average interest rate on all debt declined to 6.5% from 7.4% in 1995 primarily due to lower market interest rates and the maturity of high fixed rate public debt during 1995 and 1996. The ratio of debt to equity was 4.3:1, 4.7:1 and 5.2:1 at October 31, 1997, 1996, and 1995, respectively. Credit, collection and administrative expenses increased to $31 million in 1997 from $28 million in 1996 and 1995. The increase in 1997 compared with 1996 and 1995 was primarily due to employee related costs, retail marketing efforts and training and development programs. The provision for losses on receivables totaled $3 million in 1997 compared with $9 million in 1996 and $3 million in 1995. During 1997 and 1996 competitive freight rates and higher fuel costs have impacted NFC's customers' abilities to meet obligations and have resulted in higher delinquencies, repossessions and credit losses as compared to 1995. Notes and account write-offs (recoveries), including sold notes totaled $2 million in 1997, $5 million in 1996 and $(1) million in 1995. The Corporation's allowance for losses as a percentage of serviced finance receivables was .72%, .74% and .62% at October 31, 1997, 1996 and 1995, respectively. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations - Finance Operations (Continued) Depreciation and other expenses in 1997 increased to $19 million from $9 million in 1996. The increase is primarily the result of a larger investment in equipment under operating leases. Insurance Operations: Harco National Insurance Company's ("Harco") pretax income was $6 million in each of the three years ended October 31, 1997. Harco's gross premiums written in 1997 were $49 million, 10% and 8% below 1996 and 1995, respectively. The insurance industry continues to be over capitalized which results in a highly competitive market and places pressure on Harco's volume and margins. The ratio of losses to earned premiums during 1997 was 70% compared to 73% and 71% in 1996 and 1995, respectively. The loss ratio improvement is primarily due to favorable experience in the liability lines. Liquidity and Funds Management Navistar Financial has traditionally obtained the funds to provide financing to Transportation's dealers and retail customers from sales of receivables, commercial paper, short and long-term bank borrowings, medium and long-term debt issues and equity capital. The Corporation's current debt ratings have made sales of finance receivables the most economical source of cash. The Corporation's insurance operation generates its funds through internal operations and has no external borrowings. Operations provided $142 million in cash in 1997 primarily due to the cash provided from net income of $46 million and an increase in accounts payable to affiliated companies of $107 million. Investing activities used $1 million in cash. During 1997, the purchase of $1,036 million of receivables and equipment leased to others was funded primarily with $958 million of proceeds from the sale of receivables and principal collections of $94 million. The cash provided by operations and the $209 million of proceeds from the issuance of long term debt were used principally to lower bank borrowings by $311 million and to pay dividends of $40 million. See also the "Statements of Consolidated Cash Flow" on page 11. Over the last three years, operations provided $225 million in cash and proceeds from the sale of retail receivables totaled $2,667 million. These amounts were used principally to fund the purchase of receivables and equipment leased to others of $3,007, net of principal collections on the receivables, and to pay dividends of $75 million. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Funds Management (Continued) Receivable sales were a significant source of funding in 1997 and 1996. Through the asset-backed public market, the Corporation has been able to fund fixed rate retail note receivables at rates offered to companies with investment grade ratings. During fiscal 1997 and 1996, the Corporation sold $987 and $985 million, respectively, of retail notes, through Navistar Financial Retail Receivables Corporation ("NFRRC"), a wholly-owned subsidiary, to owner trusts, which in turn, sold notes and certificates to investors. At October 31, 1997, the remaining shelf registration available to NFRRC for issuance of asset-backed securities was $1,473 million. At October 31, 1997, Navistar Financial Securities Corporation ("NFSC"), a wholly-owned subsidiary of the Corporation, had in place a $600 million revolving wholesale note trust that provides for the continuous sale of eligible wholesale notes on a daily basis. During 1997, a $100 million tranche matured and the trust issued a $200 million tranche of investor certificates which matures in 2003. The trust is funded by securities sold to the public comprised of two $100 million tranches of investor certificates maturing in 1998 and 1999 and two $200 million tranches of investor certificates maturing in 2003 and 2004. At October 31, 1997, the remaining shelf registration available to NFSC for issuance of investor certificates was $200 million. On May 30, 1997, the Corporation sold $100 million of Senior Subordinated Notes due June 2002. The net proceeds from the sale of the Notes offered were approximately $98 million after the deduction of underwriting fees and certain other expenses. During fiscal 1997, the Corporation entered into sale/leaseback agreements involving vehicles subject to retail finance leases and operating leases with end users. Total proceeds were $111 million and the outstanding capital lease obligations at October 31, 1997 were $96 million. The Corporation has a $925 million bank revolving credit facility and a $400 million asset-backed commercial paper ("ABCP") program supported by a bank liquidity facility, which mature in March 2001. See Note 10 to the Consolidated Financial Statements for further discussion. In November 1997, the Corporation sold $500 million of retail notes through NFRRC to an owner trust, which in turn, sold notes to investors. A gain of $7 million was recognized on the sale. The Corporation manages sensitivity to interest rate changes by funding floating rate assets with floating rate debt, primarily borrowings under the bank revolving credit agreement, and fixed rate assets with fixed rate debt, equity and floating rate debt. Management has limited the amount of fixed rate assets funded with floating rate debt by selling retail receivables on a fixed rate basis and, to a lesser extent, by utilizing derivative financial instruments. See Notes 1 and 14 to the Consolidated Financial Statements. Corporate policy prohibits the use of derivatives for speculative purposes. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Funds Management (Continued) Under a state law enacted February 14, 1997, the Corporation was relieved of any liability under the Notice of Deficiency issued on February 1, 1994 by the Illinois Department of Revenue to the Corporation for the fiscal years 1989 through 1991. See Note 8 to the Consolidated Financial Statements for further discussion. Year 2000 The Corporation has and will continue to make certain investments in its information systems and applications to ensure they are year 2000 compliant. Spending for these modifications has not had and is not expected to have a material impact on the Corporation's financial condition or results of operations in any given year. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130") and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS No. 131"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. SFAS No. 131 establishes standards for reporting information about operating segments, and related disclosures about products and services, geographic areas and major customers. These statements are effective for fiscal years beginning after December 15, 1997. These standards expand or modify disclosures and, accordingly, will have no impact on the Corporation's reported financial condition, results of operations or cash flows. Business Outlook The truck industry in 1998 is forecasted to be consistent with 1997. The competitive commercial financing market will continue to put pressure on the Corporation's retail and wholesale financing activity and margins. Management believes that collections on the outstanding receivables portfolio plus cash available from the Corporation's various funding sources will permit Navistar Financial to meet the financing requirements of Transportation's dealers and retail customers through 1998 and beyond.
Page Item 8. Financial Statements and Supplementary Data Navistar Financial Corporation and Subsidiaries: Statements of Consolidated Income and Retained Earnings for the years ended October 31, 1997, 1996 and 1995.............. 9 Statements of Consolidated Financial Condition as of October 31, 1997 and 1996 ....................................... 10 Statements of Consolidated Cash Flow for the years ended October 31, 1997, 1996 and 1995.................................. 11 Notes to Consolidated Financial Statements......................... 12 Independent Auditors' Report....................................... 31 Supplementary Financial Data....................................... 32
Navistar Financial Corporation and Subsidiaries - ------------------------------------------------------------------------------- Statements of Consolidated Income and Retained Earnings - ------------------------------------------------------------------------------- Millions of Dollars
For the years ended October 31 1997 1996 1995 - ------------------------------------------------------------------------------- Revenues Retail notes and lease financing.............. $105.8 $ 97.7 $ 73.3 Wholesale notes............................... 36.1 56.6 54.1 Accounts...................................... 31.2 26.6 29.2 Servicing fee income.......................... 20.0 20.5 18.3 Insurance premiums earned..................... 33.3 42.0 44.6 Marketable securities......................... 8.5 9.4 8.7 Total..................................... 234.9 252.8 228.2 Expenses Cost of borrowing: Interest expense.......................... 65.9 73.2 75.1 Other..................................... 7.0 8.4 9.1 Total..................................... 72.9 81.6 84.2 Credit, collection and administrative......... 31.0 28.2 27.9 Provision for losses on receivables........... 2.5 9.3 2.6 Insurance claims and underwriting............. 35.1 44.4 46.7 Depreciation expense and other................ 18.8 8.8 8.1 Total..................................... 160.3 172.3 169.5 Income Before Taxes................................ 74.6 80.5 58.7 Taxes on Income.................................... 28.9 31.1 22.5 Net Income......................................... 45.7 49.4 36.2 Retained Earnings Beginning of year............................. 107.4 84.0 56.8 Dividends paid................................ (40.0) (26.0) (9.0) End of year................................... $113.1 $107.4 $ 84.0
See Notes to Consolidated Financial Statements. Navistar Financial Corporation and Subsidiaries - ------------------------------------------------------------------------------- Statements of Consolidated Financial Condition - ------------------------------------------------------------------------------- Millions of Dollars
As of October 31 1997 1996 - ------------------------------------------------------------------------------- ASSETS Cash and Cash Equivalents.............................. $ 10.7 $ 6.7 Marketable Securities.................................. 114.2 128.1 Receivables Finance receivables............................... 1,223.2 1,205.2 Allowance for losses.............................. (12.0) (11.6) Receivables, net.............................. 1,211.2 1,193.6 Amounts Due from Sales of Receivables.................. 233.3 264.3 Equipment on Operating Leases, Net..................... 124.1 101.1 Repossessions.......................................... 13.0 13.2 Other Assets........................................... 104.1 86.8 Total Assets........................................... $1,810.6 $1,793.8 LIABILITIES AND SHAREOWNER'S EQUITY Short-Term Debt........................................ $ 141.0 $ 99.4 Accounts Payable and Other Liabilities................. 191.3 86.4 Senior and Subordinated Debt........................... 1,082.7 1,206.4 Dealers' Reserves...................................... 22.2 22.3 Unpaid Insurance Claims and Unearned Premiums.......... 85.6 99.6 Commitments and Contingencies Shareowner's Equity Capital stock (Par value $1.00, 1,600,000 shares issued and outstanding) and paid-in capital..... 171.0 171.0 Retained earnings................................. 113.1 107.4 Unrealized gains on marketable securities......... 3.7 1.3 Total......................................... 287.8 279.7 Total Liabilities and Shareowner's Equity.............. $1,810.6 $1,793.8
See Notes to Consolidated Financial Statements. Navistar Financial Corporation and Subsidiaries - ------------------------------------------------------------------------------- Statements of Consolidated Cash Flow - ------------------------------------------------------------------------------- Millions of Dollars
For the years ended October 31 1997 1996 1995 - ------------------------------------------------------------------------------- Cash Flow From Operations Net income.................................... $ 45.7 $ 49.4 $ 36.2 Adjustments to reconcile net income to cash provided from operations: Gains on sales of receivables................. (13.4) (20.2) (5.2) Depreciation and amortization................. 22.5 15.3 11.1 Provision for losses on receivables........... 2.5 9.3 2.6 Increase (decrease) in accounts payable to affiliated companies..................... 107.0 (65.0) 73.2 Other......................................... (22.3) (17.3) (6.7) Total................................... 142.0 (28.5) 111.2 Cash Flow From Investing Activities Proceeds from sold retail notes............... 958.2 982.1 726.8 Purchase of retail notes and lease receivables........................... (969.7) (1,069.0) (1,089.3) Principal collections on retail notes and lease receivables........................... 93.8 70.2 113.2 Acquisitions (over)/under cash collections of wholesale notes and accounts receivable..... (59.9) 163.0 (77.1) Purchase of marketable securities............. (65.3) (63.0) (61.9) Proceeds from sales and maturities of marketable securities....................... 84.8 67.7 67.3 Purchase of equipment leased to others........ (66.3) (65.9) (23.9) Sale of equipment leased to others............ 23.8 9.7 5.2 Total................................... (0.6) 94.8 (339.7) Cash Flow From Financing Activities Net increase (decrease) in short-term debt.... 41.6 48.9 (368.7) Net (decrease) increase in bank revolving credit facility usage............. (311.0) (56.0) 405.0 Net (decrease) increase in asset-backed commercial paper facility usage............. (15.3) 88.1 275.8 Principal payments on long-term debt.......... (21.6) (117.5) (100.0) Proceeds from long-term debt.................. 208.9 - - Dividends paid to Transportation.............. (40.0) (26.0) (9.0) Total................................... (137.4) (62.5) 203.1 Increase/(Decrease) in Cash and Cash Equivalents.............................. 4.0 3.8 (25.4) Cash and Cash Equivalents at Beginning of Year.. 6.7 2.9 28.3 Cash and Cash Equivalents at End of Year........ $ 10.7 $ 6.7 $ 2.9 Supplementary disclosure of cash flow information: Interest paid................................. $ 59.7 $ 76.3 $ 74.3 Income taxes paid............................. $ 23.8 $ 32.2 $ 14.6
See Notes to Consolidated Financial Statements. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 1997 MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Navistar Financial Corporation ("NFC") and its wholly-owned subsidiaries ("Corporation"). All significant intercompany accounts and transactions have been eliminated. All of the Corporation's capital stock is owned by Navistar International Transportation Corp. ("Transportation"), which is wholly owned by Navistar International Corporation ("Navistar"). Nature of Operations The Corporation is a financial services organization that provides retail, wholesale and lease financing of products sold by Transportation and its dealers within the United States. The Corporation also provides commercial physical damage and liability insurance coverage to Transportation's dealers and retail customers and to the general public through an independent insurance agency system. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue on Receivables Revenue from finance receivables is recognized using the interest method. Revenue on operating leases is recognized on a straight-line basis over the life of the lease. Recognition of revenue is suspended when management determines the collection of future income is not probable. Income recognition is resumed if collection doubts are removed. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES (Continued) Allowance for Losses on Receivables The allowance for losses on receivables is established through a charge to the provision for losses. The allowance is an estimate of the amount adequate to absorb losses on existing receivables that may become uncollectible. The allowance is maintained at an amount management considers appropriate in relation to the outstanding receivables portfolio based on such factors as overall portfolio quality, historical loss experience and current economic conditions. Under various agreements, Transportation and its dealers may be liable for a portion of customer losses or may be required to repurchase the repossessed collateral at the receivable principal value. The Corporation's losses are net of these benefits. Receivables are charged off to the allowance for losses as soon as the receivable is determined to be uncollectible. Receivable Sales The Corporation securitizes and sells receivables to public and private investors with limited recourse. The Corporation continues to service the receivables, for which a servicing fee is received. Servicing fees are earned on a level yield basis over the terms of the related sold receivables and are included in servicing fee income. Gains or losses on sales of receivables are credited or charged to financing revenue in the period in which the sales occur. An adequate allowance for credit losses is provided prior to the receivable sales. Insurance Operations Insurance premiums are earned on a pro rata basis over the terms of the policies. Commission costs and premium taxes incurred in acquiring business are deferred and amortized on the same basis as related premiums are earned. The liability for unpaid insurance claims includes provisions for reported claims and an estimate of unreported claims based on past experience. Such provisions include an estimate of loss adjustment expense. The estimated liability for unpaid insurance claims is regularly reviewed and updated. Any change in such estimate is reflected in current operations. The Corporation's wholly-owned insurance subsidiary, Harco National Insurance Company ("Harco"), limits its exposure on any single loss occurrence by ceding reinsurance to other insurance enterprises. Reinsurance receivables, including amounts related to unpaid insurance claims and prepaid reinsurance premiums, are reported as other assets in the Statements of Consolidated Financial Condition. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES (Continued) Income Taxes Navistar and its subsidiaries file a consolidated Federal income tax return which includes Transportation and the Corporation. Federal income taxes for the Corporation are computed on a separate consolidated return basis and are payable to Transportation. Cash and Cash Equivalents Cash and cash equivalents include money market funds and marketable securities with original maturities of three months or less, except for such securities held by the insurance operations which are included in marketable securities. Marketable Securities Marketable securities are classified as available-for-sale and are reported at fair value. The difference between amortized cost and fair value is recorded as an adjustment to shareowner's equity, net of applicable deferred taxes. Derivative Financial Instruments The Corporation uses derivatives such as forward contracts and interest rate swaps to reduce its exposure to interest rate volatility. The Corporation's primary use of such financial instruments is to hedge the fair value of its fixed rate receivables against changes in market interest rates in anticipation of the sale of such receivables. All derivative financial instruments are held for purposes other than trading, and the Corporation's policy prohibits the use of derivatives for speculative purposes. Gains or losses related to hedges of anticipated sales of receivables are deferred and are recognized as income when the receivables are sold. The principal balance of receivables expected to be sold by the Corporation equals or exceeds the notional amount of open derivative contracts. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130") and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS No. 131"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. SFAS No. 131 establishes standards for reporting information about operating segments, and related disclosures about products and services, geographic areas and major customers. These statements are effective for fiscal years beginning after December 15, 1997. These standards expand or modify disclosures and, accordingly, will have no impact on the Corporation's reported financial condition, results of operations or cash flows. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES (Continued) Reclassification Certain amounts for prior years have been reclassified to conform with the presentation used in the 1997 financial statements. 2. TRANSACTIONS WITH AFFILIATED COMPANIES Wholesale Notes, Wholesale Accounts and Retail Accounts In accordance with the agreements between the Corporation and Transportation relating to financing of wholesale notes, wholesale accounts and retail accounts, the Corporation receives interest income from Transportation at agreed upon interest rates applied to the average outstanding balances less interest amounts paid by dealers on wholesale notes and wholesale accounts. The Corporation purchases wholesale notes and accounts from Transportation at the principal amount of the receivables. Revenue collected from Transportation was $54.7 in 1997, $49.8 in 1996 and $55.7 in 1995 Retail Notes and Lease Financing In accordance with agreements between the Corporation and Transportation, Transportation may be liable for certain losses on the finance receivables and may be required to repurchase the repossessed collateral at the receivable principal value. Losses recorded by Transportation were $10.1 in 1997, $9.5 in 1996 and $0.6 in 1995. Support Agreements Under provisions of certain public and private financing arrangements, agreements with Transportation and Navistar provide that the Corporation's consolidated income before interest expense and income taxes will be maintained at not less than 125% of its consolidated interest expense. No income maintenance payments were required during the three-year period ended October 31, 1997. Administrative Expenses The Corporation pays a fee to Transportation for data processing and other administrative services based on the actual cost of services performed. The amount of the fee was $2.1 in 1997 and $2.4 in 1996 and 1995. Accounts Payable Accounts payable and other liabilities include $131.5 and $24.5 payable to Transportation at October 31, 1997 and 1996, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 3. INDUSTRY SEGMENTS Information by industry segment is summarized as follows:
1997 1996 1995 - ------------------------------------------------------------------------------- Revenues: Finance operations....................... $ 193.5 $ 201.6 $ 175.1 Insurance operations..................... 41.4 51.2 53.1 Total revenues......................... $ 234.9 $ 252.8 $ 228.2 Income before taxes: Finance operations....................... $ 68.6 $ 74.2 $ 53.1 Insurance operations..................... 6.0 6.3 5.6 Total income before taxes.............. $ 74.6 $ 80.5 $ 58.7 Assets at end of year: Finance operations....................... $1,659.3 $1,626.9 $1,701.9 Insurance operations..................... 151.3 166.9 172.8 Total assets at end of year............ $1,810.6 $1,793.8 $1,874.7
4. MARKETABLE SECURITIES The fair value of marketable securities is based on quoted market prices, when available. If a quoted price is not available, fair value is estimated using quoted market prices for similar financial instruments. The following table sets forth, by type of security issuer, the amortized cost and estimated fair values at October 31:
1997 1996 ---------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - ------------------------------------------------------------------------------- U.S. government and agency securities................. $ 26.6 $ 27.1 $ 41.7 $ 41.5 Mortgage and asset-backed secuurities.......... 37.8 38.2 42.4 42.2 Corporate debt and other securities... 30.3 30.1 30.6 30.3 Total debt securities............. 94.7 95.4 114.7 114.0 Equity securities..................... 13.5 18.8 11.3 14.1 Total............................. $ 108.2 $ 114.2 $ 126.0 $ 128.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 4. MARKETABLE SECURITIES (Continued) Net unrealized gains and losses on marketable securities were $6.0 and $2.1 at October 31, 1997 and 1996, respectively. Unrealized losses were not material. Contractual maturities of marketable debt securities at October 31, 1997, are as follows:
Amortized Fair Cost Value - ------------------------------------------------------------------------------- Due in one year or less.................................. $ 17.4 $ 17.4 Due after one year through five years.................... 11.8 11.8 Due after five years through ten years................... 18.1 18.5 Due after ten years...................................... 9.6 9.5 56.9 57.2 Mortgage- and asset-backed securities.................... 37.8 38.2 Total (Excludes equity securities)................... $ 94.7 $ 95.4
Actual maturities may differ from the contractual maturities because of prepayments by the issuers. Proceeds from sales or maturities of marketable securities available for sale were $84.8 during 1997 and $67.7 during 1996. The related realized gains and losses were not material. All marketable securities at October 31, 1997 and 1996 were held by Harco, of which $14.5 and $16.7, respectively, were on deposit with various state departments of insurance or otherwise restricted as to use. 5. FINANCE RECEIVABLES Finance receivable balances, net of unearned finance income, at October 31 are summarized as follows:
1997 1996 - ------------------------------------------------------------------------------- Retail notes and lease financing....................... $ 706.5 $ 733.3 Wholesale notes........................................ 45.7 100.5 Accounts: Retail 396.6 314.7 Wholesale......................................... 74.4 56.7 Total......................................... 471.0 371.4 Total finance receivables................ $1,223.2 $1,205.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES (continued) Contractual maturities of finance receivables including unearned finance income at October 31, 1997, are summarized as follows:
Retail Wholesale Accounts - ------------------------------------------------------------------------------- Due in fiscal year: 1998 .................................... $239.4 $ 40.7 $471.0 1999 .................................... 190.1 5.0 - 2000 .................................... 160.9 - - 2001 .................................... 130.5 - - 2002 .................................... 90.6 - - Due after 2002................................. 17.8 - - Gross finance receivables............... 829.3 45.7 471.0 Unearned finance income........................ 122.8 - - Total finance receivables............... $706.5 $ 45.7 $471.0
The actual cash collections from finance receivables will vary from the contractual cash flows because of sales, prepayments, extensions and renewals. The contractual maturities, therefore, should not be regarded as a forecast of future collections. The Corporation's primary business is to provide wholesale, retail and lease financing for new and used trucks sold by Transportation and Transportation's dealers, and as a result the Corporation's receivables and leases have significant concentration in the trucking industry. On a geographic basis, there is not a disproportionate concentration of credit risk in any area of the United States. The Corporation retains as collateral a security interest in the equipment associated with wholesale notes, retail notes and leases other than accounts. The Corporation sells finance receivables to public and private investors with limited recourse provisions. Outstanding sold receivable net balances at October 31 are as follows:
1997 1996 - ------------------------------------------------------------------------------- Retail notes............................................ $1,422.2 $1,366.4 Wholesale notes......................................... 545.5 500.0 Total.............................................. $1,967.7 $1,866.4
The Corporation has two wholly-owned subsidiaries, Navistar Financial Retail Receivables Corporation ("NFRRC") and Navistar Financial Securities Corporation ("NFSC"), which have a limited purpose of purchasing retail and wholesale receivables, respectively, and transferring an undivided ownership interest in such notes to investors in exchange for pass-through notes and certificates. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES (Continued) During fiscal 1997, in two separate sales, the Corporation sold a total of $987 of retail notes, net of unearned finance income, through NFRRC to two individual owner trusts. The owner trusts, in turn, sold notes and certificates to investors. At October 31, 1997, the remaining shelf registration available to NFRRC for issuance of asset-backed securities was $1,473. NFSC has in place a revolving wholesale note trust that provides for the continuous sale of eligible wholesale notes up to $600. During 1997, a $100 tranche of investor certificates matured and NFSC issued a $200 tranche of investor certificates. The trust is comprised of two $100 tranches of investor certificates maturing in 1998 and 1999 and two $200 tranches of investor certificates maturing in 2003 and 2004. At October 31, 1997, the remaining shelf registration available to NFSC for issuance of investor certificates was $200. NFRRC and NFSC have limited recourse on the sold receivables and their assets are available to satisfy the claims of their creditors prior to such assets becoming available to the Corporation or affiliated companies. The terms of retail receivable sales require the Corporation to maintain cash reserves with the trusts as credit enhancement for public sales. The cash reserves held by the trusts are restricted for use by the securitized sales agreements. The maximum exposure under all receivable sale recourse provisions at October 31, 1997 was $245.8; however, management believes the reserves to be adequate. On January 1, 1997, the Corporation adopted Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", for all applicable transactions. SFAS No. 125 requires that amounts previously classified as excess servicing be reclassified as interest only receivables and that such amounts be recorded at estimated fair value. Restatement of the financial statements of prior periods is not permitted. The new standard did not have a material effect on the Corporation's net income or financial condition. The following is a summary of amounts included in "Amounts Due from Sales of Receivables" as of October 31:
1997 1996 - ------------------------------------------------------------------------------- Cash held and invested by trusts............................ $ 90.8 $ 85.2 Subordinated retained interests in wholesale receivables.... 99.9 85.4 Subordinated retained interests in retail receivables....... 47.4 96.0 Interest only receivables................................... 7.7 - Excess servicing............................................ - 10.1 Allowance for credit losses................................. (12.5) (12.4) Total.................................................. $233.3 $264.3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 6. INVESTMENT IN OPERATING LEASES Operating leases at year-end were as follows:
1997 1996 - ------------------------------------------------------------------------------- Investment in operating leases Vehicles and other equipment, at cost........................ $150.0 $116.4 Less: Accumulated depreciation.............................. (25.9) (15.3) Net investment in operating leases........................... $124.1 $101.1
Future minimum rentals on operating leases are as follows: 1998, $30.1; 1999, $26.8; 2000, $20.4; 2001, $12.6 and $3.6 thereafter. Each of these assets is depreciated on a straight-line basis over the term of the lease in an amount necessary to reduce the leased vehicle to its estimated residual value at the end of the lease term. 7. ALLOWANCE FOR LOSSES The allowance for losses on receivables is summarized as follows:
1997 1996 1995 - ------------------------------------------------------------------------------- Total allowance for losses at beginning of year....... $24.0 $19.6 $16.2 Provision for losses.................................. 2.5 9.3 2.6 Net (losses) recoveries (charged) credited to allowance............................ (2.0) (4.9) 0.8 Total allowance for losses at end of year.... $24.5 $24.0 $19.6 Allowance pertaining to: Owned notes...................................... $12.0 $11.6 $10.4 Sold notes....................................... 12.5 12.4 9.2 Total..........................................$24.5 $24.0 $19.6
8. TAXES ON INCOME Taxes on income are summarized as follows:
1997 1996 1995 - ------------------------------------------------------------------------------- Current: Federal.......................................... $29.6 $26.4 $18.9 State and local.................................. 4.1 4.4 3.1 Total current................................ 33.7 30.8 22.0 Deferred (primarily Federal).......................... (4.8) 0.3 0.5 Total........................................ $28.9 $31.1 $22.5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 8. TAXES ON INCOME (continued) The effective tax rate of approximately 38% in each of the three years ended October 31, 1997 differs from the statutory United States Federal tax rate of 35% primarily because of state and local income taxes. Deferred tax assets and liabilities at October 31, comprised the following:
1997 1996 - ------------------------------------------------------------------------------- Deferred tax assets: Other postretirement benefits............................... $3.0 $2.9 Deferred tax liabilities: Depreciation and other...................................... 2.2 6.9 Unrealized gains on marketable securities................... 2.3 0.8 Total deferred tax liabilities.......................... 4.5 7.7 Net deferred tax liabilities............................ $1.5 $4.8
During 1992, auditors of the Illinois Department of Revenue ("Department") began an income tax audit of NFC for the fiscal years ended October 31, 1989, 1990 and 1991. On February 1, 1994, the Department issued a Notice of Deficiency to NFC for approximately $12 million. The Department had taken the position that nearly 100% of NFC's income during these years should be attributed to and taxed by Illinois. On February 14, 1997, a state law was enacted which negated the Department's position and relieved NFC of the aforementioned Notice of Deficiency. 9. SHORT-TERM DEBT Commercial paper is issued by the Corporation with varying terms. The Corporation also has short-term borrowings with various banks on a non-committed basis. Compensating cash balances and commitment fees are not required under these agreements. Information regarding short-term debt is as follows:
1997 1996 1995 - ------------------------------------------------------------------------------- Aggregate obligations outstanding: Daily average.................................. $109.7 $ 68.2 $ 37.8 Maximum month-end balance...................... 145.0 117.8 81.1 Weighted average interest rate: On average daily borrowing..................... 6.1% 6.0% 6.4% At October 31.................................. 6.1% 5.9% 6.3%
Unused commitments under the Corporation's bank revolving credit facility and bank liquidity facility supporting the asset-backed commercial paper program are used as backup for outstanding short-term borrowings. See also Note 10 to the Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 10. SENIOR AND SUBORDINATED DEBT Senior and Subordinated Debt outstanding at October 31 is summarized as follows:
1997 1996 - ------------------------------------------------------------------------------- Bank revolving credit, at variable rates, due March 2001........................................$ 393.0 $ 704.0 Funding under asset-backed commercial paper program ("ABCP"), at variable rates, due March 2001................................. 399.9 402.4 Capital lease obligations, 5.19% to 5.62%, due serially through 2003............................. 95.8 - Subordinated term debt: Senior Notes, 8 7/8%, due November 1998............... 94.0 100.0 Senior Notes, 9%, due June 2002....................... 100.0 - Total senior and subordinated debt...........$1,082.7 $1,206.4
The weighted average interest rate on total debt, including short-term debt and the effect of discounts and related amortization, was 6.4%, 6.5% and 7.4% in 1997, 1996 and 1995, respectively. The aggregate annual maturities and required payments of debt are as follows: Fiscal year ended October 31, 1998 $ 12.6 1999 111.0 2000 25.4 2001 819.6 2002 and thereafter 114.1 Total $1,082.7
At October 31, 1997, the Corporation has a $925 contractually committed bank revolving credit facility and a $400 ABCP program supported by a bank liquidity facility. Available funding under the ABCP program is comprised of the $400 liquidity facility plus $14 of trust certificates issued in connection with the formation of the ABCP trust. Under the terms of the ABCP program, Truck Retail Instalment Paper Company ("TRIP"), a special purpose wholly-owned subsidiary of NFC, purchases eligible receivables from NFC. All assets of TRIP are pledged to a Trust that funds the receivables with A1/P1 rated commercial paper. Available funding under the amended and restated credit facility and the ABCP program was $546, of which $141 provided funding backup for the outstanding short-term debt at October 31, 1997. The remaining $405 when combined with unrestricted cash and cash equivalents made $416 available to fund the general business purposes of the Corporation at October 31, 1997. Under the terms of the revolving credit facility, the Corporation is required to maintain tangible net NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 10. SENIOR AND SUBORDINATED DEBT (Continued) worth at a minimum of $175 and a debt to tangible net worth ratio of no greater than 7 to 1. Consistent with the previous revolving credit agreement, the amended agreement grants security interests in substantially all of the Corporation's assets to the Corporation's debtholders. Compensating cash balances are not required under the restated revolving credit facility. Facility fees are paid quarterly regardless of usage. Under the terms of the 8 7/8% Subordinated debt agreement, the aggregate principal balances of subordinated debt may not exceed 75% of consolidated tangible net worth. During fiscal 1997, the Corporation entered into sale/leaseback agreements involving vehicles subject to retail finance and operating leases with end users. The balance, as of October 31, 1997, is classified under senior and subordinated debt as capital lease obligations. These agreements grant to the purchasers a security interest in the underlying end user leases. 11. RETIREMENT BENEFITS The Corporation provides postretirement benefits to substantially all of its employees. Expenses associated with postretirement benefits include pension expense for employees, retirees and surviving spouses, and postretirement health care and life insurance expense for employees, retirees, surviving spouses and dependents. Pension Benefits Generally pension benefits are non-contributory with benefits related to an employee's length of service and compensation rate. Plan assets are primarily invested in a dedicated portfolio of long-term fixed income securities with the remainder invested in high quality equity securities. Pension Expense Net pension (income) expense includes the following:
1997 1996 1995 ------------------------------------------------------------------------- Service cost for benefits earned during the period....................................$ 0.8 $ 0.7 $ 0.5 Interest cost on projected benefit obligation.................................... 3.0 2.9 2.8 Return on assets - actual (gain) loss........... (9.7) (3.2) (9.1) - deferred gain (loss)......... 5.7 (0.4) 5.8 Net amortization costs and other costs.......... - 0.1 - Net pension (income) expense..............$(0.2) $ 0.1 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. RETIREMENT BENEFITS (Continued) Pension Assets and Liabilities The plans' funded status and reconciliation to the Statements of Consolidated Financial Condition as of October 31 were as follows:
Plan in Which Plan in Which Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets -------------------------------------------- 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Actuarial present value of: Vested benefits................. $ (35.8) $ (31.5) $ (2.2) $ (2.0) Non-vested benefits............. (4.4) (4.0) (0.1) (0.1) Accumulated benefit obligation.................. (40.2) (35.5) (2.3) (2.1) Effect of projected future compensation levels......... (1.4) (1.0) (0.1) - Total projected benefit obligation.................. (41.6) (36.5) (2.4) (2.1) Plan assets at fair value.......... 50.1 42.7 - - Funded status at October 31..... 8.5 6.2 (2.4) (2.1) Unrecognized net losses (gains).... (7.3) (5.5) 0.8 0.4 Unrecognized plan amendments....... 0.4 0.5 - - Unrecognized net obligation as of transition date....... 0.1 0.1 - - Net asset (liability)......... $ 1.7 $ 1.3 $ (1.6) $ (1.7)
The weighted average rate assumptions used in determining the projected benefit obligation and pension expense were:
1997 1996 1995 - ------------------------------------------------------------------------------- Discount rate used to determine the present value of the projected benefit obligations................. 7.2% 7.9% 7.5% Expected long-term rate of return on plan assets.......... 9.6% 8.9% 9.9% Expected rate of increase in future compensation levels.................................. 3.5% 3.5% 3.5%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. RETIREMENT BENEFITS (Continued) Other Postretirement Benefits The components of expense for other postretirement benefits that are included in the Statements of Consolidated Income and Retained Earnings include the following:
1997 1996 1995 - ------------------------------------------------------------------------------- Service cost for benefits earned during the year....... $ 0.4 $ 0.4 $ 0.3 Interest cost on the accumulated benefit obligation........................................ 0.9 0.8 0.8 Expected return on assets - actual (gain) loss......... (0.2) 0.8 (1.5) - deferred gain (loss)....... (0.3) (1.3) 1.2 Total cost of other postretirement benefits............ $ 0.8 $ 0.7 $ 0.8
The funded status of other postretirement benefits as of October 31 were as follows:
1997 1996 - ------------------------------------------------------------------------------- Accumulated other postretirement benefit obligation (APBO): Retirees and their dependents............................... $(6.2) $(4.9) Active employees eligible to retire......................... (2.0) (2.9) Other active participants................................... (3.4) (3.4) Total APBO ................................................. (11.6) (11.2) Plan assets at fair value................................... 4.4 3.9 APBO in excess of plan assets............................... (7.2) (7.3) Unrecognized net loss....................................... 1.0 1.5 Net liability............................................... $(6.2) $(5.8)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. RETIREMENT BENEFITS (Continued) The expected return on plan assets was 11.1% for 1997, 10.5% for 1996 and 10.0% for 1995. The weighted average of discount rates used to determine the accumulated postretirement benefit obligation was 7.4% and 8.1% at October 31, 1997 and 1996, respectively. For 1998, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 8.1%. The rate is projected to decrease to 5.0% in the year 2004 and remain at that level each year thereafter. If the cost trend rate assumptions were increased by one percentage point for each year, the accumulated postretirement benefit obligation would increase by approximately $1.7 and the associated expense recognized for the year ended October 31, 1997, would increase by an estimated $0.2. 12. LEASES The Corporation is obligated under noncancelable operating leases for the majority of its office facilities and equipment. These leases are generally renewable and provide that property taxes and maintenance costs are to be paid by the lessee. At October 31, 1997, future minimum lease commitments under noncancelable operating leases with remaining terms in excess of one year are as follows: Year Ended October 31, 1998............................................. $ 1.7 1999............................................. 1.7 2000............................................. 1.4 2001............................................. 0.2 2002............................................. - Thereafter....................................... - Total........................................ $ 5.0
13. SHAREOWNER'S EQUITY The number of authorized shares of capital stock as of October 31, 1997 and 1996, was 2,000,000 of which 1,600,000 shares were issued and outstanding. All of the issued and outstanding capital stock is owned by Transportation and no shares are reserved for officers and employees, or for options, warrants, conversions and other rights. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 14. FINANCIAL INSTRUMENTS Fair Value of Financial Instruments The carrying amounts and estimated fair values of the Corporation's financial instruments were as follows:
1997 1996 ----------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - ------------------------------------------------------------------------------- Financial assets: Finance receivables: Retail notes.................... $ 607.0 $ 619.0 $ 662.5 $ 672.1 Wholesale notes and accounts.... 516.7 516.7 471.9 471.9 Amounts due from sales of receivables..................... 233.3 230.3 264.3 258.1 Financial liabilities: Senior and subordinated debt...... $1,082.7 $1,086.0 $1,206.4 $1,207.4
Cash and cash equivalents approximate fair value. The cost and fair value of marketable securities are disclosed in Note 4. The fair value of truck retail notes is estimated by discounting the future cash flows using an estimated discount rate reflecting current rates paid to purchasers of similar types of receivables with similar credit, interest rate and prepayment risks. For other retail notes, primarily variable-rate notes that re-price frequently, the carrying amount approximates fair value. For wholesale notes and retail and wholesale accounts, which also reprice frequently, the carrying amounts approximate fair value as a result of the short term nature of the receivables. The fair value of cash deposits included above in amounts due from sales of receivables approximates their carrying value. The fair values of other amounts due from sales of receivables were derived by discounting expected cash flows at estimated current market rates. For variable-rate debt that reprices frequently, the carrying amount approximates fair value. For fixed rate debt, the fair value is estimated based on quoted market prices where available and, where not available, on quoted market prices of debt with similar characteristics. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 14. FINANCIAL INSTRUMENTS (Continued) Derivatives Held or Issued for Purposes Other Than Trading The Corporation manages its exposure to fluctuations in interest rates by limiting the amount of fixed rate assets funded with variable rate debt by selling fixed rate retail receivables on a fixed rate basis and, to a lesser extent, by utilizing derivative financial instruments. These derivative financial instruments may include interest rate swaps, interest rate caps and forward interest rate contracts. The Corporation manages exposure to counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. Notional amounts are used to measure the volume of derivative financial instruments and do not represent exposure to credit loss. The Corporation enters into forward interest rate contracts to manage its exposure to fluctuations in the fair value of the retail notes anticipated to be sold. The Corporation manages interest rate risk by entering into forward contracts to sell fixed debt securities or forward interest rate swaps whose fair value is highly correlated with that of the Corporation's receivables. Gains or losses incurred with the closing of these agreements are included as a component of the gain or loss on sale of receivables. During the second half of fiscal 1997 the Corporation entered into $500 of interest rate hedge agreements in anticipation of the November 1997 sale of retail receivables. These hedge agreements, which were closed in conjunction with the pricing of the sale, resulted in an immaterial loss which was deferred and included in the gain on the sale of retail receivables recognized in November 1997. 15. LEGAL PROCEEDINGS The Corporation is subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings which constitute ordinary routine litigation incidental to the business of the Corporation. In the opinion of the Corporation's management, none of these proceedings or claims are material to the business or the financial condition of the Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 16. SUBSEQUENT EVENT In November 1997, the Corporation sold $500 of retail notes, net of unearned finance income, through NFRRC to an owner trust which, in turn, sold notes to investors. A gain of $7.2 was recognized on the sale. 17. QUARTERLY FINANCIAL INFORMATION (unaudited)
1997 ---------------------------------------------- 1st 2nd 3rd 4th Fiscal Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------- Revenues........................ $58.1 $57.3 $62.5 $57.0 $234.9 Interest expense................ 14.3 17.2 16.7 17.7 65.9 Provision for loss on receivables.............. 0.7 0.5 0.3 1.0 2.5 Net income...................... 13.4 9.3 13.4 9.6 45.7
1996 ---------------------------------------------- 1st 2nd 3rd 4th Fiscal Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------- Revenues......................... $68.7 $60.7 $67.0 $56.4 $252.8 Interest expense................. 17.1 19.7 18.8 17.6 73.2 Provision for loss on receivables............... 1.1 1.6 1.7 4.9 9.3 Net income....................... 16.6 8.7 15.6 8.5 49.4
- ------------------------------------------------------------------------------- Navistar Financial Corporation and Subsidiaries - ------------------------------------------------------------------------------- Statement of Financial Reporting Responsibility - ------------------------------------------------------------------------------- Management of Navistar Financial Corporation and its subsidiaries is responsible for the preparation and for the integrity and objectivity of the accompanying financial statements and other financial information in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based on management's estimates and judgments. The accompanying financial statements have been audited by Deloitte & Touche LLP, independent auditors. Management has made available to Deloitte & Touche LLP all the Corporation's financial records and related data, as well as the minutes of Directors' meetings. Management believes that all representations made to Deloitte & Touche LLP during its audit were valid and appropriate. Management is responsible for establishing and maintaining a system of internal controls throughout its operations that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use and the execution and recording of transactions in accordance with management's authorization. The system of internal controls which provides for appropriate division of responsibility is supported by written policies and procedures that are updated by management as necessary. The system is tested and evaluated regularly by the parent Company's internal auditors as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their audit in accordance with generally accepted auditing standards and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the Corporation's system of internal controls and takes the necessary actions that are cost-effective in the circumstances to respond appropriately to the recommendations presented. Management believes that the Corporation's system of internal controls accomplishes the objectives set forth in the first sentence of this paragraph. John J. Bongiorno President and Chief Executive Officer Phyllis E. Cochran Vice President and Controller Navistar Financial Corporation and Subsidiaries - ------------------------------------------------------------------------------- Independent Auditors' Report Navistar Financial Corporation: We have audited the financial statements of Navistar Financial Corporation and its subsidiaries listed in Item 8. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Navistar Financial Corporation and its subsidiaries at October 31, 1997 and 1996 and the results of their operations and their cash flow for each of the three years in the period ended October 31, 1997 in conformity with generally accepted accounting principles. /s/DELOITTE & TOUCHE LLP Deloitte & Touche LLP December 15, 1997 Chicago, Illinois SUPPLEMENTARY FINANCIAL DATA Five Year Summary of Financial and Operating Data Dollar amounts in millions
1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Results of Operations: Revenues.................$ 234.9 $ 252.8 $ 228.2 $ 210.8 $ 231.9 Net income ............... 45.7 49.4 36.2 34.0 22.5 Dividends paid ........... 40.0 26.0 9.0 25.6 22.6 Percent of net income to average shareowner's equity................. 16.1% 18.1% 15.0% 15.1% 10.3% Financial Data: Finance receivables, net.$1,211.2 $1,193.6 $1,370.9 $1,094.0 $1,270.2 Total assets ............ 1,810.6 1,793.8 1,874.7 1,534.8 1,625.2 Total debt .............. 1,223.7 1,305.8 1,330.3 1,091.5 1,199.2 Shareowner's equity ..... 287.8 279.7 256.7 225.6 219.4 Debt to equity ratio ..... 4.3:1 4.7:1 5.2:1 4.8:1 5.5:1 Senior debt to capital funds ratio........... 2.1:1 3.2:1 3.4:1 3.0:1 3.4:1 Number of employees at October 31............... 358 352 360 353 339
SUPPLEMENTARY FINANCIAL DATA (Continued) Gross Finance Receivables and Leases Acquired - -------------------------------------------------------------------------------
($ Millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------- Wholesale notes............$2,772.8 $2,705.8 $2,979.4 $2,306.6 $1,977.6 Retail notes and leases: New...................... 976.2 1,064.1 1,075.0 861.9 730.0 Used .................... 270.3 281.7 242.3 217.2 168.4 Total................. 1,246.5 1,345.8 1,317.3 1,079.1 898.4 Total ................$4,019.3 $4,051.6 $4,296.7 $3,385.7 $2,876.0
Serviced (including sold notes) Retail Notes and Leases With Installments Past Due Over 60 Days - -------------------------------------------------------------------------------
At October 31 ($ Millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------- Original amount of notes and leases...................... $ 31.8 $ 14.0 $ 4.2 $ 3.1 $ 3.6 Balance of notes and leases......... 16.2 8.0 2.2 1.3 1.3 Balance as a percent of total outstanding............... 0.64% 0.32% 0.10% 0.07% 0.09%
Retail Note and Lease Repossessions (including sold notes) - -------------------------------------------------------------------------------
1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------- Retail note and lease repossessions acquired as a percentage of average serviced retail note and lease balances.............. 2.69% 3.08% 0.92% 0.93% 1.94%
SUPPLEMENTARY FINANCIAL DATA (Continued) Credit Loss Experience on Serviced (including sold notes) Receivables - -------------------------------------------------------------------------------
($ Millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------- Net losses (recoveries): Retail notes and leases ............ $2.2 $5.1 $ .3 $ .6 $(.1) Wholesale notes .................... (.2) (.2) (.9) .1 .8 Accounts - - (.2) .2 - Total .......................... $2.0 $4.9 $(.8) $ .9 $ .7 Percent net losses (recoveries) to liquidations: Retail notes and leases ............ .18% .48% .03% .07% (.01)% Wholesale notes .................... (.01) (.01) (.03) .01 .04 Total .......................... .05% .13% (.02)% .03% .03% Percent net losses (recoveries) to related average gross receivables outstanding: Retail notes and leases ............ .09% .22% .02% .04% - Wholesale notes .................... (.02) (.02) (.13) .03 .16 Accounts - - (.05) .08 - Total .......................... .06% .14% (.03)% .04% .03%
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None PART III Items 10, 11, 12 and 13 Intentionally omitted. See the index page of this Report for explanation PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Financial Statements See Index to Financial Statements in Item 8. Financial Statement Schedules All schedules are omitted because of the absence of the conditions under which they are required or because information called for is shown in the financial statements and notes thereto. Exhibits, Including Those Incorporated By Reference See Index to Exhibits. Reports on Form 8-K No reports on Form 8-K were filed for the three months ended October 31, 1997. SIGNATURE 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. NAVISTAR FINANCIAL CORPORATION (Registrant) By: /s/ PHYLLIS E. COCHRAN December 22, 1997 Phyllis E. Cochran Vice President and Controller (Principal Accounting Officer) NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES Exhibit 24 POWER OF ATTORNEY Each person whose signature appears below does hereby make, constitute and appoint John J. Bongiorno, Phyllis E. Cochran and William W. Jones and each of them acting individually, true and lawful attorneys-in-fact and agents with power to act without the other and with full power of substitution, to execute, deliver and file, for and on such person's behalf, and in such person's name and capacity or capacities as stated below, any amendment, exhibit or supplement to the Form 10-K Report making such changes in the report as such attorney-in-fact deems appropriate. SIGNATURES 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 dates indicated:
Signature Title Date /s/JOHN J. BONGIORNO President and Chief Executive December 22, 1997 John J. Bongiorno Officer; Director (Principal Executive Officer) /s/R. WAYNE CAIN Vice President and Treasurer; December 22, 1997 R. Wayne Cain Director (Principal Financial Officer) /s/PHYLLIS E. COCHRAN Vice President and Controller; December 22, 1997 Phyllis E. Cochran Director (Principal Accounting Officer) /s/JORDAN H. FEIGER Vice President, Operations; December 22, 1997 Jordan H. Feiger Director /s/JOHN R. HORNE Director December 22, 1997 John R. Horne /s/THOMAS M. HOUGH Director December 22, 1997 Thomas M. Hough
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES SIGNATURES (Continued)
Signature Title Date /s/ROBERT C. LANNERT Director December 22, 1997 Robert C. Lannert /s/J. STEVEN KEATE Director December 22, 1997 J. Steven Keate /s/THOMAS D. SILVER Director December 22, 1997 Thomas D. Silver
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS The following documents of Navistar Financial Corporation are incorporated herein by reference: 3.1 Restated Certificate of Incorporation of Navistar Financial Corporation (as amended and in effect on December 15, 1987). Filed on Form 8-K dated December 17, 1987. Commission File No. 1-4146-l. 3.2 The By-Laws of Navistar Financial Corporation (as amended February 29, 1988). Filed on Form 10-K dated January 19, 1989. Commission File No. 1-4146-1. 4.1 Indenture dated as of November 15, 1993, between the Corporation and Bank of America Illinois, formerly known as Continental Bank, National Association, as Trustee, for 8 7/8% Senior Subordinated Notes due 1998 for $100,000,000. Filed on Registration No. 33-50541. 4.2 Indenture dated as of May 30, 1997 by and between the Corporation and The Fuji Bank and Trust Company, as Trustee, for 9% Senior Subordinated Notes due 2002 for $100,000,000. Filed on Registration No. 333-30167. 10.1 Pooling and Servicing Agreement dated as of December 1, 1990, among Navistar Financial Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, and The Chase Manhattan Bank (survivor in the merger between The Chase Manhattan Bank and Chemical Bank which was the survivor in the merger between Chemical Bank and Manufacturers Hanover Trust Company), as Trustee. Filed on Registration No. 33-36767. 10.2 Purchase Agreement dated as of December 1, 1990, between the Corporation and Navistar Financial Securities Corporation, as Purchaser, with respect to the Dealer Note Trust 1990. Filed on Registration No. 33-36767. 10.3 Master Inter-company Agreement dated as of April 26, 1993, between the Corporation and Transportation. Filed on Form 8-K dated April 30, 1993. Commission File No. 1-4146-1. 10.4 Inter-company Purchase Agreement dated as of April 26, 1993, between the Corporation and Truck Retail Instalment Paper Corp. Filed on Form 8-K dated April 30, 1993. Commission File No. 1-4146-1. 10.5 Purchase Agreement dated as of May 3, 1994, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1994-A Owner Trust. Filed on Registration No. 33-50291. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.6 Pooling and Servicing Agreement dated as of May 3, 1994, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1994-A Owner Trust, as Issuer. Filed on Registration No. 33-50291. 10.7 Trust Agreement dated as of May 3, 1994, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1994-A Owner Trust. Filed on Registration No. 33-50291. 10.8 Indenture dated as of May 3, 1994, between Navistar Financial 1994-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994-A Owner Trust. Filed on Registration No. 33-50291. 10.9 Purchase Agreement dated as of August 3, 1994, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1994-B Owner Trust. Filed on Registration No. 33-50291. 10.10 Pooling and Servicing Agreement dated as of August 3, 1994, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1994-B Owner Trust, as Issuer. Filed on Registration No. 33-50291. 10.11 Trust Agreement dated as of August 3, 1994, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1994-B Owner Trust. Filed on Registration No. 33-50291. 10.12 Indenture dated as of August 3, 1994, between Navistar Financial 1994-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994-B Owner Trust. Filed on Registration No. 33-50291. 10.13 Amended and Restated Credit Agreement dated as of November 4, 1994, among the Corporation, certain banks, certain Co-Arranger banks, and Morgan Guaranty Trust Company of New York, as Administrative Agent. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.14 Liquidity Agreement dated as of November 7, 1994, among NFC Asset Trust, as Borrower, hemical Bank, Bank of America Illinois, The Bank of Nova Scotia, and Morgan Guaranty Trust Company of New York, as Co-Arrangers, and Chemical Bank, as Administrative Agent. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.15 Appendix A to Liquidity Agreement at Exhibit 10.20. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.16 Collateral Trust Agreement dated as of November 7, 1994, between NFC Asset Trust and Bankers Trust Company, as Trustee. Filed on Form 8-K dated November 4, 1994. Commission File No.1-4146-1. 10.17 Administration Agreement dated as of November 7, 1994, between NFC Asset Trust and the Corporation, as Administrator. Filed on Form 8-K dated November 4, 1994. Commission File No.1-4146-1. 10.18 Trust Agreement dated as of November 7, 1994, between Truck Retail Instalment Paper Corp., as Depositor, and Chemical Bank Delaware, as Owner Trustee. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.19 Servicing Agreement dated as of November 7, 1994, between the Corporation, as Servicer, and Truck Retail Instalment Paper Corp. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.20 Servicing Agreement dated as of November 7, 1994, between the Corporation, as Servicer, and NFC Asset Trust. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.21 Receivables Purchase Agreement dated as of November 7, 1994, between Truck Retail Instalment Paper Corp., as Seller, and NFC Asset Trust, as Purchaser. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.22 Retail Receivables Purchase Agreement dated as of November 7, 1994, between Truck Retail Instalment Paper Corp. and the Corporation. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.23 Lease Receivables Purchase Agreement dated as of November 7, 1994, between Truck Retail Instalment Paper Corp. and Navistar Leasing Corporation. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.24 Purchase Agreement dated as of December 15, 1994, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1994-C Owner Trust. Filed on Registration No. 33-55865. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.25 Pooling and Servicing Agreement dated as of December 15, 1994, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1994-C Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.26 Trust Agreement dated as of December 15, 1994, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1994-C Owner Trust. Filed on Registration No. 33-55865. 10.27 Indenture dated as of December 15, 1994, between Navista Financial 1994-C Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994-C Owner Trust. Filed on Registration No. 33-55865. 10.28 Purchase Agreement dated as of May 25, 1995, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1995-A Owner Trust. Filed on Registration No. 33-55865. 10.29 Pooling and Servicing Agreement dated as of May 25, 1995, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1995-A Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.30 Trust Agreement dated as of May 25, 1995, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1995-A Owner Trust. Filed on Registration No. 33-55865. 10.31 Indenture dated as of May 25, 1995, between Navistar Financial 1995-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1995-A Owner Trust. Filed on Registration No. 33-55865. 10.32 Pooling and Servicing Agreement dated as of June 8, 1995, among Navistar Financial Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, The Chase Manhattan Bank (survivor in the merger between The Chase Manhattan Bank and Chemical Bank which was the survivor in the merger between Chemical Bank and Manufacturers Hanover Trust Company), as 1990 Trust Trustee, and The Bank of New York, as Master Trust Trustee. Filed on Registration No. 33-87374. 10.33 Series 1995-1 Supplement to the Pooling and Servicing Agreement dated as of June 8, 1995, among the Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, and The Bank of New York, as Master Trust Trustee on behalf of the Series 1995-1 Certificateholders. Filed on Registration No. 33-87374. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.34 Class A-4 Supplement to the 1990 Pooling and Servicing Agreement dated June 8, 1995, among the Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, and Chemical Bank (Successor to Manufacturers Hanover Trust Company), as Trustee. Filed on Registration No. 33-87374. 10.35 Purchase Agreement dated as of June 8, 1995, between the Corporation and Navistar Financial Securities Corporation, as Purchaser, with respect to the Dealer Note Master Trust. Filed on Registration No. 33-87374. 10.36 Purchase Agreement dated as of November 1, 1995, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1995-B Owner Trust. Filed on Registration No. 33-55865. 10.37 Pooling and Servicing Agreement dated as of November 1, 1995, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1995-B Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.38 Trust Agreement dated as of November 1, 1995, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1995-B Owner Trust. Filed on Registration No. 33-55865. 10.39 Indenture dated as of November 1, 1995, between Navistar Financial 1995-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1995-B Owner Trust. Filed on Registration No. 33-55865. 10.40 Amendment No. 1 dated as of March 29, 1996, to the Loan and Security Agreement dated as of November 7, 1994, between Truck Retail Instalment Paper Corp. ("TRIP") and NFC Asset Trust (the "Trust") filed on Form 8-K dated June 5, 1996. Commission File No. 1-4146-1. 10.41 Amendment No. 1 and Consent dated as of March 29, 1996, to the Liquidity Agreement dated as of November 7, 1994, among NFC Asset Trust, certain lenders, and Chemical Bank, as Administrative Agent for the lenders filed on Form 8-K dated June 5, 1996. Commission File No. 1-4146-1. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.42 Amendment No. 2 dated as of March 29, 1996, to the Amended and Restated Credit Agreement dated as of November 4, 1994, as amended by Amendment No. 1 dated as of December 15, 1995, among the Corporation, certain banks, certain Co-Arranger banks, and Morgan Guaranty Trust Company of New York, as Administrative Agent filed on Form 8-K dated June 5, 1996. Commission File No. 1-4146-1. 10.43 Purchase Agreement dated as of May 30, 1996, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1996-A Owner Trust. Filed on Registration No. 33-55865. 10.44 Pooling and Servicing Agreement dated as of May 30, 1996, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1996-A Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.45 Trust Agreement dated as of May 30, 1996, between Navistar Financial Retail Receivables Corporation, s Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1996-A Owner Trust. Filed on Registration No. 33-55865. 10.46 Indenture dated as of May 30, 1996, between Navistar Financial 1996-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996-A Owner Trust. Filed on Registration No. 33-55865. 10.47 Purchase Agreement dated as of November 6, 1996, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1996-B Owner Trust. Filed on Registration No. 33-55865. 10.48 Pooling and Servicing Agreement dated as of November 6, 1996, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1996-B Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.49 Trust Agreement dated as of November 6, 1996, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1996-B Owner Trust. Filed on Registration No. 33-55865. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.50 Indenture dated as of November 6, 1996, between Navistar Financial 1996-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996-B Owner Trust. Filed on Registration No. 33-55865. 10.51 Purchase Agreement dated as of May 7, 1997, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1997-A Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.52 Pooling and Servicing Agreement dated as of May 7, 1997, among the Corporation, as Servicer, Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1997-A Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.53 Trust Agreement dated as of May 7, 1997, between Navistar Financial Retail Receivables Corporation, as Seller, and Chase Manhattan Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1997-A Owner Trust. Filed on Registration No. 33-55865. 10.54 Indenture dated as of May 7, 1997, between Navistar Financial 1997-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1997-A Owner Trust. Filed on Registration No. 33-55865. 10.55 Amendment No. 3 dated as of May 27, 1997, to the Amended and Restated Credit Agreement dated as of November 4, 1994, as amended by Amendment No. 1 dated as of December 15, 1995 and Amendment No. 2 dated as of March 29, 1996, among the Corporation. Certain banks, certain Co-Arranger banks, and Morgan Guaranty Trust Company of New York, as Administrative Agent filed on Form 8-K dated June 17, 1997. Commission File No. 1-4146-1. 10.56 Series 1997-1 Supplement to the Pooling and Servicing Agreement dated as of August 19, 1997, among Navistar Financial Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, and the Bank of New York, as Master Trust Trustee on behalf of the Series 1997-1 Certificateholders. Filed on Registration No. 333-30737. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.57 Class A-5 Supplement to the 1990 Pooling and Servicing Agreement dated August 19, 1997, among Navistar Financial Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, and The Chase Manhattan Bank (survivor in the merger between The Chase Manhattan Bank and Chemical Bank which was the survivor in the merger between Chemical Bank and Manufacturers Hanover Trust Company), as Trustee. Filed on Registration No. 333-30737. 10.58 Purchase Agreement dated as of November 5, 1997, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1997-B Owner Trust, as Issuer. Filed on Registration No. 33-64249. 10.59 Pooling and Servicing Agreement dated as of November 5, 1997, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1997-B Owner Trust, as Issuer. Filed on Registration No. 33-64249. 10.60 Trust Agreement dated as of November 5, 1997, between Navistar Financial Retail Receivables Corporation, as Seller, and Chase Manhattan Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1997-B Owner Trust. Filed on Registration No. 33-64249. 10.61 Indenture dated as of November 5, 1997, between Navistar Financial 1997-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1997-B Owner Trust. Filed on Registration No. 33-64249. -----END PRIVACY-ENHANCED MESSAGE-----