-----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/sAo2ARuYmULapkRXqjvl/WNi2kAJnx4fa8zQHtkhHG4ZrOia8703ygDKM6BKoh r3w7mpVyGovit3cncesoWQ== 0000808450-98-000015.txt : 19981228 0000808450-98-000015.hdr.sgml : 19981228 ACCESSION NUMBER: 0000808450-98-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981222 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: 98773523 BUSINESS ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3128362000 MAIL ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DRIVE 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 PAGE 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, 1998 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 NAVISTAR INTERNATIONAL CORPORATION ------------------------------------------------------ (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 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of December 15, 1998 the aggregate market value of Common Stock held by non-affiliates of the registrant was $1,679,702,515. As of December 15, 1998, the number of shares outstanding of the registrant's Common Stock was 66,195,173. Documents Incorporated by Reference ----------------------------------- 1998 Annual Report to Shareowners (Parts I, II and IV) 1998 Proxy Statement(Parts I and III) Navistar Financial Corporation 1998 Annual Report on Form 10-K (Part IV) PAGE 2 NAVISTAR INTERNATIONAL CORPORATION FORM 10-K Year Ended October 31, 1998 INDEX 10-K Page --------- PART I Item 1. Business............................................. 3 Item 2. Properties........................................... 9 Item 3. Legal Proceedings.................................... 9 Executive Officers of the Registrant................. 10 Item 4. Submission of Matters to a Vote of Security Holders.. 10 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................... 11 Item 6. Selected Financial Data.............................. 11 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition... 11 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................. 11 Item 8. Financial Statements and Supplementary Data.......... 11 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... 12 Item 11. Executive Compensation............................... 12 Item 12. Security Ownership of Certain Beneficial Owners and Management................... 12 Item 13. Certain Relationships and Related Transactions....... 12 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 12 SIGNATURES Principal Accounting Officer.................................... 14 Directors ...................................................... 15 POWER OF ATTORNEY.................................................. 15 INDEPENDENT AUDITORS' REPORT....................................... 17 INDEPENDENT AUDITORS' CONSENT...................................... 17 SCHEDULE .................................................... F-1 EXHIBITS .................................................... E-1 PAGE 3 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 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 Mexico, Brazil and other 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 provision 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 1998, 1997 and 1996 is summarized in Note 13 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, ------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Class 5, 6 and 7 medium trucks and school buses.................... 158.9 150.6 145.8 151.8 134.2 Class 8 heavy trucks.............. 232.0 196.8 195.4 228.8 205.4 ----- ----- ----- ----- ----- Total.................... 390.9 347.4 341.2 380.6 339.6 ===== ===== ===== ===== ===== Source: Monthly data derived from materials produced by the American Automobile Manufacturers Associations in the United States and Canada, and other sources. The company's first full year of operations in Mexico was 1997. Industry retail deliveries of Class 5, 6 and 7 medium trucks and school buses in the Mexican market were 11,400 units and 9,600 units in 1998 and 1997, respectively. Industry retail deliveries of Class 8 heavy trucks were 10,900 units and 6,000 units over the same two-year period based on monthly data provided by the Associacion Nacional de Productores de Autobuses, Camiones y Tractocamiones. PAGE 4 The Class 5 through 8 truck markets in the United States, Canada, Mexico and Brazil are highly competitive. Major U.S. domestic competitors include PACCAR, Ford and General Motors, as well as foreign-controlled domestic manufacturers, such as Freightliner, Sterling, Mack and Volvo. 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. TRUCK MARKET SHARE The company delivered 112,800 Class 5 through 8 trucks, including school buses, in the United States and Canada in fiscal 1998, a 13% increase from the 99,500 units delivered in 1997. Navistar's combined share of the Class 5 through 8 truck market was 28.9% in 1998 and 28.6% in 1997. Navistar 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 18 fiscal years based on data obtained from the American Automobile Manufacturers Association, the Canadian Motor Vehicle Manufacturers Association and R.L. Polk & Company. The company delivered 4,100 Class 5 through 8 trucks, including school buses, in Mexico in 1998, a 141% increase from the 1,700 units delivered in 1997. Navistar's combined share of the Class 5 through 8 truck market in Mexico was 18.3% in 1998 and 10.9% in 1997. 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, ------------------------------------ 1998 1997 1996 ---- ---- ---- PRODUCT CLASS - ------------- Class 5, 6 and 7 medium trucks and school buses.................... 34% 34% 35% Class 8 heavy trucks.............. 39 37 35 Engines........................... 16 16 16 Service parts..................... 11 13 14 ---- ---- ---- Total...................... 100% 100% 100% ==== ==== ==== The company manufactures a full line of products in the common carrier, private carrier, government/service, leasing, construction, energy/petroleum and student transportation markets. The company offers diesel-powered trucks and school buses because of their improved fuel economy, ease of serviceability and greater durability over gasoline-powered vehicles. Navistar'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 Navistar. Based upon information published by R.L. Polk & Company, diesel-powered Class 5, 6 and 7 medium truck and bus shipments represented 87.6% of all medium shipments for fiscal year 1998 in the United States and Canada. PAGE 5 The company's truck and bus manufacturing operations in the United States, Canada and Mexico consist principally of the assembly of components manufactured by its suppliers, although the company produces its own mid-range diesel truck engines, sheet metal components (including cabs) and miscellaneous other parts. The company currently estimates approximately $515 million in capital spending and $330 million in development expense through 2003 for development of its next generation vehicles. ENGINE AND FOUNDRY The company designs and manufactures diesel engines for use in its Class 5, 6 and 7 medium trucks and school buses and selected Class 8 heavy truck models, and for sale to original equipment manufacturers (OEM's) in the United States and Canada. The company also sells engines for industrial, agricultural and marine applications. Navistar 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. Navistar 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 Ford's diesel-powered light trucks and vans. Sales to Ford currently account for approximately 88% of the company's 7.3L sales. The company's shipments of engines to all OEM's totaled 214,000 units in 1998, an increase of 16% from the 184,000 units shipped in 1997. During 1997, Navistar entered into a ten-year agreement, effective with model year 2003, to supply Ford with a successor engine to the current 7.3L product for use in its diesel-powered super duty trucks and vans (over 8,500 lbs. GVW). In March 1998, the company was selected by Ford to negotiate an extended agreement to supply diesel engines to Ford for certain under 8,500 lbs. GVW light duty trucks and sport utility vehicles, such as the Ford Expedition, F-150 and F-250 pick-ups and Econoline 150 and 250 van models. The company has approved a plan for up to $600 million in capital spending over the next five years in order to manufacture a next generation version of diesel engines. In addition, approximately $110 million of development expense was approved for the development of these engines. SERVICE PARTS In the United States and Canada, the company operates seven regional parts distribution centers, which allow 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. Navistar'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 the company. The company'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 duty 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 replacement parts that will be purchased from Navistar 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. PAGE 6 MARKETING AND DISTRIBUTION Navistar's truck products are distributed in virtually all key markets in the United States and Canada. The company's truck distribution and service network in these countries was composed of 945, 954 and 957 dealers and retail outlets at October 31, 1998, 1997 and 1996, respectively. Included in these totals were 524, 514 and 504 secondary and associate locations at October 31, 1998, 1997 and 1996, respectively. The company also has a dealer network in Mexico composed of 44, 38 and 23 dealer locations at October 31, 1998, 1997 and 1996, respectively, and a dealer network in Brazil composed of six dealer locations at October 31, 1998. Retail dealer activity is supported by five regional operations in the United States and general offices in Canada, Mexico and Brazil. The company has a national account sales group, responsible for 94 major U.S. national account customers. Navistar'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 1998 and 1997, NFC provided wholesale financing for 95% and 94%, respectively, of the new truck units sold by Transportation to its dealers and distributors in the United States, and retail and lease financing for 16% and 13%, 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. Navistar's wholly owned subsidiaries, Arrendadora Financiera Navistar and Servicios Financiera Navistar, provide wholesale and lease financing to the company's dealers and customers in Mexico. 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 Navistar International Corporation Canada 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 $138 million, $85 million and $90 million for 1998, 1997 and 1996, respectively. PAGE 7 BACKLOG The backlog of unfilled truck orders (subject to cancellation or return in certain events) at October 31, 1998, 1997 and 1996, was $4,505 million, $2,360 million and $1,254 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 17,558, 16,168 and 14,187 individuals at October 31, 1998, 1997 and 1996, respectively, worldwide. LABOR RELATIONS At October 31, 1998, the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represented 9,017 of the company's active employees in the United States, and the National Automobile, Aerospace, and Agricultural Implement Workers of Canada (CAW) represented 2,339 of the company's active employees in Canada. Other unions represented 848 of the company's active employees in the United States and 147 of the company's active employees in Mexico. 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 Navistar continuously obtains patents on its inventions and, thus, owns a significant patent portfolio. Additionally, many of the components which the company purchases for its products are protected by patents that are owned or controlled by the component manufacturer. Navistar has licenses under third-party patents relating to its products and their manufacture, and Navistar 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 the company to be essential to its business as a whole. Like all businesses which offer well-known products or services, Navistar'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, Navistar 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 The company 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 the company's requirements for raw materials and supplies is filled by single-source suppliers. PAGE 8 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. The company's exposure in Mexico and Brazil to an interruption in local supply could result in an inability to meet local content requirements. At current demand levels, the entire truck industry is operating at or near capacity. Accordingly, constraints have been placed on the company's ability to meet certain customers' demands because of component parts availability. Suppliers have initiated investments to expand capacity to support demand growth. Although some of this additional capacity will become available in 1999, much of the expansion will require several years. In those commodities where domestic supply is constrained, the company is searching globally for alternative sources. IMPACT OF GOVERNMENT REGULATION Truck and engine manufacturers continue to face heavy 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, development and tooling costs to design its engine product lines to meet United States Environmental Protection Agency (U.S. EPA) and California Air Resources Board (CARB) emission standards that will come into effect after the turn of the century. The company intends to provide engines that satisfy CARB's emission standards effective in 2002 for engines used in vehicles from 8,501 to 14,000 pounds GVW, as well as heavy-duty engines that comply with more stringent CARB and U.S. EPA emission standards, promulgated in 1997, for 2004 and later model years. In October 1998, Navistar, along with other heavy-duty diesel engine manufacturers, entered into a Consent Decree with the U.S. EPA and a Settlement Agreement with CARB concerning alleged emissions from heavy-duty diesel engines which utilized strategies to improve fuel economy and may have affected nitrogen oxide emissions. The company's settlement with the U.S. EPA and CARB requires a payment of $3 million and changes to new engine configurations which are to be produced after October 2002. Navistar has received unconditional EPA approval for its 1999 model engines. Therefore, current engine configurations, which are primarily used in the company's medium trucks and other light and medium duty vehicles, will not be affected by this settlement. Navistar believes that neither the settlement nor the potential changes will have a material effect on the company's financial position or operating results. PAGE 9 Canadian and Mexican heavy-duty engine emissions regulations essentially mirror those of the U.S. EPA, except that compliance in Mexico is conditioned on availability of low-sulfur diesel fuel. The company's engines comply with Canadian and Mexican emissions regulations, as well as those of Brazil, where the company began assembling trucks in 1998. 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 OEM's 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 the company'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, the company 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 North America, the company owns and operates ten manufacturing and assembly operations, which contain approximately ten million square feet of floor space. Six facilities manufacture and assemble trucks, two plants manufacture diesel engines and two locations produce gray iron castings. In addition, the company 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. The company's truck assembly facility located in Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the company as collateral for a $125 million revolving loan agreement. Navistar'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 the company's plants are being utilized and have been adequately maintained, 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 the company'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. PAGE 10 EXECUTIVE OFFICERS OF REGISTRANT The following selected information for each of the company's current executive officers was prepared as of December 15, 1998. OFFICERS AND POSITIONS WITH NAME AGE NAVISTAR AND OTHER INFORMATION ---- --- ------------------------------ John R. Horne............. 60 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. Don DeFosset, Jr.......... 50 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. Robert C. Lannert......... 58 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. Robert A. Boardman........ 51 Senior Vice President and General Counsel since 1990. Mr. Boardman also is Senior Vice President and General Counsel of Transportation since 1990. Thomas M. Hough........... 53 Vice President and Treasurer since 1992. Mr. Hough also is Vice President and Treasurer of Transportation since 1992. Mark T. Schwetschenau..... 42 Vice President and Controller since 1998. Mr. Schwetschenau also is Vice President and Controller of Transportation since 1998. Prior to this, Mr. Schwetschenau served as Vice President, Finance, Quaker Foods Division, the Quaker Oats Company, 1995-1997, and Director, Finance, Convenience Foods Division, the Quaker Oats Company, 1993-1995. Steven K. Covey........... 47 Corporate Secretary since 1990. Mr. Covey also is Associate General Counsel of Transportation since 1992. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable PAGE 11 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 Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange under the abbreviated stock symbol "NAV." Information regarding high and low market price per share of Common Stock for each quarter of 1998 and 1997 is incorporated by reference from the 1998 Annual Report to Shareowners, page 46, filed as Exhibit 13 to this Form 10-K. There were approximately 55,157 owners of Common Stock at October 31, 1998. Holders of Common Stock are entitled to receive dividends when and as declared by the Board of Directors out of funds legally available therefor, provided that, so long as any shares of the company's preferred stock and preference stock are outstanding, no dividends (other than dividends payable in Common Stock) or other distributions (including purchases) may be made with respect to the Common Stock unless full cumulative dividends, if any, on the shares of preferred stock and preference stock have been paid. Under the General Corporation Law of the State of Delaware, dividends may only be paid out of surplus or out of net profits for the fiscal year in which the dividend is declared or the preceding fiscal year, and no dividend may be paid on Common Stock at any time during which the capital of outstanding preferred stock or preference stock exceeds the net assets of the company. The company has not paid dividends on the Common Stock since 1980. The company does not expect to pay cash dividends on the Common Stock in the foreseeable future, and is subject to restrictions under the indentures for the $100 million 7% Senior Subordinated Notes and the $250 million 8% Senior Subordinated Notes on the amount of cash dividends the company may pay and is subject to certain debt to equity ratios under the $125 million Mexican credit facility which may indirectly limit its ability to pay dividends. ITEMS 6, 7, 7A AND 8 The information required by Items 6-8 is incorporated herein by reference from the 1998 Annual Report to Shareowners, filed as Exhibit 13 to this Form 10-K as follows: 1998 Annual Report Page ------ ITEM 6. SELECTED FINANCIAL DATA.............................. 48 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.............. 2 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..................... 7 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......... 15 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 1998 Annual Report to Shareowners is not to be deemed filed as part of this report. ---------------------------------------------------------- PAGE 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEMS 10, 11 , 12 AND 13 Information required by Items 10, 11, 12 and 13 of this Form is incorporated herein by reference from Navistar's definitive Proxy Statement for the February 23, 1999 Annual Meeting of Shareowners. 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 1998 Annual Report to Shareowners, filed as Exhibit 13 to this Form 10-K as follows: 1998 Annual Report Page ------ Financial Statements - -------------------- Independent Auditors' Report................................. 14 Statement of Income for the years ended October 31, 1998, 1997 and 1996............................ 15 Statement of Financial Condition as of October 31, 1998 and 1997............................ 16 Statement of Cash Flow for the years ended October 31, 1998, 1997 and 1996............................ 17 Notes to Financial Statements................................ 18 Form 10-K Page ---- Schedule - -------- 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 1998 Annual Report to Shareowners. Finance and Insurance Subsidiaries: The financial statements of Navistar Financial Corporation for the years ended October 31, 1998, 1997 and 1996 appearing on pages 10 through 37 in the Annual Report on Form 10-K for Navistar Financial Corporation for the fiscal year ended October 31, 1998, Commission File No. 1-4146-1, are incorporated herein by reference and filed as Exhibit 28 to this Form 10-K. PAGE 13 Form 10-K Page ---- Exhibits, Including Those Incorporated by Reference - --------------------------------------------------- (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-4 (13) Navistar International Corporation 1998 Annual Report to Shareowners (only those portions incorporated herein by reference).............................. * (21) Subsidiaries of the Registrant...................... E-6 (23) Independent Auditors' Consent....................... 17 (24) Power of Attorney................................... 15 (27) Financial Data Schedule............................. * (28) Navistar Financial Corporation Annual Report on Form 10-K for the fiscal year ended October 31, 1998............................ * *Filed only electronically with the Securities and Exchange Commission. 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 1998 Annual Report to Shareowners. Exhibits, other than those incorporated by reference, have been included in copies of this report filed with the Securities and Exchange Commission. Shareowners of the company will be provided with copies of these exhibits upon written request to the Corporate Secretary at the address given on the cover page of this Form 10-K. Reports on Form 8-K - ------------------- No reports on Form 8-K were filed for the three months ended October 31, 1998. PAGE 14 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/ Mark T. Schwetschenau - ----------------------------------- Mark T. Schwetschenau December 22, 1998 Vice President and Controller (Principal Accounting Officer) PAGE 15 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, Robert C. Lannert and Mark T. Schwetschenau 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, 1998 President and Chief Executive Officer, and Director (Principal Executive Officer) /s/ Robert C. Lannert - -------------------------- Robert C. Lannert Executive Vice President December 22, 1998 and Chief Financial Officer and Director (Principal Financial Officer) /s/ Mark T. Schwetschenau - --------------------------- Mark T. Schwetschenau Vice President and Controller December 22, 1998 (Principal Accounting Officer) /s/ William F. Andrews - --------------------------- William F. Andrews Director December 22, 1998 PAGE 16 EXHIBIT 24 (CONTINUED) SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES --------------- SIGNATURES (Continued) /s/ John D. Correnti - --------------------------- John D. Correnti Director December 22, 1998 /s/ Jerry E. Dempsey - --------------------------- Jerry E. Dempsey Director December 22, 1998 /s/ John F. Fiedler - --------------------------- John F. Fiedler Director December 22, 1998 /s/ Dr. Abbie J. Griffin - --------------------------- Dr. Abbie J. Griffin Director December 22, 1998 /s/ Michael N. Hammes - --------------------------- Michael N. Hammes Director December 22, 1998 /s/ Allen J. Krowe - --------------------------- Allen J. Krowe Director December 22, 1998 /s/ Walter J. Laskowski - --------------------------- Walter J. Laskowski Director December 22, 1998 /s/ William F. Patient - --------------------------- William F. Patient Director December 22, 1998 PAGE 17 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, 1998 and 1997, and the related Statements of Income and of Cash Flow for each of the three years in the period ended October 31, 1998, and have issued our report thereon dated December 14, 1998; such consolidated financial statements and report are included in your 1998 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 14, 1998 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 dated December 14, 1998, relating to the financial statements of Navistar International Corporation and Navistar Financial Corporation, appearing and incorporated by reference in this Annual Report on Form 10-K of Navistar International Corporation for the year ended October 31, 1998. Deloitte & Touche LLP December 22, 1998 Chicago, Illinois PAGE 1
SCHEDULE II NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ============ VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996 (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: 1998 ---- Uncollectible notes and accounts Allowance for written off and losses on Notes and accounts reserve adjustment, receivables .... receivable .... $ 31 $ 3 less recoveries ... $ 1 $ 33 ===== ===== ===== ===== 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 ===== ===== ===== =====
F-1 EX-3 2 PAGE 1 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, and amended as of May 4, 1998. 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 PAGE 1 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 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. 4.2 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. 4.3 $125,000,000, Credit Agreement dated as of November 26, 1997, as amended by Amendment No. 1 dated as of February 4, 1998, and as amended by Amendment No. 2 dated as of July 10, 1998, among Navistar International Corporation Mexico, S.A. de C.V., Navistar International Corporation, certain banks, certain Co-Arranger banks, Bank of Montreal, as Paying Agent, and Bancomer, S.A., Institucion de Banca Multiple, Grupo Financiero, as Peso Agent and Collateral Agent. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b) (4) (iii). 4.4 Indenture, dated as of February 4, 1998, by and between Navistar International Corporation and Harris Trust and Savings Bank, as Trustee, for 7% Senior Notes due 2003 for $100,000,000. Filed on Registration No. 333-47063. 4.5 Indenture, dated as of February 4, 1998, by and between Navistar International Corporation and Harris Trust and Savings Bank, as Trustee, for 8% Senior Subordinated Notes due 2008 for $250,000,000. Filed on Registration No. 333-47063. 4.6 $160,000,000 Mexican pesos, Credit Agreement dated as of May 26, 1998 by and between Arrendadora Financiera Navistar S.A., de C.V., and Banco Nacional de Mexico, S.A. de C.V. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.7 $6,000,000, Credit Agreement dated as of May 26, 1998 by and between Arrendadora Financiera Navistar S.A. de C.V., and Banco Nacional de Mexico, S.A. de C.V. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). E-2 PAGE 2 EXHIBIT 4 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.8 $20,000,000 Revolving Credit Agreement dated as of June 5, 1998 by and between Servicios Financieros Navistar, S.A. de C.V. and The First National Bank of Chicago. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.9 $20,000,000 Revolving Credit Agreement dated as of June 5, 1998 by and between Arrendadora Financiera Navistar, S.A. de C.V. and The First National Bank of Chicago. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). ====== 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-3 EX-10 4 PAGE 1 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 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. 10.3 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. 10.4 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. 10.5 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. 10.6 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. 10.7 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. 10.8 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. 10.9 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. E-4 PAGE 2 EXHIBIT 10 (CONTINUED) NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES --------------------------------- MATERIAL CONTRACTS 10.10 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. 10.11 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 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. 10.12* 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. 10.13* Navistar International Corporation Stock Ownership Program. Filed as Exhibit 10.20 to Form 10-Q dated September 12, 1997. Commission File No. 1-9618. 10.14 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. 10.15* Navistar 1988 Non-Employee Director Stock Option Plan amended as of March 20, 1996. Filed as Exhibit 10.19 to Form 10-K dated December 22, 1997. Commission File No. 1-9618. 10.16* Navistar 1998 Non-Employee Director Stock Option Plan. Filed as Exhibit 10.20 to Form 10-Q dated March 17, 1998. Commission File No. 1-9618. 10.17 Indenture dated as of June 4, 1998, between Navistar Financial 1998-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1998-A Owner Trust. Filed on Registration No. 33-64249. 10.18* Navistar International Corporation 1998 Interim Stock Plan. Filed as Exhibit 10.21 to Form 10-Q dated June 12, 1998. Commission File No. 1-9618. The following documents of Navistar International Corporation are filed herewith: Form 10-K Page -------------- 10.19* Navistar 1994 Performance Incentive Plan ** amended as of October 13, 1998. * Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c). ** Filed only electronically with the Securities and Exchange Commission. E-5 EX-10.19 5 EXHIBIT 10.19 NAVISTAR 1994 PERFORMANCE INCENTIVE PLAN Amended as of October 13, 1998 SECTION I ESTABLISHMENT OF THE PLAN The Board of Directors of Navistar International Corporation approved the establishment of the Navistar 1994 Performance Incentive Plan ("Plan"). The Plan replaces the Navistar 1988 Performance Incentive Plan which consolidated and modified the Corporation's Annual Incentive Plan, the Long Term Incentive Plan and the 1984 Stock Option Plan into one plan. SECTION II PURPOSE OF THE PLAN The purpose of the Plan is to enable the Corporation and its subsidiaries to attract and retain highly qualified personnel, to provide key employees who hold positions of major responsibility the opportunity to earn incentive awards commensurate with the quality of individual performance, the achievement of performance goals and ultimately the increase in shareowner value. SECTION III DEFINITIONS For the purposes of the Plan, the following words and phrases shall have the meanings described below in this Section III unless a different meaning is plainly required by the context. (1) "Annual Incentive Award" means an award of cash approved by the Committee based on the level of achievement attained against annual performance goals approved by the Committee on or prior to the commencement of the applicable Fiscal year. (2) "Award" means an award made under the Plan. 1 (3) "Board of Directors" means the Board of Directors of Navistar International Corporation. (4) "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 in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Corporation representing 25% or more of 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 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. (5) "Committee" means the Committee on Compensation and Governance of the Board of Directors. (6) "Common Stock" means the common stock of the Corporation. (7) "Corporation" means Navistar International Corporation. (8) "Employee" means a person regularly employed by the Corporation or any subsidiary of the Corporation, including its officers. (9) "Fair Market Value" means the average of the high and the low prices of a share of Common Stock on the effective date of grant as set forth in the New York Stock Exchange Composite Transactions listing published in the Midwest Edition of The Wall Street Journal or equivalent financial publication. (10) "Fiscal Year" means the fiscal year of the Corporation. (11) "Incentive Stock Option" means a right, as evidenced by an agreement between the Participant and the Company in a form approved by the Committee, to purchase a certain number of shares of Common Stock at Fair Market Value for a period of ten (10) years from the date of grant which options are designed to meet the requirements set out under Section 422 of the Internal Revenue Code. 2 (12) "Long-term Incentive Award" means an award of Restricted Shares for a long-term cycle, the amount of the award and the length of the cycle will be determined by the Committee. (13) "Nonqualified Stock Option" means a right, as evidenced by an agreement between the Participant and the Company in a form approved by the Committee, to purchase a certain number of shares of Common Stock at Fair Market Value for a period of ten (10) years and one day from the date of grant on which options are stated not to be qualified as incentive stock options under Section 422 of the U.S. Internal Revenue Code. (14) "Participant" means an Employee selected by the Corporation for participation in the Plan. (15) "Plan" means the Navistar 1994 Performance Incentive Plan as set forth herein and as it may be amended hereafter from time to time. (16) "Qualified Retirement" means a retirement from employment of the Corporation or any of its subsidiaries at any time after the attainment of age fifty-five (55) with at least ten (10) years of credited service as defined by the applicable retirement plan. (17) "Restricted Share" means a share of Common Stock awarded to a Participant by the Committee without payment by the Participant which is restricted as to sale or transfer and subject to forfeiture pursuant to terms established by the Committee at the time of issuance. (18) "Stock Option" means either an Incentive Stock Option or a Nonqualified Stock Option. SECTION IV ELIGIBILITY Management will, from time to time, select and recommend to the Committee Employees who are to become Participants in the Plan. Such Employees will be selected from those who, in the opinion of management, have substantial responsibility in a managerial or professional capacity. Employees selected for participation in the Plan may not concurrently participate in any other annual performance, long term performance, sales incentive or profit sharing plan of the Corporation or any of its subsidiaries except as specifically approved by the Committee. 3 SECTION V ANNUAL INCENTIVE AWARDS (1) On or before the commencement of each Fiscal Year, the Committee will approve performance goals for corporate achievement for such Fiscal Year, and the amount of the Annual Incentive Awards for such Fiscal Year will be based on the level of achievement attained against previously approved performance goals. The Committee also will approve an award percentage for each organization level for each performance goal. (2) Performance goals for Annual Incentive Awards will not be increased or decreased within a Fiscal Year except for extraordinary circumstances approved by the Committee. (3) An Annual Incentive Award determination will be made by the Committee when the financial results and performance levels for a Fiscal Year are presented to the Committee by management. (4) Payment of an Annual Incentive Award will be made in cash to the Participant as soon as practicable after an Annual Incentive Award determination has been made by the Committee. A Participant who is not an Employee at the end of a Fiscal Year will not be entitled to an Annual Incentive Award for that Fiscal Year unless the Committee determines otherwise. SECTION VI LONG TERM INCENTIVE AWARDS (1) On or before the commencement of each Fiscal Year, the Committee will approve performance goals for corporate achievement for a long-term cycle as determined by the Committee. The amount of any Long Term Incentive Award earned shall be based on the cumulative level of performance attained against the approved performance goals. (2) Criteria for Long Term Incentive Awards will not be increased or decreased for any long-term cycle which has begun except for extraordinary circumstances approved by the Committee. (3) Separate Long-term Incentive Award determinations will be made by the Committee for each long term cycle. 4 (4) Restricted Shares will be awarded by the Committee to each Participant approved by the Committee at the beginning of each cycle unless to do so would present a substantial risk of causing the Corporation to undergo an ownership change, as such term is defined in Section 382 of the Internal Revenue Code, in which event the Committee shall delay the award until there is no longer such a risk. The amount to be awarded will be pursuant to a formula approved by the Committee which will be based on the ability of the Participant to contribute to the efforts to achieve the performance goals approved by the Committee for the applicable cycle. The Committee shall designate which shares shall be subject to performance goals. The Committee will make the final Long-Term Award determination. No fractional shares will be issued. A Participant who quits or is involuntarily separated will forfeit any Restricted Shares. Any Restricted Shares forfeited shall be forfeited (i) to the Company or (ii) if the forfeiture to the Company creates a substantial risk of an ownership change under Section 382 of the Internal Revenue Code, then to the salaried and hourly pension trusts of the Corporation's principal operating subsidiary pro rata based on assets held in the trusts as of the beginning of the prior plan year. If a Participant dies, becomes permanently and totally disabled, or retires pursuant to a Qualified Retirement, Restricted Shares previously awarded which are subject to performance goals, will be retained until the shares are earned or forfeited for failure to meet the performance goals. (5) A Participant may elect, subject to the provisions of Section VII(2), to pay any withholding tax due on Stock Options or on Restricted Shares awarded pursuant to the Plan either (i) by cash including a personal check made payable to the Corporation or (ii) by delivering at Fair Market Value unrestricted Common Stock already owned by the Participant or (iii) by any combination of cash or unrestricted Common Stock. If the Participant is an officer of the Corporation who is subject to Section 16(b) of the Securities Exchange Act of 1934, he or she may make an election pursuant to (ii) or (iii) above only if it is made in writing (a) at least six (6) months following the date of grant of an option or an award and at least six (6) months prior to the date on which the amount of the minimum required withholding tax related to the option or award is determined or (b) within a ten-day period following the release of the Corporation's annual or quarterly financial results. Once an officer, who is subject to Section 16(b) of the Securities Exchange Act of 1934, makes an election pursuant to (ii) or (iii) above with respect to a specific option or award, it shall be irrevocable unless the election is disapproved by the Committee at its next meeting following the election. If the redemption of shares by the Corporation to pay withholding taxes would present a substantial risk of causing an ownership change under Section 382 of the Internal Revenue Code, the Corporation may refuse the redemption. In such a case of refusal to redeem by the Corporation, the Participant would be permitted to sell sufficient shares to pay any withholding taxes due. 5 SECTION VII STOCK OPTIONS (1) The Committee may grant Nonqualified Stock Options or Incentive Stock Options or a combination of both to Participants in the amount and at the time that the Committee approves. Option grants shall be limited to a maximum of 50,000 shares per year for any Participant. The Committee may grant Nonqualified Stock Options or Incentive Stock Options or a combination of both to Participants in the amount and at the time that the Committee approves. Option grants shall be limited to a maximum of 50,000 shares per year for any Participant. The Board may in its discretion grant options in addition to the options subject to the limitation contained in the proceeding sentence, provided that option grants shall be considered as made under the proceeding sentence to the extent the limitation is not exceeded, and any option grants in excess of the limitation contained in the proceeding sentence shall be considered as made under this sentence, and any option grants made under this sentence shall not be treated as performance-based compensation for tax purposes. (2) Unless otherwise determined by the Committee, a Stock 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 Stock Option to the extent of one third of the shares, to the extent of one third of the shares after commencement of the third year, and to the extent of one third of the shares after commencement of the fourth year. The Committee will be authorized to establish the manner of exercise of a Stock Option. The effective date of the grant of a Stock Option will, unless the Committee expressly determines otherwise, be the business day on which the Committee approves the grant of such Stock Option, provided that such grant will expire if a written option agreement is not signed by the Participant receiving a Stock Option and delivered to the Corporation within thirty (30) days of such approval by the Committee. The option can be exercised in whole or in part through cashless exercises or other arrangements through agents, including stock brokers, under arrangements established by the Corporation by paying the amounts required by instructions issued by the Secretary of the Corporation for the exercise of the options. If an exercise is not covered by instructions issued by the Corporate Secretary, the purchase price is to be paid in full to the Corporation upon the exercise of a Stock Option either (i) by cash including a personal check made payable to the Corporation; (ii) by delivering at Fair Market Value unrestricted Common Stock already owned by the Participant, for six months or more if acquired from the Corporation, or (iii) by any combination of cash and unrestricted Common Stock, and in either case, by payment to the Corporation of any withholding tax. In no event 6 may successive simultaneous pyramiding be used to exercise an Option. If permitting the exercise of a Stock Option at the time notice of intent is given by the Participant to the Corporation would present a substantial risk of causing an ownership change under Section 382 of the Internal Revenue Code, the Corporation may refuse to permit the exercise in which event as soon as the Corporation determines that a substantial risk of causing an ownership change no longer exists, it will issue shares of Common Stock equal in value to the difference between the exercise price per share and the market price per share times the number of shares covered by the exercise plus interest on the total for the period of the delay calculated at the composite prime rate of interest to corporate borrowers as published in The Wall Street Journal. The Committee also will be authorized in its discretion to prescribe in the option agreement for the exercise of the Stock Option in specific installments. A Stock Option granted under the Plan will be exercisable during such period as the Committee may determine, and will be subject to earlier termination as hereinafter provided. In no event, however, may a Stock Option governed by the Plan be exercised after the expiration of its term. Except as provided herein, no Stock Option may be exercised at any time unless the Participant who holds the Stock Option is then an Employee. The Participant who holds a Stock Option will have none of the rights of a shareowner with respect to the shares subject to a Stock Option until such shares are issued upon the exercise of a Stock Option. Shares which otherwise would be delivered to the holder of a Stock Option may be delivered, at the election of the holder, to the Corporation in payment of Federal, state and/or local withholding taxes due in connection with an exercise. (3) Neither the Corporation nor any subsidiary may directly or indirectly lend money to any Participant for the purpose of assisting the individual to acquire shares of Common Stock issued upon the exercise of Stock Options granted under the Plan. (4) In the event of the termination of the employment of a Participant who holds an outstanding Stock Option, other than by reason of death, total and permanent disability or a Qualified Retirement, the Participant may (unless the Stock Option shall have been previously terminated) exercise the Stock Option at any time within three (3) months after such termination, but not after the expiration of the term of the grant, to the extent of the number of shares which were exercisable at the date of the termination of employment. Stock Options governed by the Plan will not be affected by any change of employment so long as the Participant continues to be an Employee. (5) Except as provided in the last two sentences of this Section VII(5), in the event of Qualified Retirement or total and permanent disability, a Participant who holds an outstanding Stock Option may exercise the Stock Option, to the extent the option is exercisable or becomes exercisable under its terms, at any time within three years after such termination or, if later, 7 the date on which the option becomes exercisable with respect to such shares, but not after the expiration of the term of the grant. In the event of the death of a Participant who holds an outstanding Stock Option, the Stock Option may be exercised by a legatee, or by the personal representatives or distributees, at any time within a period of two (2) years after death, but not after the expiration of the term of the grant. If death occurs while employed by the Corporation or a subsidiary, or during the three-year period specified in the first sentence of this paragraph, options may be exercised to the extent of the remaining shares covered by Stock Options whether or not such shares were exercisable at the date of death. If death occurs during the three-month period specified in Section VII(4) Stock Options may be exercised to the extent of the number of shares which were exercisable at the date of death. Notwithstanding the other provisions of this Section VII(5), no option which is not exercisable at the time of a retirement shall become exercisable after such retirement if, without the written consent of the Corporation, a Participant engages in a business, whether as owner, partner, officer, employee, or otherwise, which is in competition with the Corporation or one of its affiliates, and if the Participant's participation in such business is deemed by the Corporation to be detrimental to the best interests of the Corporation. The determination as to whether such business is in competition with the Corporation or any of its affiliates, and whether such participation by such person is detrimental to the best interests of the Corporation, shall be made by the Corporation in its absolute discretion, and the decision of the Corporation with respect thereto, including its determination as to when the participation in such competitive business commenced, shall be conclusive. SECTION VIII RESTRICTED SHARES (1) In addition to the Restricted Shares which the Committee may award pursuant to Section VI(4), the Committee also may award Restricted Shares to individuals recommended by management for either retention or performance purposes or as part of an employment agreement. (2) The Participant will be entitled to all dividends paid with respect to all Restricted Shares awarded under the Plan during the period of restriction and will not be required to return any such dividends to the Corporation in the event of the forfeiture of the Restricted Shares. The Participant also will be entitled to vote Restricted Shares during the period of restriction. (3) All Restricted Share certificates awarded under the Plan are to be delivered to the Participant with an appropriate legend imprinted on the certificate. 8 SECTION IX ADJUSTMENTS UPON CHANGES IN CAPITALIZATION Notwithstanding any other provision of the Plan, the option agreements may contain such provisions as the Committee determines to be appropriate for the adjustment of the number and class of shares, subject to each outstanding Stock Option, 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, spinoffs and the like, and, in the event of any such changes 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. SECTION X ADMINISTRATION OF THE PLAN Full power and authority to construe, interpret and administer the Plan is vested in the Committee. Decisions of the Committee will be final, conclusive and binding upon all parties, including the Corporation, shareowners and employees. The foregoing will include, but will not be limited to, all determinations by the Committee as to (a) the approval of Employees for participation in the Plan, (b) the amount of the Awards, (c) the performance levels at which different percentages of the Awards would be earned and all subsequent adjustments to such levels and (d) the determination of all Awards. Any person who accepts any Award hereunder agrees to accept as final, conclusive and binding all determinations of the Committee. The Committee will have the right, in the case of employees not employed in the United States, to vary from the provision of the Plan to the extent the Committee deems appropriate in order to preserve the incentive features of the Plan. SECTION XI NON-ASSIGNMENT Awards under the Plan may not be assigned or alienated. In case of a Participant's death, the amounts distributable to the deceased Participant under the Plan with respect to which a designation of beneficiary has been made (to the extent it is valid and enforceable under applicable law) shall be distributed in accordance with the Plan to the designated beneficiary or beneficiaries. The amount distributable to a Participant upon death and not subject to such a designation shall be distributed to the Participant's estate. If there is any question as to the right of any beneficiary to receive a 9 distribution under the Plan, the amount in question may be paid to the estate of the Participant, in which event the Corporation will have no further liability to anyone with respect to such amount. SECTION XII RIGHTS OF PARTICIPANT To the extent that any Participant, beneficiary or estate acquires a right to receive payments or distributions under the Plan, such right will be no greater than the right of a general unsecured creditor of the Corporation. All payments and distributions to be made hereunder will be paid from the general assets of the Corporation. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create any contracted right or trust of any kind or fiduciary relationship between the Corporation and any Participant, beneficiary or estate. SECTION XIII MODIFICATION, AMENDMENT OR TERMINATION The Committee may modify without the consent of the Participant (i) the Plan, (ii) the terms of any option previously granted or (iii) the terms of Restricted Shares previously awarded at any time, provided that, no such modification will, without the approval of the shareowners of the Corporation, increase the number of shares of Common Stock available hereunder. The Committee may terminate the Plan at any time. SECTION XIV RESERVATION OF SHARES Each fiscal year, there will be reserved for issue under the Plan one (1) percent of the outstanding shares of Common Stock including Class B Common Stock of the Corporation as determined by the number of shares outstanding as of the end of the immediately preceding fiscal year. No more than Five Hundred Thousand (500,000) shares shall be granted as Incentive Stock Options in any calendar year. Such shares may be in whole or in part, as the Board of Directors shall 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 less than one (1) percent of the shares is granted or awarded in any fiscal year, the difference will be available for use in the following year only and if not used in the following year, those shares will no longer be available. Any shares available from the prior year will be the last shares to be granted or awarded. 10 SECTION XV AGREEMENT TO SERVE Each Participant receiving a Nonqualified Stock Option or an Incentive Stock Option shall, as one of the terms of the option agreement, agree to remain in the service of the Corporation or of one of its subsidiaries for a period of at least one (1) year from the date of granting the option. Such service will (subject to the provisions of any contract between the Corporation or any such subsidiary and such Participant) be at the pleasure of the Corporation or of such subsidiary and at such compensation as the Corporation or such subsidiary shall determine from time to time. Any termination of a Participant's service for any reason other than death, permanent and total disability or Qualified Retirement during such period shall be deemed a violation of the Agreement contained in this Section. In the event of such violation, any Nonqualified Stock Option or Incentive Stock Option held by the Participant under the Plan will immediately be canceled. Nothing in the Plan will confer on any Participant any right to continue in the employ of the Corporation or any of its subsidiaries or interfere with or prevent in any way the right of the Corporation or any of its subsidiaries to terminate a Participant's employment at any time for any reason. SECTION XVI CHANGE IN CONTROL Notwithstanding any provision contained herein to the contrary, in the event of a Change in Control, all awarded Restricted Shares will immediately be free of all restrictions and performance contingencies and will be deemed fully earned and not subject to forfeiture and all outstanding options governed by the Plan will be immediately exercisable and shall continue to be exercisable for a period of three (3) years from the date of the Change in Control regardless of the original term or employment status, except that the term of any Incentive Stock Option shall not be extended beyond ten (10) years from the date of grant. SECTION XVII LIMITATION OF ACTIONS Every right of action by or on behalf of the Corporation or any shareowner against any past, present or future member of the Board of Directors, officer or Employee arising out of or in connection with the Plan will, irrespective of the place where action may be brought and irrespective of the place of residence of any such director, officer or employee, cease and be barred by the expiration of three years from whichever is the later of (a) the date of the act or omission 11 in respect of which such right of action arises or (b) the first date upon which there has been made generally available to shareowners an annual report of the Corporation and a proxy statement for the annual meeting of shareowners following the issuance of such annual report, which annual report and proxy statement alone or together set forth, for the related period, the aggregate amount of Awards under the Plan during such period; and any and all right of action by an Employee (past, present or future) against the Corporation arising out of or in connection with the Plan shall, irrespective of the place where action may be brought, cease and be barred by the expiration of three (3) years from the date of the act or omission in respect of which such right of action arises. SECTION XVIII GOVERNING LAW The Plan will be governed by and interpreted pursuant to the laws of the State of Delaware, the place of incorporation of the Corporation. SECTION XIX SUBSIDIARIES' PLANS To the extent determined by the Committee, any subsidiary may, without regard to the limitations under the Plan, have a separate incentive plan or program. The Committee will have exclusive jurisdiction and sole discretion to approve or disapprove any such plan or program and, from time to time, to amend, modify, or suspend any such plan or program. Individuals eligible for Awards under any such plan or program will not be considered Employees eligible for Awards under the Plan, unless otherwise determined by the Committee. No provision of any such plan or program will be included in, or considered a part of, the Plan and any awards made under any such plan or program will not be charged against the aggregate amount available under the Plan unless otherwise determined by the Committee. SECTION XX EFFECTIVE DATE The effective date of the Plan shall be December 16, 1993, if approved by the shareowners at the 1994 Annual Meeting, and the Plan shall continue in effect for ten (10) years from the effective date. 12 EX-13 6 EXHIBIT 13 FINANCIAL INFORMATION Management's Discussion and Analysis of Results of Operations and Financial Condition............................ 2 Statement of Financial Reporting Responsibility...................... 13 Independent Auditors' Report......................................... 14 Financial Statements Statement of Income.............................................. 15 Statement of Financial Condition................................. 16 Statement of Cash Flow........................................... 17 Notes to Financial Statements 1 Summary of accounting policies.......................... 18 2 Postretirement benefits................................. 22 3 Income taxes............................................ 25 4 Marketable securities................................... 28 5 Receivables............................................. 29 6 Inventories............................................. 30 7 Property and equipment.................................. 30 8 Debt.................................................... 31 9 Other liabilities....................................... 34 10 Financial instruments................................... 35 11 Commitments, contingencies, restricted assets, concentrations and leases............................. 37 12 Legal proceedings and environmental matters............. 38 13 Industry segment data................................... 39 14 Preferred and preference stocks......................... 41 15 Common shareowners' equity.............................. 42 16 Earnings per share...................................... 43 17 Stock compensation plans................................ 44 18 Selected quarterly financial data (unaudited)........... 46 Supplemental Financial Information (unaudited)....................... 47 Five -Year Summary of Selected Financial and Statistical Data........ 48 - 1 - 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" or "Navistar" 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 as well as in Mexico, Brazil and other selected export markets. The financial services operations of the company provide wholesale, retail and lease financing, and domestic 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) and the company's foreign finance companies. See Note 1 to the Financial Statements. RESULTS OF OPERATIONS The company reported net income of $299 million for 1998, or $4.11 per diluted common share, reflecting higher sales of manufactured products as well as a $45 million reduction in the company's tax valuation allowance. Net income was $150 million, or $1.65 per diluted common share in 1997 and $65 million, or $.49 per diluted common share in 1996. Net income in 1996 included a one-time $35 million pretax charge for costs related to the termination of the next generation vehicle (NGV) program. In August 1997, the company and the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) reached agreement on a master contract extension that enabled the company to reinstate this program. The company's manufacturing operations reported income before income taxes of $321 million in 1998 compared with pretax income of $164 million in 1997 and $22 million in 1996. The increases in 1998 and 1997 over the prior years reflect higher sales of trucks and diesel engines as well as the effects of improved pricing and various cost improvement initiatives. NFC's pretax income in 1998 was $85 million, a 13% increase from $75 million in 1997, primarily as a result of an increase in wholesale and retail financing activity partially offset by lower financing margins. NFC's pretax income decreased $6 million in 1997 from the $81 million reported in 1996 primarily due to lower income on sales of retail receivables and a decline in wholesale financing activity. - 2 - Sales and Revenues. U.S. and Canadian industry retail sales of Class 5 through 8 trucks totaled 390,900 units in 1998, a 13% increase from the 347,400 units sold in 1997, and 15% higher than the 341,200 units sold in 1996. Class 8 heavy truck sales totaled 232,000 units, an 18% increase from the 196,800 units sold in 1997, and 19% higher than the 195,400 units sold in 1996. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, totaled 158,900 units in 1998, a 6% increase from 1997 when 150,600 units were sold, which was a 3% increase over the 145,800 units sold in 1996. Industry sales of school buses, which accounted for 20% of the medium truck market, decreased approximately 5% from 1997 to 31,700 units. Sales and revenues of $7,885 million in 1998 were 24% higher than the $6,371 million reported in 1997 and 37% higher than the $5,754 million reported in 1996. Sales of trucks, mid-range diesel engines and service parts totaled $7,629 million in 1998, 24% above the $6,147 million reported for 1997 and a 39% increase from the $5,508 million reported in 1996. The company maintained its position as sales leader in the combined United States and Canadian Class 5 through 8 truck market in 1998 with a 28.9% market share, an increase from the 28.6% share in 1997 and the 27.5% share in 1996 (Sources: American Automobile Manufacturers Association, Canadian Vehicle Manufacturers Association and R. L. Polk & Company). Shipments of mid-range diesel engines by the company to other original equipment manufacturers during 1998 were a record 213,700 units, a 16% increase over the 184,000 units in 1997, which represented a 13% improvement over 1996. 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 $848 million in 1998 increased from the $806 million reported in 1997 and were 12% higher than the $760 million reported in 1996 as a result of dealer and national account volume growth. Finance and insurance revenue was $201 million for 1998, a $27 million increase over 1997 revenue of $174 million as a result of increased wholesale and retail financing. Revenue in 1997 was 12% lower than the $197 million reported in 1996 primarily as a result of a decline in wholesale financing activity. Costs and Expenses. Manufacturing gross margin was 15.3% of sales in 1998, compared with 14.2% in 1997 and 12.5% in 1996. The increases in gross margin are primarily due to lower unit production costs and improved pricing offset by provisions for employee profit sharing. Postretirement benefits plan expense decreased to $174 million in 1998 from $215 million in 1997 and from $220 million in 1996 mainly as a result of higher expected return on plan assets. Engineering and research expense increased to $192 million in 1998 from $124 million in 1997 and $129 million in 1996, reflecting the company's continuing investment in its NGV program as well as its investment in its Next Generation Diesel (NGD) program. Marketing and administrative expense was $427 million in 1998 compared with $365 million in 1997 and $319 million in 1996. The change between 1998 and 1997 reflects investment in the company's five-point truck strategy and an increase in the provision for payment to employees as provided by the company's performance incentive programs. The $46 million increase between 1997 and 1996 reflects higher sales and distribution costs and an increase in the provision for payment to employees as provided by the company's performance incentive programs. - 3 - Interest expense increased to $105 million in 1998 from $74 million in 1997 and $83 million in 1996. The increase in 1998 is primarily due to a $374 million net increase in debt driven by the issuance of $350 million of senior and senior subordinated notes. The decrease in 1997 was the result of lower wholesale note funding requirements and declining interest rates. The increase in other expenses from 1997 to 1998 includes $14 million of expenses related to the secondary public offering of 19.9 million shares of the company's common stock as further described in the liquidity and capital resources section. 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. The company's current debt ratings have made bank borrowings and sales of finance receivables the most economic sources of cash for NFC. Insurance operations are self-funded. Total cash, cash equivalents and marketable securities of the company amounted to $1,064 million at October 31, 1998, $965 million at October 31, 1997, and $881 million at October 31, 1996. Cash provided by operations during 1998 totaled $361 million, primarily from net income of $299 million. In addition to regular postretirement benefit payments, the company contributed $200 million to both the Retiree Health Care Base Plan Trust and to the hourly pension plan during 1998. Income tax expense for 1998 was $111 million, composed of cash payments of $7 million to federal and certain state and local governments and $149 million of federal and other taxes which reduced the deferred tax asset. These were offset by a $45 million reversal of a portion of the deferred tax asset valuation allowance. The net change in operating assets and liabilities of $188 million includes a $192 million increase in receivables, reflecting higher sales in 1998 compared to 1997, offset by a $192 million increase in accounts payable principally due to higher production in engine facilities as well as in Mexico and Brazil. The $202 million increase in other liabilities is primarily due to an increase in the accrual for the company's performance incentive programs. During 1998, investment programs used $898 million in cash primarily from a net increase in marketable securities of $266 million, a net increase in retail notes and lease receivables of $192 million and a $125 million net increase in property and equipment leased to others. Additionally, $305 million was used to fund capital expenditures including $86 million for construction of a truck assembly facility in Mexico, $106 million to increase mid-range diesel engine capacity and additional funds for truck product improvements. Financing activities provided a $374 million net increase in long-term debt primarily due to the issuance of $100 million 7% Senior Notes due 2003 and $250 million 8% Senior Subordinated Notes due 2008 offset by the $26 million used to repay the 8% Secured Note due 2002 and by the $45 million used to redeem the company's 9% Sinking Fund Debentures due June 2004. Financing activities also provided a $348 million net increase in notes and debt outstanding under the bank revolving credit facility and asset-backed and other commercial paper programs. Additionally, $84 million was borrowed under the Mexican credit facility, of which approximately half is denominated in Mexican pesos. Financing activities used cash of $240 million for the redemption of the Series G Preferred Stock and for the payment of $11 million of related dividends. In addition, $189 million of common stock was repurchased during 1998 offset by $28 million of proceeds from the reissuance of treasury shares. - 4 - In June 1998, a secondary public offering of the common stock of the company was completed, in which the Navistar International Transportation Corp. Retiree Supplemental Benefit Trust (the Trust) sold approximately 19.9 million shares of common stock at an offering price of $26.50 per share. These shares represented the Class B Common Stock held by the Trust which automatically converted into Common Stock upon the sale. In conjunction with this offering, the company and certain of the company's pension plans purchased 2 million and 3 million, respectively, of the shares being offered. The company did not receive any proceeds from the sale of the shares in the offering, but paid expenses related to the offering of $14 million pursuant to a pre-existing agreement with the Trust. These offering fees are included in other expenses. The underwriters subsequently exercised their over-allotment option and elected to purchase 1.1 million shares from the company at $26.50 per share. The company offset the dilution of this sale through open market purchases of its Common Stock. Cash flow from the company's manufacturing and financial services operations are currently sufficient to cover planned investment in the business. Capital expenditures for 1999 are expected to be approximately $450 million including approximately $130 million for the NGV and NGD programs. Additional capital expenditures are planned for increased manufacturing capacity at the Indianapolis engine plant, development of operations in Brazil and improvements to existing facilities and products. The company had outstanding capital commitments of $153 million at October 31, 1998, primarily for the NGV and NGD programs and for increased manufacturing capacity at the Indianapolis engine plant. The company currently estimates approximately $515 million in capital spending and $330 million in development expense through 2003 for the NGV program. Approximately $95 million of this development expense is planned for 1999. During 1998, the company approved a plan for up to $600 million in capital spending over the next five years in order to manufacture a next generation version of diesel engines. In addition, approximately $110 million of development expense was approved for the development of these engines, of which approximately $30 million is planned for 1999. The company's truck assembly facility located in Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the company as collateral for the $125 million revolving Mexican credit facility. At October 31, 1998, $19 million of a Mexican subsidiary's receivables were pledged as collateral for bank borrowings. In addition, as of October 31, 1998, the company is contingently liable for approximately $75 million for various purchasing commitments, credit guarantees and buyback programs; however, based on historical loss trends, the company's exposure is not considered material. Additionally, restrictions under the terms on the senior and senior subordinated notes and Mexican credit facility include a limitation on indebtedness and a limitation on certain restricted payments. Through the asset-backed public market, NFC has been able to fund fixed rate retail note receivables at rates offered to companies with investment grade ratings. During 1998 and 1997, NFC sold $1,001 million and $987 million, respectively, of retail notes, through Navistar Financial Retail Receivables Corporation (NFRRC), a wholly owned subsidiary. On August 28, 1998, NFRRC filed a shelf registration statement with the Securities and Exchange Commission which provides for the issuance of an additional $2,500 million of asset-backed securities. The aggregate shelf registration available to NFRRC for issuance of asset-backed securities is $2,972 million. In November 1998, NFC sold an additional $545 million of retail notes through NFRRC to a multi-seller asset-backed commercial paper conduit sponsored by a major financial institution. At October 31, 1998, Navistar Financial Securities Corporation (NFSC), a wholly owned subsidiary of NFC, had a revolving wholesale note trust that provides for the funding of $700 million of wholesale notes comprised of one $100 million tranche of investor certificates maturing in 1999 and three $200 million tranches of investor certificates maturing in 2003, 2004 and 2008. - 5 - NFC 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. As of October 31, 1998, available funding under the bank revolving credit facility and the ABCP facility was $124 million, of which $22 million provided funding backup for the outstanding short-term debt. NFC's maximum contractual exposure under all receivable sale recourse provisions at October 31, 1998, was $259 million. However, management believes the recorded reserves for losses on sold receivables are adequate. At October 31, 1998, the Canadian operating subsidiary was contingently liable for retail customers' contracts and leases financed by a third party. The Canadian operating subsidiary is subject to maximum recourse of $203 million on retail contracts and $16 million on retail leases. 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, 1998, the maximum amount of dividends which were available for distribution under the most restrictive covenants was $91 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, 1998. It is the opinion of management that, in the absence of significant unanticipated cash demands, current and forecasted cash flow will provide a basis for financing operating requirements and capital expenditures. Management also 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 October 1998, Navistar, along with other heavy-duty diesel engine manufacturers, entered into a Consent Decree with the United States Environmental Protection Agency (U.S. EPA) and a Settlement Agreement with California Air Resource Board (CARB) concerning alleged emissions from heavy-duty diesel engines which utilized strategies to improve fuel economy and may have affected nitrogen oxide emissions. The company's settlement with the U.S. EPA and CARB requires a payment of $3 million dollars which was expensed in 1998. The settlement additionally requires changes to new engine configurations which are to be produced after October 2002. The changes are not expected to have a material effect on the company's financial position or operating results. 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. - 6 - 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. 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 also be hedged. NFC may use forward contracts to hedge the fair value of its fixed rate receivables against changes in market interest rates in anticipation of the sale of such receivables. NFC also uses interest rate swaps to reduce exposure to interest rate changes when it sells fixed rate receivables on a variable rate basis. For the protection of investors in NFC's debt securities, NFC may write interest rate caps when fixed rate receivables are sold on a variable rate basis. MARKET RISK DISCLOSURE The company's primary market risks include fluctuations in interest rates and currency exchange rates. The company is also exposed to changes in the prices of commodities used in its manufacturing operations and to changes in the prices of equity instruments owned by the company; however commodity price risk related to the company's current commodity financial instruments and equity price risk related to the company's current investments in equity instruments are not material. The company does not hold any material market risk sensitive instruments for trading purposes. The company has established policies and procedures to manage sensitivity to interest rate and foreign currency exchange rate market risk. These procedures include the monitoring of the company's level of exposures to each market risk, the funding of variable rate receivables with variable rate debt, and limiting the amount of fixed rate receivables which may be funded with floating rate debt. These procedures also include the use of derivative financial instruments to mitigate the effects of interest rate fluctuations and to reduce the exposure to exchange rate risk. Interest rate risk is the risk that the company will incur economic losses due to adverse changes in interest rates. The company measures its interest rate risk by estimating the net amount by which the fair value of all of its interest rate sensitive assets and liabilities would be impacted by selected hypothetical changes in market interest rates. Assuming a hypothetical 10% decrease in interest rates as of October 31, 1998, the net fair value of these instruments would decrease by approximately $5 million. The company's interest rate sensitivity analysis assumes a parallel shift in interest rate yield curves. The model, therefore, does not reflect the potential impact of changes in the relationship between short-term and long-term interest rates. Foreign currency risk is the risk that the company will incur economic losses due to adverse changes in foreign currency exchange rates. The company's primary exposure to foreign currency exchange fluctuations are the Canadian dollar/U.S. dollar and Mexican peso/U.S. dollar. As of October 31, 1998, the potential reduction in future earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency exchange rates applied to foreign currency sensitive instruments would be approximately $10 million. The foreign currency sensitivity model is limited by the assumption that all of the foreign currencies to which the company is exposed would simultaneously decrease by 10%, because such synchronized changes are unlikely to occur. The effects of foreign currency forward contracts have been included in the above analysis; however, the sensitivity model does not include the inherent risks associated with the anticipated future transactions denominated in foreign currency for which these forward contracts have been entered into for hedging purposes. - 7 - YEAR 2000 In 1995, the company instituted a corporate-wide Year 2000 readiness project to identify all systems which will require modification or replacement, and to establish appropriate remediation and contingency plans to avoid an impact on the company's ability to continue to provide its products and services. Navistar has established a team of professionals within each of its sites and locations to implement and complete this initiative. In 1997, the company expanded its Year 2000 readiness project to include the company's products, external suppliers, dealers and facilities. The company's Year 2000 program is directed to four major areas: products, internal systems (including information technology (IT) and non-IT systems), suppliers and dealers. The company has completed its compliance review of virtually all of its products and has not learned of any products which it manufactures that will cease functioning or experience an interruption in operation as a result of the transition to the Year 2000. The internal systems portion of the project addresses personal computing; facilities, including the physical "machines" inside a plant or office complex; and computer business systems that are commonly run on larger mainframes and mid-range computers as well as the supporting infrastructure for the company's computer business systems. The company presently believes that it has identified all significant applications that will require remediation, which in some cases will involve the replacement of the systems, to achieve Year 2000 readiness. Both internal and external resources are being used to make the required modifications and test for Year 2000 compliance. The company currently estimates approximately 85% completion of conversion or compliance checking of its internal systems including significant applications by the end of December 1998. Integrated testing of major systems is planned to begin in late December 1998. The company currently anticipates that the modifications and testing process of all significant applications will be substantially complete by August 1999, which is prior to any anticipated impact on its operating systems. With regard to the supplier portion of the project, the company is currently assessing the Year 2000 readiness of production and service parts suppliers through a supplier survey process designed by an automotive industry trade association, the Automotive Industry Action Group (AIAG). Suppliers have been asked to respond to a compliance questionnaire. Responses to these questionnaires have been received from about 25% of these suppliers. Based on these responses, the company believes that approximately half of these suppliers are making acceptable progress toward Year 2000 readiness. The company is also assessing non-production suppliers. The supplier assurance process is expected to be substantially complete by April 1999, including audits of select suppliers. NFC has received written assurances from its major suppliers of cash management services that they expect to address all of their significant Year 2000 issues on a timely basis. The company is working with its independent dealers on their Year 2000 readiness and monitoring their progress. The company has contacted all dealers and is working with its certified Dealer Business Systems Vendors to assist the dealers in becoming Year 2000 compliant. Compliance of all certified dealers systems is expected to be substantially complete by December 1999. The company's total cost of the Year 2000 project, which will be funded through operating cash flows, is estimated to be $34 million including $24 million of estimated expense and $10 million of capital expenditures. Approximately $14 million has been expensed and approximately $4 million has been capitalized through October 31, 1998. The remaining costs are estimated to be incurred through fiscal year 2000. The company's annual 1999 expense for the Year 2000 project is estimated to represent 5% of the company's 1999 information technology budget. Other non-Year 2000 information technology efforts have not been materially delayed or impacted by the Year 2000 project. - 8 - The costs of the Year 2000 project and the dates on which the company believes it will complete the Year 2000 modifications and testing are based on management's best estimates, which were derived utilizing numerous assumptions regarding future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those currently anticipated. Examples of factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and embedded technology, and similar uncertainties. In addition, there can be no guarantee that the systems or products of other entities, including the company's independent dealers, on which the company relies will be converted on a timely basis, or that a failure to convert by another company, or a conversion that is incompatible with the company's systems, would not have a material adverse effect on the company. The company currently believes that the most reasonably likely worst case scenario with respect to the Year 2000 issue is the failure of a supplier, including utility suppliers, to become Year 2000 compliant, which could result in the temporary interruption of the supply of necessary products or services to a manufacturing facility. This could result in interruptions in production for a period of time, which in turn could result in potential lost sales and profits. Additionally, marketing and administrative expense could increase if automated functions would need to be performed manually. The company currently believes that the most reasonably likely worst case scenario for its financial services operations with respect to the Year 2000 issue would be the inability to sustain its current level of performance and customer service. Additionally, a significant failure of the banking systems or key entities in the financial markets could adversely affect the financial services operations' ability to access various credit and money markets. As part of its continuous assessment process, the company will develop contingency plans as necessary. These plans could include, but are not limited to, material banking, use of alternate suppliers and development of alternate means to process dealer orders. The company currently plans to complete such contingency planning by December 1999. Navistar is using its best efforts to ensure that the Year 2000 impact on its critical systems and processes will not affect its supply of product, quality or service. However, in the event that the company is unable to complete its remedial actions described above and is unable to implement adequate contingency plans in the event problems arise, there could be a material adverse effect on the company's business, financial position or results of operations. The preceding "Year 2000" discussion contains various forward-looking statements which represent the company's beliefs or expectations regarding future events. When used in the "Year 2000" discussion, the words "believes," "expects," "estimates," "planned," "could," and similar expressions are intended to identify forward-looking statements. Forward-looking statements include, without limitation, the company's expectations as to when it will complete the remediation and testing phases of its Year 2000 program as well as its Year 2000 contingency plans; its estimated cost of achieving Year 2000 readiness; and the company's belief that its internal systems and equipment will be Year 2000 compliant in a timely manner. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to, the availability of qualified personnel and other information technology resources; the ability to identify and remediate all date-sensitive lines of computer code or to replace embedded computer chips in affected systems or equipment; and the actions of governmental agencies or other third parties with respect to Year 2000 problems. - 9 - NEW ACCOUNTING PRONOUNCEMENTS 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. SFAS 130 and SFAS 131 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 currently assessing the impact of SFAS 131 on its reported segments. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement defines whether or not certain costs related to the development or acquisition of internal use software should be expensed or capitalized and is effective for fiscal years beginning after December 15, 1998. The company is currently assessing the impact of this statement on its results of operations and financial position. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," to establish accounting and reporting requirements for derivative instruments. This standard requires recognition of all derivative instruments in the statement of financial position as either assets or liabilities, measured at fair value, and is effective for fiscal years beginning after June 15, 1999. This statement additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. The company is currently assessing the impact of this statement on its results of operations, financial position and cash flows. INCOME TAXES The Statement of Financial Condition at October 31, 1998 and 1997 includes a deferred tax asset of $912 million and $934 million, respectively, net of valuation allowances of $264 million and $309 million, respectively, related to future tax benefits. The deferred tax assets have been reduced by the valuation allowance as management believes 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 $1,597 million and temporary differences, which represent the cumulative expense of $1,437 million recorded in the Statement of Income that has not been deducted on the company's tax returns. The valuation allowance at October 31, 1998 assumes that it is more likely than not that approximately $695 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 $2,400 million of future taxable income, of which an average of approximately $70 million would need to be generated annually for the 13-year period 1999 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. - 10 - The company performs extensive analysis 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. The financial results are evaluated using a number of alternatives in economic cycles at various industry volume conditions. Factors considered are the company's 18-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. As a result of the continued successful implementation of its manufacturing strategy, including the reinstatement of the NGV program, the continued strength of industry volume conditions, extension of the Ford diesel contract, new program initiatives and other positive operating indicators, management initiated an extensive review of its projected future taxable income. This review was completed during the fourth quarter of 1998 and resulted in a reduction to the deferred tax asset valuation allowance of $45 million which has been recorded as a reduction in income tax expense resulting in an effective tax rate of 27%. 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 $912 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 1998 1997 1996 - ------------------------------------------------------------------------------ Income before income taxes. ........... $ 410 $ 242 $ 105 Exclusion of (income) loss of foreign subsidiaries.............. (7) (3) 3 State income taxes..................... (3) (2) (2) Temporary differences.................. (169) 145 (284) Other ................................. (12) 6 - ------ ------ ------ Taxable income (loss)..... .......... $ 219 $ 388 $ (178) ------ ------ ------ BUSINESS ENVIRONMENT Sales of Class 5 through 8 trucks have been 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 1998. An improvement in the number of new truck orders has increased the company's order backlog to 72,100 units at October 31, 1998, from 45,300 units at October 31, 1997. Historically, retail deliveries have been impacted by the rate at which new truck orders are received. Therefore, the company continually evaluates order receipts and backlog throughout the year and will balance production with demand as appropriate. The company currently projects 1999 United States and Canadian Class 8 heavy truck demand to be 224,700 units, a 3% decrease from 1998. Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast at 124,100 units, slightly lower than in 1998. Demand for school buses is expected to decrease slightly in 1999 to 31,300 units. Mid-range diesel engine shipments by the company to original equipment manufacturers in 1999 are expected to be 259,100 units, 21% higher than in 1998. The company's service parts sales are projected to grow 10% to approximately $935 million. - 11 - At current demand levels, the entire truck industry is operating at or near capacity. Accordingly, constraints have been placed on the company's ability to meet certain customers' demands because of component parts availability. During 1997, the company entered into a 10-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. During March 1998, the company announced that it had been selected to negotiate an extended term agreement to supply diesel engines to Ford Motor Company for certain under 8,500 lbs. GVW light duty trucks and sport utility vehicles beginning with the 2002 model year. In September 1998, the company formally announced the start of its distribution of medium and heavy trucks to customers in Brazil. The company also announced its intent to form a joint venture to develop and manufacture proprietary next generation diesel fuel injectors incorporating digital valve technology. In October 1998, the company announced that it signed a letter of intent to form a joint venture with a Brazilian company to manufacture diesel engines in South America for a broad range of truck applications. - 12 - 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. 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. Management believes that the company's system of internal controls is adequate to accomplish these objectives. 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. The Audit Committee of the Board of Directors, composed of four 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 - 13 - 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, 1998 and 1997, and the related Statements of Income and of Cash Flow for each of the three years in the period ended October 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flow for each of the three years in the period ended October 31, 1998, in conformity with generally accepted accounting principles. Deloitte & Touche LLP December 14, 1998 Chicago, Illinois - 14 - STATEMENT OF INCOME Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- For the Years Ended October 31 (Millions of dollars, except per share data) 1998 1997 1996 - ---------------------------------------------------------------------------- Sales and revenues Sales of manufactured products ........... $7,629 $6,147 $5,508 Finance and insurance revenue ............ 201 174 197 Other income ............................. 55 50 49 ------ ------ ------ Total sales and revenues ............... 7,885 6,371 5,754 ------ ------ ------ Costs and expenses Cost of products and services sold ....... 6,498 5,292 4,827 Postretirement benefits .................. 174 215 220 Engineering and research expense ......... 192 124 129 Marketing and administrative expense ..... 427 365 319 Interest expense ......................... 105 74 83 Other expenses ........................... 79 59 71 ------ ------ ------ Total costs and expenses ............... 7,475 6,129 5,649 ------ ------ ------ Income before income taxes ........... 410 242 105 Income tax expense ................... 111 92 40 ------ ------ ------ Net income ............................... 299 150 65 Less dividends on Series G preferred stock ............... 11 29 29 ------ ------ ------ Net income applicable to common stock .... $ 288 $ 121 $ 36 ====== ====== ====== - ---------------------------------------------------------------------------- Earnings per share Basic ................................ $ 4.16 $ 1.66 $ .49 Diluted .............................. $ 4.11 $ 1.65 $ .49 Average shares outstanding (millions) Basic ................................ 69.1 73.1 73.7 Diluted .............................. 70.0 73.6 73.8 - ---------------------------------------------------------------------------- See Notes to Financial Statements. - 15 - STATEMENT OF FINANCIAL CONDITION Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- As of October 31 (Millions of dollars) 1998 1997 - ---------------------------------------------------------------------------- ASSETS Cash and cash equivalents ................ $ 440 $ 609 Marketable securities .................... 624 356 -------- ------- 1,064 965 Receivables, net ......................... 2,146 1,755 Inventories .............................. 505 496 Property and equipment, net ............. 1,106 835 Investments and other assets ............. 246 319 Intangible pension assets ................ 199 212 Deferred tax asset, net .................. 912 934 -------- -------- Total assets ............................. $ 6,178 $ 5,516 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Liabilities Accounts payable, principally trade ...... $ 1,273 $ 1,100 Debt: Manufacturing operations ............... 450 92 Financial services operations .......... 1,672 1,224 Postretirement benefits liability ........ 934 1,186 Other liabilities ........................ 1,080 894 -------- -------- Total liabilities .................... 5,409 4,496 -------- -------- Commitments and contingencies Shareowners' equity Series G convertible preferred stock ...... - 240 Series D convertible junior preference stock ................ 4 4 Common stock (75.3 million and 52.2 million shares issued).......................... 2,139 1,659 Class B Common stock (0 million and 23.1 million shares issued) - 471 Retained earnings (deficit) ............... (1,160) (1,301) Common stock held in treasury, at cost (9.1 million and 2.9 million shares held). (214) (53) -------- -------- Total shareowners' equity ............. 769 1,020 -------- -------- Total liabilities and shareowners' equity . $ 6,178 $ 5,516 ======== ======== - -------------------------------------------------------------------------- See Notes to Financial Statements. - 16 - STATEMENT OF CASH FLOW Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- For the Years Ended October 31 (Millions of dollars) 1998 1997 1996 - ------------------------------------------------------------------------------ Cash flow from operations Net income .............................. $ 299 $ 150 $ 65 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization ....... 159 120 105 Deferred income taxes ............... 149 82 37 Deferred tax asset valuation allowance adjustment .............. (45) - - Postretirement benefits funding in excess of expense .............. (373) (128) 33 Other, net .......................... (16) (51) (28) Change in operating assets and liabilities: Receivables ......................... (192) (194) 186 Inventories ......................... (13) (25) (47) Prepaid and other current assets .... (1) 4 1 Accounts payable .................... 192 288 (110) Other liabilities ................... 202 137 (123) -------- -------- -------- Cash provided by operations ........... 361 383 119 -------- -------- -------- Cash flow from investment programs Purchase of retail notes and lease receivables ................. (1,263) (970) (1,108) Collections/sales of retail notes and lease receivables ................. 1,071 1,054 1,109 Purchase of marketable securities ....... (787) (512) (585) Sales or maturities of marketable securities .............. 521 557 752 Capital expenditures .................... (305) (172) (117) Property and equipment leased to others ...................... (125) (42) (73) Other investment programs, net .......... (10) 3 (8) -------- -------- -------- Cash used in investment programs ...... (898) (82) (30) -------- -------- -------- Cash flow from financing activities Issuance of debt ......................... 493 211 - Principal payments on debt ............... (119) (46) (136) Net increase (decrease)in notes and debt outstanding under bank revolving credit facility and asset-backed and other commercial paper programs .............. 348 (285) 81 Mexican credit facility .................. 84 - - Redemption of Series G preferred stock ... (240) - - Dividends paid ........................... (11) (29) (29) Repurchase of common stock ............... (189) (23) - Proceeds from reissuance of Treasury shares 28 - - Debt and equity issuance costs ........... (26) (7) (3) -------- -------- -------- Cash provided by (used in) financing activities ................. 368 (179) (87) -------- -------- -------- Cash and cash equivalents (Decrease) increase during the year .... (169) 122 2 At beginning of the year ............... 609 487 485 -------- -------- -------- Cash and cash equivalents at end of the year ..................... $ 440 $ 609 $ 487 ======== ======== ======== - ------------------------------------------------------------------------------ See Notes to Financial Statements. - 17 - NOTES TO FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 1998 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" or "Navistar" 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 1997 and 1996 amounts have been reclassified to conform with the presentation used in the 1998 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 Mexico, Brazil and other selected export markets. Based on assets and revenues, manufacturing operations represent the majority of the company's business activities. The financial services operations consist primarily of Navistar Financial Corporation (NFC) and the company's foreign finance subsidiaries. The financial services operations provide wholesale, retail and lease financing, and domestic 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. 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. Financial services operations recognize finance charges on finance receivables as income over the term of the receivables utilizing the interest method. Operating lease revenues are recognized on a straight-line basis over - 18 - NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) Revenue Recognition (continued) 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. - 19 - 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 $138 million, $85 million and $90 million in 1998, 1997 and 1996, 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 may use forward contracts to hedge the fair value of its fixed rate receivables against changes in market interest rates in anticipation of the sale of such receivables. NFC also uses interest rate swaps to reduce exposure to interest rate changes when it sells fixed rate receivables on a variable rate basis. For the protection of investors in NFC's debt securities, NFC may write interest rate caps when fixed rate receivables are sold on a variable rate basis. The company also uses derivatives such as forward contracts to reduce its exposure to foreign exchange volatility. Derivative financial instruments are generally held for purposes other than trading. Gains or losses related to hedges of anticipated transactions are deferred and are recognized in income when the effects of the anticipated transactions are recognized in earnings. The principal balance of receivables owned and expected to be sold by NFC equals or exceeds the notional amount of open forward contracts. Additionally, the value of committed Canadian dollar truck sales generally exceeds the notional amount of related 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. Foreign Currency The financial statements of foreign subsidiaries are translated to U.S. dollars using the period-end exchange rate for assets and liabilities and a weighted-average exchange rate for each period for revenues and expenses. The local currency is the functional currency for most of the company's foreign subsidiaries and translation adjustments for these subsidiaries are recorded in shareowners' equity. The U.S. dollar is the functional currency for the company's Mexican subsidiaries and, accordingly, their translation gains and losses are included in earnings. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency, except those transactions which hedge sales commitments, are recorded in earnings as incurred. - 20 - NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) Earnings Per Share Basic earnings per share excludes dilution and is computed by dividing income available to common shareowners by the weighted-average number of basic common shares outstanding for the period. Diluted earnings per share assumes the issuance of Common Stock for other potentially dilutive equivalent shares outstanding. New Accounting Pronouncements 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. SFAS 130 and SFAS 131 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. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement defines whether or not certain costs related to the development or acquisition of internal use software should be expensed or capitalized and is effective for fiscal years beginning after December 15, 1998. The company is currently assessing the impact of this statement on its results of operations and financial position. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," to establish accounting and reporting requirements for derivative instruments. This standard requires recognition of all derivative instruments in the statement of financial position as either assets or liabilities, measured at fair value, and is effective for fiscal years beginning after June 15, 1999. This statement additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. The company is currently assessing the impact of this statement on the company's results of operations, financial position and cash flows. - 21 - NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS Effective October 31, 1998, the company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132). The information for 1998, 1997 and 1996 has been presented in conformity with the requirements of SFAS 132. The company provides postretirement benefits to substantially all of its employees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees and surviving spouses and dependents. In addition, as part of the 1993 restructured health care and life insurance plans, profit sharing payments to the Retiree Supplemental Benefit 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 1998 1997 1996 - ---------------------------------------------------------------------------- Pension expense......................... $ 74 $ 129 $ 160 Health/life insurance................... 42 66 60 Profit sharing provision to Trust....... 58 20 - ------ ------ ------ Total postretirement benefits expense... $ 174 $ 215 $ 220 ====== ====== ====== Generally, the pension plans are non-contributory. 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 accumulated benefit obligation. At October 31, 1998, all legal funding requirements had been met. In 1993, a trust was established to provide a vehicle for funding the health care liability through company contributions and retiree premiums. 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. Postretirement Benefits Expense Net periodic benefits expense included in the Statement of Income is composed of the following:
Pension Benefits Other Benefits ---------------------- ----------------------- Millions of dollars 1998 1997 1996 1998 1997 1996 - --------------------------------------------------------------------------------------- Service cost for benefits earned during the period... $ 37 $ 34 $ 34 $ 14 $ 13 $ 14 Interest on obligation........ 231 238 231 98 96 84 Net amortization costs and other............. 88 99 104 2 - - Less expected return on assets (282) (242) (209) (72) (43) (38) ------ ------ ------ ------- ------ ------ Net postretirement benefits expense..................... $ 74 $ 129 $ 160 $ 42 $ 66 $ 60 ====== ====== ====== ====== ====== ====== - 22 -
NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS (continued) Postretirement Expense (continued) "Amortization costs" include amortization of cumulative gains and losses over the expected remaining service life of employees and amortization of the initial transition liability over 15 years. Also included is the expense related to yearly lump-sum payments to retirees required by negotiated labor contracts and amortization of plan amendments. Plan amendments are 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. The funded status of the company's plans as of October 31, 1998 and 1997 and a reconciliation with amounts recognized in the Statement of Financial Condition are provided below. Pension Benefits Other Benefits ---------------- ---------------- Millions of dollars 1998 1997 1998 1997 - ---------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year........ $3,299 $3,034 $1,374 $1,225 Service cost ................ 37 34 14 13 Interest on obligation........ 231 238 98 96 Actuarial net loss............ 186 257 164 123 Benefits paid ................ (272) (264) (90) (83) ------ ------ ------ ------ Benefit obligation at end of year.............. 3,481 3,299 1,560 1,374 ------ ------ ------ ------ Change in plan assets Fair value of plan assets at beginning of year......... 2,900 2,427 486 401 Actual return on plan assets... 187 505 47 102 Employer contribution.......... 212 227 210 11 Benefits paid ................. (267) (259) (50) (28) ------ ------ ------ ------ Fair value of plan assets at end of year............... 3,032 2,900 693 486 ------ ------ ------ ------ Funded status ................. (449) (399) (867) (888) Unrecognized actuarial net loss 587 322 344 152 Unrecognized transition amount. 133 167 - - Unrecognized prior service cost 69 89 (5) (5) ------- ------ ------ ------ Net amount recognized.......... $ 340 $ 179 $ (528) $ (741) ======= ====== ====== ====== Amounts recognized in the Statement of Financial Condition consist of: Prepaid benefit cost...... $ 39 $ 120 $ - $ - Accrued benefit liability. (406) (445) (528) (741) Intangible asset.......... 199 212 - - Accumulated reduction in shareowners' equity..... 508 292 - - ------ ------ ------ ------ Net amount recognized.......... $ 340 $ 179 $ (528) $ (741) ====== ====== ====== ====== The accumulated reduction in shareowners' equity is recorded in the Statement of Financial Condition net of deferred income taxes of $172 million and $97 million at October 31, 1998 and 1997, respectively. - 23 - NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS (continued) Postretirement Expense (continued) The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $3,393 million, $3,336 million and $2,931 million, respectively, as of October 31, 1998, and $2,067 million, $2,064 million and $1,621 million, respectively, as of October 31, 1997. During 1998, the pension plans purchased 3 million shares of the company's Common Stock. At October 31, 1998, these shares accounted for approximately 2% of the plans' assets. The weighted average rate assumptions used in determining expenses and benefit obligations were:
Pension Benefits Other Benefits ---------------------- ----------------------- Millions of dollars 1998 1997 1996 1998 1997 1996 - --------------------------------------------------------------------------------------- Discount rate used to determine present value of benefit obligation at end of year............... 6.8% 7.3% 8.1% 7.1% 7.4% 8.2% Expected long-term rate of return on plan assets for the year.................. 9.7% 9.8% 9.0% 10.8% 11.1% 10.5% Expected rate of increase in future compensation levels. 3.5% 3.5% 3.5% N/A N/A N/A
For 1999, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 9.7%. The rate is projected to decrease to 5.0% by the year 2005 and remain at that level each year thereafter. The effect of changing the health care cost trend rate by one-percentage point for each future year is as follows: One-Percentage- One-Percentage- Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components.. $ 18 $ (15) Effect on postretirement benefit obligation............ 191 (158) - 24 - 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 1998 1997 1996 - ------------------------------------------------------------------------------ Domestic................................ $ 403 $ 239 $ 108 Foreign................................. 7 3 (3) ------ ------ ------ Total income before income taxes........ $ 410 $ 242 $ 105 ====== ====== ====== The components of income tax expense consist of the following: Millions of dollars 1998 1997 1996 - ------------------------------------------------------------------------------ Current: Federal.............................. $ 4 $ 8 $ 1 State and local...................... 3 2 2 ------ ------ ------ Total current expense................ 7 10 3 ------ ------ ------ Deferred: Federal.............................. 127 71 32 State and local...................... 19 11 5 Foreign.............................. 3 - - ------ ------ ------ Total deferred expense............... 149 82 37 ------ ------ ------ Less valuation allowance adjustment.... (45) - - ------ ------ ------ Total income tax expense............... $ 111 $ 92 $ 40 ====== ====== ====== 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 1998, 1997 and 1996 were $7 million, $10 million and $3 million, respectively. - 25 - NOTES TO FINANCIAL STATEMENTS (Continued) 3. INCOME TAXES (continued) The relationship of the tax expense to income before taxes for 1998, 1997 and 1996 differs from the U.S. statutory rate (35%) because of state income taxes and the benefit of NOLs in foreign countries. Also, the 1998 effective tax rate reflects a $45 million reduction in the deferred tax asset valuation allowance. A valuation allowance has been provided for those NOL carryforwards and temporary differences which are estimated to expire before they are utilized. The effective tax rates for the years 1998, 1997 and 1996 were 27.0%, 38.0% and 38.1%, respectively. Undistributed earnings of foreign subsidiaries were $50 million and $35 million at October 31, 1998 and 1997, 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. The components of the deferred tax asset (liability) at October 31 are as follows: Millions of dollars 1998 1997 - -------------------------------------------------------------------------- United States Deferred tax assets: Net operating loss carryforwards.......... $ 590 $ 680 Alternative minimum tax................... 24 19 Product liability and warranty............ 106 97 Other liabilities......................... 232 168 Postretirement benefits................... 347 353 ------ ------ Total deferred tax assets................. 1,299 1,317 ------ ------ Deferred tax liabilities: Prepaid pension assets.................... (117) (58) Depreciation.............................. (30) (37) ------ ------ Total deferred tax liabilities............ (147) (95) ------ ------ Total deferred tax assets................. 1,152 1,222 Less valuation allowance.................. (243) (288) ------ ------ Net deferred U.S. tax assets.............. $ 909 $ 934 ====== ====== Foreign Deferred tax assets: Net operating loss carryforwards.......... $ 5 $ 2 Postretirement benefits................... 19 19 ------ ------ Total deferred tax assets................. 24 21 Less valuation allowance.................. (21) (21) ------ ------ Net deferred foreign tax assets........... 3 - ------ ------ Other deferred tax liabilities........... (20) (16) ------ ------ Net deferred foreign tax liabilities...... $ (17) $ (16) ====== ====== Amounts recognized in the Statement of Financial Condition: Deferred tax assets...................... $ 912 $ 934 ====== ====== Other liabilities......................... $ (20) $ (16) ====== ====== - 26 - NOTES TO FINANCIAL STATEMENTS (Continued) 3. INCOME TAXES (continued) At October 31, 1998, the company had $1,581 million of domestic and $16 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: 2001 ........................................ $ 104 2002 ........................................ 47 2004 ........................................ 235 2005 ........................................ 7 2006 ........................................ 127 2007 ........................................ 53 2008 through 2011............................. 1,024 ------ Total ........................................ $1,597 ====== Additionally, the reversal of net temporary differences of $1,437 million as of October 31, 1998 will create net tax deductions which, if not utilized previously, will expire subsequent to 2011. - 27 - 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: 1998 1997 -------------------- --------------------- Amortized Fair Amortized Fair Millions of dollars Cost Value Cost Value - ----------------------------------------------------------------------------- Corporate securities............. $ 336 $ 338 $ 150 $ 150 U.S. government securities....... 171 174 88 89 Mortgage and asset-backed securities........ 85 86 86 86 Foreign government securities.... 6 7 10 10 ------ ------ ------ ------ Total debt securities......... 598 605 334 335 Equity securities................ 17 19 16 21 ------ ------ ------ ------ Total marketable securities...... $ 615 $ 624 $ 350 $ 356 ====== ====== ====== ====== Contractual maturities of marketable debt securities at October 31 are as follows: 1998 1997 -------------------- --------------------- Amortized Fair Amortized Fair Millions of dollars Cost Value Cost Value - ------------------------------------------------------------------------------ Due in one year or less.......... $ 189 $ 190 $ 113 $ 114 Due after one year through five years............. 297 301 100 100 Due after five years through 10 years............... 17 18 25 25 Due after 10 years............... 10 10 10 10 ------ ------ ------ ------ 513 519 248 249 Mortgage and asset-backed securities........ 85 86 86 86 ------ ------ ------ ------ Total debt securities............ $ 598 $ 605 $ 334 $ 335 ====== ====== ====== ====== Gross gains and losses realized on sales or maturities of marketable securities were not material for each of the two years. At October 31, 1998 and 1997, a domestic insurance subsidiary had $13 million and $15 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, 1998 and 1997. - 28 - NOTES TO FINANCIAL STATEMENTS (Continued) 5. RECEIVABLES Receivables at October 31 are summarized by major classification as follows: Millions of dollars 1998 1997 - -------------------------------------------------------------------------- Accounts receivable....................... $ 611 $ 671 Retail notes and lease financing.......... 925 706 Wholesale notes........................... 261 46 Amounts due from sales of receivables..... 246 233 Notes receivable.......................... 109 101 Other .................................... 27 29 Allowance for losses...................... (33) (31) ------ ------ Total receivables, net.............. $2,146 $1,755 ====== ====== 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 $953 million in 1998, $958 million in 1997 and $982 million in 1996. Uncollected sold retail and wholesale receivable balances totaled $2,145 million and $1,968 million as of October 31, 1998 and 1997, respectively. Contractual maturities of accounts receivable, retail notes and lease financing and wholesale notes, including unearned finance income, at October 31, 1998 were: 1999 - $1,079 million, 2000 - $325 million, 2001 - $219 million, 2002 - - $175 million, 2003 - $119 million, and 2004 and thereafter - $28 million. Unearned finance income totaled $148 million at October 31, 1998. Notes receivable are due upon demand from a limited partnership that invests in S&P 500 stock index arbitrage. - 29 - NOTES TO FINANCIAL STATEMENTS (Continued) 6. INVENTORIES Inventories at October 31 are as follows: Millions of dollars 1998 1997 - -------------------------------------------------------------------------- Finished products......................... $ 223 $ 225 Work in process........................... 69 106 Raw materials and supplies................ 213 165 ------ ------ Total inventories......................... $ 505 $ 496 ====== ====== 7. PROPERTY AND EQUIPMENT At October 31, property and equipment includes the following: Millions of dollars 1998 1997 - -------------------------------------------------------------------------- Land .................................... $ 18 $ 18 ------ ------ Buildings, machinery and equipment at cost: Plants................................ 1,419 1,200 Distribution.......................... 94 86 Construction in progress.............. 130 117 Net investment in operating leases.... 218 124 Other................................. 203 137 ------ ------ Total property........................ 2,082 1,682 Less accumulated depreciation and amortization.................... (976) (847) ------ ------ Total property and equipment, net. $1,106 $ 835 ====== ====== Total property includes property under capitalized lease obligations of $25 million at October 31, 1998 and 1997. Future minimum rentals on net investments in operating leases are: 1999 - $63 million, 2000 - $54 million, 2001 - $35 million, 2002 - $18 million and thereafter - $5 million. 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. - 30 - NOTES TO FINANCIAL STATEMENTS (Continued) 8. DEBT Millions of dollars 1998 1997 - -------------------------------------------------------------------------- Manufacturing operations Notes payable and current maturities of long-term debt................... $ 4 $ 13 ------ ------ 8% Senior Subordinated Notes, due 2008 250 - 7% Senior Notes, due 2003............. 100 - 9% Sinking Fund Debentures, due 2004.. - 45 8% Secured Note, due 2002, secured by plant assets ............ - 21 Mexican credit facility............... 84 - Capitalized leases and other.......... 12 13 ------ ------ Total long-term debt............... 446 79 ------ ------ Manufacturing operations debt......... 450 92 ------ ------ Financial services operations Commercial paper...................... 22 141 Capitalized leases.................... 39 13 Current maturities of long-term debt.. 82 - ------ ------ Total short-term debt.............. 143 154 ------ ------ Bank revolver, variable rate, due 2003 19 - Bank revolver, variable rate, due 2005 20 - Asset-backed commercial paper program, variable rate, due 2001............ 401 400 Bank revolver, variable rate, due 2001 815 393 ------ ------ Total senior debt.................. 1,255 793 ------ ------ 8 7/8% Subordinated Senior Notes, due 1998............................. - 94 9% Subordinated Senior Notes, due 2002. 100 100 ------ ------ Total subordinated debt............. 100 194 ------ ------ Capitalized leases, 4.8% to 5.6%, due serially through 2004............ 174 83 ------ ------ Total long-term debt................ 1,529 1,070 ------ ------ Financial services operations debt........ 1,672 1,224 ------ ------ Total debt................................ $2,122 $1,316 ====== ====== The effective annual interest rate on manufacturing notes payable was 6.8% in 1998, 8.3% in 1997 and 8.9% in 1996. Consolidated interest payments were $103 million, $66 million and $83 million in 1998, 1997 and 1996, respectively. - 31 - NOTES TO FINANCIAL STATEMENTS (Continued) 8. DEBT (continued) During 1998, the company arranged financing for $164 million of funds denominated in U.S. dollars and Mexican pesos to be used for investment in the company's Mexican operations. As of October 31, 1998, borrowings outstanding of this line were $123 million of which 54% is denominated in dollars and 46% in pesos. The interest rates on the dollar-denominated debt are a negotiated fixed rate or a variable rate based either on LIBOR or the Federal Funds Rate. On peso-denominated debt the interest rate is based on the Interbank Interest Equilibrium Rate. The effective interest rate for the period was 16.8%. During the second quarter of 1998, the company's manufacturing operations issued $100 million 7% Senior Notes due 2003 and $250 million 8% Senior Subordinated Notes due 2008. The proceeds of the Senior Notes were used to prepay the 8% Secured Note due 2002 and were used to redeem the 9% Sinking Fund Debentures on June 15, 1998. The proceeds of the Senior Subordinated Notes were used to redeem the Series G Preferred Stock and to pay related dividends thereon. 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. The aggregate annual maturities for debt for the years ended October 31 are as follows: Financial Manufacturing Services Millions of dollars Operations Operations Total - ------------------------------------------------------------------------------- 1999 .................................. $ 4 $ 143 $ 147 2000 .................................. 27 48 75 2001 .................................. 33 1,269 1,302 2002 .................................. 31 142 173 2003 .................................. 101 50 151 Thereafter................................ 254 20 274 ------ ------ ------ Total.................................. $ 450 $1,672 $2,122 ====== ====== ====== Weighted average interest rate on total debt, including short-term, and the effect of discounts and related amortization for the years ended: October 31, 1998..................... 9.3% 6.4% 7.1% October 31, 1997..................... 10.3% 6.4% 6.8% At October 31, 1998, 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 plus $14 million of trust certificates issued in connection with the formation of the ABCP trust. Available funding under the bank revolving credit facility and the ABCP program was $124 million, of which $22 million provided funding backup for the outstanding short-term debt at October 31, 1998. - 32 - NOTES TO FINANCIAL STATEMENTS (Continued) 8. DEBT (continued) 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. 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. NFSC has in place a $700 million revolving wholesale note trust that provides for the continuous sale of eligible wholesale notes on a daily basis. The trust is comprised of one $100 million tranche of investor certificates maturing in 1999 and three $200 million tranches maturing in 2003, 2004 and 2008. During 1998, NFC sold $1,001 million of retail notes, net of unearned finance income, through NFRRC. The owner trusts in turn issued securities which were sold to investors. The net proceeds, after underwriting costs and credit enhancements, were used by NFC for general working capital purposes. On August 28, 1998, NFRRC filed a shelf registration statement with the Securities and Exchange Commission which provides for the issuance of an additional $2,500 million of asset-backed securities. The aggregate shelf registration available to NFRRC for issuance of asset-backed securities is $2,972 million. NFC has entered into various sale/leaseback agreements involving vehicles subject to retail finance and operating leases with end users. The remaining balance as of October 31, 1998 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. In November 1998, NFC sold $545 million of retail notes, net of unearned finance income, through NFRRC to a multi-seller asset-backed commercial paper conduit sponsored by a major financial institution. - 33 - NOTES TO FINANCIAL STATEMENTS (Continued) 9. OTHER LIABILITIES Major classifications of other liabilities at October 31 are as follows: Millions of dollars 1998 1997 - -------------------------------------------------------------------------- Product liability and warranty............. $ 323 $ 302 Employee incentive programs................ 215 95 Payroll, commissions and employee-related benefits............ 104 96 Loss reserves and unearned premiums........ 95 99 Taxes .................................. 67 68 Sales and marketing........................ 54 26 Long-term disability and workers' compensation................ 53 54 Environmental.............................. 27 31 Interest .................................. 22 15 Other .................................. 120 108 ------ ------ Total other liabilities................. $1,080 $ 894 ====== ====== - 34 - 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: 1998 1997 -------------------- --------------------- Carrying Fair Carrying Fair Millions of dollars Amount Value Amount Value - ------------------------------------------------------------------------------ Receivables, net.............. $2,146 $2,166 $1,755 $1,764 Investments and other assets.. 246 249 319 330 Debt.......................... 2,122 2,119 1,316 1,321 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 are 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. - 35 - 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. The company periodically enters into forward contracts in order to reduce exposure to exchange rate risk between the U.S. dollar and the Canadian dollar related to committed Canadian dollar truck sales. NFC manages its exposure to fluctuations in interest rates by limiting the amount of fixed rate assets funded with variable rate debt generally by selling fixed rate receivables on a fixed rate basis and by utilizing derivative financial instruments. These derivative financial instruments may include interest rate swaps, interest rate caps and forward interest rate contracts. The fair value of these instruments is subject to market risks as the instruments may become less valuable due to changes in market conditions or interest rates. 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. NFC's credit exposure is limited to the fair value of contracts with a positive fair value at the reporting date. At October 31, 1998, none of NFC's derivative financial instruments have positive fair values. 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 of retail notes anticipated to be sold. NFC manages such risk by entering into either forward contracts to sell fixed debt securities or forward interest rate swaps whose fair value is highly correlated with that 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. At October 31, 1998, NFC held forward interest rate contracts with notional amounts of $450 million and $50 million in anticipation of retail receivable sales to occur in November 1998 and May 1999, respectively. In addition, the company held Canadian dollar forward contracts with notional amounts of $33 million and other derivative contracts with notional amounts of $14 million. At October 31, 1998, the unrealized loss on the $450 million forward contract was $5 million, and the unrealized net gain on the remaining contracts was not material. - 36 - NOTES TO FINANCIAL STATEMENTS (Continued) 11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS AND LEASES Commitments, Contingencies and Restricted Assets At October 31, 1998, commitments for capital expenditures in progress were approximately $153 million. The company's truck assembly facility located in Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the company as collateral for the $125 million revolving Mexican credit facility. At October 31, 1998, $19 million of a Mexican subsidiary's receivables were pledged as collateral for bank borrowings. In addition, as of October 31, 1998, the company is contingently liable for approximately $75 million for various purchasing commitments, credit guarantees and buyback programs; however, based on historical loss trends, the company's exposure is not considered material. Additionally, restrictions under the terms on the senior and senior subordinated notes and Mexican credit facility include a limitation on indebtedness and a limitation on certain restricted payments. At October 31, 1998, the Canadian operating subsidiary was contingently liable for retail customers' contracts and leases financed by a third party. The Canadian operating subsidiary is subject to maximum recourse of $203 million on retail contracts and $16 million on retail leases. 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, 1998, the maximum amount of dividends which were available for distribution under the most restrictive covenants was $91 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, 1998. NFC's maximum contractual exposure under all receivable sale recourse provisions at October 31, 1998 was $259 million; however, management believes that the allowance for credit losses on sold receivables is adequate. Concentrations At October 31, 1998, the company employed 12,212 hourly workers and 4,960 salaried workers in the United States and Canada. Approximately 89% of the hourly employees and 28% of the salaried employees are represented by unions. Of these represented employees, 92% of the hourly workers and 100% 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. Additionally, of the company's 309 employees in Mexico, approximately 48% are also represented by a union. 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 1998, 1997 and 1996. During 1997, the company entered into a 10-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. - 37 - 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, 1998, future minimum lease payments under operating leases having lease terms in excess of one year are: 1999 - $42 million, 2000 - $41 million, 2001 - $31 million, 2002 - $19 million, 2003 - $17 million and thereafter - $31 million. Total operating lease expense was $36 million in 1998, $40 million in 1997 and $35 million in 1996. Income received from sublease rentals was $7 million in 1998 and $6 million in 1997 and 1996. 12. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS 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. 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. - 38 - NOTES TO FINANCIAL STATEMENTS (Continued) 13. INDUSTRY SEGMENT DATA Information concerning operations by industry segment is as follows: Financial Manufacturing Services Millions of dollars Operations Operations Consolidated - ----------------------------------------------------------------------------- October 31, 1998 - ---------------- Total sales and revenues..... $7,678 $ 280 $7,885 Operating profit............. 1,165 126 1,226 Depreciation and amortization 123 36 159 Capital expenditures......... 305 - 305 Identifiable assets.......... 4,326 2,309 6,178 October 31, 1997 - ---------------- Total sales and revenues..... $6,191 $ 239 $6,371 Operating profit............. 873 112 932 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............. 690 121 762 Depreciation and amortization 90 15 105 Capital expenditures......... 117 - 117 Identifiable assets.......... 3,815 1,843 5,326 Intersegment sales and revenues were not material in 1998, 1997 or 1996. Transactions between manufacturing operations and financial services operations have been eliminated from the consolidated column. Operating profit of the financial services operations includes investment income and interest expense. - 39 - NOTES TO FINANCIAL STATEMENTS (Continued) 13. INDUSTRY SEGMENT DATA (continued) Geographic Area Data Information concerning operations by principal geographic area was as follows: United Interarea Millions of dollars States Foreign Eliminations Consolidated - ------------------------------------------------------------------------------- October 31, 1998 - ---------------- Sales and revenues, customers. $7,065 $ 820 $ - $7,885 Interarea transfers........... 486 1,293 (1,779) - ------ ------ ------ ------ Total sales and revenues. 7,551 2,113 (1,779) 7,885 Operating profits............. 1,324 87 (185) 1,226 Identifiable assets........... 5,766 703 (291) 6,178 October 31, 1997 - ---------------- Sales and revenues, customers. $5,807 $ 564 $ - $6,371 Interarea transfers........... 326 967 (1,293) - ------ ------ ------ ------ Total sales and revenues. 6,133 1,531 (1,293) 6,371 Operating profits............ 965 63 (96) 932 Identifiable assets.......... 5,238 550 (272) 5,516 October 31, 1996 - ---------------- Sales and revenues, customers $5,351 $ 403 $ - $5,754 Interarea transfers.......... 253 816 (1,069) - ------ ------ ------- ------ Total sales and revenues 5,604 1,219 (1,069) 5,754 Operating profits............ 754 46 (38) 762 Identifiable assets.......... 5,131 300 (105) 5,326 Interarea transfer prices are established by an agreement between the buying and selling locations. - 40 - NOTES TO FINANCIAL STATEMENTS (Continued) 14. 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. 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, 1998, there was one share each of Series A and Series B Preference stock authorized and outstanding. The value of the preference shares is minimal. During 1998, the company redeemed all 4.8 million shares of its $6.00 Series G Convertible Cumulative Preferred Stock at a redemption price of $50 per share plus accrued dividends. At October 31, 1998, there were 172,000 shares of Series D Convertible Junior Preference Stock (Series D) outstanding and 3 million authorized and issued with an optional redemption price and liquidation preference of $25 per share plus accrued dividends. The Series D converts into common stock (subject to adjustment in certain circumstances) at .3125 per share. The Series D ranks senior to common stock as to dividends and liquidation and receives dividends at a rate of 120% of the cash dividends on common stock as declared on an as-converted basis. Under the General Corporation Law of the State of Delaware (DGCL), dividends may only be paid out of surplus or out of net profits for the fiscal year in which the dividend is declared or the preceding fiscal year, and no dividend may be paid on Common Stock at any time during which the capital of outstanding preferred stock or preference stock exceeds the net assets of the company. At October 31, 1998, the company had surplus of $761 million as defined under DGCL. - 41 - NOTES TO FINANCIAL STATEMENTS (Continued) 15. COMMON SHAREOWNERS' EQUITY Changes in the common shareowners' equity accounts are as follows: Millions of dollars 1998 1997 1996 - ------------------------------------------------------------------------------ Common Stock Beginning of year..................... $1,659 $1,642 $1,641 Conversion of Class B Common Stock and other.............. 480 17 1 ------ ------ ------ End of year........................... $2,139 $1,659 $1,642 ------ ------ ------ Class B Common Stock Beginning of year..................... $ 471 $ 491 $ 491 Repurchase of stock................... (471) (20) - ------ ------ ------ End of year........................... $ - $ 471 $ 491 ------ ------ ------ Retained Earnings (Deficit) Beginning of year..................... $(1,301) $(1,431) $(1,478) Net income............................ 299 150 65 Preferred dividends................... (11) (29) (29) Minimum pension liability adjustments and other............... (147) 9 11 ------ ------ ------ End of year........................... $(1,160) $(1,301) $(1,431) ------ ------ ------ Common Stock Held in Treasury Beginning of year..................... $ (53) $ (30) $ (28) Repurchase of common stock and other. (189) (23) (2) Reissuance of Treasury shares......... 28 - - ------ ------ ------ End of year........................... $ (214) $ (53) $ (30) ------ ------ ------ Common Stock The company has authorized 110 million shares of Common Stock with a par value of $.10 per share. At October 31, 1998 and 1997, there were 66.2 million and 49.3 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 was 23.1 million. In January 1998, the company repurchased 3.2 million shares of the Class B Common Stock that was outstanding. During June 1998, a secondary public offering of the common stock of the company was completed, in which the Navistar International Transportation Corp. Retiree Supplemental Benefit Trust (the Trust) sold approximately 19.9 million shares of common stock at an offering price of $26.50 per share. These shares represented the Class B Common Stock held by the Trust which automatically converted into Common Stock upon the sale. In conjunction with this offering, the company and certain of the company's pension plans purchased 2 million and 3 million, respectively, of the shares being offered. The company did not receive any proceeds from the sale of the shares in the offering but paid expenses related to the offering of $14 million pursuant to a pre-existing agreement with the Trust. In addition, the underwriters exercised their over-allotment option and elected to purchase 1.1 million shares from the company at $26.50 per share. The company offset the dilution through open market purchases. - 42 - NOTES TO FINANCIAL STATEMENTS (Continued) 15. COMMON SHAREOWNERS' EQUITY (continued) At October 31, 1998, the company recorded its annual minimum pension liability adjustment which resulted in a $144 million reduction in shareowners' equity. The minimum pension liability and the resulting reduction in shareowners' equity will change from year to year as a result of revisions to actuarial assumptions, experience gains or losses, and settlement rate changes. 16. EARNINGS PER SHARE Earnings per share was computed as follows: Millions of dollars, except share and per share data 1998 1997 1996 - ------------------------------------------------------------------------------ Net income............................ $ 299 $ 150 $ 65 Less dividends on Series G Preferred Stock............ 11 29 29 ------ ------ ------ Net income applicable to common stock. (Basic and Diluted)................ $ 288 $ 121 $ 36 Average shares outstanding (millions) Basic............................ 69.1 73.1 73.7 Dilutive effect of options outstanding and other dilutive securities........ .9 .5 .1 ------ ------ ------ Diluted ........................ 70.0 73.6 73.8 Earnings per share Basic ........................ $ 4.16 $ 1.66 $ .49 Diluted ........................ $ 4.11 $ 1.65 $ .49 Unexercised employee stock options to purchase .5 million, 1.5 million and 2.2 million shares of Navistar Common Stock during the years ended October 31, 1998, 1997 and 1996, respectively, were not included in the computation of diluted shares outstanding because the exercise prices were greater than the average market prices of Navistar Common Stock. Additionally, the diluted calculations exclude the effects of the conversion of the Series G Preferred Stock as such conversion would be anti-dilutive. - 43 - 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 generally have a 10-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 $297 million in 1998, $147 million in 1997 and $63 million in 1996; pro forma diluted earnings per share would have been $4.09 in 1998, $1.61 in 1997 and $.46 in 1996 and pro forma basic earnings per share would have been $4.14 in 1998, $1.62 in 1997 and $.46 in 1996. The pro forma effect on net income for 1998, 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 pro forma effect on net income for 1998 may not be representative of the pro forma effect on net income of future years as in 1998, one-third of the options granted became exercisable on each of the first, second and third anniversaries of grant. Prior to 1998, grants were generally exercisable after one year. The weighted-average fair values at date of grant for options granted during 1998, 1997 and 1996 were $7.53, $5.71 and $5.34, respectively, and were estimated using the Black-Scholes option-pricing model with the following assumptions: 1998 1997 1996 ---- ---- ---- Risk-free interest rate 5.7% 6.6% 6.1% Dividend yield 0% 0% 0% Expected volatility 31.9% 29.8% 30.9% Expected life in years 3.5 10 10 The following summarizes stock option activity for the years ended October 31:
1998 1997 1996 ----------------- -------------------- ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares in thousands Shares Price Shares Price Shares Price - ------------------- ------ -------- ------ -------- ------ --------- Options outstanding at beginning of year. 2,430 $18.73 2,346 $20.34 1,762 $24.25 Granted................. 809 23.93 876 10.13 718 10.45 Exercised............... (592) 28.52 (715) 12.45 - - Canceled................ (109) 45.45 (77) 28.52 (134) 18.75 ------ ------ ------ ------ ------ ------ Options outstanding at year-end........... 2,538 $20.29 2,430 $18.73 2,346 $20.34 ====== ====== ====== ====== ====== ====== Options exercisable at year-end........... 1,765 $18.73 1,579 $23.35 1,682 $24.25 ====== ====== ====== ====== ====== ====== Options available for grant at year-end 443 - - ====== ====== ======
- 44 - NOTES TO FINANCIAL STATEMENTS (Continued) 17. STOCK COMPENSATION PLANS (continued) The following table summarizes information about stock options outstanding and exercisable at October 31, 1998.
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 1,047 7.3 $10.94 1,047 $10.94 17.40 - 26.66 1,213 7.6 23.58 494 23.81 27.96 - 37.50 152 6.3 34.18 98 36.66 43.75 - 61.88 126 2.6 49.51 126 49.51
- 45 - NOTES TO FINANCIAL STATEMENTS (Continued) 18. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------------- ----------------- ----------------- ----------------- (Millions of dollars, except per share data) 1998 1997 1998 1997 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------- Sales and revenues...... $1,727 $1,296 $2,042 $1,551 $1,874 $1,586 $2,242 $1,938 ====== ====== ====== ====== ====== ====== ====== ====== Manufacturing gross margin.......... 13.4% 13.6% 14.4% 13.8% 14.5% 13.8% 18.2% 15.2% ====== ====== ====== ====== ====== ====== ====== ====== Net income ............ $ 38 $ 15 $ 67 $ 30 $ 50 $ 35 $ 144 $ 70 Earnings per share Basic ............ $ .43 $ .10 $ .90 $ .31 $ .73 $ .38 $ 2.16 $ .87 Diluted ............ $ .42 $ .10 $ .89 $ .31 $ .72 $ .38 $ 2.14 $ .85 Market price range - Common Stock........ High ............ $28 $10 3/8 $35 7/8 $11 3/8 $34 $21 5/16 $28 1/2 $29 1/2 Low ............ $20 1/16 $ 9 $27 1/4 $ 9 1/8 $26 1/8 $11 1/4 $17 $17 1/4
- 46 - 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 1998 1997 1996 - ------------------------------------------------------------------------------ Sales of manufactured products...... $7,629 $6,147 $5,508 Other income........................ 49 44 42 ------ ------ ------ Total sales and revenues....... 7,678 6,191 5,550 ------ ------ ------ Cost of products sold............... 6,464 5,274 4,818 Postretirement benefits............. 174 214 219 Engineering and research expense.... 192 124 129 Marketing and administrative expense 390 332 282 Other expenses...................... 137 83 80 ------ ------ ------ Total costs and expenses............ 7,357 6,027 5,528 ------ ------ ------ Income before income taxes Manufacturing operations.......... 321 164 22 Financial services operations..... 89 78 83 ------ ------ ------ Income before income taxes...... 410 242 105 Income tax expense.................. 111 92 40 ------ ------ ------ Net income.......................... $ 299 $ 150 $ 65 ====== ====== ====== Selected Statements of Financial Condition and Cash Flow Data 1998 1997 - ------------------------------------ ------ ------ Cash, cash equivalents and marketable securities......... $ 904 $ 802 Total assets........................ $4,326 $4,111 Total liabilities................... $3,557 $3,091 1998 1997 1996 ------ ------ ------ Capital expenditures................ $ (305) $ (172) $ (117) Depreciation and amortization....... 123 97 90 Change in operating assets and liabilities................... 331 263 (189) Cash provided by operations......... 492 438 - Cash (used in) provided by investment programs............ (588) (241) 39 Cash used in financing activities... (76) (76) (48) - 47 - FIVE-YEAR SUMMARY OF SELECTED FINANCIAL AND STATISTICAL DATA - ------------------------------------------------------------------------------ For the Years Ended October 31 (Millions of dollars, except per share data, units shipped and percentages) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------ RESULTS OF OPERATIONS Total sales and revenues....... $7,885 $6,371 $5,754 $6,342 $5,337 Income of continuing operations 299 150 65 164 102 Net income .................... 299 150 65 164 82 Income of continuing operations per share Basic .................... 4.16 1.66 .49 1.83 .99 Diluted.................... 4.11 1.65 .49 1.83 .99 Earnings per share Basic ..................... 4.16 1.66 .49 1.83 .72 Diluted..................... 4.11 1.65 .49 1.83 .72 Average number of shares outstanding (millions) Basic....................... 69.1 73.1 73.7 74.2 74.5 Diluted .................... 70.0 73.6 73.8 74.3 74.6 - ------------------------------------------------------------------------------ FINANCIAL DATA Total assets................... $6,178 $5,516 $5,326 $5,566 $5,047 Debt Manufacturing operations.... 450 92 115 127 127 Financial services operations................ 1,672 1,224 1,305 1,330 1,091 ------ ------ ------ ------ ------ Total debt..................... 2,122 1,316 1,420 1,457 1,218 Shareowners' equity............ 769 1,020 916 870 817 Total manufacturing operations debt as a percent of total manufacturing capitalization. 36.9% 8.3% 11.2% 12.7% 13.4% Return on equity (a)........... 38.9% 14.7% 7.1% 18.9% 12.5% - ------------------------------------------------------------------------------ SUPPLEMENTAL DATA Capital expenditures........... $ 305 $ 172 $ 117 $ 139 $ 87 Engineering and research expense............. 192 124 129 113 97 - ------------------------------------------------------------------------------ OPERATING DATA United States and Canadian market share (b).... 28.9% 28.6% 27.5% 26.7% 27.0% Unit shipments worldwide Trucks ...................... 127,500 104,400 95,200 112,200 95,000 OEM engines.................. 213,700 184,000 163,200 154,200 130,600 Service parts sales............ $ 848 $ 806 $ 760 $ 730 $ 714 (a) Return on equity is calculated based on income of continuing operations. (b) Based on retail deliveries of medium trucks (Classes 5, 6 and 7), including school buses, and heavy trucks (Class 8). - 48 - EX-21 7 PAGE 1 EXHIBIT 21 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- SUBSIDIARIES OF THE REGISTRANT AS OF OCTOBER 31, 1998 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-18 EX-27 8
5 1,000,000 YEAR OCT-31-1998 OCT-31-1998 440 624 2178 32 505 0 2082 976 6178 0 2122 0 4 2139 (1374) 6178 7629 7885 6498 7475 174 0 105 410 111 299 0 0 0 299 4.16 4.11 The company has adopted an unclassified presentation in the Statement of Financial Condition. Amount represents Basic Earnings Per Share.
EX-28 9 EXHIBIT 28 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, 1998 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, 1998, 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, 1998
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 7A. Quantitative and Qualitative Disclosures About Market Risk.. 9 Item 8. Financial Statements........................................ 10 Statement of Financial Reporting Responsibility.......... 33 Independent Auditors' Report............................. 34 Supplementary Financial Data............................. 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 38 PART III Item 10. Directors and Executive Officers of the Registrant (A)........................................... 38 Item 11. Executive Compensation (A).................................. 38 Item 12. Security Ownership of Certain Beneficial Owners and Management (A)....................................... 38 Item 13. Certain Relationships and Related Transactions (A)......................................... 38 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 38 SIGNATURES- Principal Accounting Officer ............................. 39 - Directors................................................. 40 POWER OF ATTORNEY..................................................... 40 INDEX TO 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 commercial financing 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; Duluth, 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 of this Report for explanation. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements under this caption, which involve risks and uncertainties, constitute "forward-looking statements" under the Securities Reform Act. 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 headings "Year 2000", "Business Outlook" and "Quantitative and Qualitative Disclosures About Market Risk." Financing Volume In response to the continued strong U.S. economy, customer demand for Class 5 through 8 trucks in fiscal 1998 was 13% and 15% higher than 1997 and 1996, respectively. The strong economy continued to contribute to high liquidity in the commercial financing markets, which gives the Corporation's customers more financing alternatives. This continuing, highly competitive financing market has caused the Corporation to increase marketing efforts for its retail and wholesale financing products and services and to reduce finance rates offered during the fiscal year. Financing support provided to retail customers over the last three years was as follows:
1998 1997 1996 Retail and Lease Financing: ($ millions) Finance market share of new International trucks sold in the U.S. 16.0% 13.2% 16.3% Purchases of receivables and equipment leased to others $1,397 $1,036 $1,135 Serviced retail notes and lease financing balances (including sold notes) at October 31 $2,579 $2,253 $2,200
As a result of the Corporation's higher finance market share and the higher truck industry demand in 1998, purchases of receivables and equipment leased to others were 35% above 1997. During fiscal 1998 the serviced portfolio grew 14% to $2.6 billion. Purchases of receivables and equipment leased to others in 1997 were below those of 1996 as a result of the lower finance market share. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Financing Volume (continued) Financing support provided to Transportation's dealers over the last three years was as follows:
1998 1997 1996 Wholesale Financing: ($ millions) Percent of wholesale financing of new International trucks sold to Transportation's dealers in the U.S. 95% 94% 94% Purchases of receivables $3,813 $2,773 $2,706 Serviced wholesale note balances (including sold notes) at October 31 $1,039 $ 691 $ 685
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 increased slightly to 95% from 94% in 1997 and 1996. In 1998 the volume of receivables purchased was 38% higher than 1997 and 41% higher than 1996 in response to the strong industry demand. Results of Operations The components of net income over the last three years were as follows: 1998 1997 1996 Income before income taxes: ($ millions) Finance operations $79.2 $68.6 $74.2 Insurance operations 6.0 6.0 6.3 Income before income taxes 85.2 74.6 80.5 Taxes on income 32.3 28.9 31.1 Net income $52.9 $45.7 $49.4 Return on average equity 18.5% 16.1% 18.1%
The Corporation's 1998 return on average equity was a record 18.5% in 1998, compared with 16.1% and 18.1% in 1997 and 1996, respectively. The increase over 1997 is primarily due to the higher level of wholesale and retail financing, partially offset by lower financing margins and higher costs to service the larger portfolio. Net income in 1997 was 7.5% lower than 1996, reflecting lower average dealer inventory levels and gains on sales of retail notes, partially offset by a lower provision for losses during 1997. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations - Finance Operations: Retail note and lease financing revenue for 1998 was $136 million compared with $106 million and $98 million in 1997 and 1996, respectively. The 28% growth in fiscal 1998 is due to higher retail financing activities and the shift of the portfolio to operating leases, offset in part by lower yields. Included in retail note and lease financing revenue is operating lease revenue of $46 million, $29 million and $14 million in 1998, 1997 and 1996, respectively. The higher operating lease revenue is the result of an increase in vehicles under operating leases 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. Also included in retail note and lease finance revenue are gains on sales of retail note receivables of $15 million, $13 million and $20 million in 1998, 1997 and 1996, 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, the Corporation'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 1998 wholesale note revenue increased 20% to $43 million versus 1997, primarily as a result of the higher level of wholesale financing activity, offset in part by lower yields in response to the competitive commercial financing market. Wholesale note revenue decreased 36% in 1997 to $36 million as a result of lower average outstanding note balances and lower yields in response to the competitive commercial financing market. Borrowing costs increased 21% in 1998 to $88 million from $73 million in 1997 primarily due to higher average receivable funding requirements. The Corporation's weighted average interest rate on all debt was 6.4% in 1998 and 1997 and 6.5% in 1996. Borrowing costs decreased 11% in 1997 to $73 million from $82 million in 1996 primarily due to lower wholesale funding requirements. The ratio of debt to equity was 5.8:1, 4.3:1 and 4.7:1 at October 31, 1998, 1997, and 1996, respectively. Credit, collection and administrative expenses increased to $36 million in 1998 from $31 million and $28 million in 1997 and 1996, respectively. The increase in 1998 compared with 1997 and 1996 was primarily due to employee related costs to support the increase in financing activity, costs associated with year 2000 initiatives and marketing programs. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations - Finance Operations (continued) The provision for losses on receivables totaled $1 million in 1998 compared with $3 million in 1997 and $9 million in 1996. The improvement in 1998 compared to 1997 is primarily due to recovery of losses on one large account. Notes and account write-offs, net of recoveries, including sold notes, were less than one million in 1998, $2 million in 1997 and $5 million in 1996. The Corporation's allowance for losses as a percentage of serviced finance receivables was .64%, .72% and .74% at October 31, 1998, 1997 and 1996, respectively. Depreciation and other expenses in 1998 increased to $30 million from $19 million in 1997 and $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, 1998. Harco's gross premiums written in 1998 were $47 million, 2% and 12% below 1997 and 1996, 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 was 70% during 1998 and 1997, compared to 73% in 1996. Liquidity and Funds Management The Corporation 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 and equity capital. The Corporation's current debt ratings have made sales of finance receivables the most economical source of funding. The Corporation's insurance operation generates its funds through internal operations and has no external borrowings. In January 1998, Moody's, Standard and Poors, and Duff and Phelps raised the Corporation's senior debt ratings from Ba2, BB and BB+ to Ba1, BB+ and BBB-, respectively, while the subordinated debt ratings were also raised from B1, B+ and BB to Ba3, BB- and BB+, respectively. Operations provided $69 million in cash in 1998 primarily due to net income. The cash provided by operations was used to pay dividends of $57 million. Investing activities used $418 million in cash, while financing activities, excluding dividends, provided $410 million. During 1998, the purchase of $1,397 million of retail receivables and equipment leased to others was funded primarily with $953 million of proceeds from the sale of receivables, principal collections on retail notes and lease receivables of $116 million, and $410 million net increase in total debt. See also the "Statements of Consolidated Cash Flow" on page 13. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Funds Management (continued) Over the last three years, operations provided $182 million in cash and proceeds from the sale of retail receivables totaled $2,893 million. These amounts were used principally to fund the purchase of receivables and equipment leased to others of $3,288, net of principal collections on the receivables, and to pay dividends of $123 million. Receivable sales were a significant source of funding in 1998, 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 1998, 1997 and 1996, the Corporation sold $1,001, $987 and $985 million, respectively, of retail notes, through Navistar Financial Retail Receivables Corporation ("NFRRC"), a wholly-owned subsidiary of the Corporation, to owner trusts, which in turn, issued securities which were sold to investors. On August 28, 1998, NFRRC filed a shelf registration with the Securities and Exchange Commission which provides for the issuance of an additional $2,500 million of asset-backed securities. The aggregate shelf registration available to NFRRC for issuance of asset-backed securities is $2,972 million. At October 31, 1998, Navistar Financial Securities Corporation ("NFSC"), a wholly-owned subsidiary of the Corporation, had a revolving wholesale note trust that provides for the funding of $700 million of wholesale notes. All eligible wholesale notes are sold to the trust through NFSC. During 1998, a $100 million tranche of investor certificates matured and NFSC issued a $200 million tranche of investor certificates. As of October 31, 1998, the trust is comprised of one $100 million tranche of investor certificates maturing in 1999 and three $200 million tranches of investor certificates maturing in 2003, 2004 and 2008. During fiscal 1998 and 1997, the Corporation entered into sale/leaseback agreements involving vehicles subject to retail finance leases and operating leases with end users. Total proceeds were $144 million and $111 million in 1998 and 1997, respectively. The outstanding capital lease obligations at October 31, 1998 were $213 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. As of October 31, 1998, available funding under the bank revolving credit facility and the ABCP program was $124 million, of which $22 million provided funding backup for the outstanding short-term debt. The remaining $102 million, when combined with unrestricted cash and cash equivalents, made $116 million available to fund the general business purposes of the Corporation. In November 1998, the Corporation sold $545 million of retail notes, net of unearned finance income, through NFRRC to a multi-seller asset-backed commercial paper conduit sponsored by a major financial institution. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Year 2000 The Corporation has identified all significant information technology ("IT") applications that will require remediation, which in some cases will involve the replacement of systems, to ensure Year 2000 compliance. Internal and external resources are being used to make the required modifications and to test for Year 2000 compliance. The Corporation plans to complete the modifications and testing process of all significant IT systems by August 1999, which is prior to any anticipated impact on its operating systems. As of October 31, 1998 the Corporation believes it has remediated approximately 55% of its non-compliant IT systems. Total costs connected with the remediation of the Corporation's significant IT systems during 1998 and 1997 totaled $3.7 million and $1.1 million, respectively. Estimated future costs total $2.5 million. Approximately 25% of the total costs, representing investment in new IT systems, will be capitalized and depreciated over three to five years. The total cost of the Year 2000 project has not had nor is it anticipated to have a material impact on the Corporation's financial position or results of operations and will be funded through operating cash flows. While certain aspects of the Corporation's businesses could operate on a manual basis for a period of time, in the event Year 2000 compliance for its significant IT systems is not reached, the Corporation currently believes that the most reasonably likely worst case scenario would be the inability to sustain its current level of performance and customer service. Additionally, a significant failure of the banking systems or key entities in the financial markets could adversely affect the Corporation's ability to access various credit and money markets. The Corporation is therefore committed to taking all appropriate actions to achieve Year 2000 compliance for its significant IT systems before the millennium change date. The Corporation has developed a detailed plan, which includes an anticipated remediation completion date for each significant IT system and a scheduled overall completion date of August 1999. Management reviews the progress under the action plan on a weekly basis. Whenever management concludes a material risk exists that a significant IT system will not be remediated by the scheduled overall completion date, a contingency plan is developed. The Corporation has initiated formal communications with all significant third party suppliers which provide operational support and non-IT systems to determine the extent to which the Corporation would be vulnerable in the event that one or more of those third parties fail to remediate their own Year 2000 issues. The Corporation has received assurances from its significant suppliers of cash management services that they will be able to operate in the Year 2000 and beyond, without interruption in service. While the Corporation believes that it does not have significant exposure to other significant suppliers' Year 2000 problems, it is seeking compliance assurances from such other significant suppliers. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Year 2000 (continued) The costs of the project and the date on which the Corporation believes it will complete the Year 2000 remediation are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of qualified personnel, the ability to locate and correct all relevant computer codes and similar uncertainties. New Accounting Standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." 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. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to establish accounting and reporting standards for derivative instruments. This statement requires recognition of all derivative instruments in the statement of financial position as either assets or liabilities, measured at fair value, and is effective for fiscal years beginning after June 15, 1999. This statement additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income, depending on the intended use of the derivatives. The Corporation is currently assessing the impact of this statement on its results of operations, financial condition and cash flows. Business Outlook The truck industry in 1999 is forecasted to decrease approximately 3% from 1998. The competitive commercial financing market will continue to put pressure on the Corporation's retail and wholesale financing activity and margins. Increased volatility in the capital markets is likely to put additional pressure on the funding rates offered to the Corporation in the asset-backed public market, commercial paper markets and other debt financing markets. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Business Outlook (continued) 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 1999 and beyond. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Corporation is exposed to market risk primarily due to fluctuations in interest rates. Interest rate risk arises from the funding of a portion of the Corporation's fixed rate receivables with floating rate debt and from the Corporation's investment in fixed income securities. The Corporation has managed exposure to interest rate changes by funding floating rate receivables with floating rate debt and fixed rate receivables with fixed rate debt, floating rate debt and equity capital. Management has reduced the net exposure which results from the funding of fixed rate receivables with floating rate debt by generally selling fixed rate receivables on a fixed rate basis and by utilizing derivative financial instruments. The Corporation does not use financial instruments for trading purposes. The Corporation maintains investments in marketable securities. The securities are classified as available for sale and are recorded on the Statements of Consolidated Financial Condition at fair value with unrealized gains or losses reported as a separate component of shareowner's equity, net of applicable deferred taxes. As of October 31, 1998, the fair value of the Corporation's marketable securities portfolio was $108 million, consisting of $91 million invested in debt securities and $17 million invested in equity securities. The Corporation measures its interest rate risk by estimating the net amount by which the fair value of all interest rate sensitive assets and liabilities, including derivative financial instruments, would be impacted by selected hypothetical changes in market interest rates. Assuming a hypothetical 10% increase in interest rates as of October 31, 1998, the estimated net fair asset value would decrease by approximately $5 million. Equity price risk arises when the Corporation could incur economic losses due to adverse changes in a particular stock index or price. The Corporation's investments in equity securities are exposed to equity price risk and the fair value of the portfolio is correlated to the S&P 500. Management estimates that an immediate 10% change in the S&P 500 would affect the fair value of its equity securities by approximately $1.7 million.
Item 8. Financial Statements and Supplementary Data Page Navistar Financial Corporation and Subsidiaries: Statements of Consolidated Income and Retained Earnings for the years ended October 31, 1998, 1997 and 1996................ 11 Statements of Consolidated Financial Condition as of October 31, 1998 and 1997 ......................................... 12 Statements of Consolidated Cash Flow for the years ended October 31, 1998, 1997 and 1996.................................... 13 Notes to Consolidated Financial Statements........................... 14 Statement of Financial Reporting Responsibility...................... 33 Independent Auditors' Report......................................... 34 Supplementary Financial Data......................................... 35
Navistar Financial Corporation and Subsidiaries --------------------------------------------------------------------------- Statements of Consolidated Income and Retained Earnings --------------------------------------------------------------------------- Millions of Dollars
For the years ended October 31 1998 1997 1996 --------------------------------------------------------------------------- Revenues Retail notes and lease financing.......... $135.8 $105.8 $ 97.7 Wholesale notes........................... 43.3 36.1 56.6 Accounts.................................. 33.3 31.2 26.6 Servicing fee income...................... 21.6 20.0 20.5 Insurance premiums earned................. 32.3 33.3 42.0 Marketable securities..................... 9.6 8.5 9.4 Total................................. 275.9 234.9 252.8 Expenses Cost of borrowing: Interest expense...................... 81.0 65.9 73.2 Other................................. 7.1 7.0 8.4 Total................................. 88.1 72.9 81.6 Credit, collection and administrative..... 36.1 31.0 28.2 Provision for losses on receivables....... 0.8 2.5 9.3 Insurance claims and underwriting......... 35.6 35.1 44.4 Depreciation expense and other............ 30.1 18.8 8.8 Total................................. 190.7 160.3 172.3 Income Before Taxes............................ 85.2 74.6 80.5 Taxes on Income................................ 32.3 28.9 31.1 Net Income..................................... 52.9 45.7 49.4 Retained Earnings Beginning of year......................... 113.1 107.4 84.0 Dividends paid............................ (57.0) (40.0) (26.0) End of year............................... $109.0 $113.1 $107.4
See Notes to Consolidated Financial Statements. Navistar Financial Corporation and Subsidiaries - ------------------------------------------------------------------------------ Statements of Consolidated Financial Condition - ------------------------------------------------------------------------------ Millions of Dollars
As of October 31 1998 1997 - ------------------------------------------------------------------------------ ASSETS Cash and Cash Equivalents.............................. $ 14.1 $ 10.7 Marketable Securities.................................. 108.0 114.2 Receivables Finance receivables................................. 1,523.7 1,223.2 Allowance for losses................................ (12.8) (12.0) Receivables, net................................ 1,510.9 1,211.2 Amounts Due from Sales of Receivables.................. 245.9 233.3 Equipment on Operating Leases, Net..................... 217.7 124.1 Repossessions.......................................... 14.4 13.0 Other Assets........................................... 101.9 104.1 Total Assets........................................... $2,212.9 $1,810.6 LIABILITIES AND SHAREOWNER'S EQUITY Short-Term Debt........................................ $ 21.8 $ 141.0 Accounts Payable and Other Liabilities................. 193.9 191.3 Senior and Subordinated Debt........................... 1,611.2 1,082.7 Dealers' Reserves...................................... 24.0 22.2 Unpaid Insurance Claims and Unearned Premiums.......... 80.5 85.6 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................................... 109.0 113.1 Minimum pension liability adjustment................ (1.0) - Unrealized gains on marketable securities........... 2.5 3.7 Total........................................... 281.5 287.8 Total Liabilities and Shareowner's Equity.............. $2,212.9 $1,810.6
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 1998 1997 1996 ------------------------------------------------------------------------------- Cash Flow From Operations Net income................................... $ 52.9 $ 45.7 $ 49.4 Adjustments to reconcile net income to cash provided from operations: Gains on sales of receivables.............. (15.3) (13.4) (20.2) Depreciation and amortization.............. 35.4 22.5 15.3 Provision for losses on receivables........ 0.8 2.5 9.3 Increase (decrease) in accounts payable to affiliated companies.................. 5.3 107.0 (65.0) Other...................................... (10.5) (22.3) (17.3) Total.................................. 68.6 142.0 (28.5) Cash Flow From Investing Activities Proceeds from sold retail notes.............. 952.6 958.2 982.1 Purchase of retail notes and lease receivables........................ (1,262.8) (969.7) (1,069.0) Principal collections on retail notes and lease receivables........................ 116.4 93.8 70.2 Acquisitions (over)under cash collections of wholesale notes and accounts receivable.. (105.8) (59.9) 163.0 Purchase of marketable securities............ (43.1) (65.3) (63.0) Proceeds from sales and maturities of marketable securities.................... 50.3 84.8 67.7 Purchase of equipment leased to others....... (134.2) (66.3) (65.9) Sale of equipment leased to others........... 8.9 23.8 9.7 Total.................................. (417.7) (0.6) 94.8 Cash Flow From Financing Activities Net (decrease) increase in short-term debt... (119.2) 41.6 48.9 Net increase (decrease) in bank revolving credit facility usage.......... 422.0 (311.0) (56.0) Net increase (decrease) in asset-backed commercial paper facility usage.......... 6.0 (15.3) 88.1 Principal payments on long-term debt......... (43.6) (21.6) (117.5) Proceeds from long-term debt................. 144.3 208.9 - Dividends paid to Transportation............. (57.0) (40.0) (26.0) Total.................................. 352.5 (137.4) (62.5) Increase in Cash and Cash Equivalents.......... 3.4 4.0 3.8 Cash and Cash Equivalents at Beginning of Year. 10.7 6.7 2.9 Cash and Cash Equivalents at End of Year....... $ 14.1 $ 10.7 $ 6.7 Supplementary disclosure of cash flow information: Interest paid................................ $ 80.4 $ 59.7 $ 76.3 Income taxes paid............................ $ 36.4 $ 23.8 $ 32.2
See Notes to Consolidated Financial Statements. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 1998 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 commercial financing 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 when 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 written by the Corporation's wholly-owned insurance subsidiary, Harco National Insurance Company ("Harco"), 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. 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. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES (continued) 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 All derivative financial instruments, such as forward contracts, interest rate swaps and interest rate caps, are held for purposes other than trading. The Corporation's policy prohibits the use of derivative financial instruments for speculative purposes. The Corporation generally uses derivative financial instruments to reduce its exposure to interest rate volatility. The Corporation may use forward contracts to hedge the fair value of its fixed rate receivables against changes in market interest rates in anticipation of the sale of such receivables. The principal balance of receivables expected to be sold by the Corporation equals or exceeds the notional amount of open forward contracts. The Corporation may use interest rate swaps to reduce exposure to interest rate changes when it sells fixed rate receivables on a variable rate basis. Gains or losses incurred with the closing of forward contracts and interest rate swaps are included in the net gain or loss on sale of receivables. For the protection of investors, the Corporation may write interest rate caps when fixed rate receivables are sold on a variable rate basis. The Corporation will make payments under the terms of the written caps if interest rates exceed certain levels. The written caps are recorded at fair value with subsequent changes in fair value recognized in income. New Accounting Standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." 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) New Accounting Standards (continued) In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to establish accounting and reporting standards for derivative instruments. This statement requires recognition of all derivative instruments in the statement of financial position as either assets or liabilities, measured at fair value, and is effective for fiscal years beginning after June 15, 1999. This statement additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income, depending on the intended use of the derivatives. The Corporation is currently assessing the impact of this statement on its results of operations, financial condition and cash flow. Reclassification Certain prior year amounts have been reclassified to conform with the presentation used in the 1998 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 $67.2 in 1998, $54.7 in 1997 and $49.8 in 1996. 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 $10.7 in 1998, $10.1 in 1997 and $9.5 in 1996. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 2. TRANSACTIONS WITH AFFILIATED COMPANIES (continued) 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, 1998. 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 $2.6 in 1998, $2.1 in 1997 and $2.4 in 1996. Accounts Payable Accounts payable and other liabilities include $136.8 and $131.5 payable to Transportation at October 31, 1998 and 1997, respectively. 3. INDUSTRY SEGMENTS Information by industry segment is summarized as follows:
1998 1997 1996 - ------------------------------------------------------------------------------- Revenues: Finance operations...................... $ 234.3 $ 193.5 $ 201.6 Insurance operations.................... 41.6 41.4 51.2 Total revenues........................ $ 275.9 $ 234.9 $ 252.8 Income before taxes: Finance operations...................... $ 79.2 $ 68.6 $ 74.2 Insurance operations.................... 6.0 6.0 6.3 Total income before taxes............. $ 85.2 $ 74.6 $ 80.5 Assets at end of year: Finance operations...................... $2,067.0 $1,659.3 $1,626.9 Insurance operations.................... 145.9 151.3 166.9 Total assets at end of year........... $2,212.9 $1,810.6 $1,793.8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 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, the amortized cost and estimated fair values at October 31:
1998 1997 ------------------------------------------ Amortized Fair Amortized Fair Cost Value Cost Value - ------------------------------------------------------------------------------ U.S. government and agency securities.................. $ 21.7 $ 23.2 $ 26.6 $ 27.1 Mortgage and asset-backed securities............ 38.2 38.7 37.8 38.2 Corporate debt and other securities.. 28.4 28.6 30.3 30.1 Total debt securities.............. 88.3 90.5 94.7 95.4 Equity securities.................... 15.6 17.5 13.5 18.8 Total.............................. $ 103.9 $ 108.0 $ 108.2 $ 114.2
Net unrealized gains and losses on marketable securities were $4.1 and $6.0 at October 31, 1998 and 1997, respectively. Gross unrealized losses were not material. Contractual maturities of marketable debt securities at October 31, 1998 are as follows:
Amortized Fair Cost Value - ------------------------------------------------------------------------------ Due in one year or less............................... $ 12.9 $ 12.9 Due after one year through five years................. 13.6 14.2 Due after five years through ten years................ 14.1 14.8 Due after ten years................................... 9.5 9.9 50.1 51.8 Mortgage- and asset-backed securities................. 38.2 38.7 Total debt securities............................. $ 88.3 $ 90.5
Actual maturities may differ from the contractual maturities because of prepayments. Proceeds from sales or maturities of marketable securities available for sale were $50.3 during 1998 and $84.8 during 1997. The related net realized gains were $3.3 and $1.8 in 1998 and 1997, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 4. MARKETABLE SECURITIES (continued) All marketable securities at October 31, 1998 and 1997 were held by Harco, of which $12.6 and $14.5, 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:
1998 1997 - ------------------------------------------------------------------------------ Retail notes and lease financing...................... $ 915.9 $ 706.5 Wholesale notes....................................... 224.9 45.7 Accounts: Retail.............................................. 312.9 396.6 Wholesale........................................... 70.0 74.4 Total............................................ 382.9 471.0 Total finance receivables..................... $1,523.7 $1,223.2
Contractual maturities of finance receivables including unearned finance income at October 31, 1998, are summarized as follows:
Retail Wholesale Accounts - ------------------------------------------------------------------------------ Due in fiscal year: 1999 ............................... $ 281.6 $ 141.7 $ 382.9 2000 ............................... 242.1 83.2 - 2001 ............................... 218.7 - - 2002 ............................... 174.5 - - 2003 ............................... 118.9 - - Due after 2003............................ 27.9 - - Gross finance receivables.......... 1,063.7 224.9 382.9 Unearned finance income................... 147.8 - - Total finance receivables.......... $ 915.9 $ 224.9 $ 382.9
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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES (continued) 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. 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:
1998 1997 - ------------------------------------------------------------------------------ Retail notes..................................... $1,445.4 $1,422.2 Wholesale notes.................................. 700.0 545.5 Total....................................... $2,145.4 $1,967.7
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. During fiscal 1998, in two separate sales, the Corporation sold a total of $1,001 of retail notes, net of unearned finance income, through NFRRC to two individual owner trusts. The owner trusts, in turn, issued securities which were sold to investors. On August 28, 1998, NFRRC filed a shelf registration with the Securities and Exchange Commission which provides for the issuance of an additional $2,500 of asset-backed securities. The aggregate shelf registration available to NFRRC for issuance of asset-backed securities is $2,972. NFSC has in place a revolving wholesale note trust that provides for the continuous sale of eligible wholesale notes up to $700. During 1998, a $100 tranche of investor certificates matured and NFSC issued a $200 tranche of investor certificates. As of October 31, 1998 the trust is comprised of one $100 tranche of investor certificates maturing in 1999 and three $200 tranches of investor certificates maturing in 2003, 2004 and 2008. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES (continued) 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 receivable sales require the Corporation to maintain cash reserves with the trusts as credit enhancement. The use of cash reserves held by the trusts is restricted under the terms of the securitized sales agreements. The maximum exposure under all receivable sale recourse provisions at October 31, 1998 was $259; however, management believes the recorded reserves for losses are adequate. The following is a summary of amounts included in Amounts Due from Sales of Receivables as of October 31:
1998 1997 - ------------------------------------------------------------------------------ Cash held and invested by trusts.......................... $100.4 $ 90.8 Subordinated retained interests in wholesale receivables.. 114.5 99.9 Subordinated retained interests in retail receivables..... 34.9 47.4 Interest only receivables................................. 8.7 7.7 Allowance for credit losses............................... (12.6) (12.5) Total................................................ $245.9 $233.3
6. INVESTMENT IN OPERATING LEASES Operating leases at year-end were as follows:
1998 1997 - ------------------------------------------------------------------------------ Investment in operating leases: Vehicles and other equipment, at cost.................. $271.1 $150.0 Less: Accumulated depreciation........................ (53.4) (25.9) Net investment in operating leases.................. $217.7 $124.1
Future minimum rentals on operating leases are as follows: 1999, $62.8; 2000, $53.7; 2001, $34.7; 2002, $17.7 and $5.4 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 7. ALLOWANCE FOR LOSSES The allowance for losses on receivables is summarized as follows:
1998 1997 1996 - ------------------------------------------------------------------------------ Total allowance for losses at beginning of year..... $24.5 $24.0 $19.6 Provision for losses................................ 0.8 2.5 9.3 Net (losses) recoveries (charged) credited to allowance............................ 0.1 (2.0) (4.9) Total allowance for losses at end of year.... $25.4 $24.5 $24.0 Allowance pertaining to: Owned notes...................................... $12.8 $12.0 $11.6 Sold notes....................................... 12.6 12.5 12.4 Total........................................ $25.4 $24.5 $24.0
8. TAXES ON INCOME Taxes on income are summarized as follows:
1998 1997 1996 - ------------------------------------------------------------------------------ Current: Federal.......................................... $24.7 $29.6 $26.4 State and local.................................. 3.3 4.1 4.4 Total current................................ 28.0 33.7 30.8 Deferred (primarily Federal)........................ 4.3 (4.8) 0.3 Total........................................ $32.3 $28.9 $31.1
The effective tax rate of approximately 38% in each of the three years ended October 31, 1998 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:
1998 1997 - ------------------------------------------------------------------------------ Deferred tax assets: Other postretirement benefits........................... $2.3 $3.0 Deferred tax liabilities: Depreciation and other.................................. 5.8 2.2 Unrealized gains on marketable securities............... 1.5 2.3 Total deferred tax liabilities...................... 7.3 4.5 Net deferred tax liabilities........................ $5.0 $1.5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 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:
1998 1997 1996 - ------------------------------------------------------------------------------ Aggregate obligations outstanding: Daily average................................. $106.1 $109.7 $ 68.2 Maximum month-end balance..................... 148.8 145.0 117.8 Weighted average interest rate: On average daily borrowing.................... 6.1% 6.1% 6.0% At October 31................................. 6.1% 6.1% 5.9%
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. 10. SENIOR AND SUBORDINATED DEBT Senior and subordinated debt outstanding at October 31 is summarized as follows:
1998 1997 - ------------------------------------------------------------------------------ Bank revolving credit facility, at variable rates, due March 2001............................... $ 815.0 $ 393.0 Funding under asset-backed commercial paper program ("ABCP"), at variable rates, due March 2001............................... 400.7 399.9 Capital lease obligations, 4.75% to 5.62%, due serially through 2004........................... 213.3 95.8 Subordinated term debt: Senior Notes, 8 7/8%, due November 1998............. 82.2 94.0 Senior Notes, 9%, due June 2002..................... 100.0 100.0 Total senior and subordinated debt............. $1,611.2 $1,082.7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 10. SENIOR AND SUBORDINATED DEBT (continued) The weighted average interest rate on total debt, including short-term debt and the effect of discounts and related amortization, was 6.4% in 1998 and 1997, and 6.5% in 1996. The aggregate annual maturities and required payments of senior and subordinated debt are as follows: Fiscal year ended October 31 1999 $ 121.3 2000 47.7 2001 1,269.0 2002 141.8 2003 and thereafter 31.4 Total $1,611.2
At October 31, 1998, the Corporation had 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 the Corporation, purchases eligible receivables from the Corporation. All assets of TRIP are pledged to a Trust that funds the receivables with A1/P1 rated commercial paper. Available funding under the bank revolving credit facility and the ABCP program was $124, of which $22 provided funding backup for the outstanding short-term debt at October 31, 1998. The remaining $102 when combined with unrestricted cash and cash equivalents made $116 available to fund the general business purposes of the Corporation at October 31, 1998. Under the terms of the bank revolving credit facility, the Corporation is required to maintain tangible net worth at a minimum of $175 and a debt to tangible net worth ratio of no greater than 7 to 1. The bank revolving credit 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 bank 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 balance of subordinated debt may not exceed 75% of consolidated tangible net worth. During fiscal 1998 and 1997, the Corporation entered into sale/leaseback agreements involving vehicles subject to retail finance and operating leases with end users. The balances are 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. POSTRETIREMENT BENEFITS Effective October 31, 1998 the Corporation adopted SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." The information for 1998, 1997 and 1996 has been presented in conformity with the requirements of SFAS No. 132. The Corporation provides postretirement benefits to a majority of its employees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees and surviving spouses and dependents. In addition, as part of the 1993 restructured health care and life insurance plans, profit sharing payments to the Retiree Supplemental Benefit Trust are required. Generally, the pension plans are non-contributory. The Corporation's policy is to fund its pension plans in accordance with applicable United States government regulations. At October 31, 1998, all legal funding requirements had been met. Postretirement Expense Net periodic benefit cost included in the Statements of Consolidated Income is composed of the following:
Pension Other Benefits ---------------------- ---------------------- 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------- ---------------------- Service cost for benefits earned during the period.......$ 1.0 $ 0.8 $ 0.7 $ 0.4 $ 0.4 $ 0.4 Interest cost on obligation...... 3.1 3.0 2.9 0.8 0.9 0.8 Net amortization costs and other. 0.1 - 0.1 - - - Less expected return on assets... (4.7) (4.0) (3.6) (0.7) (0.5) (0.5) Net postretirement (income) expense...............$(0.5) $(0.2) $ 0.1 $ 0.5 $ 0.8 $ 0.7
"Amortization costs" include amortization of cumulative gains and losses over the expected remaining service life of employees and amortization of the initial transition liability over 15 years and amortization of plan amendments. Plan amendments are recognized over the remaining service life of employees. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. POSTRETIREMENT BENEFITS (continued) Postretirement Expense (continued) The funded status of the Corporation's plans as of October 31, 1998 and 1997 and a reconciliation with amounts recognized in the Statements of Consolidated Financial Condition are as follows:
Pension Benefits Other Benefits -------------------- ------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------ Change in benefit obligation Benefit obligation at beginning of year.......................... $44.0 $38.7 $11.6 $11.2 Service cost........................ 1.0 0.8 0.4 0.4 Interest on obligation.............. 3.1 3.0 0.8 0.9 Actuarial net loss (gain)........... 6.1 4.0 1.5 (0.7) Benefits paid....................... (2.7) (2.5) (0.3) (0.2) Benefit obligation at end of year.......................... $51.5 $44.0 $14.0 $11.6 Change in plan asset Fair value of plan assets at beginning of year................ $50.1 $42.7 $ 4.4 $ 3.9 Actual return on plan assets........ 5.3 9.7 0.4 0.2 Employer contribution............... - - 2.1 0.4 Benefits paid....................... (2.4) (2.3) (0.2) (0.1) Fair value of plan assets at year-end......................... $53.0 $50.1 $ 6.7 $ 4.4 Funded status....................... $ 1.5 $ 6.1 $(7.3) $(7.2) Unrecognized actuarial net (gain) loss...................... (1.1) (6.5) 2.8 1.0 Unrecognized transition amount...... 0.1 0.1 - - Unrecognized prior service cost..... 0.4 0.4 - - Net amount recognized............... $ 0.9 $ 0.1 $(4.5) $(6.2) Amounts recognized in the Statements of Consolidated Financial Condition consists of: Prepaid benefit cost.......... $ 2.4 $ 1.7 $ - $ - Accrued benefit liability..... (3.1) (1.6) (4.5) (6.2) Intangible asset.............. - - - - Accumulated reduction in shareowner's equity........ 1.6 - - - Net amount recognized... $ 0.9 $ 0.1 $(4.5) $(6.2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. POSTRETIREMENT BENEFITS (continued) Postretirement Expense (continued) The accumulated reduction in shareowner's equity is recorded in the Statement of Financial Condition net of deferred income taxes of $0.6 at October 31, 1998. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $3.3, $3.1, and $0.0, respectively, as of October 31, 1998, and $2.4, $2.3 and $0.0, respectively, as of October 31, 1997. The weighted average rate assumptions used in determining expenses and benefit obligations were:
Pension Other Benefits -------------------- ------------------- 1998 1997 1996 1998 1997 1996 ------------------------------------------------------------------------------ Discount rate used to determine present value of benefit obligation at year-end....... 6.7% 7.2% 7.9% 7.1% 7.4% 8.1% Expected long-term rate of return on plan asset for the year..................... 9.6% 9.6% 8.9% 10.8% 11.1% 10.5% Expected rate of increase in future compensation levels... 3.5% 3.5% 3.5% N/A N/A N/A
For 1999, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 9.7%. The rate is projected to decrease to 5.0% by the year 2005 and remain at that level each year thereafter. The effect of changing the health care cost trend rate is as follows:
1-Percentage- 1-Percentage- Point Increase Point Decrease - ------------------------------------------------------------------------------- Effect on total of service and interest cost components................................... $0.2 $(0.2) Effect on postretirement benefit obligation..... 2.0 (1.7)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 12. LEASES The Corporation is obligated under non-cancelable 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, 1998, future minimum lease commitments under non-cancelable operating leases with remaining terms in excess of one year are as follows: Year Ended October 31, 1999........................................ $ 1.8 2000........................................ 1.4 2001........................................ 0.3 2002........................................ 0.1 2003........................................ 0.1 Thereafter.................................. 0.1 Total....................................... $ 3.8
13. SHAREOWNER'S EQUITY The number of authorized shares of capital stock as of October 31, 1998 and 1997, 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:
1998 1997 ------------------------------------------ Carrying Fair Carrying Fair Value Value Amount Value - ------------------------------------------------------------------------------- Financial assets: Finance receivables: Retail notes.................. $ 775.3 $ 797.6 $ 607.0 $ 619.0 Wholesale notes and accounts.. 607.8 607.8 516.7 516.7 Amounts due from sales of receivables................... 245.9 243.8 233.3 230.3 Financial liabilities: Senior and subordinated debt..... 1,397.9 1,401.4 986.9 990.2
The carrying amount of cash and cash equivalents approximates fair value. The cost and fair value of marketable securities are disclosed in Note 4. The fair value of retail notes is estimated by discounting the future contractual 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 wholesale notes and retail and wholesale accounts, all of which reprice monthly, 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 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. The estimated fair values for all other financial instruments approximate carrying values due to the short-term nature or variable interest terms inherent in the financial instruments. 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 generally by selling fixed rate receivables on a fixed rate basis and by utilizing derivative financial instruments. These derivative financial instruments may include forward contracts, interest rate swaps and interest rate caps. The fair value of these instruments is subject to market risk as the instruments may become less valuable due to changes in market conditions or interest rates. 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. The Corporation does not require collateral or other security to support derivative financial instruments with credit risk. The Corporation's counter-party credit exposure is limited to the fair value of contracts with a positive fair value at the reporting date. At October 31, 1998, none of the Corporation's derivative financial instruments had positive fair values. 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 retail notes anticipated to be sold. The Corporation manages such 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. As of October 31, 1998, outstanding derivative financial instruments consisted of the following:
Notional Amount Fair Value - ------------------------------------------------------------------------------ Forward interest rate contracts in anticipation of: November 1998 sale of retail receivables...... $450 $(5.2) May 1999 sale of retail receivables........... $ 50 $(0.1)
Fair values of forward interest rate contracts are based on quoted market prices. There were no derivative financial instruments outstanding at October 31, 1997. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 15. LEGAL PROCEEDINGS The Corporation is subject to various claims arising in the ordinary course of business, and is party 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. 16. SUBSEQUENT EVENT In November 1998, the Corporation sold $545 of retail notes, net of unearned finance income, through NFRRC to a multi-seller asset-backed commercial paper conduit sponsored by a major financial institution. 17. QUARTERLY FINANCIAL INFORMATION (unaudited)
1998 -------------------------------------------------- 1st 2nd 3rd 4th Fiscal Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------- Revenues..................... $62.6 $64.1 $79.3 $69.9 $275.9 Interest expense............. 15.7 20.3 23.2 21.8 81.0 Provision for (recovery of) losses on receivables...... 0.4 0.8 (2.6) 2.2 0.8 Net income................... 13.4 10.7 17.7 11.1 52.9
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 5.7
- ------------------------------------------------------------------------------ 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 accompanying consolidated financial statements of Navistar Financial Corporation and its subsidiaries as of October 31, 1998 and 1997 and for each of the three years in the period ended October 31, 1998, 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 as of October 31, 1998 and 1997 and the results of their operations and their cash flow for each of the three years in the period ended October 31, 1998 in conformity with generally accepted accounting principles. /s/DELOITTE & TOUCHE LLP Deloitte & Touche LLP December 14, 1998 Chicago, Illinois SUPPLEMENTARY FINANCIAL DATA Five Year Summary of Financial and Operating Data Dollar amounts in millions
1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------- Results of Operations: Revenues...................$ 275.9 $ 234.9 $ 252.8 $ 228.2 $ 210.8 Net income ................ 52.9 45.7 49.4 36.2 34.0 Dividends paid ............ 57.0 40.0 26.0 9.0 25.6 Percent of net income to average shareowner's equity.................. 18.5% 16.1% 18.1% 15.0% 15.1% Financial Data: Finance receivables, net ..$1,510.9 $1,211.2 $1,193.6 $1,370.9 $1,094.0 Total assets .............. 2,212.9 1,810.6 1,793.8 1,874.7 1,534.8 Total debt ................ 1,633.0 1,223.7 1,305.8 1,330.3 1,091.5 Shareowner's equity ....... 281.5 287.8 279.7 256.7 225.6 Debt to equity ratio ...... 5.8:1 4.3:1 4.7:1 5.2:1 4.8:1 Senior debt to capital funds ratio............. 3.1:1 2.1:1 3.2:1 3.4:1 3.0:1 Number of employees at October 31.............. 394 358 352 360 353
SUPPLEMENTARY FINANCIAL DATA (Continued) Gross Finance Receivables and Leases Acquired - -------------------------------------------------------------------------------
($ Millions) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------- Wholesale notes.............. $3,812.8 $2,772.8 $2,705.8 $2,979.4 $2,306.6 Retail notes and leases: New....................... 1,358.0 976.2 1,064.1 1,075.0 861.9 Used ..................... 309.2 270.3 281.7 242.3 217.2 Total................... 1,667.2 1,246.5 1,345.8 1,317.3 1,079.1 Total .................... $5,480.0 $4,019.3 $4,051.6 $4,296.7 $3,385.7
Serviced (including sold notes) Retail Notes and Leases With Installments Past Due Over 60 Days - -------------------------------------------------------------------------------
At October 31 ($ Millions) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------- Original amount of notes and leases................. $ 33.6 $ 31.8 $ 14.0 $ 4.2 $ 3.1 Balance of notes and leases.. 16.5 16.2 8.0 2.2 1.3 Balance as a percent of total outstanding.......... 0.57% 0.64% 0.32% 0.10% 0.07%
Retail Note and Lease Repossessions (including sold notes) - -------------------------------------------------------------------------------
1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------- Retail note and lease repossessions acquired as a percentage of average serviced retail note and lease balances.... 2.26% 2.69% 3.08% 0.92% 0.93%
SUPPLEMENTARY FINANCIAL DATA (Continued) Credit Loss Experience on Serviced (including sold notes) Receivables - -------------------------------------------------------------------------------
($ Millions) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------- Net losses (recoveries): Retail notes and leases ..... $ .2 $2.2 $5.1 $ .3 $ .6 Wholesale notes ............. (.3) (.2) (.2) (.9) .1 Accounts..................... - - - (.2) .2 Total ................... $(.1) $2.0 $4.9 $(.8) $ .9 Percent net losses (recoveries) to liquidations: Retail notes and leases ..... .02% .18% .48% .03% .07% Wholesale notes ............. (.01) (.01) (.01) (.03) .01 Total ................... - .05% .13% (.02)% .03% Percent net losses (recoveries) to related average gross receivables outstanding: Retail notes and leases ..... .01% .09% .22% .02% .04% Wholesale notes ............. (.04) (.02) (.02) (.13) .03 Accounts..................... - - - (.05) .08 Total ................... - .06% .14% (.03)% .04%
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, 1998. 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 21, 1998 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 21, 1998 John J. Bongiorno Officer; Director (Principal Executive Officer) /s/R. WAYNE CAIN Vice President and Treasurer; December 21, 1998 R. Wayne Cain Director (Principal Financial Officer) /s/PHYLLIS E. COCHRAN Vice President and Controller; December 21, 1998 Phyllis E. Coch Director (Principal Accounting Officer) /s/JOHN R. HORNE Director December 21, 1998 John R. Horne /s/THOMAS M. HOUGH Director December 21, 1998 Thomas M. Hough
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES SIGNATURES (Continued)
Signature Title Date /s/ROBERT C. LANNERT Director December 21, 1998 Robert C. Lannert /s/J. STEVEN KEATE Director December 21, 1998 J. Steven Keate /s/THOMAS D. SILVER Director December 21, 1998 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. E-1 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.5 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. 10.6 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. 10.7 Appendix A to Liquidity Agreement at Exhibit 10.20. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.8 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. 10.9 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. 10.10 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. 10.11 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. 10.12 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. 10.13 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. 10.14 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. E-2 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.15 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. 10.16 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. 10.17 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. 10.18 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. 10.19 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. 10.20 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. 10.21 Series 1995-1 Supplement to the Pooling and Servicing Agreement dated as of June 8, 1995, among the Corporation, s 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. 10.22 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. E-3 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.23 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. 10.24 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. 10.25 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. 10.26 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. 10.27 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. 10.28 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. 10.29 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. 10.30 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. E-4 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.31 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. 10.32 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. 10.33 Trust Agreement dated as of May 30, 1996, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1996-A Owner Trust. Filed on Registration No. 33-55865. 10.34 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. 10.35 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. 10.36 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. 10.37 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. 10.38 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. 10.39 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. E-5 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.40 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. 10.41 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. 10.42 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. 10.43 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. 10.44 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. 10.45 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. 10.46 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. E-6 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.47 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. 10.48 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. 10.49 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. 10.50 Series 1998-1 Supplement to the Pooling and Servicing Agreement dated as of July 17, 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 1998-1 Certificateholders. Filed on Registration No. 333-30737. 10.51 Class A-6 Supplement to the 1990 Pooling and Servicing agreement dated July 17, 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. 10.52 Purchase Agreement dated as of June 4, 1998, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1998-A Owner Trust, as Issuer. Filed on Registration No. 33-64249. 10.53 Pooling and Servicing Agreement dated as of June 4, 1998, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1998-A Owner Trust, as Issuer. Filed on Registration No. 33-64249. E-7 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.54 Trust Agreement dated as of June 4, 1998, between Navistar Financial Retail Receivables Corporation, as Seller, and Chase Manhattan Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1998-A Owner Trust. Filed on Registration No. 33-64249. 10.55 Indenture dated as of June 4, 1998, between Navistar Financial 1998-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1998-A Owner Trust. Filed on Registration No. 33-64249. 10.56 Purchase Agreement dated as of November 13, 1998, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1998-B Multi-seller Asset-backed Commercial Paper Conduit, as Issuer. Filed on Form 8-K dated December 18, 1998. Commission File No. 33-64249. 10.57 Transfer and Administration Agreement dated as of November 13, 1998, between the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Transferor, Park Avenue Receivables Corporation, as Purchaser, and The Chase Manhattan Bank, as Funding Agent and APA Bank. Filed on Form 8-K dated December 18, 1998. Commission File No. 33-64249. 27.1 Financial Data Schedule for Article 5 of Regulation S-X, Item 601(c) for the year ended October 31, 1998. E-8 -----END PRIVACY-ENHANCED MESSAGE-----