<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1993
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
INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
2850 WEST GOLF ROAD 60008
ROLLING MEADOWS, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 708-734-4275
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<S> <C>
7 1/2% Debentures, due 1994 New York Stock Exchange
11.95% Subordinated Debentures, due 1995 New York Stock Exchange
</TABLE>
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 DECEMBER 31, 1993, THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S
COMMON STOCK WAS 1,600,000.
DOCUMENTS INCORPORATED BY REFERENCE
1993 ANNUAL REPORT TO SHAREOWNER (PARTS II AND IV)
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL
TRANSPORTATION CORP. AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
J(1) (A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE
REDUCED DISCLOSURE FORMAT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-K
YEAR ENDED OCTOBER 31, 1993
Navistar Financial Corporation's 1993 Annual Report to Shareowner contains
much of the financial information required in this Form 10-K. Such information
is incorporated in this Form 10-K by reference to applicable pages of the 1993
Annual Report to Shareowner, a complete copy of which is provided herein.
Except for those pages specifically referred to herein as incorporated by
reference, the 1993 Annual Report to Shareowner shall not be deemed to be filed
with the Commission.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
PART I Item 1. Business (A).......................................... 1
Item 2. Properties (A)........................................ 1
Item 3. Legal Proceedings..................................... 1
Submission of Matters to a Vote of Security Holders
Item 4. (A).................................................. 1
PART II Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters................................... 2
Item 6. Selected Financial Data (A)........................... 2
Item 7. Management's Discussion and Analysis of Financial
Condition and
Results of Operations (A)............................. 2
Item 8. Financial Statements and Supplementary Data........... 2
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 2
Directors and Executive Officers of the Registrant
PART III Item 10. (A).................................................. 2
Item 11. Executive Compensation (A)............................ 2
Security Ownership of Certain Beneficial Owners and
Item 12. Management (A)....................................... 2
Item 13. Certain Relationships and Related Transactions (A).... 2
Exhibits, Financial Statement Schedules and Reports on
PART IV Item 14. Form 8-K............................................. 2
INDEPENDENT AUDITORS' REPORT............................................. 4
SIGNATURES--Principal Accounting Officer................................. 4
--Directors.............................................................. 5
POWER OF ATTORNEY........................................................ 5
SCHEDULES................................................................ S-1
EXHIBITS................................................................. E-1
</TABLE>
- --------
(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 J(1) (a) and (b) of Form 10-K and is,
therefore, filing this Form with reduced disclosure format.
i
<PAGE>
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 provides wholesale, retail, and to a lesser extent, 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.
To a minor extent, sales of new products (including trailers) of other
manufacturers are also financed regardless of whether designed or customarily
sold for use with Transportation 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 the independent insurance agency
system.
ITEM 2. PROPERTIES
The Corporation uses leased facilities to carry out most of the
administrative and finance sales activities.
ITEM 3. LEGAL PROCEEDINGS
In July 1992, Navistar announced its decision to change its retiree health
care benefit plans, including those of the Corporation. Navistar concurrently
filed a declaratory judgment class action lawsuit to confirm its right to
change these benefits in the U.S. District Court for the Northern District of
Illinois ("Illinois Court"). A countersuit was subsequently filed against
Navistar by its unions in the U.S. District Court for the Southern District of
Ohio. On October 16, 1992, Navistar withdrew its declaratory judgment action in
the Illinois Court and began negotiations with the United Automobile, Aerospace
and Agricultural Implement Workers of America ("UAW") to resolve issues
affecting both retirees and employees. On December 17, 1992, Navistar announced
that a tentative agreement had been reached with the UAW on restructuring
retiree health care and life insurance benefits ("the Settlement Agreement").
During the third quarter of 1993, all court, regulatory agency and shareowner
approvals required to implement the Settlement Agreement concerning retiree
health care benefit plans were obtained. The Settlement Agreement became
effective and the restructured retiree health care and life insurance plan was
implemented on July 1, 1993.
In May 1993, a jury issued a verdict in favor of Vernon Klein Truck &
Equipment, Inc. and against Transportation and the Corporation in the amount of
$10.8 million in compensatory damages and $15 million in punitive damages. The
amount of any potential liability is uncertain and Transportation and the
Corporation believe that there are meritorious arguments for overturning or
diminishing the verdict on appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Intentionally omitted. See the index page of this Report for explanation.
1
<PAGE>
PART II
The information required by Items 5, 7 and 8 is incorporated by reference
from the 1993 Annual Report to Shareowner on the pages indicated:
<TABLE>
<CAPTION>
1993 ANNUAL
REPORT PAGE
-----------
<S> <C>
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 16
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 .................................. 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Navistar Financial Corporation and Subsidiaries:
Statement of Consolidated Income and Retained Earnings for the
years ended October 31, 1993, 1992 and 1991..................... 5
Statement of Consolidated Financial Condition as of October 31,
1993 and 1992................................................... 6
Statement of Consolidated Cash Flow for the years ended October
31, 1993, 1992 and 1991......................................... 7
Notes to Consolidated Financial Statements....................... 8
Independent Auditors' Report..................................... 20
</TABLE>
----------------
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
<TABLE>
<CAPTION>
FORM 10-K
PAGE
---------
<S> <C>
I--Marketable Securities--Other Investments...................... S-1
IX--Short-Term Borrowings.......................................... S-2
</TABLE>
2
<PAGE>
All schedules other than Schedules I and IX indicated above 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 1993 Annual Report to Shareowner.
EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
EXHIBIT FORM 10-K
NUMBER DESCRIPTION PAGE
------- ----------- ---------
<C> <S> <C>
(3) Articles of Incorporation and By-Laws of the Registrant.. E-1
(4) Instruments Defining the Rights of Security Holders...... E-2
(10) Material Contracts....................................... E-3
Navistar Financial Corporation 1993 Annual Report to
(13) Shareowner............................................... N/A
(24) Power of Attorney........................................ 5
</TABLE>
Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended October 31,
1993.
3
<PAGE>
INDEPENDENT AUDITORS' REPORT
Navistar Financial Corporation:
We have audited the statement of consolidated financial condition of Navistar
Financial Corporation and its subsidiaries as of October 31, 1993 and 1992 and
the related statements of consolidated income and retained earnings and of
consolidated cash flow for each of the three years in the period ended October
31, 1993, and have issued our report thereon dated December 1, 1993 (which
includes an explanatory paragraph relating to the change in methods of
accounting for postretirement benefits other than pensions and for income taxes
as required by Statements of Financial Accounting Standards No. 106 and No.
109); such consolidated financial statements and report are included in your
1993 Annual Report to Shareowner and are incorporated herein by reference. Our
audits also included the financial statement schedules of Navistar Financial
Corporation and its subsidiaries, listed in Item 14. These financial statement
schedules are the responsibility of Navistar Financial Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Deloitte & Touche
Chicago, Illinois
December 1, 1993
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)
January 27, 1994
/s/ Andrew C. Hill
By: _________________________________
Andrew C. Hill
Vice President and Controller
(Principal Accounting Officer)
4
<PAGE>
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, Andrew C. Hill 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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John J. Bongiorno January 27, 1994
- ------------------------------------
John J. Bongiorno President and Chief
Executive Officer; Director
(Principal Executive
Officer)
/s/ R. Wayne Cain January 27, 1994
- ------------------------------------
R. Wayne Cain Vice President and
Treasurer; Director
(Principal Financial
Officer)
/s/ James C. Cotting
- ------------------------------------
James C. Cotting Director January 27, 1994
/s/ Andrew C. Hill January 27, 1994
- ------------------------------------
Andrew C. Hill Vice President and
Controller; Director
(Principal Accounting
Officer)
/s/ Thomas M. Hough
- ------------------------------------
Thomas M. Hough Director January 27, 1994
/s/ John R. Horne
- ------------------------------------
John R. Horne Director January 27, 1994
/s/ Robert C. Lannert
- ------------------------------------
Robert C. Lannert Director January 27, 1994
/s/ Robert I. Morrison
- ------------------------------------
Robert I. Morrison Director January 27, 1994
/s/ Thomas D. Silver
- ------------------------------------
Thomas D. Silver Director January 27, 1994
</TABLE>
5
<PAGE>
SCHEDULE I
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
MARKETABLE SECURITIES--OTHER INVESTMENTS
AS OF OCTOBER 31, 1993
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- --------- ---------- ---------- -----------
NUMBER OF
SHARES OR
UNITS-- MARKET AMOUNT AT
PRINCIPAL VALUE OF WHICH
AMOUNT OF EACH ISSUE CARRIED IN
NAME OF ISSUER AND TITLE OF EACH BONDS AND COST OF AT BALANCE THE BALANCE
ISSUE NOTES EACH ISSUE SHEET DATE SHEET
-------------------------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
MARKETABLE SECURITIES
U.S. Government Obligations........ $74.8 $ 69.6 $ 74.5 $ 70.1
Foreign Government Obligations..... 1.6 1.7 1.6
Corporate Obligations.............. 17.9 18.4 17.8
Asset-backed Obligations........... 12.5 13.0 12.5
Mortgage-backed Obligations........ 23.6 24.4 23.6
------ ------ ------
Total............................ $125.2 $132.0 $125.6
====== ====== ======
</TABLE>
S-1
<PAGE>
SCHEDULE IX
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
SHORT-TERM BORROWINGS
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- --------- ------------- ----------- ------------- -------------
WEIGHTED MAXIMUM AVERAGE WEIGHTED
AVERAGE AMOUNT AMOUNT AVERAGE
BALANCE INTEREST RATE OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE AT END AT END DURING DURING DURING
SHORT-TERM BORROWINGS OF PERIOD OF PERIOD THE PERIOD THE PERIOD(1) THE PERIOD(2)
--------------------- --------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1993
Borrowings from banks... $ 75.0 6.50% $ 75.0 $ .6 6.50%
Commercial paper
borrowings............. -- -- $ -- -- --
------ ------
Total............... $ 75.0 6.50% $ 75.0 $ .6 6.50%
====== ======
1992
Borrowings from banks... $ -- -- $ 40.0 $ 11.9 5.60%
Commercial paper
borrowings............. -- -- $163.3 44.3 5.47%
------ ------
Total............... $ -- -- $203.3 $ 56.2 5.50%
====== ======
1991
Borrowings from banks... $ 40.0 5.81% $170.0 $ 60.6 7.19%
Commercial paper
borrowings............. 143.8 6.03% $393.2 315.7 7.12%
------ ------
Total............... $183.8 5.98% $563.2 $376.3 7.13%
====== ======
</TABLE>
- --------
Notes:
(1)The amount outstanding is calculated based on average daily borrowings
outstanding.
(2)Calculated by dividing the actual interest for the year by the average daily
balance outstanding.
S-2
<PAGE>
EXHIBIT 3
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ARTICLES OF INCORPORATION AND BY-LAWS
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.
1-4146-1.
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.
E-1
<PAGE>
EXHIBIT 4
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
The following instruments of Navistar Financial Corporation defining the
rights of security holders, including indentures, are incorporated herein by
reference:
4.1 Indenture, dated as of January 15, 1973, between the Corporation
and Manufacturers Hanover Trust Company, as Trustee, succeeded
by Commerce Union Bank, now known as Sovran Bank/Central South,
as successor Trustee, for 7 1/2% Debentures due 1994 for
$75,000,000. Filed on Registration No. 2-46636.
4.2 Indenture, dated November 1, 1985 between the Corporation and
Continental Bank N. A., as Trustee, succeeded by State Street
Bank and Trust Company, as successor Trustee, for 11.95%
Subordinated Debentures due 1995 for $100,000,000. Filed on
Registration No. 33-1259; 33-1259-01.
4.3 Indenture, dated September 22, 1989 between the Corporation and
The First National Bank of Chicago, as Trustee, succeeded by
Bank One, Columbus, NA, as successor Trustee, for $400,000,000
of debt securities on terms determined at time of sale. Filed on
Registration No. 33-31003.
4.4 Indenture, dated as of November 15, 1993 between the Corporation
and 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.
E-2
<PAGE>
EXHIBIT 10
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
MATERIAL CONTRACTS
The following material contracts of Navistar Financial Corporation and
Navistar International Transportation Corp. are incorporated herein by
reference:
<TABLE>
<C> <S>
10.1 Pooling and Servicing Agreement dated as of December 1, 1990
between the Corporation, as Servicer, Navistar Financial
Securities Corporation, as Seller, 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 Pooling and Servicing Agreement dated as of December 1, 1991
between the Corporation, as Servicer, Navistar Financial
Retail Receivables Corporation, as Seller, and The Bank of
New York, as Trustee, with respect to Navistar Financial
1991-1 Grantor Trust. Commission File No. 1-4146-1.
10.4 Navistar Financial Grantor Trusts Standard Terms and
Conditions of Agreement Effective December 1, 1991 between
the Corporation, as Servicer, and Navistar Financial Retail
Receivables Corporation, as Seller, with respect to Navistar
Financial Grantor Trusts formed on or subsequent to December
1, 1991. Commission File No. 1-4146-1.
10.5 Purchase Agreement dated as of December 16, 1991 between the
Corporation and Navistar Financial Retail Receivables
Corporation, as Purchaser, with respect to Navistar Financial
1991-1 Grantor Trust. Commission File No. 1-4146-1.
10.6 Amended and Restated Credit Agreement dated as of April 26,
1993 among the Corporation, certain banks, and Chemical Bank,
Continental Bank N.A. and Morgan Guaranty Trust Company of
New York, as Co-Agents. Filed on Form 8-K dated April 30,
1993. Commission File No. 1-4146-1.
10.7 Security, Pledge and Trust Agreement between the Corporation
and Bankers Trust Company, Trustee, dated as of April 26,
1993. Filed on Form 8-K dated April 30, 1993. Commission File
No. 1-4146-1.
10.8 Amended and Restated Purchase Agreement among Truck Retail
Instalment Paper Corp., as Seller, the Corporation, certain
purchasers, Chemical Bank and Continental Bank N.A. as Co-
Agents, and J.P. Morgan Delaware as Administrative Agent,
dated as of April 26, 1993. Filed on Form 8-K dated April 30,
1993. Commission File No.
1-4146-1.
10.9 Master Intercompany 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.
10.10 Intercompany Purchase Agreement dated as of April 26, 1993
between the Corporation and Truck Retail Instalment Paper
Corp. Filed on Form 8-K dated April 30, 1993. Commission File
No. 1-4146-1.
10.11 Pooling and Servicing Agreement dated as of November 10, 1993
between the Corporation, as Servicer, and Navistar Financial
Retail Receivables Corporation, as Seller, and Navistar
Financial 1993-A Owner Trust. Filed on Registration No.
33-50291.
</TABLE>
E-3
<PAGE>
EXHIBIT 10 (CONTINUED)
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
MATERIAL CONTRACTS
10.12 Purchase Agreement dated as of November 10, 1993 between the
Corporation and Navistar Financial Retail Receivables
Corporation, as Purchaser, with respect to Navistar Financial
1993-A Owner Trust. Filed on Registration No. 33-50291.
10.13 Administration Agreement dated as of November 10, 1993 between
the Corporation, The Bank of New York, as Indenture Trustee, and
Navistar Financial 1993-A Owner Trust. Filed on Registration No.
33-50291.
E-4
<PAGE>
EXHIBIT 13
NAVISTAR FINANCIAL LOGO
NAVISTAR FINANCIAL LOGO
1993
ANNUAL
REPORT
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Business of Navistar Financial Corporation
- --------------------------------------------------------------------------------
Financial Highlights.......................................................... 1
President's Letter............................................................ 2
Statement of Consolidated Income and Retained Earnings........................ 5
Statement of Consolidated Financial Condition................................. 6
Statement of Consolidated Cash Flow........................................... 7
Notes to Consolidated Financial Statements.................................... 8
Statement of Financial Reporting Responsibility...............................19
Independent Auditors' Report..................................................20
Management's Discussion and Analysis..........................................21
Five Year Summary of Financial and Operating Data.............................25
Directors and Officers........................................................29
Information for Investors.....................................................30
Office Locations..............................................................31
Navistar Financial Corporation ("NFC") and subsidiaries (the "Corporation")
provide wholesale, retail, and to a lesser extent, lease financing in the
United States for sales of new and used trucks sold by its parent Company,
Navistar International Transportation Corp. ("Transportation"), and Transporta-
tion's dealers. The Corporation also finances wholesale accounts and selected
retail accounts receivable of Transportation. To a minor extent, sales of new
products (including trailers) of other manufacturers are also financed regard-
less of whether designed or customarily sold for use with Transportation truck
products. Harco National Insurance Company, NFC's wholly-owned insurance sub-
sidiary, provides commercial physical damage and liability insurance coverage
to Transportation's dealers and retail customers, and to the general public
through the independent insurance agency system.
- --------------------------------------------------------------------------------
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Dollar amounts in millions
<TABLE>
<CAPTION>
1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
FOR THE YEARS ENDED OCTOBER 31
NET INCOME
Income before taxes on income and cumulative effect of
changes in accounting policy:
Finance operations....................................... $ 47.9 $ 36.6
Insurance operations..................................... 1.1 9.8
-------- --------
Total................................................... 49.0 46.4
Taxes on income........................................... 17.7 16.9
Cumulative effect of changes in accounting policy, net of
income taxes............................................. 8.8 --
-------- --------
Total................................................... $ 22.5 $ 29.5
======== ========
DIVIDENDS PAID............................................. $ 22.6 $ 16.0
GROSS FINANCE RECEIVABLES AND LEASES ACQUIRED
Retail notes and leases................................... $ 898.4 $ 777.7
Wholesale notes........................................... 1,977.6 1,547.7
-------- --------
Total................................................... $2,876.0 $2,325.4
======== ========
GROSS INSURANCE PREMIUMS WRITTEN........................... $ 65.8 $ 69.2
CREDIT LOSS EXPERIENCE (includes sold notes)
Net losses charged off on receivables..................... $ .7 $ 3.2
Percent net losses to liquidations........................ .03% .13%
AS OF OCTOBER 31
FINANCE RECEIVABLES
Retail notes and lease financing.......................... $ 810.8 $ 951.7
Wholesale notes........................................... 259.0 128.0
Accounts.................................................. 245.1 204.3
Other notes............................................... 20.6 19.2
-------- --------
Total................................................... $1,335.5 $1,303.2
======== ========
CAPITALIZATION
Short-term bank borrowings................................ $ 75.0 $ --
Medium-term notes and debentures.......................... 297.2 396.1
Bank revolving credit..................................... 727.0 727.0
Subordinated debt......................................... 100.0 94.9
Shareowner's equity....................................... 219.4 219.5
-------- --------
Total................................................... $1,418.6 $1,437.5
======== ========
Debt to equity ratio...................................... 5.5:1 5.5:1
Senior debt to capital funds ratio........................ 3.4:1 3.6:1
NUMBER OF EMPLOYEES........................................ 339 364
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
President's Letter
- --------------------------------------------------------------------------------
An improving economy in 1993
supported by historically low in-
terest rates helped to strengthen
the customers that Navistar Finan-
cial Corporation ("NFC")
serves and to improve the quality measures of its receivables portfolio.
Industry demand for truck products improved significantly over recent years
increasing Navistar International Transportation Corporation's
("Transportation's") retail unit deliveries by 15% over 1992 and growing NFC's
serviced receivables portfolio to its highest level since 1985.
Net income for the year and return on average equity fell below recent lev-
els as NFC recorded one time charges recognizing liabilities for various
postretirement benefits, principally health care, and for a trust to partially
fund these benefits in the future. Without these charges NFC's return on equity
would have exceeded 15%, the highest in NFC's 44 year history.
During the year, major initiatives were undertaken to renew existing sources
of funding as well as to access new sources to meet the growing financing needs
of Transportation's dealers and customers. Some of the more significant funding
accomplishments and some of the more important operating accomplishments are
briefly described below.
. NFC extended the contractual commitment from its banks to November 15, 1995
for both its $727 million revolving credit facility and its $600 million
retail notes receivable purchase facility.
. In September, the Corporation positioned itself to complete its first sale of
retail notes receivable in the public market by registering $1 billion of
retail note asset-backed securities with the Securities and Exchange
Commission. On November 10, the Corporation used part of this Registration to
sell $335 million of retail notes. The asset-backed notes received the
highest credit rating from Moody's Investors Service ("Moody's") and Standard
and Poor's Corporation ("Standard and Poor's").
. In December 1993, NFC redeemed its $100 million of 11.95% subordinated debt
due December 1995 using the proceeds from a new 8 7/8% subordinated issue due
November 1998. Standard and Poor's raised its rating for the Corporation's
subordinated debt to B+ from CCC, and Moody's and Duff and Phelps confirmed
their ratings of B2 and BB, respectively.
. In October, Standard and Poor's raised its rating for the Corporation's
senior debt from B- to BB and Moody's confirmed its previous rating of Ba3.
In November, Duff and Phelps confirmed a BB+ rating.
. NFC acquired the highest dollar volume of retail financing and leases since
1984 and increased its unit share of financing and leasing of new
Transportation truck products to 15.3% from 13.7% in 1992. This share was
also the highest achieved since 1984.
. 52 of Transportation's dealerships participated with NFC in developing joint
marketing plans. The plans, which are customized to meet each dealer's needs,
are designed to increase dealer profitability through increased retail
financing business. Of the participating dealership locations, 65% increased
the percentage of units financed with NFC, increasing the number of new
trucks financed at these locations by 39% during the plan period. This
activity was initiated in 1992. The number of participants increased
significantly in 1993. We expect the number of participating dealers to
ultimately reach 100 to 150.
. Guided by its retail information strategic plan, NFC continued the re-
engineering of its retail customer information systems and processes.
Implementation of the new systems and processes, which integrate with the re-
engineered credit approval processes completed last year, will occur in the
first quarter of 1994.
. For the seventh consecutive year, the A.M. Best Company affirmed their A+
rating for Harco National Insurance Company ("Harco"), the Corporation's
wholly-owned insurance subsidiary.
1993 RESULTS
The Corporation's net income for 1993 excluding special charges increased $4
million or 13% over 1992 as a result of a higher volume of retail receivables
sold, a reduction in administrative expense caused by the increase in sold re-
tail note balances and lower credit losses. Harco's results suffered from a se-
vere deterioration in the loss experience of its
- --------------------------------------------------------------------------------
2
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
President's Letter
- --------------------------------------------------------------------------------
truck liability program. Special charges for 1993 included a $9 million net of
tax charge for the adoption of new accounting standards for retiree benefits
and income taxes and a $2 million net of tax charge representing NFC's share of
a trust and of Navistar common stock established to help pay for retiree health
care benefits in the future.
RECEIVABLES
Serviced (owned and sold) truck receivable balances totaled $2.3 billion at
October 31, 1993, up 15% from the $2 billion level of 1992 and 1991.
Gross acqui-
sitions of re-
tail notes and
leases increased
15% to $898 mil-
lion, the high-
est level in al-
most ten years.
While some of
this increase is
attributable to TRUCK RECEIVABLES
NFC's success in SERVICED
expanding its CHART APPEARS HERE
share of new In-
ternational
truck financing,
a strong U.S.
industry coupled
with Transporta-
tion's continued
leadership in
the class 5 to 8
truck markets
was the
most significant contributing factor. NFC financed or leased 15.3% of the 1993
retail unit sales of new trucks manufactured by Transportation, up from 13.7%
in 1992 and the highest penetration in almost ten years. Significant progress
was made in providing medium truck financing as Transportation dealers sup-
ported NFC's effort to provide a finance quote to each retail customer as an
alternative to their traditional sources.
Serviced wholesale note balances increased to $559 million at October 31,
1993 from $402 million a year ago as Transportation and its dealers adjusted
their respective production and wholegoods inventory to meet a strong industry
demand. NFC's wholesale note acquisitions grew to $2 billion in 1993 up from
$1.5 billion in 1992 and 1991, with turnover increasing to 3.8 times in 1993
compared to 3.5 times in 1992 and 1991. NFC continued in its role as a major
provider of wholegoods financing to Transportation's dealers by financing 90%
of new International trucks sold to dealers during 1993 and 89% in both 1992
and 1991.
With a strengthened economy and improved credit and collection processes,
credit losses in 1993, including losses on sold notes, dropped to $.7 million
which is the lowest level ever and represent only .03% of average outstanding
balances. Total losses in 1992 were a more normal $3.2 million or .16% of aver-
age outstanding balances. Year-end delinquencies of retail notes were also down
from 1992 with balances having installments past due over 60 days at .08% of
serviced retail note balances compared to .19% at October 31, 1992. These sta-
tistics underscore the financial stability of the International dealers and the
retail customers that NFC serves.
FUNDING ACTIONS
In 1993, the Corporation positioned itself to utilize a strong, reliable and
inexpensive source of funding by securing access to the public asset-backed se-
curities market. In September, a $1 billion shelf registration of securities
backed by retail notes was completed allowing NFC to sell quickly into the pub-
lic market, which it did in November 1993. In 1992, the Corporation demon-
strated its ability to access the private retail asset-backed securities market
with a $209 million sale which received the highest credit rating from Moody's
and Standard and Poor's. The Corporation also has in place a $300 million re-
volving wholesale note sales trust which provides for the continuous sale of
all eligible wholesale notes on a daily basis. The wholesale note-backed secu-
rities mature annually in $100 million tranches beginning in 1997. Access to
this variety of asset-backed markets helps to assure that NFC will be able to
provide receivable financing support for Transportation's dealers and custom-
ers.
In April, the Corporation extended its $727 million committed revolving
credit line with 21 banks to November 1995 in return for granting a security
interest to debtholders in substantially all of the Corporation's assets. The
revolving credit facility was primarily used in 1993 to finance receivables
that earn interest that varies with the prime rate. NFC's $600 million retail
receivables purchase facility with 14 of the 21 revolver banks was also ex-
tended to November 1995. With the extensions of the bank facilities and NFC's
demonstrated ability to sell asset-backed securities in both public and private
markets, we are confident that funding is available to adequately support the
marketing efforts of Transportation and its dealers.
- --------------------------------------------------------------------------------
3
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
President's Letter
- --------------------------------------------------------------------------------
Over the years, NFC has followed a dividend policy designed to maintain a
reasonable debt to equity ratio that is acceptable to its lenders. During 1993,
regular dividends of $13 million and special dividends of $10 million were paid
to Transportation, resulting in a year-end debt to equity ratio of 5.5:1, iden-
tical to year-end 1992.
INSURANCE OPERATIONS
Written and earned premiums of Harco Na-
tional Insur-
ance Company
both de-
creased 4% in
1993 from
1992. The de-
creases re-
flect manage-
ment's deci-
sions to
limit writ- INSURANCE
ings in sev- PREMIUMS
eral states WRITTEN AND
in response EARNED
to recent CHART APPEARS HERE
loss experi-
ence and in-
creased com-
petition.
Several
large, well
capitalized
insurance
companies
have recently
entered the
truck physi-
cal damage
and liability
marketplace
creating ex-
cess capacity for these product lines and thereby limiting Harco's opportunity
to adjust pricing to experience.
Incurred losses for 1993 as a percent of earned premiums increased 9 per-
centage points over 1992 as a result of increased claim activity in Harco's
truck physical damage and liability insurance lines. Loss experience in 1993
was particularly bad in several states and action has been taken to be more se-
lective in writing truck liability in these jurisdictions.
Investment income decreased from lower gains on sales of marketable securi-
ties, lower investment yields and a lower average investment balance. The in-
vestment portfolio at October 31, 1993 was $126 million, down 3% from 1992.
Harco's investment portfolio had an estimated market value of $132 million.
Pretax income for Harco was $1.1 million for 1993 compared to $9.8 million
for the prior two years. Although competition and low interest rates will con-
tinue to pressure Harco's earnings in 1994, pretax income should increase as
actions taken in 1993 to improve operating results begin to take effect.
Gradual growth of the U.S. economy is likely in 1994, which will continue to
improve market conditions for the truck industry. Retail acquisitions should
again be strong, as NFC further develops its dealer sales and fleet finance
programs. Retail portfolio yield will decrease in 1994 as the portfolio contin-
ues to reprice to current interest rates. The lower retail yield will impact
retail margin and gains on sales of retail notes compared to 1993.
As we move into 1994, we will pursue strategies to increase our share of new
International truck retail financing, to maintain sound credit and underwriting
standards and to improve the quality and efficiency of the customer service
that we provide.
NFC values its relationships with its employees, its customers and its lend-
ers. The successes we realized in 1993 could not have been accomplished without
their dedication, support and loyalty. We look forward to 1994 and the chal-
lenges of better serving our customers.
/s/ John J. Bongiorno
- ---------------------
John J. Bongiorno
President and Chief Executive Officer
(PHOTO OF JOHN J. BONGIORNO APPEARS HERE)
- --------------------------------------------------------------------------------
4
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Statement of Consolidated Income and Retained Earnings
- --------------------------------------------------------------------------------
Millions of dollars
<TABLE>
<CAPTION>
Note
For the years ended October 31 1993 1992 1991 Reference
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Retail notes and lease financing............... $101.9 $100.7 $109.6
Wholesale notes................................ 32.0 28.3 36.6
Accounts....................................... 17.5 14.8 19.2
Insurance premiums earned...................... 57.4 59.9 51.7
Marketable securities.......................... 11.4 16.0 10.3
------ ------ ------
Total........................................ 220.2 219.7 227.4
------ ------ ------
EXPENSES
Cost of borrowing:
Interest expense.............................. 74.6 82.2 90.3 Note 8
Other......................................... 4.7 4.5 5.9
------ ------ ------
Total........................................ 79.3 86.7 96.2
Supplemental Trust expense..................... 3.7 -- -- Note 9
Credit, collection and administrative.......... 15.5 18.2 19.2
Provision for losses on receivables............ 1.5 3.6 5.8 Note 6
Insurance claims and underwriting.............. 65.2 61.7 50.6
Other expense, net............................. 6.0 3.1 2.4
------ ------ ------
Total........................................ 171.2 173.3 174.2
------ ------ ------
INCOME BEFORE TAXES ON INCOME AND CUMULATIVE EF-
FECT OF CHANGES IN ACCOUNTING POLICY........... 49.0 46.4 53.2
TAXES ON INCOME................................. 17.7 16.9 20.2 Note 7
------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING POLICY.............................. 31.3 29.5 33.0
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING POLI-
CY............................................. 8.8 -- -- Note 9
------ ------ ------
NET INCOME...................................... 22.5 29.5 33.0
RETAINED EARNINGS
Beginning of year.............................. 48.5 35.0 76.0
Dividends paid................................. (22.6) (16.0) (74.0)
------ ------ ------
End of year.................................... $ 48.4 $ 48.5 $ 35.0 Note 11
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
5
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Statement of Consolidated Financial Condition
- --------------------------------------------------------------------------------
Millions of dollars
<TABLE>
<CAPTION>
Note
As of October 31 1993 1992 Reference
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS........................ $ 33.9 $ 79.2
MARKETABLE SECURITIES............................ 125.6 130.5 Note 4
RECEIVABLES
Finance receivables............................. 1,335.5 1,303.2 Note 5
Allowance for losses............................ (12.0) (12.4) Note 6
-------- --------
Receivables, net............................... 1,323.5 1,290.8
AMOUNTS DUE FROM SALES OF RECEIVABLES............ 75.5 40.7 Note 5
EQUIPMENT ON OPERATING LEASES, NET............... 25.1 16.0
REPOSSESSIONS.................................... 1.8 5.5
OTHER ASSETS..................................... 39.8 46.0
-------- --------
TOTAL ASSETS .................................... $1,625.2 $1,608.7
======== ========
LIABILITIES AND SHAREOWNER'S EQUITY
SHORT-TERM BANK BORROWINGS....................... $ 75.0 $ -- Note 8
ACCOUNTS PAYABLE................................. 77.3 46.7
ACCRUED INCOME TAXES............................. 3.1 3.2
ACCRUED INTEREST................................. 14.4 20.5
SENIOR AND SUBORDINATED DEBT..................... 1,124.2 1,218.0 Note 8
DEALERS' RESERVES................................ 17.3 17.0
UNPAID INSURANCE CLAIMS AND UNEARNED PREMIUMS.... 94.5 83.8
SHAREOWNER'S EQUITY Note 11
Capital stock (Par value $1.00, 1,600,000 shares
issued and outstanding) and paid-in capital.... 171.0 171.0
Retained earnings............................... 48.4 48.5
-------- --------
Total.......................................... 219.4 219.5
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY........ $1,625.2 $1,608.7
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
6
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Statement of Consolidated Cash Flow
- --------------------------------------------------------------------------------
Millions of dollars
<TABLE>
<CAPTION>
Note
For the years ended October 31 1993 1992 1991 Reference
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATIONS
Net income..................................... $ 22.5 $ 29.5 $ 33.0
Adjustments to reconcile net income to cash
provided from operations:
Gains on sales of receivables................. (14.6) (6.0) (5.4) Note 5
Depreciation and amortization................. 9.7 8.1 5.3
Provision for losses on receivables........... 1.5 3.6 5.8 Note 6
Cumulative effect of changes in accounting
policy....................................... 8.8 -- --
Supplemental Trust expense.................... 3.7 -- --
Increase (decrease) in accounts payable and
accrued liabilities.......................... (1.8) (22.6) .8
Increase in deferred income taxes............. 3.7 2.8 1.0
Increase (decrease) in accounts payable to af-
filiated companies........................... 14.3 5.9 (12.3)
Increase in unpaid insurance claims and un-
earned premiums.............................. 10.7 3.6 9.5
Other......................................... (3.2) (12.4) (15.6)
------ ------ ------
Total........................................ 55.3 12.5 22.1
------ ------ ------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of retail notes and lease receiv-
ables........................................ (770.2) (658.6) (619.2)
Principal collections on retail notes and
lease receivables............................ 337.4 409.3 309.6
Proceeds from sold retail notes............... 558.2 249.2 236.3
Acquisitions under (over) cash collections of
wholesale notes and
accounts receivable.......................... (171.9) (85.2) 355.7
Purchase of marketable securities............. (58.1) (85.7) (63.0)
Proceeds from sales of marketable securities.. 64.8 76.9 47.0
Increase in property and equipment leased to
others....................................... (14.2) (3.9) (12.8)
------ ------ ------
Total........................................ (54.0) (98.0) 253.6
------ ------ ------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in bank revolving credit facili-
ty........................................... -- 507.0 220.0
Principal payments on term debt............... (99.0) (158.5) (90.0)
Net decrease in commercial paper.............. -- (143.8) (414.3)
Net increase (decrease) in short-term bank
borrowings................................... 75.0 (40.0) (30.0)
Dividends paid to Transportation.............. (22.6) (16.0) (74.0)
Proceeds from issuance of term debt........... -- -- 117.5
------ ------ ------
Total........................................ (46.6) 148.7 (270.8)
------ ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS.......................................... (45.3) 63.2 4.9
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.. 79.2 16.0 11.1
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR........ $ 33.9 $ 79.2 $ 16.0
====== ====== ======
Supplementary disclosure of cash flow informa-
tion:
Interest paid................................. $ 79.3 $ 79.9 $ 85.7
Income taxes paid............................. 13.5 18.9 20.0
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
7
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Three Years Ended October 31, 1993
Millions of dollars
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Navistar Fi-
nancial 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 In-
ternational Corporation ("Navistar").
Revenue on Receivables
Finance charges on retail notes and finance leases are recognized as income
over the term of the receivables on the accrual basis utilizing the actuarial
method. Interest from interest-bearing notes and accounts is taken into income
on the accrual basis.
Allowance for Losses on Receivables
The Corporation's allowance for losses on receivables is maintained at an
amount management considers appropriate in relation to the outstanding receiv-
ables portfolio. Receivables are charged off to the allowance for losses as
soon as they are determined to be uncollectible based on a note-by-note review,
after all prelitigation collection efforts have been exhausted.
Repossessions are carried at the lower of the unpaid net receivable balance
or estimated realizable value of the equipment.
Receivable Sales
The Corporation sells and securitizes receivables to public and private in-
vestors with limited recourse. The Corporation continues to service the receiv-
ables, for which a servicing fee is received. Gains or losses on sales of re-
ceivables are credited or charged to financing revenue in the period in which
the sale occurs.
Insurance Operations
Insurance premiums are earned on a pro rata basis over the terms of the pol-
icies. Commission costs and premium taxes incurred in acquiring business are
deferred and amortized on the same basis as such premiums are earned. The lia-
bility for unpaid insurance claims includes provisions for reported claims and
an estimate of unreported claims based on past experience. Such provisions in-
clude an estimate of loss adjustment expense.
Income Taxes
The tax effect of each item of revenue or expense reported in the Statement
of Consolidated Income and Retained Earnings is recognized in the current pe-
riod regardless of when the related tax is paid. Navistar and its subsidiaries
file a consolidated Federal income tax return which includes Transportation and
the Corporation. Federal income taxes for the Corporation are computed on a
separate consolidated return basis and are payable to Transportation.
Cash and Cash Equivalents
Cash and cash equivalents include money market funds and marketable securi-
ties with original maturities of three months or less, except for such securi-
ties held by the insurance operations which are included in marketable securi-
ties.
Reclassification
Certain 1992 and 1991 amounts have been reclassified to conform with the
presentation used in the 1993 financial statements.
Changes in Accounting Policy
In the third quarter of fiscal 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") and Statement of Financial Accounting Standards No. 106, "Employers' Ac-
counting for Postretirement Benefits Other Than Pensions" ("SFAS 106") retroac-
tive to November 1, 1992. Disclosures relating to SFAS 109 and SFAS 106 are
provided in notes 7 and 9, respectively. The cumulative effect of adopting
these changes in accounting policy retroactive to November 1, 1992 resulted in
an after tax charge to income of $8.8 in the first quarter of fiscal 1993. The
effect of adopting these changes was not material to the financial results of
the second quarter of fiscal 1993. Periods prior to November 1, 1992 are not
required to be restated for the changes in accounting policy. See note 14 for
the restated quarterly financial information.
- --------------------------------------------------------------------------------
8
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
New Accounting Pronouncements
In December 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"),
which is applicable to the Corporation's wholly-owned insurance subsidiary,
Harco National Insurance Company. This statement eliminates the practice of re-
porting liabilities relating to reinsured contracts net of the effects of rein-
surance. It requires reinsurance receivables (including amounts related to un-
paid insurance claims) and prepaid reinsurance premiums to be reported as as-
sets. This statement will be adopted in fiscal year 1994. The Corporation has
not yet determined the impact of SFAS 113 on the financial statements.
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). This statement establishes financial accounting and reporting standards
for investments in equity securities that have readily determinable fair values
and for all investments in debt securities. Upon adoption of SFAS 115, the Cor-
poration's Statement of Consolidated Financial Condition classification of cash
equivalents and marketable securities will not change and the requirements of
SFAS 115 will be met through revised footnote disclosure. The effective date
for this new standard is for fiscal years beginning after December 15, 1993, or
fiscal 1995 for the Corporation. The Corporation has not yet determined the im-
pact on the financial statements nor when it will adopt SFAS 115.
2. TRANSACTIONS WITH AFFILIATED COMPANIES
The Corporation's primary business is the retail, wholesale, and to a lesser
extent, lease financing of products sold by Transportation and its dealers
within the United States.
Wholesale Notes, Wholesale Accounts and Retail Accounts Revenue
In accordance with the agreements between the Corporation and Transportation
relating to financing of wholesale notes, wholesale accounts and retail ac-
counts, 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 of dealers from
Transportation at the principal amount of the receivables. An acquisition fee
applicable to purchases of wholesale notes secured by new equipment is charged
to Transportation. The retail accounts are accounts of Transportation custom-
ers. Revenue collected from Transportation for wholesale notes, wholesale and
retail accounts and leases was $41.2 in 1993, $38.6 in 1992 and $41.4 in 1991.
Support Agreements
Under provisions of certain public and private financing arrangements,
agreements with Transportation and Navistar provide that the Corporation's con-
solidated income before interest expense and income taxes will be maintained at
not less than 125% of its consolidated interest expense. Since 1984, no mainte-
nance payments have been required under these agreements.
Administrative Expenses
The Corporation pays a fee to Transportation for data processing and other
services. The amount of the fee was $2.3 in 1993, $2.6 in 1992 and $2.4 in
1991.
Accounts Payable/Receivable
Accounts payable at October 31, 1993 include $19.5 payable to Transporta-
tion. Other assets at October 31, 1992 include $.8 due from Transportation.
3. INDUSTRY SEGMENTS
The Corporation is engaged in two industry segments in the United States:
finance and insurance. The Corporation provides wholesale, retail and lease fi-
nancing for the sales of new and used trucks and related equipment by Transpor-
tation and its dealers. To a lesser extent, the Corporation also finances other
commercial vehicles, primarily trailers, sold by independent dealers. Harco Na-
tional 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 the independent
insurance agency system.
- --------------------------------------------------------------------------------
9
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
Information by industry segment is summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Finance operations................................. $ 152.5 $ 146.9 $ 166.3
Insurance operations............................... 67.7 72.8 61.1
-------- -------- --------
Total revenue..................................... $ 220.2 $ 219.7 $ 227.4
======== ======== ========
Income before taxes on income and cumulative effect
of changes in accounting policy:
Finance operations................................. $ 47.9 $ 36.6 $ 43.5
Insurance operations............................... 1.1 9.8 9.7
-------- -------- --------
Total income before taxes on income and cumulative
effect of changes in accounting policy........... $ 49.0 $ 46.4 $ 53.2
======== ======== ========
Assets at end of year:
Finance operations................................. $1,473.5 $1,459.2 $1,310.3
Insurance operations............................... 151.7 149.5 137.8
-------- -------- --------
Total assets at end of year....................... $1,625.2 $1,608.7 $1,448.1
======== ======== ========
</TABLE>
4. MARKETABLE SECURITIES
Marketable securities at October 31, 1993 and 1992 consist of investments in
debt securities and are carried at amortized cost. The following table sets
forth, by type of security issuer, the amortized cost and estimated market val-
ues at October 31, 1993 and 1992:
<TABLE>
<CAPTION>
GROSS GROSS
UNREAL- UNREAL- ESTIMATED
AMORTIZED IZED IZED MARKET
OCTOBER 31, 1993 COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and federal agency securi-
ties...................................... $ 70.1 $4.4 $-- $ 74.5
Foreign governments........................ 1.6 .1 -- 1.7
Corporate securities....................... 17.8 .6 -- 18.4
Mortgage- and asset-backed securities...... 36.1 1.3 -- 37.4
------ ---- --- ------
Total.................................... $125.6 $6.4 $-- $132.0
====== ==== === ======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Unreal- Unreal- Estimated
Amortized ized ized Market
October 31, 1992 Cost Gains Losses Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and federal agency securi-
ties...................................... $ 61.1 $2.5 $.1 $ 63.5
Foreign governments........................ 1.6 .1 -- 1.7
Corporate securities....................... 29.1 .7 -- 29.8
Mortgage- and asset-backed securities...... 38.7 .9 .1 39.5
------ ---- --- ------
Total.................................... $130.5 $4.2 $.2 $134.5
====== ==== === ======
</TABLE>
The gross unrealized gains at October 31, 1993 are not expected to be real-
ized as a significant portion of the marketable securities are intended to
- --------------------------------------------------------------------------------
10
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
be held to maturity. The amortized cost and estimated market values at October
31, 1993, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less.................................... $ 4.7 $ 4.7
Due after one year through five years...................... 61.6 64.9
Due after five years through ten years..................... 23.0 24.8
Due after ten years........................................ .2 .2
------ ------
89.5 94.6
Mortgage- and asset-backed securities...................... 36.1 37.4
------ ------
Total.................................................... $125.6 $132.0
====== ======
</TABLE>
Proceeds from sales or maturities of debt securities were $64.8 during 1993
and $76.9 during 1992. Gross gains of $1.3 and $3.1 and gross losses of $.2 and
$.1 were realized on those sales or maturities in 1993 and 1992, respectively.
All marketable securities at October 31, 1993 and 1992 were held by Harco
National Insurance Company, of which $26.5 and $19.7, respectively, were on de-
posit 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:
<TABLE>
<CAPTION>
1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
Retail notes and lease financing:
Truck....................................................... $ 810.8 $ 951.7
Other....................................................... 20.6 19.2
-------- --------
Total...................................................... 831.4 970.9
-------- --------
Wholesale notes.............................................. 259.0 128.0
-------- --------
Accounts:
Retail...................................................... 200.9 163.1
Wholesale................................................... 44.2 41.2
-------- --------
Total...................................................... 245.1 204.3
-------- --------
Total finance receivables................................. $1,335.5 $1,303.2
======== ========
</TABLE>
Contractual maturities of finance receivables including unearned finance in-
come at October 31, 1993 are summarized as follows:
<TABLE>
<CAPTION>
Retail Wholesale Accounts
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Due in:
1994................................................ $337.1 $144.6 $245.1
1995................................................ 248.6 114.2 --
1996................................................ 173.2 .2 --
Due after 1996....................................... 165.6 -- --
------ ------ ------
Gross finance receivables........................... 924.5 259.0 245.1
Unearned finance income.............................. 93.1 -- --
------ ------ ------
Total finance receivables.......................... $831.4 $259.0 $245.1
====== ====== ======
</TABLE>
The actual cash collections from finance receivables will vary from the con-
tractual cash flows because of sales, prepayments, extensions and renewals. The
contractual maturities, therefore, should not be regarded as a forecast of fu-
ture collections.
The Corporation sells finance receivables to public and private investors
with limited recourse provisions. Uncollected sold receivable net balances at
October 31 are as follows:
<TABLE>
<CAPTION>
1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C>
Retail notes...................................................... $539.4 $259.1
Wholesale notes................................................... 300.0 274.3
------ ------
Total........................................................... $839.4 $533.4
====== ======
</TABLE>
Gains on sales of finance receivables are summarized below:
<TABLE>
<CAPTION>
1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Retail notes.................................................... $14.2 $5.5 $4.5
Wholesale notes................................................. .4 .5 .9
----- ---- ----
Total......................................................... $14.6 $6.0 $5.4
===== ==== ====
</TABLE>
The "Amounts Due From Sales of Receivables" primarily represents holdback
reserves established pursuant to the limited recourse provisions of certain re-
tail note sales. The Corporation's maximum exposure under all receivable sale
recourse provisions at October 31, 1993 is $129.7 which includes holdback re-
serves of $69.4, subordinated retained interest in
- --------------------------------------------------------------------------------
11
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
securitized receivable sales of $54.4 and certain cash deposits established
pursuant to securitized receivables recourse provisions of $5.9. The Corpora-
tion has included an allowance for estimated losses on sold receivables of $2.8
and $1.6 in 1993 and 1992, respectively. The allowance is determined on a basis
consistent with owned receivables and is included in "Amounts Due From Sales of
Receivables" in the Statement of Consolidated Financial Condition.
The securitized sales structures also require the Corporation to maintain
funds for payment of principal and/or interest to the investors in the event
that collections on the securitized notes are less than required. The Corpora-
tion's other assets at October 31, 1993 and 1992 include $9.6 of deposits held
by the sales trusts and are restricted for use by the securitized sales agree-
ments.
6. ALLOWANCE FOR LOSSES
The allowance for losses on receivables is summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total allowance for losses at beginning of year............ $14.0 $13.6 $13.6
Provision for losses....................................... 1.5 3.6 5.8
Net losses charged to
allowance................................................. (.7) (3.2) (5.8)
----- ----- -----
Total allowance for losses at end of year................ $14.8 $14.0 $13.6
===== ===== =====
Allowance pertaining to:
Owned notes............................................... $12.0 $12.4 $11.7
Sold notes................................................ 2.8 1.6 1.9
----- ----- -----
Total.................................................... $14.8 $14.0 $13.6
===== ===== =====
</TABLE>
7. TAXES ON INCOME
During fiscal 1993, the Corporation adopted SFAS 109 "Accounting for Income
Taxes." Under SFAS 109, deferred tax assets and liabilities are generally de-
termined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. SFAS 109 generally allows recog-
nition of deferred tax assets if future realization is more likely than not.
Taxes on income are summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal..................................................... $12.0 $12.7 $17.4
State and local............................................. 2.0 1.4 1.8
----- ----- -----
Total current.............................................. 14.0 14.1 19.2
Deferred (primarily Federal)................................. 3.7 2.8 1.0
----- ----- -----
Total...................................................... $17.7 $16.9 $20.2
===== ===== =====
</TABLE>
The effective tax rate of 36% in 1993 and 1992 and 38% in 1991 differs from
the statutory United States Federal tax rate of 35% in 1993 and 34% in 1992 and
1991 primarily because of state and local income taxes. Deferred tax assets and
liabilities at October 31, 1993 and 1992 are comprised of the following:
<TABLE>
<CAPTION>
1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Other postretirement benefits....................................... $2.7 $ --
Deferred tax liabilities:
Depreciation and other.............................................. 2.7 1.7
---- ----
Net deferred tax liabilities....................................... $ -- $1.7
==== ====
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
8. DEBT
Debt outstanding at October 31 is summarized as follows:
<TABLE>
<CAPTION>
1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
Short-term bank borrowings................................. $ 75.0 $ --
Bank revolving credit, at variable rates, due November
1995...................................................... 727.0 727.0
Senior term debt:
Debentures:
7 5/8%, due February 1993................................ -- 60.0
7 1/2%, due January 1994................................. 75.0 75.0
Notes, medium-term, 9.35% to 9.75%, due 1994 to 1996...... 222.5 261.5
Unamortized discount...................................... (.3) (.4)
-------- --------
Total senior term debt.................................. 297.2 396.1
-------- --------
Subordinated term debt:
Debentures, 11.95%, due December 1995..................... 100.0 100.0
Unamortized discount...................................... -- (5.1)
-------- --------
Total subordinated term debt............................ 100.0 94.9
-------- --------
Total debt............................................. $1,199.2 $1,218.0
======== ========
</TABLE>
Information regarding commercial paper and short-term bank borrowings is as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate obligations outstanding:
Daily average........................................... $ .6 $ 56.2 $376.3
Maximum month-end balance............................... $75.0 $203.3 $563.2
Weighted average interest rate:
On average daily borrowing.............................. 6.5% 5.5% 7.1%
At October 31........................................... 6.5% -- 6.0%
</TABLE>
The weighted average interest rate on total debt was 6.6%, 7.6% and 8.7% in
1993, 1992 and 1991, respectively. At October 31, 1992, all of the Corpora-
tion's term debt was at a fixed rate of interest. The aggregate annual maturi-
ties and required payments of debt are as follows: 1994, $80; 1995, $100; and
1996, $945.
At October 31, 1993, the Corporation had $1,327 of committed credit facili-
ties. These facilities consisted of a contractually committed bank revolving
credit facility of $727 and a contractually committed retail notes receivable
purchase facility of $600. In April 1993, the Corporation amended and restated
the credit and purchase facility agreements extending the maturity date of both
facilities to November 15, 1995, and the restated credit facility granted secu-
rity interests in substantially all of the Corporation's assets to the Corpora-
tion's debtholders.
Unused commitments under the credit and purchase facilities were $157, $75
of which was used as funding backup for the $75 short-term bank borrowings at
October 31, 1993. The remaining $82 when combined with unrestricted cash and
cash equivalents made $105 available to fund the general business purposes of
the Corporation at October 31, 1993. Compensating cash balances are not re-
quired under the revolving credit facility, but commitment fees are paid on the
unused portions of the bank revolving credit and retail notes receivable pur-
chase facilities. The Corporation also pays a facility fee on the $600 retail
notes receivable purchase facility.
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 re-
ceivables, respectively, and transferring an undivided ownership interest in
such notes to investors in exchange for pass-through notes and certificates.
These subsidiaries have limited recourse on the sold receivables and their as-
sets are available to satisfy the claims of their creditors prior to such as-
sets becoming available to the Corporation or affiliated companies. At October
31, 1993, NFSC had in place a $300 revolving wholesale note sales trust provid-
ing for the continuous sale of eligible wholesale notes on a daily basis. The
sales trust is comprised of three $100 pools of notes maturing serially from
1997 to 1999. On September 16, 1993, NFRRC filed a shelf registration with the
Securities and Exchange Commission providing for the issuance from time to time
of $1,000 of asset-backed securities. On November 10, 1993, the Corporation
sold $335 of retail notes through NFRRC to an owner
- --------------------------------------------------------------------------------
13
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
trust which, in turn, sold to investors $323 of notes and $12 of certificates.
The net proceeds of $334 were used by the Corporation for general working capi-
tal purposes and to establish a $25 reserve account with the trust.
On November 16, 1993, the Corporation sold $100 of 8 7/8% Senior Subordi-
nated Notes due 1998 and used the proceeds to redeem its 11.95% Subordinated
Debentures due December 1995 on December 16, 1993. The Corporation also re-
deemed its 7 1/2% Senior Debentures due January 1994 on December 15, 1993.
9. RETIREMENT BENEFITS
The Corporation has a pension plan covering substantially all of its employ-
ees. The plan is non-contributory and benefits are related to an employee's
length of service and compensation rate.
Funding of the plan is in compliance with the Employee Retirement Income Se-
curity Act. For the plan year which ended during the current fiscal year, the
funding obligation of the plan has been fulfilled. Plan assets are primarily
invested in a dedicated portfolio of long-term fixed-income securities.
In addition to providing pension benefits, the Corporation provides health
care and life insurance for a majority of its retired employees. For most re-
tirees, these benefits are defined by the terms of an agreement between
Navistar and its employees, retirees and collective bargaining organizations
which provides for postretirement health care and life insurance benefits ("the
Plan"). The Plan, which was implemented on July 1, 1993, provides for cost
sharing between Navistar and retirees in the form of premiums, co-payments and
deductibles. A Base Program Trust was established to provide a vehicle for
funding of the health care liability through Navistar contributions and retiree
premiums. A separate independent Retiree Supplemental Benefit Program was also
established to potentially reduce retiree premiums, co-payments and deductibles
and provide additional benefits in the future. During 1993, the Corporation
agreed to contribute $3.7 to the Supplemental Benefit Trust as its portion of
the Navistar liability.
Pension Expense
Net pension cost includes the following:
<TABLE>
<CAPTION>
1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period............... $ .6 $ .6 $ .7
Interest cost on projected benefit obligation................ 2.8 2.7 2.5
Return on assets--actual gain................................ (8.4) (2.8) (6.4)
--deferred gain (loss)................................ 5.2 (.3) 3.8
Other costs (including
amortization of transition amount).......................... .1 .3 .4
---- ---- ----
Net pension cost........................................... $ .3 $ .5 $1.0
==== ==== ====
</TABLE>
The unrecognized net obligation as of the transition date is being amortized
on a straight-line basis over 15 years. The effect of plan amendments is amor-
tized over the remaining average service life of active employees.
- --------------------------------------------------------------------------------
14
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
Pension Assets and Liabilities
The plan's funded status and reconciliation to the Statement of Consolidated
Financial Condition as of October 31 were as follows:
<TABLE>
<CAPTION>
1993 1992
------------------ --------
PLAN ACCUMU- Plan
ASSETS LATED Assets
EXCEED BENEFITS Exceed
ACCUMU- EXCEED Accumu-
LATED PLAN lated
BENEFITS ASSETS Benefits
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of:
Vested benefits................................. $(32.8) $(1.9) $(27.8)
Non-vested benefits............................. (2.4) (.1) (2.9)
------ ----- ------
Accumulated benefit obligation................. (35.2) (2.0) (30.7)
Effect of projected future compensation levels.. (3.5) -- (3.0)
------ ----- ------
Total projected benefit obligation............ (38.7) (2.0) (33.7)
Plan assets at fair value........................ 39.8 -- 33.3
------ ----- ------
Funded status at October 31..................... 1.1 (2.0) (.4)
Unrecognized net losses (gains).................. (.8) .2 .8
Unrecognized plan amendments..................... .6 -- .7
Unrecognized net obligation as of transition
date............................................ .2 -- .2
------ ----- ------
Net prepaid pension cost ..................... $ 1.1 $(1.8) $ 1.3
====== ===== ======
</TABLE>
For 1993 and 1992, the projected benefit obligation was determined using a
discount rate of 6.7% and 8.1%, respectively, a projected long-term rate of
compensation increase of 3.5% and 5.5%, respectively, and an assumed long-term
rate of return on plan assets of 10.0%.
Postretirement Benefits Other Than Pensions
During 1993, the Corporation adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", retroactive to November 1, 1992.
SFAS 106 requires the accrual of the expected cost of providing postretirement
benefits during employees' active service periods. The Corporation's previous
practice was to charge the cost of these benefits against operations on a pay-
as-you-go basis. The adoption of SFAS 106 does not affect cash flow, but it
does change the timing of the recognition of costs. Under provisions of SFAS
106, prior years have not been restated.
The Corporation elected to recognize the SFAS 106 transition obligation as a
one-time non-cash charge to earnings. The cumulative effect of this change in
accounting policy, as of November 1, 1992, was $8.8, net of income taxes of
$5.4.
The components of expense under SFAS 106 for postretirement benefits other
than pensions that are included in the Statement of Consolidated Income and Re-
tained Earnings for 1993 include the following:
<TABLE>
<CAPTION>
Postretirement Benefits Other Than Pensions: 1993
- --------------------------------------------------------------------------------
<S> <C>
Service cost--benefits earned during the year.............................. $.3
Interest cost on the accumulated benefit obligation........................ .6
---
Total cost of postretirement benefits other than pensions................ $.9
===
</TABLE>
Postretirement benefit cost charged to expense in the comparable periods in
prior years was accounted for under the previous accounting policy and has not
been restated.
The components of the liability for postretirement benefits other than pen-
sions as of October 31, 1993, were as follows:
<TABLE>
<CAPTION>
Accumulated Postretirement Benefit Obligation: 1993
- ---------------------------------------------------------------------------------
<S> <C>
Retirees and their dependents............................................... $4.6
Active employees eligible to retire......................................... 1.3
Other active participants................................................... 2.7
----
Accumulated postretirement benefit obligation (APBO)........................ 8.6
Plan assets at fair value................................................... 2.4
----
APBO in excess of plan assets............................................... 6.2
Unrecognized net loss....................................................... .8
----
Net liability recognized on the Statement of Consolidated Financial Condi-
tion..................................................................... $5.4
====
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
The discount rate used to determine the accumulated postretirement benefit
obligation at October 31, 1993, was 7.5%, based on an estimated yield available
on high-quality fixed income securities which could be purchased to effectively
settle the obligation. As interest rates have declined, inflation rates and
their effect on future health care cost trend rates have been contained and are
experiencing a downward trend. Combined with internal containment programs and
the government program on national health care, the period to reach an ultimate
ongoing rate of increase may also shorten. For 1994, the weighted average rate
of increase in the per capita cost of covered medical benefits is projected to
be 10.5% for participants under the age of 65 and 8.5% for participants age 65
or over. The rate of increase for drugs is projected to be 11.5% for all par-
ticipants. The rates decrease on an annual basis to 5.0% in the year 2002 and
remain at that level each year thereafter. If the cost trend rate assumptions
were increased by one percentage point for each year, the accumulated
postretirement benefit obligation would increase by approximately $1.1 and the
associated expense recognized for the year ended October 31, 1993 would in-
crease by an estimated $.1.
10. LEASES
The Corporation is obligated under noncancelable operating leases for the
majority of its office facilities and equipment. These leases are generally re-
newable and provide that property taxes and maintenance costs are to be paid by
the lessee. At October 31, 1993, future minimum lease commitments under noncan-
celable operating leases with remaining terms in excess of one year are as fol-
lows:
<TABLE>
<CAPTION>
Year Ended October 31,
- --------------------------------------------------------------------------------
<S> <C>
1994....................................................................... $1.7
1995....................................................................... 1.5
1996....................................................................... 1.4
1997....................................................................... 1.3
1998....................................................................... 1.3
Thereafter................................................................. 2.6
----
Total..................................................................... $9.8
====
</TABLE>
11. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of October 31, 1993 and
1992 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, con-
versions and other rights. Effective with the decline in the Corporation's debt
ratings in February 1992, ordinary dividends to Transportation are limited by
the bank revolving credit agreement to 50% of cumulative net income measured
quarterly beginning February 1, 1992. Under this provision at October 31, 1993,
$2.0 was available for ordinary dividends to Transportation in the first quar-
ter of fiscal 1994 or thereafter.
As discussed in note 8, the Corporation amended and restated its credit fa-
cility in April 1993. The restated credit facility permitted the Corporation to
declare special dividends to Transportation in an aggregate amount not to ex-
ceed $20 upon the effectiveness of a final settlement in the retiree health
care litigation. The implementation of a settlement agreement on July 1, 1993
which restructured postretirement health care and life insurance benefits, as
discussed in note 13, resulted in a $5 special dividend payment on July 31,
1993 and on September 24, 1993. At October 31, 1993, $10 was available for spe-
cial dividends to Transportation.
12. FINANCIAL INSTRUMENTS
During fiscal 1993, the Corporation adopted Statement of Financial Account-
ing Standards No. 107, "Disclosures about Fair Value of Financial Instruments"
("SFAS 107"). This statement requires disclosure of the fair value of financial
instruments, whether recognized or not recognized in the Statement of Consoli-
dated Financial Condition, for which it is practicable to estimate that value.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and Cash Equivalents
The carrying amount approximates fair value.
Marketable Securities
Fair value is estimated based on quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted mar-
ket prices for similar financial instruments. The fair value of marketable se-
curities held by insurance affiliates at
- --------------------------------------------------------------------------------
16
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
October 31, 1993 is disclosed, as required, in note 4 and included below.
Finance Receivables
The fair value of truck retail notes is estimated based on quoted market
prices of similar receivables sold in conjunction with securitization transac-
tions or in the principal-to-principal market, adjusted for differences in mar-
ket conditions. For other retail notes, primarily variable-rate notes that
reprice frequently, and for wholesale notes and retail and wholesale accounts,
the carrying amounts approximate fair value.
Amounts Due from Sales of Receivables
Fair values for holdbacks due from purchasers of retail notes and for excess
servicing fees receivable are estimated by discounting the expected future cash
flows at the Corporation's incremental borrowing rate.
Senior and Subordinated Debt
For variable-rate borrowings under the bank revolving credit agreement that
reprice frequently, the carrying amount approximates fair value. The fair val-
ues of notes and debentures are estimated based on quoted market prices where
available and, where not available, on quoted market prices of debt with simi-
lar characteristics.
The carrying amounts of financial instruments as reported in the Statement
of Financial Condition and described in the various notes to the financial
statements and their fair values at October 31, 1993 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents................................... $ 33.9 $ 33.9
Marketable securities....................................... 125.6 132.0
Finance receivables:
Truck retail notes......................................... 752.9 764.5
Wholesale notes............................................ 259.0 259.0
Accounts................................................... 245.1 245.1
Amounts due from sales of receivables....................... 75.5 81.1
Financing liabilities
Senior and subordinated debt................................ $1,124.2 $1,138.0
</TABLE>
13. LEGAL PROCEEDINGS
Retiree Health Care Litigation
In July 1992, Navistar announced its decision to change its retiree health
care benefit plans and concurrently filed a declaratory judgment class action
lawsuit to confirm its right to change these benefits in the U.S. District
Court for the Northern District of Illinois ("Illinois Court"). A countersuit
was subsequently filed against Navistar by its unions in the U.S. District
Court for the Southern District of Ohio. On October 16, 1992, Navistar withdrew
its declaratory judgment action in the Illinois Court and began negotiations
with the United Automobile, Aerospace and Agricultural Implement Workers of
America ("UAW") to resolve issues affecting both retirees and employees. On De-
cember 17, 1992, Navistar announced that a tentative agreement had been reached
with the UAW on restructuring retiree health care and life insurance benefits
("the Settlement Agreement"). During the third quarter of fiscal 1993, all
court, regulatory agency and shareowner approvals required to implement the
Settlement Agreement concerning retiree health care benefit plans were ob-
tained. The Settlement Agreement became effective and the restructured retiree
health care and life insurance plan was implemented on July 1, 1993.
Vernon Klein Case
In May 1993, a jury issued a verdict in favor of Vernon Klein Truck & Equip-
ment, Inc. and against Transportation and the Corporation in the amount of
$10.8 in compensatory damages and $15 in punitive damages. The amount of any
potential liability is uncertain and Transportation and the Corporation believe
that there are meritorious arguments for overturning or diminishing the verdict
on appeal.
14. QUARTERLY FINANCIAL INFORMATION (unaudited)
As discussed in note 1, during the third quarter of 1993, the Corporation
adopted SFAS 106 and SFAS 109 retroactive to November 1, 1992. As required, the
previously reported results for the first quarter of 1993 have been restated.
The effect of adopting these changes was not material to the financial results
of the second quarter of 1993. Periods prior to November 1, 1992 are not re-
quired to be restated for the accounting changes.
- --------------------------------------------------------------------------------
17
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
<TABLE>
<CAPTION>
1993
----------------------------------------
RESTATED
1ST 2ND 3RD 4TH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $58.8 $56.6 $53.4 $51.4 $220.2
Interest expense....................... 20.8 18.8 17.6 17.4 74.6
Provision for losses on receivables.... .9 1.1 .3 (.8) 1.5
Net income............................. .9 8.8 5.2 7.6 22.5
<CAPTION>
1992
----------------------------------------
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $61.7 $50.2 $55.9 $51.9 $219.7
Interest expense....................... 20.1 19.3 21.4 21.4 82.2
Provision for losses on receivables.... 1.6 .8 .9 .3 3.6
Net income............................. 10.7 6.4 6.0 6.4 29.5
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Statement of Financial Reporting Responsibility
- --------------------------------------------------------------------------------
Management of Navistar Financial Corporation and its subsidiaries is respon-
sible for the preparation and for the integrity and objectivity of the accompa-
nying 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 esti-
mates and judgments.
The accompanying financial statements have been audited by Deloitte & Tou-
che, independent auditors. Management has made available to Deloitte & Touche
all the Corporation's financial records and related data, as well as the min-
utes of Directors' meetings. Management believes that all representations made
to Deloitte & Touche during its audit were valid and appropriate.
Management is responsible for establishing and maintaining a system of in-
ternal 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 writ-
ten policies and procedures that are updated by management as necessary. The
system is tested and evaluated regularly by the parent Company's internal audi-
tors as well as by the independent auditors in connection with their annual au-
dit 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.
/s/ John J. Bongiorno
- ---------------------
John J. Bongiorno
President and Chief Executive Officer
/s/ Andrew C. Hill
- ------------------
Andrew C. Hill
Vice President and Controller
- --------------------------------------------------------------------------------
19
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Navistar Financial Corporation,
Its Directors and Shareowner:
We have audited the accompanying statement of consolidated financial condi-
tion of Navistar Financial Corporation and its subsidiaries as of October 31,
1993 and 1992, and the related statements of consolidated income and retained
earnings and of consolidated cash flow for each of the three years in the pe-
riod ended October 31, 1993. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting 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 pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Navistar Financial
Corporation and its subsidiaries at October 31, 1993 and 1992, and the results
of their operations and their cash flow for each of the three years in the pe-
riod ended October 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Note 1, in accordance with the provisions of Statements of
Financial Accounting Standards No. 106 and No. 109, effective November 1, 1992,
the Corporation changed its methods of accounting for postretirement benefits
other than pensions and for income taxes.
/s/ Deloitte & Touche
- ---------------------
Deloitte & Touche
December 1, 1993
Chicago, Illinois
- --------------------------------------------------------------------------------
20
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net income for 1993 was $23 million compared with $30 million and $33 mil-
lion in 1992 and 1991, respectively. The 1993 results included an after tax
charge of $8.8 million for the cumulative effect of adopting new accounting
standards for income taxes and postretirement benefits, as discussed in notes 7
and 9, respectively, to the Consolidated Financial Statements, and a $3.7 mil-
lion pretax charge for the Corporation's portion of a contribution by Navistar
which established a Supplemental Benefit Trust for retirees, as discussed in
note 9 to the Consolidated Financial Statements. Excluding these special
charges, the Corporation's pretax income for 1993 increased 14% over 1992 from
the gains and the associated favorable impact on servicing expenses related to
increased financing through sales of retail notes receivable and from lower
losses on receivables. Earnings from the Corporation's insurance subsidiary,
Harco National Insurance Company ("Harco"), were considerably lower in 1993 as
a result of higher losses in Harco's physical damage and liability insurance
lines and lower earnings from investments. The Corporation's pretax income for
1992 decreased 13% from 1991 as a result of lower interest margins earned on
the Corporation's finance receivables portfolio, partially offset by a lower
provision for credit losses. Earnings for Harco in 1992 were equivalent to 1991
as higher earned premium revenue and increased investment income were offset by
increased losses on liability insurance and higher sales commissions to general
agents. The more significant elements of revenue and expense impacting net in-
come for these years are discussed in the following paragraphs.
Total revenues for 1993 were unchanged from 1992 and slightly less than
1991. Although revenue from retail note and lease financing was consistent with
this trend, a greater portion of 1993 revenue came from gains on retail note
sales which increased to $15 million from $6 million in 1992 and $5 million in
1991. Revenue from owned retail notes decreased a similar amount in 1993 as a
result of lower average balances, related to the higher volume of note sales,
and a decline in average portfolio yield. Portfolio yield dropped during 1993
as liquidations of older higher yielding notes were replaced with acquisitions
at lower current interest rates. Retail note and lease financing revenue de-
creased in 1992 from 1991 as a result of a decline in average portfolio yield.
Wholesale note revenue increased 14% in 1993 to $32 million as a result of
higher average note balances in support of increased demand for Transportation
truck products. Average wholesale note balances in 1992 were equivalent to
1991. In December 1990, the Corporation sold $300 million of wholesale notes to
a revolving sales trust. This revolving wholesale arrangement provides for the
continuous sale of notes by the Corporation on a daily basis. Gains on whole-
sale notes sold to the trust do not vary significantly from year to year.
Revenue from accounts increased 20% in 1993 to $18 million slightly below
the 1991 level. The increase in 1993 from 1992 resulted from higher average
balances, which increased to $251 million in 1993 compared to $193 million in
both 1992 and 1991. The decrease in account revenue in 1992 from 1991 resulted
from a decline in average yield related to decreases in the prime rate.
Insurance premiums earned by Harco decreased 5% to $57 million in 1993 after
a 15% increase in 1992 over 1991. The decrease in 1993 reflects a reduction in
written premiums in response to recent loss experience and increased competi-
tion. The increase in 1992 was the result of increased coverage written through
Harco's independent insurance agency network which includes over 1,000 agents
nationwide. Harco's investment income decreased to $9 million in 1993 compared
with $13 million in 1992 and $10 million in 1991. The decrease in 1993 resulted
from lower realized gains on sales of marketable securities caused by the sta-
bilization of interest rates during 1993 and a decline in the yield on invest-
ments resulting from the lower market interest rates available on new invest-
ments. The increase in 1992 resulted from realized gains on sales of invest-
ments.
- --------------------------------------------------------------------------------
21
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Interest expense decreased 9% in 1993 to $75 million after a similar per-
centage decrease in 1992 from a level of $90 million in 1991. The decreases in
interest expense in 1993 and 1992 primarily reflect the effect of lower inter-
est rates. In 1993, average debt balances returned to their 1991 level after a
decline in 1992 coincident with finance receivable balances. The ratio of debt
to equity was 5.5:1 at October 31, 1993 and 1992 and 5.1:1 at October 31, 1991.
On July 1, 1993, Navistar implemented a restructured retiree health care and
life insurance plan ("the Plan"), as discussed in notes 9 and 13 to the Consol-
idated Financial Statements. As part of the Plan, Navistar contributed $300
million to pre-fund Plan benefit liabilities and common stock valued at $513
million to a Supplemental Benefit Trust to help pay for Plan benefits in the
future. The Corporation recognized $3.7 million of expense as its portion of
the Supplemental Benefit Trust contribution.
The provision for losses on receivables decreased to $1.5 million in 1993
from $3.6 million in 1992 and $5.8 million in 1991, reflecting lower losses on
retail and wholesale notes. Finance receivables are written off against the al-
lowance for losses as soon as they are determined to be uncollectible based on
a review of each problem obligor. Truck note write-offs, including those on
sold notes, totaled $.7 million in 1993, $3.2 million in 1992, and $5.8 million
in 1991. At October 31, 1993, the Corporation's allowance for losses equaled
.69% of net financing receivables, including sold receivables, compared with
.77% and .75% as of October 31, 1992 and 1991, respectively. The allowance is
maintained at a level which management considers appropriate in relation to the
outstanding receivables balance, taking into consideration loss experience,
current economic conditions and other factors.
Insurance claims and underwriting expense increased to $65 million in 1993
from $62 million and $51 million in 1992 and 1991, respectively. The increased
expenses in 1993 resulted from increased losses sustained in Harco's truck
physical damage and liability insurance lines. The increase in 1992 resulted
from the higher level of activity associated with the higher premium volume as
well as adverse truck liability loss experience. Insurance underwriting expense
increased $.3 million and $2.2 million in 1993 and 1992, respectively, primar-
ily as a result of increased commission costs associated with higher volumes of
premiums written through general agents in 1992.
LIQUIDITY AND FUNDS MANAGEMENT
The Corporation's operations are substantially dependent upon the production
and sale of Transportation's truck products. Navistar Financial has tradition-
ally obtained the cash to provide financing to Transportation and its customers
from commercial paper, short- and long-term bank borrowings, medium- and long-
term debt issues, sales of receivables and equity capital. Recently, the debt
ratings of the Corporation, detailed below, have made bank borrowings and sales
of finance receivables the most economical sources of cash. The Corporation's
insurance operations generate their funds through internal operations and have
no external borrowings.
During 1993, the Corporation supplied 90% of the wholesale financing of new
trucks sold to Transportation's dealers, compared with 89% for 1992 and 1991.
Gross acquisitions of retail notes and leases increased 15% to $898 million in
1993 after a 4% increase to $778 million in 1992 from $747 million in 1991. The
higher levels of acquisitions reflect increased sales by Transportation, espe-
cially of heavy trucks, and an increase in the Corporation's share of the re-
tail financing of new trucks manufactured by Transportation and sold in the
United States to 15.3% in 1993 from 13.7% in 1992 and 13.1% in 1991. Net fi-
nance receivables increased to $1,324 million at October 31, 1993 from $1,291
million and $1,163 million at October 31, 1992 and 1991, respectively. The Cor-
poration sold $576 million of retail notes in 1993 compared with $209 million
in 1992, and $220 million in 1991. Since December 1990, the Corporation has
utilized a $300 million revolving wholesale note sales trust providing for the
continuous sale of eligible wholesale notes on a daily basis. The sales trust
sold three $100 million tranches of floating rate pass-through certificates,
maturing serially from 1997 to 1999, to the public. No significant change from
the current level of financing support for Transportation truck product sales
is anticipated by the Corporation.
- --------------------------------------------------------------------------------
22
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
At October 31, 1993, the Corporation had a contractually committed bank re-
volving credit facility of $727 million and a contractually committed retail
notes receivable purchase facility of $600 million. In April 1993, the Corpora-
tion amended and restated the credit and purchase facility agreements extending
the maturity date of both facilities to November 15, 1995. The restated credit
facility granted security interests in substantially all of the Corporation's
assets to the Corporation's debtholders and permitted special dividends of $20
million upon the effectiveness of a final settlement in Navistar's retiree
health care litigation. The implementation of the Settlement Agreement on July
1, 1993, as discussed in note 13 to the Consolidated Financial Statements, re-
sulted in special dividend payments of $5 million on July 31, 1993 and on Sep-
tember 24, 1993. At October 31, 1993, $10 million was available for special
dividends to Transportation.
At October 31, 1993, the unused commitment under the receivable purchase fa-
cility was $157 million, $75 million of which provided funding backup for the
$75 million short-term bank borrowings at October 31, 1993. The remaining $82
million when combined with unrestricted cash and cash equivalents made $105
million available to fund the general business purposes of the Corporation. The
bank revolving credit facility was fully utilized at October 31, 1993.
In October 1993, ratings on the Corporation's debt were reviewed by Standard
and Poor's Corporation ("Standard and Poor's") and Moody's Investors Service,
Inc. ("Moody's"). Standard and Poor's raised its ratings for the Corporation's
debt from B- to BB for senior debt and from CCC to B+ for subordinated debt.
Moody's confirmed their previous ratings of Ba3 for senior debt and B2 for sub-
ordinated debt. In November 1993, Duff & Phelps confirmed their debt ratings of
BB+ for senior debt and BB for subordinated debt. The Corporation's commercial
paper is rated "not prime" by Moody's.
During 1992, ratings on the Corporation's debt were lowered by Moody's,
Standard and Poor's and Duff & Phelps. After the reduction in credit ratings,
the Corporation's commercial paper and uncommitted bank borrowings were refi-
nanced at maturity with borrowings from the Corporation's revolving bank line
of credit. At October 31, 1993 there were $75 million of short-term bank
borrowings outstanding compared with no outstanding commercial paper or short-
term bank borrowings at October 31, 1992. The changes in credit ratings did not
impact the Corporation's ability to sell retail notes through its receivables
purchase facility or through asset-backed transactions in the public and pri-
vate markets.
On November 10, 1993, the Corporation sold $335 million of retail notes re-
ceivable through its special purpose subsidiary, Navistar Financial Retail Re-
ceivables Corporation, to an owner trust which, in turn, sold interests in the
notes to investors in exchange for fixed rate notes and certificates. This sale
of retail notes, pursuant to a $1 billion shelf registration filed with the Se-
curities and Exchange Commission in September 1993, netted the Corporation pro-
ceeds of $334 million, of which $25 million was used to establish a cash re-
serve account for the trust and the remainder reduced bank revolver draw downs.
On November 16, 1993, the Corporation sold $100 million of 8 7/8% Senior Subor-
dinated Notes due 1998 to the public. On December 16, 1993, the net proceeds
from the 8 7/8% subordinated issue were used to redeem the Corporation's 11.95%
Subordinated Debentures due December 1995.
The Corporation manages sensitivity to interest rate changes by funding
floating rate assets with floating rate debt, primarily borrowings under the
bank revolving credit agreement, and fixed rate assets with fixed rate debt,
equity and floating rate debt. Management has limited the amount of fixed rate
assets funded with floating rate debt by selling retail receivables on a fixed
rate basis.
Management believes that collections on the outstanding receivables portfo-
lio plus cash available from the Corporation's various funding sources will
permit Navistar Financial to meet the financing requirements of Transporta-
tion's dealers and retail customers through 1994 and beyond.
- --------------------------------------------------------------------------------
23
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
In addition to the $10 million special dividend paid by the Corporation to
Transportation during 1993, the Corporation paid ordinary cash dividends to
Transportation of $13 million, compared with $16 million and $74 million in
1992 and 1991, respectively. Effective with the decline in the Corporation's
debt ratings in 1992, ordinary dividends to Transportation are limited by the
bank revolving credit agreement to 50% of cumulative net income measured quar-
terly from February 1, 1992. At October 31, 1993, $2 million was available for
regular dividend to Transportation in the first quarter of fiscal 1994 or
thereafter. Dividends in 1991 included a special dividend of $40 million paid
in January 1991 with proceeds received from the sale of wholesale notes re-
flecting the lower funding level required to support a lower average owned fi-
nance receivables balance. The Corporation's debt to equity ratio was 5.5:1, at
October 31, 1993 and 1992 and 5.1:1 at October 31, 1991.
ACCOUNTING STANDARDS
In December 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"),
which is applicable to the Corporation's wholly-owned insurance subsidiary,
Harco National Insurance Company. This statement eliminates the practice of re-
porting liabilities relating to reinsured contracts net of the effects of rein-
surance. It requires reinsurance receivables (including amounts related to un-
paid insurance claims) and prepaid reinsurance premiums to be reported as as-
sets. This statement will be adopted in fiscal year
1994. The Corporation has not yet determined the impact of SFAS 113 on the fi-
nancial statements.
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). This statement establishes financial accounting and reporting standards
for investments in equity securities that have readily determinable fair values
and for all investments in debt securities. Upon adoption of SFAS 115, the Cor-
poration's Statement of Financial Condition classification of cash equivalents
and marketable securities will not change and the requirements of SFAS 115 will
be met through revised footnote disclosure. The effective date for this new
standard is for fiscal years beginning after December 15, 1993, or fiscal 1995
for the Corporation. The Corporation has not yet determined the impact on the
financial statements nor when it will adopt SFAS 115.
- --------------------------------------------------------------------------------
24
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Five Year Summary of Financial and Operating Data
- --------------------------------------------------------------------------------
Dollar amounts in millions
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES AND NET INCOME RE-
TAINED
Revenues.................... $ 220.2 $ 219.7 $ 227.4 $ 240.7 $ 248.1
-------- -------- -------- -------- --------
Provision for losses on re-
ceivables.................. 1.5 3.6 5.8 3.5 4.1
Interest expense............ 74.6 82.2 90.3 110.1 115.2
Other charges, net.......... 95.1 87.5 78.1 71.7 72.2
Taxes on income............. 17.7 16.9 20.2 20.4 20.4
Cumulative effect of changes
in accounting policy, net
of income taxes............ 8.8 -- -- -- --
-------- -------- -------- -------- --------
Net income.................. 22.5 29.5 33.0 35.0 36.2
Dividends paid.............. 22.6 16.0 74.0 33.0 80.0
-------- -------- -------- -------- --------
Net income retained......... $ (.1) $ 13.5 $ (41.0) $ 2.0 $ (43.8)
======== ======== ======== ======== ========
Percent of net income to av-
erage
shareowner's equity........ 10.3% 13.8% 15.0% 13.6% 11.9%
ASSETS AT END OF YEAR
Cash and cash equivalents... $ 33.9 $ 79.2 $ 16.0 $ 11.1 $ 15.6
Marketable securities....... 125.6 130.5 119.1 103.3 90.3
Finance receivables:
Retail notes and lease fi-
nancing................... 810.8 951.7 902.8 817.5 830.0
Wholesale notes............ 259.0 128.0 84.3 401.4 411.1
Accounts................... 245.1 204.3 162.9 202.7 179.5
Other notes................ 20.6 19.2 25.2 24.5 29.2
-------- -------- -------- -------- --------
Total..................... 1,335.5 1,303.2 1,175.2 1,446.1 1,449.8
Allowance for losses....... (12.0) (12.4) (11.7) (11.7) (10.4)
-------- -------- -------- -------- --------
Finance receivables, net.. 1,323.5 1,290.8 1,163.5 1,434.4 1,439.4
Other assets................ 142.2 108.2 149.5 131.6 113.8
-------- -------- -------- -------- --------
Total assets.............. $1,625.2 $1,608.7 $1,448.1 $1,680.4 $1,659.1
======== ======== ======== ======== ========
LIABILITIES AND SHAREOWNER'S
EQUITY AT END OF YEAR
Commercial paper............ $ -- $ -- $ 143.8 $ 558.1 $ 720.0
Short-term bank borrowings.. 75.0 -- 40.0 70.0 185.1
Bank revolving credit....... 727.0 727.0 220.0 -- --
Medium-term notes........... 222.2 261.1 419.4 342.3 55.0
Long-term notes and deben-
tures...................... 75.0 135.0 135.0 184.9 184.9
Subordinated debt........... 100.0 94.9 93.7 92.6 91.7
-------- -------- -------- -------- --------
Total debt................ 1,199.2 1,218.0 1,051.9 1,247.9 1,236.7
Other liabilities........... 206.6 171.2 190.2 185.5 177.4
Shareowner's equity......... 219.4 219.5 206.0 247.0 245.0
-------- -------- -------- -------- --------
Total liabilities and
shareowner's equity...... $1,625.2 $1,608.7 $1,448.1 $1,680.4 $1,659.1
======== ======== ======== ======== ========
Debt to equity ratio........ 5.5:1 5.5:1 5.1:1 5.1:1 5.0:1
Senior debt to capital funds
ratio...................... 3.4:1 3.6:1 3.2:1 3.4:1 3.4:1
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Five Year Summary of Financial and Operating Data
- --------------------------------------------------------------------------------
GROSS FINANCE RECEIVABLES AND LEASES ACQUIRED
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Dollar amounts in millions 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wholesale notes.................... $1,977.6 $1,547.7 $1,461.0 $1,601.4 $1,689.6
Retail notes and leases:
New............................... 730.0 591.8 554.4 512.6 599.0
Used.............................. 168.4 185.9 192.8 189.7 191.3
-------- -------- -------- -------- --------
Total............................ 898.4 777.7 747.2 702.3 790.3
-------- -------- -------- -------- --------
Total............................. $2,876.0 $2,325.4 $2,208.2 $2,303.7 $2,479.9
======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
ANALYSIS OF FINANCE RETAIL NOTES ACQUIRED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Down
Payment
as a
Percent
Average of
Contractual Retail Average
Term in Sales Monthly
Months Price Installment
------------ --------- -----------
Number of
Year Units New Used New Used New Used
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993............................ 15,879 53 34 6.2% 17.0% $1,248 $786
1992............................ 14,227 52 35 6.6 14.1 1,239 845
1991............................ 13,768 52 37 7.2 13.5 1,286 875
1990............................ 13,950 53 37 8.8 16.5 1,327 766
1989............................ 15,380 53 37 8.2 17.9 1,264 777
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Five Year Summary of Financial and Operating Data
- --------------------------------------------------------------------------------
Dollar amounts in millions
ANALYSIS OF GROSS RETAIL NOTES AND LEASE FINANCING WITH INSTALLMENTS PAST DUE
OVER 60 DAYS
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
At October 31 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Original amount of notes and leases............... $2.6 $4.3 $3.9 $6.1 $4.8
Balance of notes and leases....................... .7 2.1 1.9 3.9 3.1
Balance as a percent of total outstanding........ .08% .19% .18% .40% .32%
</TABLE>
- --------------------------------------------------------------------------------
ANALYSIS OF REPOSSESSIONS
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance beginning of year............... $ 5.5 $ 11.6 $ 12.2 $ 10.1 $ 6.1
Acquisitions............................ 21.5 32.7 43.1 53.1 25.7
Dispositions............................ (25.2) (38.8) (43.7) (51.0) (21.7)
------ ------ ------ ------ ------
Balance end of year.................... $ 1.8 $ 5.5 $ 11.6 $ 12.2 $ 10.1
====== ====== ====== ====== ======
</TABLE>
Repossessions are recorded at the lower of book value or the realizable
value of the equipment. Costs of reconditioning are charged to individual re-
possessions.
- --------------------------------------------------------------------------------
27
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Five Year Summary of Financial and Operating Data
- --------------------------------------------------------------------------------
Dollar amounts in millions
ANALYSIS OF LOSS EXPERIENCE
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net losses (recoveries):
Retail notes and leases....................... $(.1) $2.4 $3.0 $2.0 $2.3
Wholesale notes............................... .8 .8 2.8 .4 .3
---- ---- ---- ---- ----
Total........................................ $ .7 $3.2 $5.8 $2.4 $2.6
==== ==== ==== ==== ====
Percent net losses (recoveries) to liquida-
tions:
Retail notes and leases....................... (.01)% .27% .41% .26% .34%
Wholesale notes............................... .04 .06 .19 .03 .02
Total........................................ .03% .13% .26% .10% .11%
Percent net losses to related average gross re-
ceivables outstanding:
Retail notes and leases....................... --% .17% .21% .13% .16%
Wholesale notes............................... .16 .20 .66 .10 .07
Total........................................ .03% .16% .29% .11% .13%
</TABLE>
Includes loss experience on sold notes.
- --------------------------------------------------------------------------------
28
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Directors and Officers
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
JOHN J. BONGIORNO
President and Chief Executive
Officer
Navistar Financial Corporation
and
Group Vice President--General
Manager,
Financial Services
Navistar International Trans-
portation Corp.
R. WAYNE CAIN
Vice President and Treasurer
Navistar Financial Corporation
JAMES C. COTTING
Chairman of the Board and
Chief Executive Officer
Navistar International Corpora-
tion and
Navistar International Trans-
portation Corp.
ANDREW C. HILL
Vice President and Controller
Navistar Financial Corporation
JOHN R. HORNE
President and Chief Operating
Officer
Navistar International Corpora-
tion and
Navistar International Trans-
portation Corp.
THOMAS M. HOUGH
Vice President and Treasurer
Navistar International Corpora-
tion and
Navistar International Trans-
portation Corp.
ROBERT C. LANNERT
Executive Vice President and
Chief Financial Officer
Navistar International Corpora-
tion and
Navistar International Trans-
portation Corp.
ROBERT I. MORRISON
Vice President and Controller
Navistar International Corpora-
tion and
Navistar International Trans-
portation Corp.
THOMAS D. SILVER
Executive Vice President, Oper-
ations
Harco National Insurance Com-
pany
OFFICERS
JOHN J. BONGIORNO
President and Chief Executive
Officer
R. WAYNE CAIN
Vice President and Treasurer
ANDREW C. HILL
Vice President and Controller
LOREN C. BUNTROCK
Vice President, Field Opera-
tions
RONALD E. DIETZ
Vice President, Credit
DELBERT E. HARRISON
Vice President, Human Resources
WILLIAM W. JONES
General Counsel
GREGORY LENNES
Secretary
- --------------------------------------------------------------------------------
29
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Information for Investors
- --------------------------------------------------------------------------------
Navistar Financial Corporation's publicly held debentures are traded on the
New York Stock Exchange and quoted as "NavFin" in bond table listings in daily
newspapers.
A copy of the Corporation's 1993 Annual Report to the Securities and Ex-
change Commission on Form 10-K is available, without charge, upon written re-
quest to the Corporate Treasurer, 2850 West Golf Road, Rolling Meadows, IL
60008.
- --------------------------------------------------------------------------------
30
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Office Locations
- --------------------------------------------------------------------------------
ATLANTA, GEORGIA
3350 Northlake Parkway
Atlanta, GA 30345
Telephone: (404) 621-2700
COLUMBUS, OHIO
2500 Corporate Exchange Drive, Suite 340
Columbus, OH 43231-0325
Telephone: (614) 890-8000
PLANO, TEXAS
500 North Central Expressway
Suite 450
Plano, TX 75074
Telephone: (214) 881-3400
MT. LAUREL, NEW JERSEY
1000 Atrium Way, Suite 300
Mt. Laurel, NJ 08054
Telephone: (609) 778-3456
ROLLING MEADOWS, ILLINOIS
2850 West Golf Road
Rolling Meadows, IL 60008
Telephone: (708) 734-4500
SAN RAMON, CALIFORNIA
2682 Bishop Drive, Suite 121
San Ramon, CA 94583
Telephone: (510) 830-2241
- --------------------------------------------------------------------------------
31
<PAGE>
Navistar Financial Corporation
2850 West Golf Road
Rolling Meadows, Illinois 60008 FH-1001 Litho in U.S.A.
<PAGE>
GRAPHICS APPENDIX LIST
A bar graph comparing Truck Receivables Serviced for Years 1991, 1992 and 1993
appears on Page 3.
A bar graph comparing Insurance Premiums Written and Earned for Years 1991, 1992
and 1993 appears on Page 4.
A photo of John J. Bongiorno, President and Chief Executive Officer, appears
below his name on Page 4.
