<PAGE 1>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended October 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-9618
N A V I S T A R I N T E R N A T I O N A L C O R P O R A T I O N
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3359573
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611
-------------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 836-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- --------------------------------------- -----------------------
Common stock, par value $0.10 per share New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
$6.00 cumulative convertible preferred stock,
Series G (with $1.00 par value) New York Stock Exchange
Cumulative convertible junior preference stock,
Series D (with $1.00 par value) New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days: Yes X No
--- ---
As of December 15, 1997 the aggregate market value of Common Stock
(excluding Class B Common Stock) held by non-affiliates of the
registrant was $1,126,267,804.
As of December 15, 1997 the number of shares outstanding of the
registrant's Common Stock was 49,235,751 and the Class B Common Stock
was 23,090,905.
Documents Incorporated by Reference
-----------------------------------
1997 Annual Report to Shareowners (Parts I, II and IV)
1997 Proxy Statement (Parts I and III)
Navistar Financial Corporation 1997 Annual Report on Form 10-K (Part IV)
<PAGE>
<PAGE 2>
NAVISTAR INTERNATIONAL CORPORATION
FORM 10-K
Year Ended October 31, 1997
INDEX
10-K Page
---------
PART I
Item 1. Business ......................................... 3
Item 2. Properties ....................................... 8
Item 3. Legal Proceedings ................................ 9
Executive Officers of the Registrant ............. 10
Item 4. Submission of Matters
to a Vote of Security Holders .................. 12
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters ................ 12
Item 6. Selected Financial Data .......................... 12
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 12
Item 8. Financial Statements and Supplementary Data ...... 12
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ......... 12
PART III
Item 10. Directors and Executive Officers
of the Registrant .............................. 13
Item 11. Executive Compensation ........................... 13
Item 12. Security Ownership of Certain Beneficial
Owners and Management .......................... 13
Item 13. Certain Relationships and Related Transactions ... 13
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K ........................ 13
SIGNATURES
Principal Accounting Officer .............................. 15
Directors ................................................. 16
POWER OF ATTORNEY ......................................... 16
INDEPENDENT AUDITORS' REPORT .............................. 18
INDEPENDENT AUDITORS' CONSENT ............................. 18
SCHEDULE .................................................. F-1
EXHIBITS .................................................. E-1
<PAGE>
<PAGE 3>
PART I
ITEM 1. BUSINESS
Navistar International Corporation is a holding company and its
principal operating subsidiary is Navistar International Transportation
Corp. referred to as "Transportation". As used hereafter, "Navistar" or
"company" refers to Navistar International Corporation and its
subsidiaries.
Navistar, through its wholly owned subsidiary Transportation,
operates in two principal industry segments: manufacturing and
financial services. Manufacturing operations are responsible for the
manufacture and marketing of medium and heavy trucks, including school
buses, mid-range diesel engines and service parts primarily in the
United States and Canada as well as in selected export markets. Based
on assets and revenues, manufacturing operations represent the majority
of the company's business activities. The financial services operations
consist of Navistar Financial Corporation (NFC), its domestic insurance
subsidiary and the company's foreign finance and insurance subsidiaries.
NFC's primary business is the retail and wholesale financing of products
sold by the manufacturing operations and its dealers within the United
States and the providing of commercial physical damage and liability
insurance to the manufacturing operations' dealers and retail customers
and to the general public through an independent insurance agency
system. Industry segment data for 1997, 1996, and 1995 is summarized in
Note 14 to the Financial Statements, which is incorporated herein by
reference.
THE MEDIUM AND HEAVY TRUCK INDUSTRY
The market in which Navistar competes is subject to considerable
volatility as it moves in response to cycles in the overall business
environment and is particularly sensitive to the industrial sector which
generates a significant portion of the freight tonnage hauled.
Government regulation has impacted and will continue to impact trucking
operations and efficiency and the specifications of equipment.
The following table shows industry retail deliveries in the
combined United States and Canadian markets for the five years ended
October 31, in thousands of units:
YEARS ENDED OCTOBER 31,
---------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Class 5, 6 and 7 medium trucks and
school buses ................... 150.6 145.8 151.8 134.2 122.5
Class 8 heavy trucks ............. 196.8 195.4 228.8 205.4 166.4
----- ----- ----- ----- -----
Total .......................... 347.4 341.2 380.6 339.6 288.9
===== ===== ====== ===== =====
Source: Monthly data provided by the American Automobile
Manufacturers Associations (AAMA) in the United States and Canada, and
other sources.
<PAGE>
<PAGE 4>
The Class 5 through 8 truck market in the United States and Canada
is highly competitive. Major domestic competitors include PACCAR, Ford
and General Motors, as well as foreign-controlled manufacturers, such as
Freightliner, Mack and Volvo GM. In addition, manufacturers from Japan
(Hino, Isuzu, Nissan and Mitsubishi) are competing in the United States
and Canadian markets. The intensity of this competition results in
price discounting and margin pressures throughout the industry. In
addition to the influence of price, market position is driven by product
quality, engineering, styling, utility and distribution.
TRANSPORTATION MARKET SHARE
Transportation delivered 99,500 Class 5 through 8 trucks, including
school buses, in the United States and Canada in fiscal 1997, a 6%
increase from the 94,000 units delivered in 1996. Navistar's combined
share of the Class 5 through 8 truck market was 28.6% in 1997 and 27.5%
in 1996. Transportation has been the leader in combined market share
for Class 5 through 8 trucks, including school buses, in the United
States and Canada in each of its last 17 fiscal years based on data
obtained from the American Automobile Manufacturers Association, the
United States Motor Vehicle Manufacturers Association and R.L. Polk &
Company.
PRODUCTS
The following table illustrates the percentage of the company's
manufacturing sales by class of product based on dollar amount:
YEARS ENDED OCTOBER 31,
---------------------------
PRODUCT CLASS 1997 1996 1995
- ------------- ----- ----- -----
Class 5, 6 and 7 medium trucks and
school buses ................... 34% 35% 32%
Class 8 heavy trucks ............. 37 35 42
Service parts .................... 13 14 12
Engines .......................... 16 16 14
--- --- ---
Total .......................... 100% 100% 100%
=== === ===
Transportation manufactures a full line of products in the common
carrier, private carrier, government/service, leasing, construction,
energy/petroleum and student transportation markets. Transportation
offers diesel-powered trucks and buses because of their improved fuel
economy, ease of serviceability and greater durability over gasoline-
powered vehicles. Transportation's Class 8 heavy trucks generally use
diesel engines purchased from outside suppliers while Class 5, 6 and 7
medium trucks are powered by a proprietary line of mid-range diesel
engines manufactured by Transportation. Based upon information published
by R.L. Polk & Company, diesel-powered Class 5, 6 and 7 medium truck
shipments represented 87% of all medium truck shipments for fiscal year
1997 in the United States and Canada.
Transportation's truck and bus manufacturing operations in the
United States and Canada consist principally of the assembly of
components manufactured by its suppliers, although Transportation
produces its own mid-range diesel truck engines, sheet metal components
(including cabs) and miscellaneous other parts. During 1997, the
company announced plans for approximately $350 million in capital
spending and $300 million in development expense over the next six years
for development of the next generation truck.
<PAGE>
<PAGE 5>
ENGINE AND FOUNDRY
Transportation builds diesel engines for use in its Class 5, 6 and
7 medium trucks, school buses, selected Class 8 heavy truck models and
for sale to original equipment manufacturers in the United States and
Canada. Transportation also sells engines for industrial, agricultural
and marine applications. Transportation is the leading supplier of mid-
range diesel engines in the 160-300 horsepower range according to data
supplied by Power Systems Research of Minneapolis, Minnesota.
Transportation has an agreement to supply its 7.3 liter (7.3L)
electronically controlled diesel engine to Ford Motor Company (Ford)
through the year 2002 for use in all of its diesel-powered light trucks
and vans. Sales of this engine to Ford currently account for
approximately 87% of Transportation's 7.3L sales. Shipments of engines
to all original equipment manufacturers totaled a record 184,000 units
in 1997, an increase of 13% from the 163,200 units shipped in 1996.
During 1997, Transportation entered into a ten-year agreement, effective
with model year 2003, to supply Ford with a 7.3L replacement product for
use in its diesel-powered light trucks and vans.
SERVICE PARTS
In the United States and Canada, Transportation operates 7 regional
parts distribution centers, which allows it to offer 24-hour
availability and same day shipment of the parts most frequently
requested by customers. The company also operates a parts distribution
center in Mexico.
Transportation's service parts program is vital to the maintenance
of the relationship with its customers and dealers. The sale of
replacement parts does not represent a separate and distinct business of
Transportation. Transportation's truck group makes decisions about the
pricing of trucks and replacement parts based upon a variety of factors
which integrally link the pricing and sale of replacement parts with the
sale of medium and heavy trucks, including school buses. The acceptable
price for dealers and fleet truck sales is determined by not only
looking at the market price of the individual trucks themselves, but
also by analyzing the amount of future replacements parts that will be
purchased from Transportation over the truck's life cycle and the total
expected profit contribution, including future replacement parts,
expected to be realized on each sale. Accordingly, the pricing of
trucks and replacement parts is not independently determined.
MARKETING AND DISTRIBUTION
Transportation's truck products are distributed in virtually all
key markets in the United States and Canada. Transportation's truck
distribution and service network in these countries was composed of
954, 957 and 958 dealers and retail outlets at October 31, 1997, 1996
and 1995, respectively. Included in these totals were 514, 504 and 490
secondary and associate locations at October 31, 1997, 1996 and 1995,
respectively. The company also has a dealer network in Mexico composed
of 38 and 23 dealer locations at October 31, 1997 and 1996,
respectively.
Retail dealer activity is supported by 5 regional operations in the
United States and general offices in Canada and Mexico. Transportation
has a national account sales group, responsible for 99 major national
account customers. Transportation's network of 16 Used Truck Centers
in the United States provides trade-in support to the company's dealers
and national accounts group, and markets all makes and models of
reconditioned used trucks to owner-operators and fleet buyers. Trucks,
components and service parts are exported for wholesale and retail sale
to more than 70 countries around the world.
<PAGE>
<PAGE 6>
FINANCIAL SERVICES
NFC is a financial services organization that provides wholesale,
retail and lease financing of new and used trucks sold by
Transportation and its dealers in the United States. NFC also finances
wholesale accounts and selected retail accounts receivable of
Transportation. Sales of new products (including trailers) of other
manufacturers are also financed regardless of whether designed or
customarily sold for use with Transportation's truck products. During
1997 and 1996, NFC provided wholesale financing for 94% of the new truck
units sold by Transportation to its dealers and distributors in the
United States and retail and lease financing for 13% and 16%,
respectively, of all new truck units sold or leased by Transportation to
retail customers.
NFC's wholly owned domestic insurance subsidiary, Harco National
Insurance Company, provides commercial physical damage and liability
insurance coverage to Transportation's dealers and retail customers, and
to the general public through an independent insurance agency system.
Harbour Assurance Company of Bermuda Limited offers a variety of
programs to the company, including general liability insurance, ocean
cargo coverage for shipments to and from foreign distributors, and
reinsurance coverage for various Transportation policies.
IMPORTANT SUPPORTING OPERATIONS
In the United States, Transportation has a third party sales
financing agreement with Associates Commercial Corporation to provide
wholesale financing to certain of its truck dealers and retail financing
to their customers. Navistar International Corporation Canada also has
an agreement with a subsidiary of General Electric Capital Canada, Inc.
to provide financing for Canadian dealers and customers.
RESEARCH AND DEVELOPMENT
Research and development activities, which are directed toward the
introduction of new products and improvements of existing products and
processes used in their manufacture, totaled $92 million, $101 million,
and $91 million for 1997, 1996 and 1995, respectively.
BACKLOG
The backlog of unfilled truck orders (subject to cancellation or
return in certain events) at October 31, 1997, 1996 and 1995 was $2,360
million, $1,254 million and $2,581 million, respectively.
Although the backlog of unfilled orders is one of many indicators
of market demand, other factors such as changes in production rates,
available capacity, new product introductions and competitive pricing
actions may affect point-in-time comparisons.
EMPLOYEES
The company employed 16,168, 14,187 and 16,079 individuals at
October 31, 1997, 1996 and 1995, respectively.
<PAGE>
<PAGE 7>
LABOR RELATIONS
At October 31, 1997, the United Automobile, Aerospace and
Agricultural Implement Workers of America (UAW) represented 8,079 of the
company's active employees in the United States, and the Canadian Auto
Workers (CAW) represented 2,142 of the company's active employees in
Canada. Other unions represented 955 of the company's active employees
in the United States and Canada. The company entered into a collective
bargaining agreement with the UAW in 1995, which would have expired on
October 1, 1998. During August 1997, the company's collective
bargaining agreement with the UAW was extended through October 1, 2002.
This contract allows the company to focus its assembly plants, simplify
current product lines, invest in new product development, and achieve
more competitive wage, benefit and productivity levels. In addition,
the company entered into a collective bargaining agreement with the CAW
in 1996, which expires on October 24, 1999.
PATENTS AND TRADEMARKS
Transportation continuously obtains patents on its inventions and,
thus, owns a significant patent portfolio. Additionally, many of the
components which Transportation purchases for its products are protected
by patents that are owned or controlled by the component manufacturer.
Transportation has licenses under third-party patents relating to its
products and their manufacture, and Transportation grants licenses under
its patents. The royalties paid or received under these licenses are
not significant. No particular patent or group of patents is considered
by Transportation to be essential to its business as a whole.
Like all businesses which offer well-known products or services,
Transportation's primary trademarks are an important part of its
worldwide sales and marketing efforts, and provide instant
identification of its products and services in the marketplace. To
support these efforts, Transportation maintains, or has pending,
registrations of its primary trademarks in those countries in which it
does business or expects to do business.
RAW MATERIALS AND ENERGY SUPPLIES
Transportation purchases raw materials, parts and components from
numerous outside suppliers but relies upon some suppliers for a
substantial number of components for its truck and engine products. A
majority of Transportation's requirements for raw materials and supplies
is filled by single-source suppliers.
The impact of an interruption in supply will vary by commodity.
Some parts are generic to the industry while others are of a proprietary
design requiring unique tooling which would require time to recreate.
However, the company's exposure to a disruption in production as a
result of an interruption of raw materials and supplies is no greater
than the industry as a whole. In order to remedy any losses resulting
from an interruption in supply, the company maintains contingent
business interruption insurance for storms, fire and water damage.
While the company believes that it has adequate assurances of
continued supply, the inability of a supplier to deliver could have an
adverse effect on production at certain of the company's manufacturing
locations.
<PAGE>
<PAGE 8>
IMPACT OF GOVERNMENT REGULATION
Truck and engine manufacturers continue to face increasing
governmental regulation of their products, especially in the areas of
environment and safety. The company believes its products comply with
all applicable environmental and safety regulations.
As a diesel engine manufacturer, the company has incurred research
and tooling costs to redesign its engine product lines to meet the
United States Environmental Protection Agency (U.S. EPA) and California
Air Resources Board (CARB) emission standards effective for the 1998
model year. In addition to the 1998 standards, the company, along with
other engine manufacturers, has signed a voluntary agreement (Statement
of Principles) with U.S. EPA and CARB to achieve new reductions in
ozone-causing exhaust emissions by 2004. In October 1997, as a result
of the Statement of Principles, the U.S. EPA issued a final rule
defining heavy-duty emission requirements for the 2004 model year. The
company will also provide engines that satisfy 1998 Clean Fuel Fleet
Vehicle requirements and must also satisfy California's emission
standards in 2002 for engines used in medium-size vehicles (which
includes vehicles up to 14,000 lbs. Gross Vehicle Weight Rating). The
company expects that its diesel engines will be able to meet all of
these standards within the required time frame.
Effective with the 1998 model year, Canada's emission standards
mirror those of the U.S. EPA and require the sale of low-sulfur diesel
fuel effective October 1, 1997. Mexico has adopted the U.S. heavy
diesel engine emission standards as of the 1994 model year but has
conditioned compliance on the availability of low-sulfur diesel fuel.
Truck manufacturers are also subject to various noise standards
imposed by federal, state and local regulations. The engine is one of a
truck's primary noise sources, and the company, therefore, works closely
with original equipment manufacturers to develop strategies to reduce
engine noise. The company is also subject to the National Traffic and
Motor Vehicle Safety Act (Safety Act) and Federal Motor Vehicle Safety
Standards (Safety Standards) promulgated by the National Highway Traffic
Safety Administration. The company believes it is in compliance with
the Safety Act and the Safety Standards.
Expenditures to comply with various environmental regulations
relating to the control of air, water and land pollution at production
facilities and to control noise levels and emissions from
Transportation's products have not been material except for two sites
formerly owned by the company, Wisconsin Steel in Chicago, Illinois, and
Solar Turbine in San Diego, California. In 1994, Transportation
recorded a $20 million after-tax charge as a loss of discontinued
operations for environmental liabilities and cleanup cost at these two
sites. It is not expected that the costs of compliance with foreseeable
environmental requirements will have a material effect on the company's
financial position or operating results.
ITEM 2. PROPERTIES
In the United States and Canada, Transportation owns and operates
eight manufacturing and assembly operations, which contain approximately
nine million square feet of floor space. Four facilities manufacture
and assemble trucks, two plants manufacture diesel engines and two
locations produce gray iron castings. The company also manufactures
trucks at a facility owned and operated through a joint venture in the
U.S. and is constructing a truck assembly facility in Mexico. In
addition, Transportation owns or leases other significant properties in
the United States and Canada including vehicle and parts distribution
centers, sales offices, an engineering center and its headquarters in
Chicago.
<PAGE>
<PAGE 9>
Transportation's principal research and engineering facilities are
located in Fort Wayne, Indiana, and Melrose Park, Illinois. In
addition, certain research is conducted at its manufacturing plants.
All of Transportation's plants are being utilized and have been
maintained adequately, are in good operating condition and are suitable
for its current needs through productive utilization of the facilities.
These facilities, together with planned capital expenditures, are
expected to meet Transportation's manufacturing needs in the foreseeable
future.
A majority of the activity of the financial services operations is
conducted from its leased headquarters in Rolling Meadows, Illinois.
The financial services operations also lease six other office locations
in the United States.
ITEM 3. LEGAL PROCEEDINGS
The company and its subsidiaries are subject to various claims
arising in the ordinary course of business, and are parties to various
legal proceedings which constitute ordinary routine litigation
incidental to the business of the company and its subsidiaries. In the
opinion of the company's management, none of these proceedings or claims
are material to the business or the financial condition of the company.
<PAGE>
<PAGE 10>
EXECUTIVE OFFICERS
The following selected information for each of the company's
current executive officers was prepared as of December 16, 1997.
OFFICERS AND POSITIONS WITH
NAME AGE NAVISTAR AND OTHER INFORMATION
- ---- --- ------------------------------
John R. Horne 59 Chairman, President and Chief
Executive Officer since 1996
and a Director since 1990.
Mr. Horne also is Chairman,
President and Chief Executive
Officer of Transportation
since 1995 and a Director
since 1987. Prior to this,
Mr. Horne served as President
and Chief Executive Officer,
1995-1996, President and Chief
Operating Officer, 1990-1995,
Group Vice President and General
Manager, Engine and Foundry,
1990, and Vice President and
General Manager, Engine and
Foundry, 1983-1990.
Donald DeFosset, Jr. 49 Executive Vice President and
President, Truck Group since
1996. Mr. DeFosset also is
Executive Vice President
and President, Truck Group of
Transportation since 1996.
Prior to this, Mr. DeFosset
served as President,
Allied Signal Safety Restraints
Systems of Allied Signal Inc.,
1993 - 1996, Group Executive
and General Manager, Allied
Signal Turbocharging and
Truck Brake Systems, 1992 - 1993,
and Vice President, Planning and
Business Development in 1992
and served as Executive Vice
President, Operations for
Mack Trucks, 1989 - 1992.
Robert C. Lannert 57 Executive Vice President and Chief
Financial Officer and a
Director since 1990. Mr. Lannert
also is Executive Vice President
and Chief Financial Officer of
Transportation since 1990 and a
Director since 1987. Prior to
this, Mr. Lannert served as Vice
President and Treasurer,
1987-1990, and Vice President
and Treasurer of Transportation,
1979-1990.
Robert A. Boardman 50 Senior Vice President and General
Counsel since 1990. Mr. Boardman
also is Senior Vice President and
General Counsel of Transportation
since 1990. Prior to this,
Mr. Boardman served as Vice
President of Manville Corporation,
1988-1990, and Corporate
Secretary, 1983-1990.
<PAGE>
<PAGE 11>
EXECUTIVE OFFICERS (continued)
OFFICERS AND POSITIONS WITH
NAME AGE NAVISTAR AND OTHER INFORMATION
- ---- --- ------------------------------
Thomas M. Hough 52 Vice President and Treasurer since
1992. Mr. Hough also is
Vice President and Treasurer of
Transportation since 1992.
Prior to this, Mr. Hough served
as Assistant Treasurer 1987-1992,
and Assistant Treasurer of
Transportation, 1987-1992.
Mr. Hough also served as Assistant
Controller, Accounting and
Financial Systems, 1987, and
Controller of Navistar Financial
Corporation, 1982-1987.
J. Steven Keate 41 Vice President and Controller since
1995. Mr. Keate also is Vice
President and Controller of
Transportation since 1995.
Prior to this, Mr. Keate served
as Vice President and Controller
of General Dynamics Corporation,
1991-1995, and Corporate Manager,
Financial Planning and Analysis,
1989-1991.
Steven K. Covey 46 Corporate Secretary since 1990.
Mr. Covey also is Associate
General Counsel of Transportation
since 1992. Prior to this,
Mr. Covey served as General
Attorney, Finance and Securities
of Transportation, 1989-1992,
Senior Counsel, Finance and
Securities of Transportation,
1986-1989, and Senior Attorney,
Corporate Operations 1984-1986.
<PAGE>
<PAGE 12>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Navistar International Corporation Common Stock is listed on the
New York, Chicago and Pacific Stock Exchanges under the abbreviated
stock symbol "NAV." Information regarding high and low market price per
share of Common Stock for each quarter of 1997 and 1996 is incorporated
by reference from the 1997 Annual Report to Shareowners, page 41, filed
as Exhibit 13 to this Form 10-K. There were approximately 57,949 owners
of Common Stock at October 31, 1997.
All shares of Common Stock and Class B Common Stock share equally
in dividends except that stock dividends are payable in shares of Common
Stock to holders of that class and in Class B Common Stock to holders of
that class. Upon liquidation, all shares of Common Stock and Class B
Common Stock are entitled to share equally in the assets of the company
available for distribution to the holders of such shares. Dividends may
be paid out of surplus as defined under Delaware corporation law.
ITEMS 6, 7 AND 8
The information required by Items 6-8 is incorporated herein by
reference from the 1997 Annual Report to Shareowners, filed as Exhibit
13 to this Form 10-K as follows:
1997
Annual
Report
Page
------
ITEM 6. SELECTED FINANCIAL DATA .................... 44
ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION ...... 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 14
With the exception of the aforementioned information (Part II;
Items 5-8) and the information specified under Items 1 and 14 of this
report, the 1997 Annual Report to Shareowners is not to be deemed
filed as part of this report.
----------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
<PAGE>
<PAGE 13>
PART III
ITEMS 10, 11 AND 12.
Information required by Items 10, 11 and 12 of this Form is
incorporated herein by reference from Navistar's definitive Proxy
Statement for the March 24, 1998 Annual Meeting of Shareowners.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
Information required by Part IV (Item 14) of this form is
incorporated herein by reference from Navistar International
Corporation's 1997 Annual Report to Shareowners, filed as Exhibit 13 to
this Form 10-K as follows:
1997
Annual
Report
Page
------
Financial Statements
- --------------------
Independent Auditors' Report ........................ 13
Statement of Income
for the years ended October 31, 1997, 1996 and 1995 14
Statement of Financial Condition
as of October 31, 1997 and 1996 ................... 15
Statement of Cash Flow
for the years ended October 31, 1997, 1996 and 1995 16
Notes to Financial Statements ....................... 17
Form
10-K
Schedule Page
- -------- ----
II - Valuation and Qualifying Accounts and Reserves F-1
All other schedules are omitted because of the absence of the
conditions under which they are required or because information called
for is shown in the financial statements and notes thereto in the 1997
Annual Report to Shareowners.
Finance and Insurance Subsidiaries:
The financial statements of Navistar Financial Corporation for the
years ended October 31, 1997, 1996 and 1995 appearing on pages 8 through
34 in the Annual Report on Form 10-K for Navistar Financial Corporation
for the fiscal year ended October 31, 1997, Commission File No. 1-4146-
1, are incorporated herein by reference and filed as Exhibit 28 to this
Form 10-K.
<PAGE>
<PAGE 14>
Exhibits, Including Those Incorporated by Reference Form 10-K Page
- --------------------------------------------------- --------------
(3) Articles of Incorporation and By-Laws ......... E-1
(4) Instruments Defining the Rights of
Security Holders, Including Indentures ...... E-2
(10) Material Contracts ............................ E-3
(11) Computation of Net Income Per Common Share .... E-9
(13) Navistar International Corporation
1997 Annual Report to Shareowners ........... N/A
(21) Subsidiaries of the Registrant ................ E-10
(23) Independent Auditors' Consent ................. 18
(24) Power of Attorney ............................. 16
(27) Financial Data Schedule ....................... N/A
(28) Navistar Financial Corporation Annual Report
on Form 10-K for the fiscal year ended
October 31, 1997 ............................ N/A
All exhibits other than those indicated above are omitted because
of the absence of the conditions under which they are required or
because the information called for is shown in the financial statements
and notes thereto in the 1997 Annual Report to Shareowners.
Reports on Form 8-K
- -------------------
No reports on Form 8-K were filed for the three months ended
October 31, 1997.
<PAGE>
<PAGE 15>
SIGNATURE
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
---------------------------------
SIGNATURE
Pursuant to the requirements of Section 13 and 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NAVISTAR INTERNATIONAL CORPORATION
- ----------------------------------
(Registrant)
/s/ J. Steven Keate
- ----------------------------------
J. Steven Keate December 22, 1997
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
<PAGE 16>
EXHIBIT 24
SIGNATURE
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
POWER OF ATTORNEY
Each person whose signature appears below does hereby make,
constitute and appoint John R. Horne and J. Steven Keate and each of
them acting individually, true and lawful attorneys-in-fact and agents
with power to act without the other and with full power of substitution,
to execute, deliver and file, for and on such person's behalf, and in
such person's name and capacity or capacities as stated below, any
amendment, exhibit or supplement to the Form 10-K Report making such
changes in the report as such attorney-in-fact deems appropriate.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
Signature Title Date
- ---------------------- ----------------------------- -----------------
/s/ John R. Horne
- ----------------------
John R. Horne Chairman of the Board, December 22, 1997
President and
Chief Executive Officer,
and Director
(Principal Executive Officer)
/s/ Robert C. Lannert
- ----------------------
Robert C. Lannert Executive Vice President December 22, 1997
and Chief Financial Officer
and Director
(Principal Financial Officer)
/s/ J. Steven Keate
- ----------------------
J. Steven Keate Vice President and Controller December 22, 1997
(Principal Accounting
Officer)
/s/ William F. Andrews
- -----------------------
William F. Andrews Director December 22, 1997
<PAGE>
<PAGE 17>
EXHIBIT 24 (CONTINUED)
SIGNATURE
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
SIGNATURES (Continued)
/s/ Andrew F. Brimmer
- ----------------------
Andrew F. Brimmer Director December 22, 1997
/s/ John D. Correnti
- ----------------------
John D. Correnti Director December 22, 1997
/s/ William C. Craig
- -----------------------
William C. Craig Director December 22, 1997
/s/ Jerry E. Dempsey
- -----------------------
Jerry E. Dempsey Director December 22, 1997
/s/ John F. Fiedler
- -----------------------
John F. Fiedler Director December 22, 1997
/s/ Mary Garst
- -----------------------
Mary Garst Director December 22, 1997
/s/ Michael N. Hammes
- -----------------------
Michael N. Hammes Director December 22, 1997
/s/ Allen J. Krowe
- -----------------------
Allen J. Krowe Director December 22, 1997
/s/ Walter J. Laskowski
- ------------------------
Walter J. Laskowski Director December 22, 1997
/s/ William F. Patient
- ------------------------
William F. Patient Director December 22, 1997
<PAGE>
<PAGE 18>
SIGNATURE
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
-----------------------------------
INDEPENDENT AUDITORS' REPORT
Navistar International Corporation:
We have audited the Statement of Financial Condition of Navistar
International Corporation and Consolidated Subsidiaries as of October
31, 1997 and 1996, and the related Statements of Income and Cash Flow
for each of the three years in the period ended October 31, 1997, and
have issued our report thereon, dated December 15, 1997; such
consolidated financial statements and report are included in your 1997
Annual Report to Shareowners and are incorporated herein by reference.
Our audits also included the financial statement schedule of Navistar
International Corporation and Consolidated Subsidiaries, listed in Item
14. This financial statement schedule is the responsibility of the
company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
December 15, 1997
Chicago, Illinois
----------------------------------
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Navistar International Corporation:
We consent to the incorporation by reference in the Registration
Statements, including post-effective amendments, No. 2-70979, No. 33-
26847, No. 333-25783, No. 333-29735, No. 333-29739 and No.333-29301
of Navistar International Corporation all on Form S-8 of our reports on
Navistar International Corporation and Navistar Financial Corporation,
dated December 15, 1997, appearing and incorporated by reference in this
Annual Report on Form 10-K of Navistar International Corporation for the
year ended October 31, 1997.
Deloitte & Touche LLP
December 22, 1997
Chicago, Illinois
<PAGE>
<PAGE 1>
<TABLE>
<CAPTION> SCHEDULE II
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
============
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(MILLIONS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE DEDUCTIONS FROM
DESCRIPTION AT RESERVES BALANCE
DESCRIPTION BEGINNING ADDITIONS CHARGED AT END
OF RESERVES DEDUCTED FROM OF YEAR TO INCOME DESCRIPTION AMOUNT OF YEAR
----------- ------------- --------- ----------------- ----------- ------ -------
<S> <S> <C> <C> <S> <C> <C>
Reserves deducted from
assets to which they
apply:
1997
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustment,
receivables .... receivable .... $ 31 $ 14 less recoveries ... $ 14 $ 31
===== ===== ===== =====
1996
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustment,
receivables .... receivable .... $ 28 $ 21 less recoveries ... $ 18 $ 31
===== ===== ===== =====
1995
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustment,
receivables .... receivable .... $ 25 $ 4 less recoveries ... $ 1 $ 28
===== ===== ===== =====
</TABLE>
F-1
<PAGE 1>
EXHIBIT 3
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
ARTICLES OF INCORPORATION AND BY-LAWS
The following documents of Navistar International Corporation are
incorporated herein by reference:
3.1 Restated Certificate of Incorporation of Navistar
International Corporation effective July 1, 1993,
filed as Exhibit 3.2 to Form 10-K dated October 31,
1993, which was filed on January 27, 1994, Commission
File No. 1-9618.
3.2 The By-Laws of Navistar International Corporation
effective April 14, 1995, filed as Exhibit 3.2 on
Annual Report on Form 10-K dated October 31, 1995,
which was filed on January 26, 1996, on Commission
File No. 1-9618.
E-1
<PAGE 1>
EXHIBIT 4
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
The following instruments of Navistar International Corporation and
its principal subsidiary Navistar International Transportation Corp. and
its principal subsidiary Navistar Financial Corporation defining the
rights of security holders are incorporated herein by reference.
4.1 Indenture, dated as of March 1, 1968, between
Navistar International Transportation Corp. and
Manufacturers Hanover Trust Company, as Trustee, and
succeeded by FIDATA Trust Company of New York, as
successor Trustee, for 6 1/4% Sinking Fund Debentures
due 1998 for $50,000,000. Filed on Registration
No. 2-28150.
4.2 Indenture, dated as of June 15, 1974, between
Navistar International Transportation Corp. and
Harris Trust and Savings Bank, as Trustee, and
succeeded by Commerce Union Bank, now known as
Sovran Bank/Central South, as successor Trustee,
for 9% Sinking Fund Debentures due 2004 for
$150,000,000. Filed on Registration No. 2-51111.
4.3 Indenture, dated as of November 15, 1993, between
Navistar Financial Corporation and Bank of America,
Illinois formerly known as Continental Bank, National
Association, as Trustee, for 8 7/8% Senior
Subordinated Notes due 1998 for $100,000,000. Filed
on Registration No. 33-50541.
4.4 Indenture, dated as of May 30, 1997, by and between
Navistar Financial Corporation and The Fuji Bank and
Trust Company, as Trustee, for 9% Senior Subordinated
Notes due 2002 for $100,000,000. Filed on
Registration No. 333-30167.
======
Instruments defining the rights of holders of other unregistered
long-term debt of Navistar and its subsidiaries have been omitted
from this exhibit index because the amount of debt authorized under any
such instrument does not exceed 10% of the total assets of the Registrant
and its consolidated subsidiaries. The Registrant agrees to furnish a
copy of any such instrument to the Commission upon request.
E-2
<PAGE 1>
EXHIBIT 10
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
MATERIAL CONTRACTS
The following documents of Navistar International Corporation and its
affiliate Navistar Financial Corporation are incorporated herein by
reference.
10.1 Navistar International Corporation 1984 Stock Option
Plan. Filed as Exhibit A to Proxy Statement dated
February 6, 1984. Commission File No. 1-5236.
10.2 Pooling and Servicing Agreement dated as of December
1, 1990, among Navistar Financial Corporation as
Servicer, Navistar Financial Securities Corporation
as Seller, and Manufacturers Hanover Trust Company,
as Trustee. Filed on Registration No. 33-36767.
10.3 Navistar 1994 Performance Incentive Plan. Filed as
Appendix to Proxy Statement dated January 27, 1994.
Commission File No. 1-9618.
10.4 Indenture dated as of May 3, 1994 between Navistar
Financial 1994-A Owner Trust and The Bank of New
York, as Indenture Trustee, with respect to Navistar
Financial 1994-A Owner Trust. Filed on Registration
No. 33-50291.
10.5 Indenture dated as of August 3, 1994 between
Navistar Financial 1994-B Owner Trust and The Bank
of New York, as Indenture Trustee, with respect to
Navistar Financial 1994-B Owner Trust. Filed on
Registration No. 33-50291.
10.6 Amended and Restated Credit Agreement dated as of
November 4, 1994 among Navistar Financial
Corporation, certain banks, certain Co-Arranger
banks, and Morgan Guaranty Trust Company of New
York, as Administrative Agent. Filed on Form 8-K
dated November 4, 1994. Commission File
No. 1-4146-1.
10.7 Liquidity Agreement dated as of November 7, 1994
among NFC Asset Trust, as Borrower, Chemical Bank,
Bank of America Illinois, The Bank of Nova Scotia,
and Morgan Guaranty Trust Company of New York, as
Co-Arrangers, and Chemical Bank, as Administrative
Agent. Filed on Form 8-K dated November 4, 1994.
Commission File No. 1-4146-1.
10.8 Indenture dated as of December 15, 1994 between
Navistar Financial 1994-C Owner Trust and the Bank
of New York, as Indenture Trustee, with respect to
Navistar Financial 1994-C Owner Trust. Filed on
Registration No. 33-55865.
10.9 Indenture dated as of May 25, 1995 between Navistar
Financial 1995-A Owner Trust and The Bank of New
York, as Indenture Trustee, with respect to Navistar
Financial 1995-A Owner Trust. Filed on Registration
No. 33-55865.
E-3
<PAGE>
<PAGE 2>
EXHIBIT 10 (CONTINUED)
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
MATERIAL CONTRACTS
10.10 Indenture dated as of November 1, 1995 between
Navistar Financial 1995-B Owner Trust and The Bank
of New York, as Indenture Trustee, with respect to
Navistar Financial 1995-B Owner Trust. Filed on
Registration No. 33-55865.
10.11 Amendment No. 2 dated as of March 29, 1996, to the
Amended and Restated Credit Agreement dated as of
November 4, 1994, as amended by Amendment No. 1
dated as of December 15, 1995, among Navistar
Financial, certain banks, certain Co-Arranger
banks, and Morgan Guaranty Trust Company of New
York, as Administrative Agent filed on Form 8-K
dated June 5, 1996. Commission File No. 1-4146-1.
10.12 Indenture dated as of May 30, 1996, between
Navistar Financial 1996-A Owner Trust and The Bank
of New York, as Indenture Trustee, with respect to
Navistar Financial 1996-A Owner Trust. Filed on
Registration No. 33-55865.
10.13 Indenture dated as of November 6, 1996, between
Navistar Financial 1996-B Owner Trust and The Bank
of New York, as Indenture Trustee, with respect to
Navistar Financial 1996-B Owner Trust. Filed on
Registration No. 33-55865.
10.14 Indenture dated as of May 7, 1997, between Navistar
Financial 1997-A Owner Trust and The Bank of New
York, as Indenture Trustee, with respect to
Navistar Financial 1997-A Owner Trust. Filed on
Registration No. 33-55865.
10.15 Amendment No. 3 dated as of May 27, 1997, to the
Amended and Restated Credit Agreement dated as of
November 4, 1994, as amended by Amendment No. 1
dated as of December 15, 1995 and Amendment No. 2
dated as of March 29, 1996, among the Navistar
Financial Corporation, certain banks, certain
Co-Arranger banks, and Morgan Guaranty Trust
Company of New York, as Administrative Agent filed
on Form 8-K dated June 17, 1997. Commission File
No. 1-4146-1.
10.16 Form of Executive Severance Agreement which is
executed with all executive officers dated June 16,
1997. Filed as Exhibit 10.5 to Form 10-Q dated
September 12, 1997. Commission File No. 1-9618.
10.17 Navistar International Corporation Stock Ownership
Program. Filed as Exhibit 10.20 to Form 10-Q dated
September 12, 1997. Commission File No. 1-9618.
10.18 Indenture dated as of November 5, 1997, between
Navistar Financial 1997-B Owner Trust and The Bank
of New York, as Indenture Trustee, with respect to
Navistar Financial 1997-B Owner Trust. Filed on
Registration No. 33-64249.
The following documents of Navistar International Corporation are
included herein:
Form 10-K Page
--------------
10.19 Navistar 1988 Non-Employee Director E-5
Stock Option Plan amended as of
March 20, 1996.
E-4
<PAGE 1>
EXHIBIT 10.19
NAVISTAR 1988 NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
Amended As Of March 20, 1996
I. Administration
The Navistar 1988 Non-Employee Director Stock Option Plan (the "Plan")
will be administered by the Board of Directors ("Board") of Navistar
International Corporation ("Corporation").
The granting of an option pursuant to the Plan will take place the
business day following the day on which the Board approves the grant of
such option at its regularly scheduled December meeting, provided that,
such grant will expire if a written option agreement is not signed by the
optionee and delivered to the Corporation within thirty (30) days of the
date of the grant.
Subject to the express provisions of the Plan, the Board will have
complete authority to interpret the Plan, to prescribe, amend and rescind
rules and regulations relating to it, to determine the terms and provisions
of the respective option agreements (which need not be identical) and to
make all other determinations necessary or advisable for the administration
of the Plan. The Board's determinations on the matters referred to in this
paragraph 1 will be conclusive.
2. Stock Subject to the Plan
Such shares may be in whole or in part, as the Board will from time to
time determine, authorized and unissued shares of Common Stock or issued
shares of Common Stock which shall have been reacquired by the Corporation.
If any option granted under the Plan shall expire or terminate for any
reason without having been exercised or earned in full, the shares subject
thereto will again be available for the purposes of the Plan.
3. Effectiveness of the Plan
The Plan will become effective upon the effective date of its adoption
by the Board and options may be granted immediately thereafter, but no
option may be exercised under the Plan unless and until the Plan shall have
been approved by the vote of the holders of a majority of the outstanding
shares of Common Stock present and voting at a meeting of the shareowners
within six (6) months after the date of adoption of the Plan by the Board.
4. Eligibility
Options may be granted only to non-employee directors of the Board.
No individual who is, at the time of the grant, an employee of the
Corporation or of any subsidiary of the Corporation will be eligible to
receive an option under the Plan.
5. Number of Shares To Be Granted
At each regularly scheduled December meeting of the Board, an option
will be granted to each non-employee director for two thousand (2,000)
shares of Common Stock.
E-5
<PAGE>
<PAGE 2>
6. Option Prices
The purchase price of the Common Stock under each option will be 100%
of the fair market value of the Common Stock on the business day following
the day of grant by the Board. Such fair market value will be determined
by the average of the high and low prices of the Common Stock in the New
York Stock Exchange--Composite Transactions listing published in the
Midwest Edition of The Wall Street Journal or equivalent financial
publication.
7. Exercise Options
An option granted under the Plan will become exercisable in whole or
in part after the commencement of the second year of the term of the
option. The Board is authorized to establish the manner and the effective
date of the exercise of an option. Each option will become immediately
exercisable in the event of death, total and permanent disability,
retirement in accordance with the Board's policy or a "change in control"
of the Corporation. A "change in control" shall be deemed to have
occurred, if (A) any "person" or "group" (as such terms are used in Section
13(d) and 14(d) of the Securities Exchange Act of 1934 other than employee
or retiree benefit plans or trusts sponsored or established by the
Corporation or Navistar International Transportation Corp. ("NITC") is or
becomes the "beneficial owner" (as defined Rule 13d-3 under the Securities
Exchange Act of 1934), directly or indirectly, of securities of the
Corporation representing 25% or more the combined voting power of the
Corporation's then outstanding securities, (B) as the result of, or in
connection with, any cash tender offer, exchange offer, merger or other
business combination, sale of assets, proxy or consent solicitation,
contested election or substantial stock accumulation (a "Control
Transaction"), the members of the Board of Directors of the Corporation
immediately prior to the first public announcement relating to such Control
Transaction shall immediately thereafter, or within two years, cease to
constitute a majority of the Board of Directors of the Corporation or (C)
any dissolution or liquidation of the Corporation or NITC or an agreement
for the sale or disposition of all or substantially all (more than 50%) of
the assets of the Corporation or of NITC occurs. Notwithstanding the
foregoing, the sale or disposition of any or all of the assets or stock of
Navistar Financial Corporation shall not be deemed a Change in Control.
The purchase price is to be paid in full to the Corporation upon the
exercise of the option either (i) by cash including a personal check
payable to the order of the Corporation or (ii) by delivering at fair
market value Common Stock already owned by the optionee or any combination
of cash and Common Stock. The fair market value of the Common Stock so
delivered will be the average of the high and low prices of the Common
Stock on the day prior to delivery as published in the New York Stock
Exchange--Composite Transactions listed in the Midwest Edition of the Wall
Street Journal or equivalent financial publication. An option granted
under the Plan will be exercisable for a term of ten (10) years from the
date of the grant, and will be subject to earlier termination as
hereinafter provided. Except as provided in paragraphs 10 and 11 hereof,
no option may exercised at any time unless the holder thereof is then a
director of the Corporation. The holder of an option will have none of the
rights of a stockholder with respect to the shares subject to option until
such shares are issued upon the exercise of the option. Shares which
otherwise would be delivered to the holder of an option may be delivered,
at the election of the holder, to the Corporation in payment of any
Federal, state and/or local withholding taxes due in connection with an
exercise.
E-6
<PAGE>
<PAGE 3>
8. Non-Transferability of Options
No option granted under the Plan will be transferable other than by
will or the laws of descent and distribution, and an option may be
exercised, during the life time of the holder thereof, only by the holder.
9. Agreement to Serve
Each individual receiving an option will, as one of the terms of the
option agreement, agree to remain as a director of the Corporation for a
period of at least one (1) year from the date of granting the option except
as provided in the immediately following sentence. In the event of
retirement in accordance with the Board's policy prior to the end of the
one year service period, each holder will, as one of the terms of the
option agreement, agree to serve as a consultant to the Board for any
remaining portion of such one year service period. Such service will
(subject to the provisions of paragraph 10 hereof) be at the pleasure of
the Corporation and at such compensation as the Corporation will reasonably
determine from time to time.
10. Termination of Service
In the event of the termination of the service of the holder of any
option, other than by reason of a retirement, permanent and total
disability or death as set forth in paragraph 11, the holder may (unless
the option shall have been previously terminated pursuant to the provisions
of paragraph 9 above or unless otherwise provided in the option agreement)
exercise the option at any time within three (3) months after such
termination, but not after the date identified in the option agreement as
the date the options expire. Nothing in the Plan or in any option granted
pursuant to the Plan will confer on any individual any right to continue in
the service of the Corporation or interfere in any way with the right of
the Board to terminate service at any time.
11. Retirement, Total and Permanent Disability or Death of Holder
of Option
In the event of retirement in accordance with the Board's policy or in
the event of total and permanent disability, the holder may exercise the
option at any time within three (3) years after such retirement or such
disability but not after the date identified in the option agreement as the
date the options expire. In the event of the death of an individual to
whom an option has been granted under the Plan, while the option is
outstanding, the option theretofore granted to the holder may be exercised
by a legatee or legatees of the option holder, or by the personal
representative or distributees, at any time within a period of one (1) year
after death, but not after the date identified in the option as the date
the options expire.
E-7
<PAGE>
<PAGE 4>
12. Adjustments upon Changes in Capitalization
Notwithstanding any other provision of the Plan, the option agreements
may contain such provisions as the Board shall determine to be appropriate
for the adjustment of the number and class of shares subject to each
outstanding option and the option prices in the event of changes in, or
distributions with respect to, the outstanding Common Stock by reason of
stock dividends, recapitalizations, mergers, consolidations, split-ups,
combinations or exchanges of shares, spin-offs and the like, and, in the
event of any such change in, or distribution with respect to, the
outstanding Common Stock, the aggregate number and class of shares
available under the Plan shall be appropriately adjusted by the committee,
whose determination shall be conclusive.
13. No Loans to Holders of Options
Neither the Corporation, nor any of its subsidiaries, may directly or
indirectly lend money to any individual for the purpose of assisting the
individual to acquire or carry shares of Common Stock issued upon the
exercise of options granted under the Plan.
14. Amendment and Termination
Unless the Plan shall theretofore have been terminated as hereinafter
provided, the Plan will terminate on, and no option will be granted after
December 17, 1997. The Plan may be terminated, modified or amended by the
shareowners of the Corporation. The Board may also terminate the Plan, or
modify or amend the Plan in such respects as it shall deem advisable to
conform to any change in any law or regulations applicable thereto, or in
other respects which will not change (i) the maximum number of shares as to
which benefits may be granted under the Plan or the amount of the annual
grant of shares subject to the option, (ii) the classes of individuals
eligible to receive options, (iii) the manner of determining the minimum
options prices other than to change the manner of determining the fair
market value of the Common Stock, as set forth in paragraph 5 above, to
conform to any then applicable provisions of the Code or regulations
thereunder or (iv) the period during which options may be granted or
exercised. No termination, modification or amendment of the Plan may,
without the consent of the optionee to whom any option or award shall
theretofore have been granted, adversely affect the rights of such
optionee.
E-8
<PAGE 1>
EXHIBIT 11
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
COMPUTATION OF NET INCOME PER COMMON SHARE
A. Primary: See the Statement of Income contained in the Navistar
International Corporation 1997 Annual Report to Shareowners incorporated
herein by reference.
B. Full Dilution:
YEARS ENDED OCTOBER 31
Millions of Dollars, -----------------------------
except per share data 1997 1996 1995
- -------------------------------------------------------------------
Net income .................. $ 150 $ 65 $ 164
Less dividends on
Series G
Preferred stock ........... 29 29 29
------ ------ ------
Net income applicable to
common stock .............. $ 121 $ 36 $ 135
====== ====== ======
Fully diluted average
common and dilutive
common equivalent
shares outstanding ........ 74.1 73.8 74.3
====== ====== ======
Fully diluted earnings
per share ................. $ 1.64 $ .49 $ 1.83
====== ====== ======
- ---------------
This calculation is submitted in accordance with Regulation S-K item
601(b)(11) of the Securities Exchange Act and excludes the effects of the
conversion of the Series G preferred stock as such conversion would
produce anti-dilutive results.
E-9
<PAGE 1>
EXHIBIT 13
NAVISTAR INTERNATIONAL CORPORATION
1997 ANNUAL REPORT TO SHAREOWNERS
FINANCIAL SUMMARY
Millions of dollars, except per share data 1997 1996
- --------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31
Sales and revenues ............... $6,371 $5,754
Income before income taxes ....... $ 242 $ 105
Net income ....................... $ 150 $ 65
Net income per common share ...... $ 1.65 $ .49
Manufacturing gross margin ....... 14.2% 12.5%
Return on equity ................. 14.7% 7.1%
Cash and marketable securities ... $ 965 $ 881
<PAGE>
<PAGE 2>
FINANCIAL INFORMATION
Financial Summary ............................................. 1
Management's Discussion and Analysis of Results
of Operations and Financial Condition ....................... 3
Statement of Financial Reporting Responsibility ............... 12
Independent Auditors' Report .................................. 13
Financial Statements
Statement of Income ......................................... 14
Statement of Financial Condition ............................ 15
Statement of Cash Flow ...................................... 16
Notes to Financial Statements
1 Summary of accounting policies ....................... 17
2 Postretirement benefits .............................. 20
3 Income taxes ......................................... 24
4 Marketable securities ................................ 27
5 Receivables .......................................... 28
6 Inventories .......................................... 29
7 Property and equipment ............................... 29
8 Debt ................................................. 30
9 Other liabilities .................................... 32
10 Financial instruments ................................ 33
11 Commitments, contingencies, restricted assets,
concentrations and leases .......................... 35
12 Legal proceedings .................................... 36
13 Environmental matters ................................ 36
14 Industry segment data ................................ 37
15 Preferred and preference stocks ...................... 38
16 Common shareowners' equity ........................... 39
17 Stock compensation plans ............................. 40
18 Selected quarterly financial data (unaudited) ........ 41
19 Supplemental financial information (unaudited) ....... 42
Five -Year Summary of Selected Financial and Statistical Data . 44
<PAGE>
<PAGE 3>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Certain statements under this caption constitute "forward-looking
statements" under the Reform Act, which involve risks and uncertainties.
Navistar International Corporation's actual results may differ
significantly from the results discussed in such forward-looking
statements. Factors that might cause such a difference include, but are
not limited to, those discussed under the caption "Business Environment."
Navistar International Corporation is a holding company and its
principal operating subsidiary is Navistar International Transportation
Corp. (Transportation). In this discussion and analysis, "company" refers
to Navistar International Corporation and its consolidated subsidiaries.
The company's manufacturing operations are engaged in the manufacture and
marketing of Class 5 through 8 trucks, including school buses, mid-range
diesel engines and service parts primarily in the United States and
Canada. These products are also sold to distributors in selected export
markets. The financial services operations of the company provide
wholesale, retail and lease financing, and commercial physical damage and
liability insurance coverage to the company's dealers and retail customers
and to the general public through an independent insurance agency system.
The discussion and analysis reviews the operating and financial
results, and liquidity and capital resources of manufacturing operations
and financial services operations. Manufacturing operations include the
financial results of the financial services operations included on a one-
line basis under the equity method of accounting. Financial services
operations include Navistar Financial Corporation (NFC), its domestic
insurance subsidiary as well as the company's foreign finance and
insurance companies. See Note 1 to the Financial Statements.
RESULTS OF OPERATIONS
The company reported net income of $150 million for 1997, or $1.65
per common share, reflecting higher sales of manufactured products. Net
income was $65 million, or $0.49 per common share, in 1996 and $164
million, or $1.83 per common share, in 1995. Net income in 1996 included
a one-time $35 million pretax charge for costs related to the termination
of the next generation truck (NGT) program. In August 1997, the company
and the United Auto Workers reached agreement on a master contract
extension that enabled the company to reinstate this program. The
remaining accrual for the 1996 charge at the time of the announcement was
not material.
The company's manufacturing operations reported income before income
taxes of $164 million in 1997 compared with pretax income of $22 million
in 1996 and $200 million in 1995. The increase in 1997 reflects higher
sales of trucks and diesel engines as well as the effects of improved
pricing and various cost improvement initiatives. The decrease in 1996
from 1995 reflects a decline in demand for trucks as well as the charge
for termination of the company's next generation truck program.
The company's financial services operations had income before income
taxes of $78 million, $83 million and $62 million in 1997, 1996 and 1995,
respectively.
<PAGE>
<PAGE 4>
NFC's pretax income in 1997 was $75 million, a 7% decrease from $81
million in 1996. The change is primarily a result of lower income on
sales of retail receivables and a decline in wholesale financing activity.
The reduced gains on sales resulted from lower margins on retail notes
reflecting higher market interest rates prior to the date of sale. NFC's
pretax income increased $22 million in 1996 from the $59 million reported
in 1995 primarily due to higher income on sales of retail notes and an
increased volume of wholesale financing.
Earnings from the foreign finance and insurance subsidiaries were $3
million, $2 million and $3 million in 1997, 1996 and 1995, respectively.
Sales and Revenues. Industry retail sales of Class 5 through 8 trucks
totaled 347,400 units in 1997, a 2% increase from the 341,200 units sold
in 1996, but 9% lower than the 380,600 units sold in 1995. Class 8 heavy
truck sales totaled 196,800 units, comparable to the 195,400 units sold in
1996 but a decrease of 14% from the 228,800 units sold in 1995. Industry
sales of Class 5, 6 and 7 medium trucks, including school buses, totaled
150,600 units in 1997, a 3% increase from 1996 when 145,800 units were
sold, and comparable to the 151,800 units sold in 1995. Industry sales of
school buses, which accounted for 22% of the medium truck market,
increased slightly from 1996 to 33,200 units.
Sales and revenues of $6,371 million in 1997 were 11% higher than the
$5,754 million reported in 1996 and comparable to the $6,342 million
reported in 1995. Sales of trucks, mid-range diesel engines and service
parts totaled $6,147 million in 1997, 12% above the $5,508 million
reported for 1996 and comparable to the $6,125 million reported in 1995.
The company maintained its position as sales leader in the combined
United States and Canadian Class 5 through 8 truck market in 1997 with a
28.6% market share, an increase from the 27.5% share in 1996 and the 26.7%
share in 1995. (Sources: American Automobile Manufacturer's Association,
the United States Motor Vehicle Manufacturer's Association and R. L. Polk
& Company.) In 1997, the company's share of the Class 8 heavy truck
market increased to 18.6% from 17.1% in 1996 and 18.4% in 1995.
Shipments of mid-range diesel engines by the company to other
original equipment manufacturers during 1997 were a record 184,000 units,
a 13% increase from 1996 and a 19% improvement over 1995. Higher
shipments to Ford Motor Company to meet consumer demand for the light
trucks and vans which use this engine was the primary reason for the
increase.
Service parts sales of $806 million in 1997 increased from the $760
million reported in 1996 and were 10% higher than the $730 million
reported in 1995 as a result of dealer and national account volume growth.
Finance and insurance revenue for 1997 was $174 million, 12% lower
than the $197 million reported in 1996 primarily as a result of a decline
in wholesale financing activity. Revenues from financial services
operations increased 18% between 1996 and 1995 primarily as a result of
higher income on sales of retail notes.
<PAGE>
<PAGE 5>
Costs and Expenses. Manufacturing gross margin was 14.2% of sales in
1997, compared with 12.5% in 1996 and 13.8% in 1995. The increase in
gross margin is primarily due to lower production costs and improved
pricing offset by a provision for employee profit sharing. Factors which
contributed to the change in gross margin between 1996 and 1995 included
lower sales volumes, more competitive pricing and the costs of terminating
the next generation truck program.
Engineering and research expense was $124 million in 1997, $129
million in 1996 and $113 million in 1995, reflecting continuing investment
in new truck and engine products as well as improvements to existing
products.
Marketing and administrative expense was $365 million in 1997
compared with $319 million in 1996 and $307 million in 1995. The change
between 1997 and 1996 is the result of higher sales and distribution
costs, and an increase in the provision for payment to employees as
provided by the company's performance incentive programs. The $12 million
increase in the expense between 1996 and 1995 reflects investment in the
implementation of the company's strategy to reduce costs and complexity in
its manufacturing processes.
Interest expense decreased to $74 million in 1997 from $83 million in
1996 and $87 million in 1995. The decreases in 1997 and 1996 were the
result of lower wholesale note funding requirements and declining interest
rates.
Finance service charges on sold receivables were $23 million in 1997,
4% lower than in 1996 and 21% lower than in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow is generated from the manufacture and sale of trucks, mid-
range diesel engines and service parts as well as product financing and
insurance coverage provided to Transportation's dealers and retail
customers by the financial services operations.
Historically, funds to finance Transportation's products are obtained
from a combination of commercial paper, short- and long-term bank
borrowings, medium- and long-term debt issues, sales of finance
receivables and equity capital. NFC's current debt ratings have made bank
borrowings and sales of finance receivables the most economic sources of
cash. Insurance operations are funded through internal operations.
Total cash, cash equivalents and marketable securities of the company
amounted to $965 million at October 31, 1997, $881 million at October 31,
1996 and $1,040 million at October 31, 1995.
Cash provided by operations during 1997 totaled $380 million,
primarily from net income of $150 million, $82 million of noncash deferred
income taxes, and $59 million of other noncash items, principally
depreciation and a net change in operating assets and liabilities of $89
million. Income tax expense for 1997 was $92 million, of which $10
million was cash payments to federal and certain state and local
governments, while the remaining $82 million of federal and other taxes
reduced the deferred tax asset.
<PAGE>
<PAGE 6>
The net change in operating assets and liabilities of $89 million
includes a $195 million increase in receivables, reflecting continued
strong demand for the company's products, offset by a $288 million
increase in accounts payable as a result of increased production in the
fourth quarter.
Investment programs included a net decrease in marketable securities,
as sales of securities exceeded purchases by $45 million. During 1997,
the purchase of $970 million of retail notes and lease receivables was
funded with $958 million in proceeds from the sale of receivables and
principal collections of $94 million. Other investment activities used
$42 million for an increase in property and equipment leased to others and
$172 million to fund capital expenditures. Capital expenditures included
$82 million for construction of a truck assembly facility in Mexico, $42
million to increase mid-range diesel engine capacity and additional funds
for truck product improvements.
Financing activities used cash to pay $29 million in dividends on the
Series G Preferred shares, $46 million for principal payments on long-term
debt, and $285 million to reduce notes and debt outstanding under the bank
revolving credit facility and asset-backed and other commercial paper
programs offset by an increase of $209 million in long-term debt.
During 1997 and 1996, NFC supplied 94% of the wholesale financing of
new trucks sold to Transportation's dealers compared with 93% in 1995.
NFC's share of the retail financing of new trucks sold in the United
States decreased to 13% in 1997 from 16% in 1996 and 14% in 1995 due to
the highly competitive commercial financing market.
The sale of finance receivables is a significant source of funding
for the financial services operations. During 1997, 1996 and 1995, NFC
sold $987 million, $985 million and $740 million, respectively, of retail
notes through Navistar Financial Retail Receivables Corporation (NFRRC), a
wholly owned subsidiary. The net proceeds from these sales were used for
general working capital purposes. In November 1997, NFC sold an
additional $500 million of retail notes through NFRRC.
NFRRC has filed registration statements with the Securities and
Exchange Commission which provide for the issuance of up to $5,000 million
of asset-backed securities. At October 31, 1997, the remaining shelf
registration available to NFRRC for issuance of asset-backed securities
was $1,473 million. See Note 8 to the Financial Statements.
NFC has a $925 million contractually committed bank revolving credit
facility and a $400 million asset-backed commercial paper program
supported by a bank liquidity facility which mature in March 2001. NFC
also utilizes a $600 million revolving wholesale note trust that provides
for the continuous sale of eligible wholesale notes on a daily basis. The
trust is comprised of two $100 million tranches of investor certificates
maturing serially from 1998 to 1999, and two $200 million tranches
maturing in 2003 and 2004. At October 31, 1997 the remaining shelf
registration available for issuance of investor certificates was $200
million.
At October 31, 1997, available funding under NFC's amended and
restated credit facility and the asset-backed commercial paper facility
was $532 million and $14 million, respectively, of which $141 million was
used to back short-term debt at October 31, 1997.
<PAGE>
<PAGE 7>
The company finances capital expenditures principally through
internally generated cash. Capital leasing is used to fund selected
projects based on economic and operating factors. The company had
outstanding capital commitments of $137 million at October 31, 1997
primarily for increased manufacturing capacity at the Indianapolis engine
plant and construction of a truck assembly facility in Mexico.
The company has announced plans for approximately $350 million in
capital spending over the next six years for the NGT program. Capital
expenditures for 1998 are expected to be approximately double the current
year's level. Approximately $25 million is to be spent in 1998 for the
NGT program. Additional capital expenditures are planned for the
completion of the truck assembly facility in Mexico, increased
manufacturing capacity at the Indianapolis engine plant, commencement of
truck operations in Brazil and improvements to existing facilities and
products. The company's investment in the NGT program will also include
$300 million in development expense over the next six years, of which
approximately $50 million is planned for 1998.
In November 1997, the company contributed $200 million to the Retiree
Health Care Base Plan Trust and contributed $100 million to the hourly
pension plan.
NFC's maximum exposure under all receivable sale recourse provisions
at October 31, 1997 was $246 million; however, management believes that
the allowance for credit losses on sold receivables is adequate.
At October 31, 1997, the Canadian operating subsidiary was
contingently liable for retail customers' contracts and leases financed by
a third party. The company is subject to maximum recourse of $261 million
on retail contracts and $13 million on retail leases. In addition, as of
October 31, 1997, the company is contingently liable for approximately $49
million for various guarantees and buyback programs; however, based on
historical loss trends, the company's exposure is not considered material.
The Canadian operating subsidiary, NFC and certain other subsidiaries
included in financial services operations are parties to agreements which
result in the restriction of amounts which can be distributed to
Transportation in the form of dividends, loans or advances. At October
31, 1997, the maximum amount of dividends which were available for
distribution under the most restrictive covenants was $62 million.
The company and Transportation are obligated under certain agreements
with public and private lenders of NFC to maintain the subsidiary's income
before interest expense and income taxes at not less than 125% of its
total interest expense. No income maintenance payments were required for
the three years ended October 31, 1997.
During November 1997, the company arranged financing for $125 million
of funds denominated in U.S. dollars and Mexican pesos to be used for
development of the company's Mexican operations.
Management continues to evaluate current and forecasted cash flow as
a basis for financing operating requirements, capital expenditures and
anticipated payments of preferred dividends. Management believes that
collections on the outstanding receivables portfolios as well as funds
available from various funding sources will permit the financial services
operations to meet the financing requirements of the company's dealers and
customers.
<PAGE>
<PAGE 8>
ENVIRONMENTAL MATTERS
In the fourth quarter of 1994, Transportation recorded a $20 million
charge, net of $13 million of income taxes, as a loss of discontinued
operations related to environmental liabilities at production facilities
of two formerly owned businesses, Wisconsin Steel and Solar Turbine, Inc.
Included in the charge was an anticipated $11 million payment to the
Economic Development Administration, a division of the U.S. Department of
Commerce, in settlement of commercial and environmental disputes related
to the Wisconsin Steel property. In 1997, the U.S. Department of Justice
and Transportation approved the final consent decree related to the
Wisconsin Steel property and the company paid $11 million to the Economic
Development Administration.
The company has been named a potentially responsible party (PRP), in
conjunction with other parties, in a number of cases arising under an
environmental protection law known as the Superfund law. These cases
involve sites which allegedly have received wastes from current or former
company locations. Based on information available to the company, which in
most cases consists of data related to quantities and characteristics of
material generated at or shipped to each site as well as cost estimates
from PRPs and/or federal or state regulatory agencies for the cleanup of
these sites, a reasonable estimate is calculated of the company's share,
if any, of the probable costs and is provided for in the financial
statements. These obligations generally are recognized no later than
completion of the remedial feasibility study and are not discounted to
their present value. The company reviews its accruals on a regular basis
and believes that, based on these calculations, its share of the potential
additional costs for the cleanup of each site will not have a material
effect on the company's financial results.
DERIVATIVE FINANCIAL INSTRUMENTS
As disclosed in Notes 1 and 10 to the Financial Statements, the
company uses derivative financial instruments to transfer or reduce the
risks of foreign exchange and interest rate volatility, and potentially
increase the return on invested funds. Company policy does not allow the
use of derivatives for speculative purposes.
The company's manufacturing operations, as conditions warrant, hedge
foreign exchange exposure on the purchase of parts and materials from
foreign countries and its exposure from sales of manufactured products in
other countries. Contracted purchases of commodities for manufacturing
may be hedged up to one year. The manufacturing operations had no foreign
exchange exposure at October 31, 1997.
NFC uses interest rate caps, interest rate swaps and forward interest
rate contracts when needed to convert floating rate funds to fixed and
vice versa to match its asset portfolio. NFC also uses forward interest
rate contracts to manage its exposure to fluctuations in funding costs
from the anticipated securitization and sale of retail notes. During 1997,
NFC entered into $500 million of interest rate hedge agreements in
anticipation of the November 1997 sale of retail receivables. These hedge
agreements were closed in conjunction with the pricing of the sale, and
the loss at October 31, 1997, which was not material, was deferred and
reduced the gain recognized on the sale of receivables in November 1997.
Both manufacturing operations and NFC purchase collateralized
mortgage obligations that have relatively stable cash flow patterns in
relation to interest rate changes.
<PAGE>
<PAGE 9>
YEAR 2000
The company has made and will make certain investments in its
software systems and applications to ensure that the company is Year 2000
compliant. The financial impact to the company has not been and is not
anticipated to be material to its financial position or results of
operations.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
This statement specifies the computation, presentation and disclosure
requirements for earnings per share and is effective for financial
statements issued for periods ending after December 15, 1997. The
standard is not expected to have a material effect on the company's net
income per common share computation.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components. SFAS
131 establishes standards for reporting information about operating
segments, and related disclosures about products and services, geographic
areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. These standards expand or modify
disclosures and, accordingly, will have no impact on the company's
reported financial position, results of operations and cash flows. The
company is assessing the impact of SFAS 131 on its reported segments.
INCOME TAXES
The Statement of Financial Condition at October 31, 1997 and 1996
includes a deferred tax asset of $934 million and $1,030 million,
respectively, net of valuation allowances of $309 million related to
future tax benefits. The deferred tax assets are net of valuation
allowances since it is more likely than not that some portion of the
deferred tax asset may not be realized in the future.
The deferred tax asset includes the tax benefits associated with
cumulative tax losses of $1,808 million and temporary differences, which
represent the cumulative expense of $1,413 million recorded in the
Statement of Income that has not been deducted on the company's tax
returns. The valuation allowance at October 31, 1997 assumes that it is
more likely than not that approximately $815 million of cumulative tax
losses will not be realized before their expiration date. Realization of
the net deferred tax asset is dependent on the generation of approximately
$2,500 million of future taxable income, of which an average of
approximately $75 million would need to be generated annually for the 14-
year period 1998 through 2011. The remaining taxable income, which
represents the realization of tax benefits associated with temporary
differences, does not need to be generated until subsequent to 2011.
Until the company has utilized its significant NOL carryforwards, the cash
payment of federal income taxes will be minimal. See Note 3 to the
Financial Statements.
<PAGE>
<PAGE 10>
Extensive analysis is performed to determine the amount of the
deferred tax asset. Such analysis is based on the premise that the
company is and will continue to be a going concern and that it is more
likely than not that deferred tax benefits will be realized through the
generation of future taxable income. Management reviews all available
evidence, both positive and negative, to assess the long-term earnings
potential of the company using a number of alternatives to evaluate
financial results in economic cycles at various industry volume conditions
based upon the company's current operating structure. Other factors
considered are the company's 17-consecutive-year leadership in the
combined market share of Class 5 through 8 trucks and recognition as a
worldwide leading producer of mid-range diesel engines. The projected
availability of taxable income to realize the tax benefit from net
operating loss carryforwards and the reversal of temporary differences
before expiration of these benefits are also considered. The valuation
allowance may be adjusted in the future as a result of changes in business
and industry conditions, operating structure, company strategies or other
significant transactions. Management believes that, with the combination
of available tax planning strategies and the maintenance of significant
market share, earnings are achievable in order to realize the net deferred
tax asset of $934 million.
Reconciliation of the company's income before income taxes for
financial statement purposes to United States taxable income for the years
ended October 31 is as follows:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Income before income taxes ...... $ 242 $ 105 $ 262
Exclusion of (income) loss
of foreign subsidiaries ...... (3) 3 (11)
State income taxes .............. (2) (2) (2)
Temporary differences ........... 151 (284) 69
Other ........................... 6 - (4)
------ ------ ------
Taxable income (loss) ......... $ 394 $ (178) $ 314
------ ------ ------
The company contributed approximately $215 million to its hourly and
salaried pension plans in fiscal 1997. The timing of these contributions
allowed for their deduction on the company's 1996 tax return, which
resulted in a tax loss of $178 million as compared to the $37 million of
taxable income previously reported.
BUSINESS ENVIRONMENT
Sales of Class 5 through 8 trucks are cyclical, with demand affected
by such economic factors as industrial production, construction, demand
for consumer durable goods, interest rates and the earnings and cash flow
of dealers and customers. Reflecting the stability of the general
economy, demand for new trucks remained strong during 1997. An
improvement in the number of new truck orders has increased the company's
order backlog to 45,300 units at October 31, 1997 from 20,900 units at
October 31, 1996. Retail deliveries in 1998 continue to be highly
dependent on the rate at which new truck orders are received. The company
will evaluate order receipts and backlog throughout the year and will
balance production with demand as appropriate.
The company currently projects 1998 United States and Canadian Class
8 heavy truck demand to be 195,000 units, a slight decrease from 1997.
Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast
at 116,000 units, slightly lower than in 1997. Demand for school buses is
expected to decrease 8% in 1998 to 30,500 units. Mid-range diesel engine
shipments by the company to original equipment manufacturers in 1998 are
expected to be 215,700 units, 17% higher than in 1997. The company's
service parts sales are projected to grow 9% to approximately $875
million.
<PAGE>
<PAGE 11>
An independent trust, created in 1993 for the benefit of the
company's current and future retirees and administered by a five person
trust committee, owned all of the outstanding Class B Common Stock at
October 31, 1997 which is approximately one-third of the company's
outstanding common stock. The Class B Common Stock has restricted voting
rights and transfer provisions but, on June 30, 1998, will convert into
Common Stock with full voting rights and no transfer restrictions.
During August 1997, the company's current master contract with the
United Auto Workers (UAW) was extended through October 1, 2002. This
contract allows the company to focus its assembly plants, simplify current
product lines, invest in new product development, and achieve more
competitive wage, benefit and productivity levels.
During 1997, the company entered into a ten-year agreement, effective
with model year 2003, to supply newly designed, advanced technology
engines through the year 2012 to Ford Motor Company for use in its diesel-
powered light trucks and vans. The company's current engine agreement
with Ford was extended through model year 2002.
<PAGE>
<PAGE 12>
STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY
Management of Navistar International Corporation and its subsidiaries
is responsible for the preparation and for the integrity and objectivity
of the accompanying financial statements and other financial information
in this report. The financial statements have been prepared in accordance
with generally accepted accounting principles and include amounts that are
based on management's estimates and judgments.
The accompanying financial statements have been audited by Deloitte &
Touche LLP, independent auditors, whose appointment is ratified by
shareowner vote at the Annual Meeting. Management has made available to
Deloitte & Touche LLP all the company's financial records and related
data, as well as the minutes of the Board of Directors' meetings.
Management believes that all representations made to Deloitte & Touche LLP
during its audit were valid and appropriate.
Management is responsible for establishing and maintaining a system
of internal controls throughout its operations that provides reasonable
assurance as to the integrity and reliability of the financial statements,
the protection of assets from unauthorized use and the execution and
recording of transactions in accordance with management's authorization.
The system of internal controls which provides for appropriate division of
responsibility is supported by written policies and procedures that are
updated by management, as necessary. The system is tested and evaluated
regularly by the company's internal auditors as well as by the independent
auditors in connection with their annual audit of the financial
statements. The independent auditors conduct their audit in accordance
with generally accepted auditing standards and perform such tests of
transactions and balances as they deem necessary. Management considers
the recommendations of its internal auditors and independent auditors
concerning the company's system of internal controls and takes the
necessary actions that are cost-effective in the circumstances to respond
appropriately to the recommendations presented. Management believes that
the company's system of internal controls accomplishes the objectives set
forth in the first sentence of this paragraph.
The Audit Committee of the Board of Directors, composed of six non-
employee Directors, meets periodically with the independent auditors,
management, general counsel and internal auditors to satisfy itself that
such persons are properly discharging their responsibilities regarding
financial reporting and auditing. In carrying out these responsibilities,
the Committee has full access to the independent auditors, internal
auditors, general counsel and financial management in scheduled joint
sessions or private meetings as in the Committee's judgment seem
appropriate. Similarly, the company's independent auditors, internal
auditors, general counsel and financial management have full access to the
Committee and to the Board of Directors and each is responsible for
bringing before the Committee or its Chair, in a timely manner, any matter
deemed appropriate to the discharge of the Committee's responsibility.
John R. Horne
Chairman, President and
Chief Executive Officer
Robert C. Lannert
Executive Vice President
and Chief Financial Officer<PAGE>
<PAGE 13>
INDEPENDENT AUDITORS' REPORT
Navistar International Corporation,
Its Directors and Shareowners:
We have audited the Statement of Financial Condition of Navistar
International Corporation and Consolidated Subsidiaries as of October 31,
1997 and 1996, and the related Statements of Income and of Cash Flow for
each of the three years in the period ended October 31, 1997. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the accompanying consolidated financial statements
present fairly, in all material respects, the financial position of
Navistar International Corporation and Consolidated Subsidiaries at
October 31, 1997 and 1996, and the results of their operations and their
cash flow for each of the three years in the period ended October 31,
1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
December 15, 1997
Chicago, Illinois
<PAGE>
<PAGE 14>
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
For the Years Ended October 31
(Millions of dollars, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and revenues
Sales of manufactured products ............... $ 6,147 $ 5,508 $ 6,125
Finance and insurance revenue ................ 174 197 167
Other income ................................. 50 49 50
-------- -------- --------
Total sales and revenues ................... 6,371 5,754 6,342
-------- -------- --------
Costs and expenses
Cost of products and services sold ........... 5,292 4,827 5,288
Postretirement benefits ...................... 215 220 206
Engineering and research expense ............. 124 129 113
Marketing and administrative expense ......... 365 319 307
Interest expense ............................. 74 83 87
Financing charges on sold receivables ........ 23 24 29
Insurance claims and underwriting expense .... 36 47 50
-------- -------- --------
Total costs and expenses ................... 6,129 5,649 6,080
-------- -------- --------
Income before income taxes ............... 242 105 262
Income tax expense ....................... 92 40 98
-------- -------- --------
Net income ................................... 150 65 164
Less dividends on Series G preferred stock ... 29 29 29
-------- -------- --------
Net income applicable to common stock ........ $ 121 $ 36 $ 135
======== ======== ========
- --------------------------------------------------------------------------------------
Net income per common share .................. $ 1.65 $ .49 $ 1.83
======== ======== ========
Average number of common and dilutive common
equivalent shares outstanding (millions) ... 73.6 73.8 74.3
- --------------------------------------------------------------------------------------
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE 15>
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
As of October 31 (Millions of dollars) 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .......................... $ 609 $ 487
Marketable securities .............................. 356 394
-------- -------
965 881
Receivables, net ................................... 1,755 1,655
Inventories ........................................ 483 463
Property and equipment, net ........................ 835 770
Investments and other assets ....................... 332 213
Intangible pension assets .......................... 212 314
Deferred tax asset, net ............................ 934 1,030
-------- --------
Total assets ....................................... $ 5,516 $ 5,326
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Accounts payable, principally trade ................ $ 1,100 $ 820
Debt:
Manufacturing operations ......................... 92 115
Financial services operations .................... 1,224 1,305
Postretirement benefits liability .................. 1,186 1,351
Other liabilities .................................. 894 819
-------- --------
Total liabilities .............................. 4,496 4,410
-------- --------
Commitments and contingencies
Shareowners' equity
Series G convertible preferred stock
(liquidation preference $240 million) ............ 240 240
Series D convertible junior preference stock
(liquidation preference $4 million) .............. 4 4
Common stock (52.2 million and 51.0 million shares
issued)........................................... 1,659 1,642
Class B Common stock
(23.1 million and 24.3 million shares issued) ...... 471 491
Retained earnings (deficit) - balance accumulated
after the deficit reclassification as of
October 31, 1987 ................................. (1,301) (1,431)
Common stock held in treasury, at cost
(2.9 million and 1.6 million shares held) ......... (53) (30)
-------- --------
Total shareowners' equity ...................... 1,020 916
-------- --------
Total liabilities and shareowners' equity .......... $ 5,516 $ 5,326
======== ========
- -----------------------------------------------------------------------------------
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE 16>
STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
For the Years Ended October 31
(Millions of dollars) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operations
Net income ...................................... $ 150 $ 65 $ 164
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization ............... 120 105 86
Deferred income taxes ....................... 82 37 89
Other, net .................................. (61) (13) (9)
Change in operating assets and liabilities:
Receivables ................................. (195) 186 (91)
Inventories ................................. (25) (47) 35
Prepaid and other current assets ............ 4 1 10
Accounts payable ............................ 288 (110) 63
Other liabilities ........................... 17 (106) 70
-------- -------- --------
Cash provided by operations ................... 380 118 417
-------- -------- --------
Cash flow from investment programs
Purchase of retail notes and lease receivables .. (970) (1,108) (1,099)
Collections/sales of retail notes
and lease receivables ......................... 1,052 1,107 850
Purchase of marketable securities ............... (512) (585) (722)
Sales or maturities of marketable securities .... 557 752 480
Capital expenditures ............................ (172) (117) (139)
Property and equipment leased to others ......... (42) (73) (19)
Other investment programs, net .................. 3 (8) 8
-------- -------- --------
Cash used in investment programs .............. (84) (32) (641)
-------- -------- --------
Cash flow from financing activities
Issuance of debt ................................ 209 - -
Principal payments on debt ...................... (46) (136) (121)
Net increase (decrease)in notes and debt
outstanding under bank revolving credit
facility and asset-backed and other
commercial paper programs ..................... (285) 81 312
Dividends paid .................................. (29) (29) (29)
Repurchase of common stock ...................... (23) - (10)
-------- -------- --------
Cash (used in) provided by financing activities (174) (84) 152
-------- -------- --------
Cash and cash equivalents
Increase (decrease) during the year ........... 122 2 (72)
At beginning of the year ...................... 487 485 557
-------- -------- --------
Cash and cash equivalents at end of the year .... $ 609 $ 487 $ 485
======== ======== ========
- --------------------------------------------------------------------------------------
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE 17>
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1997
1. SUMMARY OF ACCOUNTING POLICIES
Basis of Consolidation
Navistar International Corporation is a holding company, whose
principal operating subsidiary is Navistar International Transportation
Corp. (Transportation). As used hereafter, "company" refers to Navistar
International Corporation and its consolidated subsidiaries. The
consolidated financial statements include the results of the company's
manufacturing operations and its wholly owned financial services
subsidiaries. The effects of transactions between the manufacturing and
financial services operations have been eliminated to arrive at the
consolidated totals. The distinction between current and long-term assets
and liabilities in the Statement of Financial Condition is not meaningful
when finance, insurance and manufacturing operations are combined;
therefore, the company has adopted an unclassified presentation. Certain
1996 and 1995 amounts have been reclassified to conform with the
presentation used in the 1997 financial statements.
The company operates in two principal industry segments:
manufacturing and financial services. Manufacturing operations
are responsible for the manufacture and marketing of medium and heavy
trucks, including school buses, mid-range diesel engines and service
parts primarily in the United States and Canada as well as in selected
export markets. Based on assets and revenues, manufacturing operations
represent the majority of the company's business activities. The
financial services operations consist of Navistar Financial Corporation
(NFC), its domestic insurance subsidiary and the company's foreign
finance and insurance subsidiaries. NFC's primary business is the
retail and wholesale financing of products sold by the manufacturing
operations and its dealers within the United States and the providing
of commercial physical damage and liability insurance to the
manufacturing operations' dealers and retail customers and to the
general public through an independent insurance agency system.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Manufacturing operations recognize shipments of new trucks and
service parts to independent dealers and retail customers as sales. Price
allowances, expected in the normal course of business, and the cost of
special incentive programs are recorded at the time of sale. Engine sales
are recognized at the time of shipment to original equipment
manufacturers. An allowance for losses on receivables is maintained at an
amount that management considers appropriate in relation to the
outstanding receivables portfolio and it is charged when receivables are
determined to be uncollectible.
<PAGE>
<PAGE 18>
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
Financial services operations recognize finance charges on retail
notes and finance leases as income over the term of the receivables
utilizing the interest method. Interest due from interest-bearing notes
and accounts is recognized on the accrual basis. Operating lease revenues
are recognized on a straight-line basis over the life of the lease.
Selected receivables are sold and securitized to public and private
investors with limited recourse. Gains or losses on sales of receivables
are credited or charged to revenue in the period in which the sale occurs.
Financial services operations continue to service the sold receivables and
receive a fee for such services from the investor. An allowance for
losses is maintained at a level deemed appropriate based on such factors
as overall portfolio quality, historical loss experience and current
economic conditions.
Insurance premiums are earned on a prorata basis over the terms of
the policies. Underwriting losses and outstanding loss reserve balances
are based on individual case estimates of the ultimate cost of settlement,
including actual losses, and determinations of amounts required for losses
incurred but not reported.
Cash and Cash Equivalents
All highly liquid financial instruments with maturities of three
months or less from date of purchase, consisting primarily of bankers'
acceptances, commercial paper, United States government securities and
floating rate notes, are classified as cash equivalents in the Statement
of Financial Condition and Statement of Cash Flow.
Marketable Securities
Marketable securities are classified as available-for-sale securities
and are reported at fair value. The difference between amortized cost and
fair value is recorded as an adjustment to shareowners' equity, net of
applicable deferred taxes.
Inventories
Inventories are valued at the lower of average cost or market.
Property and Other Long-Lived Assets
Significant expenditures for replacement of equipment, tooling and
pattern equipment, and major rebuilding of machine tools are capitalized.
Depreciation and amortization are generally provided on the straight-line
basis over the estimated useful lives of the assets, which average 35
years for buildings and improvements and eight years for machinery and
equipment. Gains and losses on property disposals are included in other
income and expense. The carrying amount of all long-lived assets is
evaluated periodically to determine if adjustment to the depreciation and
amortization period or to the unamortized balance is warranted. Such
evaluation is based principally on the expected utilization of the long-
lived assets and the projected, undiscounted cash flows of the operations
in which the long-lived assets are deployed.
<PAGE>
<PAGE 19>
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Engineering and Research Expense
Engineering and research expense includes research and development
expenses and routine ongoing costs associated with improving existing
products and manufacturing processes. Research and development expenses,
which include activities for the introduction of new truck and diesel
engine products and major improvements to existing products and processes,
totaled $92 million, $101 million and $91 million in 1997, 1996 and 1995,
respectively.
Product Related Costs
The company accrues warranty expense at the time of end product sale.
Product liability expense is accrued based on the estimate of total future
payments to settle product liability claims.
Derivative Financial Instruments
The company uses derivatives to transfer or reduce risks of foreign
exchange and interest rate volatility and to potentially increase the
return on invested funds. NFC, a wholly owned subsidiary of
Transportation, uses derivatives such as forward contracts and interest
rate swaps to reduce its exposure to interest rate volatility. NFC's
primary use of such financial instruments is to hedge the fair value of
its fixed rate receivables against changes in market interest rates in
anticipation of securitization and sale of such receivables. The
anticipated transactions are probable of occurrence and their significant
terms and characteristics have been identified.
All derivative financial instruments are held for purposes other than
trading, and company policy prohibits the use of derivatives for
speculative purposes. Gains or losses related to hedges of anticipated
sales of receivables are deferred and are recognized in income when the
receivables are sold. At all times, the principal balance of receivables
owned and expected to be sold by NFC exceeds the notional amount of open
derivative contracts.
Stock-Based Compensation
Effective November 1, 1996, the company adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, the
company elected to continue to account for stock-based compensation plans
consistent with prior years.
<PAGE>
<PAGE 20>
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
This statement specifies the computation, presentation and disclosure
requirements for earnings per share and is effective for financial
statements issued for periods ending after December 15, 1997. The
standard is not expected to have a material effect on the company's net
income per common share computation.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components. SFAS
131 establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic
areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. These standards expand or modify
current disclosures and, accordingly, will have no impact on the
company's reported financial position, results of operations and cash
flows. The company is assessing the impact of SFAS 131 on its reported
segments.
2. POSTRETIREMENT BENEFITS
The company provides postretirement benefits to substantially all of
its employees. Costs associated with postretirement benefits include
pension expense for employees, retirees and surviving spouses, and
postretirement health care and life insurance expense for employees,
retirees, surviving spouses and dependents. In addition, as part of the
1993 restructured retiree health care and life insurance plans, profit
sharing payments to an independent retiree trust are required. The cost
of postretirement benefits is segregated as a separate component in the
Statement of Income and is as follows:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Pension expense ................... $ 129 $ 160 $ 110
Health/life insurance ............. 66 60 70
Profit sharing provision to Trust 20 - 26
------ ------ ------
Total postretirement
benefits expense ................ $ 215 $ 220 $ 206
====== ====== ======
In the Statement of Financial Condition, the postretirement benefits
liability of $1,186 million in 1997 and $1,351 million in 1996 includes
$445 million and $607 million, respectively, for pension and $741 million
and $744 million, respectively, for postretirement health care and life
insurance benefits. Included in investments and other assets in the
Statement of Financial Condition is a prepaid pension asset of $120
million in 1997 and $38 million in 1996.
<PAGE>
<PAGE 21>
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. POSTRETIREMENT BENEFITS (continued)
Pension Benefits
Generally, the pension plans are noncontributory with benefits
related to an employee's length of service and compensation rate. The
company's policy is to fund its pension plans in accordance with
applicable United States and Canadian government regulations and to make
additional payments as funds are available to achieve full funding of the
vested accumulated benefit obligation. The pension plans vary in the
extent to which they are funded, but, for plan years which ended during
the current year, all legal funding requirements have been met. Plan
assets are invested primarily in dedicated portfolios of long-term fixed
income securities with more recent contributions invested in equity
securities.
Pension Expense
Net pension expense included in the Statement of Income is composed
of the following:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Service cost for benefits
earned during the period ........ $ 34 $ 34 $ 24
Interest on projected
benefit obligation .............. 238 231 232
Net amortization costs and other .. 99 104 57
Less expected return on assets .... (242) (209) (203)
------ ------ ------
Net pension expense ............... $ 129 $ 160 $ 110
====== ====== ======
Actual return on assets ........... $ 505 $ 188 $ 398
====== ====== ======
"Amortization costs" include amortization of cumulative gains and
losses over the expected remaining service life of employees,
amortization of the initial transition liability over 15 years, the
expense related to yearly lump-sum payments to retirees required by
negotiated labor contracts and amortization of plan amendments,
recognized over the remaining service life of employees, except for
those plan amendments arising from negotiated labor contracts, which
are amortized over the length of the contract.
<PAGE>
<PAGE 22>
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. POSTRETIREMENT BENEFITS (continued)
Pension Assets and Liabilities
Included in the Statement of Financial Condition is the minimum
pension liability for certain unfunded pension plans. The adjustment for
the minimum pension liability in the amounts of $504 million and $623
million are offset by intangible pension assets of $212 million and $314
million and accumulated reductions in shareowners' equity of $195 million
and $206 million at October 31, 1997 and October 31, 1996, respectively.
The changes in shareowners' equity are net of deferred income taxes of
$97 million at October 31, 1997 and $103 million at October 31, 1996. The
minimum pension liability will change from year to year as a result of
revisions to actuarial assumptions, experience gains or losses and
settlement rate changes.
The funded status of the company's plans as of October 31, 1997 and
1996 and a reconciliation with amounts recognized in the Statement of
Financial Condition are provided below.
Plans in Which Plans in Which
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
-------------------- --------------------
Millions of dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------
Actuarial present value of:
Vested benefits ........ $(1,122) $ (59) $(1,857) $(2,672)
Nonvested benefits ..... (80) (7) (207) (270)
------- ------- ------- -------
Accumulated benefit
obligation ......... (1,202) (66) (2,064) (2,942)
Effect of projected
future compensation
levels ................. (30) (3) (3) (23)
------- ------- ------- -------
Projected benefit
obligation ............. (1,232) (69) (2,067) (2,965)
Plan assets at fair value. 1,279 91 1,621 2,336
------- ------- ------- -------
Funded status
at October 31 .......... 47 22 (446) (629)
Unamortized pension costs:
Net losses ........... 29 11 293 332
Prior service costs .. 12 6 77 113
(Asset) liability
at date of transition 32 (1) 135 200
Adjustment for
the minimum liability - - (504) (623)
------- ------- ------- -------
Net asset (liability) .... $ 120 $ 38 $ (445) $ (607)
======= ======= ======= =======
The weighted average rate assumptions used in determining pension
costs and the projected benefit obligation were:
1997 1996 1995
- --------------------------------------------------------------------
Discount rate used to determine
present value of projected
benefit obligation at end of year 7.3% 8.1% 7.8%
Expected long-term rate of return
on plan assets for the year ..... 9.8% 9.0% 9.9%
Expected rate of increase in future
compensation levels ............. 3.5% 3.5% 3.5%
<PAGE>
<PAGE 23>
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. POSTRETIREMENT BENEFITS (continued)
Other Postretirement Benefits
In addition to providing pension benefits, the company provides
health care and life insurance for a majority of its retired employees,
spouses and certain dependents in the United States and Canada.
In 1993, a trust was established to provide a vehicle for funding the
health care liability through company contributions and retiree premiums.
The funds in this trust are invested primarily in equity securities. The
company was required to make a prefunding contribution of $200 million to
the trust on or prior to June 30, 1998. This contribution was made during
November 1997.
The components of expense for other postretirement benefits included
in the Statement of Income are as follows:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Service cost for benefits
earned during the year .......... $ 13 $ 14 $ 10
Interest cost on the
accumulated benefit obligation
and other ....................... 96 84 90
Less expected return on assets .... (43) (38) (30)
------ ------ ------
Net other postretirement
benefits expense ................ $ 66 $ 60 $ 70
====== ====== ======
Actual return on assets ........... $ 102 $ 46 $ 65
====== ====== ======
The funded status of other postretirement benefits as of October 31
is as follows:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Accumulated other postretirement
benefit obligation (APBO):
Retirees and their dependents . $ (952) $ (773)
Active employees eligible
to retire ................... (221) (244)
Other active participants ......... (201) (208)
------ ------
Total APBO ........................ (1,374) (1,225)
Plan assets at fair value ......... 486 401
------ ------
APBO in excess of plan assets ..... (888) (824)
Unamortized prior service cost .... (5) (6)
Unrecognized net loss ............ 152 86
------ ------
Net liability ..................... $ (741) $ (744)
====== ======
The weighted average expected return on plan assets was 11.1% for
1997, 10.5% for 1996 and 10% for 1995. The weighted average of discount
rates used to determine the accumulated other postretirement benefit
obligation was 7.4% and 8.2% at October 31, 1997 and 1996, respectively.
For 1998, the weighted average rate of increase in the per capita cost of
covered health care benefits is projected to be 8.2%. The rate is
projected to decrease to 5.0% by the year 2004 and remain at that level
each year thereafter. If the cost trend rate assumptions were increased
by one percentage point for each year, the accumulated postretirement
benefit obligation would increase by approximately $167 million and the
associated expense recognized for the year ended October 31, 1997 would
increase by an estimated $16 million.<PAGE>
<PAGE 24>
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. INCOME TAXES
The domestic and foreign components of income (loss) before income
taxes consist of the following:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Domestic .......................... $ 239 $ 108 $ 251
Foreign ........................... 3 (3) 11
------ ------ ------
Total income before income taxes .. $ 242 $ 105 $ 262
====== ====== ======
The components of income tax expense consist of the following:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Current:
Federal ........................ $ 8 $ 1 $ 7
State and local ................ 2 2 2
------ ------ ------
Total current expense .......... 10 3 9
------ ------ ------
Deferred:
Federal ........................ 71 32 77
State and local ................ 11 5 12
------ ------ ------
Total deferred expense ......... 82 37 89
------ ------ ------
Total income tax expense ......... $ 92 $ 40 $ 98
====== ====== ======
The deferred tax expense does not represent cash payment of income
taxes and was primarily generated by the utilization of net operating
loss (NOL) carryforwards and the increase of temporary differences, and
will not require future cash payments. Consolidated tax payments made
during 1997, 1996 and 1995 were $10 million, $3 million and $9 million,
respectively.
<PAGE>
<PAGE 25>
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. INCOME TAXES (continued)
The relationship of the tax expense to income before taxes for 1997,
1996 and 1995 differs from the U.S. statutory rate (35%) because of state
income taxes and the benefit of NOLs in foreign countries. The effective
tax rates for the years 1997, 1996 and 1995 were 38.0%, 38.1% and 37.4%,
respectively.
Undistributed earnings of foreign subsidiaries were $35 million and
$30 million at October 31, 1997 and 1996, respectively. Taxes have not
been provided on these earnings because no withholding taxes are
applicable upon repatriation and U.S. tax would be substantially offset by
utilization of NOL carryforwards.
Taxpaying entities of the company offset all deferred tax assets and
liabilities within each tax jurisdiction and present them in a single
amount in the Statement of Financial Condition. The components of the
deferred tax asset (liability) at October 31 are as follows:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
United States
- -------------
Deferred tax assets:
Net operating loss carryforwards . $ 680 $ 753
Alternative minimum tax .......... 19 11
Product liability and warranty ... 97 100
Other liabilities ................ 168 143
Postretirement benefits .......... 353 363
------ ------
Total deferred tax assets ........ 1,317 1,370
------ ------
Deferred tax liabilities:
Prepaid pension assets ............ (58) (12)
Depreciation ...................... (37) (40)
------ ------
Total deferred tax liabilities .... (95) (52)
------ ------
Total deferred tax asset .......... 1,222 1,318
Less valuation allowance .......... (288) (288)
------ ------
Net deferred tax asset ............ $ 934 $1,030
====== ======
Foreign
- -------
Deferred tax assets:
Net operating loss carryforwards . $ 2 $ 2
Postretirement benefits .......... 19 19
------ ------
Total deferred tax assets ........ 21 21
Less valuation allowance ......... (21) (21)
------ ------
Net deferred tax assets .......... - -
Deferred tax liabilities
--prepaid pension assets ....... (16) (16)
------ ------
Net deferred tax liabilities ..... $ (16) $ (16)
====== ======
<PAGE>
<PAGE 26>
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. INCOME TAXES (continued)
A valuation allowance has been provided for those NOL carryforwards
and temporary differences which are estimated to expire before they are
utilized. Because the foreign tax carryforward period is relatively
short, an allowance has been provided against the total deferred tax
assets.
At October 31, 1997, the company had $1,802 million of domestic and
$6 million of foreign NOL carryforwards available to offset future taxable
income. Such carryforwards reflect income tax losses incurred which will
expire as follows, in millions of dollars:
2000 ................... $ 174
2001 ................... 143
2002 ................... 47
2004 ................... 238
2005 ................... 7
2006 through 2011 ...... 1,199
------
Total .................. $1,808
======
Additionally, the reversal of net temporary differences of $1,413
million as of October 31, 1997 will create net tax deductions which, if
not utilized previously, will expire subsequent to 2011.
<PAGE>
<PAGE 27>
NOTES TO FINANCIAL STATEMENTS
(Continued)
4. MARKETABLE SECURITIES
The fair value of marketable securities is estimated based on quoted
market prices, when available. If a quoted price is not available, fair
value is estimated using quoted market prices for similar financial
instruments.
Information related to the company's marketable securities at October
31 is as follows:
1997 1996
------------------ -------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- --------------------------------------------------------------------
Corporate securities . $ 150 $ 150 $ 127 $ 126
U.S. government
securities ......... 88 89 152 152
Mortgage and
asset-backed
securities ......... 86 86 94 94
Foreign government
securities ......... 10 10 5 5
------ ------ ------ ------
Total debt securities 334 335 378 377
Equity securities .... 16 21 14 17
------ ------ ------ ------
Total marketable
securities ......... $ 350 $ 356 $ 392 $ 394
====== ====== ====== ======
Contractual maturities of marketable debt securities at October 31
are as follows:
1997 1996
------------------ -------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- --------------------------------------------------------------------
Due in one year
or less ............ $ 113 $ 114 $ 66 $ 66
Due after one year
through five years . 100 100 189 188
Due after five years
through ten years .. 25 25 23 23
Due after ten years .. 10 10 6 6
------ ------ ------ ------
248 249 284 283
Mortgage and
asset-backed
securities ......... 86 86 94 94
------ ------ ------ ------
Total debt securities. $ 334 $ 335 $ 378 $ 377
====== ====== ====== ======
Gross gains and losses realized on sales or maturities of marketable
securities were not material for each of the two years. At October 31,
1997 and 1996, a domestic insurance subsidiary had $15 million and $17
million, respectively, of marketable securities which were on deposit with
various state departments of insurance or otherwise not available. These
securities are included in total marketable securities balances at October
31, 1997 and 1996.
<PAGE>
<PAGE 28>
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. RECEIVABLES
Receivables at October 31 are summarized by major classification as
follows:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Accounts receivable .............. $ 671 $ 560
Retail notes and lease financing . 706 733
Wholesale notes .................. 46 101
Amounts due from sales
of receivables ................. 233 264
Notes receivable ................. 101 -
Other ............................ 29 28
Allowance for losses ............. (31) (31)
------ ------
Total receivables, net ........ $1,755 $1,655
====== ======
NFC purchases the majority of the wholesale notes receivable and some
retail notes and accounts receivable arising from Transportation's
operations in the United States.
A portion of NFC's funding for retail and wholesale notes comes from
sales of receivables by NFC to third parties with limited recourse.
Proceeds from sales of retail notes receivable, net of underwriting costs,
were $958 million in 1997, $982 million in 1996 and $727 million in 1995.
Uncollected sold retail and wholesale receivable balances totaled $1,968
million and $1,866 million as of October 31, 1997 and 1996, respectively.
Contractual maturities of accounts receivable, retail notes and lease
financing and wholesale notes, including unearned finance income, at
October 31, 1997 were: 1998 - $950 million, 1999 - $195 million, 2000 -
$161 million, 2001 - $131 million, 2002 - $91 million, and 2003 and
thereafter - $18 million. Unearned finance income totaled $123 million at
October 31, 1997. Notes receivable are due upon demand from a limited
partnership that invests in S&P 500 stock index arbitrage.
<PAGE>
<PAGE 29>
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. INVENTORIES
Inventories at October 31 are as follows:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Finished products ................ $ 212 $ 242
Work in process .................. 106 97
Raw materials and supplies ....... 165 124
------ ------
Total inventories ................ $ 483 $ 463
====== ======
7. PROPERTY AND EQUIPMENT
At October 31, property and equipment includes the following:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Land ............................ $ 18 $ 12
------ ------
Buildings, machinery
and equipment at cost:
Plants ...................... 1,200 1,241
Distribution ................ 86 79
Construction in progress .... 117 58
Other ....................... 261 222
------ ------
Subtotal .................. 1,664 1,600
------ ------
Total property ................ 1,682 1,612
Less accumulated depreciation
and amortization ............ (847) (842)
------ ------
Total property
and equipment, net ........ $ 835 $ 770
====== ======
Total property includes property under capitalized lease obligations
of $25 million at October 31, 1997 and 1996. In addition, other property
includes vehicles under operating leases to third parties of $150 million
at October 31, 1997 and $116 million at October 31, 1996.
<PAGE>
<PAGE 30>
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. DEBT
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Manufacturing operations
Notes payable and current
maturities of long-term debt . $ 13 $ 14
------ ------
9% Sinking Fund Debentures,
due 2004 ..................... 45 53
8% Secured Note, due 2002,
secured by plant assets ...... 21 26
Capitalized leases and other ... 13 22
------ ------
Total long-term debt ....... 79 101
------ ------
Manufacturing operations debt .... 92 115
------ ------
Financial services operations
Commercial paper ............... 141 99
Capitalized leases ............. 13 -
------ ------
Total short-term debt ...... 154 99
------ ------
Asset-backed commercial paper
program, variable rate,
due 2001 ..................... 400 402
Bank revolver, variable rate,
due 2001 ..................... 393 704
------ ------
Total senior debt .......... 793 1,106
------ ------
8 7/8% Subordinated Senior Notes
due 1998 ..................... 94 100
9% Subordinated Senior Notes
due 2002 ..................... 100 -
------ ------
Total subordinated term debt 194 100
------ ------
Capitalized leases, 5.2% to 5.6%,
due 2002 ..................... 83 -
------ ------
Total long-term debt ....... 1,070 1,206
------ ------
Financial services operations debt 1,224 1,305
------ ------
Total debt ....................... $1,316 $1,420
====== ======
The effective annual interest rate on Manufacturing notes payable was
8.3% in 1997 and 8.9% in 1996. Consolidated interest payments were $66
million, $83 million and $82 million in 1997, 1996 and 1995, respectively.
NFC issues commercial paper with varying terms and has short-term
borrowings with various banks on a noncommitted basis. Compensating cash
balances and commitment fees are not required under these borrowings.
<PAGE>
<PAGE 31>
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. DEBT (continued)
The aggregate annual maturities and sinking fund requirements for
debt for the years ended October 31 are as follows:
Financial
Manufacturing Services
Millions of dollars Operations Operations Total
- --------------------------------------------------------------------
1998 ................ $ 13 $ 154 $ 167
1999 ................ 15 111 126
2000 ................ 15 25 40
2001 ................ 15 820 835
2002 ................ 14 114 128
Thereafter .......... 20 - 20
Weighted average
interest rate on
total debt,
including short-term,
and the effect of
discounts and related
amortization
for the years ended:
October 31, 1997. 10.3% 6.4% 6.8%
October 31, 1996. 9.7% 6.5% 6.8%
At October 31, 1997, NFC has a $925 million contractually committed
bank revolving credit facility and a $400 million asset-backed commercial
paper (ABCP) program supported by a bank liquidity facility. Available
funding under the ABCP program is comprised of a $400 million liquidity
facility plus $14 million of trust certificates issued in connection with
the formation of the ABCP trust.
Available funding under the amended and restated credit facility and
the ABCP program was $546 million, of which $141 million provided funding
backup for the outstanding short-term debt at October 31, 1997. The
remaining $405 million when combined with unrestricted cash and cash
equivalents made $416 million available to fund the general business
purposes of NFC at October 31, 1997.
NFC's wholly owned subsidiaries, Navistar Financial Retail
Receivables Corporation (NFRRC) and Navistar Financial Securities
Corporation (NFSC), have a limited purpose of purchasing retail and
wholesale receivables, respectively, and transferring an undivided
ownership interest in such notes to investors in exchange for pass-through
notes and certificates. The subsidiaries have limited recourse on the
sold receivables and their assets are available to satisfy the claims of
their creditors prior to such assets becoming available to NFC or
affiliated companies.
<PAGE>
<PAGE 32>
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. DEBT (continued)
NFSC has in place a $600 million revolving wholesale note trust that
provides for the continuous sale of eligible wholesale notes on a daily
basis. The trust is comprised of two $100 million tranches of investor
certificates maturing in 1998 and 1999 and two $200 million tranches
maturing in 2003. At October 31, 1997, the remaining shelf registration
available to NFSC for issuance of investor certificates was $200 million.
During 1997, NFC sold $987 million of retail notes, net of unearned
finance income, through NFRRC to two individual owner trusts. The owner
trusts in turn sold notes and certificates to investors. The net proceeds,
after underwriting costs and credit enhancements, were used by NFC for
general working capital purposes. At October 31, 1997, the remaining shelf
registration available to NFRRC for issuance of asset-backed securities
was $1,473 million.
In November 1997, NFC sold $500 million of retail notes, net of
unearned finance income, through NFRRC. The net proceeds were used for
general working capital purposes.
During 1997, NFC entered into sale/leaseback agreements involving
vehicles that were already subject to retail finance and operating leases
with end users. The remaining balance as of October 31, 1997 is classified
under Financial Services operations as capitalized leases. These
agreements grant a security interest in the underlying vehicles and lease
receivables to the purchasers.
During November 1997, the company arranged financing for $125 million
of funds denominated in U.S. dollars and Mexican pesos to be used for
development of the company's Mexican operations.
9. OTHER LIABILITIES
Major classifications of other liabilities at October 31 are as
follows:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Product liability and warranty ... $ 285 $ 293
Loss reserves
and unearned premiums .......... 99 113
Employee incentive programs ...... 93 10
Payroll, commissions
and employee related benefits .. 83 73
Long-term disability
and workers' compensation ...... 54 55
Taxes ............................ 59 44
Environmental .................... 27 23
Interest ......................... 13 9
Other ............................ 181 199
------ ------
Total other liabilities ........ $ 894 $ 819
====== ======
During the fourth quarter of 1996, the company recorded a one-time
$35 million pretax charge for costs related to the termination of its next
generation truck program. In August 1997, the company and the United Auto
Workers reached agreement on a master contract extension that enabled the
company to reinstate its next generation truck program. The remaining
accrual at the time of the announcement was not material.
<PAGE>
<PAGE 33>
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The carrying amounts of financial instruments, as reported in the
Statement of Financial Condition and described in various Notes to the
Financial Statements, and their fair values at October 31 are as follows:
1997 1996
------------------ -------------------
Carrying Fair Carrying Fair
Millions of dollars Amount Value Amount Value
- --------------------------------------------------------------------
Receivables, net ..... $1,755 $1,764 $1,655 $1,658
Investments
and other assets ... 332 343 213 221
Debt ................. 1,316 1,321 1,420 1,414
Cash and cash equivalents approximate fair value. The cost and fair
value of marketable securities are disclosed in Note 4.
Customer receivables, wholesale notes, retail and wholesale accounts,
notes receivable, and other variable-rate retail notes approximate fair
value as a result of the short-term maturities of the financial
instruments. The fair value of truck retail notes is estimated based on
quoted market prices of similar sold receivables. The fair value of
amounts due from sales of receivables is estimated by discounting expected
cash flows at estimated current market rates.
The fair value of investments and other assets is estimated based on
quoted market prices or by discounting future cash flows.
The short-term debt and variable-rate borrowings under NFC's bank
revolving credit agreement, which is repriced frequently, approximate fair
value. The fair value of long-term debt is estimated based on quoted
market prices, when available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar financial
instruments or discounting future cash flows.
<PAGE>
<PAGE 34>
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. FINANCIAL INSTRUMENTS (continued)
Derivatives Held or Issued for Purposes Other Than Trading
The company uses derivatives to transfer or reduce risks of foreign
exchange and interest rate volatility and to potentially increase the
return on invested funds.
NFC manages its exposure to fluctuations in interest rates by
limiting the amount of fixed rate assets funded with variable rate debt,
by selling fixed rate retail receivables on a fixed rate basis and, to a
lesser extent, by utilizing derivative financial instruments. These
instruments may include interest rate swaps, interest rate caps and
forward interest rate contracts. NFC manages exposure to counter-party
credit risk by entering into derivative financial instruments with major
financial institutions that can be expected to fully perform under the
terms of such agreements. Notional amounts are used to measure the volume
of derivative financial instruments and do not represent exposure to
credit loss.
NFC enters into forward interest rate contracts to manage its
exposure to fluctuations in the fair value and resulting funding costs
from the anticipated securitization and sale of retail notes. NFC manages
interest rate risk by entering into either forward contracts to sell fixed
debt securities or interest rate swaps whose fair values are highly
correlated with the fair value of NFC's receivables. Gains or losses
incurred with the closing of these agreements are included as a component
of the gain or loss on sale of receivables.
During 1997, NFC entered into $500 million of interest rate hedge
agreements in anticipation of the November 1997 sale of retail
receivables. These hedge agreements were closed in conjunction with the
pricing of the sale, and the loss at October 31, 1997, which was not
material, was deferred and reduced the gain recognized on the sale of
receivables in November 1997.
<PAGE>
<PAGE 35>
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS,
CONCENTRATIONS, AND LEASES
Commitments, contingencies and restricted assets
At October 31, 1997, commitments for capital expenditures in progress
were approximately $137 million.
NFC's maximum exposure under all receivable sale recourse provisions
at October 31, 1997 was $246 million; however, management believes that
the allowance for credit losses on sold receivables is adequate.
At October 31, 1997, the Canadian operating subsidiary was
contingently liable for retail customers' contracts and leases financed by
a third party. The company is subject to maximum recourse of $261 million
on retail contracts and $13 million on retail leases. In addition, as of
October 31, 1997, the company is contingently liable for approximately $49
million for various guarantees and buyback programs; however, based on
historical loss trends, the company's exposure is not considered material.
The Canadian operating subsidiary, NFC and certain other subsidiaries
included in financial services operations are parties to agreements that
may result in the restriction of amounts which can be distributed to
Transportation in the form of dividends or loans and advances. At October
31, 1997, the maximum amount of dividends which were available for
distribution under the most restrictive covenants was $62 million.
The company and Transportation are obligated under certain agreements
with public and private lenders of NFC to maintain the subsidiary's income
before interest expense and income taxes at not less than 125% of its
total interest expense. No income maintenance payments were required for
the three years ended October 31, 1997.
Concentrations
At October 31, 1997, the company employed 10,593 hourly workers and
5,434 salaried workers in the United States and Canada. Approximately 93%
of the hourly employees and 23% of the salaried employees are represented
by unions. Of these represented employees, 91% of the hourly workers and
94% of the salaried workers are represented by the United Automobile,
Aerospace, and Agricultural Implement Workers of America (UAW) or the
National Automobile, Aerospace, and Agricultural Implement Workers of
Canada (CAW). During August 1997, the company's current master contract
with the UAW was extended from October 1, 1998 to October 1, 2002. The
collective bargaining agreement with the CAW expires on October 24, 1999.
Reflecting higher consumer demand for light trucks and vans, sales of
mid-range diesel engines to Ford Motor Company were 14% of consolidated
sales and revenues in 1997 and 1996 and 12% in 1995. During 1997, the
company entered into a ten-year agreement, effective with model year 2003,
to continue supplying Ford Motor Company with diesel engines for use in
its diesel-powered light trucks and vans.
<PAGE>
<PAGE 36>
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS,
CONCENTRATIONS, AND LEASES (continued)
Leases
The company has long-term noncancellable leases for use of various
equipment and facilities. Lease terms are generally for five to 25 years
and, in many cases, provide for renewal options. The company is generally
obligated for the cost of property taxes, insurance and maintenance. The
company leases office buildings, distribution centers, furniture and
equipment, machinery and equipment, and computer equipment.
The majority of the company's lease payments are for operating
leases. At October 31, 1997, future minimum lease payments under
operating leases having lease terms in excess of one year are: 1998 - $36
million, 1999 - $34 million, 2000 - $33 million, 2001 - $20 million, 2002
- - $15 million and thereafter - $42 million. Total operating lease expense
was $40 million in 1997, $35 million in 1996 and $42 million in 1995.
Income received from sublease rentals was $6 million in 1997, 1996 and
1995, respectively.
12. LEGAL PROCEEDINGS
The company and its subsidiaries are subject to various claims
arising in the ordinary course of business, and are parties to various
legal proceedings which constitute ordinary routine litigation
incidental to the business of the company and its subsidiaries.
In the opinion of the company's management, none of these proceedings
or claims is material to the business or the financial condition of
the company.
13. ENVIRONMENTAL MATTERS
In the fourth quarter of 1994, Transportation recorded a $20 million
charge, net of $13 million of income taxes, as a loss of discontinued
operations related to environmental liabilities at production facilities
of two formerly owned businesses, Wisconsin Steel and Solar Turbine, Inc.
Included in the charge was an anticipated $11 million payment to the
Economic Development Administration, a division of the U.S. Department of
Commerce, in settlement of commercial and environmental disputes related
to the Wisconsin Steel property. In 1997, the U.S. Department of Justice
and Transportation approved the final consent decree related to the
Wisconsin Steel property and the company paid the $11 million to the
Economic Development Administration.
The company has been named a potentially responsible party (PRP), in
conjunction with other parties, in a number of cases arising under an
environmental protection law known as the Superfund law. These cases
involve sites which allegedly have received wastes from current or former
company locations. Based on information available to the company, which in
most cases consists of data related to quantities and characteristics of
material generated at or shipped to each site as well as cost estimates
from PRPs and/or federal or state regulatory agencies for the cleanup of
these sites, a reasonable estimate is calculated of the company's share,
if any, of the probable costs and is provided for in the financial
statements. These obligations generally are recognized no later than
completion of the remedial feasibility study and are not discounted to
their present value. The company reviews its accruals on a regular basis
and believes that, based on these calculations, its share of the potential
additional costs for the cleanup of each site will not have a material
effect on the company's financial results.
<PAGE>
<PAGE 37>
NOTES TO FINANCIAL STATEMENTS
(Continued)
14. INDUSTRY SEGMENT DATA
Information concerning operations by industry segment is as follows:
Financial
Manufacturing Services
Millions of dollars Operations Operations Consolidated
- -------------------------------------------------------------------------
October 31, 1997
- ----------------
Total sales
and revenues ....... $6,191 $ 239 $6,371
Operating profit ..... 873 101 924
Depreciation
and amortization ... 97 23 120
Capital expenditures . 172 - 172
Identifiable assets .. 4,111 1,857 5,516
October 31, 1996
- ----------------
Total sales
and revenues ....... $5,550 $ 258 $5,754
Operating profit ..... 690 109 755
Depreciation
and amortization ... 90 15 105
Capital expenditures . 117 - 117
Identifiable assets .. 3,815 1,843 5,326
October 31, 1995
- ----------------
Total sales
and revenues ....... $6,168 $ 235 $6,342
Operating profit ..... 845 80 870
Depreciation
and amortization ... 75 11 86
Capital expenditures . 139 - 139
Identifiable assets .. 4,018 1,922 5,566
Intersegment sales and revenues were not material in 1997, 1996 or
1995. Transactions between manufacturing operations and financial
services operations have been eliminated from the consolidated column.
<PAGE>
<PAGE 38>
NOTES TO FINANCIAL STATEMENTS
(Continued)
15. PREFERRED AND PREFERENCE STOCKS
The company's Nonconvertible Junior Preference Stock Series A is held
for the Retiree Supplemental Benefit Program by the Supplemental Trust
which is currently entitled to elect two members to the company's Board of
Directors. The UAW holds the Nonconvertible Junior Preference Stock
Series B and is currently entitled to elect one member of the company's
Board of Directors. At October 31, 1997, there was one share each of
Series A and Series B Preference stock authorized and outstanding. The
value of the preference shares is minimal.
Other information pertaining to preferred and preference stocks
outstanding is summarized as follows:
Series G Convertible Series D Convertible
Cumulative Preferred Junior Preference
- ---------------------------------------------------------------------
Number authorized
and issued ............. 4,800,000 3,000,000
Number outstanding ....... 4,800,000 175,000
Optional redemption price
and liquidation
preference ............. $50 per share $25 per share
plus accrued plus accrued
dividends dividends
Conversion rate per share
into Common Stock
(subject to adjustment
in certain circumstances) 0.133 shares 0.3125 shares
Ranking as to dividends
and upon liquidation .. Senior to all other Senior to Common;
equity securities junior to Series G
Dividend rate ............ Annual rate of $6.00 120% of the cash
per share, dividends
payable quarterly on Common Stock as
declared on a common
equivalent basis
Dividends may be paid out of surplus as defined under Delaware corporation
law. At October 31, 1997, the company had such defined surplus of $1,007
million.
- -------------------------------------------------------------------------
<PAGE>
<PAGE 39>
NOTES TO FINANCIAL STATEMENTS
(Continued)
16. COMMON SHAREOWNERS' EQUITY
Changes in the common shareowners' equity accounts are as follows:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Common Stock
Beginning of year ................ $ 1,642 $ 1,641 $ 1,628
Conversion of Class B
Common Stock and other ......... 17 1 13
------- ------- -------
End of year ...................... $ 1,659 $ 1,642 $ 1,641
------- ------- -------
Class B Common Stock
Beginning of year ................ $ 491 $ 491 $ 501
Repurchase of stock .............. (20) - (10)
------- ------- -------
End of year ...................... $ 471 $ 491 $ 491
------- ------- -------
Retained Earnings (Deficit)
Beginning of year ................ $(1,431) $(1,478) $(1,538)
Net income ....................... 150 65 164
Preferred dividends .............. (29) (29) (22)
Minimum pension liability
adjustments and other .......... 9 11 (82)
------- ------- -------
End of year ...................... $(1,301) $(1,431) $(1,478)
------- ------- -------
Common Stock Held in Treasury
Beginning of year ................ $ (30) $ (28) $ (18)
Repurchase of Common Stock
and other ...................... (23) (2) (10)
------- ------- -------
End of year ...................... $ (53) $ (30) $ (28)
------- ------- -------
Common Stock
The company has authorized 110 million shares of Common Stock with a
par value of $.10 per share and 26 million shares of Class B Common Stock
with a par value of $.10 per share and restricted voting rights and
transfer provisions. At October 31, 1997 and 1996, there were 49.3
million and 49.4 million shares of Common Stock outstanding, net of Common
Stock held in Treasury, respectively. The number of shares of Class B
Common Stock outstanding at October 31, 1997 and 1996 was 23.1 million and
24.3 million, respectively. The remaining Class B Common Stock will
convert into Common Stock on June 30, 1998.
<PAGE>
<PAGE 40>
NOTES TO FINANCIAL STATEMENTS
(Continued)
17. STOCK COMPENSATION PLANS
The company has stock-based compensation plans, approved by the
Committee on Organization of the Board of Directors, which provide for
granting of stock options to employees for purchase of Common Stock at the
fair market value of the stock on the date of grant. The grants are
generally exercisable after one year and generally have a ten-year life.
The company has elected to continue to account for stock option
grants in accordance with Accounting Principles Board Opinion No. 25 and
related Interpretations. Accordingly, no compensation cost has been
recognized for fixed stock options because the exercise prices of the
stock options equal the market value of the company's Common Stock at the
date of grant. Had compensation cost for the plans been determined based
upon the fair value at the grant date consistent with SFAS 123, pro forma
net income would have been $147 million in 1997 and $63 million in 1996
and pro forma earnings per share would have been $1.61 in 1997 and $0.46
in 1996. The pro forma effect on net income for 1997 and 1996 may not be
representative of the pro forma effect on net income of future years
because it does not take into consideration pro forma compensation expense
relating to grants made prior to November 1, 1995.
The weighted-average fair values at date of grant for options granted
during 1997 and 1996 were $5.71 and $5.34, respectively, and were
estimated using the Black-Scholes option-pricing model with the following
assumptions:
1997 1996
---- ----
Risk-free interest rate 6.6% 6.1%
Dividend yield 0% 0%
Expected volatility 29.8% 30.9%
Expected life in years 10 10
The following summarizes stock option activity for the years ended
October 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares in Thousands Shares Price Shares Price Shares Price
- ------------------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
at beginning
of period ....... 2,346 $20.34 1,762 $24.25 1,163 $30.08
Granted ........... 876 10.13 718 10.45 642 13.58
Exercised ......... (715) 12.45 - - - -
Canceled .......... (77) 28.52 (134) 18.75 (43) 22.46
----- ------ ------ ------ ------ ------
Options outstanding
at year end ..... 2,430 $18.73 2,346 $20.34 1,762 $24.25
====== ====== ====== ====== ====== ======
Options exercisable
at year end ..... 1,579 $23.35 1,682 $24.25 1,140 $30.07
====== ====== ====== ====== ====== ======
Options available
for grant at
year end ........ - - -
====== ====== ======
</TABLE>
<PAGE>
<PAGE 41>
NOTES TO FINANCIAL STATEMENTS
(Continued)
17. STOCK COMPENSATION PLANS (continued)
The following table summarizes information about stock options
outstanding and exercisable at October 31, 1997.
<TABLE>
<CAPTION>
Outstanding Options Options Exercisable
---------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (in thousands) Life Price (in thousands) Price
---------------- -------------- - ----------- -------- -------------- --------
<C> <C> <C> <C> <C> <C>
$ 9.31 - $13.75 1,448 8.5 $10.70 649 $12.11
17.40 - 25.63 686 6.5 $23.52 642 23.93
27.96 - 37.50 113 5.5 $36.78 105 37.43
43.75 - 61.88 156 3.5 $49.49 156 49.49
68.12 - 91.25 27 1.1 $73.09 27 73.09
</TABLE>
18. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(Millions
of dollars
except per
share data) 1997 1996 1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and
revenues $1,296 $1,432 $1,551 $1,480 $1,586 $1,391 $1,938 $1,451
====== ====== ====== ====== ====== ====== ====== ======
Manufactur-
ing gross
margin 13.6% 12.2% 13.8% 13.7% 13.8% 12.6% 15.2% 11.6%
====== ====== ====== ====== ====== ====== ====== ======
Net income $ 15 $ 22 $ 30 $ 26 $ 35 $ 17 $ 70 $ -
Net income
(loss) per
common
share $ .10 $ .20 $ .31 $ .26 $ .38 $ .13 $ .85 $ (.10)
Market
price
range
- Common
Stock
High $10 3/8 $12 1/8 $11 3/8 $12 $21 5/16 $12 $29 1/2 $10 3/8
Low $ 9 $ 9 1/2 $ 9 1/8 $ 9 1/2 $11 1/4 $9 1/8 $17 1/4 $ 8 1/2
</TABLE>
Net income per common share is computed independently based on the
weighted average number of Common and Class B Common shares at the end of
each quarter.
<PAGE>
<PAGE 42>
NOTES TO FINANCIAL STATEMENTS
(Continued)
19. SUPPLEMENTAL FINANCIAL INFORMATION AS OF OCTOBER 31
AND FOR THE YEARS THEN ENDED(Unaudited)
Navistar International Corporation (with financial services
operations on an equity basis)
in millions of dollars:
<TABLE>
<CAPTION>
Condensed Statement of Income 1997 1996 1995
- ----------------------------- --------- -------- --------
<S> <C> <C> <C>
Sales of manufactured products ... $ 6,147 $ 5,508 $ 6,125
Other income ..................... 44 42 43
-------- -------- --------
Total sales and revenues .... 6,191 5,550 6,168
-------- -------- --------
Cost of products sold ............ 5,274 4,818 5,280
Postretirement benefits .......... 214 219 205
Engineering and research expense . 124 129 113
Marketing and administrative expense 332 282 277
Other expenses .................... 83 80 93
-------- -------- --------
Total costs and expenses .......... 6,027 5,528 5,968
-------- -------- --------
Income before income taxes
Manufacturing operations ........ 164 22 200
Financial services operations ... 78 83 62
-------- -------- --------
Income before income taxes .... 242 105 262
Income tax expense ................ 92 40 98
-------- -------- --------
Net income ........................ $ 150 $ 65 $ 164
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement
of Financial Condition 1997 1996
- ------------------------ -------- -------
<S> <C> <C>
Cash, cash equivalents
and marketable securities ....... $ 802 $ 707
Inventories ....................... 483 463
Property and equipment, net ....... 706 666
Equity in nonconsolidated
subsidiaries .................... 322 306
Other assets ...................... 864 643
Deferred tax asset, net ........... 934 1,030
-------- --------
Total assets ................. $ 4,111 $ 3,815
-------- --------
Accounts payable .................. $ 1,060 $ 771
Postretirement benefits liabilities 1,178 1,344
Other liabilities ................. 853 784
Shareowners' equity ............... 1,020 916
-------- --------
Total liabilities
and shareowners' equity .... $ 4,111 $ 3,815
======== ========
</TABLE>
<PAGE>
<PAGE 43>
NOTES TO FINANCIAL STATEMENTS
(Continued)
19. SUPPLEMENTAL FINANCIAL INFORMATION AS OF OCTOBER 31
AND FOR THE YEARS THEN ENDED(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Condensed Statement of Cash Flow 1997 1996 1995
- -------------------------------- --------- -------- --------
<S> <C> <C> <C>
Cash flow from operations
Net income ....................... $ 150 $ 65 $ 164
Adjustments to reconcile net
income to cash provided
by operations:
Depreciation and amortization 97 90 75
Equity in earnings of
nonconsolidated companies,
net of dividends received . (8) (24) (28)
Deferred income taxes ....... 82 37 89
Other, net .................. (26) 4 (66)
Change in operating assets
and liabilities ................ 143 (172) 166
-------- -------- --------
Cash provided by operations ...... 438 - 400
-------- -------- --------
Cash flow from investment programs
Purchase of marketable securities. (428) (501) (646)
Sales or maturities
of marketable securities ....... 454 665 399
Capital expenditures ............. (172) (117) (139)
Loan to NFC ...................... (99) - -
Other investment programs, net ... 4 (8) 8
-------- -------- --------
Cash (used in) provided by
investment programs ........... (241) 39 (378)
-------- -------- --------
Cash flow from financing activities (76) (48) (60)
-------- -------- --------
Cash and cash equivalents
Increase (decrease)
during the year ............. 121 (9) (38)
At beginning of the year ...... 452 461 499
-------- -------- --------
Cash and cash equivalents
at end of the year ............ $ 573 $ 452 $ 461
======== ======== ========
</TABLE>
<PAGE>
<PAGE 44>
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL AND STATISTICAL DATA
- ----------------------------------------------------------------------------------------------------------
For the Years Ended October 31
(Millions of dollars,
except per share data
market share, and units shipped) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Total sales and revenues ....................... $6,371 $5,754 $6,342 $5,337 $4,721
Income (loss) of continuing operations ......... 150 65 164 102 (273)
Net income (loss)(a) ........................... 150 65 164 82 (501)
Income (loss) per common share
of continuing operations ..................... 1.65 .49 1.83 .99 (8.63)
Net income (loss) per common share ............. 1.65 .49 1.83 .72 (15.19)
Average number of Common, Class B Common
and dilutive common equivalent shares
outstanding (millions) ...................... 73.6 73.8 74.3 74.6 34.9
- -----------------------------------------------------------------------------------------------------------
FINANCIAL DATA
Total assets ................................... 5,516 5,326 5,566 5,047 5,060
Debt
Manufacturing operations .................... 92 115 127 127 175
Financial services operations ............... 1,224 1,305 1,330 1,091 1,199
------ ------ ------ ------ ------
Total debt ..................................... 1,316 1,420 1,457 1,218 1,374
Shareowners' equity ............................ 1,020 916 870 817 775
Total manufacturing operations debt as a
percent of total manufacturing capitalization. 8.3% 11.2% 12.7% 13.4% 18.4%
Return on equity (b) ........................... 14.7% 7.1% 18.9% 12.5% (35.2)%
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Capital expenditures ........................... 172 117 139 87 110
Engineering and research expense ............... 124 129 113 97 94
- -----------------------------------------------------------------------------------------------------------
OPERATING DATA
United States and Canadian market share (c) .... 28.6% 27.5% 26.7% 27.0% 27.6%
Unit shipments
Trucks ....................................... 104,400 95,200 112,200 95,000 87,200
OEM engines .................................. 184,000 163,200 154,200 130,600 118,200
Service parts sales ............................ 806 760 730 714 632
<FN>
(a) In the third quarter of 1993, the company adopted SFAS 106 and SFAS 109
retroactive to November 1, 1992.
(b) Return on equity is calculated based on income of continuing operations.
(c) Based on retail deliveries of medium trucks (Classes 5, 6 and 7),
including school buses, and heavy trucks (Class 8).
</TABLE>
<PAGE>
<PAGE 45>
INFORMATION FOR OUR INVESTORS
About Your Stock
Navistar International Corporation Common Stock is listed on the New
York, Chicago and Pacific Stock Exchanges and is quoted as "Navistar" in
stock table listings in daily newspapers. The abbreviated stock symbol is
"NAV."
The stock transfer agent who can answer inquiries about your Navistar
International Corporation Common Stock such as name changes, changes of
address or missing certificates is: Harris Trust and Savings Bank, 311
West Monroe Street, 11th Floor, Chicago, Illinois 60606; Telephone: (312)
360-5101.
For information about other shareowner matters, contact: Investor
Relations, Navistar International Corporation, 455 North Cityfront Plaza
Drive, Chicago, Illinois 60611; Telephone: (312) 836-2143.
There were approximately 57,949 owners of Common Stock at October 31,
1997.
Annual Meeting
The 1998 Annual Meeting of Shareowners is scheduled to take place at
10:15 a.m., CST on March 24, 1998, at the Art Institute of Chicago in the
Arthur Rubloff Auditorium.
Shareowners are invited to attend this meeting, take part in
discussions of company affairs and meet personally with the directors and
officers responsible for the operations of Navistar.
A Proxy Statement and Form of Proxy will be mailed to each shareowner
on or about February 2, 1998.
Commitment to Equal Employment Opportunity
Navistar International Corporation has a long-standing commitment to
equal employment opportunity dating back to 1919 when the company issued
its first written statement against discrimination in the workplace.
Today, Navistar continues to be a leader in the industry in complying
with all state and federal laws, local municipal laws and regulations
governing employment. Navistar has continuously and aggressively
implemented measures to ensure that all individuals regardless of age,
race, sex, religion, national origin, disability, or veteran status are
not discriminated against in regard to career opportunities within the
company.
Navistar has adopted policy standards and assurances for all
employees and qualified applicants, pledging terms and conditions of
employment to be equal for all individuals.
Corporate Headquarters
The corporate offices of Navistar International Corporation and its
principal subsidiary, Navistar International Transportation Corp., are
located at 455 North Cityfront Plaza Drive, Chicago, Illinois 60611;
Telephone: (312) 836-2000.
<PAGE>
<PAGE 46>
Reports and Publications
A copy of the company's 1997 Annual Report on Form 10-K to the
Securities and Exchange Commission will be provided, without charge, to
shareowners upon written request to the Corporate Secretary, Corporate
Headquarters, after January 31, 1998.
In order to provide shareowners with immediate access to financial
information and news about the company, Navistar distributes its corporate
news releases through PR Newswire, an electronic news service, and files
its financial statements with the Securities and Exchange Commission
electronically through the EDGAR system. PR Newswire and EDGAR can be
accessed by computer via the Internet, and through such services as
America On-Line and CompuServe. In addition, this information can be
accessed through such databases and information services as Lexis/Nexus,
Dow Jones and Bloomberg which frequently are available at libraries and
brokerage firms.
Navistar also offers a toll-free, "Company News on Call" service,
which allows shareowners to receive copies of recent Navistar corporate
news releases via telefax. To access this service, call (800) 758-5804,
and enter Navistar's six digit code when prompted: 103895. Using a touch-
tone phone, shareowners can select from a menu of news releases and
request specific news releases to be faxed directly to them.
Navistar encourages shareowners to take advantage of these electronic
databases and the "Company News on Call" service to access the company's
quarterly financial results on the same day that the results are
announced. Navistar's 1998 quarterly financial results will be announced
on the following dates:
First quarter February 12, 1998
Second quarter May 14, 1998
Third quarter August 13, 1998
Fourth quarter December 3, 1998
News releases, Form 10-Qs, Navistar's Annual Environmental Health &
Safety Report, and other publications are available by writing:
Corporate Communications
Navistar International Corporation
455 North Cityfront Plaza Drive
Chicago, Illinois 60611
Navistar also encourages shareowners to visit its home page on the
World Wide Web at http://www.navistar.com.
Trademarks
Navistar logotype and Navistar are registered trademarks of Navistar
International Corporation. The Diamond Road symbol and International are
registered trademarks of Navistar International Transportation Corp.
Additional registered trademarks include Eagle, Fleet Charge, Fleetrite,
Skyrise, Paystar and Pro Sleeper. Diamond SPEC, Diamond PLUS and Diamond
Services are trademarks of Navistar International Transportation Corp.
<PAGE>
<PAGE 47>
<TABLE>
<CAPTION>
Directors and Officers
Navistar International Corporation (As of December 19, 1997)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <S> <S> <S>
Board of Directors Principal Officers
John R. Horne Jerry E. Dempsey Michael N. Hammes John R. Horne
Chairman, President Retired Chairman and Former Chairman and Chairman, President
and Chief Executive Officer Chief Executive Officer Chief Executive Officer and Chief Executive Officer
Navistar International Corporation PPG Industries, Inc. The Coleman Company, Inc. Donald DeFosset, Jr.
Committees: 1[Chair] Diversified Global Manufacturer Manufacturer and Distributor Executive Vice President
of Glass, Protective Coatings of Camping and Outdoor and President, Truck Group
William F. Andrews and Chemicals Recreational Products Robert C. Lannert
Chairman Committees: 1, 2 [Chair] and Hardware/Home Products Executive Vice President
Schrader-Bridgeport 3, 6 [Chair] Committees: 3, 5 and Chief Financial Officer
International Inc. Robert A. Boardman
Manufacturer of Tire Valves John F. Fiedler Allen J. Krowe Senior Vice President
and Valve Accessories Chairman, President and Retired Vice Chairman and General Counsel
Chairman Chief Executive Officer Texaco, Inc. Thomas M. Hough
Scovill Fasteners, Inc. Borg-Warner Automotive, Inc. Global Energy Company Vice President and Treasurer
Manufacturers of Apparel Supplier of Engineered Committees: 3, 4 J. Steven Keate
and Industrial Fasteners Components and Systems Vice President and Controller
Committees: 1, 2, 3 [Chair], 6 Committees: 2, 5, 6 Robert C. Lannert Steven K. Covey
Executive Vice President Corporate Secretary
Dr. Andrew F. Brimmer Mary Garst and Chief Financial Officer
President Manager, Cattle Division Navistar International Corporation
Brimmer & Company, Inc. Garst Company
Economic and Financial Agri-Business Company Walter J. Laskowski Committees:
Consulting Committees: 1, 4, 5 [Chair] International Vice President 1 Executive
Committees: 1, 3, 4 [Chair], of the UAW 2 Organization
5, 6 John T. Grigsby Committees: 1, 3, 4 3 Finance
President 4 Audit
John D. Correnti John Grigsby and William F. Patient 5 Public Policy
Chief Executive Officer, Associates, Inc. Chairman of the Board, President 6 Strategic Initiatives
President and Vice Chairman Provider of Strategic and Chief Executive Officer
Nucor Corporation and Operational The Geon Company
Steel Manufacturer Consulting to Manufacturer of Polyvinyl
Committees: 2, 4, 6 Financially Chloride (PVC) Resins and
Distressed Compounds
William C. Craig Companies Committees: 2, 4
Former Executive Vice President Committees: 4, 5
Mack Trucks
Manufacturer of Trucks
Committees: 1, 2, 3
Navistar International Transportation Corp.
__________________________________________________________________________________________________________________________________
Principal Officers Group Vice Presidents Senior Vice Presidents Vice Presidents
John R. Horne John J. Bongiorno Robert A. Boardman Thomas M. Hough
Chairman, President General Manager General Counsel Treasurer
and Chief Executive Officer Financial Services Joseph V. Thompson J. Steven Keate
Donald DeFosset, Jr. R. Gary Diaz Employee Relations Controller
Executive Vice President Chief Technical Officer and Administration James L. Simonton
and President Truck Group Truck Group Purchasing and
Robert C. Lannert David J. Johanneson Secretary Supplier Development
Executive Vice President Truck Businesses Gregory Lennes Brian B. Whalen
and Chief Financial Officer James T. O'Dare, Jr. Public Affairs
Sales and Distribution
Daniel C. Ustian
General Manager
Engine and Foundry
Dennis W. Webb
International Operations
</TABLE>
<PAGE 1>
EXHIBIT 21
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
SUBSIDIARIES OF THE REGISTRANT
AS OF OCTOBER 31, 1997
STATE OR
COUNTRY IN
WHICH
SUBSIDIARY
ORGANIZED
----------
Subsidiary included in the financial
statements, which is 100% owned:
Navistar International Transportation Corp. Delaware
Subsidiaries that are 100% owned by Navistar
International Transportation Corp.:
Navistar International Corporation Canada Canada
Navistar Financial Corporation Delaware
Subsidiaries and corporate joint ventures not shown by name in the
above listing, if considered in the aggregate as a single subsidiary,
would not constitute a significant subsidiary.
E-10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 609
<SECURITIES> 356
<RECEIVABLES> 1786
<ALLOWANCES> (31)
<INVENTORY> 483
<CURRENT-ASSETS> 0<F1>
<PP&E> 1682
<DEPRECIATION> (847)
<TOTAL-ASSETS> 5516
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 1316
0
244
<COMMON> 2130
<OTHER-SE> (1354)
<TOTAL-LIABILITY-AND-EQUITY> 5516
<SALES> 6147
<TOTAL-REVENUES> 6371
<CGS> 5292
<TOTAL-COSTS> 6129
<OTHER-EXPENSES> 215
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 74
<INCOME-PRETAX> 242
<INCOME-TAX> (92)
<INCOME-CONTINUING> 150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
<FN>
<F1>The company has adopted an unclassified presentation in the Statement of
Financial Condition.
</FN>
</TABLE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________
-----------------
Commission File Number 1-4146-1
-----------------
NAVISTAR FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-2472404
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2850 West Golf Road
Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 847-734-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No__
As of November 30, 1997, the number of shares outstanding of the registrant's
common stock was 1,600,000.
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL
TRANSPORTATION CORP. AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
FORM 10-K
Year Ended October 31, 1997
<TABLE>
<CAPTION>
INDEX
10-K Page
PART I
<S> <C> <C>
Item 1. Business (A)................................................ 1
Item 2. Properties (A).............................................. 1
Item 3. Legal Proceedings........................................... 1
Item 4. Submission of Matters to a Vote of
Security Holders (A)..................................... 1
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters................................. 1
Item 6. Selected Financial Data (A)................................. 1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (A)..................... 2
Item 8. Financial Statements........................................ 8
Independent Auditors' Report................................ 31
Supplementary Financial Data................................ 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 35
PART III
Item 10. Directors and Executive Officers of the
Registrant (A).............................................. 35
Item 11. Executive Compensation (A).................................. 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management (A).......................................... 35
Item 13. Certain Relationships and Related
Transactions (A)............................................ 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 35
SIGNATURES- Principal Accounting Officer ............................... 36
- Directors.............................................. 37
POWER OF ATTORNEY....................................................... 37
EXHIBITS ......................................................... E-1
(A) - Omitted or amended as the registrant is a wholly-owned subsidiary of
Navistar International Transportation Corp. and meets the conditions set
forth in General Instructions I(1) (a) and (b) of Form 10-K and is,
therefore, filing this Form with the reduced disclosure format.
</TABLE>
<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 is a financial services organization that provides
wholesale, retail and lease financing in the United States for sales of new and
used trucks sold by Transportation and Transportation's dealers. The Corporation
also finances wholesale accounts and selected retail accounts receivable of
Transportation. Sales of new products (including trailers) of other
manufacturers are also financed regardless of whether designed or customarily
sold for use with Transportation's truck products. Harco National Insurance
Company, NFC's wholly-owned insurance subsidiary, provides commercial physical
damage and liability insurance coverage to Transportation's dealers and retail
customers, and to the general public through an independent insurance agency
system.
Item 2. Properties
The Corporation's properties principally consist of office equipment and
leased office space in Rolling Meadows, Illinois; Columbus, Ohio; Atlanta,
Georgia; Plano, Texas; Mt. Laurel, New Jersey; and San Ramon, California. The
office equipment owned and in use by the Corporation is not significant in
relation to the total assets of the Corporation.
Item 3. Legal Proceedings
There were no material pending legal proceedings other than ordinary,
routine litigation incidental to the business of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. See the index page of this Report for explanation.
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
See Note 13 to Consolidated Financial Statements.
Item 6. Selected Financial Data
Intentionally omitted. See the index page to this Report for explanation.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements under this caption constitute "forward-looking
statements" under the Securities Reform Act, which involve risks and
uncertainties. Navistar Financial Corporation's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under the heading "Business Outlook".
Financing Volume
In fiscal 1997 industry demand for Class 5 through 8 trucks was slightly
higher than 1996 and 9% lower than 1995. Financing support provided to retail
customers over the last three years was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Retail and Lease Financing: ($ millions)
Finance market share of new International
trucks sold in the U.S. 13.2% 16.3% 14.4%
Purchases of receivables and
equipment leased to others $1,036 $1,135 $1,113
Serviced retail notes and lease
financing balances (including
sold notes) at October 31 $2,253 $2,200 $1,960
</TABLE>
During 1997, the Corporation's finance market share fell below 1996
performance due to the highly competitive commercial financing market. As a
result of the lower finance market share, purchases of receivables and equipment
leased to others in 1997 were below 1996. Purchases of receivables and equipment
leased to others in 1996 were consistent with those of 1995 as the increase in
finance market share was offset by the lower industry demand for Class 5 through
8 trucks.
Financing support provided to Transportation's dealers over the last three
years was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Wholesale Financing: ($ millions)
Percent of wholesale financing of
new International trucks sold to
Transportation's dealers in the U.S. 94% 94% 93%
Purchases of receivables $2,773 $2,706 $2,979
Serviced wholesale note balances
(including sold notes) at
October 31 $ 691 $ 685 $ 854
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Financing Volume (continued)
In spite of the strong liquidity in the commercial financing market, the
Corporation's finance percentage of new International trucks sold to
Transportation's dealers remained at 94%. In 1997 the volume of receivables
purchased was slightly higher than 1996 and 7% below 1995 in response to the
truck industry demand. Although dealer inventory levels at October 31, 1997 were
comparable to the 1996 year end levels, fiscal 1997 average dealer inventory
levels were approximately 22% below 1996. In response to the continued strong
customer demand, Transportation's dealers significantly increased the level of
truck inventory during the fourth quarter of fiscal 1997. Wholesale note
balances at October 31, 1996 were 25% below 1995 year end balances. This
significant decline occurred primarily in the fourth quarter of fiscal 1996 as
average dealer inventory levels during fiscal 1996 were approximately 22% higher
than fiscal 1995.
Results of Operations
The components of net income over the last three years were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Income before income taxes: ($ millions)
Finance operations $68.6 $74.2 $53.1
Insurance operations 6.0 6.3 5.6
Income before taxes 74.6 80.5 58.7
Taxes on income 28.9 31.1 22.5
Net income $45.7 $49.4 $36.2
Return on average equity 16.1% 18.1% 15.0%
</TABLE>
The Corporation's 1997 return on average equity of 16.1% was below its
record 18.1% in 1996 primarily due to lower average dealer inventory levels and
gains on sales of retail notes, partially offset by lower borrowing costs and
provision for losses. Income in 1996 was 37% higher than 1995 primarily as a
result of higher gains on sales of retail notes and higher average wholesale
note balances.
Finance Operations:
Retail note and lease financing revenue for 1997 was $106 million compared
with $98 million and $73 million in 1996 and 1995, respectively. Included in
these amounts is operating lease revenue of $29 million, $14 million and $9
million in 1997, 1996 and 1995, respectively. The higher operating lease revenue
is the result of an increase in operating lease balances due to a market shift
toward lease financing. For operating leases, the Corporation recognizes the
entire lease payment as revenue and records depreciation expense on the assets
under lease.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Results of Operations - Finance Operations (Continued)
Also included in retail note and lease finance revenue are gains on sales
of retail note receivables of $13 million, $20 million and $5 million in 1997,
1996 and 1995, respectively, on sales of $987 million, $985 million and $740
million, respectively. The higher gains on sales in fiscal 1996 resulted from
higher margins on retail notes due to declining market interest rates prior to
the sale in November 1995. During a declining interest rate environment, NFC's
acquisition spreads may improve as the Corporation's cost of borrowing differs
from the time when interest rates are quoted to borrowers and the time when such
notes are acquired. In addition, unless hedged, the effective interest rate for
each sale is based on a market interest rate at the time of the sale, which may
be up to six months after the Corporation acquired the retail notes.
In fiscal 1997 wholesale note revenue decreased 36.2% from 1996 primarily
as a result of lower average outstanding note balances and lower yields in
response to the competitive commercial financing market. Wholesale note revenue
increased 5% in 1996 to $57 million as a result of higher average outstanding
note balances offset in part by lower average yields relating to a lower prime
interest rate.
Borrowing costs decreased 10.6% in 1997 to $73 million from $82 million in
1996 primarily due to lower wholesale funding requirements and lower borrowing
rates. During 1997 the Corporation's weighted average interest rate on all debt
declined to 6.4% from 6.5% in 1996. The Corporation's 1996 borrowing costs of
$82 million were slightly less than the $84 million in 1995 due to a decline in
the Corporation's weighted average interest rate offset in part by higher debt
balances to support receivable balances. During 1996, the Corporation's weighted
average interest rate on all debt declined to 6.5% from 7.4% in 1995 primarily
due to lower market interest rates and the maturity of high fixed rate public
debt during 1995 and 1996. The ratio of debt to equity was 4.3:1, 4.7:1 and
5.2:1 at October 31, 1997, 1996, and 1995, respectively.
Credit, collection and administrative expenses increased to $31 million in
1997 from $28 million in 1996 and 1995. The increase in 1997 compared with 1996
and 1995 was primarily due to employee related costs, retail marketing efforts
and training and development programs.
The provision for losses on receivables totaled $3 million in 1997 compared
with $9 million in 1996 and $3 million in 1995. During 1997 and 1996 competitive
freight rates and higher fuel costs have impacted NFC's customers' abilities to
meet obligations and have resulted in higher delinquencies, repossessions and
credit losses as compared to 1995. Notes and account write-offs (recoveries),
including sold notes totaled $2 million in 1997, $5 million in 1996 and $(1)
million in 1995. The Corporation's allowance for losses as a percentage of
serviced finance receivables was .72%, .74% and .62% at October 31, 1997, 1996
and 1995, respectively.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Results of Operations - Finance Operations (Continued)
Depreciation and other expenses in 1997 increased to $19 million from $9
million in 1996. The increase is primarily the result of a larger investment in
equipment under operating leases.
Insurance Operations:
Harco National Insurance Company's ("Harco") pretax income was $6 million
in each of the three years ended October 31, 1997. Harco's gross premiums
written in 1997 were $49 million, 10% and 8% below 1996 and 1995, respectively.
The insurance industry continues to be over capitalized which results in a
highly competitive market and places pressure on Harco's volume and margins. The
ratio of losses to earned premiums during 1997 was 70% compared to 73% and 71%
in 1996 and 1995, respectively. The loss ratio improvement is primarily due to
favorable experience in the liability lines.
Liquidity and Funds Management
Navistar Financial has traditionally obtained the funds to provide
financing to Transportation's dealers and retail customers from sales of
receivables, commercial paper, short and long-term bank borrowings, medium and
long-term debt issues and equity capital. The Corporation's current debt ratings
have made sales of finance receivables the most economical source of cash. The
Corporation's insurance operation generates its funds through internal
operations and has no external borrowings.
Operations provided $142 million in cash in 1997 primarily due to the cash
provided from net income of $46 million and an increase in accounts payable to
affiliated companies of $107 million. Investing activities used $1 million in
cash. During 1997, the purchase of $1,036 million of receivables and equipment
leased to others was funded primarily with $958 million of proceeds from the
sale of receivables and principal collections of $94 million. The cash provided
by operations and the $209 million of proceeds from the issuance of long term
debt were used principally to lower bank borrowings by $311 million and to pay
dividends of $40 million. See also the "Statements of Consolidated Cash Flow" on
page 11.
Over the last three years, operations provided $225 million in cash and
proceeds from the sale of retail receivables totaled $2,667 million. These
amounts were used principally to fund the purchase of receivables and equipment
leased to others of $3,007, net of principal collections on the receivables, and
to pay dividends of $75 million.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Liquidity and Funds Management (Continued)
Receivable sales were a significant source of funding in 1997 and 1996.
Through the asset-backed public market, the Corporation has been able to fund
fixed rate retail note receivables at rates offered to companies with investment
grade ratings. During fiscal 1997 and 1996, the Corporation sold $987 and $985
million, respectively, of retail notes, through Navistar Financial Retail
Receivables Corporation ("NFRRC"), a wholly-owned subsidiary, to owner trusts,
which in turn, sold notes and certificates to investors. At October 31, 1997,
the remaining shelf registration available to NFRRC for issuance of asset-backed
securities was $1,473 million.
At October 31, 1997, Navistar Financial Securities Corporation ("NFSC"), a
wholly-owned subsidiary of the Corporation, had in place a $600 million
revolving wholesale note trust that provides for the continuous sale of eligible
wholesale notes on a daily basis. During 1997, a $100 million tranche matured
and the trust issued a $200 million tranche of investor certificates which
matures in 2003. The trust is funded by securities sold to the public comprised
of two $100 million tranches of investor certificates maturing in 1998 and 1999
and two $200 million tranches of investor certificates maturing in 2003 and
2004. At October 31, 1997, the remaining shelf registration available to NFSC
for issuance of investor certificates was $200 million.
On May 30, 1997, the Corporation sold $100 million of Senior Subordinated
Notes due June 2002. The net proceeds from the sale of the Notes offered were
approximately $98 million after the deduction of underwriting fees and certain
other expenses.
During fiscal 1997, the Corporation entered into sale/leaseback agreements
involving vehicles subject to retail finance leases and operating leases with
end users. Total proceeds were $111 million and the outstanding capital lease
obligations at October 31, 1997 were $96 million.
The Corporation has a $925 million bank revolving credit facility and a
$400 million asset-backed commercial paper ("ABCP") program supported by a bank
liquidity facility, which mature in March 2001. See Note 10 to the Consolidated
Financial Statements for further discussion.
In November 1997, the Corporation sold $500 million of retail notes through
NFRRC to an owner trust, which in turn, sold notes to investors. A gain of $7
million was recognized on the sale.
The Corporation manages sensitivity to interest rate changes by funding
floating rate assets with floating rate debt, primarily borrowings under the
bank revolving credit agreement, and fixed rate assets with fixed rate debt,
equity and floating rate debt. Management has limited the amount of fixed rate
assets funded with floating rate debt by selling retail receivables on a fixed
rate basis and, to a lesser extent, by utilizing derivative financial
instruments. See Notes 1 and 14 to the Consolidated Financial Statements.
Corporate policy prohibits the use of derivatives for speculative purposes.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Liquidity and Funds Management (Continued)
Under a state law enacted February 14, 1997, the Corporation was relieved
of any liability under the Notice of Deficiency issued on February 1, 1994 by
the Illinois Department of Revenue to the Corporation for the fiscal years 1989
through 1991. See Note 8 to the Consolidated Financial Statements for further
discussion.
Year 2000
The Corporation has and will continue to make certain investments in its
information systems and applications to ensure they are year 2000 compliant.
Spending for these modifications has not had and is not expected to have a
material impact on the Corporation's financial condition or results of
operations in any given year.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," ("SFAS No. 131"). SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. SFAS No. 131 establishes standards for reporting information
about operating segments, and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. These standards expand or modify
disclosures and, accordingly, will have no impact on the Corporation's reported
financial condition, results of operations or cash flows.
Business Outlook
The truck industry in 1998 is forecasted to be consistent with 1997. The
competitive commercial financing market will continue to put pressure on the
Corporation's retail and wholesale financing activity and margins.
Management believes that collections on the outstanding receivables
portfolio plus cash available from the Corporation's various funding sources
will permit Navistar Financial to meet the financing requirements of
Transportation's dealers and retail customers through 1998 and beyond.
<PAGE>
<TABLE>
<CAPTION>
Page
Item 8. Financial Statements and Supplementary Data
Navistar Financial Corporation and Subsidiaries:
<S> <C>
Statements of Consolidated Income and Retained Earnings
for the years ended October 31, 1997, 1996 and 1995.............. 9
Statements of Consolidated Financial Condition as of
October 31, 1997 and 1996 ....................................... 10
Statements of Consolidated Cash Flow for the years ended
October 31, 1997, 1996 and 1995.................................. 11
Notes to Consolidated Financial Statements......................... 12
Independent Auditors' Report....................................... 31
Supplementary Financial Data....................................... 32
</TABLE>
<PAGE>
Navistar Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Statements of Consolidated Income and Retained Earnings
- -------------------------------------------------------------------------------
Millions of Dollars
<TABLE>
<CAPTION>
For the years ended October 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Retail notes and lease financing.............. $105.8 $ 97.7 $ 73.3
Wholesale notes............................... 36.1 56.6 54.1
Accounts...................................... 31.2 26.6 29.2
Servicing fee income.......................... 20.0 20.5 18.3
Insurance premiums earned..................... 33.3 42.0 44.6
Marketable securities......................... 8.5 9.4 8.7
Total..................................... 234.9 252.8 228.2
Expenses
Cost of borrowing:
Interest expense.......................... 65.9 73.2 75.1
Other..................................... 7.0 8.4 9.1
Total..................................... 72.9 81.6 84.2
Credit, collection and administrative......... 31.0 28.2 27.9
Provision for losses on receivables........... 2.5 9.3 2.6
Insurance claims and underwriting............. 35.1 44.4 46.7
Depreciation expense and other................ 18.8 8.8 8.1
Total..................................... 160.3 172.3 169.5
Income Before Taxes................................ 74.6 80.5 58.7
Taxes on Income.................................... 28.9 31.1 22.5
Net Income......................................... 45.7 49.4 36.2
Retained Earnings
Beginning of year............................. 107.4 84.0 56.8
Dividends paid................................ (40.0) (26.0) (9.0)
End of year................................... $113.1 $107.4 $ 84.0
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Navistar Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Statements of Consolidated Financial Condition
- -------------------------------------------------------------------------------
Millions of Dollars
<TABLE>
<CAPTION>
As of October 31 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents.............................. $ 10.7 $ 6.7
Marketable Securities.................................. 114.2 128.1
Receivables
Finance receivables............................... 1,223.2 1,205.2
Allowance for losses.............................. (12.0) (11.6)
Receivables, net.............................. 1,211.2 1,193.6
Amounts Due from Sales of Receivables.................. 233.3 264.3
Equipment on Operating Leases, Net..................... 124.1 101.1
Repossessions.......................................... 13.0 13.2
Other Assets........................................... 104.1 86.8
Total Assets........................................... $1,810.6 $1,793.8
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Debt........................................ $ 141.0 $ 99.4
Accounts Payable and Other Liabilities................. 191.3 86.4
Senior and Subordinated Debt........................... 1,082.7 1,206.4
Dealers' Reserves...................................... 22.2 22.3
Unpaid Insurance Claims and Unearned Premiums.......... 85.6 99.6
Commitments and Contingencies
Shareowner's Equity
Capital stock (Par value $1.00, 1,600,000 shares
issued and outstanding) and paid-in capital..... 171.0 171.0
Retained earnings................................. 113.1 107.4
Unrealized gains on marketable securities......... 3.7 1.3
Total......................................... 287.8 279.7
Total Liabilities and Shareowner's Equity.............. $1,810.6 $1,793.8
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Navistar Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Statements of Consolidated Cash Flow
- -------------------------------------------------------------------------------
Millions of Dollars
<TABLE>
<CAPTION>
For the years ended October 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flow From Operations
Net income.................................... $ 45.7 $ 49.4 $ 36.2
Adjustments to reconcile net income to
cash provided from operations:
Gains on sales of receivables................. (13.4) (20.2) (5.2)
Depreciation and amortization................. 22.5 15.3 11.1
Provision for losses on receivables........... 2.5 9.3 2.6
Increase (decrease) in accounts payable
to affiliated companies..................... 107.0 (65.0) 73.2
Other......................................... (22.3) (17.3) (6.7)
Total................................... 142.0 (28.5) 111.2
Cash Flow From Investing Activities
Proceeds from sold retail notes............... 958.2 982.1 726.8
Purchase of retail notes and
lease receivables........................... (969.7) (1,069.0) (1,089.3)
Principal collections on retail notes and
lease receivables........................... 93.8 70.2 113.2
Acquisitions (over)/under cash collections of
wholesale notes and accounts receivable..... (59.9) 163.0 (77.1)
Purchase of marketable securities............. (65.3) (63.0) (61.9)
Proceeds from sales and maturities of
marketable securities....................... 84.8 67.7 67.3
Purchase of equipment leased to others........ (66.3) (65.9) (23.9)
Sale of equipment leased to others............ 23.8 9.7 5.2
Total................................... (0.6) 94.8 (339.7)
Cash Flow From Financing Activities
Net increase (decrease) in short-term debt.... 41.6 48.9 (368.7)
Net (decrease) increase in bank
revolving credit facility usage............. (311.0) (56.0) 405.0
Net (decrease) increase in asset-backed
commercial paper facility usage............. (15.3) 88.1 275.8
Principal payments on long-term debt.......... (21.6) (117.5) (100.0)
Proceeds from long-term debt.................. 208.9 - -
Dividends paid to Transportation.............. (40.0) (26.0) (9.0)
Total................................... (137.4) (62.5) 203.1
Increase/(Decrease) in Cash and
Cash Equivalents.............................. 4.0 3.8 (25.4)
Cash and Cash Equivalents at Beginning of Year.. 6.7 2.9 28.3
Cash and Cash Equivalents at End of Year........ $ 10.7 $ 6.7 $ 2.9
Supplementary disclosure of cash
flow information:
Interest paid................................. $ 59.7 $ 76.3 $ 74.3
Income taxes paid............................. $ 23.8 $ 32.2 $ 14.6
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1997
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Navistar
Financial Corporation ("NFC") and its wholly-owned subsidiaries ("Corporation").
All significant intercompany accounts and transactions have been eliminated. All
of the Corporation's capital stock is owned by Navistar International
Transportation Corp. ("Transportation"), which is wholly owned by Navistar
International Corporation ("Navistar").
Nature of Operations
The Corporation is a financial services organization that provides retail,
wholesale and lease financing of products sold by Transportation and its dealers
within the United States. The Corporation also provides commercial physical
damage and liability insurance coverage to Transportation's dealers and retail
customers and to the general public through an independent insurance agency
system.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue on Receivables
Revenue from finance receivables is recognized using the interest method.
Revenue on operating leases is recognized on a straight-line basis over the life
of the lease. Recognition of revenue is suspended when management determines the
collection of future income is not probable. Income recognition is resumed if
collection doubts are removed.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
Allowance for Losses on Receivables
The allowance for losses on receivables is established through a charge to
the provision for losses. The allowance is an estimate of the amount adequate to
absorb losses on existing receivables that may become uncollectible. The
allowance is maintained at an amount management considers appropriate in
relation to the outstanding receivables portfolio based on such factors as
overall portfolio quality, historical loss experience and current economic
conditions.
Under various agreements, Transportation and its dealers may be liable for
a portion of customer losses or may be required to repurchase the repossessed
collateral at the receivable principal value. The Corporation's losses are net
of these benefits. Receivables are charged off to the allowance for losses as
soon as the receivable is determined to be uncollectible.
Receivable Sales
The Corporation securitizes and sells receivables to public and private
investors with limited recourse. The Corporation continues to service the
receivables, for which a servicing fee is received. Servicing fees are earned on
a level yield basis over the terms of the related sold receivables and are
included in servicing fee income. Gains or losses on sales of receivables are
credited or charged to financing revenue in the period in which the sales occur.
An adequate allowance for credit losses is provided prior to the receivable
sales.
Insurance Operations
Insurance premiums are earned on a pro rata basis over the terms of the
policies. Commission costs and premium taxes incurred in acquiring business are
deferred and amortized on the same basis as related premiums are earned. The
liability for unpaid insurance claims includes provisions for reported claims
and an estimate of unreported claims based on past experience. Such provisions
include an estimate of loss adjustment expense. The estimated liability for
unpaid insurance claims is regularly reviewed and updated. Any change in such
estimate is reflected in current operations.
The Corporation's wholly-owned insurance subsidiary, Harco National
Insurance Company ("Harco"), limits its exposure on any single loss occurrence
by ceding reinsurance to other insurance enterprises. Reinsurance receivables,
including amounts related to unpaid insurance claims and prepaid reinsurance
premiums, are reported as other assets in the Statements of Consolidated
Financial Condition.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
Income Taxes
Navistar and its subsidiaries file a consolidated Federal income tax return
which includes Transportation and the Corporation. Federal income taxes for the
Corporation are computed on a separate consolidated return basis and are payable
to Transportation.
Cash and Cash Equivalents
Cash and cash equivalents include money market funds and marketable
securities with original maturities of three months or less, except for such
securities held by the insurance operations which are included in marketable
securities.
Marketable Securities
Marketable securities are classified as available-for-sale and are reported
at fair value. The difference between amortized cost and fair value is recorded
as an adjustment to shareowner's equity, net of applicable deferred taxes.
Derivative Financial Instruments
The Corporation uses derivatives such as forward contracts and interest
rate swaps to reduce its exposure to interest rate volatility. The Corporation's
primary use of such financial instruments is to hedge the fair value of its
fixed rate receivables against changes in market interest rates in anticipation
of the sale of such receivables.
All derivative financial instruments are held for purposes other than
trading, and the Corporation's policy prohibits the use of derivatives for
speculative purposes. Gains or losses related to hedges of anticipated sales of
receivables are deferred and are recognized as income when the receivables are
sold. The principal balance of receivables expected to be sold by the
Corporation equals or exceeds the notional amount of open derivative contracts.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," ("SFAS No. 131"). SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. SFAS No. 131 establishes standards for reporting information
about operating segments, and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. These standards expand or modify
disclosures and, accordingly, will have no impact on the Corporation's reported
financial condition, results of operations or cash flows.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
Reclassification
Certain amounts for prior years have been reclassified to conform with the
presentation used in the 1997 financial statements.
2. TRANSACTIONS WITH AFFILIATED COMPANIES
Wholesale Notes, Wholesale Accounts and Retail Accounts
In accordance with the agreements between the Corporation and
Transportation relating to financing of wholesale notes, wholesale accounts and
retail accounts, the Corporation receives interest income from Transportation at
agreed upon interest rates applied to the average outstanding balances less
interest amounts paid by dealers on wholesale notes and wholesale accounts. The
Corporation purchases wholesale notes and accounts from Transportation at the
principal amount of the receivables. Revenue collected from Transportation was
$54.7 in 1997, $49.8 in 1996 and $55.7 in 1995
Retail Notes and Lease Financing
In accordance with agreements between the Corporation and Transportation,
Transportation may be liable for certain losses on the finance receivables and
may be required to repurchase the repossessed collateral at the receivable
principal value. Losses recorded by Transportation were $10.1 in 1997, $9.5 in
1996 and $0.6 in 1995.
Support Agreements
Under provisions of certain public and private financing arrangements,
agreements with Transportation and Navistar provide that the Corporation's
consolidated income before interest expense and income taxes will be maintained
at not less than 125% of its consolidated interest expense. No income
maintenance payments were required during the three-year period ended October
31, 1997.
Administrative Expenses
The Corporation pays a fee to Transportation for data processing and other
administrative services based on the actual cost of services performed. The
amount of the fee was $2.1 in 1997 and $2.4 in 1996 and 1995.
Accounts Payable
Accounts payable and other liabilities include $131.5 and $24.5 payable to
Transportation at October 31, 1997 and 1996, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
3. INDUSTRY SEGMENTS
Information by industry segment is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Finance operations....................... $ 193.5 $ 201.6 $ 175.1
Insurance operations..................... 41.4 51.2 53.1
Total revenues......................... $ 234.9 $ 252.8 $ 228.2
Income before taxes:
Finance operations....................... $ 68.6 $ 74.2 $ 53.1
Insurance operations..................... 6.0 6.3 5.6
Total income before taxes.............. $ 74.6 $ 80.5 $ 58.7
Assets at end of year:
Finance operations....................... $1,659.3 $1,626.9 $1,701.9
Insurance operations..................... 151.3 166.9 172.8
Total assets at end of year............ $1,810.6 $1,793.8 $1,874.7
</TABLE>
4. MARKETABLE SECURITIES
The fair value of marketable securities is based on quoted market prices,
when available. If a quoted price is not available, fair value is estimated
using quoted market prices for similar financial instruments. The following
table sets forth, by type of security issuer, the amortized cost and estimated
fair values at October 31:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and
agency securities................. $ 26.6 $ 27.1 $ 41.7 $ 41.5
Mortgage and
asset-backed secuurities.......... 37.8 38.2 42.4 42.2
Corporate debt and other securities... 30.3 30.1 30.6 30.3
Total debt securities............. 94.7 95.4 114.7 114.0
Equity securities..................... 13.5 18.8 11.3 14.1
Total............................. $ 108.2 $ 114.2 $ 126.0 $ 128.1
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES (Continued)
Net unrealized gains and losses on marketable securities were $6.0 and $2.1
at October 31, 1997 and 1996, respectively. Unrealized losses were not material.
Contractual maturities of marketable debt securities at October 31, 1997,
are as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less.................................. $ 17.4 $ 17.4
Due after one year through five years.................... 11.8 11.8
Due after five years through ten years................... 18.1 18.5
Due after ten years...................................... 9.6 9.5
56.9 57.2
Mortgage- and asset-backed securities.................... 37.8 38.2
Total (Excludes equity securities)................... $ 94.7 $ 95.4
</TABLE>
Actual maturities may differ from the contractual maturities because of
prepayments by the issuers.
Proceeds from sales or maturities of marketable securities available for
sale were $84.8 during 1997 and $67.7 during 1996. The related realized gains
and losses were not material.
All marketable securities at October 31, 1997 and 1996 were held by Harco,
of which $14.5 and $16.7, respectively, were on deposit with various state
departments of insurance or otherwise restricted as to use.
5. FINANCE RECEIVABLES
Finance receivable balances, net of unearned finance income, at October 31
are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Retail notes and lease financing....................... $ 706.5 $ 733.3
Wholesale notes........................................ 45.7 100.5
Accounts:
Retail 396.6 314.7
Wholesale......................................... 74.4 56.7
Total......................................... 471.0 371.4
Total finance receivables................ $1,223.2 $1,205.2
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (continued)
Contractual maturities of finance receivables including unearned finance
income at October 31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
Retail Wholesale Accounts
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Due in fiscal year:
1998 .................................... $239.4 $ 40.7 $471.0
1999 .................................... 190.1 5.0 -
2000 .................................... 160.9 - -
2001 .................................... 130.5 - -
2002 .................................... 90.6 - -
Due after 2002................................. 17.8 - -
Gross finance receivables............... 829.3 45.7 471.0
Unearned finance income........................ 122.8 - -
Total finance receivables............... $706.5 $ 45.7 $471.0
</TABLE>
The actual cash collections from finance receivables will vary from the
contractual cash flows because of sales, prepayments, extensions and renewals.
The contractual maturities, therefore, should not be regarded as a forecast of
future collections.
The Corporation's primary business is to provide wholesale, retail and
lease financing for new and used trucks sold by Transportation and
Transportation's dealers, and as a result the Corporation's receivables and
leases have significant concentration in the trucking industry. On a geographic
basis, there is not a disproportionate concentration of credit risk in any area
of the United States. The Corporation retains as collateral a security interest
in the equipment associated with wholesale notes, retail notes and leases other
than accounts.
The Corporation sells finance receivables to public and private investors
with limited recourse provisions. Outstanding sold receivable net balances at
October 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Retail notes............................................ $1,422.2 $1,366.4
Wholesale notes......................................... 545.5 500.0
Total.............................................. $1,967.7 $1,866.4
</TABLE>
The Corporation has two wholly-owned subsidiaries, Navistar Financial
Retail Receivables Corporation ("NFRRC") and Navistar Financial Securities
Corporation ("NFSC"), which have a limited purpose of purchasing retail and
wholesale receivables, respectively, and transferring an undivided ownership
interest in such notes to investors in exchange for pass-through notes and
certificates.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
During fiscal 1997, in two separate sales, the Corporation sold a total of
$987 of retail notes, net of unearned finance income, through NFRRC to two
individual owner trusts. The owner trusts, in turn, sold notes and certificates
to investors. At October 31, 1997, the remaining shelf registration available to
NFRRC for issuance of asset-backed securities was $1,473.
NFSC has in place a revolving wholesale note trust that provides for the
continuous sale of eligible wholesale notes up to $600. During 1997, a $100
tranche of investor certificates matured and NFSC issued a $200 tranche of
investor certificates. The trust is comprised of two $100 tranches of investor
certificates maturing in 1998 and 1999 and two $200 tranches of investor
certificates maturing in 2003 and 2004. At October 31, 1997, the remaining shelf
registration available to NFSC for issuance of investor certificates was $200.
NFRRC and NFSC have limited recourse on the sold receivables and their
assets are available to satisfy the claims of their creditors prior to such
assets becoming available to the Corporation or affiliated companies. The terms
of retail receivable sales require the Corporation to maintain cash reserves
with the trusts as credit enhancement for public sales. The cash reserves held
by the trusts are restricted for use by the securitized sales agreements. The
maximum exposure under all receivable sale recourse provisions at October 31,
1997 was $245.8; however, management believes the reserves to be adequate.
On January 1, 1997, the Corporation adopted Statement of Financial
Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", for all
applicable transactions. SFAS No. 125 requires that amounts previously
classified as excess servicing be reclassified as interest only receivables and
that such amounts be recorded at estimated fair value. Restatement of the
financial statements of prior periods is not permitted. The new standard did not
have a material effect on the Corporation's net income or financial condition.
The following is a summary of amounts included in "Amounts Due from Sales
of Receivables" as of October 31:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash held and invested by trusts............................ $ 90.8 $ 85.2
Subordinated retained interests in wholesale receivables.... 99.9 85.4
Subordinated retained interests in retail receivables....... 47.4 96.0
Interest only receivables................................... 7.7 -
Excess servicing............................................ - 10.1
Allowance for credit losses................................. (12.5) (12.4)
Total.................................................. $233.3 $264.3
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
6. INVESTMENT IN OPERATING LEASES
Operating leases at year-end were as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Investment in operating leases
Vehicles and other equipment, at cost........................ $150.0 $116.4
Less: Accumulated depreciation.............................. (25.9) (15.3)
Net investment in operating leases........................... $124.1 $101.1
</TABLE>
Future minimum rentals on operating leases are as follows: 1998, $30.1;
1999, $26.8; 2000, $20.4; 2001, $12.6 and $3.6 thereafter. Each of these assets
is depreciated on a straight-line basis over the term of the lease in an amount
necessary to reduce the leased vehicle to its estimated residual value at the
end of the lease term.
7. ALLOWANCE FOR LOSSES
The allowance for losses on receivables is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total allowance for losses at beginning of year....... $24.0 $19.6 $16.2
Provision for losses.................................. 2.5 9.3 2.6
Net (losses) recoveries (charged)
credited to allowance............................ (2.0) (4.9) 0.8
Total allowance for losses at end of year.... $24.5 $24.0 $19.6
Allowance pertaining to:
Owned notes...................................... $12.0 $11.6 $10.4
Sold notes....................................... 12.5 12.4 9.2
Total..........................................$24.5 $24.0 $19.6
</TABLE>
8. TAXES ON INCOME
Taxes on income are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal.......................................... $29.6 $26.4 $18.9
State and local.................................. 4.1 4.4 3.1
Total current................................ 33.7 30.8 22.0
Deferred (primarily Federal).......................... (4.8) 0.3 0.5
Total........................................ $28.9 $31.1 $22.5
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
8. TAXES ON INCOME (continued)
The effective tax rate of approximately 38% in each of the three years
ended October 31, 1997 differs from the statutory United States Federal tax rate
of 35% primarily because of state and local income taxes. Deferred tax assets
and liabilities at October 31, comprised the following:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Other postretirement benefits............................... $3.0 $2.9
Deferred tax liabilities:
Depreciation and other...................................... 2.2 6.9
Unrealized gains on marketable securities................... 2.3 0.8
Total deferred tax liabilities.......................... 4.5 7.7
Net deferred tax liabilities............................ $1.5 $4.8
</TABLE>
During 1992, auditors of the Illinois Department of Revenue ("Department")
began an income tax audit of NFC for the fiscal years ended October 31, 1989,
1990 and 1991. On February 1, 1994, the Department issued a Notice of Deficiency
to NFC for approximately $12 million. The Department had taken the position that
nearly 100% of NFC's income during these years should be attributed to and taxed
by Illinois. On February 14, 1997, a state law was enacted which negated the
Department's position and relieved NFC of the aforementioned Notice of
Deficiency.
9. SHORT-TERM DEBT
Commercial paper is issued by the Corporation with varying terms. The
Corporation also has short-term borrowings with various banks on a non-committed
basis. Compensating cash balances and commitment fees are not required under
these agreements.
Information regarding short-term debt is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate obligations outstanding:
Daily average.................................. $109.7 $ 68.2 $ 37.8
Maximum month-end balance...................... 145.0 117.8 81.1
Weighted average interest rate:
On average daily borrowing..................... 6.1% 6.0% 6.4%
At October 31.................................. 6.1% 5.9% 6.3%
</TABLE>
Unused commitments under the Corporation's bank revolving credit facility
and bank liquidity facility supporting the asset-backed commercial paper program
are used as backup for outstanding short-term borrowings. See also Note 10 to
the Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. SENIOR AND SUBORDINATED DEBT
Senior and Subordinated Debt outstanding at October 31 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Bank revolving credit, at variable rates,
due March 2001........................................$ 393.0 $ 704.0
Funding under asset-backed commercial
paper program ("ABCP"), at variable
rates, due March 2001................................. 399.9 402.4
Capital lease obligations, 5.19% to 5.62%,
due serially through 2003............................. 95.8 -
Subordinated term debt:
Senior Notes, 8 7/8%, due November 1998............... 94.0 100.0
Senior Notes, 9%, due June 2002....................... 100.0 -
Total senior and subordinated debt...........$1,082.7 $1,206.4
</TABLE>
The weighted average interest rate on total debt, including short-term debt
and the effect of discounts and related amortization, was 6.4%, 6.5% and 7.4% in
1997, 1996 and 1995, respectively. The aggregate annual maturities and required
payments of debt are as follows:
<TABLE>
<S> <C>
Fiscal year ended October 31,
1998 $ 12.6
1999 111.0
2000 25.4
2001 819.6
2002 and thereafter 114.1
Total $1,082.7
</TABLE>
At October 31, 1997, the Corporation has a $925 contractually committed
bank revolving credit facility and a $400 ABCP program supported by a bank
liquidity facility. Available funding under the ABCP program is comprised of the
$400 liquidity facility plus $14 of trust certificates issued in connection with
the formation of the ABCP trust. Under the terms of the ABCP program, Truck
Retail Instalment Paper Company ("TRIP"), a special purpose wholly-owned
subsidiary of NFC, purchases eligible receivables from NFC. All assets of TRIP
are pledged to a Trust that funds the receivables with A1/P1 rated commercial
paper.
Available funding under the amended and restated credit facility and the
ABCP program was $546, of which $141 provided funding backup for the outstanding
short-term debt at October 31, 1997. The remaining $405 when combined with
unrestricted cash and cash equivalents made $416 available to fund the general
business purposes of the Corporation at October 31, 1997. Under the terms of the
revolving credit facility, the Corporation is required to maintain tangible net
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. SENIOR AND SUBORDINATED DEBT (Continued)
worth at a minimum of $175 and a debt to tangible net worth ratio of no greater
than 7 to 1. Consistent with the previous revolving credit agreement, the
amended agreement grants security interests in substantially all of the
Corporation's assets to the Corporation's debtholders. Compensating cash
balances are not required under the restated revolving credit facility. Facility
fees are paid quarterly regardless of usage.
Under the terms of the 8 7/8% Subordinated debt agreement, the aggregate
principal balances of subordinated debt may not exceed 75% of consolidated
tangible net worth.
During fiscal 1997, the Corporation entered into sale/leaseback agreements
involving vehicles subject to retail finance and operating leases with end
users. The balance, as of October 31, 1997, is classified under senior and
subordinated debt as capital lease obligations. These agreements grant to the
purchasers a security interest in the underlying end user leases.
11. RETIREMENT BENEFITS
The Corporation provides postretirement benefits to substantially all of
its employees. Expenses associated with postretirement benefits include pension
expense for employees, retirees and surviving spouses, and postretirement health
care and life insurance expense for employees, retirees, surviving spouses and
dependents.
Pension Benefits
Generally pension benefits are non-contributory with benefits related to an
employee's length of service and compensation rate. Plan assets are primarily
invested in a dedicated portfolio of long-term fixed income securities with the
remainder invested in high quality equity securities.
Pension Expense
Net pension (income) expense includes the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during
the period....................................$ 0.8 $ 0.7 $ 0.5
Interest cost on projected benefit
obligation.................................... 3.0 2.9 2.8
Return on assets - actual (gain) loss........... (9.7) (3.2) (9.1)
- deferred gain (loss)......... 5.7 (0.4) 5.8
Net amortization costs and other costs.......... - 0.1 -
Net pension (income) expense..............$(0.2) $ 0.1 -
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
Pension Assets and Liabilities
The plans' funded status and reconciliation to the Statements of
Consolidated Financial Condition as of October 31 were as follows:
<TABLE>
<CAPTION>
Plan in Which Plan in Which
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
--------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits................. $ (35.8) $ (31.5) $ (2.2) $ (2.0)
Non-vested benefits............. (4.4) (4.0) (0.1) (0.1)
Accumulated benefit
obligation.................. (40.2) (35.5) (2.3) (2.1)
Effect of projected future
compensation levels......... (1.4) (1.0) (0.1) -
Total projected benefit
obligation.................. (41.6) (36.5) (2.4) (2.1)
Plan assets at fair value.......... 50.1 42.7 - -
Funded status at October 31..... 8.5 6.2 (2.4) (2.1)
Unrecognized net losses (gains).... (7.3) (5.5) 0.8 0.4
Unrecognized plan amendments....... 0.4 0.5 - -
Unrecognized net obligation
as of transition date....... 0.1 0.1 - -
Net asset (liability)......... $ 1.7 $ 1.3 $ (1.6) $ (1.7)
</TABLE>
The weighted average rate assumptions used in determining the projected
benefit obligation and pension expense were:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate used to determine the present value
of the projected benefit obligations................. 7.2% 7.9% 7.5%
Expected long-term rate of return on plan assets.......... 9.6% 8.9% 9.9%
Expected rate of increase in future
compensation levels.................................. 3.5% 3.5% 3.5%
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
Other Postretirement Benefits
The components of expense for other postretirement benefits that are
included in the Statements of Consolidated Income and Retained Earnings include
the following:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during the year....... $ 0.4 $ 0.4 $ 0.3
Interest cost on the accumulated benefit
obligation........................................ 0.9 0.8 0.8
Expected return on assets - actual (gain) loss......... (0.2) 0.8 (1.5)
- deferred gain (loss)....... (0.3) (1.3) 1.2
Total cost of other postretirement benefits............ $ 0.8 $ 0.7 $ 0.8
</TABLE>
The funded status of other postretirement benefits as of October 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Accumulated other postretirement benefit obligation (APBO):
Retirees and their dependents............................... $(6.2) $(4.9)
Active employees eligible to retire......................... (2.0) (2.9)
Other active participants................................... (3.4) (3.4)
Total APBO ................................................. (11.6) (11.2)
Plan assets at fair value................................... 4.4 3.9
APBO in excess of plan assets............................... (7.2) (7.3)
Unrecognized net loss....................................... 1.0 1.5
Net liability............................................... $(6.2) $(5.8)
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
The expected return on plan assets was 11.1% for 1997, 10.5% for 1996 and
10.0% for 1995. The weighted average of discount rates used to determine the
accumulated postretirement benefit obligation was 7.4% and 8.1% at October 31,
1997 and 1996, respectively. For 1998, the weighted average rate of increase in
the per capita cost of covered health care benefits is projected to be 8.1%. The
rate is projected to decrease to 5.0% in the year 2004 and remain at that level
each year thereafter. If the cost trend rate assumptions were increased by one
percentage point for each year, the accumulated postretirement benefit
obligation would increase by approximately $1.7 and the associated expense
recognized for the year ended October 31, 1997, would increase by an estimated
$0.2.
12. LEASES
The Corporation is obligated under noncancelable operating leases for the
majority of its office facilities and equipment. These leases are generally
renewable and provide that property taxes and maintenance costs are to be paid
by the lessee. At October 31, 1997, future minimum lease commitments under
noncancelable operating leases with remaining terms in excess of one year are as
follows:
<TABLE>
<S> <C>
Year Ended October 31,
1998............................................. $ 1.7
1999............................................. 1.7
2000............................................. 1.4
2001............................................. 0.2
2002............................................. -
Thereafter....................................... -
Total........................................ $ 5.0
</TABLE>
13. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of October 31, 1997 and
1996, was 2,000,000 of which 1,600,000 shares were issued and outstanding. All
of the issued and outstanding capital stock is owned by Transportation and no
shares are reserved for officers and employees, or for options, warrants,
conversions and other rights.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Corporation's
financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Finance receivables:
Retail notes.................... $ 607.0 $ 619.0 $ 662.5 $ 672.1
Wholesale notes and accounts.... 516.7 516.7 471.9 471.9
Amounts due from sales of
receivables..................... 233.3 230.3 264.3 258.1
Financial liabilities:
Senior and subordinated debt...... $1,082.7 $1,086.0 $1,206.4 $1,207.4
</TABLE>
Cash and cash equivalents approximate fair value. The cost and fair value
of marketable securities are disclosed in Note 4.
The fair value of truck retail notes is estimated by discounting the future
cash flows using an estimated discount rate reflecting current rates paid to
purchasers of similar types of receivables with similar credit, interest rate
and prepayment risks. For other retail notes, primarily variable-rate notes that
re-price frequently, the carrying amount approximates fair value. For wholesale
notes and retail and wholesale accounts, which also reprice frequently, the
carrying amounts approximate fair value as a result of the short term nature of
the receivables.
The fair value of cash deposits included above in amounts due from sales of
receivables approximates their carrying value. The fair values of other amounts
due from sales of receivables were derived by discounting expected cash flows at
estimated current market rates.
For variable-rate debt that reprices frequently, the carrying amount
approximates fair value. For fixed rate debt, the fair value is estimated based
on quoted market prices where available and, where not available, on quoted
market prices of debt with similar characteristics.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. FINANCIAL INSTRUMENTS (Continued)
Derivatives Held or Issued for Purposes Other Than Trading
The Corporation manages its exposure to fluctuations in interest rates by
limiting the amount of fixed rate assets funded with variable rate debt by
selling fixed rate retail receivables on a fixed rate basis and, to a lesser
extent, by utilizing derivative financial instruments. These derivative
financial instruments may include interest rate swaps, interest rate caps and
forward interest rate contracts. The Corporation manages exposure to
counter-party credit risk by entering into derivative financial instruments with
major financial institutions that can be expected to fully perform under the
terms of such agreements. Notional amounts are used to measure the volume of
derivative financial instruments and do not represent exposure to credit loss.
The Corporation enters into forward interest rate contracts to manage its
exposure to fluctuations in the fair value of the retail notes anticipated to be
sold. The Corporation manages interest rate risk by entering into forward
contracts to sell fixed debt securities or forward interest rate swaps whose
fair value is highly correlated with that of the Corporation's receivables.
Gains or losses incurred with the closing of these agreements are included as a
component of the gain or loss on sale of receivables.
During the second half of fiscal 1997 the Corporation entered into $500 of
interest rate hedge agreements in anticipation of the November 1997 sale of
retail receivables. These hedge agreements, which were closed in conjunction
with the pricing of the sale, resulted in an immaterial loss which was deferred
and included in the gain on the sale of retail receivables recognized in
November 1997.
15. LEGAL PROCEEDINGS
The Corporation is subject to various claims arising in the ordinary course
of business, and are parties to various legal proceedings which constitute
ordinary routine litigation incidental to the business of the Corporation. In
the opinion of the Corporation's management, none of these proceedings or claims
are material to the business or the financial condition of the Corporation
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
16. SUBSEQUENT EVENT
In November 1997, the Corporation sold $500 of retail notes, net of
unearned finance income, through NFRRC to an owner trust which, in turn, sold
notes to investors. A gain of $7.2 was recognized on the sale.
17. QUARTERLY FINANCIAL INFORMATION (unaudited)
<TABLE>
<CAPTION>
1997
----------------------------------------------
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues........................ $58.1 $57.3 $62.5 $57.0 $234.9
Interest expense................ 14.3 17.2 16.7 17.7 65.9
Provision for loss
on receivables.............. 0.7 0.5 0.3 1.0 2.5
Net income...................... 13.4 9.3 13.4 9.6 45.7
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues......................... $68.7 $60.7 $67.0 $56.4 $252.8
Interest expense................. 17.1 19.7 18.8 17.6 73.2
Provision for loss
on receivables............... 1.1 1.6 1.7 4.9 9.3
Net income....................... 16.6 8.7 15.6 8.5 49.4
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
Navistar Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Statement of Financial Reporting Responsibility
- -------------------------------------------------------------------------------
Management of Navistar Financial Corporation and its subsidiaries is
responsible for the preparation and for the integrity and objectivity of the
accompanying financial statements and other financial information in this
report. The financial statements have been prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's estimates and judgments.
The accompanying financial statements have been audited by Deloitte &
Touche LLP, independent auditors. Management has made available to Deloitte &
Touche LLP all the Corporation's financial records and related data, as well as
the minutes of Directors' meetings. Management believes that all representations
made to Deloitte & Touche LLP during its audit were valid and appropriate.
Management is responsible for establishing and maintaining a system of
internal controls throughout its operations that provides reasonable assurance
as to the integrity and reliability of the financial statements, the protection
of assets from unauthorized use and the execution and recording of transactions
in accordance with management's authorization. The system of internal controls
which provides for appropriate division of responsibility is supported by
written policies and procedures that are updated by management as necessary. The
system is tested and evaluated regularly by the parent Company's internal
auditors as well as by the independent auditors in connection with their annual
audit of the financial statements. The independent auditors conduct their audit
in accordance with generally accepted auditing standards and perform such tests
of transactions and balances as they deem necessary. Management considers the
recommendations of its internal auditors and independent auditors concerning the
Corporation's system of internal controls and takes the necessary actions that
are cost-effective in the circumstances to respond appropriately to the
recommendations presented. Management believes that the Corporation's system of
internal controls accomplishes the objectives set forth in the first sentence of
this paragraph.
John J. Bongiorno
President and Chief Executive Officer
Phyllis E. Cochran
Vice President and Controller
<PAGE>
Navistar Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Independent Auditors' Report
Navistar Financial Corporation:
We have audited the financial statements of Navistar Financial Corporation and
its subsidiaries listed in Item 8. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Navistar Financial
Corporation and its subsidiaries at October 31, 1997 and 1996 and the results of
their operations and their cash flow for each of the three years in the period
ended October 31, 1997 in conformity with generally accepted accounting
principles.
/s/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
December 15, 1997
Chicago, Illinois
<PAGE>
SUPPLEMENTARY FINANCIAL DATA
Five Year Summary of Financial and Operating Data
Dollar amounts in millions
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Revenues.................$ 234.9 $ 252.8 $ 228.2 $ 210.8 $ 231.9
Net income ............... 45.7 49.4 36.2 34.0 22.5
Dividends paid ........... 40.0 26.0 9.0 25.6 22.6
Percent of net income to
average shareowner's
equity................. 16.1% 18.1% 15.0% 15.1% 10.3%
Financial Data:
Finance receivables, net.$1,211.2 $1,193.6 $1,370.9 $1,094.0 $1,270.2
Total assets ............ 1,810.6 1,793.8 1,874.7 1,534.8 1,625.2
Total debt .............. 1,223.7 1,305.8 1,330.3 1,091.5 1,199.2
Shareowner's equity ..... 287.8 279.7 256.7 225.6 219.4
Debt to equity ratio ..... 4.3:1 4.7:1 5.2:1 4.8:1 5.5:1
Senior debt to capital
funds ratio........... 2.1:1 3.2:1 3.4:1 3.0:1 3.4:1
Number of employees at
October 31............... 358 352 360 353 339
</TABLE>
<PAGE>
SUPPLEMENTARY FINANCIAL DATA (Continued)
Gross Finance Receivables and Leases Acquired
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ Millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wholesale notes............$2,772.8 $2,705.8 $2,979.4 $2,306.6 $1,977.6
Retail notes and leases:
New...................... 976.2 1,064.1 1,075.0 861.9 730.0
Used .................... 270.3 281.7 242.3 217.2 168.4
Total................. 1,246.5 1,345.8 1,317.3 1,079.1 898.4
Total ................$4,019.3 $4,051.6 $4,296.7 $3,385.7 $2,876.0
</TABLE>
Serviced (including sold notes) Retail Notes and
Leases With Installments Past Due Over 60 Days
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At October 31 ($ Millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Original amount of notes
and leases...................... $ 31.8 $ 14.0 $ 4.2 $ 3.1 $ 3.6
Balance of notes and leases......... 16.2 8.0 2.2 1.3 1.3
Balance as a percent of
total outstanding............... 0.64% 0.32% 0.10% 0.07% 0.09%
</TABLE>
Retail Note and Lease Repossessions (including sold notes)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Retail note and lease repossessions
acquired as a percentage
of average serviced retail
note and lease balances.............. 2.69% 3.08% 0.92% 0.93% 1.94%
</TABLE>
<PAGE>
SUPPLEMENTARY FINANCIAL DATA (Continued)
Credit Loss Experience on Serviced (including sold notes) Receivables
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ Millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net losses (recoveries):
Retail notes and leases ............ $2.2 $5.1 $ .3 $ .6 $(.1)
Wholesale notes .................... (.2) (.2) (.9) .1 .8
Accounts - - (.2) .2 -
Total .......................... $2.0 $4.9 $(.8) $ .9 $ .7
Percent net losses (recoveries) to liquidations:
Retail notes and leases ............ .18% .48% .03% .07% (.01)%
Wholesale notes .................... (.01) (.01) (.03) .01 .04
Total .......................... .05% .13% (.02)% .03% .03%
Percent net losses (recoveries) to related average gross receivables
outstanding:
Retail notes and leases ............ .09% .22% .02% .04% -
Wholesale notes .................... (.02) (.02) (.13) .03 .16
Accounts - - (.05) .08 -
Total .......................... .06% .14% (.03)% .04% .03%
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
None
PART III
Items 10, 11, 12 and 13
Intentionally omitted. See the index page of this Report for
explanation
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements
See Index to Financial Statements in Item 8.
Financial Statement Schedules
All schedules are omitted because of the absence of the conditions
under which they are required or because information called for is shown
in the financial statements and notes thereto.
Exhibits, Including Those Incorporated By Reference
See Index to Exhibits.
Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended October
31, 1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NAVISTAR FINANCIAL CORPORATION
(Registrant)
By: /s/ PHYLLIS E. COCHRAN December 22, 1997
Phyllis E. Cochran
Vice President and Controller
(Principal Accounting Officer)
<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, Phyllis E. Cochran and William W. Jones and each of
them acting individually, true and lawful attorneys-in-fact and agents with
power to act without the other and with full power of substitution, to execute,
deliver and file, for and on such person's behalf, and in such person's name and
capacity or capacities as stated below, any amendment, exhibit or supplement to
the Form 10-K Report making such changes in the report as such attorney-in-fact
deems appropriate.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S><C> <C> <C>
/s/JOHN J. BONGIORNO President and Chief Executive December 22, 1997
John J. Bongiorno Officer; Director
(Principal Executive Officer)
/s/R. WAYNE CAIN Vice President and Treasurer; December 22, 1997
R. Wayne Cain Director
(Principal Financial Officer)
/s/PHYLLIS E. COCHRAN Vice President and Controller; December 22, 1997
Phyllis E. Cochran Director
(Principal Accounting Officer)
/s/JORDAN H. FEIGER Vice President, Operations; December 22, 1997
Jordan H. Feiger Director
/s/JOHN R. HORNE Director December 22, 1997
John R. Horne
/s/THOMAS M. HOUGH Director December 22, 1997
Thomas M. Hough
</TABLE>
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
SIGNATURES (Continued)
<TABLE>
<CAPTION>
Signature Title Date
<S><C> <C> <C>
/s/ROBERT C. LANNERT Director December 22, 1997
Robert C. Lannert
/s/J. STEVEN KEATE Director December 22, 1997
J. Steven Keate
/s/THOMAS D. SILVER Director December 22, 1997
Thomas D. Silver
</TABLE>
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
The following documents of Navistar Financial Corporation are incorporated
herein by reference:
3.1 Restated Certificate of Incorporation of Navistar Financial Corporation
(as amended and in effect on December 15, 1987). Filed on Form 8-K dated
December 17, 1987. Commission File No. 1-4146-l.
3.2 The By-Laws of Navistar Financial Corporation (as amended February 29,
1988). Filed on Form 10-K dated January 19, 1989. Commission File No.
1-4146-1.
4.1 Indenture dated as of November 15, 1993, between the Corporation and Bank
of America Illinois, formerly known as Continental Bank, National
Association, as Trustee, for 8 7/8% Senior Subordinated Notes due 1998
for $100,000,000. Filed on Registration No. 33-50541.
4.2 Indenture dated as of May 30, 1997 by and between the Corporation and The
Fuji Bank and Trust Company, as Trustee, for 9% Senior Subordinated Notes
due 2002 for $100,000,000. Filed on Registration No. 333-30167.
10.1 Pooling and Servicing Agreement dated as of December 1, 1990, among
Navistar Financial Corporation, as Servicer, Navistar Financial
Securities Corporation, as Seller, and The Chase Manhattan Bank (survivor
in the merger between The Chase Manhattan Bank and Chemical Bank which
was the survivor in the merger between Chemical Bank and Manufacturers
Hanover Trust Company), as Trustee. Filed on Registration No. 33-36767.
10.2 Purchase Agreement dated as of December 1, 1990, between the Corporation
and Navistar Financial Securities Corporation, as Purchaser, with respect
to the Dealer Note Trust 1990. Filed on Registration No. 33-36767.
10.3 Master Inter-company Agreement dated as of April 26, 1993, between the
Corporation and Transportation. Filed on Form 8-K dated April 30, 1993.
Commission File No. 1-4146-1.
10.4 Inter-company Purchase Agreement dated as of April 26, 1993, between the
Corporation and Truck Retail Instalment Paper Corp. Filed on Form 8-K
dated April 30, 1993. Commission File No. 1-4146-1.
10.5 Purchase Agreement dated as of May 3, 1994, between the Corporation and
Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1994-A Owner Trust. Filed on Registration
No. 33-50291.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.6 Pooling and Servicing Agreement dated as of May 3, 1994, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1994-A Owner Trust, as
Issuer. Filed on Registration No. 33-50291.
10.7 Trust Agreement dated as of May 3, 1994, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1994-A Owner Trust.
Filed on Registration No. 33-50291.
10.8 Indenture dated as of May 3, 1994, between Navistar Financial 1994-A
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1994-A Owner Trust. Filed on Registration No.
33-50291.
10.9 Purchase Agreement dated as of August 3, 1994, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1994-B Owner Trust. Filed on Registration
No. 33-50291.
10.10 Pooling and Servicing Agreement dated as of August 3, 1994, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1994-B Owner Trust, as
Issuer. Filed on Registration No. 33-50291.
10.11 Trust Agreement dated as of August 3, 1994, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1994-B Owner Trust.
Filed on Registration No. 33-50291.
10.12 Indenture dated as of August 3, 1994, between Navistar Financial 1994-B
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1994-B Owner Trust. Filed on Registration No.
33-50291.
10.13 Amended and Restated Credit Agreement dated as of November 4, 1994, among
the Corporation, certain banks, certain Co-Arranger banks, and Morgan
Guaranty Trust Company of New York, as Administrative Agent. Filed on
Form 8-K dated November 4, 1994. Commission File No. 1-4146-1.
10.14 Liquidity Agreement dated as of November 7, 1994, among NFC Asset Trust,
as Borrower, hemical Bank, Bank of America Illinois, The Bank of Nova
Scotia, and Morgan Guaranty Trust Company of New York, as Co-Arrangers,
and Chemical Bank, as Administrative Agent. Filed on Form 8-K dated
November 4, 1994. Commission File No. 1-4146-1.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.15 Appendix A to Liquidity Agreement at Exhibit 10.20. Filed on Form 8-K
dated November 4, 1994. Commission File No. 1-4146-1.
10.16 Collateral Trust Agreement dated as of November 7, 1994, between NFC
Asset Trust and Bankers Trust Company, as Trustee. Filed on Form 8-K
dated November 4, 1994. Commission File No.1-4146-1.
10.17 Administration Agreement dated as of November 7, 1994, between NFC Asset
Trust and the Corporation, as Administrator. Filed on Form 8-K dated
November 4, 1994. Commission File No.1-4146-1.
10.18 Trust Agreement dated as of November 7, 1994, between Truck Retail
Instalment Paper Corp., as Depositor, and Chemical Bank Delaware, as
Owner Trustee. Filed on Form 8-K dated November 4, 1994. Commission File
No. 1-4146-1.
10.19 Servicing Agreement dated as of November 7, 1994, between the
Corporation, as Servicer, and Truck Retail Instalment Paper Corp. Filed
on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1.
10.20 Servicing Agreement dated as of November 7, 1994, between the
Corporation, as Servicer, and NFC Asset Trust. Filed on Form 8-K dated
November 4, 1994. Commission File No. 1-4146-1.
10.21 Receivables Purchase Agreement dated as of November 7, 1994, between
Truck Retail Instalment Paper Corp., as Seller, and NFC Asset Trust, as
Purchaser. Filed on Form 8-K dated November 4, 1994. Commission File No.
1-4146-1.
10.22 Retail Receivables Purchase Agreement dated as of November 7, 1994,
between Truck Retail Instalment Paper Corp. and the Corporation.
Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1.
10.23 Lease Receivables Purchase Agreement dated as of November 7, 1994,
between Truck Retail Instalment Paper Corp. and Navistar Leasing
Corporation. Filed on Form 8-K dated November 4, 1994. Commission File
No. 1-4146-1.
10.24 Purchase Agreement dated as of December 15, 1994, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1994-C Owner Trust. Filed on Registration
No. 33-55865.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.25 Pooling and Servicing Agreement dated as of December 15, 1994, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1994-C Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.26 Trust Agreement dated as of December 15, 1994, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1994-C Owner Trust.
Filed on Registration No. 33-55865.
10.27 Indenture dated as of December 15, 1994, between Navista Financial 1994-C
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1994-C Owner Trust. Filed on Registration No.
33-55865.
10.28 Purchase Agreement dated as of May 25, 1995, between the Corporation and
Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1995-A Owner Trust. Filed on Registration
No. 33-55865.
10.29 Pooling and Servicing Agreement dated as of May 25, 1995, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1995-A Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.30 Trust Agreement dated as of May 25, 1995, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1995-A Owner Trust.
Filed on Registration No. 33-55865.
10.31 Indenture dated as of May 25, 1995, between Navistar Financial 1995-A
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1995-A Owner Trust. Filed on Registration No.
33-55865.
10.32 Pooling and Servicing Agreement dated as of June 8, 1995, among Navistar
Financial Corporation, as Servicer, Navistar Financial Securities
Corporation, as Seller, The Chase Manhattan Bank (survivor in the merger
between The Chase Manhattan Bank and Chemical Bank which was the survivor
in the merger between Chemical Bank and Manufacturers Hanover Trust
Company), as 1990 Trust Trustee, and The Bank of New York, as Master
Trust Trustee. Filed on Registration No. 33-87374.
10.33 Series 1995-1 Supplement to the Pooling and Servicing Agreement dated as
of June 8, 1995, among the Corporation, as Servicer, Navistar Financial
Securities Corporation, as Seller, and The Bank of New York, as Master
Trust Trustee on behalf of the Series 1995-1 Certificateholders. Filed on
Registration No. 33-87374.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.34 Class A-4 Supplement to the 1990 Pooling and Servicing Agreement dated
June 8, 1995, among the Corporation, as Servicer, Navistar Financial
Securities Corporation, as Seller, and Chemical Bank (Successor to
Manufacturers Hanover Trust Company), as Trustee. Filed on Registration
No. 33-87374.
10.35 Purchase Agreement dated as of June 8, 1995, between the Corporation and
Navistar Financial Securities Corporation, as Purchaser, with respect to
the Dealer Note Master Trust. Filed on Registration No. 33-87374.
10.36 Purchase Agreement dated as of November 1, 1995, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1995-B Owner Trust. Filed on Registration
No. 33-55865.
10.37 Pooling and Servicing Agreement dated as of November 1, 1995, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1995-B Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.38 Trust Agreement dated as of November 1, 1995, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1995-B Owner Trust.
Filed on Registration No. 33-55865.
10.39 Indenture dated as of November 1, 1995, between Navistar Financial 1995-B
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1995-B Owner Trust. Filed on Registration No.
33-55865.
10.40 Amendment No. 1 dated as of March 29, 1996, to the Loan and Security
Agreement dated as of November 7, 1994, between Truck Retail Instalment
Paper Corp. ("TRIP") and NFC Asset Trust (the "Trust") filed on Form 8-K
dated June 5, 1996. Commission File No. 1-4146-1.
10.41 Amendment No. 1 and Consent dated as of March 29, 1996, to the Liquidity
Agreement dated as of November 7, 1994, among NFC Asset Trust, certain
lenders, and Chemical Bank, as Administrative Agent for the lenders filed
on Form 8-K dated June 5, 1996. Commission File No. 1-4146-1.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.42 Amendment No. 2 dated as of March 29, 1996, to the Amended and Restated
Credit Agreement dated as of November 4, 1994, as amended by Amendment
No. 1 dated as of December 15, 1995, among the Corporation, certain
banks, certain Co-Arranger banks, and Morgan Guaranty Trust Company of
New York, as Administrative Agent filed on Form 8-K dated June 5, 1996.
Commission File No. 1-4146-1.
10.43 Purchase Agreement dated as of May 30, 1996, between the Corporation and
Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1996-A Owner Trust. Filed on Registration
No. 33-55865.
10.44 Pooling and Servicing Agreement dated as of May 30, 1996, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1996-A Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.45 Trust Agreement dated as of May 30, 1996, between Navistar Financial
Retail Receivables Corporation, s Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1996-A Owner Trust.
Filed on Registration No. 33-55865.
10.46 Indenture dated as of May 30, 1996, between Navistar Financial 1996-A
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1996-A Owner Trust. Filed on Registration No.
33-55865.
10.47 Purchase Agreement dated as of November 6, 1996, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1996-B Owner Trust. Filed on Registration
No. 33-55865.
10.48 Pooling and Servicing Agreement dated as of November 6, 1996, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1996-B Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.49 Trust Agreement dated as of November 6, 1996, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1996-B Owner Trust.
Filed on Registration No. 33-55865.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.50 Indenture dated as of November 6, 1996, between Navistar Financial 1996-B
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1996-B Owner Trust. Filed on Registration No.
33-55865.
10.51 Purchase Agreement dated as of May 7, 1997, between the Corporation and
Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1997-A Owner Trust, as Issuer. Filed on
Registration No. 33-55865.
10.52 Pooling and Servicing Agreement dated as of May 7, 1997, among the
Corporation, as Servicer, Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1997-A Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.53 Trust Agreement dated as of May 7, 1997, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chase Manhattan Bank
Delaware, as Owner Trustee, with respect to Navistar Financial 1997-A
Owner Trust. Filed on Registration No. 33-55865.
10.54 Indenture dated as of May 7, 1997, between Navistar Financial 1997-A
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1997-A Owner Trust. Filed on Registration No.
33-55865.
10.55 Amendment No. 3 dated as of May 27, 1997, to the Amended and Restated
Credit Agreement dated as of November 4, 1994, as amended by Amendment
No. 1 dated as of December 15, 1995 and Amendment No. 2 dated as of March
29, 1996, among the Corporation. Certain banks, certain Co-Arranger
banks, and Morgan Guaranty Trust Company of New York, as Administrative
Agent filed on Form 8-K dated June 17, 1997. Commission File No.
1-4146-1.
10.56 Series 1997-1 Supplement to the Pooling and Servicing Agreement dated as
of August 19, 1997, among Navistar Financial Corporation, as Servicer,
Navistar Financial Securities Corporation, as Seller, and the Bank of New
York, as Master Trust Trustee on behalf of the Series 1997-1
Certificateholders. Filed on Registration No. 333-30737.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.57 Class A-5 Supplement to the 1990 Pooling and Servicing Agreement dated
August 19, 1997, among Navistar Financial Corporation, as Servicer,
Navistar Financial Securities Corporation, as Seller, and The Chase
Manhattan Bank (survivor in the merger between The Chase Manhattan Bank
and Chemical Bank which was the survivor in the merger between Chemical
Bank and Manufacturers Hanover Trust Company), as Trustee. Filed on
Registration No. 333-30737.
10.58 Purchase Agreement dated as of November 5, 1997, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1997-B Owner Trust, as Issuer. Filed on
Registration No. 33-64249.
10.59 Pooling and Servicing Agreement dated as of November 5, 1997, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1997-B Owner Trust, as
Issuer. Filed on Registration No. 33-64249.
10.60 Trust Agreement dated as of November 5, 1997, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chase Manhattan Bank
Delaware, as Owner Trustee, with respect to Navistar Financial 1997-B
Owner Trust. Filed on Registration No. 33-64249.
10.61 Indenture dated as of November 5, 1997, between Navistar Financial 1997-B
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1997-B Owner Trust. Filed on Registration No.
33-64249.
