PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended October 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-9618
NAVISTAR INTERNATIONAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3359573
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611
-------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 836-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ----------------------------------------------- -----------------------
Common stock, par value $0.10 per share New York Stock Exchange
Chicago Stock Exchange
Pacific Exchange
$6.00 cumulative convertible preferred stock,
Series G (with $1.00 par value) New York Stock Exchange
Cumulative convertible junior preference stock,
Series D (with $1.00 par value) New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of December 15, 1998 the aggregate market value of Common Stock held by
non-affiliates of the registrant was $1,679,702,515.
As of December 15, 1998, the number of shares outstanding of the registrant's
Common Stock was 66,195,173.
Documents Incorporated by Reference
-----------------------------------
1998 Annual Report to Shareowners (Parts I, II and IV)
1998 Proxy Statement(Parts I and III)
Navistar Financial Corporation 1998 Annual Report on Form 10-K (Part IV)
<PAGE>
PAGE 2
NAVISTAR INTERNATIONAL CORPORATION
FORM 10-K
Year Ended October 31, 1998
INDEX
10-K Page
---------
PART I
Item 1. Business............................................. 3
Item 2. Properties........................................... 9
Item 3. Legal Proceedings.................................... 9
Executive Officers of the Registrant................. 10
Item 4. Submission of Matters to a Vote of Security Holders.. 10
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters.................... 11
Item 6. Selected Financial Data.............................. 11
Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition... 11
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.................................. 11
Item 8. Financial Statements and Supplementary Data.......... 11
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............. 12
PART III
Item 10. Directors and Executive Officers of the Registrant... 12
Item 11. Executive Compensation............................... 12
Item 12. Security Ownership of Certain
Beneficial Owners and Management................... 12
Item 13. Certain Relationships and Related Transactions....... 12
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K............................ 12
SIGNATURES
Principal Accounting Officer.................................... 14
Directors ...................................................... 15
POWER OF ATTORNEY.................................................. 15
INDEPENDENT AUDITORS' REPORT....................................... 17
INDEPENDENT AUDITORS' CONSENT...................................... 17
SCHEDULE .................................................... F-1
EXHIBITS .................................................... E-1
<PAGE>
PAGE 3
PART I
ITEM 1. BUSINESS
Navistar International Corporation is a holding company and its principal
operating subsidiary is Navistar International Transportation Corp., referred to
as "Transportation". As used hereafter, "Navistar" or "company" refers to
Navistar International Corporation and its subsidiaries.
Navistar operates in two principal industry segments: manufacturing and
financial services. Manufacturing operations are responsible for the manufacture
and marketing of medium and heavy trucks, including school buses, mid-range
diesel engines and service parts primarily in the United States and Canada as
well as in Mexico, Brazil and other selected export markets. Based on assets and
revenues, manufacturing operations represent the majority of the company's
business activities. The financial services operations consist of Navistar
Financial Corporation (NFC), its domestic insurance subsidiary and the company's
foreign finance and insurance subsidiaries. NFC's primary business is the retail
and wholesale financing of products sold by the manufacturing operations and its
dealers within the United States and the provision of commercial physical damage
and liability insurance to the manufacturing operations' dealers and retail
customers and to the general public through an independent insurance agency
system. Industry segment data for 1998, 1997 and 1996 is summarized in Note 13
to the Financial Statements, which is incorporated herein by reference.
THE MEDIUM AND HEAVY TRUCK INDUSTRY
The market in which Navistar competes is subject to considerable
volatility as it moves in response to cycles in the overall business environment
and is particularly sensitive to the industrial sector which generates a
significant portion of the freight tonnage hauled. Government regulation has
impacted and will continue to impact trucking operations and efficiency and the
specifications of equipment.
The following table shows industry retail deliveries in the combined
United States and Canadian markets for the five years ended October 31, in
thousands of units:
YEARS ENDED OCTOBER 31,
------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Class 5, 6 and 7 medium trucks and
school buses.................... 158.9 150.6 145.8 151.8 134.2
Class 8 heavy trucks.............. 232.0 196.8 195.4 228.8 205.4
----- ----- ----- ----- -----
Total.................... 390.9 347.4 341.2 380.6 339.6
===== ===== ===== ===== =====
Source: Monthly data derived from materials produced by the American
Automobile Manufacturers Associations in the United States and Canada, and other
sources.
The company's first full year of operations in Mexico was 1997. Industry
retail deliveries of Class 5, 6 and 7 medium trucks and school buses in the
Mexican market were 11,400 units and 9,600 units in 1998 and 1997, respectively.
Industry retail deliveries of Class 8 heavy trucks were 10,900 units and 6,000
units over the same two-year period based on monthly data provided by the
Associacion Nacional de Productores de Autobuses, Camiones y Tractocamiones.
<PAGE>
PAGE 4
The Class 5 through 8 truck markets in the United States, Canada, Mexico
and Brazil are highly competitive. Major U.S. domestic competitors include
PACCAR, Ford and General Motors, as well as foreign-controlled domestic
manufacturers, such as Freightliner, Sterling, Mack and Volvo. In addition,
manufacturers from Japan (Hino, Isuzu, Nissan and Mitsubishi) are competing in
the United States and Canadian markets. The intensity of this competition
results in price discounting and margin pressures throughout the industry. In
addition to the influence of price, market position is driven by product
quality, engineering, styling, utility and distribution.
TRUCK MARKET SHARE
The company delivered 112,800 Class 5 through 8 trucks, including school
buses, in the United States and Canada in fiscal 1998, a 13% increase from the
99,500 units delivered in 1997. Navistar's combined share of the Class 5 through
8 truck market was 28.9% in 1998 and 28.6% in 1997. Navistar has been the leader
in combined market share for Class 5 through 8 trucks, including school buses,
in the United States and Canada in each of its last 18 fiscal years based on
data obtained from the American Automobile Manufacturers Association, the
Canadian Motor Vehicle Manufacturers Association and R.L. Polk & Company.
The company delivered 4,100 Class 5 through 8 trucks, including school buses, in
Mexico in 1998, a 141% increase from the 1,700 units delivered in 1997.
Navistar's combined share of the Class 5 through 8 truck market in Mexico was
18.3% in 1998 and 10.9% in 1997.
PRODUCTS
The following table illustrates the percentage of the company's
manufacturing sales by class of product based on dollar amount:
YEARS ENDED OCTOBER 31,
------------------------------------
1998 1997 1996
---- ---- ----
PRODUCT CLASS
- -------------
Class 5, 6 and 7 medium trucks and
school buses.................... 34% 34% 35%
Class 8 heavy trucks.............. 39 37 35
Engines........................... 16 16 16
Service parts..................... 11 13 14
---- ---- ----
Total...................... 100% 100% 100%
==== ==== ====
The company manufactures a full line of products in the common carrier,
private carrier, government/service, leasing, construction, energy/petroleum and
student transportation markets. The company offers diesel-powered trucks and
school buses because of their improved fuel economy, ease of serviceability and
greater durability over gasoline-powered vehicles. Navistar's Class 8 heavy
trucks generally use diesel engines purchased from outside suppliers while Class
5, 6 and 7 medium trucks are powered by a proprietary line of mid-range diesel
engines manufactured by Navistar. Based upon information published by R.L. Polk
& Company, diesel-powered Class 5, 6 and 7 medium truck and bus shipments
represented 87.6% of all medium shipments for fiscal year 1998 in the United
States and Canada.
<PAGE>
PAGE 5
The company's truck and bus manufacturing operations in the United States,
Canada and Mexico consist principally of the assembly of components manufactured
by its suppliers, although the company produces its own mid-range diesel truck
engines, sheet metal components (including cabs) and miscellaneous other parts.
The company currently estimates approximately $515 million in capital spending
and $330 million in development expense through 2003 for development of its next
generation vehicles.
ENGINE AND FOUNDRY
The company designs and manufactures diesel engines for use in its Class
5, 6 and 7 medium trucks and school buses and selected Class 8 heavy truck
models, and for sale to original equipment manufacturers (OEM's) in the United
States and Canada. The company also sells engines for industrial, agricultural
and marine applications. Navistar is the leading supplier of mid-range diesel
engines in the 160-300 horsepower range according to data supplied by Power
Systems Research of Minneapolis, Minnesota.
Navistar has an agreement to supply its 7.3 liter (7.3L) electronically
controlled diesel engine to Ford Motor Company (Ford) through the year 2002 for
use in all of Ford's diesel-powered light trucks and vans. Sales to Ford
currently account for approximately 88% of the company's 7.3L sales. The
company's shipments of engines to all OEM's totaled 214,000 units in 1998, an
increase of 16% from the 184,000 units shipped in 1997. During 1997, Navistar
entered into a ten-year agreement, effective with model year 2003, to supply
Ford with a successor engine to the current 7.3L product for use in its
diesel-powered super duty trucks and vans (over 8,500 lbs. GVW). In March 1998,
the company was selected by Ford to negotiate an extended agreement to supply
diesel engines to Ford for certain under 8,500 lbs. GVW light duty trucks and
sport utility vehicles, such as the Ford Expedition, F-150 and F-250 pick-ups
and Econoline 150 and 250 van models.
The company has approved a plan for up to $600 million in capital spending
over the next five years in order to manufacture a next generation version of
diesel engines. In addition, approximately $110 million of development expense
was approved for the development of these engines.
SERVICE PARTS
In the United States and Canada, the company operates seven regional parts
distribution centers, which allow it to offer 24-hour availability and same day
shipment of the parts most frequently requested by customers. The company also
operates a parts distribution center in Mexico.
Navistar's service parts program is vital to the maintenance of the
relationship with its customers and dealers. The sale of replacement parts does
not represent a separate and distinct business of the company. The company's
truck group makes decisions about the pricing of trucks and replacement parts
based upon a variety of factors which integrally link the pricing and sale of
replacement parts with the sale of medium and heavy duty trucks, including
school buses. The acceptable price for dealers and fleet truck sales is
determined by not only looking at the market price of the individual trucks
themselves, but also by analyzing the amount of future replacement parts that
will be purchased from Navistar over the truck's life cycle and the total
expected profit contribution, including future replacement parts, expected to be
realized on each sale. Accordingly, the pricing of trucks and replacement parts
is not independently determined.
<PAGE>
PAGE 6
MARKETING AND DISTRIBUTION
Navistar's truck products are distributed in virtually all key markets in
the United States and Canada. The company's truck distribution and service
network in these countries was composed of 945, 954 and 957 dealers and retail
outlets at October 31, 1998, 1997 and 1996, respectively. Included in these
totals were 524, 514 and 504 secondary and associate locations at October 31,
1998, 1997 and 1996, respectively. The company also has a dealer network in
Mexico composed of 44, 38 and 23 dealer locations at October 31, 1998, 1997 and
1996, respectively, and a dealer network in Brazil composed of six dealer
locations at October 31, 1998.
Retail dealer activity is supported by five regional operations in the
United States and general offices in Canada, Mexico and Brazil. The company has
a national account sales group, responsible for 94 major U.S. national account
customers. Navistar's network of 16 Used Truck Centers in the United States
provides trade-in support to the company's dealers and national accounts group,
and markets all makes and models of reconditioned used trucks to owner-operators
and fleet buyers. Trucks, components and service parts are exported for
wholesale and retail sale to more than 70 countries around the world.
FINANCIAL SERVICES
NFC is a financial services organization that provides wholesale, retail
and lease financing of new and used trucks sold by Transportation and its
dealers in the United States. NFC also finances wholesale accounts and selected
retail accounts receivable of Transportation. Sales of new products (including
trailers) of other manufacturers are also financed regardless of whether
designed or customarily sold for use with Transportation's truck products.
During 1998 and 1997, NFC provided wholesale financing for 95% and 94%,
respectively, of the new truck units sold by Transportation to its dealers and
distributors in the United States, and retail and lease financing for 16% and
13%, respectively, of all new truck units sold or leased by Transportation to
retail customers.
NFC's wholly owned domestic insurance subsidiary, Harco National Insurance
Company, provides commercial physical damage and liability insurance coverage to
Transportation's dealers and retail customers and to the general public through
an independent insurance agency system.
Navistar's wholly owned subsidiaries, Arrendadora Financiera Navistar and
Servicios Financiera Navistar, provide wholesale and lease financing to the
company's dealers and customers in Mexico.
Harbour Assurance Company of Bermuda Limited offers a variety of programs
to the company, including general liability insurance, ocean cargo coverage for
shipments to and from foreign distributors and reinsurance coverage for various
Transportation policies.
IMPORTANT SUPPORTING OPERATIONS
Navistar International Corporation Canada has an agreement with a
subsidiary of General Electric Capital Canada, Inc. to provide financing for
Canadian dealers and customers.
RESEARCH AND DEVELOPMENT
Research and development activities, which are directed toward the
introduction of new products and improvements of existing products and processes
used in their manufacture, totaled $138 million, $85 million and $90 million for
1998, 1997 and 1996, respectively.
<PAGE>
PAGE 7
BACKLOG
The backlog of unfilled truck orders (subject to cancellation or return in
certain events) at October 31, 1998, 1997 and 1996, was $4,505 million, $2,360
million and $1,254 million, respectively.
Although the backlog of unfilled orders is one of many indicators of
market demand, other factors such as changes in production rates, available
capacity, new product introductions and competitive pricing actions may affect
point-in-time comparisons.
EMPLOYEES
The company employed 17,558, 16,168 and 14,187 individuals at October 31,
1998, 1997 and 1996, respectively, worldwide.
LABOR RELATIONS
At October 31, 1998, the United Automobile, Aerospace and Agricultural
Implement Workers of America (UAW) represented 9,017 of the company's active
employees in the United States, and the National Automobile, Aerospace, and
Agricultural Implement Workers of Canada (CAW) represented 2,339 of the
company's active employees in Canada. Other unions represented 848 of the
company's active employees in the United States and 147 of the company's active
employees in Mexico. The company entered into a collective bargaining agreement
with the UAW in 1995, which would have expired on October 1, 1998. During August
1997, the company's collective bargaining agreement with the UAW was extended
through October 1, 2002. This contract allows the company to focus its assembly
plants, simplify current product lines, invest in new product development and
achieve more competitive wage, benefit and productivity levels. In addition, the
company entered into a collective bargaining agreement with the CAW in 1996
which expires on October 24, 1999.
PATENTS AND TRADEMARKS
Navistar continuously obtains patents on its inventions and, thus, owns a
significant patent portfolio. Additionally, many of the components which the
company purchases for its products are protected by patents that are owned or
controlled by the component manufacturer. Navistar has licenses under
third-party patents relating to its products and their manufacture, and Navistar
grants licenses under its patents. The royalties paid or received under these
licenses are not significant. No particular patent or group of patents is
considered by the company to be essential to its business as a whole.
Like all businesses which offer well-known products or services,
Navistar's primary trademarks are an important part of its worldwide sales and
marketing efforts and provide instant identification of its products and
services in the marketplace. To support these efforts, Navistar maintains, or
has pending, registrations of its primary trademarks in those countries in which
it does business or expects to do business.
RAW MATERIALS AND ENERGY SUPPLIES
The company purchases raw materials, parts and components from numerous
outside suppliers, but relies upon some suppliers for a substantial number of
components for its truck and engine products. A majority of the company's
requirements for raw materials and supplies is filled by single-source
suppliers.
<PAGE>
PAGE 8
The impact of an interruption in supply will vary by commodity. Some parts
are generic to the industry while others are of a proprietary design requiring
unique tooling which would require time to recreate. However, the company's
exposure to a disruption in production as a result of an interruption of raw
materials and supplies is no greater than the industry as a whole. In order to
remedy any losses resulting from an interruption in supply, the company
maintains contingent business interruption insurance for storms, fire and water
damage.
While the company believes that it has adequate assurances of continued
supply, the inability of a supplier to deliver could have an adverse effect on
production at certain of the company's manufacturing locations. The company's
exposure in Mexico and Brazil to an interruption in local supply could result in
an inability to meet local content requirements.
At current demand levels, the entire truck industry is operating at or
near capacity. Accordingly, constraints have been placed on the company's
ability to meet certain customers' demands because of component parts
availability. Suppliers have initiated investments to expand capacity to support
demand growth. Although some of this additional capacity will become available
in 1999, much of the expansion will require several years. In those commodities
where domestic supply is constrained, the company is searching globally for
alternative sources.
IMPACT OF GOVERNMENT REGULATION
Truck and engine manufacturers continue to face heavy governmental
regulation of their products, especially in the areas of environment and safety.
The company believes its products comply with all applicable environmental and
safety regulations.
As a diesel engine manufacturer, the company has incurred research,
development and tooling costs to design its engine product lines to meet United
States Environmental Protection Agency (U.S. EPA) and California Air Resources
Board (CARB) emission standards that will come into effect after the turn of the
century. The company intends to provide engines that satisfy CARB's emission
standards effective in 2002 for engines used in vehicles from 8,501 to 14,000
pounds GVW, as well as heavy-duty engines that comply with more stringent CARB
and U.S. EPA emission standards, promulgated in 1997, for 2004 and later model
years.
In October 1998, Navistar, along with other heavy-duty diesel engine
manufacturers, entered into a Consent Decree with the U.S. EPA and a Settlement
Agreement with CARB concerning alleged emissions from heavy-duty diesel engines
which utilized strategies to improve fuel economy and may have affected nitrogen
oxide emissions. The company's settlement with the U.S. EPA and CARB requires a
payment of $3 million and changes to new engine configurations which are to be
produced after October 2002. Navistar has received unconditional EPA approval
for its 1999 model engines. Therefore, current engine configurations, which are
primarily used in the company's medium trucks and other light and medium duty
vehicles, will not be affected by this settlement. Navistar believes that
neither the settlement nor the potential changes will have a material effect on
the company's financial position or operating results.
<PAGE>
PAGE 9
Canadian and Mexican heavy-duty engine emissions regulations essentially
mirror those of the U.S. EPA, except that compliance in Mexico is conditioned on
availability of low-sulfur diesel fuel. The company's engines comply with
Canadian and Mexican emissions regulations, as well as those of Brazil, where
the company began assembling trucks in 1998.
Truck manufacturers are also subject to various noise standards imposed by
federal, state and local regulations. The engine is one of a truck's primary
noise sources, and the company, therefore, works closely with OEM's to develop
strategies to reduce engine noise. The company is also subject to the National
Traffic and Motor Vehicle Safety Act (Safety Act) and Federal Motor Vehicle
Safety Standards (Safety Standards) promulgated by the National Highway Traffic
Safety Administration. The company believes it is in compliance with the Safety
Act and the Safety Standards.
Expenditures to comply with various environmental regulations relating to
the control of air, water and land pollution at production facilities and to
control noise levels and emissions from the company's products have not been
material except for two sites formerly owned by the company: Wisconsin Steel in
Chicago, Illinois, and Solar Turbine in San Diego, California. In 1994, the
company recorded a $20 million after-tax charge as a loss of discontinued
operations for environmental liabilities and cleanup cost at these two sites. It
is not expected that the costs of compliance with foreseeable environmental
requirements will have a material effect on the company's financial position or
operating results.
ITEM 2. PROPERTIES
In North America, the company owns and operates ten manufacturing and
assembly operations, which contain approximately ten million square feet of
floor space. Six facilities manufacture and assemble trucks, two plants
manufacture diesel engines and two locations produce gray iron castings. In
addition, the company owns or leases other significant properties in the United
States and Canada, including vehicle and parts distribution centers, sales
offices, an engineering center and its headquarters in Chicago. The company's
truck assembly facility located in Escobedo, Mexico is encumbered by a lien in
favor of certain lenders of the company as collateral for a $125 million
revolving loan agreement.
Navistar's principal research and engineering facilities are located in
Fort Wayne, Indiana, and Melrose Park, Illinois. In addition, certain research
is conducted at its manufacturing plants.
All of the company's plants are being utilized and have been adequately
maintained, are in good operating condition and are suitable for its current
needs through productive utilization of the facilities. These facilities,
together with planned capital expenditures, are expected to meet the company's
manufacturing needs in the foreseeable future.
A majority of the activity of the financial services operations is
conducted from its leased headquarters in Rolling Meadows, Illinois. The
financial services operations also lease six other office locations in the
United States.
ITEM 3. LEGAL PROCEEDINGS
The company and its subsidiaries are subject to various claims arising in
the ordinary course of business, and are parties to various legal proceedings
which constitute ordinary routine litigation incidental to the business of the
company and its subsidiaries. In the opinion of the company's management, none
of these proceedings or claims are material to the business or the financial
condition of the company.
<PAGE>
PAGE 10
EXECUTIVE OFFICERS OF REGISTRANT
The following selected information for each of the company's current
executive officers was prepared as of December 15, 1998.
OFFICERS AND POSITIONS WITH
NAME AGE NAVISTAR AND OTHER INFORMATION
---- --- ------------------------------
John R. Horne............. 60 Chairman, President and Chief
Executive Officer since 1996
and a Director since 1990.
Mr. Horne also is Chairman,
President and Chief Executive
Officer of Transportation
since 1995 and a Director since
1987. Prior to this, Mr. Horne
served as President and Chief
Executive Officer, 1995-1996,
President and Chief Operating
Officer, 1990-1995.
Don DeFosset, Jr.......... 50 Executive Vice President and
President, Truck Group since
1996. Mr. DeFosset also is
Executive Vice President
and President, Truck Group of
Transportation since 1996.
Prior to this, Mr. DeFosset
served as President, Allied Signal
Safety Restraints Systems of
Allied Signal Inc., 1993 - 1996,
Group Executive and General
Manager, Allied Signal
Turbocharging and Truck Brake
Systems, 1992 - 1993, and Vice
President, Planning and
Business Development in 1992.
Robert C. Lannert......... 58 Executive Vice President and Chief
Financial Officer and a Director
since 1990. Mr. Lannert also is
Executive Vice President and
Chief Financial Officer of
Transportation since 1990 and
a Director since 1987.
Robert A. Boardman........ 51 Senior Vice President and General
Counsel since 1990. Mr. Boardman
also is Senior Vice President
and General Counsel of
Transportation since 1990.
Thomas M. Hough........... 53 Vice President and Treasurer
since 1992. Mr. Hough also is
Vice President and Treasurer of
Transportation since 1992.
Mark T. Schwetschenau..... 42 Vice President and Controller since
1998. Mr. Schwetschenau also is
Vice President and Controller
of Transportation since 1998.
Prior to this, Mr. Schwetschenau
served as Vice President,
Finance, Quaker Foods Division,
the Quaker Oats Company,
1995-1997, and Director, Finance,
Convenience Foods Division, the
Quaker Oats Company, 1993-1995.
Steven K. Covey........... 47 Corporate Secretary since 1990.
Mr. Covey also is Associate
General Counsel of Transportation
since 1992.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
<PAGE>
PAGE 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Navistar International Corporation Common Stock is listed on the New York
Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange under the
abbreviated stock symbol "NAV." Information regarding high and low market price
per share of Common Stock for each quarter of 1998 and 1997 is incorporated by
reference from the 1998 Annual Report to Shareowners, page 46, filed as Exhibit
13 to this Form 10-K. There were approximately 55,157 owners of Common Stock at
October 31, 1998.
Holders of Common Stock are entitled to receive dividends when and as
declared by the Board of Directors out of funds legally available therefor,
provided that, so long as any shares of the company's preferred stock and
preference stock are outstanding, no dividends (other than dividends payable in
Common Stock) or other distributions (including purchases) may be made with
respect to the Common Stock unless full cumulative dividends, if any, on the
shares of preferred stock and preference stock have been paid. Under the General
Corporation Law of the State of Delaware, dividends may only be paid out of
surplus or out of net profits for the fiscal year in which the dividend is
declared or the preceding fiscal year, and no dividend may be paid on Common
Stock at any time during which the capital of outstanding preferred stock or
preference stock exceeds the net assets of the company.
The company has not paid dividends on the Common Stock since 1980. The
company does not expect to pay cash dividends on the Common Stock in the
foreseeable future, and is subject to restrictions under the indentures for the
$100 million 7% Senior Subordinated Notes and the $250 million 8% Senior
Subordinated Notes on the amount of cash dividends the company may pay and is
subject to certain debt to equity ratios under the $125 million Mexican credit
facility which may indirectly limit its ability to pay dividends.
ITEMS 6, 7, 7A AND 8
The information required by Items 6-8 is incorporated herein by reference
from the 1998 Annual Report to Shareowners, filed as Exhibit 13 to this Form
10-K as follows:
1998
Annual
Report
Page
------
ITEM 6. SELECTED FINANCIAL DATA.............................. 48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.............. 2
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK ..................... 7
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......... 15
With the exception of the aforementioned information (Part II; Items 5-8)
and the information specified under Items 1 and 14 of this report, the 1998
Annual Report to Shareowners is not to be deemed filed as part of this report.
----------------------------------------------------------
<PAGE>
PAGE 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEMS 10, 11 , 12 AND 13
Information required by Items 10, 11, 12 and 13 of this Form is
incorporated herein by reference from Navistar's definitive Proxy Statement for
the February 23, 1999 Annual Meeting of Shareowners.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Information required by Part IV (Item 14) of this form is incorporated
herein by reference from Navistar International Corporation's 1998 Annual Report
to Shareowners, filed as Exhibit 13 to this Form 10-K as follows:
1998
Annual
Report
Page
------
Financial Statements
- --------------------
Independent Auditors' Report................................. 14
Statement of Income for the years ended
October 31, 1998, 1997 and 1996............................ 15
Statement of Financial Condition
as of October 31, 1998 and 1997............................ 16
Statement of Cash Flow for the years ended
October 31, 1998, 1997 and 1996............................ 17
Notes to Financial Statements................................ 18
Form
10-K
Page
----
Schedule
- --------
II Valuation and Qualifying Accounts and Reserves........ F-1
All other schedules are omitted because of the absence of the conditions
under which they are required or because information called for is shown in the
financial statements and notes thereto in the 1998 Annual Report to Shareowners.
Finance and Insurance Subsidiaries:
The financial statements of Navistar Financial Corporation for the years
ended October 31, 1998, 1997 and 1996 appearing on pages 10 through 37 in the
Annual Report on Form 10-K for Navistar Financial Corporation for the fiscal
year ended October 31, 1998, Commission File No. 1-4146-1, are incorporated
herein by reference and filed as Exhibit 28 to this Form 10-K.
<PAGE>
PAGE 13
Form
10-K
Page
----
Exhibits, Including Those Incorporated by Reference
- ---------------------------------------------------
(3) Articles of Incorporation and By-Laws............... E-1
(4) Instruments Defining the Rights of Security Holders,
Including Indentures.............................. E-2
(10) Material Contracts.................................. E-4
(13) Navistar International Corporation
1998 Annual Report to Shareowners
(only those portions incorporated
herein by reference).............................. *
(21) Subsidiaries of the Registrant...................... E-6
(23) Independent Auditors' Consent....................... 17
(24) Power of Attorney................................... 15
(27) Financial Data Schedule............................. *
(28) Navistar Financial Corporation Annual Report
on Form 10-K for the fiscal year
ended October 31, 1998............................ *
*Filed only electronically with the Securities and Exchange Commission.
All exhibits other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information called for is shown in the financial statements and notes thereto in
the 1998 Annual Report to Shareowners.
Exhibits, other than those incorporated by reference, have been included in
copies of this report filed with the Securities and Exchange Commission.
Shareowners of the company will be provided with copies of these exhibits upon
written request to the Corporate Secretary at the address given on the cover
page of this Form 10-K.
Reports on Form 8-K
- -------------------
No reports on Form 8-K were filed for the three months ended October 31,
1998.
<PAGE>
PAGE 14
SIGNATURE
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------
SIGNATURE
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NAVISTAR INTERNATIONAL CORPORATION
- ----------------------------------
(Registrant)
/s/ Mark T. Schwetschenau
- -----------------------------------
Mark T. Schwetschenau December 22, 1998
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
PAGE 15
EXHIBIT 24
SIGNATURE
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------
POWER OF ATTORNEY
Each person whose signature appears below does hereby make, constitute and
appoint John R. Horne, Robert C. Lannert and Mark T. Schwetschenau and each of
them acting individually, true and lawful attorneys-in-fact and agents with
power to act without the other and with full power of substitution, to execute,
deliver and file, for and on such person's behalf, and in such person's name and
capacity or capacities as stated below, any amendment, exhibit or supplement to
the Form 10-K Report making such changes in the report as such attorney-in-fact
deems appropriate.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
- -------------------------- ------------------------------- -------------------
/s/ John R. Horne
- --------------------------
John R. Horne Chairman of the Board, December 22, 1998
President and
Chief Executive Officer,
and Director
(Principal Executive Officer)
/s/ Robert C. Lannert
- --------------------------
Robert C. Lannert Executive Vice President December 22, 1998
and Chief Financial Officer
and Director
(Principal Financial Officer)
/s/ Mark T. Schwetschenau
- ---------------------------
Mark T. Schwetschenau Vice President and Controller December 22, 1998
(Principal Accounting Officer)
/s/ William F. Andrews
- ---------------------------
William F. Andrews Director December 22, 1998
<PAGE>
PAGE 16
EXHIBIT 24 (CONTINUED)
SIGNATURE
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
---------------
SIGNATURES (Continued)
/s/ John D. Correnti
- ---------------------------
John D. Correnti Director December 22, 1998
/s/ Jerry E. Dempsey
- ---------------------------
Jerry E. Dempsey Director December 22, 1998
/s/ John F. Fiedler
- ---------------------------
John F. Fiedler Director December 22, 1998
/s/ Dr. Abbie J. Griffin
- ---------------------------
Dr. Abbie J. Griffin Director December 22, 1998
/s/ Michael N. Hammes
- ---------------------------
Michael N. Hammes Director December 22, 1998
/s/ Allen J. Krowe
- ---------------------------
Allen J. Krowe Director December 22, 1998
/s/ Walter J. Laskowski
- ---------------------------
Walter J. Laskowski Director December 22, 1998
/s/ William F. Patient
- ---------------------------
William F. Patient Director December 22, 1998
<PAGE>
PAGE 17
SIGNATURE
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
---------------
INDEPENDENT AUDITORS' REPORT
Navistar International Corporation:
We have audited the Statement of Financial Condition of Navistar
International Corporation and Consolidated Subsidiaries as of October 31, 1998
and 1997, and the related Statements of Income and of Cash Flow for each of the
three years in the period ended October 31, 1998, and have issued our report
thereon dated December 14, 1998; such consolidated financial statements and
report are included in your 1998 Annual Report to Shareowners and are
incorporated herein by reference. Our audits also included the financial
statement schedule of Navistar International Corporation and Consolidated
Subsidiaries, listed in Item 14. This financial statement schedule is the
responsibility of the company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
December 14, 1998
Chicago, Illinois
---------------
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Navistar International Corporation:
We consent to the incorporation by reference in the Registration
Statements, including post-effective amendments, No. 2-70979, No. 33-26847, No.
333-25783, No. 333-29735, No. 333-29739 and No. 333-29301 of Navistar
International Corporation, all on Form S-8, of our reports dated December 14,
1998, relating to the financial statements of Navistar International Corporation
and Navistar Financial Corporation, appearing and incorporated by reference in
this Annual Report on Form 10-K of Navistar International Corporation for the
year ended October 31, 1998.
Deloitte & Touche LLP
December 22, 1998
Chicago, Illinois
<PAGE>
PAGE 1
<TABLE>
<CAPTION>
SCHEDULE II
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
============
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(MILLIONS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE DEDUCTIONS FROM
DESCRIPTION AT RESERVES BALANCE
DESCRIPTION BEGINNING ADDITIONS CHARGED AT END
OF RESERVES DEDUCTED FROM OF YEAR TO INCOME DESCRIPTION AMOUNT OF YEAR
----------- ------------- --------- ----------------- ----------- ------ -------
Reserves deducted from
assets to which they
apply:
1998
----
<S> <S> <C> <C> <S> <C> <C>
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustment,
receivables .... receivable .... $ 31 $ 3 less recoveries ... $ 1 $ 33
===== ===== ===== =====
1997
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustment,
receivables .... receivable .... $ 31 $ 14 less recoveries ... $ 14 $ 31
===== ===== ===== =====
1996
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustment,
receivables .... receivable .... $ 28 $ 21 less recoveries ... $ 18 $ 31
===== ===== ===== =====
</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, and amended as of May 4, 1998.
3.2 The By-Laws of Navistar International Corporation effective April
14, 1995, filed as Exhibit 3.2 on Annual Report on Form 10-K
dated October 31, 1995, which was filed on January 26, 1996, on
Commission File No. 1-9618.
E-1
PAGE 1
EXHIBIT 4
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
The following instruments of Navistar International Corporation and its
principal subsidiary Navistar International Transportation Corp. and its
principal subsidiary Navistar Financial Corporation defining the rights of
security holders are incorporated herein by reference.
4.1 Indenture, dated as of November 15, 1993, between Navistar
Financial Corporation and Bank of America, Illinois formerly
known as Continental Bank, National Association, as Trustee, for
8 7/8% Senior Subordinated Notes due 1998 for $100,000,000. Filed
on Registration No. 33-50541.
4.2 Indenture, dated as of May 30, 1997, by and between Navistar
Financial Corporation and The Fuji Bank and Trust Company, as
Trustee, for 9% Senior Subordinated Notes due 2002 for
$100,000,000. Filed on Registration No. 333-30167.
4.3 $125,000,000, Credit Agreement dated as of November 26, 1997, as
amended by Amendment No. 1 dated as of February 4, 1998, and as
amended by Amendment No. 2 dated as of July 10, 1998, among
Navistar International Corporation Mexico, S.A. de C.V., Navistar
International Corporation, certain banks, certain Co-Arranger
banks, Bank of Montreal, as Paying Agent, and Bancomer, S.A.,
Institucion de Banca Multiple, Grupo Financiero, as Peso Agent
and Collateral Agent. The Registrant agrees to furnish to the
Commission upon request a copy of such agreement which it has
elected not to file under the provisions of Regulation 601(b) (4)
(iii).
4.4 Indenture, dated as of February 4, 1998, by and between Navistar
International Corporation and Harris Trust and Savings Bank, as
Trustee, for 7% Senior Notes due 2003 for $100,000,000. Filed on
Registration No. 333-47063.
4.5 Indenture, dated as of February 4, 1998, by and between Navistar
International Corporation and Harris Trust and Savings Bank, as
Trustee, for 8% Senior Subordinated Notes due 2008 for
$250,000,000. Filed on Registration No. 333-47063.
4.6 $160,000,000 Mexican pesos, Credit Agreement dated as of May 26,
1998 by and between Arrendadora Financiera Navistar S.A., de
C.V., and Banco Nacional de Mexico, S.A. de C.V. The Registrant
agrees to furnish to the Commission upon request a copy of such
agreement which it has elected not to file under the provisions
of Regulation 601(b)(4)(iii).
4.7 $6,000,000, Credit Agreement dated as of May 26, 1998 by and
between Arrendadora Financiera Navistar S.A. de C.V., and Banco
Nacional de Mexico, S.A. de C.V. The Registrant agrees to furnish
to the Commission upon request a copy of such agreement which it
has elected not to file under the provisions of Regulation
601(b)(4)(iii).
E-2
<PAGE>
PAGE 2
EXHIBIT 4
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
4.8 $20,000,000 Revolving Credit Agreement dated as of June 5, 1998
by and between Servicios Financieros Navistar, S.A. de C.V. and
The First National Bank of Chicago. The Registrant agrees to
furnish to the Commission upon request a copy of such agreement
which it has elected not to file under the provisions of
Regulation 601(b)(4)(iii).
4.9 $20,000,000 Revolving Credit Agreement dated as of June 5, 1998
by and between Arrendadora Financiera Navistar, S.A. de C.V. and
The First National Bank of Chicago. The Registrant agrees to
furnish to the Commission upon request a copy of such agreement
which it has elected not to file under the provisions of
Regulation 601(b)(4)(iii).
======
Instruments defining the rights of holders of other unregistered long-term
debt of Navistar and its subsidiaries have been omitted from this exhibit index
because the amount of debt authorized under any such instrument does not exceed
10% of the total assets of the Registrant and its consolidated subsidiaries. The
Registrant agrees to furnish a copy of any such instrument to the Commission
upon request.
E-3
PAGE 1
EXHIBIT 10
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
---------------------------------
MATERIAL CONTRACTS
The following documents of Navistar International Corporation and its
affiliate Navistar Financial Corporation are incorporated herein by reference.
10.1* Navistar International Corporation 1984 Stock Option Plan. Filed
as Exhibit A to Proxy Statement dated February 6, 1984.
Commission File No. 1-5236.
10.2 Pooling and Servicing Agreement dated as of December 1, 1990,
among Navistar Financial Corporation as Servicer, Navistar
Financial Securities Corporation as Seller, and The Chase
Manhattan Bank (survivor in the merger between The Chase
Manhattan Bank and Chemical Bank, which was the survivor in the
merger between Chemical Bank and Manufacturers Hanover Trust
Company), as Trustee. Filed on Registration No. 33-36767.
10.3 Amended and Restated Credit Agreement dated as of November 4,
1994 among Navistar Financial Corporation, certain banks, certain
Co-Arranger banks, and Morgan Guaranty Trust Company of New York,
as Administrative Agent. Filed on Form 8-K dated November 4,
1994. Commission File No.
1-4146-1.
10.4 Liquidity Agreement dated as of November 7, 1994 among NFC Asset
Trust, as Borrower, Chemical Bank, Bank of America Illinois, The
Bank of Nova Scotia, and Morgan Guaranty Trust Company of New
York, as Co-Arrangers, and Chemical Bank, as Administrative
Agent. Filed on Form 8-K dated November 4, 1994. Commission File
No. 1-4146-1.
10.5 Indenture dated as of May 25, 1995 between Navistar Financial
1995-A Owner Trust and The Bank of New York, as Indenture
Trustee, with respect to Navistar Financial 1995-A Owner Trust.
Filed on Registration No. 33-55865.
10.6 Indenture dated as of November 1, 1995 between Navistar Financial
1995-B Owner Trust and The Bank of New York, as Indenture
Trustee, with respect to Navistar Financial 1995-B Owner Trust.
Filed on Registration No. 33-55865.
10.7 Amendment No. 2 dated as of March 29, 1996, to the Amended and
Restated Credit Agreement dated as of November 4, 1994, as
amended by Amendment No. 1 dated as of December 15, 1995, among
Navistar Financial, certain banks, certain Co-Arranger banks, and
Morgan Guaranty Trust Company of New York, as Administrative
Agent filed on Form 8-K dated June 5, 1996. Commission File No.
1-4146-1.
10.8 Indenture dated as of May 30, 1996, between Navistar Financial
1996-A Owner Trust and The Bank of New York, as Indenture
Trustee, with respect to Navistar Financial 1996-A Owner Trust.
Filed on Registration No. 33-55865.
10.9 Indenture dated as of November 6, 1996, between Navistar
Financial 1996-B Owner Trust and The Bank of New York, as
Indenture Trustee, with respect to Navistar Financial 1996-B
Owner Trust. Filed on Registration No. 33-55865.
E-4
<PAGE>
PAGE 2
EXHIBIT 10 (CONTINUED)
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
---------------------------------
MATERIAL CONTRACTS
10.10 Indenture dated as of May 7, 1997, between Navistar Financial
1997-A Owner Trust and The Bank of New York, as Indenture
Trustee, with respect to Navistar Financial 1997-A Owner Trust.
Filed on Registration No. 33-55865.
10.11 Amendment No. 3 dated as of May 27, 1997, to the Amended and
Restated Credit Agreement dated as of November 4, 1994, as
amended by Amendment No. 1 dated as of December 15, 1995 and
Amendment No. 2 dated as of March 29, 1996, among Navistar
Financial Corporation, certain banks, certain Co-Arranger banks,
and Morgan Guaranty Trust Company of New York, as Administrative
Agent filed on Form 8-K dated June 17, 1997. Commission File No.
1-4146-1.
10.12* Form of Executive Severance Agreement which is executed with all
executive officers dated June 16, 1997. Filed as Exhibit 10.5 to
Form 10-Q dated September 12, 1997. Commission File No. 1-9618.
10.13* Navistar International Corporation Stock Ownership Program.
Filed as Exhibit 10.20 to Form 10-Q dated September 12, 1997.
Commission File No. 1-9618.
10.14 Indenture dated as of November 5, 1997, between Navistar
Financial 1997-B Owner Trust and The Bank of New York, as
Indenture Trustee, with respect to Navistar Financial 1997-B
Owner Trust. Filed on Registration No. 33-64249.
10.15* Navistar 1988 Non-Employee Director Stock Option Plan amended as
of March 20, 1996. Filed as Exhibit 10.19 to Form 10-K dated
December 22, 1997. Commission File No. 1-9618.
10.16* Navistar 1998 Non-Employee Director Stock Option Plan. Filed as
Exhibit 10.20 to Form 10-Q dated March 17, 1998. Commission File
No. 1-9618.
10.17 Indenture dated as of June 4, 1998, between Navistar Financial
1998-A Owner Trust and The Bank of New York, as Indenture
Trustee, with respect to Navistar Financial 1998-A Owner Trust.
Filed on Registration No. 33-64249.
10.18* Navistar International Corporation 1998 Interim Stock Plan.
Filed as Exhibit 10.21 to Form 10-Q dated June 12, 1998.
Commission File No. 1-9618.
The following documents of Navistar International Corporation are filed
herewith:
Form 10-K Page
--------------
10.19* Navistar 1994 Performance Incentive Plan **
amended as of October 13, 1998.
* Indicates a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report pursuant to Item 14(c).
** Filed only electronically with the Securities and Exchange Commission.
E-5
EXHIBIT 10.19
NAVISTAR 1994 PERFORMANCE INCENTIVE PLAN
Amended as of October 13, 1998
SECTION I
ESTABLISHMENT OF THE PLAN
The Board of Directors of Navistar International Corporation approved the
establishment of the Navistar 1994 Performance Incentive Plan ("Plan"). The Plan
replaces the Navistar 1988 Performance Incentive Plan which consolidated and
modified the Corporation's Annual Incentive Plan, the Long Term Incentive Plan
and the 1984 Stock Option Plan into one plan.
SECTION II
PURPOSE OF THE PLAN
The purpose of the Plan is to enable the Corporation and its subsidiaries
to attract and retain highly qualified personnel, to provide key employees who
hold positions of major responsibility the opportunity to earn incentive awards
commensurate with the quality of individual performance, the achievement of
performance goals and ultimately the increase in shareowner value.
SECTION III
DEFINITIONS
For the purposes of the Plan, the following words and phrases shall have
the meanings described below in this Section III unless a different meaning is
plainly required by the context.
(1) "Annual Incentive Award" means an award of cash approved by the
Committee based on the level of achievement attained against
annual performance goals approved by the Committee on or prior
to the commencement of the applicable Fiscal year.
(2) "Award" means an award made under the Plan.
1
<PAGE>
(3) "Board of Directors" means the Board of Directors of Navistar
International Corporation.
(4) "Change in Control" shall be deemed to have occurred if (A) any
"Person" or "group" (as such terms are used in Section 13 (d)
and 14 (d) of the Securities Exchange Act of 1934) other than
employee or retiree benefit plans or trusts sponsored or
established by the Corporation or Navistar International
Transportation Corp. ("NITC") is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting
power of the Corporation's then outstanding securities, (B) as
the result of, or in connection with, any cash tender offer,
exchange offer, merger or other business combination, sale of
assets, proxy or consent solicitation, contested election or
substantial stock accumulation (a "Control Transaction"), the
members of the Board of Directors of the Corporation immediately
prior to the first public announcement relating to such Control
Transaction shall immediately thereafter, or within two years,
cease to constitute a majority of the Board of Directors of the
Corporation or (C) any dissolution or liquidation of the
Corporation or NITC or an agreement for the sale or disposition
of all or substantially all (more than 50%) of the assets of the
Corporation or NITC occurs. Notwithstanding the foregoing, the
sale or disposition of any or all of the assets or stock of
Navistar Financial Corporation shall not be deemed a Change in
Control.
(5) "Committee" means the Committee on Compensation and Governance
of the Board of Directors.
(6) "Common Stock" means the common stock of the Corporation.
(7) "Corporation" means Navistar International Corporation.
(8) "Employee" means a person regularly employed by the Corporation
or any subsidiary of the Corporation, including its officers.
(9) "Fair Market Value" means the average of the high and the low
prices of a share of Common Stock on the effective date of grant
as set forth in the New York Stock Exchange Composite
Transactions listing published in the Midwest Edition of The
Wall Street Journal or equivalent financial publication.
(10) "Fiscal Year" means the fiscal year of the Corporation.
(11) "Incentive Stock Option" means a right, as evidenced by an
agreement between the Participant and the Company in a form
approved by the Committee, to purchase a certain number of
shares of Common Stock at Fair Market Value for a period of ten
(10) years from the date of grant which options are designed to
meet the requirements set out under Section 422 of the Internal
Revenue Code.
2
<PAGE>
(12) "Long-term Incentive Award" means an award of Restricted Shares
for a long-term cycle, the amount of the award and the length of
the cycle will be determined by the Committee.
(13) "Nonqualified Stock Option" means a right, as evidenced by an
agreement between the Participant and the Company in a form
approved by the Committee, to purchase a certain number of
shares of Common Stock at Fair Market Value for a period of ten
(10) years and one day from the date of grant on which options
are stated not to be qualified as incentive stock options under
Section 422 of the U.S. Internal Revenue Code.
(14) "Participant" means an Employee selected by the Corporation
for participation in the Plan.
(15) "Plan" means the Navistar 1994 Performance Incentive Plan as set
forth herein and as it may be amended hereafter from time to
time.
(16) "Qualified Retirement" means a retirement from employment of the
Corporation or any of its subsidiaries at any time after the
attainment of age fifty-five (55) with at least ten (10) years
of credited service as defined by the applicable retirement
plan.
(17) "Restricted Share" means a share of Common Stock awarded to a
Participant by the Committee without payment by the Participant
which is restricted as to sale or transfer and subject to
forfeiture pursuant to terms established by the Committee at the
time of issuance.
(18) "Stock Option" means either an Incentive Stock Option or
a Nonqualified Stock Option.
SECTION IV
ELIGIBILITY
Management will, from time to time, select and recommend to the Committee
Employees who are to become Participants in the Plan. Such Employees will be
selected from those who, in the opinion of management, have substantial
responsibility in a managerial or professional capacity. Employees selected for
participation in the Plan may not concurrently participate in any other annual
performance, long term performance, sales incentive or profit sharing plan of
the Corporation or any of its subsidiaries except as specifically approved by
the Committee.
3
<PAGE>
SECTION V
ANNUAL INCENTIVE AWARDS
(1) On or before the commencement of each Fiscal Year, the Committee
will approve performance goals for corporate achievement for
such Fiscal Year, and the amount of the Annual Incentive Awards
for such Fiscal Year will be based on the level of achievement
attained against previously approved performance goals. The
Committee also will approve an award percentage for each
organization level for each performance goal.
(2) Performance goals for Annual Incentive Awards will not be
increased or decreased within a Fiscal Year except for
extraordinary circumstances approved by the Committee.
(3) An Annual Incentive Award determination will be made by the
Committee when the financial results and performance levels for
a Fiscal Year are presented to the Committee by management.
(4) Payment of an Annual Incentive Award will be made in cash to the
Participant as soon as practicable after an Annual Incentive
Award determination has been made by the Committee. A
Participant who is not an Employee at the end of a Fiscal Year
will not be entitled to an Annual Incentive Award for that
Fiscal Year unless the Committee determines otherwise.
SECTION VI
LONG TERM INCENTIVE AWARDS
(1) On or before the commencement of each Fiscal Year, the Committee
will approve performance goals for corporate achievement for a
long-term cycle as determined by the Committee. The amount of
any Long Term Incentive Award earned shall be based on the
cumulative level of performance attained against the approved
performance goals.
(2) Criteria for Long Term Incentive Awards will not be increased or
decreased for any long-term cycle which has begun except for
extraordinary circumstances approved by the Committee.
(3) Separate Long-term Incentive Award determinations will be made
by the Committee for each long term cycle.
4
<PAGE>
(4) Restricted Shares will be awarded by the Committee to each
Participant approved by the Committee at the beginning of each
cycle unless to do so would present a substantial risk of
causing the Corporation to undergo an ownership change, as such
term is defined in Section 382 of the Internal Revenue Code, in
which event the Committee shall delay the award until there is
no longer such a risk. The amount to be awarded will be pursuant
to a formula approved by the Committee which will be based on
the ability of the Participant to contribute to the efforts to
achieve the performance goals approved by the Committee for the
applicable cycle. The Committee shall designate which shares
shall be subject to performance goals. The Committee will make
the final Long-Term Award determination. No fractional shares
will be issued. A Participant who quits or is involuntarily
separated will forfeit any Restricted Shares. Any Restricted
Shares forfeited shall be forfeited (i) to the Company or (ii)
if the forfeiture to the Company creates a substantial risk of
an ownership change under Section 382 of the Internal Revenue
Code, then to the salaried and hourly pension trusts of the
Corporation's principal operating subsidiary pro rata based on
assets held in the trusts as of the beginning of the prior plan
year. If a Participant dies, becomes permanently and totally
disabled, or retires pursuant to a Qualified Retirement,
Restricted Shares previously awarded which are subject to
performance goals, will be retained until the shares are earned
or forfeited for failure to meet the performance goals.
(5) A Participant may elect, subject to the provisions of Section
VII(2), to pay any withholding tax due on Stock Options or on
Restricted Shares awarded pursuant to the Plan either (i) by
cash including a personal check made payable to the Corporation
or (ii) by delivering at Fair Market Value unrestricted Common
Stock already owned by the Participant or (iii) by any
combination of cash or unrestricted Common Stock. If the
Participant is an officer of the Corporation who is subject to
Section 16(b) of the Securities Exchange Act of 1934, he or she
may make an election pursuant to (ii) or (iii) above only if it
is made in writing (a) at least six (6) months following the
date of grant of an option or an award and at least six (6)
months prior to the date on which the amount of the minimum
required withholding tax related to the option or award is
determined or (b) within a ten-day period following the release
of the Corporation's annual or quarterly financial results. Once
an officer, who is subject to Section 16(b) of the Securities
Exchange Act of 1934, makes an election pursuant to (ii) or
(iii) above with respect to a specific option or award, it shall
be irrevocable unless the election is disapproved by the
Committee at its next meeting following the election. If the
redemption of shares by the Corporation to pay withholding taxes
would present a substantial risk of causing an ownership change
under Section 382 of the Internal Revenue Code, the Corporation
may refuse the redemption. In such a case of refusal to redeem
by the Corporation, the Participant would be permitted to sell
sufficient shares to pay any withholding taxes due.
5
<PAGE>
SECTION VII
STOCK OPTIONS
(1) The Committee may grant Nonqualified Stock Options or Incentive
Stock Options or a combination of both to Participants in the
amount and at the time that the Committee approves. Option
grants shall be limited to a maximum of 50,000 shares per year
for any Participant. The Committee may grant Nonqualified Stock
Options or Incentive Stock Options or a combination of both to
Participants in the amount and at the time that the Committee
approves. Option grants shall be limited to a maximum of 50,000
shares per year for any Participant. The Board may in its
discretion grant options in addition to the options subject to
the limitation contained in the proceeding sentence, provided
that option grants shall be considered as made under the
proceeding sentence to the extent the limitation is not
exceeded, and any option grants in excess of the limitation
contained in the proceeding sentence shall be considered as made
under this sentence, and any option grants made under this
sentence shall not be treated as performance-based compensation
for tax purposes.
(2) Unless otherwise determined by the Committee, a Stock Option
granted under the Plan will become exercisable in whole or in
part after the commencement of the second year of the term of
the Stock Option to the extent of one third of the shares, to
the extent of one third of the shares after commencement of the
third year, and to the extent of one third of the shares after
commencement of the fourth year. The Committee will be
authorized to establish the manner of exercise of a Stock
Option. The effective date of the grant of a Stock Option will,
unless the Committee expressly determines otherwise, be the
business day on which the Committee approves the grant of such
Stock Option, provided that such grant will expire if a written
option agreement is not signed by the Participant receiving a
Stock Option and delivered to the Corporation within thirty (30)
days of such approval by the Committee. The option can be
exercised in whole or in part through cashless exercises or
other arrangements through agents, including stock brokers,
under arrangements established by the Corporation by paying the
amounts required by instructions issued by the Secretary of the
Corporation for the exercise of the options. If an exercise is
not covered by instructions issued by the Corporate Secretary,
the purchase price is to be paid in full to the Corporation upon
the exercise of a Stock Option either (i) by cash including a
personal check made payable to the Corporation; (ii) by
delivering at Fair Market Value unrestricted Common Stock
already owned by the Participant, for six months or more if
acquired from the Corporation, or (iii) by any combination of
cash and unrestricted Common Stock, and in either case, by
payment to the Corporation of any withholding tax. In no event
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may successive simultaneous pyramiding be used to exercise an
Option. If permitting the exercise of a Stock Option at the time
notice of intent is given by the Participant to the Corporation
would present a substantial risk of causing an ownership change
under Section 382 of the Internal Revenue Code, the Corporation
may refuse to permit the exercise in which event as soon as the
Corporation determines that a substantial risk of causing an
ownership change no longer exists, it will issue shares of
Common Stock equal in value to the difference between the
exercise price per share and the market price per share times
the number of shares covered by the exercise plus interest on
the total for the period of the delay calculated at the
composite prime rate of interest to corporate borrowers as
published in The Wall Street Journal. The Committee also will be
authorized in its discretion to prescribe in the option
agreement for the exercise of the Stock Option in specific
installments. A Stock Option granted under the Plan will be
exercisable during such period as the Committee may determine,
and will be subject to earlier termination as hereinafter
provided. In no event, however, may a Stock Option governed by
the Plan be exercised after the expiration of its term. Except
as provided herein, no Stock Option may be exercised at any time
unless the Participant who holds the Stock Option is then an
Employee. The Participant who holds a Stock Option will have
none of the rights of a shareowner with respect to the shares
subject to a Stock Option until such shares are issued upon the
exercise of a Stock Option. Shares which otherwise would be
delivered to the holder of a Stock Option may be delivered, at
the election of the holder, to the Corporation in payment of
Federal, state and/or local withholding taxes due in connection
with an exercise.
(3) Neither the Corporation nor any subsidiary may directly or
indirectly lend money to any Participant for the purpose of
assisting the individual to acquire shares of Common Stock
issued upon the exercise of Stock Options granted under the
Plan.
(4) In the event of the termination of the employment of a
Participant who holds an outstanding Stock Option, other than by
reason of death, total and permanent disability or a Qualified
Retirement, the Participant may (unless the Stock Option shall
have been previously terminated) exercise the Stock Option at
any time within three (3) months after such termination, but not
after the expiration of the term of the grant, to the extent of
the number of shares which were exercisable at the date of the
termination of employment. Stock Options governed by the Plan
will not be affected by any change of employment so long as the
Participant continues to be an Employee.
(5) Except as provided in the last two sentences of this Section
VII(5), in the event of Qualified Retirement or total and
permanent disability, a Participant who holds an outstanding
Stock Option may exercise the Stock Option, to the extent the
option is exercisable or becomes exercisable under its terms, at
any time within three years after such termination or, if later,
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the date on which the option becomes exercisable with respect to
such shares, but not after the expiration of the term of the
grant. In the event of the death of a Participant who holds an
outstanding Stock Option, the Stock Option may be exercised by a
legatee, or by the personal representatives or distributees, at
any time within a period of two (2) years after death, but not
after the expiration of the term of the grant. If death occurs
while employed by the Corporation or a subsidiary, or during the
three-year period specified in the first sentence of this
paragraph, options may be exercised to the extent of the
remaining shares covered by Stock Options whether or not such
shares were exercisable at the date of death. If death occurs
during the three-month period specified in Section VII(4) Stock
Options may be exercised to the extent of the number of shares
which were exercisable at the date of death. Notwithstanding the
other provisions of this Section VII(5), no option which is not
exercisable at the time of a retirement shall become exercisable
after such retirement if, without the written consent of the
Corporation, a Participant engages in a business, whether as
owner, partner, officer, employee, or otherwise, which is in
competition with the Corporation or one of its affiliates, and
if the Participant's participation in such business is deemed by
the Corporation to be detrimental to the best interests of the
Corporation. The determination as to whether such business is in
competition with the Corporation or any of its affiliates, and
whether such participation by such person is detrimental to the
best interests of the Corporation, shall be made by the
Corporation in its absolute discretion, and the decision of the
Corporation with respect thereto, including its determination as
to when the participation in such competitive business
commenced, shall be conclusive.
SECTION VIII
RESTRICTED SHARES
(1) In addition to the Restricted Shares which the Committee may
award pursuant to Section VI(4), the Committee also may award
Restricted Shares to individuals recommended by management for
either retention or performance purposes or as part of an
employment agreement.
(2) The Participant will be entitled to all dividends paid with
respect to all Restricted Shares awarded under the Plan during
the period of restriction and will not be required to return any
such dividends to the Corporation in the event of the forfeiture
of the Restricted Shares. The Participant also will be entitled
to vote Restricted Shares during the period of restriction.
(3) All Restricted Share certificates awarded under the Plan are to
be delivered to the Participant with an appropriate legend
imprinted on the certificate.
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SECTION IX
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
Notwithstanding any other provision of the Plan, the option agreements may
contain such provisions as the Committee determines to be appropriate for the
adjustment of the number and class of shares, subject to each outstanding Stock
Option, the option prices in the event of changes in, or distributions with
respect to, the outstanding Common Stock by reason of stock dividends,
recapitalizations, mergers, consolidations, split-ups, combinations or exchanges
of shares, spinoffs and the like, and, in the event of any such changes in, or
distribution with respect to, the outstanding Common Stock, the aggregate number
and class of shares available under the Plan shall be appropriately adjusted by
the Committee, whose determination shall be conclusive.
SECTION X
ADMINISTRATION OF THE PLAN
Full power and authority to construe, interpret and administer the Plan is
vested in the Committee. Decisions of the Committee will be final, conclusive
and binding upon all parties, including the Corporation, shareowners and
employees. The foregoing will include, but will not be limited to, all
determinations by the Committee as to (a) the approval of Employees for
participation in the Plan, (b) the amount of the Awards, (c) the performance
levels at which different percentages of the Awards would be earned and all
subsequent adjustments to such levels and (d) the determination of all Awards.
Any person who accepts any Award hereunder agrees to accept as final, conclusive
and binding all determinations of the Committee. The Committee will have the
right, in the case of employees not employed in the United States, to vary from
the provision of the Plan to the extent the Committee deems appropriate in order
to preserve the incentive features of the Plan.
SECTION XI
NON-ASSIGNMENT
Awards under the Plan may not be assigned or alienated. In case of a
Participant's death, the amounts distributable to the deceased Participant under
the Plan with respect to which a designation of beneficiary has been made (to
the extent it is valid and enforceable under applicable law) shall be
distributed in accordance with the Plan to the designated beneficiary or
beneficiaries. The amount distributable to a Participant upon death and not
subject to such a designation shall be distributed to the Participant's estate.
If there is any question as to the right of any beneficiary to receive a
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distribution under the Plan, the amount in question may be paid to the estate of
the Participant, in which event the Corporation will have no further liability
to anyone with respect to such amount.
SECTION XII
RIGHTS OF PARTICIPANT
To the extent that any Participant, beneficiary or estate acquires a right
to receive payments or distributions under the Plan, such right will be no
greater than the right of a general unsecured creditor of the Corporation. All
payments and distributions to be made hereunder will be paid from the general
assets of the Corporation. Nothing contained in the Plan, and no action taken
pursuant to its provisions, shall create or be construed to create any
contracted right or trust of any kind or fiduciary relationship between the
Corporation and any Participant, beneficiary or estate.
SECTION XIII
MODIFICATION, AMENDMENT OR TERMINATION
The Committee may modify without the consent of the Participant (i) the
Plan, (ii) the terms of any option previously granted or (iii) the terms of
Restricted Shares previously awarded at any time, provided that, no such
modification will, without the approval of the shareowners of the Corporation,
increase the number of shares of Common Stock available hereunder. The Committee
may terminate the Plan at any time.
SECTION XIV
RESERVATION OF SHARES
Each fiscal year, there will be reserved for issue under the Plan one (1)
percent of the outstanding shares of Common Stock including Class B Common Stock
of the Corporation as determined by the number of shares outstanding as of the
end of the immediately preceding fiscal year. No more than Five Hundred Thousand
(500,000) shares shall be granted as Incentive Stock Options in any calendar
year. Such shares may be in whole or in part, as the Board of Directors shall
from time to time determine, authorized and unissued shares of Common Stock or
issued shares of Common Stock which shall have been reacquired by the
Corporation. If less than one (1) percent of the shares is granted or awarded in
any fiscal year, the difference will be available for use in the following year
only and if not used in the following year, those shares will no longer be
available. Any shares available from the prior year will be the last shares to
be granted or awarded.
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SECTION XV
AGREEMENT TO SERVE
Each Participant receiving a Nonqualified Stock Option or an Incentive
Stock Option shall, as one of the terms of the option agreement, agree to remain
in the service of the Corporation or of one of its subsidiaries for a period of
at least one (1) year from the date of granting the option. Such service will
(subject to the provisions of any contract between the Corporation or any such
subsidiary and such Participant) be at the pleasure of the Corporation or of
such subsidiary and at such compensation as the Corporation or such subsidiary
shall determine from time to time. Any termination of a Participant's service
for any reason other than death, permanent and total disability or Qualified
Retirement during such period shall be deemed a violation of the Agreement
contained in this Section. In the event of such violation, any Nonqualified
Stock Option or Incentive Stock Option held by the Participant under the Plan
will immediately be canceled. Nothing in the Plan will confer on any Participant
any right to continue in the employ of the Corporation or any of its
subsidiaries or interfere with or prevent in any way the right of the
Corporation or any of its subsidiaries to terminate a Participant's employment
at any time for any reason.
SECTION XVI
CHANGE IN CONTROL
Notwithstanding any provision contained herein to the contrary, in the
event of a Change in Control, all awarded Restricted Shares will immediately be
free of all restrictions and performance contingencies and will be deemed fully
earned and not subject to forfeiture and all outstanding options governed by the
Plan will be immediately exercisable and shall continue to be exercisable for a
period of three (3) years from the date of the Change in Control regardless of
the original term or employment status, except that the term of any Incentive
Stock Option shall not be extended beyond ten (10) years from the date of grant.
SECTION XVII
LIMITATION OF ACTIONS
Every right of action by or on behalf of the Corporation or any shareowner
against any past, present or future member of the Board of Directors, officer or
Employee arising out of or in connection with the Plan will, irrespective of the
place where action may be brought and irrespective of the place of residence of
any such director, officer or employee, cease and be barred by the expiration of
three years from whichever is the later of (a) the date of the act or omission
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in respect of which such right of action arises or (b) the first date upon which
there has been made generally available to shareowners an annual report of the
Corporation and a proxy statement for the annual meeting of shareowners
following the issuance of such annual report, which annual report and proxy
statement alone or together set forth, for the related period, the aggregate
amount of Awards under the Plan during such period; and any and all right of
action by an Employee (past, present or future) against the Corporation arising
out of or in connection with the Plan shall, irrespective of the place where
action may be brought, cease and be barred by the expiration of three (3) years
from the date of the act or omission in respect of which such right of action
arises.
SECTION XVIII
GOVERNING LAW
The Plan will be governed by and interpreted pursuant to the laws of the
State of Delaware, the place of incorporation of the Corporation.
SECTION XIX
SUBSIDIARIES' PLANS
To the extent determined by the Committee, any subsidiary may, without
regard to the limitations under the Plan, have a separate incentive plan or
program. The Committee will have exclusive jurisdiction and sole discretion to
approve or disapprove any such plan or program and, from time to time, to amend,
modify, or suspend any such plan or program. Individuals eligible for Awards
under any such plan or program will not be considered Employees eligible for
Awards under the Plan, unless otherwise determined by the Committee. No
provision of any such plan or program will be included in, or considered a part
of, the Plan and any awards made under any such plan or program will not be
charged against the aggregate amount available under the Plan unless otherwise
determined by the Committee.
SECTION XX
EFFECTIVE DATE
The effective date of the Plan shall be December 16, 1993, if approved by
the shareowners at the 1994 Annual Meeting, and the Plan shall continue in
effect for ten (10) years from the effective date.
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EXHIBIT 13
FINANCIAL INFORMATION
Management's Discussion and Analysis of Results
of Operations and Financial Condition............................ 2
Statement of Financial Reporting Responsibility...................... 13
Independent Auditors' Report......................................... 14
Financial Statements
Statement of Income.............................................. 15
Statement of Financial Condition................................. 16
Statement of Cash Flow........................................... 17
Notes to Financial Statements
1 Summary of accounting policies.......................... 18
2 Postretirement benefits................................. 22
3 Income taxes............................................ 25
4 Marketable securities................................... 28
5 Receivables............................................. 29
6 Inventories............................................. 30
7 Property and equipment.................................. 30
8 Debt.................................................... 31
9 Other liabilities....................................... 34
10 Financial instruments................................... 35
11 Commitments, contingencies, restricted assets,
concentrations and leases............................. 37
12 Legal proceedings and environmental matters............. 38
13 Industry segment data................................... 39
14 Preferred and preference stocks......................... 41
15 Common shareowners' equity.............................. 42
16 Earnings per share...................................... 43
17 Stock compensation plans................................ 44
18 Selected quarterly financial data (unaudited)........... 46
Supplemental Financial Information (unaudited)....................... 47
Five -Year Summary of Selected Financial and Statistical Data........ 48
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Certain statements under this caption constitute "forward-looking
statements" under the Reform Act, which involve risks and uncertainties.
Navistar International Corporation's actual results may differ significantly
from the results discussed in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
under the caption "Business Environment."
Navistar International Corporation is a holding company and its principal
operating subsidiary is Navistar International Transportation Corp.
(Transportation). In this discussion and analysis, "company" or "Navistar"
refers to Navistar International Corporation and its consolidated subsidiaries.
The company's manufacturing operations are engaged in the manufacture and
marketing of Class 5 through 8 trucks, including school buses, mid-range diesel
engines and service parts primarily in the United States and Canada as well as
in Mexico, Brazil and other selected export markets. The financial services
operations of the company provide wholesale, retail and lease financing, and
domestic commercial physical damage and liability insurance coverage to the
company's dealers and retail customers and to the general public through an
independent insurance agency system.
The discussion and analysis reviews the operating and financial results,
and liquidity and capital resources of manufacturing operations and financial
services operations. Manufacturing operations include the financial results of
the financial services operations included on a one-line basis under the equity
method of accounting. Financial services operations include Navistar Financial
Corporation (NFC) and the company's foreign finance companies. See Note 1 to the
Financial Statements.
RESULTS OF OPERATIONS
The company reported net income of $299 million for 1998, or $4.11 per
diluted common share, reflecting higher sales of manufactured products as well
as a $45 million reduction in the company's tax valuation allowance. Net income
was $150 million, or $1.65 per diluted common share in 1997 and $65 million, or
$.49 per diluted common share in 1996. Net income in 1996 included a one-time
$35 million pretax charge for costs related to the termination of the next
generation vehicle (NGV) program. In August 1997, the company and the United
Automobile, Aerospace and Agricultural Implement Workers of America (UAW)
reached agreement on a master contract extension that enabled the company to
reinstate this program.
The company's manufacturing operations reported income before income taxes
of $321 million in 1998 compared with pretax income of $164 million in 1997 and
$22 million in 1996. The increases in 1998 and 1997 over the prior years reflect
higher sales of trucks and diesel engines as well as the effects of improved
pricing and various cost improvement initiatives.
NFC's pretax income in 1998 was $85 million, a 13% increase from $75
million in 1997, primarily as a result of an increase in wholesale and retail
financing activity partially offset by lower financing margins. NFC's pretax
income decreased $6 million in 1997 from the $81 million reported in 1996
primarily due to lower income on sales of retail receivables and a decline in
wholesale financing activity.
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Sales and Revenues. U.S. and Canadian industry retail sales of Class 5 through 8
trucks totaled 390,900 units in 1998, a 13% increase from the 347,400 units sold
in 1997, and 15% higher than the 341,200 units sold in 1996. Class 8 heavy truck
sales totaled 232,000 units, an 18% increase from the 196,800 units sold in
1997, and 19% higher than the 195,400 units sold in 1996. Industry sales of
Class 5, 6 and 7 medium trucks, including school buses, totaled 158,900 units in
1998, a 6% increase from 1997 when 150,600 units were sold, which was a 3%
increase over the 145,800 units sold in 1996. Industry sales of school buses,
which accounted for 20% of the medium truck market, decreased approximately 5%
from 1997 to 31,700 units.
Sales and revenues of $7,885 million in 1998 were 24% higher than the
$6,371 million reported in 1997 and 37% higher than the $5,754 million reported
in 1996. Sales of trucks, mid-range diesel engines and service parts totaled
$7,629 million in 1998, 24% above the $6,147 million reported for 1997 and a 39%
increase from the $5,508 million reported in 1996.
The company maintained its position as sales leader in the combined United
States and Canadian Class 5 through 8 truck market in 1998 with a 28.9% market
share, an increase from the 28.6% share in 1997 and the 27.5% share in 1996
(Sources: American Automobile Manufacturers Association, Canadian Vehicle
Manufacturers Association and R. L. Polk & Company). Shipments of mid-range
diesel engines by the company to other original equipment manufacturers during
1998 were a record 213,700 units, a 16% increase over the 184,000 units in 1997,
which represented a 13% improvement over 1996. Higher shipments to Ford Motor
Company to meet consumer demand for the light trucks and vans which use this
engine was the primary reason for the increase.
Service parts sales of $848 million in 1998 increased from the $806 million
reported in 1997 and were 12% higher than the $760 million reported in 1996 as a
result of dealer and national account volume growth.
Finance and insurance revenue was $201 million for 1998, a $27 million
increase over 1997 revenue of $174 million as a result of increased wholesale
and retail financing. Revenue in 1997 was 12% lower than the $197 million
reported in 1996 primarily as a result of a decline in wholesale financing
activity.
Costs and Expenses. Manufacturing gross margin was 15.3% of sales in 1998,
compared with 14.2% in 1997 and 12.5% in 1996. The increases in gross margin are
primarily due to lower unit production costs and improved pricing offset by
provisions for employee profit sharing.
Postretirement benefits plan expense decreased to $174 million in 1998 from
$215 million in 1997 and from $220 million in 1996 mainly as a result of higher
expected return on plan assets.
Engineering and research expense increased to $192 million in 1998 from
$124 million in 1997 and $129 million in 1996, reflecting the company's
continuing investment in its NGV program as well as its investment in its Next
Generation Diesel (NGD) program.
Marketing and administrative expense was $427 million in 1998 compared with
$365 million in 1997 and $319 million in 1996. The change between 1998 and 1997
reflects investment in the company's five-point truck strategy and an increase
in the provision for payment to employees as provided by the company's
performance incentive programs. The $46 million increase between 1997 and 1996
reflects higher sales and distribution costs and an increase in the provision
for payment to employees as provided by the company's performance incentive
programs.
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Interest expense increased to $105 million in 1998 from $74 million in 1997
and $83 million in 1996. The increase in 1998 is primarily due to a $374 million
net increase in debt driven by the issuance of $350 million of senior and senior
subordinated notes. The decrease in 1997 was the result of lower wholesale note
funding requirements and declining interest rates.
The increase in other expenses from 1997 to 1998 includes $14 million of
expenses related to the secondary public offering of 19.9 million shares of the
company's common stock as further described in the liquidity and capital
resources section.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow is generated from the manufacture and sale of trucks, mid-range
diesel engines and service parts as well as product financing and insurance
coverage provided to Transportation's dealers and retail customers by the
financial services operations. The company's current debt ratings have made bank
borrowings and sales of finance receivables the most economic sources of cash
for NFC. Insurance operations are self-funded.
Total cash, cash equivalents and marketable securities of the company
amounted to $1,064 million at October 31, 1998, $965 million at October 31,
1997, and $881 million at October 31, 1996.
Cash provided by operations during 1998 totaled $361 million, primarily
from net income of $299 million. In addition to regular postretirement benefit
payments, the company contributed $200 million to both the Retiree Health Care
Base Plan Trust and to the hourly pension plan during 1998. Income tax expense
for 1998 was $111 million, composed of cash payments of $7 million to federal
and certain state and local governments and $149 million of federal and other
taxes which reduced the deferred tax asset. These were offset by a $45 million
reversal of a portion of the deferred tax asset valuation allowance.
The net change in operating assets and liabilities of $188 million includes
a $192 million increase in receivables, reflecting higher sales in 1998 compared
to 1997, offset by a $192 million increase in accounts payable principally due
to higher production in engine facilities as well as in Mexico and Brazil. The
$202 million increase in other liabilities is primarily due to an increase in
the accrual for the company's performance incentive programs.
During 1998, investment programs used $898 million in cash primarily from a
net increase in marketable securities of $266 million, a net increase in retail
notes and lease receivables of $192 million and a $125 million net increase in
property and equipment leased to others. Additionally, $305 million was used to
fund capital expenditures including $86 million for construction of a truck
assembly facility in Mexico, $106 million to increase mid-range diesel engine
capacity and additional funds for truck product improvements.
Financing activities provided a $374 million net increase in long-term debt
primarily due to the issuance of $100 million 7% Senior Notes due 2003 and $250
million 8% Senior Subordinated Notes due 2008 offset by the $26 million used to
repay the 8% Secured Note due 2002 and by the $45 million used to redeem the
company's 9% Sinking Fund Debentures due June 2004. Financing activities also
provided a $348 million net increase in notes and debt outstanding under the
bank revolving credit facility and asset-backed and other commercial paper
programs. Additionally, $84 million was borrowed under the Mexican credit
facility, of which approximately half is denominated in Mexican pesos. Financing
activities used cash of $240 million for the redemption of the Series G
Preferred Stock and for the payment of $11 million of related dividends. In
addition, $189 million of common stock was repurchased during 1998 offset by $28
million of proceeds from the reissuance of treasury shares.
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In June 1998, a secondary public offering of the common stock of the
company was completed, in which the Navistar International Transportation Corp.
Retiree Supplemental Benefit Trust (the Trust) sold approximately 19.9 million
shares of common stock at an offering price of $26.50 per share. These shares
represented the Class B Common Stock held by the Trust which automatically
converted into Common Stock upon the sale. In conjunction with this offering,
the company and certain of the company's pension plans purchased 2 million and 3
million, respectively, of the shares being offered. The company did not receive
any proceeds from the sale of the shares in the offering, but paid expenses
related to the offering of $14 million pursuant to a pre-existing agreement with
the Trust. These offering fees are included in other expenses. The underwriters
subsequently exercised their over-allotment option and elected to purchase 1.1
million shares from the company at $26.50 per share. The company offset the
dilution of this sale through open market purchases of its Common Stock.
Cash flow from the company's manufacturing and financial services
operations are currently sufficient to cover planned investment in the business.
Capital expenditures for 1999 are expected to be approximately $450 million
including approximately $130 million for the NGV and NGD programs. Additional
capital expenditures are planned for increased manufacturing capacity at the
Indianapolis engine plant, development of operations in Brazil and improvements
to existing facilities and products. The company had outstanding capital
commitments of $153 million at October 31, 1998, primarily for the NGV and NGD
programs and for increased manufacturing capacity at the Indianapolis engine
plant.
The company currently estimates approximately $515 million in capital
spending and $330 million in development expense through 2003 for the NGV
program. Approximately $95 million of this development expense is planned for
1999. During 1998, the company approved a plan for up to $600 million in capital
spending over the next five years in order to manufacture a next generation
version of diesel engines. In addition, approximately $110 million of
development expense was approved for the development of these engines, of which
approximately $30 million is planned for 1999.
The company's truck assembly facility located in Escobedo, Mexico is
encumbered by a lien in favor of certain lenders of the company as collateral
for the $125 million revolving Mexican credit facility. At October 31, 1998, $19
million of a Mexican subsidiary's receivables were pledged as collateral for
bank borrowings. In addition, as of October 31, 1998, the company is
contingently liable for approximately $75 million for various purchasing
commitments, credit guarantees and buyback programs; however, based on
historical loss trends, the company's exposure is not considered material.
Additionally, restrictions under the terms on the senior and senior subordinated
notes and Mexican credit facility include a limitation on indebtedness and a
limitation on certain restricted payments.
Through the asset-backed public market, NFC has been able to fund fixed
rate retail note receivables at rates offered to companies with investment grade
ratings. During 1998 and 1997, NFC sold $1,001 million and $987 million,
respectively, of retail notes, through Navistar Financial Retail Receivables
Corporation (NFRRC), a wholly owned subsidiary. On August 28, 1998, NFRRC filed
a shelf registration statement with the Securities and Exchange Commission which
provides for the issuance of an additional $2,500 million of asset-backed
securities. The aggregate shelf registration available to NFRRC for issuance of
asset-backed securities is $2,972 million. In November 1998, NFC sold an
additional $545 million of retail notes through NFRRC to a multi-seller
asset-backed commercial paper conduit sponsored by a major financial
institution.
At October 31, 1998, Navistar Financial Securities Corporation (NFSC), a
wholly owned subsidiary of NFC, had a revolving wholesale note trust that
provides for the funding of $700 million of wholesale notes comprised of one
$100 million tranche of investor certificates maturing in 1999 and three $200
million tranches of investor certificates maturing in 2003, 2004 and 2008.
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NFC has a $925 million bank revolving credit facility and a $400 million
asset-backed commercial paper (ABCP) program supported by a bank liquidity
facility, which mature in March 2001. As of October 31, 1998, available funding
under the bank revolving credit facility and the ABCP facility was $124 million,
of which $22 million provided funding backup for the outstanding short-term
debt.
NFC's maximum contractual exposure under all receivable sale recourse
provisions at October 31, 1998, was $259 million. However, management believes
the recorded reserves for losses on sold receivables are adequate.
At October 31, 1998, the Canadian operating subsidiary was contingently
liable for retail customers' contracts and leases financed by a third party. The
Canadian operating subsidiary is subject to maximum recourse of $203 million on
retail contracts and $16 million on retail leases. The Canadian operating
subsidiary, NFC and certain other subsidiaries included in financial services
operations are parties to agreements that may result in the restriction of
amounts which can be distributed to Transportation in the form of dividends or
loans and advances. At October 31, 1998, the maximum amount of dividends which
were available for distribution under the most restrictive covenants was $91
million.
The company and Transportation are obligated under certain agreements with
public and private lenders of NFC to maintain the subsidiary's income before
interest expense and income taxes at not less than 125% of its total interest
expense. No income maintenance payments were required for the three years ended
October 31, 1998.
It is the opinion of management that, in the absence of significant
unanticipated cash demands, current and forecasted cash flow will provide a
basis for financing operating requirements and capital expenditures. Management
also believes that collections on the outstanding receivables portfolios as well
as funds available from various funding sources will permit the financial
services operations to meet the financing requirements of the company's dealers
and customers.
ENVIRONMENTAL MATTERS
In October 1998, Navistar, along with other heavy-duty diesel engine
manufacturers, entered into a Consent Decree with the United States
Environmental Protection Agency (U.S. EPA) and a Settlement Agreement with
California Air Resource Board (CARB) concerning alleged emissions from
heavy-duty diesel engines which utilized strategies to improve fuel economy and
may have affected nitrogen oxide emissions. The company's settlement with the
U.S. EPA and CARB requires a payment of $3 million dollars which was expensed in
1998. The settlement additionally requires changes to new engine configurations
which are to be produced after October 2002. The changes are not expected to
have a material effect on the company's financial position or operating results.
The company has been named a potentially responsible party (PRP), in
conjunction with other parties, in a number of cases arising under an
environmental protection law known as the Superfund law. These cases involve
sites which allegedly have received wastes from current or former company
locations. Based on information available to the company, which, in most cases,
consists of data related to quantities and characteristics of material generated
at, or shipped to, each site as well as cost estimates from PRPs and/or federal
or state regulatory agencies for the cleanup of these sites, a reasonable
estimate is calculated of the company's share, if any, of the probable costs and
is provided for in the financial statements. These obligations generally are
recognized no later than completion of the remedial feasibility study and are
not discounted to their present value. The company reviews its accruals on a
regular basis and believes that, based on these calculations, its share of the
potential additional costs for the cleanup of each site will not have a material
effect on the company's financial results.
- 6 -
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
As disclosed in Notes 1 and 10 to the Financial Statements, the company
uses derivative financial instruments to transfer or reduce the risks of foreign
exchange and interest rate volatility, and potentially increase the return on
invested funds.
The company's manufacturing operations, as conditions warrant, hedge
foreign exchange exposure on the purchase of parts and materials from foreign
countries and its exposure from sales of manufactured products in other
countries. Contracted purchases of commodities for manufacturing may also be
hedged.
NFC may use forward contracts to hedge the fair value of its fixed rate
receivables against changes in market interest rates in anticipation of the sale
of such receivables. NFC also uses interest rate swaps to reduce exposure to
interest rate changes when it sells fixed rate receivables on a variable rate
basis. For the protection of investors in NFC's debt securities, NFC may write
interest rate caps when fixed rate receivables are sold on a variable rate
basis.
MARKET RISK DISCLOSURE
The company's primary market risks include fluctuations in interest rates
and currency exchange rates. The company is also exposed to changes in the
prices of commodities used in its manufacturing operations and to changes in the
prices of equity instruments owned by the company; however commodity price risk
related to the company's current commodity financial instruments and equity
price risk related to the company's current investments in equity instruments
are not material. The company does not hold any material market risk sensitive
instruments for trading purposes.
The company has established policies and procedures to manage sensitivity
to interest rate and foreign currency exchange rate market risk. These
procedures include the monitoring of the company's level of exposures to each
market risk, the funding of variable rate receivables with variable rate debt,
and limiting the amount of fixed rate receivables which may be funded with
floating rate debt. These procedures also include the use of derivative
financial instruments to mitigate the effects of interest rate fluctuations and
to reduce the exposure to exchange rate risk.
Interest rate risk is the risk that the company will incur economic losses
due to adverse changes in interest rates. The company measures its interest rate
risk by estimating the net amount by which the fair value of all of its interest
rate sensitive assets and liabilities would be impacted by selected hypothetical
changes in market interest rates. Assuming a hypothetical 10% decrease in
interest rates as of October 31, 1998, the net fair value of these instruments
would decrease by approximately $5 million. The company's interest rate
sensitivity analysis assumes a parallel shift in interest rate yield curves. The
model, therefore, does not reflect the potential impact of changes in the
relationship between short-term and long-term interest rates.
Foreign currency risk is the risk that the company will incur economic
losses due to adverse changes in foreign currency exchange rates. The company's
primary exposure to foreign currency exchange fluctuations are the Canadian
dollar/U.S. dollar and Mexican peso/U.S. dollar. As of October 31, 1998, the
potential reduction in future earnings from a hypothetical instantaneous 10%
adverse change in quoted foreign currency exchange rates applied to foreign
currency sensitive instruments would be approximately $10 million. The foreign
currency sensitivity model is limited by the assumption that all of the foreign
currencies to which the company is exposed would simultaneously decrease by 10%,
because such synchronized changes are unlikely to occur. The effects of foreign
currency forward contracts have been included in the above analysis; however,
the sensitivity model does not include the inherent risks associated with the
anticipated future transactions denominated in foreign currency for which these
forward contracts have been entered into for hedging purposes.
- 7 -
<PAGE>
YEAR 2000
In 1995, the company instituted a corporate-wide Year 2000 readiness
project to identify all systems which will require modification or replacement,
and to establish appropriate remediation and contingency plans to avoid an
impact on the company's ability to continue to provide its products and
services. Navistar has established a team of professionals within each of its
sites and locations to implement and complete this initiative. In 1997, the
company expanded its Year 2000 readiness project to include the company's
products, external suppliers, dealers and facilities.
The company's Year 2000 program is directed to four major areas: products,
internal systems (including information technology (IT) and non-IT systems),
suppliers and dealers.
The company has completed its compliance review of virtually all of its
products and has not learned of any products which it manufactures that will
cease functioning or experience an interruption in operation as a result of the
transition to the Year 2000.
The internal systems portion of the project addresses personal computing;
facilities, including the physical "machines" inside a plant or office complex;
and computer business systems that are commonly run on larger mainframes and
mid-range computers as well as the supporting infrastructure for the company's
computer business systems. The company presently believes that it has identified
all significant applications that will require remediation, which in some cases
will involve the replacement of the systems, to achieve Year 2000 readiness.
Both internal and external resources are being used to make the required
modifications and test for Year 2000 compliance. The company currently estimates
approximately 85% completion of conversion or compliance checking of its
internal systems including significant applications by the end of December 1998.
Integrated testing of major systems is planned to begin in late December 1998.
The company currently anticipates that the modifications and testing process of
all significant applications will be substantially complete by August 1999,
which is prior to any anticipated impact on its operating systems.
With regard to the supplier portion of the project, the company is
currently assessing the Year 2000 readiness of production and service parts
suppliers through a supplier survey process designed by an automotive industry
trade association, the Automotive Industry Action Group (AIAG). Suppliers have
been asked to respond to a compliance questionnaire. Responses to these
questionnaires have been received from about 25% of these suppliers. Based on
these responses, the company believes that approximately half of these suppliers
are making acceptable progress toward Year 2000 readiness. The company is also
assessing non-production suppliers. The supplier assurance process is expected
to be substantially complete by April 1999, including audits of select
suppliers. NFC has received written assurances from its major suppliers of cash
management services that they expect to address all of their significant Year
2000 issues on a timely basis.
The company is working with its independent dealers on their Year 2000
readiness and monitoring their progress. The company has contacted all dealers
and is working with its certified Dealer Business Systems Vendors to assist the
dealers in becoming Year 2000 compliant. Compliance of all certified dealers
systems is expected to be substantially complete by December 1999.
The company's total cost of the Year 2000 project, which will be funded
through operating cash flows, is estimated to be $34 million including $24
million of estimated expense and $10 million of capital expenditures.
Approximately $14 million has been expensed and approximately $4 million has
been capitalized through October 31, 1998. The remaining costs are estimated to
be incurred through fiscal year 2000. The company's annual 1999 expense for the
Year 2000 project is estimated to represent 5% of the company's 1999 information
technology budget. Other non-Year 2000 information technology efforts have not
been materially delayed or impacted by the Year 2000 project.
- 8 -
<PAGE>
The costs of the Year 2000 project and the dates on which the company
believes it will complete the Year 2000 modifications and testing are based on
management's best estimates, which were derived utilizing numerous assumptions
regarding future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
differ materially from those currently anticipated. Examples of factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and embedded technology, and similar
uncertainties. In addition, there can be no guarantee that the systems or
products of other entities, including the company's independent dealers, on
which the company relies will be converted on a timely basis, or that a failure
to convert by another company, or a conversion that is incompatible with the
company's systems, would not have a material adverse effect on the company.
The company currently believes that the most reasonably likely worst case
scenario with respect to the Year 2000 issue is the failure of a supplier,
including utility suppliers, to become Year 2000 compliant, which could result
in the temporary interruption of the supply of necessary products or services to
a manufacturing facility. This could result in interruptions in production for a
period of time, which in turn could result in potential lost sales and profits.
Additionally, marketing and administrative expense could increase if automated
functions would need to be performed manually.
The company currently believes that the most reasonably likely worst case
scenario for its financial services operations with respect to the Year 2000
issue would be the inability to sustain its current level of performance and
customer service. Additionally, a significant failure of the banking systems or
key entities in the financial markets could adversely affect the financial
services operations' ability to access various credit and money markets.
As part of its continuous assessment process, the company will develop
contingency plans as necessary. These plans could include, but are not limited
to, material banking, use of alternate suppliers and development of alternate
means to process dealer orders. The company currently plans to complete such
contingency planning by December 1999.
Navistar is using its best efforts to ensure that the Year 2000 impact on
its critical systems and processes will not affect its supply of product,
quality or service. However, in the event that the company is unable to complete
its remedial actions described above and is unable to implement adequate
contingency plans in the event problems arise, there could be a material adverse
effect on the company's business, financial position or results of operations.
The preceding "Year 2000" discussion contains various forward-looking
statements which represent the company's beliefs or expectations regarding
future events. When used in the "Year 2000" discussion, the words "believes,"
"expects," "estimates," "planned," "could," and similar expressions are intended
to identify forward-looking statements. Forward-looking statements include,
without limitation, the company's expectations as to when it will complete the
remediation and testing phases of its Year 2000 program as well as its Year 2000
contingency plans; its estimated cost of achieving Year 2000 readiness; and the
company's belief that its internal systems and equipment will be Year 2000
compliant in a timely manner. All forward-looking statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the projected results. Factors that may cause these differences include,
but are not limited to, the availability of qualified personnel and other
information technology resources; the ability to identify and remediate all
date-sensitive lines of computer code or to replace embedded computer chips in
affected systems or equipment; and the actions of governmental agencies or other
third parties with respect to Year 2000 problems.
- 9 -
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components. SFAS 131 establishes standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. SFAS 130 and SFAS 131 expand or modify
current disclosures and, accordingly, will have no impact on the company's
reported financial position, results of operations and cash flows. The company
is currently assessing the impact of SFAS 131 on its reported segments.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement defines whether
or not certain costs related to the development or acquisition of internal use
software should be expensed or capitalized and is effective for fiscal years
beginning after December 15, 1998. The company is currently assessing the impact
of this statement on its results of operations and financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," to establish accounting and reporting requirements for
derivative instruments. This standard requires recognition of all derivative
instruments in the statement of financial position as either assets or
liabilities, measured at fair value, and is effective for fiscal years beginning
after June 15, 1999. This statement additionally requires changes in the fair
value of derivatives to be recorded each period in current earnings or
comprehensive income depending on the intended use of the derivatives. The
company is currently assessing the impact of this statement on its results of
operations, financial position and cash flows.
INCOME TAXES
The Statement of Financial Condition at October 31, 1998 and 1997 includes
a deferred tax asset of $912 million and $934 million, respectively, net of
valuation allowances of $264 million and $309 million, respectively, related to
future tax benefits. The deferred tax assets have been reduced by the valuation
allowance as management believes it is more likely than not that some portion of
the deferred tax asset may not be realized in the future.
The deferred tax asset includes the tax benefits associated with cumulative
tax losses of $1,597 million and temporary differences, which represent the
cumulative expense of $1,437 million recorded in the Statement of Income that
has not been deducted on the company's tax returns. The valuation allowance at
October 31, 1998 assumes that it is more likely than not that approximately $695
million of cumulative tax losses will not be realized before their expiration
date. Realization of the net deferred tax asset is dependent on the generation
of approximately $2,400 million of future taxable income, of which an average of
approximately $70 million would need to be generated annually for the 13-year
period 1999 through 2011. The remaining taxable income, which represents the
realization of tax benefits associated with temporary differences, does not need
to be generated until subsequent to 2011. Until the company has utilized its
significant NOL carryforwards, the cash payment of federal income taxes will be
minimal. See Note 3 to the Financial Statements.
- 10 -
<PAGE>
The company performs extensive analysis to determine the amount of the
deferred tax asset. Such analysis is based on the premise that the company is,
and will continue to be, a going concern and that it is more likely than not
that deferred tax benefits will be realized through the generation of future
taxable income. Management reviews all available evidence, both positive and
negative, to assess the long-term earnings potential of the company. The
financial results are evaluated using a number of alternatives in economic
cycles at various industry volume conditions. Factors considered are the
company's 18-consecutive-year leadership in the combined market share of Class 5
through 8 trucks and recognition as a worldwide leading producer of mid-range
diesel engines.
As a result of the continued successful implementation of its manufacturing
strategy, including the reinstatement of the NGV program, the continued strength
of industry volume conditions, extension of the Ford diesel contract, new
program initiatives and other positive operating indicators, management
initiated an extensive review of its projected future taxable income. This
review was completed during the fourth quarter of 1998 and resulted in a
reduction to the deferred tax asset valuation allowance of $45 million which has
been recorded as a reduction in income tax expense resulting in an effective tax
rate of 27%. Management believes that, with the combination of available tax
planning strategies and the maintenance of significant market share, earnings
are achievable in order to realize the net deferred tax asset of $912 million.
Reconciliation of the company's income before income taxes for financial
statement purposes to United States taxable income for the years ended October
31 is as follows:
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------
Income before income taxes. ........... $ 410 $ 242 $ 105
Exclusion of (income) loss
of foreign subsidiaries.............. (7) (3) 3
State income taxes..................... (3) (2) (2)
Temporary differences.................. (169) 145 (284)
Other ................................. (12) 6 -
------ ------ ------
Taxable income (loss)..... .......... $ 219 $ 388 $ (178)
------ ------ ------
BUSINESS ENVIRONMENT
Sales of Class 5 through 8 trucks have been cyclical, with demand affected
by such economic factors as industrial production, construction, demand for
consumer durable goods, interest rates and the earnings and cash flow of dealers
and customers. Reflecting the stability of the general economy, demand for new
trucks remained strong during 1998. An improvement in the number of new truck
orders has increased the company's order backlog to 72,100 units at October 31,
1998, from 45,300 units at October 31, 1997. Historically, retail deliveries
have been impacted by the rate at which new truck orders are received.
Therefore, the company continually evaluates order receipts and backlog
throughout the year and will balance production with demand as appropriate.
The company currently projects 1999 United States and Canadian Class 8
heavy truck demand to be 224,700 units, a 3% decrease from 1998. Class 5, 6 and
7 medium truck demand, excluding school buses, is forecast at 124,100 units,
slightly lower than in 1998. Demand for school buses is expected to decrease
slightly in 1999 to 31,300 units. Mid-range diesel engine shipments by the
company to original equipment manufacturers in 1999 are expected to be 259,100
units, 21% higher than in 1998. The company's service parts sales are projected
to grow 10% to approximately $935 million.
- 11 -
<PAGE>
At current demand levels, the entire truck industry is operating at or near
capacity. Accordingly, constraints have been placed on the company's ability to
meet certain customers' demands because of component parts availability.
During 1997, the company entered into a 10-year agreement, effective with
model year 2003, to supply newly designed, advanced technology engines through
the year 2012 to Ford Motor Company for use in its diesel-powered light trucks
and vans. The company's current engine agreement with Ford was extended through
model year 2002. During March 1998, the company announced that it had been
selected to negotiate an extended term agreement to supply diesel engines to
Ford Motor Company for certain under 8,500 lbs. GVW light duty trucks and sport
utility vehicles beginning with the 2002 model year.
In September 1998, the company formally announced the start of its
distribution of medium and heavy trucks to customers in Brazil. The company also
announced its intent to form a joint venture to develop and manufacture
proprietary next generation diesel fuel injectors incorporating digital valve
technology. In October 1998, the company announced that it signed a letter of
intent to form a joint venture with a Brazilian company to manufacture diesel
engines in South America for a broad range of truck applications.
- 12 -
<PAGE>
STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY
Management of Navistar International Corporation and its subsidiaries is
responsible for the preparation and for the integrity and objectivity of the
accompanying financial statements and other financial information in this
report. The financial statements have been prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's estimates and judgments.
The accompanying financial statements have been audited by Deloitte &
Touche LLP, independent auditors. Management has made available to Deloitte &
Touche LLP all the company's financial records and related data, as well as the
minutes of the Board of Directors' meetings. Management believes that all
representations made to Deloitte & Touche LLP during its audit were valid and
appropriate.
Management is responsible for establishing and maintaining a system of
internal controls throughout its operations that provides reasonable assurance
as to the integrity and reliability of the financial statements, the protection
of assets from unauthorized use and the execution and recording of transactions
in accordance with management's authorization. Management believes that the
company's system of internal controls is adequate to accomplish these
objectives. The system of internal controls, which provides for appropriate
division of responsibility, is supported by written policies and procedures that
are updated by management, as necessary. The system is tested and evaluated
regularly by the company's internal auditors as well as by the independent
auditors in connection with their annual audit of the financial statements. The
independent auditors conduct their audit in accordance with generally accepted
auditing standards and perform such tests of transactions and balances as they
deem necessary. Management considers the recommendations of its internal
auditors and independent auditors concerning the company's system of internal
controls and takes the necessary actions that are cost-effective in the
circumstances to respond appropriately to the recommendations presented.
The Audit Committee of the Board of Directors, composed of four
non-employee Directors, meets periodically with the independent auditors,
management, general counsel and internal auditors to satisfy itself that such
persons are properly discharging their responsibilities regarding financial
reporting and auditing. In carrying out these responsibilities, the Committee
has full access to the independent auditors, internal auditors, general counsel
and financial management in scheduled joint sessions or private meetings as in
the Committee's judgment seem appropriate. Similarly, the company's independent
auditors, internal auditors, general counsel and financial management have full
access to the Committee and to the Board of Directors and each is responsible
for bringing before the Committee or its Chair, in a timely manner, any matter
deemed appropriate to the discharge of the Committee's responsibility.
John R. Horne
Chairman, President and
Chief Executive Officer
Robert C. Lannert
Executive Vice President
and Chief Financial Officer
- 13 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
Navistar International Corporation,
Its Directors and Shareowners:
We have audited the Statement of Financial Condition of Navistar
International Corporation and Consolidated Subsidiaries as of October 31, 1998
and 1997, and the related Statements of Income and of Cash Flow for each of the
three years in the period ended October 31, 1998. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Navistar
International Corporation and Consolidated Subsidiaries at October 31, 1998 and
1997, and the results of their operations and their cash flow for each of the
three years in the period ended October 31, 1998, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
December 14, 1998
Chicago, Illinois
- 14 -
<PAGE>
STATEMENT OF INCOME
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
For the Years Ended October 31
(Millions of dollars,
except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------
Sales and revenues
Sales of manufactured products ........... $7,629 $6,147 $5,508
Finance and insurance revenue ............ 201 174 197
Other income ............................. 55 50 49
------ ------ ------
Total sales and revenues ............... 7,885 6,371 5,754
------ ------ ------
Costs and expenses
Cost of products and services sold ....... 6,498 5,292 4,827
Postretirement benefits .................. 174 215 220
Engineering and research expense ......... 192 124 129
Marketing and administrative expense ..... 427 365 319
Interest expense ......................... 105 74 83
Other expenses ........................... 79 59 71
------ ------ ------
Total costs and expenses ............... 7,475 6,129 5,649
------ ------ ------
Income before income taxes ........... 410 242 105
Income tax expense ................... 111 92 40
------ ------ ------
Net income ............................... 299 150 65
Less dividends on
Series G preferred stock ............... 11 29 29
------ ------ ------
Net income applicable to common stock .... $ 288 $ 121 $ 36
====== ====== ======
- ----------------------------------------------------------------------------
Earnings per share
Basic ................................ $ 4.16 $ 1.66 $ .49
Diluted .............................. $ 4.11 $ 1.65 $ .49
Average shares outstanding (millions)
Basic ................................ 69.1 73.1 73.7
Diluted .............................. 70.0 73.6 73.8
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
- 15 -
<PAGE>
STATEMENT OF FINANCIAL CONDITION
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
As of October 31 (Millions of dollars) 1998 1997
- ----------------------------------------------------------------------------
ASSETS
Cash and cash equivalents ................ $ 440 $ 609
Marketable securities .................... 624 356
-------- -------
1,064 965
Receivables, net ......................... 2,146 1,755
Inventories .............................. 505 496
Property and equipment, net ............. 1,106 835
Investments and other assets ............. 246 319
Intangible pension assets ................ 199 212
Deferred tax asset, net .................. 912 934
-------- --------
Total assets ............................. $ 6,178 $ 5,516
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Accounts payable, principally trade ...... $ 1,273 $ 1,100
Debt:
Manufacturing operations ............... 450 92
Financial services operations .......... 1,672 1,224
Postretirement benefits liability ........ 934 1,186
Other liabilities ........................ 1,080 894
-------- --------
Total liabilities .................... 5,409 4,496
-------- --------
Commitments and contingencies
Shareowners' equity
Series G convertible preferred stock ...... - 240
Series D convertible
junior preference stock ................ 4 4
Common stock (75.3 million and 52.2 million
shares issued).......................... 2,139 1,659
Class B Common stock
(0 million and 23.1 million shares issued) - 471
Retained earnings (deficit) ............... (1,160) (1,301)
Common stock held in treasury, at cost
(9.1 million and 2.9 million shares held). (214) (53)
-------- --------
Total shareowners' equity ............. 769 1,020
-------- --------
Total liabilities and shareowners' equity . $ 6,178 $ 5,516
======== ========
- --------------------------------------------------------------------------
See Notes to Financial Statements.
- 16 -
<PAGE>
STATEMENT OF CASH FLOW
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
For the Years Ended October 31
(Millions of dollars) 1998 1997 1996
- ------------------------------------------------------------------------------
Cash flow from operations
Net income .............................. $ 299 $ 150 $ 65
Adjustments to reconcile net income
to cash provided by operations:
Depreciation and amortization ....... 159 120 105
Deferred income taxes ............... 149 82 37
Deferred tax asset valuation
allowance adjustment .............. (45) - -
Postretirement benefits funding
in excess of expense .............. (373) (128) 33
Other, net .......................... (16) (51) (28)
Change in operating assets and liabilities:
Receivables ......................... (192) (194) 186
Inventories ......................... (13) (25) (47)
Prepaid and other current assets .... (1) 4 1
Accounts payable .................... 192 288 (110)
Other liabilities ................... 202 137 (123)
-------- -------- --------
Cash provided by operations ........... 361 383 119
-------- -------- --------
Cash flow from investment programs
Purchase of retail notes
and lease receivables ................. (1,263) (970) (1,108)
Collections/sales of retail notes
and lease receivables ................. 1,071 1,054 1,109
Purchase of marketable securities ....... (787) (512) (585)
Sales or maturities
of marketable securities .............. 521 557 752
Capital expenditures .................... (305) (172) (117)
Property and equipment
leased to others ...................... (125) (42) (73)
Other investment programs, net .......... (10) 3 (8)
-------- -------- --------
Cash used in investment programs ...... (898) (82) (30)
-------- -------- --------
Cash flow from financing activities
Issuance of debt ......................... 493 211 -
Principal payments on debt ............... (119) (46) (136)
Net increase (decrease)in notes and debt
outstanding under bank revolving credit
facility and asset-backed and other
commercial paper programs .............. 348 (285) 81
Mexican credit facility .................. 84 - -
Redemption of Series G preferred stock ... (240) - -
Dividends paid ........................... (11) (29) (29)
Repurchase of common stock ............... (189) (23) -
Proceeds from reissuance of Treasury shares 28 - -
Debt and equity issuance costs ........... (26) (7) (3)
-------- -------- --------
Cash provided by (used in)
financing activities ................. 368 (179) (87)
-------- -------- --------
Cash and cash equivalents
(Decrease) increase during the year .... (169) 122 2
At beginning of the year ............... 609 487 485
-------- -------- --------
Cash and cash equivalents
at end of the year ..................... $ 440 $ 609 $ 487
======== ======== ========
- ------------------------------------------------------------------------------
See Notes to Financial Statements.
- 17 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1998
1. SUMMARY OF ACCOUNTING POLICIES
Basis of Consolidation
Navistar International Corporation is a holding company, whose principal
operating subsidiary is Navistar International Transportation Corp.
(Transportation). As used hereafter, "company" or "Navistar" refers to Navistar
International Corporation and its consolidated subsidiaries. The consolidated
financial statements include the results of the company's manufacturing
operations and its wholly owned financial services subsidiaries. The effects of
transactions between the manufacturing and financial services operations have
been eliminated to arrive at the consolidated totals. The distinction between
current and long-term assets and liabilities in the Statement of Financial
Condition is not meaningful when finance, insurance and manufacturing operations
are combined; therefore, the company has adopted an unclassified presentation.
Certain 1997 and 1996 amounts have been reclassified to conform with the
presentation used in the 1998 financial statements.
The company operates in two principal industry segments: manufacturing and
financial services. Manufacturing operations are responsible for the manufacture
and marketing of medium and heavy trucks, including school buses, mid-range
diesel engines and service parts primarily in the United States and Canada as
well as in Mexico, Brazil and other selected export markets. Based on assets and
revenues, manufacturing operations represent the majority of the company's
business activities. The financial services operations consist primarily of
Navistar Financial Corporation (NFC) and the company's foreign finance
subsidiaries. The financial services operations provide wholesale, retail and
lease financing, and domestic commercial physical damage and liability insurance
coverage to the company's dealers and retail customers and to the general public
through an independent insurance agency system.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Manufacturing operations recognize shipments of new trucks and service
parts to independent dealers and retail customers as sales. Price allowances,
expected in the normal course of business, and the cost of special incentive
programs are recorded at the time of sale. Engine sales are recognized at the
time of shipment to original equipment manufacturers. An allowance for losses on
receivables is maintained at an amount that management considers appropriate in
relation to the outstanding receivables portfolio, and it is charged when
receivables are determined to be uncollectible.
Financial services operations recognize finance charges on finance
receivables as income over the term of the receivables utilizing the interest
method. Operating lease revenues are recognized on a straight-line basis over
- 18 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
the life of the lease. Selected receivables are sold and securitized to public
and private investors with limited recourse. Gains or losses on sales of
receivables are credited or charged to revenue in the period in which the sale
occurs. Financial services operations continue to service the sold receivables
and receive a fee for such services from the investor. An allowance for losses
is maintained at a level deemed appropriate based on such factors as overall
portfolio quality, historical loss experience and current economic conditions.
Insurance premiums are earned on a prorata basis over the terms of the
policies. Underwriting losses and outstanding loss reserve balances are based on
individual case estimates of the ultimate cost of settlement, including actual
losses, and determinations of amounts required for losses incurred but not
reported.
Cash and Cash Equivalents
All highly liquid financial instruments with maturities of three months or
less from date of purchase, consisting primarily of bankers' acceptances,
commercial paper, United States government securities and floating rate notes,
are classified as cash equivalents in the Statement of Financial Condition and
Statement of Cash Flow.
Marketable Securities
Marketable securities are classified as available-for-sale securities and
are reported at fair value. The difference between amortized cost and fair value
is recorded as an adjustment to shareowners' equity, net of applicable deferred
taxes.
Inventories
Inventories are valued at the lower of average cost or market.
Property and Other Long-Lived Assets
Significant expenditures for replacement of equipment, tooling and pattern
equipment, and major rebuilding of machine tools are capitalized. Depreciation
and amortization are generally provided on the straight-line basis over the
estimated useful lives of the assets, which average 35 years for buildings and
improvements and eight years for machinery and equipment. Gains and losses on
property disposals are included in other income and expense. The carrying amount
of all long-lived assets is evaluated periodically to determine if adjustment to
the depreciation and amortization period or to the unamortized balance is
warranted. Such evaluation is based principally on the expected utilization of
the long-lived assets and the projected, undiscounted cash flows of the
operations in which the long-lived assets are deployed.
- 19 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Engineering and Research Expense
Engineering and research expense includes research and development expenses
and routine ongoing costs associated with improving existing products and
manufacturing processes. Research and development expenses, which include
activities for the introduction of new truck and diesel engine products and
major improvements to existing products and processes, totaled $138 million, $85
million and $90 million in 1998, 1997 and 1996, respectively.
Product Related Costs
The company accrues warranty expense at the time of end product sale.
Product liability expense is accrued based on the estimate of total future
payments to settle product liability claims.
Derivative Financial Instruments
The company uses derivatives to transfer or reduce risks of foreign
exchange and interest rate volatility and to potentially increase the return on
invested funds. NFC may use forward contracts to hedge the fair value of its
fixed rate receivables against changes in market interest rates in anticipation
of the sale of such receivables. NFC also uses interest rate swaps to reduce
exposure to interest rate changes when it sells fixed rate receivables on a
variable rate basis. For the protection of investors in NFC's debt securities,
NFC may write interest rate caps when fixed rate receivables are sold on a
variable rate basis. The company also uses derivatives such as forward contracts
to reduce its exposure to foreign exchange volatility.
Derivative financial instruments are generally held for purposes other than
trading. Gains or losses related to hedges of anticipated transactions are
deferred and are recognized in income when the effects of the anticipated
transactions are recognized in earnings. The principal balance of receivables
owned and expected to be sold by NFC equals or exceeds the notional amount of
open forward contracts. Additionally, the value of committed Canadian dollar
truck sales generally exceeds the notional amount of related open derivative
contracts.
Stock-Based Compensation
Effective November 1, 1996, the company adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). Accordingly, the company elected to
continue to account for stock-based compensation plans consistent with prior
years.
Foreign Currency
The financial statements of foreign subsidiaries are translated to U.S.
dollars using the period-end exchange rate for assets and liabilities and a
weighted-average exchange rate for each period for revenues and expenses. The
local currency is the functional currency for most of the company's foreign
subsidiaries and translation adjustments for these subsidiaries are recorded in
shareowners' equity. The U.S. dollar is the functional currency for the
company's Mexican subsidiaries and, accordingly, their translation gains and
losses are included in earnings. Transaction gains and losses arising from
fluctuations in currency exchange rates on transactions denominated in
currencies other than the functional currency, except those transactions which
hedge sales commitments, are recorded in earnings as incurred.
- 20 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareowners by the weighted-average number of basic
common shares outstanding for the period. Diluted earnings per share assumes the
issuance of Common Stock for other potentially dilutive equivalent shares
outstanding.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components. SFAS 131 establishes standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. SFAS 130 and SFAS 131 expand or modify
current disclosures and, accordingly, will have no impact on the company's
reported financial position, results of operations and cash flows. The company
is assessing the impact of SFAS 131 on its reported segments.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement defines whether
or not certain costs related to the development or acquisition of internal use
software should be expensed or capitalized and is effective for fiscal years
beginning after December 15, 1998. The company is currently assessing the impact
of this statement on its results of operations and financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," to establish accounting and reporting requirements for
derivative instruments. This standard requires recognition of all derivative
instruments in the statement of financial position as either assets or
liabilities, measured at fair value, and is effective for fiscal years beginning
after June 15, 1999. This statement additionally requires changes in the fair
value of derivatives to be recorded each period in current earnings or
comprehensive income depending on the intended use of the derivatives. The
company is currently assessing the impact of this statement on the company's
results of operations, financial position and cash flows.
- 21 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. POSTRETIREMENT BENEFITS
Effective October 31, 1998, the company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS 132). The information for 1998, 1997 and 1996 has
been presented in conformity with the requirements of SFAS 132.
The company provides postretirement benefits to substantially all of its
employees. Costs associated with postretirement benefits include pension and
postretirement health care expenses for employees, retirees and surviving
spouses and dependents. In addition, as part of the 1993 restructured health
care and life insurance plans, profit sharing payments to the Retiree
Supplemental Benefit Trust are required.
The cost of postretirement benefits is segregated as a separate component
in the Statement of Income and is as follows:
Millions of dollars 1998 1997 1996
- ----------------------------------------------------------------------------
Pension expense......................... $ 74 $ 129 $ 160
Health/life insurance................... 42 66 60
Profit sharing provision to Trust....... 58 20 -
------ ------ ------
Total postretirement benefits expense... $ 174 $ 215 $ 220
====== ====== ======
Generally, the pension plans are non-contributory. The company's policy is
to fund its pension plans in accordance with applicable United States and
Canadian government regulations and to make additional payments as funds are
available to achieve full funding of the accumulated benefit obligation. At
October 31, 1998, all legal funding requirements had been met.
In 1993, a trust was established to provide a vehicle for funding the
health care liability through company contributions and retiree premiums. The
company was required to make a prefunding contribution of $200 million to the
trust on or prior to June 30, 1998. This contribution was made during November
1997.
Postretirement Benefits Expense
Net periodic benefits expense included in the Statement of Income is
composed of the following:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------- -----------------------
Millions of dollars 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost for benefits
earned during the period... $ 37 $ 34 $ 34 $ 14 $ 13 $ 14
Interest on obligation........ 231 238 231 98 96 84
Net amortization
costs and other............. 88 99 104 2 - -
Less expected return on assets (282) (242) (209) (72) (43) (38)
------ ------ ------ ------- ------ ------
Net postretirement benefits
expense..................... $ 74 $ 129 $ 160 $ 42 $ 66 $ 60
====== ====== ====== ====== ====== ======
- 22 -
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. POSTRETIREMENT BENEFITS (continued)
Postretirement Expense (continued)
"Amortization costs" include amortization of cumulative gains and losses
over the expected remaining service life of employees and amortization of the
initial transition liability over 15 years. Also included is the expense related
to yearly lump-sum payments to retirees required by negotiated labor contracts
and amortization of plan amendments. Plan amendments are recognized over the
remaining service life of employees, except for those plan amendments arising
from negotiated labor contracts, which are amortized over the length of the
contract.
The funded status of the company's plans as of October 31, 1998 and 1997
and a reconciliation with amounts recognized in the Statement of Financial
Condition are provided below.
Pension Benefits Other Benefits
---------------- ----------------
Millions of dollars 1998 1997 1998 1997
- ----------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation
at beginning of year........ $3,299 $3,034 $1,374 $1,225
Service cost ................ 37 34 14 13
Interest on obligation........ 231 238 98 96
Actuarial net loss............ 186 257 164 123
Benefits paid ................ (272) (264) (90) (83)
------ ------ ------ ------
Benefit obligation
at end of year.............. 3,481 3,299 1,560 1,374
------ ------ ------ ------
Change in plan assets
Fair value of plan assets
at beginning of year......... 2,900 2,427 486 401
Actual return on plan assets... 187 505 47 102
Employer contribution.......... 212 227 210 11
Benefits paid ................. (267) (259) (50) (28)
------ ------ ------ ------
Fair value of plan assets
at end of year............... 3,032 2,900 693 486
------ ------ ------ ------
Funded status ................. (449) (399) (867) (888)
Unrecognized actuarial net loss 587 322 344 152
Unrecognized transition amount. 133 167 - -
Unrecognized prior service cost 69 89 (5) (5)
------- ------ ------ ------
Net amount recognized.......... $ 340 $ 179 $ (528) $ (741)
======= ====== ====== ======
Amounts recognized
in the Statement of
Financial Condition consist of:
Prepaid benefit cost...... $ 39 $ 120 $ - $ -
Accrued benefit liability. (406) (445) (528) (741)
Intangible asset.......... 199 212 - -
Accumulated reduction in
shareowners' equity..... 508 292 - -
------ ------ ------ ------
Net amount recognized.......... $ 340 $ 179 $ (528) $ (741)
====== ====== ====== ======
The accumulated reduction in shareowners' equity is recorded in the
Statement of Financial Condition net of deferred income taxes of $172 million
and $97 million at October 31, 1998 and 1997, respectively.
- 23 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. POSTRETIREMENT BENEFITS (continued)
Postretirement Expense (continued)
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $3,393 million, $3,336 million and $2,931 million,
respectively, as of October 31, 1998, and $2,067 million, $2,064 million and
$1,621 million, respectively, as of October 31, 1997.
During 1998, the pension plans purchased 3 million shares of the company's
Common Stock. At October 31, 1998, these shares accounted for approximately 2%
of the plans' assets.
The weighted average rate assumptions used in determining expenses and
benefit obligations were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------- -----------------------
Millions of dollars 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate used
to determine present value
of benefit obligation
at end of year............... 6.8% 7.3% 8.1% 7.1% 7.4% 8.2%
Expected long-term rate
of return on plan assets
for the year.................. 9.7% 9.8% 9.0% 10.8% 11.1% 10.5%
Expected rate of increase
in future compensation levels. 3.5% 3.5% 3.5% N/A N/A N/A
</TABLE>
For 1999, the weighted average rate of increase in the per capita cost of
covered health care benefits is projected to be 9.7%. The rate is projected to
decrease to 5.0% by the year 2005 and remain at that level each year thereafter.
The effect of changing the health care cost trend rate by one-percentage point
for each future year is as follows:
One-Percentage- One-Percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total of service
and interest cost components.. $ 18 $ (15)
Effect on postretirement
benefit obligation............ 191 (158)
- 24 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes
consist of the following:
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------
Domestic................................ $ 403 $ 239 $ 108
Foreign................................. 7 3 (3)
------ ------ ------
Total income before income taxes........ $ 410 $ 242 $ 105
====== ====== ======
The components of income tax expense consist of the following:
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------
Current:
Federal.............................. $ 4 $ 8 $ 1
State and local...................... 3 2 2
------ ------ ------
Total current expense................ 7 10 3
------ ------ ------
Deferred:
Federal.............................. 127 71 32
State and local...................... 19 11 5
Foreign.............................. 3 - -
------ ------ ------
Total deferred expense............... 149 82 37
------ ------ ------
Less valuation allowance adjustment.... (45) - -
------ ------ ------
Total income tax expense............... $ 111 $ 92 $ 40
====== ====== ======
The deferred tax expense does not represent cash payment of income taxes
and was primarily generated by the utilization of net operating loss (NOL)
carryforwards and the increase of temporary differences, and will not require
future cash payments. Consolidated tax payments made during 1998, 1997 and 1996
were $7 million, $10 million and $3 million, respectively.
- 25 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. INCOME TAXES (continued)
The relationship of the tax expense to income before taxes for 1998, 1997
and 1996 differs from the U.S. statutory rate (35%) because of state income
taxes and the benefit of NOLs in foreign countries. Also, the 1998 effective tax
rate reflects a $45 million reduction in the deferred tax asset valuation
allowance. A valuation allowance has been provided for those NOL carryforwards
and temporary differences which are estimated to expire before they are
utilized. The effective tax rates for the years 1998, 1997 and 1996 were 27.0%,
38.0% and 38.1%, respectively.
Undistributed earnings of foreign subsidiaries were $50 million and $35
million at October 31, 1998 and 1997, respectively. Taxes have not been provided
on these earnings because no withholding taxes are applicable upon repatriation
and U.S. tax would be substantially offset by utilization of NOL carryforwards.
Taxpaying entities of the company offset all deferred tax assets and
liabilities within each tax jurisdiction. The components of the deferred tax
asset (liability) at October 31 are as follows:
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
United States
Deferred tax assets:
Net operating loss carryforwards.......... $ 590 $ 680
Alternative minimum tax................... 24 19
Product liability and warranty............ 106 97
Other liabilities......................... 232 168
Postretirement benefits................... 347 353
------ ------
Total deferred tax assets................. 1,299 1,317
------ ------
Deferred tax liabilities:
Prepaid pension assets.................... (117) (58)
Depreciation.............................. (30) (37)
------ ------
Total deferred tax liabilities............ (147) (95)
------ ------
Total deferred tax assets................. 1,152 1,222
Less valuation allowance.................. (243) (288)
------ ------
Net deferred U.S. tax assets.............. $ 909 $ 934
====== ======
Foreign
Deferred tax assets:
Net operating loss carryforwards.......... $ 5 $ 2
Postretirement benefits................... 19 19
------ ------
Total deferred tax assets................. 24 21
Less valuation allowance.................. (21) (21)
------ ------
Net deferred foreign tax assets........... 3 -
------ ------
Other deferred tax liabilities........... (20) (16)
------ ------
Net deferred foreign tax liabilities...... $ (17) $ (16)
====== ======
Amounts recognized in the
Statement of Financial Condition:
Deferred tax assets...................... $ 912 $ 934
====== ======
Other liabilities......................... $ (20) $ (16)
====== ======
- 26 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. INCOME TAXES (continued)
At October 31, 1998, the company had $1,581 million of domestic and $16
million of foreign NOL carryforwards available to offset future taxable income.
Such carryforwards reflect income tax losses incurred which will expire as
follows, in millions of dollars:
2001 ........................................ $ 104
2002 ........................................ 47
2004 ........................................ 235
2005 ........................................ 7
2006 ........................................ 127
2007 ........................................ 53
2008 through 2011............................. 1,024
------
Total ........................................ $1,597
======
Additionally, the reversal of net temporary differences of $1,437 million
as of October 31, 1998 will create net tax deductions which, if not utilized
previously, will expire subsequent to 2011.
- 27 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
4. MARKETABLE SECURITIES
The fair value of marketable securities is estimated based on quoted market
prices, when available. If a quoted price is not available, fair value is
estimated using quoted market prices for similar financial instruments.
Information related to the company's marketable securities at October 31 is
as follows:
1998 1997
-------------------- ---------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- -----------------------------------------------------------------------------
Corporate securities............. $ 336 $ 338 $ 150 $ 150
U.S. government securities....... 171 174 88 89
Mortgage and
asset-backed securities........ 85 86 86 86
Foreign government securities.... 6 7 10 10
------ ------ ------ ------
Total debt securities......... 598 605 334 335
Equity securities................ 17 19 16 21
------ ------ ------ ------
Total marketable securities...... $ 615 $ 624 $ 350 $ 356
====== ====== ====== ======
Contractual maturities of marketable debt securities at October 31 are as
follows:
1998 1997
-------------------- ---------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- ------------------------------------------------------------------------------
Due in one year or less.......... $ 189 $ 190 $ 113 $ 114
Due after one year
through five years............. 297 301 100 100
Due after five years
through 10 years............... 17 18 25 25
Due after 10 years............... 10 10 10 10
------ ------ ------ ------
513 519 248 249
Mortgage and
asset-backed securities........ 85 86 86 86
------ ------ ------ ------
Total debt securities............ $ 598 $ 605 $ 334 $ 335
====== ====== ====== ======
Gross gains and losses realized on sales or maturities of marketable
securities were not material for each of the two years. At October 31, 1998 and
1997, a domestic insurance subsidiary had $13 million and $15 million,
respectively, of marketable securities which were on deposit with various state
departments of insurance or otherwise not available. These securities are
included in total marketable securities balances at October 31, 1998 and 1997.
- 28 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. RECEIVABLES
Receivables at October 31 are summarized by major classification as
follows:
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Accounts receivable....................... $ 611 $ 671
Retail notes and lease financing.......... 925 706
Wholesale notes........................... 261 46
Amounts due from sales of receivables..... 246 233
Notes receivable.......................... 109 101
Other .................................... 27 29
Allowance for losses...................... (33) (31)
------ ------
Total receivables, net.............. $2,146 $1,755
====== ======
NFC purchases the majority of the wholesale notes receivable and some
retail notes and accounts receivable arising from Transportation's operations in
the United States.
A portion of NFC's funding for retail and wholesale notes comes from sales
of receivables by NFC to third parties with limited recourse. Proceeds from
sales of retail notes receivable, net of underwriting costs, were $953 million
in 1998, $958 million in 1997 and $982 million in 1996. Uncollected sold retail
and wholesale receivable balances totaled $2,145 million and $1,968 million as
of October 31, 1998 and 1997, respectively.
Contractual maturities of accounts receivable, retail notes and lease
financing and wholesale notes, including unearned finance income, at October 31,
1998 were: 1999 - $1,079 million, 2000 - $325 million, 2001 - $219 million, 2002
- - $175 million, 2003 - $119 million, and 2004 and thereafter - $28 million.
Unearned finance income totaled $148 million at October 31, 1998. Notes
receivable are due upon demand from a limited partnership that invests in S&P
500 stock index arbitrage.
- 29 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. INVENTORIES
Inventories at October 31 are as follows:
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Finished products......................... $ 223 $ 225
Work in process........................... 69 106
Raw materials and supplies................ 213 165
------ ------
Total inventories......................... $ 505 $ 496
====== ======
7. PROPERTY AND EQUIPMENT
At October 31, property and equipment includes the following:
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Land .................................... $ 18 $ 18
------ ------
Buildings, machinery and equipment at cost:
Plants................................ 1,419 1,200
Distribution.......................... 94 86
Construction in progress.............. 130 117
Net investment in operating leases.... 218 124
Other................................. 203 137
------ ------
Total property........................ 2,082 1,682
Less accumulated depreciation
and amortization.................... (976) (847)
------ ------
Total property and equipment, net. $1,106 $ 835
====== ======
Total property includes property under capitalized lease obligations of $25
million at October 31, 1998 and 1997. Future minimum rentals on net investments
in operating leases are: 1999 - $63 million, 2000 - $54 million, 2001 - $35
million, 2002 - $18 million and thereafter - $5 million. Each of these assets is
depreciated on a straight-line basis over the term of the lease in an amount
necessary to reduce the leased vehicle to its estimated residual value at the
end of the lease term.
- 30 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. DEBT
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Manufacturing operations
Notes payable and current maturities
of long-term debt................... $ 4 $ 13
------ ------
8% Senior Subordinated Notes, due 2008 250 -
7% Senior Notes, due 2003............. 100 -
9% Sinking Fund Debentures, due 2004.. - 45
8% Secured Note, due 2002,
secured by plant assets ............ - 21
Mexican credit facility............... 84 -
Capitalized leases and other.......... 12 13
------ ------
Total long-term debt............... 446 79
------ ------
Manufacturing operations debt......... 450 92
------ ------
Financial services operations
Commercial paper...................... 22 141
Capitalized leases.................... 39 13
Current maturities of long-term debt.. 82 -
------ ------
Total short-term debt.............. 143 154
------ ------
Bank revolver, variable rate, due 2003 19 -
Bank revolver, variable rate, due 2005 20 -
Asset-backed commercial paper program,
variable rate, due 2001............ 401 400
Bank revolver, variable rate, due 2001 815 393
------ ------
Total senior debt.................. 1,255 793
------ ------
8 7/8% Subordinated Senior Notes,
due 1998............................. - 94
9% Subordinated Senior Notes, due 2002. 100 100
------ ------
Total subordinated debt............. 100 194
------ ------
Capitalized leases, 4.8% to 5.6%,
due serially through 2004............ 174 83
------ ------
Total long-term debt................ 1,529 1,070
------ ------
Financial services operations debt........ 1,672 1,224
------ ------
Total debt................................ $2,122 $1,316
====== ======
The effective annual interest rate on manufacturing notes payable was 6.8%
in 1998, 8.3% in 1997 and 8.9% in 1996. Consolidated interest payments were $103
million, $66 million and $83 million in 1998, 1997 and 1996, respectively.
- 31 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. DEBT (continued)
During 1998, the company arranged financing for $164 million of funds
denominated in U.S. dollars and Mexican pesos to be used for investment in the
company's Mexican operations. As of October 31, 1998, borrowings outstanding of
this line were $123 million of which 54% is denominated in dollars and 46% in
pesos. The interest rates on the dollar-denominated debt are a negotiated fixed
rate or a variable rate based either on LIBOR or the Federal Funds Rate. On
peso-denominated debt the interest rate is based on the Interbank Interest
Equilibrium Rate. The effective interest rate for the period was 16.8%.
During the second quarter of 1998, the company's manufacturing operations
issued $100 million 7% Senior Notes due 2003 and $250 million 8% Senior
Subordinated Notes due 2008. The proceeds of the Senior Notes were used to
prepay the 8% Secured Note due 2002 and were used to redeem the 9% Sinking Fund
Debentures on June 15, 1998. The proceeds of the Senior Subordinated Notes were
used to redeem the Series G Preferred Stock and to pay related dividends
thereon.
NFC issues commercial paper with varying terms and has short-term
borrowings with various banks on a noncommitted basis. Compensating cash
balances and commitment fees are not required under these borrowings.
The aggregate annual maturities for debt for the years ended October 31 are
as follows:
Financial
Manufacturing Services
Millions of dollars Operations Operations Total
- -------------------------------------------------------------------------------
1999 .................................. $ 4 $ 143 $ 147
2000 .................................. 27 48 75
2001 .................................. 33 1,269 1,302
2002 .................................. 31 142 173
2003 .................................. 101 50 151
Thereafter................................ 254 20 274
------ ------ ------
Total.................................. $ 450 $1,672 $2,122
====== ====== ======
Weighted average interest rate on total debt, including short-term, and the
effect of discounts and related amortization for the years ended:
October 31, 1998..................... 9.3% 6.4% 7.1%
October 31, 1997..................... 10.3% 6.4% 6.8%
At October 31, 1998, NFC has a $925 million contractually committed bank
revolving credit facility and a $400 million asset-backed commercial paper
(ABCP) program supported by a bank liquidity facility plus $14 million of trust
certificates issued in connection with the formation of the ABCP trust.
Available funding under the bank revolving credit facility and the ABCP program
was $124 million, of which $22 million provided funding backup for the
outstanding short-term debt at October 31, 1998.
- 32 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. DEBT (continued)
NFC's wholly owned subsidiaries, Navistar Financial Retail Receivables
Corporation (NFRRC) and Navistar Financial Securities Corporation (NFSC), have a
limited purpose of purchasing retail and wholesale receivables, respectively,
and transferring an undivided ownership interest in such notes to investors. The
subsidiaries have limited recourse on the sold receivables and their assets are
available to satisfy the claims of their creditors prior to such assets becoming
available to NFC or affiliated companies.
NFSC has in place a $700 million revolving wholesale note trust that
provides for the continuous sale of eligible wholesale notes on a daily basis.
The trust is comprised of one $100 million tranche of investor certificates
maturing in 1999 and three $200 million tranches maturing in 2003, 2004 and
2008.
During 1998, NFC sold $1,001 million of retail notes, net of unearned
finance income, through NFRRC. The owner trusts in turn issued securities which
were sold to investors. The net proceeds, after underwriting costs and credit
enhancements, were used by NFC for general working capital purposes. On August
28, 1998, NFRRC filed a shelf registration statement with the Securities and
Exchange Commission which provides for the issuance of an additional $2,500
million of asset-backed securities. The aggregate shelf registration available
to NFRRC for issuance of asset-backed securities is $2,972 million.
NFC has entered into various sale/leaseback agreements involving vehicles
subject to retail finance and operating leases with end users. The remaining
balance as of October 31, 1998 is classified under Financial Services operations
as capitalized leases. These agreements grant a security interest in the
underlying vehicles and lease receivables to the purchasers.
In November 1998, NFC sold $545 million of retail notes, net of unearned
finance income, through NFRRC to a multi-seller asset-backed commercial paper
conduit sponsored by a major financial institution.
- 33 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. OTHER LIABILITIES
Major classifications of other liabilities at October 31 are as follows:
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Product liability and warranty............. $ 323 $ 302
Employee incentive programs................ 215 95
Payroll, commissions
and employee-related benefits............ 104 96
Loss reserves and unearned premiums........ 95 99
Taxes .................................. 67 68
Sales and marketing........................ 54 26
Long-term disability
and workers' compensation................ 53 54
Environmental.............................. 27 31
Interest .................................. 22 15
Other .................................. 120 108
------ ------
Total other liabilities................. $1,080 $ 894
====== ======
- 34 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The carrying amounts of financial instruments, as reported in the Statement
of Financial Condition and described in various Notes to the Financial
Statements, and their fair values at October 31 are as follows:
1998 1997
-------------------- ---------------------
Carrying Fair Carrying Fair
Millions of dollars Amount Value Amount Value
- ------------------------------------------------------------------------------
Receivables, net.............. $2,146 $2,166 $1,755 $1,764
Investments and other assets.. 246 249 319 330
Debt.......................... 2,122 2,119 1,316 1,321
Cash and cash equivalents approximate fair value. The cost and fair value
of marketable securities are disclosed in Note 4.
Customer receivables, wholesale notes, retail and wholesale accounts, notes
receivable and other variable-rate retail notes approximate fair value as a
result of the short-term maturities of the financial instruments. The fair value
of truck retail notes is estimated based on quoted market prices of similar sold
receivables. The fair value of amounts due from sales of receivables is
estimated by discounting expected cash flows at estimated current market rates.
The fair value of investments and other assets is estimated based on quoted
market prices or by discounting future cash flows.
The short-term debt and variable-rate borrowings under NFC's bank revolving
credit agreement, which are repriced frequently, approximate fair value. The
fair value of long-term debt is estimated based on quoted market prices, when
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar financial instruments or discounting
future cash flows.
- 35 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. FINANCIAL INSTRUMENTS (continued)
Derivatives Held or Issued for Purposes Other Than Trading
The company uses derivatives to transfer or reduce risks of foreign
exchange and interest rate volatility and to potentially increase the return on
invested funds.
The company periodically enters into forward contracts in order to reduce
exposure to exchange rate risk between the U.S. dollar and the Canadian dollar
related to committed Canadian dollar truck sales.
NFC manages its exposure to fluctuations in interest rates by limiting the
amount of fixed rate assets funded with variable rate debt generally by selling
fixed rate receivables on a fixed rate basis and by utilizing derivative
financial instruments. These derivative financial instruments may include
interest rate swaps, interest rate caps and forward interest rate contracts. The
fair value of these instruments is subject to market risks as the instruments
may become less valuable due to changes in market conditions or interest rates.
NFC manages exposure to counter-party credit risk by entering into derivative
financial instruments with major financial institutions that can be expected to
fully perform under the terms of such agreements. NFC's credit exposure is
limited to the fair value of contracts with a positive fair value at the
reporting date. At October 31, 1998, none of NFC's derivative financial
instruments have positive fair values. Notional amounts are used to measure the
volume of derivative financial instruments and do not represent exposure to
credit loss.
NFC enters into forward interest rate contracts to manage its exposure to
fluctuations in the fair value of retail notes anticipated to be sold. NFC
manages such risk by entering into either forward contracts to sell fixed debt
securities or forward interest rate swaps whose fair value is highly correlated
with that of NFC's receivables. Gains or losses incurred with the closing of
these agreements are included as a component of the gain or loss on sale of
receivables.
At October 31, 1998, NFC held forward interest rate contracts with notional
amounts of $450 million and $50 million in anticipation of retail receivable
sales to occur in November 1998 and May 1999, respectively. In addition, the
company held Canadian dollar forward contracts with notional amounts of $33
million and other derivative contracts with notional amounts of $14 million. At
October 31, 1998, the unrealized loss on the $450 million forward contract was
$5 million, and the unrealized net gain on the remaining contracts was not
material.
- 36 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS AND LEASES
Commitments, Contingencies and Restricted Assets
At October 31, 1998, commitments for capital expenditures in progress were
approximately $153 million. The company's truck assembly facility located in
Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the
company as collateral for the $125 million revolving Mexican credit facility. At
October 31, 1998, $19 million of a Mexican subsidiary's receivables were pledged
as collateral for bank borrowings. In addition, as of October 31, 1998, the
company is contingently liable for approximately $75 million for various
purchasing commitments, credit guarantees and buyback programs; however, based
on historical loss trends, the company's exposure is not considered material.
Additionally, restrictions under the terms on the senior and senior subordinated
notes and Mexican credit facility include a limitation on indebtedness and a
limitation on certain restricted payments.
At October 31, 1998, the Canadian operating subsidiary was contingently
liable for retail customers' contracts and leases financed by a third party. The
Canadian operating subsidiary is subject to maximum recourse of $203 million on
retail contracts and $16 million on retail leases. The Canadian operating
subsidiary, NFC and certain other subsidiaries included in financial services
operations are parties to agreements that may result in the restriction of
amounts which can be distributed to Transportation in the form of dividends or
loans and advances. At October 31, 1998, the maximum amount of dividends which
were available for distribution under the most restrictive covenants was $91
million.
The company and Transportation are obligated under certain agreements with
public and private lenders of NFC to maintain the subsidiary's income before
interest expense and income taxes at not less than 125% of its total interest
expense. No income maintenance payments were required for the three years ended
October 31, 1998. NFC's maximum contractual exposure under all receivable sale
recourse provisions at October 31, 1998 was $259 million; however, management
believes that the allowance for credit losses on sold receivables is adequate.
Concentrations
At October 31, 1998, the company employed 12,212 hourly workers and 4,960
salaried workers in the United States and Canada. Approximately 89% of the
hourly employees and 28% of the salaried employees are represented by unions. Of
these represented employees, 92% of the hourly workers and 100% of the salaried
workers are represented by the United Automobile, Aerospace, and Agricultural
Implement Workers of America (UAW) or the National Automobile, Aerospace, and
Agricultural Implement Workers of Canada (CAW). During August 1997, the
company's current master contract with the UAW was extended from October 1, 1998
to October 1, 2002. The collective bargaining agreement with the CAW expires on
October 24, 1999. Additionally, of the company's 309 employees in Mexico,
approximately 48% are also represented by a union.
Reflecting higher consumer demand for light trucks and vans, sales of
mid-range diesel engines to Ford Motor Company were 14% of consolidated sales
and revenues in 1998, 1997 and 1996. During 1997, the company entered into a
10-year agreement, effective with model year 2003, to continue supplying Ford
Motor Company with diesel engines for use in its diesel-powered light trucks and
vans.
- 37 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS, AND LEASES
(continued)
Leases
The company has long-term noncancellable leases for use of various
equipment and facilities. Lease terms are generally for five to 25 years and, in
many cases, provide for renewal options. The company is generally obligated for
the cost of property taxes, insurance and maintenance. The company leases office
buildings, distribution centers, furniture and equipment, machinery and
equipment, and computer equipment.
The majority of the company's lease payments are for operating leases. At
October 31, 1998, future minimum lease payments under operating leases having
lease terms in excess of one year are: 1999 - $42 million, 2000 - $41 million,
2001 - $31 million, 2002 - $19 million, 2003 - $17 million and thereafter - $31
million. Total operating lease expense was $36 million in 1998, $40 million in
1997 and $35 million in 1996. Income received from sublease rentals was $7
million in 1998 and $6 million in 1997 and 1996.
12. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
The company and its subsidiaries are subject to various claims arising in
the ordinary course of business, and are parties to various legal proceedings
which constitute ordinary routine litigation incidental to the business of the
company and its subsidiaries. In the opinion of the company's management, none
of these proceedings or claims is material to the business or the financial
condition of the company.
The company has been named a potentially responsible party (PRP), in
conjunction with other parties, in a number of cases arising under an
environmental protection law known as the Superfund law. These cases involve
sites which allegedly have received wastes from current or former company
locations. Based on information available to the company, which, in most cases,
consists of data related to quantities and characteristics of material generated
at or shipped to each site as well as cost estimates from PRPs and/or federal or
state regulatory agencies for the cleanup of these sites, a reasonable estimate
is calculated of the company's share, if any, of the probable costs and is
provided for in the financial statements. These obligations generally are
recognized no later than completion of the remedial feasibility study and are
not discounted to their present value. The company reviews its accruals on a
regular basis and believes that, based on these calculations, its share of the
potential additional costs for the cleanup of each site will not have a material
effect on the company's financial results.
- 38 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
13. INDUSTRY SEGMENT DATA
Information concerning operations by industry segment is as follows:
Financial
Manufacturing Services
Millions of dollars Operations Operations Consolidated
- -----------------------------------------------------------------------------
October 31, 1998
- ----------------
Total sales and revenues..... $7,678 $ 280 $7,885
Operating profit............. 1,165 126 1,226
Depreciation and amortization 123 36 159
Capital expenditures......... 305 - 305
Identifiable assets.......... 4,326 2,309 6,178
October 31, 1997
- ----------------
Total sales and revenues..... $6,191 $ 239 $6,371
Operating profit............. 873 112 932
Depreciation and amortization 97 23 120
Capital expenditures......... 172 - 172
Identifiable assets.......... 4,111 1,857 5,516
October 31, 1996
- ----------------
Total sales and revenues..... $5,550 $ 258 $5,754
Operating profit............. 690 121 762
Depreciation and amortization 90 15 105
Capital expenditures......... 117 - 117
Identifiable assets.......... 3,815 1,843 5,326
Intersegment sales and revenues were not material in 1998, 1997 or 1996.
Transactions between manufacturing operations and financial services operations
have been eliminated from the consolidated column. Operating profit of the
financial services operations includes investment income and interest expense.
- 39 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
13. INDUSTRY SEGMENT DATA (continued)
Geographic Area Data
Information concerning operations by principal geographic area was as
follows:
United Interarea
Millions of dollars States Foreign Eliminations Consolidated
- -------------------------------------------------------------------------------
October 31, 1998
- ----------------
Sales and revenues, customers. $7,065 $ 820 $ - $7,885
Interarea transfers........... 486 1,293 (1,779) -
------ ------ ------ ------
Total sales and revenues. 7,551 2,113 (1,779) 7,885
Operating profits............. 1,324 87 (185) 1,226
Identifiable assets........... 5,766 703 (291) 6,178
October 31, 1997
- ----------------
Sales and revenues, customers. $5,807 $ 564 $ - $6,371
Interarea transfers........... 326 967 (1,293) -
------ ------ ------ ------
Total sales and revenues. 6,133 1,531 (1,293) 6,371
Operating profits............ 965 63 (96) 932
Identifiable assets.......... 5,238 550 (272) 5,516
October 31, 1996
- ----------------
Sales and revenues, customers $5,351 $ 403 $ - $5,754
Interarea transfers.......... 253 816 (1,069) -
------ ------ ------- ------
Total sales and revenues 5,604 1,219 (1,069) 5,754
Operating profits............ 754 46 (38) 762
Identifiable assets.......... 5,131 300 (105) 5,326
Interarea transfer prices are established by an agreement between the
buying and selling locations.
- 40 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
14. PREFERRED AND PREFERENCE STOCKS
The company's Nonconvertible Junior Preference Stock Series A is held for
the Retiree Supplemental Benefit Program by the Supplemental Trust. The UAW
holds the Nonconvertible Junior Preference Stock Series B and is currently
entitled to elect one member of the company's Board of Directors. At October 31,
1998, there was one share each of Series A and Series B Preference stock
authorized and outstanding. The value of the preference shares is minimal.
During 1998, the company redeemed all 4.8 million shares of its $6.00
Series G Convertible Cumulative Preferred Stock at a redemption price of $50 per
share plus accrued dividends. At October 31, 1998, there were 172,000 shares of
Series D Convertible Junior Preference Stock (Series D) outstanding and 3
million authorized and issued with an optional redemption price and liquidation
preference of $25 per share plus accrued dividends. The Series D converts into
common stock (subject to adjustment in certain circumstances) at .3125 per
share. The Series D ranks senior to common stock as to dividends and liquidation
and receives dividends at a rate of 120% of the cash dividends on common stock
as declared on an as-converted basis.
Under the General Corporation Law of the State of Delaware (DGCL),
dividends may only be paid out of surplus or out of net profits for the fiscal
year in which the dividend is declared or the preceding fiscal year, and no
dividend may be paid on Common Stock at any time during which the capital of
outstanding preferred stock or preference stock exceeds the net assets of the
company. At October 31, 1998, the company had surplus of $761 million as defined
under DGCL.
- 41 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
15. COMMON SHAREOWNERS' EQUITY
Changes in the common shareowners' equity accounts are as follows:
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------
Common Stock
Beginning of year..................... $1,659 $1,642 $1,641
Conversion of Class B
Common Stock and other.............. 480 17 1
------ ------ ------
End of year........................... $2,139 $1,659 $1,642
------ ------ ------
Class B Common Stock
Beginning of year..................... $ 471 $ 491 $ 491
Repurchase of stock................... (471) (20) -
------ ------ ------
End of year........................... $ - $ 471 $ 491
------ ------ ------
Retained Earnings (Deficit)
Beginning of year..................... $(1,301) $(1,431) $(1,478)
Net income............................ 299 150 65
Preferred dividends................... (11) (29) (29)
Minimum pension liability
adjustments and other............... (147) 9 11
------ ------ ------
End of year........................... $(1,160) $(1,301) $(1,431)
------ ------ ------
Common Stock Held in Treasury
Beginning of year..................... $ (53) $ (30) $ (28)
Repurchase of common stock and other. (189) (23) (2)
Reissuance of Treasury shares......... 28 - -
------ ------ ------
End of year........................... $ (214) $ (53) $ (30)
------ ------ ------
Common Stock
The company has authorized 110 million shares of Common Stock with a par
value of $.10 per share. At October 31, 1998 and 1997, there were 66.2 million
and 49.3 million shares of Common Stock outstanding, net of Common Stock held in
Treasury, respectively. The number of shares of Class B Common Stock outstanding
at October 31, 1997 was 23.1 million.
In January 1998, the company repurchased 3.2 million shares of the Class B
Common Stock that was outstanding. During June 1998, a secondary public offering
of the common stock of the company was completed, in which the Navistar
International Transportation Corp. Retiree Supplemental Benefit Trust (the
Trust) sold approximately 19.9 million shares of common stock at an offering
price of $26.50 per share. These shares represented the Class B Common Stock
held by the Trust which automatically converted into Common Stock upon the sale.
In conjunction with this offering, the company and certain of the company's
pension plans purchased 2 million and 3 million, respectively, of the shares
being offered. The company did not receive any proceeds from the sale of the
shares in the offering but paid expenses related to the offering of $14 million
pursuant to a pre-existing agreement with the Trust. In addition, the
underwriters exercised their over-allotment option and elected to purchase 1.1
million shares from the company at $26.50 per share. The company offset the
dilution through open market purchases.
- 42 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
15. COMMON SHAREOWNERS' EQUITY (continued)
At October 31, 1998, the company recorded its annual minimum pension
liability adjustment which resulted in a $144 million reduction in shareowners'
equity. The minimum pension liability and the resulting reduction in
shareowners' equity will change from year to year as a result of revisions to
actuarial assumptions, experience gains or losses, and settlement rate changes.
16. EARNINGS PER SHARE
Earnings per share was computed as follows:
Millions of dollars,
except share and per share data 1998 1997 1996
- ------------------------------------------------------------------------------
Net income............................ $ 299 $ 150 $ 65
Less dividends on
Series G Preferred Stock............ 11 29 29
------ ------ ------
Net income applicable to common stock.
(Basic and Diluted)................ $ 288 $ 121 $ 36
Average shares outstanding (millions)
Basic............................ 69.1 73.1 73.7
Dilutive effect of options
outstanding and other
dilutive securities........ .9 .5 .1
------ ------ ------
Diluted ........................ 70.0 73.6 73.8
Earnings per share
Basic ........................ $ 4.16 $ 1.66 $ .49
Diluted ........................ $ 4.11 $ 1.65 $ .49
Unexercised employee stock options to purchase .5 million, 1.5 million and
2.2 million shares of Navistar Common Stock during the years ended October 31,
1998, 1997 and 1996, respectively, were not included in the computation of
diluted shares outstanding because the exercise prices were greater than the
average market prices of Navistar Common Stock. Additionally, the diluted
calculations exclude the effects of the conversion of the Series G Preferred
Stock as such conversion would be anti-dilutive.
- 43 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
17. STOCK COMPENSATION PLANS
The company has stock-based compensation plans, approved by the Committee
on Organization of the Board of Directors, which provide for granting of stock
options to employees for purchase of Common Stock at the fair market value of
the stock on the date of grant. The grants generally have a 10-year life.
The company has elected to continue to account for stock option grants in
accordance with Accounting Principles Board Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for fixed
stock options because the exercise prices of the stock options equal the market
value of the company's Common Stock at the date of grant. Had compensation cost
for the plans been determined based upon the fair value at the grant date
consistent with SFAS 123, pro forma net income would have been $297 million in
1998, $147 million in 1997 and $63 million in 1996; pro forma diluted earnings
per share would have been $4.09 in 1998, $1.61 in 1997 and $.46 in 1996 and pro
forma basic earnings per share would have been $4.14 in 1998, $1.62 in 1997 and
$.46 in 1996. The pro forma effect on net income for 1998, 1997 and 1996 may not
be representative of the pro forma effect on net income of future years because
it does not take into consideration pro forma compensation expense relating to
grants made prior to November 1, 1995. The pro forma effect on net income for
1998 may not be representative of the pro forma effect on net income of future
years as in 1998, one-third of the options granted became exercisable on each of
the first, second and third anniversaries of grant. Prior to 1998, grants were
generally exercisable after one year.
The weighted-average fair values at date of grant for options granted
during 1998, 1997 and 1996 were $7.53, $5.71 and $5.34, respectively, and were
estimated using the Black-Scholes option-pricing model with the following
assumptions:
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.7% 6.6% 6.1%
Dividend yield 0% 0% 0%
Expected volatility 31.9% 29.8% 30.9%
Expected life in years 3.5 10 10
The following summarizes stock option activity for the years ended October
31:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- -------------------- ------------------
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 year. 2,430 $18.73 2,346 $20.34 1,762 $24.25
Granted................. 809 23.93 876 10.13 718 10.45
Exercised............... (592) 28.52 (715) 12.45 - -
Canceled................ (109) 45.45 (77) 28.52 (134) 18.75
------ ------ ------ ------ ------ ------
Options outstanding
at year-end........... 2,538 $20.29 2,430 $18.73 2,346 $20.34
====== ====== ====== ====== ====== ======
Options exercisable
at year-end........... 1,765 $18.73 1,579 $23.35 1,682 $24.25
====== ====== ====== ====== ====== ======
Options available
for grant at year-end 443 - -
====== ====== ======
</TABLE>
- 44 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
17. STOCK COMPENSATION PLANS (continued)
The following table summarizes information about stock options outstanding
and exercisable at October 31, 1998.
<TABLE>
<CAPTION>
Outstanding Options Options Exercisable
--------------------------------------- -------------------------
<S> <S> <S> <S> <S> <S>
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> <C> <C>
$ 9.31 - $13.75 1,047 7.3 $10.94 1,047 $10.94
17.40 - 26.66 1,213 7.6 23.58 494 23.81
27.96 - 37.50 152 6.3 34.18 98 36.66
43.75 - 61.88 126 2.6 49.51 126 49.51
</TABLE>
- 45 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Continued)
18. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ----------------- ----------------- -----------------
(Millions of dollars,
except per share data) 1998 1997 1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and revenues...... $1,727 $1,296 $2,042 $1,551 $1,874 $1,586 $2,242 $1,938
====== ====== ====== ====== ====== ====== ====== ======
Manufacturing
gross margin.......... 13.4% 13.6% 14.4% 13.8% 14.5% 13.8% 18.2% 15.2%
====== ====== ====== ====== ====== ====== ====== ======
Net income ............ $ 38 $ 15 $ 67 $ 30 $ 50 $ 35 $ 144 $ 70
Earnings per share
Basic ............ $ .43 $ .10 $ .90 $ .31 $ .73 $ .38 $ 2.16 $ .87
Diluted ............ $ .42 $ .10 $ .89 $ .31 $ .72 $ .38 $ 2.14 $ .85
Market price range
- Common Stock........
High ............ $28 $10 3/8 $35 7/8 $11 3/8 $34 $21 5/16 $28 1/2 $29 1/2
Low ............ $20 1/16 $ 9 $27 1/4 $ 9 1/8 $26 1/8 $11 1/4 $17 $17 1/4
</TABLE>
- 46 -
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION AS OF OCTOBER 31
AND FOR THE YEARS THEN ENDED (Unaudited)
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
Condensed Statement of Income 1998 1997 1996
- ------------------------------------------------------------------------------
Sales of manufactured products...... $7,629 $6,147 $5,508
Other income........................ 49 44 42
------ ------ ------
Total sales and revenues....... 7,678 6,191 5,550
------ ------ ------
Cost of products sold............... 6,464 5,274 4,818
Postretirement benefits............. 174 214 219
Engineering and research expense.... 192 124 129
Marketing and administrative expense 390 332 282
Other expenses...................... 137 83 80
------ ------ ------
Total costs and expenses............ 7,357 6,027 5,528
------ ------ ------
Income before income taxes
Manufacturing operations.......... 321 164 22
Financial services operations..... 89 78 83
------ ------ ------
Income before income taxes...... 410 242 105
Income tax expense.................. 111 92 40
------ ------ ------
Net income.......................... $ 299 $ 150 $ 65
====== ====== ======
Selected Statements
of Financial Condition
and Cash Flow Data 1998 1997
- ------------------------------------ ------ ------
Cash, cash equivalents
and marketable securities......... $ 904 $ 802
Total assets........................ $4,326 $4,111
Total liabilities................... $3,557 $3,091
1998 1997 1996
------ ------ ------
Capital expenditures................ $ (305) $ (172) $ (117)
Depreciation and amortization....... 123 97 90
Change in operating assets
and liabilities................... 331 263 (189)
Cash provided by operations......... 492 438 -
Cash (used in) provided
by investment programs............ (588) (241) 39
Cash used in financing activities... (76) (76) (48)
- 47 -
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL AND STATISTICAL DATA
- ------------------------------------------------------------------------------
For the Years Ended October 31
(Millions of dollars,
except per share data,
units shipped and percentages) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Total sales and revenues....... $7,885 $6,371 $5,754 $6,342 $5,337
Income of continuing operations 299 150 65 164 102
Net income .................... 299 150 65 164 82
Income of continuing operations
per share
Basic .................... 4.16 1.66 .49 1.83 .99
Diluted.................... 4.11 1.65 .49 1.83 .99
Earnings per share
Basic ..................... 4.16 1.66 .49 1.83 .72
Diluted..................... 4.11 1.65 .49 1.83 .72
Average number of shares
outstanding (millions)
Basic....................... 69.1 73.1 73.7 74.2 74.5
Diluted .................... 70.0 73.6 73.8 74.3 74.6
- ------------------------------------------------------------------------------
FINANCIAL DATA
Total assets................... $6,178 $5,516 $5,326 $5,566 $5,047
Debt
Manufacturing operations.... 450 92 115 127 127
Financial services
operations................ 1,672 1,224 1,305 1,330 1,091
------ ------ ------ ------ ------
Total debt..................... 2,122 1,316 1,420 1,457 1,218
Shareowners' equity............ 769 1,020 916 870 817
Total manufacturing operations
debt as a percent of total
manufacturing capitalization. 36.9% 8.3% 11.2% 12.7% 13.4%
Return on equity (a)........... 38.9% 14.7% 7.1% 18.9% 12.5%
- ------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Capital expenditures........... $ 305 $ 172 $ 117 $ 139 $ 87
Engineering and
research expense............. 192 124 129 113 97
- ------------------------------------------------------------------------------
OPERATING DATA
United States and
Canadian market share (b).... 28.9% 28.6% 27.5% 26.7% 27.0%
Unit shipments worldwide
Trucks ...................... 127,500 104,400 95,200 112,200 95,000
OEM engines.................. 213,700 184,000 163,200 154,200 130,600
Service parts sales............ $ 848 $ 806 $ 760 $ 730 $ 714
(a) Return on equity is calculated based on income of continuing operations.
(b) Based on retail deliveries of medium trucks (Classes 5, 6 and 7),
including school buses, and heavy trucks (Class 8).
- 48 -
PAGE 1
EXHIBIT 21
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
SUBSIDIARIES OF THE REGISTRANT
AS OF OCTOBER 31, 1998
STATE OR
COUNTRY IN
WHICH
SUBSIDIARY
ORGANIZED
----------
Subsidiary included in the financial statements,
which is 100% owned:
Navistar International Transportation Corp........ Delaware
Subsidiaries that are 100% owned by
Navistar International Transportation Corp.:
Navistar International Corporation Canada........ Canada
Navistar Financial Corporation................... Delaware
Subsidiaries and corporate joint ventures not shown by name in the above
listing, if considered in the aggregate as a single subsidiary, would not
constitute a significant subsidiary.
E-18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 440
<SECURITIES> 624
<RECEIVABLES> 2178
<ALLOWANCES> 32
<INVENTORY> 505
<CURRENT-ASSETS> 0<F1>
<PP&E> 2082
<DEPRECIATION> 976
<TOTAL-ASSETS> 6178
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2122
0
4
<COMMON> 2139
<OTHER-SE> (1374)
<TOTAL-LIABILITY-AND-EQUITY> 6178
<SALES> 7629
<TOTAL-REVENUES> 7885
<CGS> 6498
<TOTAL-COSTS> 7475
<OTHER-EXPENSES> 174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 410
<INCOME-TAX> 111
<INCOME-CONTINUING> 299
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 299
<EPS-PRIMARY> 4.16<F2>
<EPS-DILUTED> 4.11
<FN>
<F1>The company has adopted an unclassified presentation in the Statement of
Financial Condition.
<F2>Amount represents Basic Earnings Per Share.
</FN>
</TABLE>
EXHIBIT 28
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________
-----------------
Commission File Number 1-4146-1
-----------------
NAVISTAR FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-2472404
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2850 West Golf Road
Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 847-734-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No__
As of November 30, 1998, the number of shares outstanding of the registrant's
common stock was 1,600,000.
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL
TRANSPORTATION CORP. AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
FORM 10-K
Year Ended October 31, 1998
<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 7A. Quantitative and Qualitative Disclosures About Market Risk.. 9
Item 8. Financial Statements........................................ 10
Statement of Financial Reporting Responsibility.......... 33
Independent Auditors' Report............................. 34
Supplementary Financial Data............................. 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 38
PART III
Item 10. Directors and Executive Officers of the
Registrant (A)........................................... 38
Item 11. Executive Compensation (A).................................. 38
Item 12. Security Ownership of Certain Beneficial Owners
and Management (A)....................................... 38
Item 13. Certain Relationships and Related
Transactions (A)......................................... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...................................... 38
SIGNATURES- Principal Accounting Officer ............................. 39
- Directors................................................. 40
POWER OF ATTORNEY..................................................... 40
INDEX TO EXHIBITS..................................................... E-1
(A)- Omitted or amended as the registrant is a wholly-owned subsidiary of
Navistar International Transportation Corp. and meets the conditions set
forth in General Instructions I(1) (a) and (b) of Form 10-K and is,
therefore, filing this Form with the reduced disclosure format.
</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 commercial financing organization that provides
wholesale, retail and lease financing in the United States for sales of new and
used trucks sold by Transportation and Transportation's dealers. The Corporation
also finances wholesale accounts and selected retail accounts receivable of
Transportation. Sales of new products (including trailers) of other
manufacturers are also financed regardless of whether designed or customarily
sold for use with Transportation's truck products. Harco National Insurance
Company, NFC's wholly-owned insurance subsidiary, provides commercial physical
damage and liability insurance coverage to Transportation's dealers and retail
customers, and to the general public through an independent insurance agency
system.
Item 2. Properties
The Corporation's properties principally consist of office equipment and
leased office space in Rolling Meadows, Illinois; Columbus, Ohio; Duluth,
Georgia; Plano, Texas; Mt. Laurel, New Jersey; and San Ramon, California. The
office equipment owned and in use by the Corporation is not significant in
relation to the total assets of the Corporation.
Item 3. Legal Proceedings
There were no material pending legal proceedings other than ordinary,
routine litigation incidental to the business of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. See the index page of this Report for explanation.
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
See Note 13 to Consolidated Financial Statements.
Item 6. Selected Financial Data
Intentionally omitted. See the index page of this Report for explanation.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements under this caption, which involve risks and
uncertainties, constitute "forward-looking statements" under the Securities
Reform Act. Navistar Financial Corporation's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under the headings "Year 2000", "Business Outlook" and
"Quantitative and Qualitative Disclosures About Market Risk."
Financing Volume
In response to the continued strong U.S. economy, customer demand for Class
5 through 8 trucks in fiscal 1998 was 13% and 15% higher than 1997 and 1996,
respectively. The strong economy continued to contribute to high liquidity in
the commercial financing markets, which gives the Corporation's customers more
financing alternatives. This continuing, highly competitive financing market has
caused the Corporation to increase marketing efforts for its retail and
wholesale financing products and services and to reduce finance rates offered
during the fiscal year.
Financing support provided to retail customers over the last three years
was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Retail and Lease Financing: ($ millions)
Finance market share of new International
trucks sold in the U.S. 16.0% 13.2% 16.3%
Purchases of receivables and
equipment leased to others $1,397 $1,036 $1,135
Serviced retail notes and lease
financing balances (including
sold notes) at October 31 $2,579 $2,253 $2,200
</TABLE>
As a result of the Corporation's higher finance market share and the higher
truck industry demand in 1998, purchases of receivables and equipment leased to
others were 35% above 1997. During fiscal 1998 the serviced portfolio grew 14%
to $2.6 billion. Purchases of receivables and equipment leased to others in 1997
were below those of 1996 as a result of the lower finance market share.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Financing Volume (continued)
Financing support provided to Transportation's dealers over the last three
years was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Wholesale Financing: ($ millions)
Percent of wholesale financing of
new International trucks sold to
Transportation's dealers in the U.S. 95% 94% 94%
Purchases of receivables $3,813 $2,773 $2,706
Serviced wholesale note balances
(including sold notes) at
October 31 $1,039 $ 691 $ 685
</TABLE>
In spite of the strong liquidity in the commercial financing market, the
Corporation's finance percentage of new International trucks sold to
Transportation's dealers increased slightly to 95% from 94% in 1997 and 1996. In
1998 the volume of receivables purchased was 38% higher than 1997 and 41% higher
than 1996 in response to the strong industry demand.
Results of Operations
The components of net income over the last three years were as follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Income before income taxes: ($ millions)
Finance operations $79.2 $68.6 $74.2
Insurance operations 6.0 6.0 6.3
Income before income taxes 85.2 74.6 80.5
Taxes on income 32.3 28.9 31.1
Net income $52.9 $45.7 $49.4
Return on average equity 18.5% 16.1% 18.1%
</TABLE>
The Corporation's 1998 return on average equity was a record 18.5% in 1998,
compared with 16.1% and 18.1% in 1997 and 1996, respectively. The increase over
1997 is primarily due to the higher level of wholesale and retail financing,
partially offset by lower financing margins and higher costs to service the
larger portfolio. Net income in 1997 was 7.5% lower than 1996, reflecting lower
average dealer inventory levels and gains on sales of retail notes, partially
offset by a lower provision for losses during 1997.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Results of Operations - Finance Operations:
Retail note and lease financing revenue for 1998 was $136 million compared
with $106 million and $98 million in 1997 and 1996, respectively. The 28% growth
in fiscal 1998 is due to higher retail financing activities and the shift of the
portfolio to operating leases, offset in part by lower yields. Included in
retail note and lease financing revenue is operating lease revenue of $46
million, $29 million and $14 million in 1998, 1997 and 1996, respectively. The
higher operating lease revenue is the result of an increase in vehicles under
operating leases due to a market shift toward lease financing. For operating
leases, the Corporation recognizes the entire lease payment as revenue and
records depreciation expense on the assets under lease.
Also included in retail note and lease finance revenue are gains on sales
of retail note receivables of $15 million, $13 million and $20 million in 1998,
1997 and 1996, respectively. The higher gains on sales in fiscal 1996 resulted
from higher margins on retail notes due to declining market interest rates prior
to the sale in November 1995. During a declining interest rate environment, the
Corporation's acquisition spreads may improve as the Corporation's cost of
borrowing differs from the time when interest rates are quoted to borrowers and
the time when such notes are acquired. In addition, unless hedged, the effective
interest rate for each sale is based on a market interest rate at the time of
the sale, which may be up to six months after the Corporation acquired the
retail notes.
In fiscal 1998 wholesale note revenue increased 20% to $43 million versus
1997, primarily as a result of the higher level of wholesale financing activity,
offset in part by lower yields in response to the competitive commercial
financing market. Wholesale note revenue decreased 36% in 1997 to $36 million as
a result of lower average outstanding note balances and lower yields in response
to the competitive commercial financing market.
Borrowing costs increased 21% in 1998 to $88 million from $73 million in
1997 primarily due to higher average receivable funding requirements. The
Corporation's weighted average interest rate on all debt was 6.4% in 1998 and
1997 and 6.5% in 1996. Borrowing costs decreased 11% in 1997 to $73 million from
$82 million in 1996 primarily due to lower wholesale funding requirements. The
ratio of debt to equity was 5.8:1, 4.3:1 and 4.7:1 at October 31, 1998, 1997,
and 1996, respectively.
Credit, collection and administrative expenses increased to $36 million in
1998 from $31 million and $28 million in 1997 and 1996, respectively. The
increase in 1998 compared with 1997 and 1996 was primarily due to employee
related costs to support the increase in financing activity, costs associated
with year 2000 initiatives and marketing programs.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Results of Operations - Finance Operations (continued)
The provision for losses on receivables totaled $1 million in 1998 compared
with $3 million in 1997 and $9 million in 1996. The improvement in 1998 compared
to 1997 is primarily due to recovery of losses on one large account. Notes and
account write-offs, net of recoveries, including sold notes, were less than one
million in 1998, $2 million in 1997 and $5 million in 1996. The Corporation's
allowance for losses as a percentage of serviced finance receivables was .64%,
.72% and .74% at October 31, 1998, 1997 and 1996, respectively.
Depreciation and other expenses in 1998 increased to $30 million from $19
million in 1997 and $9 million in 1996. The increase is primarily the result of
a larger investment in equipment under operating leases.
Insurance Operations:
Harco National Insurance Company's ("Harco") pretax income was $6 million
in each of the three years ended October 31, 1998. Harco's gross premiums
written in 1998 were $47 million, 2% and 12% below 1997 and 1996, respectively.
The insurance industry continues to be over capitalized which results in a
highly competitive market and places pressure on Harco's volume and margins. The
ratio of losses to earned premiums was 70% during 1998 and 1997, compared to 73%
in 1996.
Liquidity and Funds Management
The Corporation has traditionally obtained the funds to provide financing
to Transportation's dealers and retail customers from sales of receivables,
commercial paper, short and long-term bank borrowings, medium and long-term debt
and equity capital. The Corporation's current debt ratings have made sales of
finance receivables the most economical source of funding. The Corporation's
insurance operation generates its funds through internal operations and has no
external borrowings.
In January 1998, Moody's, Standard and Poors, and Duff and Phelps raised
the Corporation's senior debt ratings from Ba2, BB and BB+ to Ba1, BB+ and BBB-,
respectively, while the subordinated debt ratings were also raised from B1, B+
and BB to Ba3, BB- and BB+, respectively.
Operations provided $69 million in cash in 1998 primarily due to net
income. The cash provided by operations was used to pay dividends of $57
million. Investing activities used $418 million in cash, while financing
activities, excluding dividends, provided $410 million. During 1998, the
purchase of $1,397 million of retail receivables and equipment leased to others
was funded primarily with $953 million of proceeds from the sale of receivables,
principal collections on retail notes and lease receivables of $116 million, and
$410 million net increase in total debt. See also the "Statements of
Consolidated Cash Flow" on page 13.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Liquidity and Funds Management (continued)
Over the last three years, operations provided $182 million in cash and
proceeds from the sale of retail receivables totaled $2,893 million. These
amounts were used principally to fund the purchase of receivables and equipment
leased to others of $3,288, net of principal collections on the receivables, and
to pay dividends of $123 million.
Receivable sales were a significant source of funding in 1998, 1997 and
1996. Through the asset-backed public market, the Corporation has been able to
fund fixed rate retail note receivables at rates offered to companies with
investment grade ratings. During fiscal 1998, 1997 and 1996, the Corporation
sold $1,001, $987 and $985 million, respectively, of retail notes, through
Navistar Financial Retail Receivables Corporation ("NFRRC"), a wholly-owned
subsidiary of the Corporation, to owner trusts, which in turn, issued securities
which were sold to investors. On August 28, 1998, NFRRC filed a shelf
registration with the Securities and Exchange Commission which provides for the
issuance of an additional $2,500 million of asset-backed securities. The
aggregate shelf registration available to NFRRC for issuance of asset-backed
securities is $2,972 million.
At October 31, 1998, Navistar Financial Securities Corporation ("NFSC"), a
wholly-owned subsidiary of the Corporation, had a revolving wholesale note trust
that provides for the funding of $700 million of wholesale notes. All eligible
wholesale notes are sold to the trust through NFSC. During 1998, a $100 million
tranche of investor certificates matured and NFSC issued a $200 million tranche
of investor certificates. As of October 31, 1998, the trust is comprised of one
$100 million tranche of investor certificates maturing in 1999 and three $200
million tranches of investor certificates maturing in 2003, 2004 and 2008.
During fiscal 1998 and 1997, the Corporation entered into sale/leaseback
agreements involving vehicles subject to retail finance leases and operating
leases with end users. Total proceeds were $144 million and $111 million in 1998
and 1997, respectively. The outstanding capital lease obligations at October 31,
1998 were $213 million.
The Corporation has a $925 million bank revolving credit facility and a
$400 million asset-backed commercial paper ("ABCP") program supported by a bank
liquidity facility, which mature in March 2001. See Note 10 to the Consolidated
Financial Statements for further discussion.
As of October 31, 1998, available funding under the bank revolving credit
facility and the ABCP program was $124 million, of which $22 million provided
funding backup for the outstanding short-term debt. The remaining $102 million,
when combined with unrestricted cash and cash equivalents, made $116 million
available to fund the general business purposes of the Corporation.
In November 1998, the Corporation sold $545 million of retail notes, net of
unearned finance income, through NFRRC to a multi-seller asset-backed commercial
paper conduit sponsored by a major financial institution.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Year 2000
The Corporation has identified all significant information technology
("IT") applications that will require remediation, which in some cases will
involve the replacement of systems, to ensure Year 2000 compliance. Internal and
external resources are being used to make the required modifications and to test
for Year 2000 compliance. The Corporation plans to complete the modifications
and testing process of all significant IT systems by August 1999, which is prior
to any anticipated impact on its operating systems.
As of October 31, 1998 the Corporation believes it has remediated
approximately 55% of its non-compliant IT systems. Total costs connected with
the remediation of the Corporation's significant IT systems during 1998 and 1997
totaled $3.7 million and $1.1 million, respectively. Estimated future costs
total $2.5 million. Approximately 25% of the total costs, representing
investment in new IT systems, will be capitalized and depreciated over three to
five years. The total cost of the Year 2000 project has not had nor is it
anticipated to have a material impact on the Corporation's financial position or
results of operations and will be funded through operating cash flows.
While certain aspects of the Corporation's businesses could operate on a
manual basis for a period of time, in the event Year 2000 compliance for its
significant IT systems is not reached, the Corporation currently believes that
the most reasonably likely worst case scenario would be the inability to sustain
its current level of performance and customer service. Additionally, a
significant failure of the banking systems or key entities in the financial
markets could adversely affect the Corporation's ability to access various
credit and money markets. The Corporation is therefore committed to taking all
appropriate actions to achieve Year 2000 compliance for its significant IT
systems before the millennium change date. The Corporation has developed a
detailed plan, which includes an anticipated remediation completion date for
each significant IT system and a scheduled overall completion date of August
1999. Management reviews the progress under the action plan on a weekly basis.
Whenever management concludes a material risk exists that a significant IT
system will not be remediated by the scheduled overall completion date, a
contingency plan is developed.
The Corporation has initiated formal communications with all significant
third party suppliers which provide operational support and non-IT systems to
determine the extent to which the Corporation would be vulnerable in the event
that one or more of those third parties fail to remediate their own Year 2000
issues. The Corporation has received assurances from its significant suppliers
of cash management services that they will be able to operate in the Year 2000
and beyond, without interruption in service. While the Corporation believes that
it does not have significant exposure to other significant suppliers' Year 2000
problems, it is seeking compliance assurances from such other significant
suppliers.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Year 2000 (continued)
The costs of the project and the date on which the Corporation believes it
will complete the Year 2000 remediation are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of qualified
personnel, the ability to locate and correct all relevant computer codes and
similar uncertainties.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components. SFAS No. 131
establishes standards for reporting information about operating segments, and
related disclosures about products and services, geographic areas and major
customers. These statements are effective for fiscal years beginning after
December 15, 1997. These standards expand or modify disclosures and,
accordingly, will have no impact on the Corporation's reported financial
condition, results of operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to establish accounting and reporting
standards for derivative instruments. This statement requires recognition of all
derivative instruments in the statement of financial position as either assets
or liabilities, measured at fair value, and is effective for fiscal years
beginning after June 15, 1999. This statement additionally requires changes in
the fair value of derivatives to be recorded each period in current earnings or
comprehensive income, depending on the intended use of the derivatives. The
Corporation is currently assessing the impact of this statement on its results
of operations, financial condition and cash flows.
Business Outlook
The truck industry in 1999 is forecasted to decrease approximately 3% from
1998. The competitive commercial financing market will continue to put pressure
on the Corporation's retail and wholesale financing activity and margins.
Increased volatility in the capital markets is likely to put additional pressure
on the funding rates offered to the Corporation in the asset-backed public
market, commercial paper markets and other debt financing markets.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Business Outlook (continued)
Management believes that collections on the outstanding receivables
portfolio plus cash available from the Corporation's various funding sources
will permit Navistar Financial to meet the financing requirements of
Transportation's dealers and retail customers through 1999 and beyond.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Corporation is exposed to market risk primarily due to fluctuations in
interest rates. Interest rate risk arises from the funding of a portion of the
Corporation's fixed rate receivables with floating rate debt and from the
Corporation's investment in fixed income securities. The Corporation has managed
exposure to interest rate changes by funding floating rate receivables with
floating rate debt and fixed rate receivables with fixed rate debt, floating
rate debt and equity capital. Management has reduced the net exposure which
results from the funding of fixed rate receivables with floating rate debt by
generally selling fixed rate receivables on a fixed rate basis and by utilizing
derivative financial instruments. The Corporation does not use financial
instruments for trading purposes.
The Corporation maintains investments in marketable securities. The
securities are classified as available for sale and are recorded on the
Statements of Consolidated Financial Condition at fair value with unrealized
gains or losses reported as a separate component of shareowner's equity, net of
applicable deferred taxes. As of October 31, 1998, the fair value of the
Corporation's marketable securities portfolio was $108 million, consisting of
$91 million invested in debt securities and $17 million invested in equity
securities.
The Corporation measures its interest rate risk by estimating the net
amount by which the fair value of all interest rate sensitive assets and
liabilities, including derivative financial instruments, would be impacted by
selected hypothetical changes in market interest rates. Assuming a hypothetical
10% increase in interest rates as of October 31, 1998, the estimated net fair
asset value would decrease by approximately $5 million.
Equity price risk arises when the Corporation could incur economic losses
due to adverse changes in a particular stock index or price. The Corporation's
investments in equity securities are exposed to equity price risk and the fair
value of the portfolio is correlated to the S&P 500. Management estimates that
an immediate 10% change in the S&P 500 would affect the fair value of its equity
securities by approximately $1.7 million.
<PAGE>
<TABLE>
<CAPTION>
Item 8. Financial Statements and Supplementary Data Page
Navistar Financial Corporation and Subsidiaries:
<S> <C>
Statements of Consolidated Income and Retained Earnings
for the years ended October 31, 1998, 1997 and 1996................ 11
Statements of Consolidated Financial Condition as of
October 31, 1998 and 1997 ......................................... 12
Statements of Consolidated Cash Flow for the years ended
October 31, 1998, 1997 and 1996.................................... 13
Notes to Consolidated Financial Statements........................... 14
Statement of Financial Reporting Responsibility...................... 33
Independent Auditors' Report......................................... 34
Supplementary Financial Data......................................... 35
</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 1998 1997 1996
---------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Retail notes and lease financing.......... $135.8 $105.8 $ 97.7
Wholesale notes........................... 43.3 36.1 56.6
Accounts.................................. 33.3 31.2 26.6
Servicing fee income...................... 21.6 20.0 20.5
Insurance premiums earned................. 32.3 33.3 42.0
Marketable securities..................... 9.6 8.5 9.4
Total................................. 275.9 234.9 252.8
Expenses
Cost of borrowing:
Interest expense...................... 81.0 65.9 73.2
Other................................. 7.1 7.0 8.4
Total................................. 88.1 72.9 81.6
Credit, collection and administrative..... 36.1 31.0 28.2
Provision for losses on receivables....... 0.8 2.5 9.3
Insurance claims and underwriting......... 35.6 35.1 44.4
Depreciation expense and other............ 30.1 18.8 8.8
Total................................. 190.7 160.3 172.3
Income Before Taxes............................ 85.2 74.6 80.5
Taxes on Income................................ 32.3 28.9 31.1
Net Income..................................... 52.9 45.7 49.4
Retained Earnings
Beginning of year......................... 113.1 107.4 84.0
Dividends paid............................ (57.0) (40.0) (26.0)
End of year............................... $109.0 $113.1 $107.4
</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 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents.............................. $ 14.1 $ 10.7
Marketable Securities.................................. 108.0 114.2
Receivables
Finance receivables................................. 1,523.7 1,223.2
Allowance for losses................................ (12.8) (12.0)
Receivables, net................................ 1,510.9 1,211.2
Amounts Due from Sales of Receivables.................. 245.9 233.3
Equipment on Operating Leases, Net..................... 217.7 124.1
Repossessions.......................................... 14.4 13.0
Other Assets........................................... 101.9 104.1
Total Assets........................................... $2,212.9 $1,810.6
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Debt........................................ $ 21.8 $ 141.0
Accounts Payable and Other Liabilities................. 193.9 191.3
Senior and Subordinated Debt........................... 1,611.2 1,082.7
Dealers' Reserves...................................... 24.0 22.2
Unpaid Insurance Claims and Unearned Premiums.......... 80.5 85.6
Commitments and Contingencies
Shareowner's Equity
Capital stock (Par value $1.00, 1,600,000 shares
issued and outstanding) and paid-in capital..... 171.0 171.0
Retained earnings................................... 109.0 113.1
Minimum pension liability adjustment................ (1.0) -
Unrealized gains on marketable securities........... 2.5 3.7
Total........................................... 281.5 287.8
Total Liabilities and Shareowner's Equity.............. $2,212.9 $1,810.6
</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 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flow From Operations
Net income................................... $ 52.9 $ 45.7 $ 49.4
Adjustments to reconcile net income to
cash provided from operations:
Gains on sales of receivables.............. (15.3) (13.4) (20.2)
Depreciation and amortization.............. 35.4 22.5 15.3
Provision for losses on receivables........ 0.8 2.5 9.3
Increase (decrease) in accounts payable
to affiliated companies.................. 5.3 107.0 (65.0)
Other...................................... (10.5) (22.3) (17.3)
Total.................................. 68.6 142.0 (28.5)
Cash Flow From Investing Activities
Proceeds from sold retail notes.............. 952.6 958.2 982.1
Purchase of retail notes and
lease receivables........................ (1,262.8) (969.7) (1,069.0)
Principal collections on retail notes and
lease receivables........................ 116.4 93.8 70.2
Acquisitions (over)under cash collections of
wholesale notes and accounts receivable.. (105.8) (59.9) 163.0
Purchase of marketable securities............ (43.1) (65.3) (63.0)
Proceeds from sales and maturities of
marketable securities.................... 50.3 84.8 67.7
Purchase of equipment leased to others....... (134.2) (66.3) (65.9)
Sale of equipment leased to others........... 8.9 23.8 9.7
Total.................................. (417.7) (0.6) 94.8
Cash Flow From Financing Activities
Net (decrease) increase in short-term debt... (119.2) 41.6 48.9
Net increase (decrease) in bank
revolving credit facility usage.......... 422.0 (311.0) (56.0)
Net increase (decrease) in asset-backed
commercial paper facility usage.......... 6.0 (15.3) 88.1
Principal payments on long-term debt......... (43.6) (21.6) (117.5)
Proceeds from long-term debt................. 144.3 208.9 -
Dividends paid to Transportation............. (57.0) (40.0) (26.0)
Total.................................. 352.5 (137.4) (62.5)
Increase in Cash and Cash Equivalents.......... 3.4 4.0 3.8
Cash and Cash Equivalents at Beginning of Year. 10.7 6.7 2.9
Cash and Cash Equivalents at End of Year....... $ 14.1 $ 10.7 $ 6.7
Supplementary disclosure of cash flow
information:
Interest paid................................ $ 80.4 $ 59.7 $ 76.3
Income taxes paid............................ $ 36.4 $ 23.8 $ 32.2
</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, 1998
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Navistar
Financial Corporation ("NFC") and its wholly-owned subsidiaries ("Corporation").
All significant intercompany accounts and transactions have been eliminated. All
of the Corporation's capital stock is owned by Navistar International
Transportation Corp. ("Transportation"), which is wholly-owned by Navistar
International Corporation ("Navistar").
Nature of Operations
The Corporation is a commercial financing organization that provides
retail, wholesale and lease financing of products sold by Transportation and its
dealers within the United States. The Corporation also provides commercial
physical damage and liability insurance coverage to Transportation's dealers and
retail customers and to the general public through an independent insurance
agency system.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue on Receivables
Revenue from finance receivables is recognized using the interest method.
Revenue on operating leases is recognized on a straight-line basis over the life
of the lease. Recognition of revenue is suspended when management determines the
collection of future income is not probable. Income recognition is resumed if
collection doubts are removed.
<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 when
the receivable is determined to be uncollectible.
Receivable Sales
The Corporation securitizes and sells receivables to public and private
investors with limited recourse. The Corporation continues to service the
receivables, for which a servicing fee is received. Servicing fees are earned on
a level yield basis over the terms of the related sold receivables and are
included in servicing fee income. Gains or losses on sales of receivables are
credited or charged to financing revenue in the period in which the sales occur.
An adequate allowance for credit losses is provided prior to the receivable
sales.
Insurance Operations
Insurance premiums written by the Corporation's wholly-owned insurance
subsidiary, Harco National Insurance Company ("Harco"), are earned on a pro rata
basis over the terms of the policies. Commission costs and premium taxes
incurred in acquiring business are deferred and amortized on the same basis as
related premiums are earned. The liability for unpaid insurance claims includes
provisions for reported claims and an estimate of unreported claims based on
past experience. Such provisions include an estimate of loss adjustment expense.
The estimated liability for unpaid insurance claims is regularly reviewed and
updated. Any change in such estimate is reflected in current operations.
Harco limits its exposure on any single loss occurrence by ceding
reinsurance to other insurance enterprises. Reinsurance receivables, including
amounts related to unpaid insurance claims and prepaid reinsurance premiums, are
reported as other assets in the Statements of Consolidated Financial Condition.
Income Taxes
Navistar and its subsidiaries file a consolidated federal income tax
return, which includes Transportation and the Corporation. Federal income taxes
for the Corporation are computed on a separate consolidated return basis and are
payable to Transportation.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
Cash and cash equivalents include money market funds and marketable
securities with original maturities of three months or less, except for such
securities held by the insurance operations which are included in marketable
securities.
Marketable Securities
Marketable securities are classified as available-for-sale and are reported
at fair value. The difference between amortized cost and fair value is recorded
as an adjustment to shareowner's equity, net of applicable deferred taxes.
Derivative Financial Instruments
All derivative financial instruments, such as forward contracts, interest
rate swaps and interest rate caps, are held for purposes other than trading. The
Corporation's policy prohibits the use of derivative financial instruments for
speculative purposes. The Corporation generally uses derivative financial
instruments to reduce its exposure to interest rate volatility.
The Corporation may use forward contracts to hedge the fair value of its
fixed rate receivables against changes in market interest rates in anticipation
of the sale of such receivables. The principal balance of receivables expected
to be sold by the Corporation equals or exceeds the notional amount of open
forward contracts. The Corporation may use interest rate swaps to reduce
exposure to interest rate changes when it sells fixed rate receivables on a
variable rate basis. Gains or losses incurred with the closing of forward
contracts and interest rate swaps are included in the net gain or loss on sale
of receivables.
For the protection of investors, the Corporation may write interest rate
caps when fixed rate receivables are sold on a variable rate basis. The
Corporation will make payments under the terms of the written caps if interest
rates exceed certain levels. The written caps are recorded at fair value with
subsequent changes in fair value recognized in income.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components. SFAS No. 131
establishes standards for reporting information about operating segments, and
related disclosures about products and services, geographic areas and major
customers. These statements are effective for fiscal years beginning after
December 15, 1997. These standards expand or modify disclosures and,
accordingly, will have no impact on the Corporation's reported financial
condition, results of operations or cash flows.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (continued)
New Accounting Standards (continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to establish accounting and reporting
standards for derivative instruments. This statement requires recognition of all
derivative instruments in the statement of financial position as either assets
or liabilities, measured at fair value, and is effective for fiscal years
beginning after June 15, 1999. This statement additionally requires changes in
the fair value of derivatives to be recorded each period in current earnings or
comprehensive income, depending on the intended use of the derivatives. The
Corporation is currently assessing the impact of this statement on its results
of operations, financial condition and cash flow.
Reclassification
Certain prior year amounts have been reclassified to conform with the
presentation used in the 1998 financial statements.
2. TRANSACTIONS WITH AFFILIATED COMPANIES
Wholesale Notes, Wholesale Accounts and Retail Accounts
In accordance with the agreements between the Corporation and
Transportation relating to financing of wholesale notes, wholesale accounts and
retail accounts, the Corporation receives interest income from Transportation at
agreed upon interest rates applied to the average outstanding balances less
interest amounts paid by dealers on wholesale notes and wholesale accounts. The
Corporation purchases wholesale notes and accounts from Transportation at the
principal amount of the receivables. Revenue collected from Transportation was
$67.2 in 1998, $54.7 in 1997 and $49.8 in 1996.
Retail Notes and Lease Financing
In accordance with agreements between the Corporation and Transportation,
Transportation may be liable for certain losses on the finance receivables and
may be required to repurchase the repossessed collateral at the receivable
principal value. Losses recorded by Transportation were $10.7 in 1998, $10.1 in
1997 and $9.5 in 1996.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
2. TRANSACTIONS WITH AFFILIATED COMPANIES (continued)
Support Agreements
Under provisions of certain public and private financing arrangements,
agreements with Transportation and Navistar provide that the Corporation's
consolidated income before interest expense and income taxes will be maintained
at not less than 125% of its consolidated interest expense. No income
maintenance payments were required during the three-year period ended October
31, 1998.
Administrative Expenses
The Corporation pays a fee to Transportation for data processing and other
administrative services based on the actual cost of services performed. The
amount of the fee was $2.6 in 1998, $2.1 in 1997 and $2.4 in 1996.
Accounts Payable
Accounts payable and other liabilities include $136.8 and $131.5 payable to
Transportation at October 31, 1998 and 1997, respectively.
3. INDUSTRY SEGMENTS
Information by industry segment is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Finance operations...................... $ 234.3 $ 193.5 $ 201.6
Insurance operations.................... 41.6 41.4 51.2
Total revenues........................ $ 275.9 $ 234.9 $ 252.8
Income before taxes:
Finance operations...................... $ 79.2 $ 68.6 $ 74.2
Insurance operations.................... 6.0 6.0 6.3
Total income before taxes............. $ 85.2 $ 74.6 $ 80.5
Assets at end of year:
Finance operations...................... $2,067.0 $1,659.3 $1,626.9
Insurance operations.................... 145.9 151.3 166.9
Total assets at end of year........... $2,212.9 $1,810.6 $1,793.8
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES
The fair value of marketable securities is based on quoted market prices,
when available. If a quoted price is not available, fair value is estimated
using quoted market prices for similar financial instruments. The following
table sets forth, by type of security, the amortized cost and estimated fair
values at October 31:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and
agency securities.................. $ 21.7 $ 23.2 $ 26.6 $ 27.1
Mortgage and
asset-backed securities............ 38.2 38.7 37.8 38.2
Corporate debt and other securities.. 28.4 28.6 30.3 30.1
Total debt securities.............. 88.3 90.5 94.7 95.4
Equity securities.................... 15.6 17.5 13.5 18.8
Total.............................. $ 103.9 $ 108.0 $ 108.2 $ 114.2
</TABLE>
Net unrealized gains and losses on marketable securities were $4.1 and $6.0
at October 31, 1998 and 1997, respectively. Gross unrealized losses were not
material.
Contractual maturities of marketable debt securities at October 31, 1998
are as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- ------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less............................... $ 12.9 $ 12.9
Due after one year through five years................. 13.6 14.2
Due after five years through ten years................ 14.1 14.8
Due after ten years................................... 9.5 9.9
50.1 51.8
Mortgage- and asset-backed securities................. 38.2 38.7
Total debt securities............................. $ 88.3 $ 90.5
</TABLE>
Actual maturities may differ from the contractual maturities because of
prepayments.
Proceeds from sales or maturities of marketable securities available for
sale were $50.3 during 1998 and $84.8 during 1997. The related net realized
gains were $3.3 and $1.8 in 1998 and 1997, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES (continued)
All marketable securities at October 31, 1998 and 1997 were held by Harco,
of which $12.6 and $14.5, respectively, were on deposit with various state
departments of insurance or otherwise restricted as to use.
5. FINANCE RECEIVABLES
Finance receivable balances, net of unearned finance income, at October 31
are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Retail notes and lease financing...................... $ 915.9 $ 706.5
Wholesale notes....................................... 224.9 45.7
Accounts:
Retail.............................................. 312.9 396.6
Wholesale........................................... 70.0 74.4
Total............................................ 382.9 471.0
Total finance receivables..................... $1,523.7 $1,223.2
</TABLE>
Contractual maturities of finance receivables including unearned finance
income at October 31, 1998, are summarized as follows:
<TABLE>
<CAPTION>
Retail Wholesale Accounts
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Due in fiscal year:
1999 ............................... $ 281.6 $ 141.7 $ 382.9
2000 ............................... 242.1 83.2 -
2001 ............................... 218.7 - -
2002 ............................... 174.5 - -
2003 ............................... 118.9 - -
Due after 2003............................ 27.9 - -
Gross finance receivables.......... 1,063.7 224.9 382.9
Unearned finance income................... 147.8 - -
Total finance receivables.......... $ 915.9 $ 224.9 $ 382.9
</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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (continued)
The Corporation's primary business is to provide wholesale, retail and
lease financing for new and used trucks sold by Transportation and
Transportation's dealers, and as a result the Corporation's receivables and
leases have significant concentration in the trucking industry. On a geographic
basis, there is not a disproportionate concentration of credit risk in any area
of the United States. The Corporation retains as collateral a security interest
in the equipment associated with wholesale notes, retail notes and leases.
The Corporation sells finance receivables to public and private investors
with limited recourse provisions. Outstanding sold receivable net balances at
October 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Retail notes..................................... $1,445.4 $1,422.2
Wholesale notes.................................. 700.0 545.5
Total....................................... $2,145.4 $1,967.7
</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.
During fiscal 1998, in two separate sales, the Corporation sold a total of
$1,001 of retail notes, net of unearned finance income, through NFRRC to two
individual owner trusts. The owner trusts, in turn, issued securities which were
sold to investors. On August 28, 1998, NFRRC filed a shelf registration with the
Securities and Exchange Commission which provides for the issuance of an
additional $2,500 of asset-backed securities. The aggregate shelf registration
available to NFRRC for issuance of asset-backed securities is $2,972.
NFSC has in place a revolving wholesale note trust that provides for the
continuous sale of eligible wholesale notes up to $700. During 1998, a $100
tranche of investor certificates matured and NFSC issued a $200 tranche of
investor certificates. As of October 31, 1998 the trust is comprised of one $100
tranche of investor certificates maturing in 1999 and three $200 tranches of
investor certificates maturing in 2003, 2004 and 2008.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (continued)
NFRRC and NFSC have limited recourse on the sold receivables and their
assets are available to satisfy the claims of their creditors prior to such
assets becoming available to the Corporation or affiliated companies. The terms
of receivable sales require the Corporation to maintain cash reserves with the
trusts as credit enhancement. The use of cash reserves held by the trusts is
restricted under the terms of the securitized sales agreements. The maximum
exposure under all receivable sale recourse provisions at October 31, 1998 was
$259; however, management believes the recorded reserves for losses are
adequate.
The following is a summary of amounts included in Amounts Due from Sales of
Receivables as of October 31:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash held and invested by trusts.......................... $100.4 $ 90.8
Subordinated retained interests in wholesale receivables.. 114.5 99.9
Subordinated retained interests in retail receivables..... 34.9 47.4
Interest only receivables................................. 8.7 7.7
Allowance for credit losses............................... (12.6) (12.5)
Total................................................ $245.9 $233.3
</TABLE>
6. INVESTMENT IN OPERATING LEASES
Operating leases at year-end were as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Investment in operating leases:
Vehicles and other equipment, at cost.................. $271.1 $150.0
Less: Accumulated depreciation........................ (53.4) (25.9)
Net investment in operating leases.................. $217.7 $124.1
</TABLE>
Future minimum rentals on operating leases are as follows: 1999, $62.8;
2000, $53.7; 2001, $34.7; 2002, $17.7 and $5.4 thereafter. Each of these assets
is depreciated on a straight-line basis over the term of the lease in an amount
necessary to reduce the leased vehicle to its estimated residual value at the
end of the lease term.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
7. ALLOWANCE FOR LOSSES
The allowance for losses on receivables is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Total allowance for losses at beginning of year..... $24.5 $24.0 $19.6
Provision for losses................................ 0.8 2.5 9.3
Net (losses) recoveries (charged)
credited to allowance............................ 0.1 (2.0) (4.9)
Total allowance for losses at end of year.... $25.4 $24.5 $24.0
Allowance pertaining to:
Owned notes...................................... $12.8 $12.0 $11.6
Sold notes....................................... 12.6 12.5 12.4
Total........................................ $25.4 $24.5 $24.0
</TABLE>
8. TAXES ON INCOME
Taxes on income are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal.......................................... $24.7 $29.6 $26.4
State and local.................................. 3.3 4.1 4.4
Total current................................ 28.0 33.7 30.8
Deferred (primarily Federal)........................ 4.3 (4.8) 0.3
Total........................................ $32.3 $28.9 $31.1
</TABLE>
The effective tax rate of approximately 38% in each of the three years
ended October 31, 1998 differs from the statutory United States Federal tax rate
of 35% primarily because of state and local income taxes. Deferred tax assets
and liabilities at October 31 comprised the following:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Other postretirement benefits........................... $2.3 $3.0
Deferred tax liabilities:
Depreciation and other.................................. 5.8 2.2
Unrealized gains on marketable securities............... 1.5 2.3
Total deferred tax liabilities...................... 7.3 4.5
Net deferred tax liabilities........................ $5.0 $1.5
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
9. SHORT-TERM DEBT
Commercial paper is issued by the Corporation with varying terms. The
Corporation also has short-term borrowings with various banks on a non-committed
basis. Compensating cash balances and commitment fees are not required under
these agreements.
Information regarding short-term debt is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate obligations outstanding:
Daily average................................. $106.1 $109.7 $ 68.2
Maximum month-end balance..................... 148.8 145.0 117.8
Weighted average interest rate:
On average daily borrowing.................... 6.1% 6.1% 6.0%
At October 31................................. 6.1% 6.1% 5.9%
</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.
10. SENIOR AND SUBORDINATED DEBT
Senior and subordinated debt outstanding at October 31 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Bank revolving credit facility, at variable
rates, due March 2001............................... $ 815.0 $ 393.0
Funding under asset-backed commercial
paper program ("ABCP"), at variable
rates, due March 2001............................... 400.7 399.9
Capital lease obligations, 4.75% to 5.62%,
due serially through 2004........................... 213.3 95.8
Subordinated term debt:
Senior Notes, 8 7/8%, due November 1998............. 82.2 94.0
Senior Notes, 9%, due June 2002..................... 100.0 100.0
Total senior and subordinated debt............. $1,611.2 $1,082.7
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. SENIOR AND SUBORDINATED DEBT (continued)
The weighted average interest rate on total debt, including short-term debt
and the effect of discounts and related amortization, was 6.4% in 1998 and 1997,
and 6.5% in 1996. The aggregate annual maturities and required payments of
senior and subordinated debt are as follows:
<TABLE>
<S> <C>
Fiscal year ended October 31
1999 $ 121.3
2000 47.7
2001 1,269.0
2002 141.8
2003 and thereafter 31.4
Total $1,611.2
</TABLE>
At October 31, 1998, the Corporation had a $925 contractually committed
bank revolving credit facility and a $400 ABCP program supported by a bank
liquidity facility. Available funding under the ABCP program is comprised of the
$400 liquidity facility plus $14 of trust certificates issued in connection with
the formation of the ABCP trust. Under the terms of the ABCP program, Truck
Retail Instalment Paper Company ("TRIP"), a special purpose wholly-owned
subsidiary of the Corporation, purchases eligible receivables from the
Corporation. All assets of TRIP are pledged to a Trust that funds the
receivables with A1/P1 rated commercial paper.
Available funding under the bank revolving credit facility and the ABCP
program was $124, of which $22 provided funding backup for the outstanding
short-term debt at October 31, 1998. The remaining $102 when combined with
unrestricted cash and cash equivalents made $116 available to fund the general
business purposes of the Corporation at October 31, 1998. Under the terms of the
bank revolving credit facility, the Corporation is required to maintain tangible
net worth at a minimum of $175 and a debt to tangible net worth ratio of no
greater than 7 to 1. The bank revolving credit agreement grants security
interests in substantially all of the Corporation's assets to the Corporation's
debtholders. Compensating cash balances are not required under the bank
revolving credit facility. Facility fees are paid quarterly regardless of usage.
Under the terms of the 8 7/8% subordinated debt agreement, the aggregate
principal balance of subordinated debt may not exceed 75% of consolidated
tangible net worth.
During fiscal 1998 and 1997, the Corporation entered into sale/leaseback
agreements involving vehicles subject to retail finance and operating leases
with end users. The balances are classified under senior and subordinated debt
as capital lease obligations. These agreements grant to the purchasers a
security interest in the underlying end user leases.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. POSTRETIREMENT BENEFITS
Effective October 31, 1998 the Corporation adopted SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits." The
information for 1998, 1997 and 1996 has been presented in conformity with the
requirements of SFAS No. 132.
The Corporation provides postretirement benefits to a majority of its
employees. Costs associated with postretirement benefits include pension and
postretirement health care expenses for employees, retirees and surviving
spouses and dependents. In addition, as part of the 1993 restructured health
care and life insurance plans, profit sharing payments to the Retiree
Supplemental Benefit Trust are required.
Generally, the pension plans are non-contributory. The Corporation's policy
is to fund its pension plans in accordance with applicable United States
government regulations. At October 31, 1998, all legal funding requirements had
been met.
Postretirement Expense
Net periodic benefit cost included in the Statements of Consolidated Income
is composed of the following:
<TABLE>
<CAPTION>
Pension Other Benefits
---------------------- ----------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost for benefits
earned during the period.......$ 1.0 $ 0.8 $ 0.7 $ 0.4 $ 0.4 $ 0.4
Interest cost on obligation...... 3.1 3.0 2.9 0.8 0.9 0.8
Net amortization costs and other. 0.1 - 0.1 - - -
Less expected return on assets... (4.7) (4.0) (3.6) (0.7) (0.5) (0.5)
Net postretirement
(income) expense...............$(0.5) $(0.2) $ 0.1 $ 0.5 $ 0.8 $ 0.7
</TABLE>
"Amortization costs" include amortization of cumulative gains and losses
over the expected remaining service life of employees and amortization of the
initial transition liability over 15 years and amortization of plan amendments.
Plan amendments are recognized over the remaining service life of employees.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. POSTRETIREMENT BENEFITS (continued)
Postretirement Expense (continued)
The funded status of the Corporation's plans as of October 31, 1998 and
1997 and a reconciliation with amounts recognized in the Statements of
Consolidated Financial Condition are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------- -------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning
of year.......................... $44.0 $38.7 $11.6 $11.2
Service cost........................ 1.0 0.8 0.4 0.4
Interest on obligation.............. 3.1 3.0 0.8 0.9
Actuarial net loss (gain)........... 6.1 4.0 1.5 (0.7)
Benefits paid....................... (2.7) (2.5) (0.3) (0.2)
Benefit obligation at end
of year.......................... $51.5 $44.0 $14.0 $11.6
Change in plan asset
Fair value of plan assets at
beginning of year................ $50.1 $42.7 $ 4.4 $ 3.9
Actual return on plan assets........ 5.3 9.7 0.4 0.2
Employer contribution............... - - 2.1 0.4
Benefits paid....................... (2.4) (2.3) (0.2) (0.1)
Fair value of plan assets at
year-end......................... $53.0 $50.1 $ 6.7 $ 4.4
Funded status....................... $ 1.5 $ 6.1 $(7.3) $(7.2)
Unrecognized actuarial net
(gain) loss...................... (1.1) (6.5) 2.8 1.0
Unrecognized transition amount...... 0.1 0.1 - -
Unrecognized prior service cost..... 0.4 0.4 - -
Net amount recognized............... $ 0.9 $ 0.1 $(4.5) $(6.2)
Amounts recognized in the
Statements of Consolidated
Financial Condition
consists of:
Prepaid benefit cost.......... $ 2.4 $ 1.7 $ - $ -
Accrued benefit liability..... (3.1) (1.6) (4.5) (6.2)
Intangible asset.............. - - - -
Accumulated reduction in
shareowner's equity........ 1.6 - - -
Net amount recognized... $ 0.9 $ 0.1 $(4.5) $(6.2)
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. POSTRETIREMENT BENEFITS (continued)
Postretirement Expense (continued)
The accumulated reduction in shareowner's equity is recorded in the
Statement of Financial Condition net of deferred income taxes of $0.6 at October
31, 1998.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $3.3, $3.1, and $0.0, respectively, as of October
31, 1998, and $2.4, $2.3 and $0.0, respectively, as of October 31, 1997.
The weighted average rate assumptions used in determining expenses and
benefit obligations were:
<TABLE>
<CAPTION>
Pension Other Benefits
-------------------- -------------------
1998 1997 1996 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate used to determine
present value of benefit
obligation at year-end....... 6.7% 7.2% 7.9% 7.1% 7.4% 8.1%
Expected long-term rate of
return on plan asset for
the year..................... 9.6% 9.6% 8.9% 10.8% 11.1% 10.5%
Expected rate of increase in
future compensation levels... 3.5% 3.5% 3.5% N/A N/A N/A
</TABLE>
For 1999, the weighted average rate of increase in the per capita cost of
covered health care benefits is projected to be 9.7%. The rate is projected to
decrease to 5.0% by the year 2005 and remain at that level each year thereafter.
The effect of changing the health care cost trend rate is as follows:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
- -------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost
components................................... $0.2 $(0.2)
Effect on postretirement benefit obligation..... 2.0 (1.7)
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
12. LEASES
The Corporation is obligated under non-cancelable operating leases for the
majority of its office facilities and equipment. These leases are generally
renewable and provide that property taxes and maintenance costs are to be paid
by the lessee. At October 31, 1998, future minimum lease commitments under
non-cancelable operating leases with remaining terms in excess of one year are
as follows:
<TABLE>
<S> <C>
Year Ended October 31,
1999........................................ $ 1.8
2000........................................ 1.4
2001........................................ 0.3
2002........................................ 0.1
2003........................................ 0.1
Thereafter.................................. 0.1
Total....................................... $ 3.8
</TABLE>
13. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of October 31, 1998 and
1997, was 2,000,000 of which 1,600,000 shares were issued and outstanding. All
of the issued and outstanding capital stock is owned by Transportation and no
shares are reserved for officers and employees, or for options, warrants,
conversions and other rights.
<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>
1998 1997
------------------------------------------
Carrying Fair Carrying Fair
Value Value Amount Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Finance receivables:
Retail notes.................. $ 775.3 $ 797.6 $ 607.0 $ 619.0
Wholesale notes and accounts.. 607.8 607.8 516.7 516.7
Amounts due from sales of
receivables................... 245.9 243.8 233.3 230.3
Financial liabilities:
Senior and subordinated debt..... 1,397.9 1,401.4 986.9 990.2
</TABLE>
The carrying amount of cash and cash equivalents approximates fair value.
The cost and fair value of marketable securities are disclosed in Note 4.
The fair value of retail notes is estimated by discounting the future
contractual cash flows using an estimated discount rate reflecting current rates
paid to purchasers of similar types of receivables with similar credit, interest
rate and prepayment risks. For wholesale notes and retail and wholesale
accounts, all of which reprice monthly, the carrying amounts approximate fair
value as a result of the short-term nature of the receivables.
The fair value of cash deposits included above in amounts due from sales of
receivables approximates their carrying value. The fair values of other amounts
due from sales of receivables were derived by discounting expected cash flows at
estimated current market rates.
For fixed rate debt, the fair value is estimated based on quoted market
prices where available and, where not available, on quoted market prices of debt
with similar characteristics.
The estimated fair values for all other financial instruments approximate
carrying values due to the short-term nature or variable interest terms inherent
in the financial instruments.
<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
generally by selling fixed rate receivables on a fixed rate basis and by
utilizing derivative financial instruments. These derivative financial
instruments may include forward contracts, interest rate swaps and interest rate
caps. The fair value of these instruments is subject to market risk as the
instruments may become less valuable due to changes in market conditions or
interest rates. The Corporation manages exposure to counter-party credit risk by
entering into derivative financial instruments with major financial institutions
that can be expected to fully perform under the terms of such agreements. The
Corporation does not require collateral or other security to support derivative
financial instruments with credit risk. The Corporation's counter-party credit
exposure is limited to the fair value of contracts with a positive fair value at
the reporting date. At October 31, 1998, none of the Corporation's derivative
financial instruments had positive fair values. Notional amounts are used to
measure the volume of derivative financial instruments and do not represent
exposure to credit loss.
The Corporation enters into forward interest rate contracts to manage its
exposure to fluctuations in the fair value of retail notes anticipated to be
sold. The Corporation manages such risk by entering into forward contracts to
sell fixed debt securities or forward interest rate swaps whose fair value is
highly correlated with that of the Corporation's receivables. Gains or losses
incurred with the closing of these agreements are included as a component of the
gain or loss on sale of receivables.
As of October 31, 1998, outstanding derivative financial instruments
consisted of the following:
<TABLE>
<CAPTION>
Notional
Amount Fair Value
- ------------------------------------------------------------------------------
<S> <C> <C>
Forward interest rate contracts in anticipation of:
November 1998 sale of retail receivables...... $450 $(5.2)
May 1999 sale of retail receivables........... $ 50 $(0.1)
</TABLE>
Fair values of forward interest rate contracts are based on quoted market
prices. There were no derivative financial instruments outstanding at October
31, 1997.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
15. LEGAL PROCEEDINGS
The Corporation is subject to various claims arising in the ordinary course
of business, and is party to various legal proceedings which constitute ordinary
routine litigation incidental to the business of the Corporation. In the opinion
of the Corporation's management, none of these proceedings or claims are
material to the business or the financial condition of the Corporation.
16. SUBSEQUENT EVENT
In November 1998, the Corporation sold $545 of retail notes, net of
unearned finance income, through NFRRC to a multi-seller asset-backed commercial
paper conduit sponsored by a major financial institution.
17. QUARTERLY FINANCIAL INFORMATION (unaudited)
<TABLE>
<CAPTION>
1998
--------------------------------------------------
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $62.6 $64.1 $79.3 $69.9 $275.9
Interest expense............. 15.7 20.3 23.2 21.8 81.0
Provision for (recovery of)
losses on receivables...... 0.4 0.8 (2.6) 2.2 0.8
Net income................... 13.4 10.7 17.7 11.1 52.9
</TABLE>
<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 5.7
</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 accompanying consolidated financial statements of Navistar
Financial Corporation and its subsidiaries as of October 31, 1998 and 1997 and
for each of the three years in the period ended October 31, 1998, listed in Item
8. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Navistar Financial
Corporation and its subsidiaries as of October 31, 1998 and 1997 and the results
of their operations and their cash flow for each of the three years in the
period ended October 31, 1998 in conformity with generally accepted accounting
principles.
/s/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
December 14, 1998
Chicago, Illinois
<PAGE>
SUPPLEMENTARY FINANCIAL DATA
Five Year Summary of Financial and Operating Data
Dollar amounts in millions
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Revenues...................$ 275.9 $ 234.9 $ 252.8 $ 228.2 $ 210.8
Net income ................ 52.9 45.7 49.4 36.2 34.0
Dividends paid ............ 57.0 40.0 26.0 9.0 25.6
Percent of net income to
average shareowner's
equity.................. 18.5% 16.1% 18.1% 15.0% 15.1%
Financial Data:
Finance receivables, net ..$1,510.9 $1,211.2 $1,193.6 $1,370.9 $1,094.0
Total assets .............. 2,212.9 1,810.6 1,793.8 1,874.7 1,534.8
Total debt ................ 1,633.0 1,223.7 1,305.8 1,330.3 1,091.5
Shareowner's equity ....... 281.5 287.8 279.7 256.7 225.6
Debt to equity ratio ...... 5.8:1 4.3:1 4.7:1 5.2:1 4.8:1
Senior debt to capital
funds ratio............. 3.1:1 2.1:1 3.2:1 3.4:1 3.0:1
Number of employees at
October 31.............. 394 358 352 360 353
</TABLE>
<PAGE>
SUPPLEMENTARY FINANCIAL DATA (Continued)
Gross Finance Receivables and Leases Acquired
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ Millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wholesale notes.............. $3,812.8 $2,772.8 $2,705.8 $2,979.4 $2,306.6
Retail notes and leases:
New....................... 1,358.0 976.2 1,064.1 1,075.0 861.9
Used ..................... 309.2 270.3 281.7 242.3 217.2
Total................... 1,667.2 1,246.5 1,345.8 1,317.3 1,079.1
Total .................... $5,480.0 $4,019.3 $4,051.6 $4,296.7 $3,385.7
</TABLE>
Serviced (including sold notes) Retail Notes and
Leases With Installments Past Due Over 60 Days
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At October 31 ($ Millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Original amount of notes
and leases................. $ 33.6 $ 31.8 $ 14.0 $ 4.2 $ 3.1
Balance of notes and leases.. 16.5 16.2 8.0 2.2 1.3
Balance as a percent of
total outstanding.......... 0.57% 0.64% 0.32% 0.10% 0.07%
</TABLE>
Retail Note and Lease Repossessions (including sold notes)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Retail note and lease repossessions
acquired as a percentage
of average serviced retail
note and lease balances.... 2.26% 2.69% 3.08% 0.92% 0.93%
</TABLE>
<PAGE>
SUPPLEMENTARY FINANCIAL DATA (Continued)
Credit Loss Experience on Serviced (including sold notes) Receivables
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ Millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net losses (recoveries):
Retail notes and leases ..... $ .2 $2.2 $5.1 $ .3 $ .6
Wholesale notes ............. (.3) (.2) (.2) (.9) .1
Accounts..................... - - - (.2) .2
Total ................... $(.1) $2.0 $4.9 $(.8) $ .9
Percent net losses (recoveries) to liquidations:
Retail notes and leases ..... .02% .18% .48% .03% .07%
Wholesale notes ............. (.01) (.01) (.01) (.03) .01
Total ................... - .05% .13% (.02)% .03%
Percent net losses (recoveries) to related average gross receivables
outstanding:
Retail notes and leases ..... .01% .09% .22% .02% .04%
Wholesale notes ............. (.04) (.02) (.02) (.13) .03
Accounts..................... - - - (.05) .08
Total ................... - .06% .14% (.03)% .04%
</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,
1998.
<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 21, 1998
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 21, 1998
John J. Bongiorno Officer; Director
(Principal Executive Officer)
/s/R. WAYNE CAIN Vice President and Treasurer; December 21, 1998
R. Wayne Cain Director
(Principal Financial Officer)
/s/PHYLLIS E. COCHRAN Vice President and Controller; December 21, 1998
Phyllis E. Coch Director
(Principal Accounting Officer)
/s/JOHN R. HORNE Director December 21, 1998
John R. Horne
/s/THOMAS M. HOUGH Director December 21, 1998
Thomas M. Hough
</TABLE>
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
SIGNATURES (Continued)
<TABLE>
<CAPTION>
Signature Title Date
<S><C> <C> <C>
/s/ROBERT C. LANNERT Director December 21, 1998
Robert C. Lannert
/s/J. STEVEN KEATE Director December 21, 1998
J. Steven Keate
/s/THOMAS D. SILVER Director December 21, 1998
Thomas D. Silver
</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.
<PAGE>
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.
<PAGE>
10.1 Pooling and Servicing Agreement dated as of December 1, 1990, among
Navistar Financial Corporation, as Servicer, Navistar Financial
Securities Corporation, as Seller, and The Chase Manhattan Bank (survivor
in the merger between The Chase Manhattan Bank and Chemical Bank which
was the survivor in the merger between Chemical Bank and Manufacturers
Hanover Trust Company), as Trustee. Filed on Registration No. 33-36767.
10.2 Purchase Agreement dated as of December 1, 1990, between the Corporation
and Navistar Financial Securities Corporation, as Purchaser, with respect
to the Dealer Note Trust 1990. Filed on Registration No. 33-36767.
10.3 Master Inter-company Agreement dated as of April 26, 1993, between the
Corporation and Transportation. Filed on Form 8-K dated April 30, 1993.
Commission File No. 1-4146-1.
10.4 Inter-company Purchase Agreement dated as of April 26, 1993, between
the Corporation and Truck Retail Instalment Paper Corp. Filed on Form 8-K
dated April 30, 1993. Commission File No. 1-4146-1.
E-1
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.5 Amended and Restated Credit Agreement dated as of November 4, 1994, among
the Corporation, certain banks, certain Co-Arranger banks, and Morgan
Guaranty Trust Company of New York, as Administrative Agent. Filed on
Form 8-K dated November 4, 1994. Commission File No. 1-4146-1.
10.6 Liquidity Agreement dated as of November 7, 1994, among NFC Asset Trust,
as Borrower, Chemical Bank, Bank of America Illinois, The Bank of Nova
Scotia, and Morgan Guaranty Trust Company of New York, as Co-Arrangers,
and Chemical Bank, as Administrative Agent. Filed on Form 8-K dated
November 4, 1994. Commission File No. 1-4146-1.
10.7 Appendix A to Liquidity Agreement at Exhibit 10.20. Filed on Form 8-K
dated November 4, 1994. Commission File No. 1-4146-1.
10.8 Collateral Trust Agreement dated as of November 7, 1994, between NFC
Asset Trust and Bankers Trust Company, as Trustee. Filed on Form 8-K
dated November 4, 1994. Commission File No. 1-4146-1.
10.9 Administration Agreement dated as of November 7, 1994, between NFC Asset
Trust and the Corporation, as Administrator. Filed on Form 8-K dated
November 4, 1994. Commission File No. 1-4146-1.
10.10 Trust Agreement dated as of November 7, 1994, between Truck Retail
Instalment Paper Corp., as Depositor, and Chemical Bank Delaware, as
Owner Trustee. Filed on Form 8-K dated November 4, 1994. Commission File
No. 1-4146-1.
10.11 Servicing Agreement dated as of November 7, 1994, between the
Corporation, as Servicer, and Truck Retail Instalment Paper Corp. Filed
on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1.
10.12 Servicing Agreement dated as of November 7, 1994, between the
Corporation, as Servicer, and NFC Asset Trust. Filed on Form 8-K dated
November 4, 1994. Commission File No. 1-4146-1.
10.13 Receivables Purchase Agreement dated as of November 7, 1994, between
Truck Retail Instalment Paper Corp., as Seller, and NFC Asset Trust, as
Purchaser. Filed on Form 8-K dated November 4, 1994. Commission File No.
1-4146-1.
10.14 Retail Receivables Purchase Agreement dated as of November 7, 1994,
between Truck Retail Instalment Paper Corp. and the Corporation. Filed on
Form 8-K dated November 4, 1994. Commission File No. 1-4146-1.
E-2
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.15 Lease Receivables Purchase Agreement dated as of November 7, 1994,
between Truck Retail Instalment Paper Corp. and Navistar Leasing
Corporation. Filed on Form 8-K dated November 4, 1994. Commission File
No. 1-4146-1.
10.16 Purchase Agreement dated as of May 25, 1995, between the Corporation and
Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1995-A Owner Trust. Filed on Registration
No. 33-55865.
10.17 Pooling and Servicing Agreement dated as of May 25, 1995, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1995-A Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.18 Trust Agreement dated as of May 25, 1995, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1995-A Owner Trust.
Filed on Registration No. 33-55865.
10.19 Indenture dated as of May 25, 1995, between Navistar Financial 1995-A
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1995-A Owner Trust. Filed on Registration No.
33-55865.
10.20 Pooling and Servicing Agreement dated as of June 8, 1995, among Navistar
Financial Corporation, as Servicer, Navistar Financial Securities
Corporation, as Seller, The Chase Manhattan Bank (survivor in the merger
between The Chase Manhattan Bank and Chemical Bank which was the survivor
in the merger between Chemical Bank and Manufacturers Hanover Trust
Company), as 1990 Trust Trustee, and The Bank of New York, as Master
Trust Trustee. Filed on Registration No. 33-87374.
10.21 Series 1995-1 Supplement to the Pooling and Servicing Agreement dated as
of June 8, 1995, among the Corporation, s Servicer, Navistar Financial
Securities Corporation, as Seller, and The Bank of New York, as Master
Trust Trustee on behalf of the Series 1995-1 Certificateholders. Filed on
Registration No. 33-87374.
10.22 Class A-4 Supplement to the 1990 Pooling and Servicing Agreement dated
June 8, 1995, among the Corporation, as Servicer, Navistar Financial
Securities Corporation, as Seller, and Chemical Bank (Successor to
Manufacturers Hanover Trust Company), as Trustee. Filed on Registration
No. 33-87374.
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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.23 Purchase Agreement dated as of June 8, 1995, between the Corporation and
Navistar Financial Securities Corporation, as Purchaser, with respect to
the Dealer Note Master Trust. Filed on Registration No. 33-87374.
10.24 Purchase Agreement dated as of November 1, 1995, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1995-B Owner Trust. Filed on Registration
No. 33-55865.
10.25 Pooling and Servicing Agreement dated as of November 1, 1995, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1995-B Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.26 Trust Agreement dated as of November 1, 1995, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1995-B Owner Trust.
Filed on Registration No. 33-55865.
10.27 Indenture dated as of November 1, 1995, between Navistar Financial 1995-B
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1995-B Owner Trust. Filed on Registration
No. 33-55865.
10.28 Amendment No. 1 dated as of March 29, 1996, to the Loan and Security
Agreement dated as of November 7, 1994, between Truck Retail Instalment
Paper Corp. ("TRIP") and NFC Asset Trust (the "Trust") filed on Form 8-K
dated June 5, 1996. Commission File No. 1-4146-1.
10.29 Amendment No. 1 and Consent dated as of March 29, 1996, to the Liquidity
Agreement dated as of November 7, 1994, among NFC Asset Trust, certain
lenders, and Chemical Bank, as Administrative Agent for the lenders filed
on Form 8-K dated June 5, 1996. Commission File No. 1-4146-1.
10.30 Amendment No. 2 dated as of March 29, 1996, to the Amended and Restated
Credit Agreement dated as of November 4, 1994, as amended by Amendment
No. 1 dated as of December 15, 1995, among the Corporation, certain
banks, certain Co-Arranger banks, and Morgan Guaranty Trust Company of
New York, as Administrative Agent filed on Form 8-K dated June 5, 1996.
Commission File No. 1-4146-1.
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<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.31 Purchase Agreement dated as of May 30, 1996, between the Corporation and
Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1996-A Owner Trust. Filed on Registration
No. 33-55865.
10.32 Pooling and Servicing Agreement dated as of May 30, 1996, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1996-A Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.33 Trust Agreement dated as of May 30, 1996, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1996-A Owner Trust.
Filed on Registration No. 33-55865.
10.34 Indenture dated as of May 30, 1996, between Navistar Financial 1996-A
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1996-A Owner Trust. Filed on Registration No.
33-55865.
10.35 Purchase Agreement dated as of November 6, 1996, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1996-B Owner Trust. Filed on Registration
No. 33-55865.
10.36 Pooling and Servicing Agreement dated as of November 6, 1996, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1996-B Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.37 Trust Agreement dated as of November 6, 1996, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1996-B Owner Trust.
Filed on Registration No. 33-55865.
10.38 Indenture dated as of November 6, 1996, between Navistar Financial 1996-B
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1996-B Owner Trust. Filed on Registration No.
33-55865.
10.39 Purchase Agreement dated as of May 7, 1997, between the Corporation and
Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1997-A Owner Trust, as Issuer. Filed on
Registration No. 33-55865.
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<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.40 Pooling and Servicing Agreement dated as of May 7, 1997, among the
Corporation as Servicer, Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1997-A Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.41 Trust Agreement dated as of May 7, 1997, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chase Manhattan Bank
Delaware, as Owner Trustee, with respect to Navistar Financial 1997-A
Owner Trust. Filed on Registration No. 33-55865.
10.42 Indenture dated as of May 7, 1997, between Navistar Financial 1997-A
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1997-A Owner Trust. Filed on Registration No.
33-55865.
10.43 Amendment No. 3 dated as of May 27, 1997, to the Amended and Restated
Credit Agreement dated as of November 4, 1994, as amended by Amendment
No. 1 dated as of December 15, 1995 and Amendment No. 2 dated as of March
29, 1996, among the Corporation. Certain banks, certain Co- Arranger
banks, and Morgan Guaranty Trust Company of New York, as Administrative
Agent filed on Form 8-K dated June 17, 1997. Commission File No.
1-4146-1.
10.44 Series 1997-1 Supplement to the Pooling and Servicing Agreement dated as
of August 19, 1997, among Navistar Financial Corporation, as Servicer,
Navistar Financial Securities Corporation, as Seller, and the Bank of New
York, as Master Trust Trustee on behalf of the Series 1997-1
Certificateholders. Filed on Registration No. 333-30737.
10.45 Class A-5 Supplement to the 1990 Pooling and Servicing Agreement dated
August 19, 1997, among Navistar Financial Corporation, as Servicer,
Navistar Financial Securities Corporation, as Seller, and The Chase
Manhattan Bank (survivor in the merger between The Chase Manhattan Bank
and Chemical Bank which was the survivor in the merger between Chemical
Bank and Manufacturers Hanover Trust Company), as Trustee. Filed on
Registration No. 333-30737.
10.46 Purchase Agreement dated as of November 5, 1997, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1997-B Owner Trust, as Issuer. Filed on
Registration No. 33-64249.
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<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.47 Pooling and Servicing Agreement dated as of November 5, 1997, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1997-B Owner Trust, as
Issuer. Filed on Registration No. 33-64249.
10.48 Trust Agreement dated as of November 5, 1997, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chase Manhattan Bank
Delaware, as Owner Trustee, with respect to Navistar Financial 1997-B
Owner Trust. Filed on Registration No. 33-64249.
10.49 Indenture dated as of November 5, 1997, between Navistar Financial 1997-B
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1997-B Owner Trust. Filed on Registration No.
33-64249.
10.50 Series 1998-1 Supplement to the Pooling and Servicing Agreement dated as
of July 17, 1997, among Navistar Financial Corporation, as Servicer,
Navistar Financial Securities Corporation, as Seller, and the Bank of New
York, as Master Trust Trustee on behalf of the Series 1998-1
Certificateholders. Filed on Registration No. 333-30737.
10.51 Class A-6 Supplement to the 1990 Pooling and Servicing agreement dated
July 17, 1997, among Navistar Financial Corporation, as Servicer,
Navistar Financial Securities Corporation, as Seller, and The Chase
Manhattan Bank (survivor in the merger between The Chase Manhattan Bank
and Chemical Bank which was the survivor in the merger between Chemical
Bank and Manufacturers Hanover Trust Company), as Trustee.
Filed on Registration No. 333-30737.
10.52 Purchase Agreement dated as of June 4, 1998, between the Corporation and
Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1998-A Owner Trust, as Issuer. Filed on
Registration No. 33-64249.
10.53 Pooling and Servicing Agreement dated as of June 4, 1998, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1998-A Owner Trust, as
Issuer. Filed on Registration No. 33-64249.
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<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.54 Trust Agreement dated as of June 4, 1998, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chase Manhattan Bank
Delaware, as Owner Trustee, with respect to Navistar Financial 1998-A
Owner Trust. Filed on Registration No. 33-64249.
10.55 Indenture dated as of June 4, 1998, between Navistar Financial 1998-A
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1998-A Owner Trust. Filed on Registration No.
33-64249.
10.56 Purchase Agreement dated as of November 13, 1998, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1998-B Multi-seller Asset-backed Commercial
Paper Conduit, as Issuer. Filed on Form 8-K dated December 18, 1998.
Commission File No. 33-64249.
10.57 Transfer and Administration Agreement dated as of November 13, 1998,
between the Corporation, as Servicer, and Navistar Financial Retail
Receivables Corporation, as Transferor, Park Avenue Receivables
Corporation, as Purchaser, and The Chase Manhattan Bank, as Funding Agent
and APA Bank. Filed on Form 8-K dated December 18, 1998. Commission File
No. 33-64249.
27.1 Financial Data Schedule for Article 5 of Regulation S-X, Item 601(c) for
the year ended October 31, 1998.
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