-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FXU6HzZCZ9a/dCWQ3tsTJgAb3Iz3+RyzhLfMgp57hcFvQjHBHpiUtUHSOIBAU2QS KHVl+WOoGdfQ5MM7xZ6GZQ== 0000808450-96-000001.txt : 19960129 0000808450-96-000001.hdr.sgml : 19960129 ACCESSION NUMBER: 0000808450-96-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951031 FILED AS OF DATE: 19960126 SROS: CSE SROS: NASD SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAVISTAR INTERNATIONAL CORP /DE/NEW CENTRAL INDEX KEY: 0000808450 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 363359573 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09618 FILM NUMBER: 96507556 BUSINESS ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3128362000 MAIL ADDRESS: STREET 2: 455 N CITYFRONT PLAZA DRIVE CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: NAVISTAR HOLDING INC DATE OF NAME CHANGE: 19870528 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended October 31, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 1-9618 N A V I S T A R I N T E R N A T I O N A L C O R P O R A T I O N --------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3359573 ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 455 North Cityfront Plaza Drive, Chicago, Illinois 60611 -------------------------------------------------- -------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (312) 836-2000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ----------------------------------------------- --------------------- Common stock, par value $0.10 per share New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange $6.00 cumulative convertible preferred stock, Series G (with $1.00 par value) New York Stock Exchange Cumulative convertible junior preference stock, Series D (with $1.00 par value) New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- As of January 16, 1996, the aggregate market value of Common Stock (excluding Class B Common Stock) held by non-affiliates of the registrant was $548,099,758. As of January 16, 1996, the number of shares outstanding of the registrant's Common Stock was 50,986,024 and the Class B Common Stock was 24,292,206. Documents Incorporated by Reference ----------------------------------- 1995 Annual Report to Shareowners (Parts I, II and IV) 1995 Proxy Statement (Parts I and III) Navistar Financial Corporation 1995 Annual Report on Form 10-K (Part IV) NAVISTAR INTERNATIONAL CORPORATION FORM 10-K Year Ended October 31, 1995 INDEX 10-K Page --------- PART I Item 1. Business .............................................. 3 Item 2. Properties ............................................ 11 Item 3. Legal Proceedings ..................................... 12 Executive Officers of the Registrant .................. 13 Item 4. Submission of Matters to a Vote of Security Holders ... 14 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ..................... 14 Item 6. Selected Financial Data ............................... 14 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition .... 14 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............. 14 PART III Item 10. Directors and Executive Officers of the Registrant ... 14 Item 11. Executive Compensation ............................... 14 Item 12. Security Ownership of Certain Beneficial Owners and Management ..................................... 14 Item 13. Certain Relationships and Related Transactions ....... 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................ 15 SIGNATURES Principal Accounting Officer ................................... 17 Directors ...................................................... 18 POWER OF ATTORNEY ................................................ 18 INDEPENDENT AUDITORS' REPORT ..................................... 20 INDEPENDENT AUDITORS' CONSENT .................................... 20 SCHEDULES ........................................................ F-1 EXHIBITS ......................................................... E-1 PART I ITEM 1. BUSINESS Navistar International Corporation is a holding company and its principal operating subsidiary is Navistar International Transportation Corp. referred to as "Transportation". As used hereafter, "Navistar" or "Company" refers to Navistar International Corporation and its subsidiaries, and "Parent Company" refers to Navistar International Corporation alone. Navistar, through its wholly-owned subsidiary Transportation, operates in one principal business segment, the manufacture and marketing of Class 5 through 8 diesel trucks (GVW 16,001 lbs. and greater), including school buses, mid-range diesel engines and service parts in the United States and Canada, and in selected export markets. Transportation is the industry market share leader in the combined Class 5 through 8 truck market in the United States and Canada, offering a full line of diesel-powered products in the common carrier, private carrier, government/service, leasing, construction, energy/petroleum and student transportation markets. Transportation also produces mid-range diesel engines for use in its Class 5, 6 and 7 medium trucks and for sale to original equipment manufacturers. Transportation markets its products through an extensive distribution network which includes 958 dealer and distribution outlets in the United States and Canada. Service and customer support are also supplied at these outlets. As a further extension of its business, Transportation provides financing and insurance for its dealers, distributors and retail customers through its wholly-owned subsidiary, Navistar Financial Corporation, referred to as "Navistar Financial". See "Important Supporting Operations". 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, 1995, in thousands of units: YEARS ENDED OCTOBER 31, ----------------------- 1995 1994 1993 1992 1991 ----- ----- ----- ----- ----- Class 5, 6 and 7 medium trucks and school buses ...................... 151.8 134.2 122.5 118.3 120.1 Class 8 heavy trucks ................ 228.8 205.4 166.4 125.2 109.0 ----- ----- ----- ----- ----- Total ............................. 380.6 339.6 288.9 243.5 229.1 ===== ===== ===== ===== ===== Source: Based upon monthly data by the American Automobile Manufacturers Associations (AAMA) in the United States and Canada, and other sources. The Class 5 through 8 diesel truck market in the United States and Canada is highly competitive. Major domestic competitors include PACCAR, Ford and General Motors, as well as foreign-controlled manufacturers, such as Freightliner, Mack and Volvo GM. In addition, manufacturers from Japan (Hino, Isuzu, Nissan and Mitsubishi) are competing in the United States and Canadian markets. The intensity of this competition results in price discounting and margin pressures throughout the industry. In addition to the influence of price, market position is driven by product quality, engineering, styling, utility and distribution. TRANSPORTATION MARKET SHARE Transportation delivered 101,700 Class 5 through 8 trucks, including school buses, in the United States and Canada in fiscal 1995, an 11% increase from the 91,600 in 1994. Navistar's combined share of the Class 5 through 8 truck market in 1995 was 26.7%. Transportation has been the leader in combined market share for Class 5 through 8 trucks, including school buses, in the United States and Canada in each of its last 15 fiscal years. PRODUCTS AND SERVICES The following table illustrates the percentage of Transportation's sales by class of product based on dollar amount: YEARS ENDED OCTOBER 31, ----------------------- 1995 1994 1993 ----- ----- ----- PRODUCT CLASS - ------------- Class 5, 6 and 7 medium trucks and school buses ..................... 32% 32% 31% Class 8 heavy trucks ............... 42 42 44 Service parts ...................... 12 14 14 Engines ............................ 14 12 11 ----- ----- ----- Total ........................... 100% 100% 100% ===== ===== ===== Transportation offers a full line of Class 5 through 8 trucks, with the objective of serving the customer by addressing requirements for performance and value. In 1995, Transportation solidified its market leadership position in the cabover market segment with the introduction of the 9800 Pro Sleeper, an industry first with a totally flat floor design. The T444E and DT466E electronically controlled diesel engines, which were introduced in 1994, enhance Class 5, 6 and 7 medium truck operating performance and life. In addition, new interiors and a hydraulic anti-lock brake system were introduced in 1995 in the Company's Class 5 through 7 medium trucks. Transportation was recognized as possessing the best overall dealer franchise organization according to the most recent American Truck Dealers (ATD) Dealer Attitude Survey (May 1995). In 1995, Heavy Duty Trucking magazine recognized Transportation for two products. The "9800 Pro Sleeper with Flat Floor" and the "International HEUI Engine" were selected as two of the most significant 50 new truck-related products of 1995. According to the annual survey conducted by J. D. Power and Associates on 1995 Medium-Duty Truck Customer Satisfaction, Navistar ranked number one in customer satisfaction in product for Class 5, 6 and 7 medium conventional trucks for the third consecutive year. For over two decades, Transportation has been the leading supplier of school bus chassis in the United States. Transportation manufactures chassis for conventional school buses as well as for use in small capacity buses, designed to meet the needs of disabled students. Chassis are sold through dealers and national account managers for delivery to the ultimate customers: school districts and contractors. In addition to its traditional chassis business, Transportation's wholly-owned subsidiary, American Transportation Corporation (AmTran), manufactures school bus bodies. In 1995, Transportation acquired the remaining interests in AmTran. Through its relationship with AmTran, Transportation participates in the trend toward the integrated design and manufacture of school buses, which offers improved production and marketing efficiencies, and a reduction in the school bus order cycle. Transportation offers diesel-powered trucks and buses because of their improved fuel economy, ease of serviceability and greater durability over gasoline-powered vehicles. Transportation's Class 8 heavy trucks generally use diesel engines purchased from outside suppliers while Class 5, 6 and 7 medium trucks are powered by a proprietary line of mid-range diesel engines manufactured by Transportation. In 1994, Transportation launched its all new series of V-8 and in-line six-cylinder diesel engines for bus and Class 5 through 8 truck models. In 1995, the HEUI (Hydraulically actuated, Electronically controlled Unit Injection) fuel system extended Transportation's leadership position as the only truck and engine manufacturer to offer a fully electronic mid-range diesel engine line. Based upon information published by R.L. Polk & Company, diesel-powered Class 5, 6 and 7 medium truck shipments represented 80% of all medium truck shipments for fiscal year 1995 in the United States and Canada. Transportation's truck and bus manufacturing operations in the United States and Canada consist principally of the assembly of components manufactured by its suppliers, although Transportation produces its own mid- range diesel truck engines, sheet metal components (including cabs) and miscellaneous other parts. The following is a summary of Transportation's truck manufacturing capacity utilization for the five years ended October 31, 1995: YEARS ENDED OCTOBER 31, ----------------------- 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- Production units ............. 110,633 94,993 88,274 73,901 70,502 Total production capacity .... 112,952 112,966 106,032 106,088 106,762 Capacity utilization ......... 97.9% 84.1% 83.3% 69.7% 66.0% Total production capacity varies as a result of changes in the number of days of production during a year, as well as changes in production constraints. The capacity utilization information excludes AmTran which was acquired during the fourth quarter of 1995. In 1995, Transportation reached an agreement with Spartan Motors to jointly develop, market and manufacture diesel-powered rear-engine recreational vehicle chassis. Spartan Motors is the world's largest engineer and manufacturer of custom chassis for recreational vehicles, fire trucks, airport tankers and other specialty vehicles. ENGINE AND FOUNDRY Transportation builds diesel engines for use in its Class 5, 6 and 7 medium trucks, school buses, selected Class 8 heavy truck models and for sale to original equipment manufacturers in the United States and Canada. Transportation also sells engines for industrial, agricultural and marine applications. Transportation is the leading supplier of mid-range diesel engines in the 160-300 horsepower range according to data supplied by a private research firm, Power Systems Research of Minneapolis, Minnesota. Production in 1995 totalled 228,600 units, an increase of 19% from the 192,400 units produced in 1994. Transportation has completed an engine program which began with a major capital investment in its engine products and facilities to manufacture a new generation of V-8 and in-line six cylinder diesel engines. The implementation of this program began in 1993 with the introduction of a new in-line six- cylinder diesel engine family, equipped with a special mechanical fuel injection system, that replaced the long-standing DT family of engines. In February 1994, Transportation introduced the V-8 T444E, the industry's first full-featured electronic diesel engine designed specifically for the medium truck market. This engine offers a 10 to 15 percent improvement in fuel economy, 30 to 40 percent enhancement in durability, and improved power and torque when compared to the former 7.3 Liter V-8 product. In addition, this engine meets current emissions requirements and includes such optional features as electronic cruise control, electronically controlled power-take- off and diagnostic capabilities. In 1995, Transportation became the first North American truck manufacturer to offer a complete line of fully electronic diesel engines. All of Transportation's electronic diesel engines are equipped with HEUI, the new fuel injection technology first introduced in 1994. All International brand diesel truck engines are able to meet emission standards without the use of a catalytic converter or exhaust after treatment device, unlike Transportation's competitors. This new generation of engines is designed to respond to customer demands for engines that have more power, improved fuel economy, long life, and meet current emission requirements through 1997. The engines are offered in a wider horsepower range than previously offered, which will give Transportation an opportunity to expand the number of applications for its engines and broaden its customer base. Based on U.S. registrations published by R.L. Polk & Company, the T444E electronically controlled diesel engine is the leading engine of its class. In addition to its strong contribution to the market position of Transportation's medium trucks, the light truck version, marketed as the 7.3 Liter Direct Injection Diesel, has realized significant external sales. Transportation has an agreement to supply this V-8 product to a domestic automotive company through the year 2000 for use in all of its diesel-powered light trucks and vans. Sales of this engine to the automotive company currently account for approximately 87% of Transportation's T444E sales. Shipments to all original equipment manufacturers totalled a record 156,100 units in 1995, an increase of 20% from the 130,600 units shipped in 1994. The International 530/530E offers high horsepower and torque, as well as a lower initial price, considerable weight savings and reduced operating costs. The International 530 is well-suited for customers using their trucks in "hub and spoke" freight hauling applications, such as beverage or refrigerated delivery, and construction applications, such as material hauling, redi-mix and roll off refuse. The following is a summary of Transportation's engine capacity utilization for the five years ended October 31, 1995. YEARS ENDED OCTOBER 31, ----------------------- 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- Engine production units ..... 228,638 192,446 175,464 148,991 126,103 Total production capacity ... 198,000 188,000 166,260 166,260 166,720 Capacity utilization ........ 115.5% 102.4% 105.5% 89.6% 75.6% Total production capacity varies as a result of changes in product mix. Transportation is exploring the development of alternative fuel engines, including engines powered by compressed natural gas, and has an agreement with Detroit Diesel Corporation to develop a natural gas engine based on Transportation's new V-8 engine and Detroit Diesel's electronic alternative fuel technology. SERVICE PARTS The service parts business is a significant contributor to Transportation's sales and gross margin, and to the maintenance of its Class 5 through 8 truck and engine customer base. In the United States and Canada, Transportation operates 7 regional parts distribution centers, which allows it to offer 24-hour availability and same day shipment of the parts most frequently requested by customers. Transportation is undertaking initiatives to increase parts sales outside of the United States and Canada. As customers have explored ways to reduce their costs and improve efficiency, Transportation and its dealers have established programs to help them manage the parts and maintenance aspects of their businesses more efficiently. Transportation also offers a "Fleet Charge" program, which allows participating customers to purchase parts on credit at all of its dealer locations at consistent and competitive prices. In 1995, service parts sales increased as a result of growth in dealer and national accounts, as well as in its export business. MARKETING AND DISTRIBUTION UNITED STATES AND CANADIAN OPERATIONS. Transportation's truck products are distributed in virtually all key markets in the United States and Canada through the largest retail organization specializing in medium and heavy trucks. As part of its continuing program to adapt to changing market conditions, Transportation has been assisting dealers to expand their operations to better serve their customer base. Transportation's truck distribution and service network in the United States and Canada was composed of 958, 949 and 950 dealers and retail outlets at October 31, 1995, 1994 and 1993, respectively. Included in these totals were 490, 473 and 467 secondary and associate locations at October 31, 1995, 1994 and 1993, respectively. Retail dealer activity is supported by 5 regional operations in the United States and a general office in Canada. Transportation has a national account sales group responsible for its 130 major national account customers. Transportation's 8 retail and 3 wholesale used truck centers in the United States and Canada provide sales and trade-in benefits to its dealers and retail customers. INTERNATIONAL OPERATIONS. Transportation exports trucks, components and service parts, both wholesale and retail, to more than 70 countries around the world. In 1995, 5,000 trucks were exported while 5,100 trucks were exported in 1994. Cumulatively, from 1986 through 1995, Transportation was the leading North American exporter of Class 6 through 8 trucks according to data provided by the AAMA. In 1995, the Company established new regional sales offices in Johannesburg, South Africa, and in Dubai, United Arab Emirates, to oversee the distribution of Class 5 through 8 diesel trucks and service parts. In Mexico, Transportation has an agreement with DINA Camiones, S.A. (DINA) to supply product technology, components and technical services for assembly of DINA trucks and buses. Transportation also sells its in-line six-cylinder family of mid-range diesel engines to Perkins Group, Ltd. (Perkins) of Peterborough, England, for worldwide distribution and to Detroit Diesel Corporation, the North American distributor of Perkins. NAVISTAR FINANCIAL CORPORATION Navistar Financial is engaged in the wholesale, retail and lease financing of new and used trucks sold by Transportation and its dealers in the United States. Navistar Financial 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 1994 and 1995, Navistar Financial provided wholesale financing for 93% of the new truck units sold by Transportation to its dealers and distributors in the United States. Navistar Financial also provided retail financing in 1995 and 1994 for approximately 14% and 15%, respectively, of the new truck units sold by Transportation and its dealers and distributors in the United States. Navistar Financial'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. IMPORTANT SUPPORTING OPERATIONS THIRD PARTY SALES FINANCING AGREEMENTS. In the United States, Transportation has an agreement with Associates Commercial Corporation (Associates) to provide wholesale financing to certain of its truck dealers and retail financing to their customers. During 1995, Associates provided 7% of the wholesale financing utilized by Transportation's dealers and distributors, unchanged from fiscal 1994. Navistar International Corporation Canada has an agreement with a subsidiary of General Electric Canadian Holdings Limited to provide financing for Canadian dealers and customers. FOREIGN INSURANCE SUBSIDIARIES. 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. The company writes minimal third-party coverage and provides a variety of insurance programs to Transportation, its dealers, distributors and customers. CAPITAL EXPENDITURES AND RESEARCH AND DEVELOPMENT Transportation designs and manufactures its trucks and diesel engines to meet or exceed specific industry requirements. New products are introduced and improvements are made in accordance with operating plans and market requirements. Research and development activities are directed toward the introduction of new products and improvements of existing products and processes used in their manufacture, and spending for these activities totalled $91 million, $88 million, and $86 million for 1995, 1994 and 1993, respectively. During 1995, 1994 and 1993, capital expenditures totalled $139 million, $87 million and $110 million, respectively. Major program expenditures in 1995 and 1994 included continued investment in machinery and equipment at the Melrose Park, Illinois and Indianapolis, Indiana engine facilities to manufacture mid-range diesel engines used in trucks and school bus chassis produced by the Company and also sold to original equipment manufacturers. Other expenditures were made for truck product improvements, modernization of facilities and compliance with environmental regulations. BACKLOG The backlog of unfilled truck orders (subject to cancellation or return in certain events) was as follows: AT OCTOBER 31 MILLIONS OF DOLLARS UNITS ----------------- ------------------- ----- 1995 .......... $ 3,226 47,119 1994 .......... $ 4,197 64,841 1993 .......... $ 1,353 23,939 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 following table summarizes employment levels as of the end of fiscal years 1993 through 1995: TOTAL AT OCTOBER 31 EMPLOYMENT ----------------- ---------- 1995 ............................... 16,079 1994 ............................... 14,910 1993 ............................... 13,612 LABOR RELATIONS At October 31, 1995, the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represented 8,199 of the Company's active employees in the United States, and the Canadian Auto Workers (CAW) represented 1,968 of the Company's active employees in Canada. Other unions represented 1,246 of the Company's active employees in the United States, and Canada. The Company entered into a collective bargaining agreement with the UAW in 1995 which expires on October 1, 1998. The 1993 collective bargaining agreement with the CAW expires on October 24, 1996. The new UAW contract increases the Company's pension costs but provides greater operating flexibility. PATENTS AND TRADEMARKS Transportation continuously obtains patents on its inventions and, thus, owns a significant patent portfolio. Additionally, many of the components which Transportation purchases for its products are protected by patents that are owned or controlled by the component manufacturer. Transportation has licenses under third-party patents relating to its products and their manufacture, and Transportation grants licenses under its patents. The royalties paid or received under these licenses are not significant. No particular patent or group of patents is considered by Transportation to be essential to its business as a whole. Like all businesses which offer well-known products or services, Transportation's primary trademarks are an important part of its worldwide sales and marketing efforts, and provide instant identification of its products and services in the marketplace. To support these efforts, Transportation maintains, or has pending, registrations of its primary trademarks in those countries in which it does business or expects to do business. RAW MATERIALS AND ENERGY SUPPLIES Transportation purchases raw materials, parts and components from numerous outside suppliers but relies upon some suppliers for a substantial number of components for its truck products. Transportation's purchasing strategies have been designed to improve access to the lowest cost, highest quality sources of raw materials, parts and components, and to reduce inventory carrying requirements. A portion of Transportation's requirements for raw materials and supplies is filled by single-source suppliers. The impact of an interruption in supply will vary by commodity. Some parts are generic to the industry while others are of a proprietary design requiring unique tooling which would require time to recreate. However, the Company's exposure to a disruption in production as a result of an interruption of raw materials and supplies is no greater than the industry as a whole. In order to remedy any losses resulting from an interruption in supply, the Company maintains contingent business interruption insurance for storms, fire and water damage. In 1995, several suppliers experienced labor problems or capacity constraints, as a result of industry wide-growth and demand, which created interruptions in the flow of supplies to the Company. As the truck and automotive market demand decreases, the strain on suppliers' production capacity will be reduced. IMPACT OF GOVERNMENT REGULATION Truck and engine manufacturers continue to face increasing governmental regulation of their products, especially in the areas of environment and safety. The Company believes its products comply with all applicable environmental and safety regulations. As a diesel engine manufacturer, the Company has incurred significant research and tooling costs to totally redesign its engine product lines to meet United States Environmental Protection Agency (U.S. EPA) and California Air Resources Board (CARB) emission standards effective in the 1994 model year. The Company faces significant additional outlays through 1998 to meet further tightening of these standards. In addition to the 1998 standard, the Company, along with other engine manufacturers, has signed an unprecedented voluntary agreement (Statement of Principles) with U.S. EPA and CARB to achieve dramatic new reductions in ozone-causing exhaust emissions by 2004. Complying with the resulting new emission standards represent a significant engineering challenge that will require a major outlay of resources. The Company faces further challenges in satisfying California's emission standards in 1996 and 2002 for engines used in medium-size vehicles (which includes vehicles up to 14,000 lbs. Gross Vehicle Weight Rating. The Company expects that its diesel engines will be able to meet all of these standards in the required timeframe. Emissions regulations in Canada and Mexico are similar, but not identical, to the U.S. federal regulations. Although Canada's regulations impose standards equivalent only to the U.S. standards for the 1990 model year, diesel engine manufacturers, including the Company, have voluntarily signed several memorandums of understanding with the Canadian federal government, agreeing to sell only engines meeting the 1994 U.S. emission standards in model years 1995 to 1997. Canada has announced its intention to conform its heavy-duty engine emission standards to the U.S. EPA standards in 1998 and to require low-sulfur diesel fuel, as in the U.S., beginning October 1, 1997. Mexico has adopted the U.S. heavy diesel engine emission standards as of the 1994 model year but has conditioned compliance on the availability of low-sulfur diesel fuel. The Mexican government is expected to complete the conversion of diesel fuel supplies nationwide to low-sulfur fuel no later than early 1996. Truck manufacturers are also subject to various noise standards imposed by federal, state and local regulations. The engine is one of a truck's primary noise sources, and the Company, therefore, works closely with original equipment manufacturers to develop strategies to reduce engine noise. The Company is also subject to the National Traffic and Motor Vehicle Safety Act (Safety Act) and Federal Motor Vehicle Safety Standards (Safety Standards) promulgated by the National Highway Traffic Safety Administration. The Company believes it is in compliance with the Safety Act and the Safety Standards. Expenditures to comply with various environmental regulations relating to the control of air, water and land pollution at production facilities and to control noise levels and emissions from Transportation's products have not been material except for two sites formerly owned by the Company, Wisconsin Steel and Solar Turbine. In 1994, Transportation recorded a $20 million after-tax charge as a loss of discontinued operations for environmental liabilities and cleanup cost. ITEM 2. PROPERTIES Transportation has 8 manufacturing and assembly plants in the United States and 1 in Canada which are owned by Transportation. The aggregate floor space of these 9 plants is approximately 9 million square feet. Transportation also owns or leases other significant properties in the United States and Canada, including a paint facility, a small component fabrication plant, vehicle and parts distribution centers, sales offices, engineering centers and its headquarters in Chicago. ITEM 3. LEGAL PROCEEDINGS In May 1993, a jury issued a verdict in favor of Vernon Klein Truck & Equipment, Inc. (Klein Truck) and against Transportation in the amount of $10.8 million in compensatory damages and $15 million in punitive damages. The Company appealed the verdict and, in order to do so, was required to post a bond collateralized with $30 million in cash. In November 1994, the Court of Appeals of the State of Oklahoma reversed the verdict and entered judgment in favor of Transportation on virtually all aspects of the case. Klein Truck appealed to the Oklahoma Supreme Court, where the case is now pending. The bond and related collateral will be released when the order of the Oklahoma Supreme Court is filed. Transportation and the Economic Development Administration (EDA), a division of the U.S. Department of Commerce, reached an agreement in the fourth quarter of 1994 in settlement of commercial and environmental disputes related to the Wisconsin Steel property. EDA and Transportation became 90% and 10% beneficiaries, respectively, of a trust which was created after the party that purchased Wisconsin Steel filed for bankruptcy. At the time of bankruptcy, EDA had guaranteed repayment of 90% and Transportation of 10% of loans made to Wisconsin Steel. The settlement provides that EDA transfer its interest in the trust to Transportation which, in turn, will assume responsibility for completing the investigation of the environmental condition at the site and for any cleanup work that may be necessary. Transportation has agreed to pay EDA $11 million to settle various commercial issues, as well as reimburse them for a portion of environmental response costs spent by EDA. The Department of Justice must approve the final settlement before the interest in the trust or the property is transferred to Transportation. Transportation and Solar Turbines Incorporated (Solar), a wholly-owned subsidiary of Caterpillar, Inc., executed an agreement in June 1995, wherein Transportation agreed to pay for 65% of future costs associated with environmental cleanup at Solar's facility in San Diego, California. In addition, Transportation agreed to pay for a yet undetermined portion of past environmental costs. Transportation owned and operated this facility from 1961 to 1981 and sold it to Caterpillar Inc. in 1981. As part of the agreement, Transportation will control the site investigation and any cleanup work that may be necessary. The Company and its subsidiaries are subject to various other claims arising in the ordinary course of business, and are parties to various legal proceedings which constitute ordinary routine litigation incidental to the business of the Company and its subsidiaries. In the opinion of the Company's management, none of these proceedings or claims are material to the business or the financial condition of the Company. EXECUTIVE OFFICERS The following selected information for each of the Company's current executive officers was prepared as of January 16, 1995. OFFICERS AND POSITIONS WITH NAME AGE NAVISTAR AND OTHER INFORMATION - ------------------ --- ------------------------------------------------- John R. Horne .... 57 President and Chief Executive Officer in 1995 and a Director since 1990. Mr. Horne also is Chairman, President and Chief Executive Officer of Transportation in 1995 and a Director since 1987. Prior to this, Mr. Horne served as President and Chief Operating Officer, 1990-1995, Group Vice President and General Manager, Engine and Foundry, 1990, and Vice President and General Manager, Engine and Foundry, 1983-1990. Robert C. Lannert. 55 Executive Vice President and Chief Financial Officer and a Director since 1990. Mr. Lannert also is Executive Vice President and Chief Financial Officer of Transportation since 1990 and a Director since 1987. Prior to this, Mr. Lannert served as Vice President and Treasurer, 1987-1990, and Vice President and Treasurer of Transportation, 1979-1990. Robert A. Boardman 48 Senior Vice President and General Counsel since 1990. Mr. Boardman also is Senior Vice President and General Counsel of Transportation since 1990. Prior to this, Mr. Boardman served as Vice President of Manville Corporation, 1988-1990, and Corporate Secretary, 1983-1990. Thomas M. Hough .. 50 Vice President and Treasurer since 1992. Mr. Hough also is Vice President and Treasurer of Transportation since 1992. Prior to this, Mr. Hough served as Assistant Treasurer 1987-1992, and Assistant Treasurer of Transportation, 1987-1992. Mr. Hough also served as Assistant Controller, Accounting and Financial Systems, 1987, and Controller of Navistar Financial Corporation, 1982-1987. J. Steven Keate .. 39 Vice President and Controller since December 1995. Mr. Keate is also Vice President and Controller of Transportation since March 1995. Prior to this, Mr. Keate served as Vice President and Controller of General Dynamics Corporation, 1991-1995, and Corporate Manager, Financial Planning and Analysis, 1989-1991. Steven K. Covey .. 44 Corporate Secretary since 1990. Mr. Covey also is Associate General Counsel of Transportation since November 1992. Prior to this, Mr. Covey served as General Attorney, Finance and Securities of Transportation, 1989-1992, Senior Counsel, Finance and Securities, 1986-1989, and Senior Attorney, Corporate Operations 1984-1986. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable PART II The information required by Items 5-8 is incorporated herein by reference from the 1995 Annual Report to Shareowners, filed as Exhibit 13 to this Form 10-K as follows: 1995 Annual Report Page ------ ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ......................... 50 ITEM 6. SELECTED FINANCIAL DATA ................................. 48 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ................... 4 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............. 13 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 1995 Annual Report to Shareowners is not to be deemed filed as part of this report. ---------------------------------------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEMS 10, 11, 12 AND 13 Information required by Part III (Items 10, 11, 12 and 13) of this Form is incorporated herein by reference from Navistar's definitive Proxy Statement for the March 20, 1996 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 1995 Annual Report to Shareowners, filed as Exhibit 13 to this Form 10-K as follows: 1995 Annual Report Page ------- Financial Statements - -------------------- Independent Auditors' Report .................................... 12 Statement of Income for the years ended October 31, 1995, 1994 and 1993 ........... 13 Statement of Financial Condition as of October 31, 1995 and 1994. 15 Statement of Cash Flow for the years ended October 31, 1995, 1994 and 1993 ........... 17 Statement of Non-Redeemable Preferred, Preference and Common Shareowners' Equity for the years ended October 31, 1995, 1994 and 1993 ........... 19 Notes to Financial Statements ................................... 20 Form 10-K Schedule Page - -------- ---- II - Valuation and Qualifying Accounts and Reserves ........... F-1 All other schedules are omitted because of the absence of the conditions under which they are required or because information called for is shown in the financial statements and notes thereto in the 1995 Annual Report to Shareowners. Finance and Insurance Subsidiaries: The financial statements of Navistar Financial Corporation for the years ended October 31, 1995, 1994 and 1993 appearing on pages 10 through 39 in Annual Report on Form 10-K for Navistar Financial Corporation for the fiscal year ended October 31, 1995, Commission File No. 1-4146-1, are incorporated herein by reference and filed as Exhibit 28 to this Form 10-K. Financial information regarding all Navistar subsidiaries engaged in finance and insurance operations, including Navistar Financial Corporation, appears as supplemental information to the Financial Statements in the Navistar 1995 Annual Report to Shareowners and is incorporated herein by reference. Form 10-K Exhibits, Including Those Incorporated by Reference Page - --------------------------------------------------- ---- (3) Articles of Incorporation and By-Laws .................... E-1 (4) Instruments Defining the Rights of Security Holders, Including Indentures ................................... E-2 (10) Material Contracts E-3 (11) Computation of Net Income (Loss) Per Common Share ........ E-5 (13) Navistar International Corporation 1995 Annual Report to Shareowners ......................................... N/A (21) Subsidiaries of the Registrant .......................... E-6 (23) Independent Auditors' Consent ........................... 20 (24) Power of Attorney ....................................... 18 (27) Financial Data Schedule ................................. N/A (28) Navistar Financial Corporation Annual Report on Form 10-K for the fiscal year ended October 31, 1995 N/A All exhibits other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information called for is shown in the financial statements and notes thereto in the 1995 Annual Report to Shareowners. Reports on Form 8-K - ------------------- No reports on Form 8-K were filed for the three months ended October 31, 1995. SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND SUBSIDIARIES ---------------------------------- SIGNATURE Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAVISTAR INTERNATIONAL CORPORATION - ---------------------------------- (Registrant) /s/ J. Steven Keate - ----------------------------------- J. Steven Keate January 26, 1996 Vice President and Controller (Principal Accounting Officer) EXHIBIT 24 SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND SUBSIDIARIES ---------------------------------- POWER OF ATTORNEY Each person whose signature appears below does hereby make, constitute and appoint John R. Horne and Robert I. Morrison 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/ James C. Cotting - --------------------------- James C. Cotting Chairman of the Board, January 26, 1996 and Director /s/ John R. Horne - --------------------------- John R. Horne President and January 26, 1996 Chief Executive Officer, and Director (Principal Executive Officer) /s/ J. Steven Keate - --------------------------- J. Steven Keate Vice President and Controller January 26, 1996 (Principal Accounting Officer) /s/ William F. Andrews - --------------------------- William F. Andrews Director January 26, 1996 /s/ Wallace W. Booth - --------------------------- Wallace W. Booth Director January 26, 1996 /s/ Andrew F. Brimmer - --------------------------- Andrew F. Brimmer Director January 26, 1996 EXHIBIT 24 (CONTINUED) SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND SUBSIDIARIES ---------------------------------- SIGNATURES (Continued) /s/ Richard F. Celeste - --------------------------- Richard F. Celeste Director January 26, 1996 /s/ John D. Correnti - --------------------------- John D. Correnti Director January 26, 1996 /s/ William C. Craig - --------------------------- William C. Craig Director January 26, 1996 /s/ Jerry E. Dempsey - --------------------------- Jerry E. Dempsey Director January 26, 1996 /s/ Mary Garst - --------------------------- Mary Garst Director January 26, 1996 /s/ Charles A. Haggerty - --------------------------- Charles A. Haggerty Director January 26, 1996 /s/ Arthur G. Hansen - --------------------------- Arthur G. Hansen Director January 26, 1996 /s/ Robert C. Lannert - --------------------------- Robert C. Lannert Director January 26, 1996 /s/ Walter J. Laskowski - --------------------------- Walter J. Laskowski Director January 26, 1996 SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND 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, 1995 and 1994, and the related Statement of Income, of Cash Flow, and of Non- Redeemable Preferred, Preference and Common Shareowners' Equity for each of the three years in the period ended October 31, 1995, and have issued our report thereon, dated December 18, 1995 (which includes an explanatory paragraph relating to the change in methods of accounting for postretirement benefits other than pensions and for income taxes as required by Statements of Financial Accounting Standards No. 106 and No. 109); such consolidated financial statements and report are included in your 1995 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 18, 1995 Chicago, Illinois ---------------------------------------------------------- EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT Navistar International Corporation: We consent to the incorporation by reference in Post-Effective Amendment No. 1 to Registration No. 2-70979 on Form S-8 and in Post-Effective Amendment No. 6 to Registration No. 2-55544 on Form S-8 and in Post-Effective Amendment No. 1 to Registration No. 2-9604 on Form S-8 of our reports on Navistar International Corporation and Navistar Financial Corporation, dated December 18, 1995, appearing and incorporated by reference in this Annual Report on Form 10-K of Navistar International Corporation for the year ended October 31, 1995. Deloitte & Touche LLP January 26, 1996 Chicago, Illinois SCHEDULE II
NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ============ VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 (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: 1995 ---- Uncollectible notes and accounts Allowance for written off and losses on Notes and accounts reserve adjustments, receivables .... receivable .... $ 25 $ 4 less recoveries ... $ 1 $ 28 ===== ===== ===== ===== 1994 ---- Uncollectible notes and accounts Allowance for written off and losses on Notes and accounts reserve adjustments, receivables .... receivable .... $ 36 $ 2 less recoveries ... $ 13 $ 25 ===== ===== ===== ===== 1993 ---- Uncollectible notes and accounts Allowance for written off and losses on Notes and accounts reserve adjustments, receivables .... receivable .... $ 34 $ 6 less recoveries ... $ 4 $ 36 ===== ===== ===== =====
F-1 EX-3 2 EXHIBIT 3 NAVISTAR INTERNATIONAL CORPORATION AND SUBSIDIARIES ---------------------------------- ARTICLES OF INCORPORATION AND BY-LAWS The following document of Navistar International Corporation is 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. The following document of Navistar International Corporation is included herein in those executed and conformed copies of this report to the Securities and Exchange Commission, the New York Stock Exchange, the Chicago Stock Exchange and the Pacific Stock Exchange. 3.2 The By-Laws of Navistar International Corporation effective April 14, 1995, filed as Exhibit 3.2 on Annual Report on Form 10-K dated October 31, 1995, which was filed on January 26, 1996, on Commission File No. 1-9618. E-1 EX-3.2 3 - ----------------------------------------------------------------------------- EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF NAVISTAR INTERNATIONAL CORPORATION ---------------------------------- Incorporated Under the Laws of the State of Delaware (Effective February 14, 1995) - ----------------------------------------------------------------------------- AMENDED AND RESTATED BY-LAWS OF NAVISTAR INTERNATIONAL CORPORATION ARTICLE I. ---------- Meetings of Stockholders ------------------------ Section 1. Annual Meetings. The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held in the first three (3) months of each calendar year. Section 2. Special Meetings. A special meeting of the stockholders for any purpose or purposes, unless otherwise prescribed by statute, may be called at any time by the Chair of the Board or the Board of Directors. Section 3. Time and Place of Meetings. All meetings of the stockholders shall be held at such times and places, within or without the State of Delaware, as may from time to time be fixed by the Board of Directors, or as shall be specified or fixed in the respective notices or waivers of notice thereof. Section 4. Notice of Meetings. Except as otherwise expressly required by law or by the Certificate of Incorporation of Navistar International Corporation ("Corporation"), notice of each meeting of the stockholders shall be given, at least fifteen (15) days in the case of an annual meeting, and ten (10) days in the case of a special meeting, before the day on which the meeting is to be held, to each stockholder of record entitled to vote at such meeting by mailing such notice in a postage prepaid envelope addressed to the stockholder at the stockholder's last post office address appearing on the stock records of the Corporation. Except as otherwise expressly required by law, no publication of any notice of a meeting of the stockholders shall be required. At special meetings of stockholders no business other than that specified in the notice of the meeting or germane thereto shall be transacted at such meeting. Except as otherwise expressly required by law, notice of any adjourned meeting of the stockholders need not be given. Section 5. Quorum. At each meeting of the stockholders, except as otherwise expressly required by law, stockholders holding one-third (1/3) of the shares of stock of the Corporation, issued and outstanding, and entitled to be voted thereat, shall be present in person or by proxy to constitute a quorum for the transaction of business. In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in voting interest of those present in person or by proxy and entitled to vote thereat, or in the absence therefrom of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting from time to time until stockholders holding the amount of stock requisite for a quorum shall be present or represented. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called. Section 6. Organization. At each meeting of the stockholders, one of the following shall chair the meeting and preside thereat, in the following order of precedence: (a) the Chair of the Board; (b) the Chief Executive Officer; (c) an Executive Officer in order of rank of office and by seniority within the same rank; or (d) a stockholder of record of the Corporation who shall be chosen to chair such meeting by a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat. The Secretary, or, if he or she shall be absent from such meeting, the person (who shall be an Assistant Secretary, if an Assistant Secretary shall be present thereat) whom the chair of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. Section 7. Order of Business. The order of business at each meeting of the stockholders shall be determined by the chair of such meeting, but such order of business at any meeting at which a quorum is present may be changed by the vote of a majority in voting interest of those present in person or by proxy at such meeting and entitled to vote thereat. Section 8. Notice of Stockholder Nomination and Stockholder Business. At a meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Other matters to be properly brought before the meeting must be: (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, including matters covered by rule 14a-8 of the United States Securities and Exchange Commission; (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors; or (c) otherwise properly brought before the meeting by a stockholder. A notice of the intent of a stockholder to make a nomination or to bring any other matter before the meeting shall be made in writing and received by the Secretary of the Corporation not more than 180 days and not less than 120 days in advance of the annual meeting or, in the event of a special meeting of stockholders, such notice shall be received by the Secretary of the Corporation not later than the earlier of () the close of the fifteenth day following the day on which notice of the meeting is first mailed to stockholders, or (ii) the close of the day next preceding the meeting. Every such notice by a stockholder shall set forth: (a) the name and residence address of the stockholder of the Corporation who intends to make a nomination or bring up any other matter; (b) a representation that the stockholder is a holder of the Corporation's voting stock and intends to appear in person or by proxy at the meeting to make the nomination or bring up the matter specified in the notice; (c) with respect to notice of an intent to make a nomination, a description of all arrangements or understandings among the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) with respect to notice of an intent to make a nomination, such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated by the Board of Directors of the Corporation; and (e) with respect to notice of an intent to bring up any other matter, a description of the matter, and any material interest of the stockholder in the matter. Notice of intent to make a nomination shall be accompanied by the written consent of each nominee to serve as director of the Corporation if so elected. At the meeting of stockholders, the chair shall declare out of order and disregard any nomination or other matter not presented in accordance with this section. Section 9. Voting. Each stockholder shall, at each meeting of the stockholders, be entitled to one vote in person or by proxy for each share of stock of the Corporation held by the stockholder and registered in the stockholder's name on the books of the Corporation on the date fixed or determined pursuant to the provisions of Section 5 of Article VI of these By- laws as the record date for the determination of stockholders who shall be entitled to receive notice of and to vote at such meeting. Shares of its own stock belonging to the Corporation shall not be voted directly or indirectly. Any vote on stock of the Corporation may be given at any meeting of the stockholders by the stockholder entitled thereto in person or by the stockholder's proxy appointed by an instrument in writing delivered to the Secretary or an Assistant Secretary of the Corporation or to the secretary of the meeting. The attendance at any meeting of a stockholder who may theretofore have given a proxy shall not have the effect of revoking the same unless the stockholder shall in writing so notify the secretary of the meeting prior to the voting of the proxy. At all meetings of the stockholders all matters, except as otherwise provided in these By-laws or by law, shall be decided by the vote of a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat, a quorum being present. Except in the case of votes for the election of directors, the vote at any meeting of the stockholders on any question need not be by ballot, unless so directed by the chair of the meeting. On a vote by ballot each ballot shall be signed by the stockholder voting, or by the stockholder's proxy, if there be such proxy. Section 10. List of Stockholders. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of its stock ledger to prepare and make, at least ten (10) days before every meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to said meeting either at a place within the city where said meeting is to be held and which place shall be specified in the notice of said meeting, or, if not so specified, at the place where said meeting is to be held, and such list shall be produced and kept at the time and place of said meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger or such list or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. Section 11. Inspectors or Judges. The Board of Directors, in advance of any meeting of stockholders, may appoint one or more inspectors or judges to act at such meeting or any adjournment thereof. If the inspectors or judges shall not be so appointed, or if any of them shall fail to appear or act, the chair of such meeting shall appoint the inspectors or judges, or such replacement or replacements therefor, as the case may be. Such inspectors or judges, before entering on the discharge of their duties, shall take and sign an oath or affirmation faithfully to execute the duties of inspectors or judges at meetings for which they are appointed. At such meeting, the inspectors or judges shall receive and take in charge the proxies and ballots and decide all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes. An inspector or judge need not be a stockholder of the Corporation, and any officer of the Corporation may be an inspector or judge on any question other than a vote for or against his or her election to any position with the Corporation. ARTICLE II. ----------- Board of Directors ------------------ Section 1. General Powers. The business and affairs of the Corporation shall be managed by the Board of Directors. Section 2. Number and Time of Holding office. Subject to the requirements of the laws of the State of Delaware, the Board may from time to time by the vote of the majority of the whole Board determine the number of directors. Until the Board shall otherwise so determine, the number of directors shall not exceed eighteen (18). Each of the directors of the Corporation shall hold office until the expiration of his or her term and until his or her successor shall be elected. Directors need not be stockholders. Section 3. Election of Directors. Except as otherwise provided in the Certificate of Incorporation of the Corporation, at each meeting of the stockholders for the election of directors, at which a quorum is present, the persons receiving the greatest number of votes, up to the number of directors to be elected, shall be the directors. Such election shall be by ballot; provided, however, a nomination shall be accepted and votes cast for a nominee shall be counted by the inspectors or judges of the election, only if the Secretary of the Corporation has received at least 24 hours prior to the meeting a statement over the signature of the nominee that he or she consents to being a nominee and, if elected, intends to serve as a director. Section 4. Organization and Order of Business. At its last meeting before, or first meeting after, the Annual Meeting of Stockholders the Board of Directors shall elect one of its members to be Chair of the Board. The Chair of the Board may be but does not have to be an officer, executive or employee of the Corporation. The Chair of the Board shall preside at meetings of the Board, lead the Board in carrying out its responsibilities to manage the business and affairs of the Corporation and perform other duties as requested by the Board of Directors. At each meeting of the Board, one of the following shall chair the meeting and preside thereat, in the following order of precedence: (a) the Chair of the Board; (b) the Chief Executive Officer; or (c) any director chosen by a majority of the directors present thereat. The Secretary, or in case of his or her absence, the person whom the chair of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. The order of business at each meeting of the Board of Directors shall be determined by the chair of such meeting. Section 5. Resignations. Any director may resign at any time by giving written notice of his or her resignation to the Chair of the Board or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time when it shall become effective shall not be specified therein, then it shall take effect when accepted by action of the Board of Directors. Except as aforesaid, the acceptance of such resignation shall not be necessary to make it effective. Section 6. Vacancies, etc. Except as otherwise provided in the Certificate of Incorporation of the Corporation, in case of any vacancy on the Board, or in case of any newly created directorship, a director to fill the vacancy or the newly created directorship for the unexpired portion of the term being filled may be elected by the holders of shares of stock of the Corporation entitled to vote in respect thereof at an annual or special meeting of said holders or by a majority of the directors of the Corporation then in office though less than a quorum. Section 7. Place of Meeting. The Board may hold its meetings at such place or places within or without the State of Delaware as the Board may from time to time by resolution determine or as shall be specified or fixed in the respective notices or waivers of notice thereof; provided, that all meetings, regular or special, shall be held at the chief executive office of the Corporation in Chicago, Illinois, unless otherwise ordered or approved by a majority of the whole Board. Section 8. First Meeting. As soon as practicable after each annual election of directors, the Board shall meet for the purpose of organization, the election of officers and the transaction of other business. Such meeting shall be held at the time and place theretofore fixed by the Board for the next regular meeting of the Board and no notice thereof need be given; provided, however, that the Board may determine that such meeting shall be held at a different place and time but notice thereof shall be given in the manner hereinafter provided for special meetings of the Board. Section 9. Regular Meetings. Regular meetings of the Board shall be held at such times as the Board shall from time to time determine. Notices of regular meetings need not be given. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be postponed until the same hour on the same day of the next succeeding week in which such day shall not be a legal holiday at such place, or at such other time and place as the Board shall determine in which event notice thereof shall be given. Section 10. Special Meetings; Notice. Special meetings of the Board shall be held whenever called by the Chair of the Board, the Chief Executive Officer or one-third (1/3) of the directors at the time in office. The Secretary shall give notice to each director as hereinafter in this Section provided of each such special meeting, in which shall be stated the time and place of such meeting. Notice of each such meeting shall be mailed to each director, addressed to the director at his or her residence or usual place of business, at least two (2) days before the day on which such meeting is to be held; or shall be sent addressed to him or her at such place by telegraph, cable, wireless or other form of recorded communication, or be delivered personally or by telephone not later than the day before the day on which such meeting is to be held. Notice of any meeting of the Board need not, however, be given to any director, if waived by him or her in writing or by telegraph, cable, wireless or other form of recorded communication, before, during or after such meeting, or if he or she shall be present at such meeting; and any meeting of the Board shall be a legal meeting without any notice thereof having been given if all the directors of the Corporation then in office shall be present thereat. Dividends may be declared upon the stock of the Corporation at any special meeting of the Board of Directors; provided, that the notice of said special meeting states specifically the fact that dividend action is to be considered. Any and all other business may be transacted at a special meeting unless notice of the meeting specifically states that action will be taken only upon the matters listed in the notice. Section 11. Quorum and Manner of Acting. Except as otherwise provided in these By-laws or by law, a majority of directors at the time in office shall be present in person at any meeting of the Board of Directors in order to constitute a quorum for the transaction of business at such meeting, and the affirmative vote of at least a majority of the directors present at any such meeting, at which a quorum is present, shall be necessary for the passage of any resolution or act of the Board. In the absence of a quorum from any such meeting, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present thereat. Notice of any adjourned meeting need not be given. The directors shall act only as a board and the individual directors shall have no power as such. Section 12. Action by Consent. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the Board or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. Section 13. Committees. The Board of Directors may appoint standing committees of its members. Such committees shall be composed of such number of Directors and shall have such powers as are conferred by the By-laws or determined by the Board of Directors. The members of all standing committees shall be appointed annually at the first meeting of the Board of Directors after the annual meeting of the stockholders and shall continue as members until their successors are appointed, subject to the power of the Board to remove any member of a committee at any time and to appoint a successor. A majority of the members of each standing committee shall constitute a quorum. The chair of each standing committee shall preside at the committee's meetings. If the chair is absent, then the meeting shall be chaired by the Committee member present at the meeting who has been a director for the longest period of time. Each committee chair shall report regularly to the Board as to the committee's reviews, actions and recommendations. Section 14. Meeting by Communication Equipment. Members of the Board of Directors or any committee appointed by the Board of Directors, may participate in a meeting of the Board of Directors or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. ARTICLE III. ------------ Executive Committee ------------------- Section 1. Number, Appointment, Term of Office. There shall be an Executive Committee consisting of not less than three (3) and not more than eight (8) regular members appointed from and by the Board of Directors. A majority of the members of the Executive Committee shall be Independent Directors, as defined by the Board. In addition to the regular members, the Chair of the Board and the Chief Executive Officer shall be members ex officio. The regular members of the Committee shall be appointed by the affirmative vote of a majority of the whole Board and shall hold office until the first meeting of the Board after the next annual meeting of the stockholders until their successors are appointed. A vacancy in a regular membership may be filled by the Board at any time. Any appointed regular member of the Executive Committee shall be subject to removal at any time by the affirmative vote of a majority of the whole Board. Section 2. Functions and Powers. The Executive Committee shall represent the Board of Directors between meetings for the purpose of consulting with the officers and giving special consideration to matters of importance affecting the policies, financing, management and operations of the business, and taking action thereon or making recommendations to the Board. The Board of Directors reserves to itself alone the power to elect and remove officers, to determine the number of directors, to fill any vacancies on the Board of Directors, to declare dividends, issue stock, recommend to shareholders any action requiring their approval, change the membership of any committee at any time, and discharge any committee either with or without cause at any time. Subject to the foregoing limitations, the Executive Committee shall possess and may exercise all other powers of the Board of Directors during the intervals between meetings of the Board of Directors. Section 3. Meetings. The Executive Committee shall meet as often as may be deemed necessary and expedient. Meetings may be called by standing resolution of the Committee, or at the request of the Chair of the Board, the Chief Executive Officer or of any two (2) members of the Committee. The Secretary shall notify each member of the Committee of each meeting, giving at least two (2) days' notice by mail or one (1) day's notice by telegraph or telephone, but such notice may be waived by any member. The purposes of a meeting need not be specified in the notice or waiver of notice of any meeting. At each meeting of the Board of Directors the Committee shall make a report to the Board of all action taken since its last report. Such reports may be made orally or in writing and only such matters need be recorded in the minutes of the Executive Committee as the Committee deems proper or the Board of Directors may require. Section 4. Organization. A majority of the Executive Committee shall constitute a quorum. The Chair of the Board shall serve as Chair of the Executive Committee. The Chair of the Board, or in his or her absence, the Chief Executive Officer shall preside at meetings of the Executive Committee. If the Chair of the Board and the Chief Executive Officer are absent, the Committee shall appoint a temporary Chair from among the members present. In other respects the Committee shall fix its own rules of procedures. ARTICLE IV. ----------- Officers -------- Section 1. Election, Appointment, Term of Office. The Executive Officers of the Corporation shall consist of a Chief Executive Officer, a President and such number of other Executive Officers as the Board of Directors may determine from time to time. There shall also be a General Counsel, a Treasurer, a Controller and a Secretary, any of whom may also be an Executive Officer. The Board of Directors may also appoint such other officers and agents as it may deem necessary, who shall have such authority and perform such duties as may be prescribed by the Board. All Executive Officers and other officers of the Corporation shall be regularly elected or appointed by the majority vote of the whole Board of Directors at its first meeting after the annual meeting of the stockholders and shall hold office until the first meeting of the Board after the next annual meeting of the stockholders, and until their successors are elected or appointed. If additional officers are elected or appointed during the year, they shall hold office until the next annual meeting of the Board of Directors at which officers are regularly elected or appointed and until their successors are elected or appointed. A vacancy in any office may be filled for the unexpired portion of the term in the same manner as provided for election or appointment to such office. All officers and agents elected or appointed by the Board of Directors shall be subject to removal at any time by the Board of Directors. Section 2. Chief Executive Officer. The Chief Executive Officer shall have the powers and perform the duties incident to that position. Subject to the Board of Directors, he or she shall be in general and active charge of the entire business and all the affairs of the Corporation, and shall be its chief policy-making officer. He or she shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or provided in the Bylaws. Section 3. President. The President shall have such powers and perform such duties as may be prescribed by the Board of Directors at the time of his or her election and such other powers and duties as may be assigned to him or her from time to time by the Chief Executive Officer or the Board of Directors. Section 4. Executive Officers. Each Executive Officer shall have such powers, duties and titles as shall be prescribed by the Board of Directors at the time of his or her election and such other powers and duties as may be assigned to him or her from time to time by the Chief Executive Officer or the Board of Directors. Section 5. General Counsel. The General Counsel shall have charge of all matters of legal import concerning the Corporation and of the department relating to such matters. He or she shall have such other powers and duties as may be assigned to him or her by the Chief Executive Officer or the Board of Directors. Section 6. Treasurer. The Treasurer shall be responsible for safeguarding the cash and securities of the Corporation and the formulation of the investment and financial policies of the Corporation. He or she shall have such other powers and duties as may be assigned to him or her by the Chief Executive Officer or the Board of Directors. Section 7. Controller. The Controller shall be in charge of the accounts of the Corporation and the maintenance of adequate accounting procedure and records of the Corporation. He or she shall have such other powers and duties as may be assigned to him or her by the Chief Executive Officer or the Board of Directors. Section 8. Secretary. The Secretary shall keep the records of all meetings of the stockholders and of the Board of Directors and of its committees. He or she shall affix the seal of the Corporation to all deeds, contracts, bonds or other instruments requiring the corporate seal when the same have been signed on behalf of the Corporation by a duly authorized officer. He or she shall perform such other duties as may be assigned to him or her from time to time by the Chief Executive Officer or the Board of Directors. ARTICLE V. ---------- Contracts, Checks, Drafts, Bank Accounts, Etc. ---------------------------------------------- Section 1. Execution of Documents by Officers. All of the Executive Officers of the Corporation elected as provided in Section 1 of Article IV of the By-laws, shall have power to execute and deliver any deeds, contracts, mortgages, bonds, debentures and other documents for and in the name of the Corporation. All appointed officers shall have such powers with respect to execution and delivery of deeds, contracts, mortgages, bonds, debentures and other documents as may be assigned to them by the Board of Directors. Section 2. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation or otherwise as the Board of Directors, the Chief Executive Officer or the Treasurer shall direct in such banks, trust companies or other depositories as the Board of Directors may select or as may be selected by any officer or officers or agent or agents of the Corporation to whom power in that respect shall have been delegated by the Board of Directors. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by any officer or agent of the Corporation. Section 3. Proxies in Respect of Stock or Other Securities of Other Corporations. Unless otherwise provided by resolution adopted by the Board, each of the Executive officers of the Corporation elected as provided in Section 1 of Article IV of the By-laws may from time to time appoint an attorney or attorneys or agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation to vote or consent in respect of such stock or other securities, may instruct the person or persons so appointed as to the manner of exercising such powers and rights, and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, all such written proxies, powers of attorney or other instruments as such Executive Officer may deem necessary or proper in order that the Corporation may exercise its said powers and rights. ARTICLE VI. ----------- Shares and Their Transfers Examination of Books -------------------- Section 1. Certificates for Stock. Every holder of stock of the Corporation shall be entitled to have a certificate or certificates, in such form as the Board shall prescribe, certifying the number of shares of stock of the Corporation owned by the stockholder. The certificates representing shares of such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the person who was at the time of signing the Chief Executive Officer or an Executive Officer and by the person who was at the time of signing the Treasurer or an Assistant Treasurer and its seal may be affixed thereto; provided, however, that the signature of such Executive Officer of the Corporation and of such Treasurer or Assistant Treasurer and the seal of the Corporation may be facsimile. In case any officer or officers of the Corporation who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be such officer or officers, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be such officer or officers. A record shall be kept of the respective names of the persons, firms or corporations owning the stock represented by certificates for stock of the Corporation, the number of shares represented by such certificates, respectively, and the respective dates thereof, and in case of cancellation, the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be canceled and a new certificate or certificates shall not be issued in exchange for any existing certificate until such existing certificate shall have been so canceled except in cases provided for in Section 4 of this Article VI. Section 2. Transfers of Stock. Transfers of shares of the stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, or with a transfer clerk or a transfer agent appointed as in Section 3 of this Article VI provided, and upon surrender of the certificate or certificates for such shares properly endorsed and payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Section 3. Regulations. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these By-laws, concerning the issue, transfer and registration of certificates for stock of the Corporation. The Board may appoint or authorize any officer or officers to appoint one or more transfer clerks, any of whom may be employees of the Corporation, or one or more transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them; provided, however, that the signature of any transfer clerk, transfer agent, or registrar may be facsimile. In case any transfer clerk, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such transfer clerk, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such transfer clerk, transfer agent, or registrar at the date of issue. Section 4. Lost, Destroyed and Mutilated Certificates. The owner of any stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost or destroyed, and the Board may, in its discretion, require the owner of the lost or destroyed certificate, or his or her legal representatives, to give the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties, as the Board shall in its uncontrolled discretion determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or the issuance of such new certificate. Section 5. Record Date. To determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed by the Board of Directors: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given. (b) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the Board of Directors shall fix a new record date for the adjourned meeting. Section 6. Examination of Books by Stockholders. The Board may determine, from time to time, whether and to what extent, at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by the laws of the State of Delaware or as authorized by resolution adopted by the Board or by the stockholders of the Corporation entitled to vote in respect thereof. ARTICLE VII. ------------ Offices, Etc. ------------- Section 1. Registered Office. The registered office of the Corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, and the name of the resident agent in charge thereof shall be The Corporation Trust Company. Section 2. Other Offices. The Corporation also may have an office or offices other than said principal office at such place or places, either within or without the State of Delaware, as provided in these By-laws or as the Board may from time to time appoint or as the business of the Corporation may require. Section 3. Books and Records. Except as otherwise required by law, the Certificate of Incorporation or these By-laws, the Corporation may keep the books and records of the Corporation in such place or places within or without the State of Delaware as the Board may from time to time by resolution determine or the business of the Corporation may require; provided, however, the principal accounting books and records of the Corporation, including the records of meetings of the Board of Directors, shall be kept at the chief executive office of the Corporation in Chicago, Illinois, unless otherwise determined by resolution of the Board of Directors. ARTICLE VIII. ------------- Dividends --------- Subject to the provisions of law, of the Certificate of Incorporation of the Corporation and of these By-laws, the Board may declare and pay dividends upon the shares of the stock of the Corporation either (a) out of its net assets in excess of its capital as computed in accordance with the provisions of the laws of the State of Delaware or (b) in case there shall be no such excess, out of its net profits for the fiscal year then current and/or the preceding fiscal year, whenever and in such amounts as, in the opinion of the Board, the condition of the affairs of the Corporation shall render it advisable. Dividends upon the shares of stock of the Corporation may be declared at any regular meeting of the Board of Directors and also at a special meeting, if notice of such proposed action is given as provided Section 10 of Article II of these By-laws. ARTICLE IX. ----------- Seal ---- The Board shall provide a corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation and the words and figures "Incorporated 1993 Delaware", or words and figures of similar import. The seal or a facsimile thereof may be impressed or affixed or reproduced or other use made thereof by the Secretary or any Assistant Secretary or any other officer authorized by the Board. ARTICLE X. ---------- Fiscal Years ------------ The fiscal year of the Corporation shall end on the thirty-first day of October in each year. ARTICLE XI. ----------- Waiver of Notices ----------------- Whenever any notice whatever is required to be given by these By- laws or by the Certificate of Incorporation of the Corporation or by the General Corporation Law of the State of Delaware, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE XII. ------------ Indemnification --------------- Section 1. Coverage. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation (which term shall include any predecessor corporation of the Corporation) or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans ("indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators; provided however, that, except as provided in Section 2 of this Article XII with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors. The right to indemnification conferred in this Article XII shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided however, that, if the Delaware General Corporation law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Article XII or otherwise. Section 2. Claims. If a claim under Section 1 of this Article XII is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit or in a suit brought by the Corporation to recover payments by the Corporation of expenses incurred by an indemnitee in defending in his or her capacity as a director or officer, a proceeding in advance of its final disposition, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such claim. In any action brought by the indemnitee to enforce a right to indemnification hereunder (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the Corporation) or by the Corporation to recover payments by the Corporation of expenses incurred by an indemnitee in defending, in his or her capacity as a director or officer, a proceeding in advance of its final disposition, the burden of proving that the indemnitee is not entitled to be indemnified under this Article XII or otherwise shall be on the Corporation. Neither the failure of the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation law, nor an actual determination by the Corporation (including the Board of Directors, independent legal counsel or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall be a presumption that the indemnitee has not met the applicable standard of conduct, or in the case of such an action brought by the indemnitee, be a defense to the action. Section 3. Rights Not Exclusive. The rights conferred on any person by Sections 1 and 2 of this Article XII shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, this certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. Section 4. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation law. Section 5. Employees. Persons who are not included as indemnities under Section 1 of this Article XII but are employees of the Corporation or any subsidiary may be indemnified to the extent authorized at any time or from time to time by the Board of Directors. ARTICLE XIII. ------------- Amendments ---------- These By-laws as they shall be at any time may be amended, altered or repealed by the Board of Directors at any regular meeting of the Board of Directors or at any special meeting if the proposed amendment, alteration or repeal is stated in the notice of the special meeting; but any by-laws made by the Board may be altered, amended or repealed by the stockholders in the manner provided in the Certificate of Incorporation of the Corporation. ARTICLE XIV. ------------ National Emergency ------------------ Section 1. Definition and Application. For the purposes of this Article XIV the term "national emergency" is defined as an emergency situation resulting from an attack upon the United States, a nuclear disaster within the United States, a catastrophe, or other emergency condition, as a result of which attack, disaster, catastrophe or emergency condition a quorum of the Board of Directors cannot readily be convened for action. Persons not directors of the Corporation may conclusively rely upon the determination by the Board of Directors of the Corporation, at a meeting held or purporting to be held pursuant to this Article XIV that a national emergency as hereinabove defined exists regardless of the correctness of such determination made or purporting to be made as hereinafter provided. During the existence of a national emergency the provisions of this Article XIV shall become operative, but, to the extent not inconsistent with such provisions, the other provisions of these By-laws shall remain in effect during any national emergency and upon its termination the provisions of this Article XIV shall cease to be operative. Section 2. Meetings, etc. When it is determined in good faith by any director that a national emergency exists, special meetings of the Board of Directors may be called by such director. The director calling any such special meeting shall make a reasonable effort to notify all other directors of the time and place of such special meeting, and such effort shall be deemed to constitute the giving of notice of such special meeting, and every director shall be deemed to have waived any requirement, of law or otherwise, that any other notice of such special meeting be given. At any such special meeting two directors shall constitute a quorum for the transaction of business including without limiting the generality hereof the filling of vacancies among directors and officers of the Corporation and the election of additional Executive Officers, Assistant Controllers, Assistant Secretaries and Assistant Treasurers. The act of a majority of the directors present thereat shall be the act of the Board of Directors. If at any such special meeting of the Board of Directors there shall be only one director present, such director present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given of any such adjournment. The directors present at any such special meeting shall make reasonable effort to notify all absent directors of any action taken thereat, but failure to give such notice shall not affect the validity of the action taken at any such meeting. All directors, officers, employees and agents of, and all persons dealing with, the Corporation, if acting in good faith, may conclusively rely upon any action taken at any such special meeting. Section 3. Amendment. The Board of Directors shall have the power to alter, amend, or repeal any of these By-laws by the affirmative vote of at least two-thirds (2/3) of the directors present at any special meeting attended by two (2) or more directors and held in the manner prescribed in Section 2 of this Article XIV, if it is determined in good faith by said two-thirds (2/3) that such alteration, amendment or repeal would be conducive to the proper direction of the Corporation's affairs. Section 4. Chair of the Board and Executive Officers. If during the existence of a national emergency, the Chair of the Board becomes incapacitated, cannot by reasonable effort be located or otherwise is unable or unavailable to perform the duties of his or her office, the Board shall elect one of its members to be Chair of the Board. The Chair of the Board may, but need not be an officer of or employed in an executive or any other capacity by the Corporation. If, during the existence of a national emergency, the Chief Executive Officer becomes incapacitated or unavailable to perform the duties of his or her office, the Chair of the Board is hereby designated also as Chief Executive Officer and will act as both Chair of the Board and Chief Executive Officer. Section 5. Substitute Directors. To the extent required to constitute a quorum at any meeting of the Board of Directors during a national emergency, the officers of the Corporation who are present shall be deemed, in order of rank of office and within the same rank in order of election or appointment of such offices, directors for such meeting. EX-4 4 EXHIBIT 4 NAVISTAR INTERNATIONAL CORPORATION AND SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES The following instruments of Navistar International Corporation and its principal subsidiary Navistar International Transportation Corp. and its principal subsidiary Navistar Financial Corporation defining the rights of security holders are incorporated herein by reference. 4.1 Indenture, dated as of March 1, 1968, between Navistar International Transportation Corp. and Manufacturers Hanover Trust Company, as Trustee, and succeeded by FIDATA Trust Company of New York, as successor Trustee, for 6 1/4% Sinking Fund Debentures due 1998 for $50,000,000. Filed on Registration No. 2-28150. 4.2 Indenture, dated as of June 15, 1974, between Navistar International Transportation Corp. and Harris Trust and Savings Bank, as Trustee, and succeeded by Commerce Union Bank, now known as Sovran Bank/Central South, as successor Trustee, for 9% Sinking Fund Debentures due 2004 for $150,000,000. Filed on Registration No. 2-51111. 4.3 Indenture, dated as of September 22, 1989, between Navistar Financial Corporation and the First National Bank of Chicago, as Trustee, succeeded by Bank One, Columbus, N.A., as successor Trustee, for $400,000,000 of debt securities on terms to be determined at time of sale. Filed on Registration No. 33-31003. 4.4 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. ====== Instruments defining the rights of holders of other unregistered long- term debt of Navistar and its subsidiaries have been omitted from this exhibit index because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its consolidated subsidiaries. The Registrant agrees to furnish a copy of any such instrument to the Commission upon request. E-2 EX-10 5 EXHIBIT 10 NAVISTAR INTERNATIONAL CORPORATION AND 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 1975 Stock Option Plan. Filed as Exhibit A to Registration No. 2-55544. 10.2 Navistar International Corporation 1984 Stock Option Plan. Filed as Exhibit A to Proxy Statement dated February 6, 1984. Commission File No. 1-5236. 10.3 Navistar 1988 Non-Employee Director Stock Option Plan. Filed as Exhibit B to Proxy Statement dated January 25, 1988. Commission File No. 1-9618. 10.4 Pooling and Servicing Agreement dated as of December 1, 1990, between Navistar Financial Corporation as Servicer, Navistar Financial Securities Corporation as Purchaser, with respect to Dealer Note Trust 1990. Filed on Registration No. 33-36767. 10.5 Form of Executive Severance Agreement which is executed with all executive officers dated September 14, 1992. Commission File No. 1-9618. 10.6 Security, Pledge and Trust Agreement between Navistar Financial Corporation and Bankers Trust Company, Trustee, dated as of April 26, 1993. Filed on Form 8-K dated April 30, 1993. Commission File No. 1-4146-1. 10.7 Amended and Restated Purchase Agreement among Truck Retail Instalment Paper Corp., as Seller, Navistar Financial Corporation, certain purchasers, Chemical Bank and Bank of America, Illinois formerly known as Continental Bank N.A. as Co-Agents, and J. P. Morgan Delaware as Administrative Agent, dated as of April 26, 1993. Filed on Form 8-K dated April 30, 1993. Commission File No. 1-4146-1. 10.8 Indenture dated as of November 10, 1993 between Navistar Financial 1993-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1993-A Owner Trust. Filed on Registration No. 33-50291. 10.9 Navistar 1994 Performance Incentive Plan. Filed as Appendix to Proxy Statement dated January 27, 1994. Commission File No. 1-9618. 10.10 Indenture dated as of May 3, 1994 between Navistar Financial 1994-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994-A Owner Trust. Filed on Registration No. 33-50291. E-3 PAGE 2 EXHIBIT 10 (CONTINUED) NAVISTAR INTERNATIONAL CORPORATION AND SUBSIDIARIES ---------------------------------- MATERIAL CONTRACTS 10.11 Indenture dated as of August 3, 1994 between Navistar Financial 1994-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994-B Owner Trust. Filed on Registration No. 33-50291. 10.12 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. 10.13 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. 10.14 Indenture dated as of December 15, 1994 between Navistar Financial 1994-C Owner Trust and the Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994-C Owner Trust. Filed on Registration No. 33-55865. 10.15 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. 10.16 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. E-4 EX-11 6 EXHIBIT 11 NAVISTAR INTERNATIONAL CORPORATION AND SUBSIDIARIES ---------------------------------- COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE A. Primary: See the Statement of Income contained in the Navistar International Corporation 1995 Annual Report to Shareowners incorporated herein by reference. B. Full Dilution: Net income (loss) per common share assuming full dilution is computed by assuming that all options and warrants which are exercisable below market prices are assumed to be exercised, and the proceeds applied to reduce common stock outstanding. The computations assume that convertible preferred and preference stock are converted to common stock. Income (loss) is divided by the weighted average number of common shares outstanding and unconditionally issuable at the end of each month during the period, adjusted for the net effects of the exercise of options and warrants and the conversion of convertible preferred and preference stocks. YEARS ENDED OCTOBER 31 Millions of Dollars 1995 1994 1993 - -------------------------------------- -------- -------- -------- Income (loss) of continuing operations $ 164 $ 102 $ (273) Loss of discontinued operations ...... - (20) - -------- -------- -------- Income (loss) before cumulative effect of changes in accounting policy..... 164 82 (273) Cumulative effect of changes in accounting policy ............... - - (228) -------- -------- -------- Net income (loss) .................... $ 164 $ 82 $ (501) ======== ======== ======== Average common and common equivalent shares (millions): Average common shares outstanding as adjusted per primary computation 74.3 74.6 34.9 Assuming conversion of Series G ..... .6 .6 .6 Assuming conversion of Series D ..... - - .1 -------- -------- -------- Average common and dilutive common equivalent shares as adjusted 74.9 75.2 35.6 ======== ======== ======== Income (loss) per common share assuming full dilution (dollars): Continuing operations .......... $ 2.20 # $ 1.36 # $ (7.64)# Discontinued operations ........ - (.27) - Cumulative effect of changes in accounting policy .......... - - (6.42)# -------- -------- -------- Net income (loss) ................ $ 2.20 # $ 1.09 # $ (14.06)# ======== ======== ======== # This calculation is submitted in accordance with Regulation S-K item 601(b)(11) of the Securities Exchange Act, although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. E-5 EX-13 7 EXHIBIT 13 NAVISTAR INTERNATIONAL CORPORATION AND SUBSIDIARIES FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED OCTOBER 31, 1995 FILED PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FINANCIAL SUMMARY Millions of dollars, except per share data 1995 1994 - ---------------------------------------------------------------------------- FOR THE YEARS ENDED OCTOBER 31 Sales and revenues ............................ $ 6,342 $ 5,337 Income before income taxes .................... $ 262 $ 158 Net income .................................... $ 164 $ 82 Net income per common share ................... $ 1.83 $ .72 Manufacturing gross margin .................... 13.8% 12.8% Return on equity (a) .......................... 18.9% 12.5% Cash and marketable securities ................ $ 1,040 $ 861 (a) Calculated using income of continuing operations. - ---------------------------------------------------------------------------- FINANCIAL INFORMATION Financial Summary ................................................... 2 Management's Discussion and Analysis of Results of Operations and Financial Condition ............................. 4 Statement of Financial Reporting Responsibility ..................... 11 Independent Auditors' Report ........................................ 12 Financial Statements Statement of Income ............................................... 13 Statement of Financial Condition .................................. 15 Statement of Cash Flow ............................................ 17 Statement of Non-Redeemable Preferred, Preference and Common Shareowners' Equity ...................................... 19 Notes to Financial Statements 1 Summary of accounting policies ................................. 20 2 Supplemental cash flow information ............................ 22 3 Postretirement benefits ........................................ 23 4 Income taxes ................................................... 26 5 Discontinued operations ........................................ 30 6 Marketable securities .......................................... 30 7 Receivables .................................................... 32 8 Property ....................................................... 34 9 Inventories .................................................... 34 10 Leases ........................................................ 35 11 Accounts payable .............................................. 36 12 Other liabilities ............................................. 36 13 Debt .......................................................... 37 14 Financial instruments ......................................... 40 15 Commitments, contingent liabilities and restrictions on assets. 42 16 Legal proceedings ............................................. 42 17 Environmental matters ......................................... 43 18 Preferred and preference stocks ............................... 44 19 Common stock .................................................. 45 20 Stock compensation plans ...................................... 46 21 Selected quarterly financial data (unaudited) ................. 47 Ten-Year Summary of Selected Financial and Statistical Data ......... 48 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Navistar International Corporation is a holding company and its principal operating subsidiary is Navistar International Transportation Corp. (Transportation). In this discussion and analysis, "Company" refers to Navistar International Corporation and its consolidated subsidiaries. The Company manufactures and markets Class 5 through 8 trucks, including school buses, mid-range diesel engines and service parts in the United States and Canada. These products are also sold to distributors in selected export markets. The financial services subsidiaries of the Company provide wholesale, retail and lease financing and commercial physical damage and liability insurance coverage to the Company's dealers and retail customers and to the general public through an independent insurance agency system. The discussion and analysis reviews separately the operating and financial results and liquidity and capital resources of "Manufacturing" and "Financial Services." Manufacturing includes the consolidated financial results of the Company's manufacturing operations with its wholly-owned financial services subsidiaries included on a one-line basis under the equity method of accounting. Financial Services includes Navistar Financial Corporation (Navistar Financial) and its domestic insurance subsidiary as well as foreign finance and insurance companies. See Note 1 to the Financial Statements. Management's discussion and analysis of results of operations should be read in conjunction with the Financial Statements and the Notes to the Financial Statements. RESULTS OF OPERATIONS Consolidated The Company reported net income of $164 million for 1995, or $1.83 per common share, on increased sales and revenues. This was a substantial improvement over the $82 million, or $.72 per common share, reported in 1994 which included a $20 million charge to discontinued operations, net of $13 million of income taxes, related to environmental liabilities. See Notes 5 and 17 to the Financial Statements. The net loss of $501 million for 1993 included a one-time charge of $513 million ($318 million after taxes) for common stock contributed to an independent retiree Trust and a $228 million charge for the cumulative effect of accounting changes. As a result of the strong demand for trucks and diesel engines, sales and revenues of $6,342 million in 1995 were 19% higher than the $5,337 million reported in 1994 and 34% above the $4,721 million reported in 1993. Manufacturing Manufacturing, excluding Financial Services, reported income before income taxes of $200 million in 1995, double the $98 million reported in 1994. The 1995 operating results reflect a second consecutive record year of Class 8 heavy truck, mid-range diesel engine and truck service parts sales. Sales of Class 5, 6 and 7 medium trucks also increased. The 1995 operating results reflect the effects of improved pricing and various cost improvement initiatives. Pretax income of $98 million in 1994 was $91 million higher than the $7 million reported in 1993 before the one-time $509 million contribution to an independent retiree Trust. The improvement of 1994 over 1993 reflects higher sales of trucks, diesel engines and service parts as well as a $33 million reduction in postretirement benefits expense. Sales and Revenues. As a result of continued favorable economic conditions in both the United States and Canada, 1995 industry retail sales of Class 5 through 8 trucks totalled 380,600 units, a 12% improvement over 1994 and 32% greater than the 288,900 units sold in 1993. Class 8 heavy truck sales increased 11% from the 1994 level to 228,800 units as a result of demand from large fleet customers. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, were up 13% to 151,800 units in 1995 reflecting demand across a wide variety of vocations including maintenance leasing, local governments, and wholesale, retail and service related businesses. Industry sales of school buses, which accounted for 20% of the medium truck market, increased slightly over 1994 to 30,400 units. Manufacturing's sales of trucks, diesel engines and service parts for 1995 totalled $6,125 million, 19% over the $5,153 million reported for 1994 and 36% higher than the $4,510 million recorded in 1993. Truck shipments totalled 110,200 units in 1995, increases of 16% and 26% from 1994 and 1993, respectively. The Company maintained its position as sales leader in the combined United States and Canadian Class 5 through 8 truck market in 1995 with a 26.7% market share, a slight decline from the 27.0% share in 1994. This change reflects a decrease in the Company's Class 8 heavy truck market share as the Company was unable to produce sufficient quantities of those models most in demand by its customers as a result of capacity limitations at its assembly facilities. Shipments of mid-range diesel engines by the Company to original equipment manufacturers during 1995 were a record 156,100 units, a 20% increase from 1994 and a 32% improvement over 1993. Higher shipments to a domestic automotive manufacturer to meet consumer demand for the light trucks and vans which use this engine were the primary reason for the increase. Service parts sales of $730 million in 1995 were slightly higher than the $714 million in 1994 and 16% higher than the $632 million reported in 1993 as a result of dealer and national account volume growth. Other income increased to $43 million in 1995 from $25 million in 1994 and $16 million in 1993 as a result of increased income on higher cash, cash equivalents and marketable securities balances. Operating Costs and Expenses. Manufacturing gross margin was 13.8% of sales in 1995 compared with 12.8% in 1994 and 13.1% in 1993. The increase in gross margin is primarily the result of higher sales volumes, improved pricing and an increase in operating efficiency. These improvements were partially offset by higher material costs, overtime costs to meet demand for the Company's products and a $62 million provision for payment to employees as required by the Company's profit sharing agreements, an increase of $38 million. Factors which contributed to the change in gross margin between 1994 and 1993 included higher sales volumes offset by an increase in the provision for profit sharing, additional costs to meet customer delivery commitments and additional costs incurred with the introduction of new truck and engine products. Engineering and research expense increased to $113 million in 1995 from $97 million in 1994 and $94 million in 1993 reflecting investment in the next generation of trucks and diesel engines as well as improvements to existing products. Marketing and administrative expense of $277 million was 4% of sales in 1995, down from 5% in 1994 and 1993. This expense was $238 million and $230 million, respectively, in those years. The $39 million increase in the expense between 1994 and 1995 reflects higher sales and distribution expense, an increase in the provision for payment to employees as provided by the Company's performance based incentive programs and an investment in the development of systems and processes which support the Company's business strategy. Finance service charges on sold receivables increased to $84 million, a 27% increase over 1994 and 50% higher than 1993, as a result of higher truck sales and increased interest rates. Financial Services Financial Services, which consists of Navistar Financial, its domestic insurance subsidiary and the Company's foreign finance and insurance subsidiaries, had income before income taxes of $62 million, $60 million and $61 million in 1995, 1994 and 1993, respectively. Navistar Financial's pretax income in 1995 was $59 million, a 6% increase from $55 million in 1994. The change is a result of higher income from an increased volume of wholesale financing to support the demand for trucks, and improvement in Navistar Financial's interest cost over market interest rates. The increase was offset by a reduction in margins on retail financing as a result of increased competition in the commercial financing markets and rising interest costs which could not be fully offset by increased retail note pricing. Navistar Financial's pretax income increased $6 million in 1994 from the $49 million reported in 1993. The improvement reflects higher income from Navistar Financial's insurance subsidiary and an increased volume of wholesale financing partially offset by lower margins on retail financing. In addition, 1993 pretax income included a one-time $4 million charge for the contribution to an independent retiree Trust. Earnings from the foreign finance and insurance subsidiaries were $3 million and $5 million in 1995 and 1994, respectively. Earnings in 1993 of $12 million included a one-time benefit of $6 million resulting from lower loss reserve requirements. Navistar Financial's revenue for 1995 was $228 million, 8% higher than the $211 million reported in 1994. The change reflects an increased volume of wholesale and retail financing to support the demand for trucks, and higher average yields on wholesale notes and accounts as a result of a higher prime interest rate. The increase was partially offset by lower revenues from Navistar Financial's insurance subsidiary reflecting a reduction in written premiums of truck liability lines as a result of adverse loss experience in those lines. Navistar Financial's revenues declined 9% between 1993 and 1994 following a decline in retail note and lease revenue. Interest expense for Navistar Financial increased to $84 million in 1995 from $70 million in 1994 and $79 million in 1993. The change between 1995 and 1994 was the result of higher debt balances required to finance the increased wholesale note and account balances and higher market interest rates. The decrease between 1994 and 1993 was the result of reduced debt required to finance the lower level of owned retail receivables, offset in part by higher interest rates. LIQUIDITY AND CAPITAL RESOURCES Consolidated Consolidated cash flow is generated from the manufacture, sale and financing of trucks, diesel engines and service parts. Total cash, cash equivalents and marketable securities of the Company amounted to $1,040 million at October 31, 1995 and $861 million at October 31, 1994. At October 31, 1995 and 1994, approximately $140 million and $138 million in marketable securities, respectively, were held by the Company's insurance subsidiaries and not available for general corporate purposes. Manufacturing Manufacturing's cash, cash equivalents and marketable securities amounted to $876 million at October 31, 1995 and $665 million at October 31, 1994. This included cash and cash equivalents of $461 million at October 31, 1995 and $499 million at October 31, 1994. Cash generated by operations during 1995 totalled $400 million primarily from net income of $164 million, a net change in operating assets and liabilities of $166 million as well as $89 million of non-cash deferred income taxes and $53 million of other non-cash items, principally depreciation. These amounts were partially offset by a $72 million pension contribution in excess of normal funding. Consolidated income tax expense for 1995 was $98 million, of which $9 million was cash payments to federal, and certain state and local governments while the remaining $89 million of federal and other taxes reduced the deferred tax asset. The net change in operating assets and liabilities of $166 million includes a $72 million increase in accounts payable as a result of higher production schedules at the Company's assembly facilities, the $137 million increase in other liabilities attributed principally to the provision for payment to employees as required by the Company's profit sharing and performance incentive programs and to the timing of such payments. These changes were partially offset by an $88 million increase in outstanding receivables primarily reflecting the timing of payments from Navistar Financial. The cash generated by operations was used to fund Manufacturing's investment and financing activities. Investment programs used $139 million in cash to fund capital expenditures for truck product improvements, to increase diesel engine production capacity and for programs to improve cost performance. In addition, purchases of marketable securities exceeded proceeds from sales by $247 million. Financing programs used cash of $29 million for dividends on the Series G Preferred shares, $21 million for principal payments on debt and $10 million to repurchase Class B Common shares. Financial Services The Financial Services subsidiaries provide product financing and insurance coverage to Transportation's dealers and retail customers. During 1995 and 1994, Navistar Financial supplied 93% of the wholesale financing of new trucks to Transportation's dealers, up from 90% in 1993. Navistar Financial's share of the retail financing of new trucks sold in the United States was 14% in 1995 compared with 15% in 1994 and 1993. The reduced share of retail financing is a result of competition and high levels of liquidity in the commercial financing markets. Historically, funds to finance Transportation's products come from a combination of commercial paper, short and long-term bank borrowings, medium and long-term debt issues, sales of finance receivables and equity capital. Navistar Financial's current debt ratings have made bank borrowings and sales of finance receivables the most economic sources of cash. Insurance operations are funded from premiums and income from investments. Operations provided $115 million in cash in 1995 primarily from net income of $40 million and an increase in accounts payable of $68 million reflecting the timing of payments to Manufacturing. Investment programs used $349 million during this period principally as a result of a net increase of $335 million in retail and wholesale finance receivables. Financing activities provided $200 million reflecting a net increase in debt of $212 million and the payment of $12 million in dividends to Transportation. Receivable sales were a significant source of funding in 1995 and 1994. During 1995, Navistar Financial sold $740 million of retail notes, net of unearned finance income, through Navistar Financial Retail Receivables Corporation (NFRRC), a wholly-owned subsidiary, to two owner trusts which, in turn, sold $714 million of notes and $26 million of certificates to investors. The net proceeds from these sales were $693 million. During 1994, Navistar Financial sold $1,033 million of retail notes receivable. Net proceeds from these sales were $952 million. In both years, the net proceeds were used for general working capital purposes. At October 31, 1995, the remaining shelf registration available to NFRRC for issuance of asset-backed securities was $1,430 million. On November 14, 1995, NFRRC filed an additional registration statement with the Securities and Exchange Commission providing for the issuance from time to time of an additional $2,000 million of asset-backed securities. See also Note 13 to the Financial Statements. Navistar Financial utilizes a revolving wholesale note sales trust which provides for the continuous sale of eligible wholesale notes on a daily basis. In June 1995, the Navistar Financial Dealer Note Master Trust issued an additional $200 million of certificates increasing the revolving wholesale note sales trusts from $300 million to $500 million. These sales trusts are comprised of three $100 million pools of notes maturing serially from 1997 to 1999 and the $200 million pool maturing in 2004. Management's discussion of the future liquidity of Manufacturing and Financial Services operations is included in Business Environment of Management's Discussion and Analysis. Environmental Matters As disclosed in Notes 5 and 17 to the Financial Statements, Transportation recorded a $20 million charge, net of $13 million of income taxes, in the fourth quarter of 1994 as a loss of discontinued operations for environmental liabilities at production facilities of two formerly owned businesses: Wisconsin Steel located in Chicago, Illinois and Solar Turbine, Inc. located in San Diego, California. The $33 million pretax charge consisted of an $11 million payment to be made to the Economic Development Administration and a $22 million charge for potential cleanup costs for the Wisconsin Steel and Solar sites. In addition, 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 commonly 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, a reasonable estimate is calculated of the Company's share, if any, of the costs for the investigation and cleanup of these sites and is provided for in the Financial Statements. The Company believes that, based on these calculations, its share of the potential additional costs for each site, other than the Wisconsin Steel and Solar sites, is not material. The anticipated cleanup costs of current PRP actions at October 31, 1995, including the environmental cleanup costs of the Wisconsin Steel and Solar sites, are reflected in the Company's $25 million environmental liability. The Company reviews its environmental liability on a regular basis. Derivative Financial Instruments As disclosed in Notes 1 and 14 to the Financial Statements, the Company uses derivative financial instruments to transfer or reduce the risks of foreign exchange and interest rate volatility, and potentially increase the return on invested funds. Company policy does not allow the use of derivatives for speculative purposes. Manufacturing, as conditions warrant, has hedged its foreign exchange exposure on the purchase of parts and materials from foreign countries and its exposure from sales of manufactured products in other countries. Contracted purchases of commodities for manufacturing may be hedged up to one year. During 1995, Manufacturing entered into forward contracts to hedge its forward exchange exposure to the Canadian dollar on firm commitments. These foreign currency contracts generally mature within three months of origination. Navistar Financial uses interest rate caps, interest rate swaps and forward interest rate contracts when needed to convert floating rate funds to fixed and vice versa to match its asset portfolio. Navistar Financial also uses forward interest rate contracts to manage its exposure to fluctuations in funding costs from the anticipated securitization and sale of retail notes. Both Manufacturing and Navistar Financial purchase collateralized mortgage obligations that have relatively stable cash flow patterns in relation to interest rate changes. Income Taxes The Statement of Financial Condition at October 31, 1995 and 1994 includes a deferred tax asset of $1,087 million and $1,134 million, respectively, net of a valuation allowance of $307 million and $297 million, respectively, related to future tax benefits. The deferred tax assets are net of valuation allowances since it is more likely than not that some portion of the deferred tax asset may not be realized in the future. The deferred tax asset includes the tax benefits associated with cumulative tax losses of $2,020 million and temporary differences, which represent the cumulative expense of $1,620 million recorded in the Statement of Income that has not been deducted on the Company's tax returns. The valuation allowances assume that it is more likely than not that approximately $810 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 $2,900 million of future taxable income, of which an average of approximately $90 million would need to be generated annually for the 14-year period 1996 through 2009. The remaining taxable income, which represents the realization of tax benefits associated with temporary differences, does not need to be generated until subsequent to 2009. See Note 4 to the Financial Statements. Extensive analysis is performed to determine the amount of the deferred tax asset. Such analysis is based on the premise that the Company is and will continue to be a going concern and that it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Management reviews all available evidence, both positive and negative, to assess the long-term earnings potential of the Company using a number of alternatives to evaluate financial results in economic cycles at various industry volume conditions. Other factors considered are the Company's 15 consecutive year leadership in the combined market share of Class 5 through 8 trucks, recognition as a worldwide leading producer of mid-range diesel engines and projected revenue enhancements and operating cost reductions from manufacturing and product quality improvements as well as design and material cost reduction programs. The projected availability of taxable income to realize the tax benefit from net operating loss carryforwards and the reversal of temporary differences before expiration of these benefits is also considered. Management believes that with the combination of available tax planning strategies, the Company's plan to reduce its cost structure and the maintenance of significant market share, earnings are achievable in order to realize the net deferred tax asset of $1,087 million. Reconciliation of the Company's United States income before income taxes for financial statement purposes to taxable income for the years ended October 31 is as follows: Millions of dollars 1995 1994 - ---------------------------------------------------------------------------- Income of continuing operations before income taxes ........................ $ 262 $ 158 Exclusion of income of foreign subsidiaries .. (11) (13) Loss of discontinued operations before income tax benefits ................. - (33) State income taxes ........................... (2) (2) Temporary differences ........................ 67 24 Other ........................................ 1 2 -------- -------- Taxable income ............................... $ 317 $ 136 ======== ======== The Company undertook significant restructuring actions in 1993. Since these actions resulted in a substantial loss, management believes that the information which would be presented in the above table for that year is not meaningful. Business Environment Sales of Class 5 through 8 trucks are cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates and the earnings and cash flow of dealers and customers. As a result of a general slowdown in economic activity in the United States, the Class 5 through 8 truck market has experienced a significant decline in the rate of new truck orders. During the latter half of 1995, this slowdown has also been responsible for an increase in the cancellation of some existing orders which were originally placed during 1994 and early 1995 in anticipation of continued growth in the economy. The decline in the number of new orders, in combination with high retail delivery rates throughout 1995, has reduced the Company's backlog of unfilled truck orders by 27% to 47,100 units at October 31, 1995 from 64,800 units at October 31, 1994. Accordingly, retail deliveries in 1996 will be highly dependent on the rate at which new truck orders are received. The Company will evaluate order receipts and backlog throughout the year and will balance production with demand as appropriate. The Company currently projects 1996 United States and Canadian Class 8 heavy truck demand to be 175,000 units, a 24% decrease from 1995. Class 5, 6 and 7 medium truck demand is forecast at 115,000 units, a decline from 1995. Demand for school buses is expected to increase 7% in 1996 to 32,500 units. These demand levels, while consistent with other industry forecasts, will require a significant increase in new order receipts over the levels experienced during the second half of 1995 in order to be achieved. Diesel engine shipments by the Company to original equipment manufacturers in 1996 are expected to be approximately 156,000 units, unchanged from 1995. The Company's service parts sales are projected to grow 3% to $755 million. It is the opinion of management that current cash, cash equivalents and marketable securities and forecasted cash flow will provide a basis for financing operating requirements, capital expenditures and anticipated payments of preferred dividends. In addition, management believes that collections on the outstanding receivables portfolios as well as funds available from various funding sources will permit the Financial Services subsidiaries to meet the financing requirements of the Company's dealers and customers. STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY Management of Navistar International Corporation and its subsidiaries is responsible for the preparation and for the integrity and objectivity of the accompanying financial statements and other financial information in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based on management's estimates and judgments. The accompanying financial statements have been audited by Deloitte & Touche LLP, independent auditors, whose appointment is ratified by shareowner vote at the Annual Meeting. Management has made available to Deloitte & Touche LLP all the Company's financial records and related data, as well as the minutes of the Board of Directors' meetings. Management believes that all representations made to Deloitte & Touch LLP during its audit were valid and appropriate. Management is responsible for establishing and maintaining a system of internal controls throughout its operations that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use and the execution and recording of transactions in accordance with management's authorization. The system of internal controls which provides for appropriate division of responsibility is supported by written policies and procedures that are updated by management, as necessary. The system is tested and evaluated regularly by the Company's internal auditors as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their audit in accordance with generally accepted auditing standards and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the Company's system of internal controls and takes the necessary actions that are cost- effective in the circumstances to respond appropriately to the recommendations presented. Management believes that the Company's system of internal controls accomplishes the objectives set forth in the first sentence of this paragraph. The Audit Committee of the Board of Directors, composed of six non- employee Directors, meets periodically with the independent auditors, management, general counsel and internal auditors to satisfy itself that such persons are properly discharging their responsibilities regarding financial reporting and auditing. In carrying out these responsibilities, the Committee has full access to the independent auditors, internal auditors, general counsel and financial management in scheduled joint sessions or private meetings as in the Committee's judgment seem appropriate. Similarly, the Company's independent auditors, internal auditors, general counsel and financial management have full access to the Committee and to the Board of Directors and each is responsible for bringing before the Committee or its Chair, in a timely manner, any matter deemed appropriate to the discharge of the Committee's responsibility. John R. Horne President and Chief Executive Officer Robert C. Lannert Executive Vice President and Chief Financial Officer INDEPENDENT AUDITORS' REPORT Navistar International Corporation, Its Directors and Shareowners: We have audited the Statement of Financial Condition of Navistar International Corporation and Consolidated Subsidiaries as of October 31, 1995 and 1994, and the related Statement of Income, of Cash Flow, and of Non-Redeemable Preferred, Preference and Common Shareowners' Equity for each of the three years in the period ended October 31, 1995. 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, 1995 and 1994, and the results of their operations and their cash flow for each of the three years in the period ended October 31, 1995, in conformity with generally accepted accounting principles. As discussed in Notes 3 and 4 to the Financial Statements, effective November 1, 1992, the Company changed its methods of accounting for postretirement benefits other than pensions and for income taxes. Deloitte & Touche LLP December 18, 1995 Chicago, Illinois
STATEMENT OF INCOME Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- For the Years Ended October 31 (Millions of dollars, except per share data) 1995 1994 1993 - ------------------------------------------------------------------------------------ Sales and revenues Sales of manufactured products ............... $ 6,125 $ 5,153 $ 4,510 Finance and insurance revenue ................ 167 152 181 Other income ................................. 50 32 30 -------- -------- -------- Total sales and revenues ................... 6,342 5,337 4,721 -------- -------- -------- Costs and expenses Cost of products and services sold ........... 5,288 4,496 3,925 Postretirement benefits ...................... 206 176 209 Supplemental Trust contribution .............. - - 513 Engineering and research expense ............. 113 97 94 Marketing and administrative expense ......... 307 265 257 Interest expense ............................. 87 75 91 Financing charges on sold receivables ........ 29 16 14 Insurance claims and underwriting expense .... 50 54 59 -------- -------- -------- Total costs and expenses ................... 6,080 5,179 5,162 -------- -------- -------- Income (loss) before income taxes Manufacturing .............................. - - - Financial Services ......................... - - - -------- -------- -------- Income (loss) before income taxes ........ 262 158 (441) Income tax benefit (expense) ............. (98) (56) 168 -------- -------- -------- Income (loss) of continuing operations ....... 164 102 (273) Loss of discontinued operations .............. - (20) - -------- -------- -------- Income (loss) before cumulative effect of changes in accounting policy ............. 164 82 (273) Cumulative effect of changes in accounting policy ....................... - - (228) -------- -------- -------- Net income (loss) ............................ 164 82 (501) Less dividends on Series G preferred stock ... 29 29 29 -------- -------- -------- Net income (loss) applicable to common stock . $ 135 $ 53 $ (530) ======== ======== ======== - ------------------------------------------------------------------------------------ Income (loss) per common share: Continuing operations ...................... $ 1.83 $ .99 $ (8.63) Discontinued operations .................... - (.27) - Cumulative effect of changes in accounting policy ..................... - - (6.56) -------- -------- -------- Net income (loss) per common share ........... $ 1.83 $ .72 $ (15.19) ======== ======== ======== Average number of common and dilutive common equivalent shares outstanding (millions) ... 74.3 74.6 34.9 - ----------------------------------------------------------------------------------- See Notes to Financial Statements.
Manufacturing* Financial Services* ---------------------------------- ---------------------------------- 1995 1994 1993 1995 1994 1993 ---------------------------------------------------------------------------- $ 6,125 $ 5,153 $ 4,510 $ - $ - $ - - - - 222 202 223 43 25 16 13 12 14 -------- -------- -------- -------- -------- -------- 6,168 5,178 4,526 235 214 237 -------- -------- -------- -------- -------- -------- 5,280 4,494 3,919 8 2 6 205 175 208 1 1 1 - - 509 - - 4 113 97 94 - - - 277 238 230 30 27 27 9 10 12 84 70 79 84 66 56 - - - - - - 50 54 59 -------- -------- -------- -------- -------- -------- 5,968 5,080 5,028 173 154 176 -------- -------- -------- -------- -------- -------- 200 98 (502) - - - 62 60 61 - - - -------- -------- -------- -------- -------- -------- 262 158 (441) 62 60 61 (98) (56) 168 (22) (22) (22) -------- -------- -------- -------- -------- -------- 164 102 (273) 40 38 39 - (20) - - - - -------- -------- -------- -------- -------- -------- 164 82 (273) 40 38 39 - - (228) - - (9) -------- -------- -------- -------- -------- -------- $ 164 $ 82 $ (501) $ 40 $ 38 $ 30 ======== ======== ======== ======== ======== ======== ---------------------------------------------------------------------------- * "Manufacturing" includes the consolidated financial results of the Company's manufacturing operations with its wholly-owned financial services subsidiaries included under the equity method of accounting. "Financial Services" includes the Company's wholly-owned subsidiary, Navistar Financial Corporation, and other wholly-owned finance and insurance subsidiaries. Transactions between Manufacturing and Financial Services have been eliminated from the "Navistar International Corporation and Consolidated Subsidiaries" columns on the preceding page. The basis of consolidation is described in Note 1.
STATEMENT OF FINANCIAL CONDITION Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- As of October 31 (Millions of dollars) 1995 1994 - ----------------------------------------------------------------------------------- ASSETS Cash and cash equivalents .......................... $ 485 $ 557 Marketable securities .............................. 555 304 -------- ------- 1,040 861 Receivables, net ................................... 1,854 1,508 Inventories ........................................ 416 429 Property and equipment, net ........................ 683 578 Equity in Financial Services subsidiaries .......... - - Investments and other assets ....................... 166 165 Prepaid and intangible pension assets .............. 320 372 Deferred tax asset ................................. 1,087 1,134 -------- -------- Total assets ....................................... $ 5,566 $ 5,047 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Liabilities Accounts payable ................................... $ 933 $ 836 Debt ............................................... 1,457 1,218 Postretirement benefits liability .................. 1,341 1,299 Other liabilities .................................. 965 877 -------- -------- Total liabilities .............................. 4,696 4,230 -------- -------- Shareowners' equity Series G convertible preferred stock (liquidation preference $240 million) ............ 240 240 Series D convertible junior preference stock (liquidation preference $4 million) .............. 4 4 Common stock (50.9 million and 50.0 million shares issued)........................................... 1,641 1,628 Class B Common stock (24.3 million and 25.0 million shares issued) 491 501 Retained earnings (deficit) - balance accumulated after the deficit reclassification as of October 31, 1987 ................................. (1,478) (1,538) Common stock held in treasury, at cost ............. (28) (18) -------- -------- Total shareowners' equity ...................... 870 817 -------- -------- Total liabilities and shareowners' equity .......... $ 5,566 $ 5,047 ======== ======== - ----------------------------------------------------------------------------------- See Notes to Financial Statements.
Manufacturing* Financial Services* ---------------------- --------------------- 1995 1994 1995 1994 ---------------------------------------------------------------------------- $ 461 $ 499 $ 24 $ 58 415 166 140 138 -------- -------- -------- -------- 876 665 164 196 274 176 1,672 1,342 416 429 - - 642 549 41 29 282 249 - - 122 151 44 14 319 371 1 1 1,087 1,134 - - -------- -------- -------- -------- $ 4,018 $ 3,724 $ 1,922 $ 1,582 ======== ======== ======== ======== $ 876 $ 779 $ 146 $ 70 127 127 1,330 1,091 1,334 1,292 7 7 811 709 157 165 -------- -------- -------- -------- 3,148 2,907 1,640 1,333 -------- -------- -------- -------- 240 240 - - 4 4 - - 1,641 1,628 178 178 491 501 - - (1,478) (1,538) 104 71 (28) (18) - - -------- -------- -------- -------- 870 817 282 249 -------- -------- -------- -------- $ 4,018 $ 3,724 $ 1,922 $ 1,582 ======== ======== ======== ======== ---------------------------------------------------------------------------- * "Manufacturing" includes the consolidated financial results of the Company's manufacturing operations with its wholly-owned financial services subsidiaries included under the equity method of accounting. "Financial Services" includes the Company's wholly-owned subsidiary, Navistar Financial Corporation, and other wholly-owned finance and insurance subsidiaries. Transactions between Manufacturing and Financial Services have been eliminated from the "Navistar International Corporation and Consolidated Subsidiaries" columns on the preceding page. The basis of consolidation is described in Note 1.
STATEMENT OF CASH FLOW Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- For the Years Ended October 31 (Millions of dollars) 1995 1994 1993 - ------------------------------------------------------------------------------------- Cash flow from operations Net income (loss) ............................... $ 164 $ 82 $ (501) Adjustments to reconcile net income (loss) to cash provided by operations: Depreciation and amortization ................. 81 72 75 Supplemental Trust contribution ............... - - 513 Equity in earnings of Financial Services, net of dividends received ................... - - - Deferred income taxes ......................... 89 51 (170) Additional pension funding .................... (72) - - Provision for loss of discontinued operations . - 20 - Cumulative effect of changes in accounting policy ........................ - - 228 Other, net .................................... (4) (26) (2) Change in operating assets and liabilities: Receivables ................................. (91) (173) (164) Inventories ................................. 35 (19) (51) Prepaid and other current assets ............ 10 (4) (10) Accounts payable ............................ 63 99 107 Other liabilities ........................... 142 52 10 -------- -------- -------- Cash provided by operations ................... 417 154 35 -------- -------- -------- Cash flow from investment programs Purchase of retail notes and lease receivables .. (1,099) (916) (770) Collections/sales of retail notes and lease receivables ......................... 850 1,176 895 Acquisitions in excess of cash collections of wholesale notes and accounts receivable .... - - - Purchase of marketable securities ............... (722) (710) (371) Sales or maturities of marketable securities .... 480 621 326 Proceeds from property sold under sale/leaseback. - 87 - Capital expenditures ............................ (139) (87) (110) Base Program Trust pre-funding .................. - - (300) Other investment programs, net .................. (11) 31 (57) -------- -------- -------- Cash provided by (used in) investment programs. (641) 202 (387) -------- -------- -------- Cash flow from financing activities Principal payments on debt ...................... (121) (222) (117) Issuance of debt ................................ - 100 - Net increase (decrease)in notes and debt outstanding under bank revolving credit facility and asset-backed and other commercial paper programs ..................... 312 (28) 75 Net proceeds from issuance of Common stock ...... - - 492 Dividends paid .................................. (29) (58) - Repurchase of Class B Common stock .............. (10) (12) (2) -------- -------- -------- Cash provided by (used in) financing activities 152 (220) 448 -------- -------- -------- Cash and cash equivalents Increase (decrease) during the year ........... (72) 136 96 At beginning of the year ...................... 557 421 325 -------- -------- -------- Cash and cash equivalents at end of the year .... $ 485 $ 557 $ 421 ======== ======== ======== - ------------------------------------------------------------------------------------ See Notes to Financial Statements.
Manufacturing* Financial Services* ---------------------------------- ---------------------------------- 1995 1994 1993 1995 1994 1993 ---------------------------------------------------------------------------- $ 164 $ 82 $ (501) $ 40 $ 38 $ 30 75 68 69 6 4 6 - - 509 - - 4 (28) (10) (10) - - - 89 51 (170) - 3 4 (72) - - - - - - 20 - - - - - - 228 - - 9 6 (12) 3 (10) (17) (9) (88) (49) 7 1 (1) 2 35 (19) (51) - - - 10 (4) (10) - - - 72 103 106 68 (7) 19 137 50 12 10 - (2) -------- -------- -------- -------- -------- -------- 400 280 192 115 20 63 -------- -------- -------- -------- -------- -------- - - - (1,099) (916) (770) - - - 850 1,176 895 - - - (86) (118) (187) (646) (651) (296) (76) (59) (75) 399 569 240 81 52 86 - 87 - - - - (139) (87) (110) - - - - - (300) - - - 8 36 (43) (19) (5) (14) -------- -------- -------- -------- -------- -------- (378) (46) (509) (349) 130 (65) -------- -------- -------- -------- -------- -------- (21) (42) (18) (100) (180) (99) - - - - 100 - - - - 312 (28) 75 - - 492 - - - (29) (58) - (12) (28) (33) (10) (12) (2) - - - -------- -------- -------- -------- -------- -------- (60) (112) 472 200 (136) (57) -------- -------- -------- -------- -------- -------- (38) 122 155 (34) 14 (59) 499 377 222 58 44 103 -------- -------- -------- -------- -------- -------- $ 461 $ 499 $ 377 $ 24 $ 58 $ 44 ======== ======== ======== ======== ======== ======== ----------------------------------------------------------------------------- * "Manufacturing" includes the consolidated financial results of the Company's manufacturing operations with its wholly-owned financial services subsidiaries included under the equity method of accounting. "Financial Services" includes the Company's wholly-owned subsidiary, Navistar Financial Corporation, and other wholly-owned finance and insurance subsidiaries. Transactions between Manufacturing and Financial Services have been eliminated from the "Navistar International Corporation and Consolidated Subsidiaries" columns on the preceding page. The basis of consolidation is described in Note 1.
STATEMENT OF NON-REDEEMABLE PREFERRED, PREFERENCE AND COMMON SHAREOWNERS' EQUITY Non-Redeemable Convertible -------------------------- Preferred Preference Class B SHARES OUTSTANDING Stock Stock Common Common (Thousands) Series G Series D Stock Stock Warrants - ----------------------------------------------- -------- ---------- ------ ------- -------- Balance at October 31, 1992 ................... 4,800 179 25,410 - 14,834 Public stock offering ......................... - - 23,600 - - Issuance of Class B Common stock .............. - - - 25,642 - Repurchase of stock and other additions/ (conversions) ............................... - (1) 9 (96) - Stock accumulation fund settlement ............ - - 136 - - Expiration of warrants ........................ - - - - (4,000) ------ ------ ------ ------ ------ Balance at October 31, 1993 ................... 4,800 178 49,155 25,546 10,834 Repurchase of stock and other additions/ (conversions) ............................... - (1) 164 (511) - Expiration of warrants ........................ - - - - (10,834) Balance at October 31, 1994 ................... 4,800 177 49,319 25,035 - Repurchase of stock and other additons/ (conversions) ............................... - - 162 (742) - ------ ------ ------ ------ ------ Balance at October 31, 1995 ................... 4,800 177 49,481 24,293 - ====== ====== ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------ EQUITY (Millions of dollars) 1995 1994 1993 - ----------------------------------------------- -------- -------- -------- Preferred Stock Series G ...................... $ 240 $ 240 $ 240 -------- -------- -------- Preference Stock Series D ..................... 4 4 4 -------- -------- -------- Common Stock Balance at beginning of the year .............. 1,628 1,615 508 Public stock offering ......................... - - 492 Reclassification of NOL (a) ................... - - 618 Conversion of Class B Common stock and other .. 13 13 (3) -------- -------- -------- Balance at end of the year .................... 1,641 1,628 1,615 -------- -------- -------- Class B Common Stock Balance at beginning of the year .............. 501 513 - Issuance of stock ............................. - - 513 Repurchase of stock ........................... (10) (12) - -------- -------- -------- Balance at end of the year .................... 491 501 513 -------- -------- -------- Retained Earnings Balance at beginning of the year .............. (1,538) (1,592) (404) Reclassification of NOL (a) ................... - - (618) Net income (loss) ............................. 164 82 (501) Preferred dividends ........................... (22) (36) (29) Minimum pension liability adjustment/other .... (82) 8 (40) -------- -------- -------- Balance at end of the year .................... (1,478 (1,538) (1,592) -------- -------- -------- Common Stock Held in Treasury Balance at beginning of the year .............. (18) (5) (11) Repurchase of Common stock and other .......... (10) (13) 6 -------- -------- -------- Balance at end of the year .................... (28) (18) (5) -------- -------- -------- Total shareowners' equity ..................... $ 870 $ 817 $ 775 ======== ======== ======== See Notes to Financial Statements. (a) Reclassification required as a result of the 1987 deficit reclassification and adoption of SFAS 109 in 1993.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 1995 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). Transportation operates in one principal industry segment, the manufacture and marketing of medium and heavy trucks, including school buses, mid-range diesel engines and service parts in the United States and Canada and selected export markets. As used hereafter, "Company" refers to Navistar International Corporation and its consolidated subsidiaries. In addition to the consolidated financial statements, the Company has elected to provide financial information in a format that presents the operating results, financial condition and cash flow designated as "Manufacturing" and "Financial Services." Manufacturing includes the consolidated financial results of the Company's manufacturing operations with its wholly-owned financial services subsidiaries included on a one-line basis under the equity method of accounting. Financial Services includes the consolidated financial results of Navistar Financial Corporation (Navistar Financial), its domestic insurance subsidiary and foreign finance and insurance companies. Navistar Financial's primary business is the retail and wholesale financing of products sold by Transportation and its dealers within the United States and the providing of commercial physical damage and liability insurance to Transportation's dealers and retail customers and to the general public through an independent insurance agency system. The effects of transactions between Manufacturing and Financial Services 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 subsidiaries are combined; therefore, the Company has adopted an unclassified presentation. Certain 1994 and 1993 amounts have been reclassified to conform with the presentation used in the 1995 financial statements. Revenue Recognition Manufacturing recognizes 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 recognizes finance charges on retail notes and finance leases as income over the term of the receivables on the accrual basis utilizing the interest method. Interest due from interest bearing notes and accounts is recognized on the accrual basis. 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 continues to service the sold receivables and receives a fee for such services from the investor. An allowance for losses is maintained at a level deemed appropriate based on loss experience and other factors and it is charged when receivables are determined to be uncollectible. Insurance premiums are earned on a pro rata 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. NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) 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, U.S. 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. 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 8 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 annually to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Engineering and Research Expense Engineering and research expense includes routine ongoing costs associated with improving existing products and manufacturing processes. Included are expenditures for research, manufacturing and product engineering and development activities for the introduction of new truck and diesel engine products and major improvements to existing products and processes. These costs are expensed as incurred and are classified as research and development expenses. Research and development expenditures totalled $91 million, $88 million and $86 million in 1995, 1994 and 1993, 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 all product liability claims. NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) 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. Navistar Financial uses a variety of contracts to manage its exposure to fluctuations in funding costs from the anticipated securitization and sale of retail notes. All derivatives are held for purposes other than trading and Company policy does not allow the use of derivatives for speculative purposes. Gains and losses on hedges of existing assets or liabilities, firm commitments or anticipated transactions are included in the carrying amounts of the related asset or liability and recognized in income when the hedged event occurs. Gains or losses related to qualifying hedges of anticipated sales of receivables are deferred and are recognized in income when the receivables are sold. Changes in Accounting Policy In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS 123), which the Company must adopt by fiscal 1997. This Statement allows for, and the Company intends to, retain the current method of accounting for employee stock-based compensation arrangements with certain additional disclosures. The new standard is not expected to have a material effect on the Company's net income or financial position. 2. SUPPLEMENTAL CASH FLOW INFORMATION On the Statement of Cash Flow, "Acquisitions in excess of cash collections" relating to Financial Services' wholesale notes and accounts receivable are included on a consolidated basis as a change in operating assets and liabilities under cash flow from operations and in Financial Services as cash flow from investment programs. Consolidated interest payments were $82 million, $76 million and $91 million in 1995, 1994 and 1993, respectively. Consolidated tax payments during 1995, 1994 and 1993 were $9 million, $5 million and $2 million, respectively. NOTES TO FINANCIAL STATEMENTS (Continued) 3. POSTRETIREMENT BENEFITS The Company provides postretirement benefits to substantially all of its employees. Costs associated with postretirement benefits include pension expense for employees, retirees and surviving spouses, and postretirement health care and life insurance expense for employees, retirees, surviving spouses and dependents. In addition, as part of the 1993 restructured retiree health care and life insurance plans, profit sharing payments to an independent retiree Trust are required. The cost of postretirement benefits is segregated as a separate component in the Statement of Income and is as follows: Millions of dollars 1995 1994 1993 - ---------------------------------------------------------------------------- Pension expense .............................. $ 110 $ 108 $ 107 Health/life insurance ........................ 70 64 102 Profit sharing provision to Trust ............ 26 4 - ------ ------ ------ Total postretirement benefits expense ........ $ 206 $ 176 $ 209 ====== ====== ====== In the Statement of Financial Condition, the postretirement benefits liability of $1,341 million in 1995 and $1,299 million in 1994 includes $587 million and $549 million, respectively, for pension and $754 million and $750 million, respectively, for postretirement health care and life insurance benefits. Pension Benefits Generally, the pension plans are non-contributory with benefits related to an employee's length of service and compensation rate. The Company's policy is to fund its pension plans in accordance with applicable United States and Canadian government regulations and to make additional payments as funds are available to achieve full funding of the vested accumulated benefit obligation. The pension plans vary in the extent to which they are funded, but for plan years which ended during the current year, all legal funding requirements have been met. During 1995, the Company contributed $72 million in excess of its normal funding requirement. Plan assets are invested primarily in dedicated portfolios of long-term fixed income securities with more recent contributions invested in equity securities. Pension Expense Net pension expense included in the Statement of Income is composed of the following: Millions of dollars 1995 1994 1993 - ---------------------------------------------------------------------------- Service cost for benefits earned during the period .......................... $ 24 $ 34 $ 27 Interest on projected benefit obligation ..... 232 211 220 Other pension costs .......................... 57 50 43 Less expected return on assets ............... (203) (187) (183) ------ ------ ------ Net pension expense .......................... $ 110 $ 108 $ 107 ====== ====== ====== Actual return on assets ...................... $ 398 $ (127) $ 427 ====== ====== ====== "Other pension costs" in the above table include principally the amortization of the net transition obligation and amortization of the cost of plan amendments. NOTES TO FINANCIAL STATEMENTS (Continued) 3. POSTRETIREMENT BENEFITS (continued) Pension Assets and Liabilities Included in the Statement of Financial Condition is the minimum pension liability for certain unfunded pension obligations. The unfunded liability in excess of the unamortized prior service cost and net transition obligation was recorded as a reduction in shareowners' equity of $219 million, net of deferred income taxes of $124 million as of October 31, 1995 and $132 million, net of deferred income taxes of $81 million as of October 31, 1994. The change in the minimum pension liability at October 31, 1995 resulted primarily from settlement rate changes, offset partially by investment gains. The funded status of the Company's plans as of October 31, 1995 and 1994 and a reconciliation with amounts recognized in the Statement of Financial Condition are provided below. Plans in Which Plans in Which Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets ------------------- ------------------- Millions of dollars 1995 1994 1995 1994 - ---------------------------------------------------------------------------- Actuarial present value of: Vested benefits .............. $ (51) $ (81) $ (2,612) $ (2,282) Non-vested benefits .......... (5) (5) (270) (223) -------- -------- -------- -------- Accumulated benefit obligation ............... (56) (86) (2,882) (2,505) Effect of projected future compensation levels ........ (4) (2) (27) (21) -------- -------- -------- -------- Projected benefit obligation ... (60) (88) (2,909) (2,526) Plan assets at fair value ...... 87 118 2,295 1,968 -------- -------- -------- -------- Funded status at October 31 .... 27 30 (614) (558) Unamortized pension costs: Net losses ................... 9 7 372 235 Prior service costs .......... 1 14 50 43 (Asset) liability at date of transition ...... (1) (1) 233 266 Adjustment for the minimum liability .................... - - (628) (522) -------- -------- -------- -------- Net asset (liability) .......... $ 36 $ 50 $ (587) $ (536) ======== ======== ======== ======== The weighted average rate assumptions used in determining pension costs and the projected benefit obligation were: 1995 1994 1993 - ---------------------------------------------------------------------------- Discount rate used to determine present value of projected benefit obligation at end of year ......................... 7.8% 9.3% 7.3% Expected long-term rate of return on plan assets for the year ............... 9.9% 8.1% 8.8% Expected rate of increase in future compensation levels .................... 3.5% 3.5% 3.5% NOTES TO FINANCIAL STATEMENTS (Continued) 3. POSTRETIREMENT BENEFITS (continued) Other Postretirement Benefits In addition to providing pension benefits, the Company provides health care and life insurance for a majority of its retired employees, spouses and certain dependents in the United States and Canada. Under the terms of an agreement between the Company and its employees, retirees and collective bargaining organizations, a Plan was implemented in fiscal 1993 which provided for cost sharing between the Company and participants in the form of premiums, co-payments and deductibles. A Trust was established to provide a vehicle for funding the health care liability through Company contributions and retiree premiums. In October 1993, the Company pre-funded $300 million of this liability from the partial proceeds of a public offering of Common Stock. The funds in this Trust are invested primarily in equity securities. The Company is required to make an additional pre-funding contribution of $200 million on or prior to June 30, 1998. See also Note 19. The Company adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," for its United States and Canadian plans in 1993 and recognized the transition obligation as a one-time non-cash charge to earnings. The cumulative effect of this change in accounting policy was $729 million, net of a deferred income tax benefit of $420 million. The $228 million cumulative charge for the changes in accounting policy reported in the Statement of Income for 1993 includes the $729 million charge from the adoption of SFAS 106 offset by the $501 million benefit from the adoption of SFAS 109, as discussed in Note 4. The components of expense for other postretirement benefits included in the Statement of Income are as follows: Millions of dollars 1995 1994 1993 - ---------------------------------------------------------------------------- Service cost for benefits earned during the year .................................... $ 10 $ 10 $ 12 Interest cost on the accumulated benefit obligation ................................. 90 81 91 Expected return on assets ..................... (30) (27) (1) ------ ------ ------ Net other postretirement benefits expense ..... $ 70 $ 64 $ 102 ====== ====== ====== Actual return on assets ....................... $ 65 $ 12 $ - ====== ====== ====== The funded status of other postretirement benefits as of October 31 is as follows: Millions of dollars 1995 1994 - ---------------------------------------------------------------------------- Accumulated other postretirement benefit obligation (APBO): Retirees and their dependents ............. $ (729) $ (662) Active employees eligible to retire ....... (201) (198) Other active participants ................. (227) (178) ------ ------ Total APBO ................................ (1,157) (1,038) Plan assets at fair value ................. 364 308 ------ ------ APBO in excess of plan assets ............. (793) (730) Unrecognized net (gain) loss .............. 39 (20) ------ ------ Net liability ............................. $ (754) $ (750) ====== ====== NOTES TO FINANCIAL STATEMENTS (Continued) 3. POSTRETIREMENT BENEFITS (continued) Other Postretirement Benefits (continued) The expected return on plan assets was 10% for 1995 and 9% for 1994 and 1993. The weighted average of discount rates used to determine the accumulated postretirement benefit obligation was 7.8% and 9.0% at October 31, 1995 and 1994, respectively. For 1996, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 9.8%. The rate is projected to decrease to 5.0% by the year 2003 and remain at that level each year thereafter. If the cost trend rate assumptions were increased by one percentage point for each year, the accumulated postretirement benefit obligation would increase by approximately $150 million and the associated expense recognized for the year ended October 31, 1995 would increase by an estimated $13 million. 4. INCOME TAXES The Company adopted SFAS 109, "Accounting for Income Taxes," in 1993. The $228 million cumulative charge for the changes in accounting policy reported in the 1993 Statement of Income includes a $501 million benefit from the adoption of SFAS 109. The Income Tax section of Management's Discussion and Analysis includes disclosures related to the determination of the amount of the net deferred tax asset included in the Statement of Financial Condition. The income tax benefit (expense) for the years ended October 31 is as follows: Millions of dollars 1995 1994 1993 - ---------------------------------------------------------------------------- Tax benefit (expense) on income (loss) of continuing operations: Manufacturing .............................. $ (76) $ (34) $ 190 Financial Services ......................... (22) (22) (22) ------ ------ ------ Total income tax benefit (expense) of continuing operations ...................... $ (98) $ (56) $ 168 ====== ====== ====== Taxes on income (loss) of continuing operations are analyzed by categories as follows: Millions of dollars 1995 1994 1993 - ---------------------------------------------------------------------------- Current: Federal .................................... $ (7) $ (3) $ - State and local ............................ (2) (2) (2) ------ ------ ------ Total current (expense) .................. (9) (5) (2) ------ ------ ------ Deferred: Federal .................................... (77) (44) 149 State and local ............................ (12) (7) 21 ------ ------ ------ Total deferred benefit (expense) ......... (89) (51) 170 ------ ------ ------ Total income tax benefit (expense) of continuing operations ................... $ (98) $ (56) $ 168 ====== ====== ====== NOTES TO FINANCIAL STATEMENTS (Continued) 4. INCOME TAXES (continued) 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. The domestic and foreign components of income (loss) from continuing operations before income taxes and the cumulative effect of changes in accounting policy consist of the following: Millions of dollars 1995 1994 1993 - ---------------------------------------------------------------------------- Domestic ..................................... $ 251 $ 145 $ (453) Foreign ...................................... 11 13 12 ------ ------ ------ Total income (loss) .......................... $ 262 $ 158 $ (441) ====== ====== ====== The relationship of the tax (expense) benefit to the income (loss) of continuing operations for 1995, 1994 and 1993 differs from the U.S. statutory rate (35%) because of state income taxes and benefit of NOLs in foreign countries. The effective tax rates on the income (loss) of continuing operations for the years 1995, 1994 and 1993 were 37.4%, 35.4% and 38.1%, respectively. Undistributed earnings of foreign subsidiaries were $28 million and $16 million at October 31, 1995 and 1994, 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. The following is a summary of deferred tax assets and liabilities at October 31: Millions of dollars 1995 1994 - ---------------------------------------------------------------------------- Deferred tax assets: Total deferred tax assets .................. $1,394 $1,431 Less valuation allowances .................. (307) (297) ------ ------ Net deferred tax assets .................. $1,087 $1,134 ====== ====== Deferred tax liabilities, included in Other Liabilities .............. $ (16) $ (16) ====== ====== NOTES TO FINANCIAL STATEMENTS (Continued) 4. INCOME TAXES (continued) The components of the deferred tax asset (liability) at October 31 are as follows: Millions of dollars 1995 1994 - ---------------------------------------------------------------------------- United States - ------------- Deferred tax assets: Net operating loss carryforwards .......... $ 768 $ 872 Alternative minimum tax ................... 10 3 Product liability .......................... 60 63 Warranty ................................... 42 38 Other liabilities .......................... 170 138 Postretirement benefits .................... 390 347 -------- ------- Total deferred tax assets .............. 1,440 1,461 -------- ------- Deferred tax liabilities: Prepaid pension assets ..................... (23) (10) Depreciation ............................... (42) (39) -------- ------- Total deferred tax liabilities ......... (65) (49) -------- ------- Total .................................. 1,375 1,412 Less valuation allowance ..................... (288) (278) -------- ------- Net deferred tax asset ................. $ 1,087 $ 1,134 ======== ======= Millions of dollars 1995 1994 - --------------------------------------------------------------------------- Foreign - ------- Deferred tax assets: Net operating loss carryforwards .......... $ - $ 3 Postretirement benefits ................... 19 16 -------- -------- Total deferred tax assets ............... 19 19 Less valuation allowance ...................... (19) (19) -------- -------- Net deferred tax assets ................... - - Deferred tax liabilities - prepaid pension assets .............................. (16) (16) -------- -------- Net deferred tax liabilities .............. $ (16) $ (16) ======== ======== NOTES TO FINANCIAL STATEMENTS (Continued) 4. INCOME TAXES (continued) A valuation allowance has been provided for those net operating loss carryforwards and temporary differences which are estimated to expire before they are utilized. Because the foreign tax carryforward period is relatively short, a full allowance has been provided against the total deferred tax assets. The valuation allowance increased $10 million during 1995 resulting from tax benefits associated with a stock acquisition which are not expected to be realized. Tax paying entities of the Company offset all deferred tax assets and liabilities within each tax jurisdiction and present them in a single amount in the Statement of Financial Condition. Amounts in different tax jurisdictions cannot be offset against each other. Accordingly, the net U.S. deferred tax asset is shown in the Statement of Financial Condition as a deferred tax asset, whereas the net foreign deferred tax liability is included in the amount shown for Other Liabilities. At October 31, 1995, the Company had $2,020 million of domestic NOL carryforwards available to offset future taxable income. Such carryforwards reflect income tax losses incurred which will expire as follows, in millions of dollars: 1998 ...................... $ 236 1999 ...................... 29 2000 ...................... 300 2001 ...................... 143 2002 ...................... 47 2004 ...................... 238 2005 ...................... 7 2006 ...................... 128 2007 ...................... 56 2008 ...................... 817 2009 ...................... 19 -------- Total ................ $ 2,020 ======== Additionally, the estimated reversal of net temporary differences of $1,620 million as of October 31, 1995 will create net tax deductions which, if not utilized previously, will expire subsequent to 2009, as indicated, in millions of dollars: Estimated Year Estimated Year of Reversal Amount of Expiration -------------- ------ -------------- United States: 1996 ................................... $ 393 2011 1997 ................................... 214 2012 1998 ................................... 17 2013 1999-2003 .............................. 24 2014-2018 2004 and thereafter .................... 924 2019 and thereafter -------- Total United States .................. 1,572 Canada: 2001 and thereafter .................... 48 2009 and thereafter -------- $ 1,620 ======== NOTES TO FINANCIAL STATEMENTS (Continued) 5. DISCONTINUED OPERATIONS In the fourth quarter of 1994, Transportation recorded a $20 million charge, net of $13 million of income taxes, as a loss of discontinued operations for environmental liabilities at production facilities of two formerly owned businesses, Wisconsin Steel and Solar Turbine, Inc. The $33 million pretax charge, which included an $11 million settlement for various environmental related commercial issues and a $22 million charge for cleanup costs for these sites, was included in Other Liabilities. See also Note 17. 6. 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: 1995 1994 ------------------ ------------------ Amortized Fair Amortized Fair Millions of dollars Cost Value Cost Value - --------------------------------------------------------------------------- MANUFACTURING Corporate securities ............... $ 23 $ 23 $ 31 $ 31 U.S. government securities ......... 358 359 125 124 Mortgage and asset-backed securities 33 33 11 11 ------ ------ ------ ------ Manufacturing debt securities ...... 414 415 167 166 FINANCIAL SERVICES Corporate securities ............... 33 33 28 28 U.S. government securities ......... 53 54 67 65 Mortgage and asset-backed securities 32 33 28 28 Foreign government securities ...... 9 9 9 8 ------ ------ ------ ------ Financial Services debt securities .................. 127 129 132 129 Financial Services equity securities 10 11 9 9 ------ ------ ------ ------ Financial Services marketable securities ............ 137 140 141 138 ------ ------ ------ ------ Total marketable securities .......... $ 551 $ 555 $ 308 $ 304 ====== ====== ====== ====== Gross unrealized gains and losses on marketable securities at October 31, 1995 and 1994 are not material. NOTES TO FINANCIAL STATEMENTS (Continued) 6. MARKETABLE SECURITIES (Continued) Contractual maturities of marketable debt securities at October 31 are as follows: 1995 1994 ------------------ ------------------ Amortized Fair Amortized Fair Millions of dollars Cost Value Cost Value - --------------------------------------------------------------------------- MANUFACTURING Due in one year or less ........... $ 98 $ 98 $ 32 $ 32 Due after one year through five years .............. 283 284 124 123 ------ ------ ------ ------ 381 382 156 155 Mortgage and asset-backed securities 33 33 11 11 ------ ------ ------ ------ Manufacturing debt securities 414 415 167 166 ------ ------ ------ ------ FINANCIAL SERVICES Due in one year or less ........... 22 22 17 17 Due after one year through five years 35 36 61 60 Due after five years through ten years 27 27 17 16 Due after ten years ............... 11 11 9 8 ------ ------ ------ ------ 95 96 104 101 Mortgage and asset-backed securities 32 33 28 28 ------ ------ ------ ------ Financial Services debt securities ........... 127 129 132 129 ------ ------ ------ ------ Total debt securities ............. $ 541 $ 544 $ 299 $ 295 ====== ====== ====== ====== Proceeds from sales or maturities of investments in securities were $480 million during 1995 and $621 million during 1994. Gross gains and losses realized on such sales or maturities were not material for each of the two years. Shareowners' equity includes an unrealized holding gain of $3 million, net of income taxes, at October 31, 1995 and a loss of $3 million, net of income taxes, at October 31, 1994. At October 31, 1995 and 1994, Financial Services' domestic insurance subsidiary had $23 million and $30 million, respectively, of marketable securities on deposit with various state departments of insurance or otherwise not available. These securities are included in total marketable securities balances at October 31, 1995 and 1994. NOTES TO FINANCIAL STATEMENTS (Continued) 7. RECEIVABLES Receivables at October 31 are summarized by major classification as follows: Millions of dollars 1995 1994 - ------------------------------------------------------------------------- MANUFACTURING Customers .......................................... $ 200 $ 180 Financial Services ................................. 92 13 Allowance for losses ............................... (18) (17) -------- -------- Manufacturing receivables, net ................... 274 176 -------- -------- FINANCIAL SERVICES Retail notes and lease financing ................... 747 514 Wholesale notes .................................... 268 231 Accounts receivable ................................ 388 370 Amounts due from sales of receivables .............. 248 193 Reinsurance balance receivables .................... 31 42 Allowance for losses ............................... (10) (8) -------- -------- Financial Services receivables, net .............. 1,672 1,342 -------- -------- Eliminations ..................................... (92) (10) -------- -------- Total receivables, net ............................... $ 1,854 $ 1,508 ======== ======== The allowance for losses of Manufacturing includes amounts associated with receivables financed by Navistar Financial and receivables on products sold to distributors in export markets. Reflecting higher consumer demand for light trucks and vans, sales of mid-range diesel engines to a domestic automobile manufacturer have increased from 9% of consolidated sales and revenues in 1993 to 10% in 1994 and 12% in 1995. Financial Services Navistar Financial 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 Navistar Financial's funding for retail and wholesale notes comes from sales of receivables by Navistar Financial to third parties with limited recourse. Proceeds from sales of retail notes receivable were $727 million in 1995, $995 million in 1994 and $558 million in 1993. Uncollected sold retail and wholesale receivable balances totalled $1,673 million and $1,347 million as of October 31, 1995 and 1994, respectively. Navistar Financial's maximum exposure under all receivable sale recourse provisions at October 31, 1995 is $210 million which includes holdback reserves of $44 million, subordinated retained interest in securitized receivable sales of $99 million and $67 million of certain cash deposits established as a result of the securitized receivables recourse provisions. NOTES TO FINANCIAL STATEMENTS (Continued) 7. RECEIVABLES (continued) Contractual maturities of finance receivables including unearned finance income at October 31, 1995 are summarized below. Prepayments may cause the average actual life to be shorter. Retail Notes and Wholesale Accounts Millions of dollars Lease Financing Notes Receivable - ------------------------------------------------------------------------- Gross finance receivables due in: 1996 ........................ $ 239 $ 181 $ 388 1997 ........................ 203 87 - 1998 ........................ 184 - - 1999 ........................ 140 - - 2000 ........................ 92 - - 2001 and thereafter ......... 8 - - -------- -------- -------- Gross finance receivables ..... 866 268 388 Unearned finance charges ...... 119 - - -------- -------- -------- Total finance receivables ..... $ 747 $ 268 $ 388 ======== ======== ======== NOTES TO FINANCIAL STATEMENTS (Continued) 8. PROPERTY At October 31, property includes the following: Millions of dollars 1995 1994 - ------------------------------------------------------------------------- MANUFACTURING Land ............................................... $ 11 $ 8 -------- -------- Buildings, machinery and equipment at cost: Plants ........................................... 1,223 1,070 Distribution ..................................... 75 71 Other ............................................ 90 78 -------- -------- Subtotal ....................................... 1,388 1,219 -------- -------- Total property ..................................... 1,399 1,227 Less accumulated depreciation and amortization ..... (757) (678) -------- -------- Manufacturing property, net .................... 642 549 -------- -------- FINANCIAL SERVICES Total property ..................................... 48 35 Less accumulated depreciation and amortization ..... (7) (6) -------- -------- Financial Services property, net ................. 41 29 -------- -------- Total property and equipment, net .................... $ 683 $ 578 ======== ======== Included in the gross property of Manufacturing is property under capitalized lease obligations of $24 million at October 31, 1995 and $27 million at October 31, 1994. 9. INVENTORIES Inventories at October 31 are as follows: Millions of dollars 1995 1994 - ------------------------------------------------------------------------- Finished products .................................... $ 167 $ 169 Work in process ...................................... 91 103 Raw materials and supplies ........................... 158 157 -------- -------- Total inventories .................................... $ 416 $ 429 ======== ======== NOTES TO FINANCIAL STATEMENTS (Continued) 10. LEASES The Company has long-term noncancellable leases for use of various equipment and facilities. Lease terms are generally for 5 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. Total operating lease expense was $42 million in 1995, $38 million in 1994 and $35 million in 1993. Income received from sublease rentals was $6 million in 1995, 1994 and 1993. At October 31, 1995, consolidated future minimum lease payments required under capital and noncancellable operating leases having lease terms in excess of one year are as follows: Capital Operating Millions of dollars Leases Leases - ------------------------------------------------------------------------- 1996 ................................................. $ 3 $ 35 1997 ................................................. 3 32 1998 ................................................. 3 31 1999 ................................................. 3 30 2000 ................................................. 3 30 Thereafter ........................................... 5 78 -------- -------- Total minimum payments ............................... 20 $ 236 Less imputed interest ................................ (7) ======== -------- Present value of minimum lease payments ............ $ 13 ======== Future income from subleases ...................... $ 26 ======== NOTES TO FINANCIAL STATEMENTS (Continued) 11. ACCOUNTS PAYABLE Major classifications of accounts payable at October 31 are as follows: Millions of dollars 1995 1994 - ------------------------------------------------------------------------- MANUFACTURING Trade .............................................. $ 857 $ 776 Other .............................................. 19 3 -------- -------- Manufacturing accounts payable ................... 876 779 -------- -------- FINANCIAL SERVICES Other .............................................. 57 57 Manufacturing ...................................... 89 13 -------- -------- Financial Services accounts payable .............. 146 70 -------- -------- Eliminations ......................................... (89) (13) -------- -------- Total accounts payable ............................... $ 933 $ 836 ======== ======== 12. OTHER LIABILITIES Major classifications of other liabilities at October 31 are as follows: Millions of dollars 1995 1994 - ------------------------------------------------------------------------- MANUFACTURING Product liability and warranty .................... $ 294 $ 288 Employee incentive programs ....................... 104 35 Payroll, commissions and employee related benefits. 91 94 Long-term disability .............................. 55 46 Taxes ............................................. 45 44 Environmental ..................................... 25 31 Other ............................................. 197 171 -------- -------- Manufacturing other liabilities ................. 811 709 -------- -------- FINANCIAL SERVICES Loss reserves and unearned premiums ............... 118 136 Interest .......................................... 12 11 Other ............................................. 27 18 -------- -------- Financial Services other liabilities ............ 157 165 -------- -------- Eliminations ........................................ (3) 3 -------- -------- Total other liabilities ............................. $ 965 $ 877 ======== ======== NOTES TO FINANCIAL STATEMENTS (Continued) 13. DEBT Millions of dollars 1995 1994 - ------------------------------------------------------------------------- MANUFACTURING Notes payable and current maturities of long-term debt ............................... $ 10 $ 3 -------- -------- 6 1/4% Sinking Fund Debentures, due 1998 .......... 6 7 9% Sinking Fund Debentures, due 2004 .............. 60 65 8% Secured Note, due 2002 secured by plant assets . 31 37 Capitalized leases/other .......................... 20 15 -------- -------- Total long-term debt ............................ 117 124 -------- -------- Manufacturing debt .................................. 127 127 -------- -------- FINANCIAL SERVICES Commercial paper ................................. 50 19 Bank borrowings .................................. - 400 Current maturities of long-term debt ............. 118 100 -------- -------- Total short-term debt ........................ 168 519 -------- -------- Senior Debentures and Notes 9.5% medium-term, due 1996 ..................... - 117 Asset-backed commercial paper program, variable rate, due October 1998 ................ 302 - Bank revolver, variable rate, due October 1998 ... 760 355 -------- -------- Total senior debt .............................. 1,062 472 -------- -------- Subordinated Term Debt - Senior notes, 8 7/8%, due November 1998 .............................. 100 100 -------- -------- Total long-term debt ........................... 1,162 572 -------- -------- Financial Services debt .......................... 1,330 1,091 -------- -------- Total debt ......................................... $ 1,457 $ 1,218 ======== ======== Navistar Financial issues commercial paper with varying terms and has short-term borrowings with various banks on a non-committed basis. Compensating cash balances and commitment fees are not required under these borrowings. NOTES TO FINANCIAL STATEMENTS (Continued) 13. DEBT (continued) The aggregate annual maturities and sinking fund requirements for debt for the years ended October 31 are as follows: Financial Millions of dollars Manufacturing Services Total - ------------------------------------------------------------------------ 1996 .......................... $ 10 $ 168 $ 178 1997 .......................... 19 - 19 1998 .......................... 20 1,062 1,082 1999 .......................... 17 100 117 2000 .......................... 16 - 16 Thereafter .................... 45 - 45 -------- -------- -------- Weighted average interest rate on debt including the effect of discounts and related amortization: 1995 ...................... 9.0% 7.4% 7.6% 1994 ...................... 8.7% 7.1% 7.3% In November 1994, Navistar Financial amended and restated its $727 million bank revolving credit agreement extending the scheduled maturities for 1996 to October 31, 1998 and expanding the commitment to $900 million. In addition, the commitments to sell retail notes under the $600 million retail notes purchase facility agreement were terminated and Navistar Financial established a $300 million asset-backed commercial paper (ABCP) program backed by a $300 million bank liquidity facility which terminates October 31, 1998. The amended revolving credit facility removes dividend restrictions, provides that Navistar Financial maintain certain covenant requirements and grants security interests in substantially all of its assets consistent with the previous credit agreement. Facility fees will be paid quarterly regardless of usage. Under the terms of the ABCP program, a special purpose wholly-owned subsidiary of Navistar Financial will purchase retail notes and lease receivables. All assets of the subsidiary will be pledged or sold to a trust that will fund the receivables with investment grade commercial paper. Navistar Financial will pay a commitment fee on the unused portion of the $300 million ABCP liquidity facility. Available funding under the amended and restated credit agreement and ABCP program was $148 million, of which $50 million was used to back short- term debt at October 31, 1995. The remaining $98 million when combined with unrestricted cash and cash equivalents made $101 million available to fund the general business purposes of Navistar Financial at October 31, 1995. NOTES TO FINANCIAL STATEMENTS (Continued) 13. DEBT (continued) Navistar Financial's wholly-owned subsidiaries, Navistar Financial Retail Receivables Corporation (NFRRC) and Navistar Financial Securities Corporation (NFSC), have a limited purpose of purchasing retail and wholesale receivables, respectively, and transferring an undivided ownership interest in such notes to investors in exchange for pass-through notes and certificates. The subsidiaries have limited recourse on the sold receivables and their assets are available to satisfy the claims of their creditors prior to such assets becoming available to Navistar Financial or affiliated companies. NFSC utilizes a revolving wholesale note sales trust providing for the continuous sale of wholesale notes on a daily basis. In June 1995, the Navistar Financial Dealer Note Master Trust issued an additional $200 million of 9.3 year asset-backed certificates to the public increasing the sales trust from $300 million to $500 million. The net proceeds of $195 million were used by Navistar Financial for general working capital purposes. Under the terms of the sale, the amount subordinated to the investors' interest increased from $47 million to $87 million. These sales trusts comprise three $100 million pools of notes maturing serially from 1997 to 1999 and a $200 million pool maturing in 2004. During 1995, Navistar Financial sold $740 million of retail notes, net of unearned finance income, through NFRRC in two separate sales to two individual owner trusts which, in turn, sold $714 million of notes and $26 million of certificates to investors. The net proceeds of $738 million were used by Navistar Financial for general working capital purposes and to establish a $45 million reserve account with the trust. At October 31, 1995, the remaining shelf registration available to NFRRC for issuance of asset- backed securities was $1,430 million. In November 1995, Navistar Financial sold $525 million of retail notes through NFRRC. The net proceeds of $524 million were used for general working capital purposes and to establish a $25 million reserve account with the trust. On November 14, 1995, NFRRC filed an additional registration with the Securities and Exchange Commission providing for the issuance from time to time of an additional $2,000 million of asset-backed securities. NOTES TO FINANCIAL STATEMENTS (Continued) 14. 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: 1995 1994 ------------------ ------------------ Carrying Fair Carrying Fair Millions of dollars Amount Value Amount Value - --------------------------------------------------------------------------- Receivables, net .................. $1,854 $1,867 $1,508 $1,504 Investments and other assets ...... 166 166 165 187 Debt .............................. 1,457 1,460 1,218 1,215 Cash and cash equivalents approximate fair value. The cost and fair value of marketable securities are disclosed in Note 6. Manufacturing's customer receivables and Navistar Financial's wholesale notes and retail and wholesale accounts 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 Navistar Financial's 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 Navistar Financial's bank revolving credit agreement, which is repriced frequently, approximate fair value. The fair value of long-term debt is estimated based on quoted market prices, when available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar financial instruments or discounting future cash flows. NOTES TO FINANCIAL STATEMENTS (Continued) 14. FINANCIAL INSTRUMENTS (continued) Derivatives Held or Issued for Purposes Other Than Trading Derivatives are used by the Company to transfer or reduce risks in foreign exchange and purchase transactions, reduce interest rate risks and potentially increase the return on invested funds. During the fourth quarter of 1995, Manufacturing entered into three forward contracts to hedge its foreign exchange exposure to the Canadian dollar on firm commitments. These foreign currency contracts were valued at $33 million as of October 31, 1995 and mature within three months of origination. Gains or losses on these contracts are recognized at the completion of the related contract. In addition, collateralized mortgage obligations (CMOs) are purchased that have pre-determined fixed-principal payment patterns that are relatively certain. Manufacturing had $33 million of CMOs in its investment portfolio at October 31, 1995. At October 31, 1995, the unrecognized loss on the three forward contracts and the CMOs was not material. Navistar Financial manages its exposure to fluctuations in interest rates by limiting the amount of fixed rate assets funded with variable rate debt, by selling fixed rate retail receivables on a fixed rate basis and, to a lesser extent, by utilizing financial derivative instruments. These instruments may include interest rate swaps, interest rate caps and forward interest rate contracts. Navistar Financial enters into forward interest rate contracts to manage its exposure to fluctuations in funding costs from the anticipated securitization and sale of retail notes. During 1995, there were no swap agreements outstanding and only one interest rate cap purchased in 1985 for a notional amount of $50 million which serves to hedge the interest cost of variable rate debt. The premium paid for this interest rate cap agreement has been fully amortized to interest expense. The effect of this cap on Navistar Financial's interest expense was not material. Between June and October 1995, Navistar Financial entered into $325 million of forward interest rate lock agreements on a Treasury note maturing in 1997 related to the anticipated November 1995 sale of retail receivables. These hedge agreements were closed on October 18, 1995, and the loss, which was not material, was deferred and included in the gain recognized on the sale of receivables in November 1995. Financial Services' insurance companies use CMOs and foreign exchange future contracts to increase the yield on their investment portfolio. These instruments totalled $37 million at October 31, 1995. At October 31, 1995, the unrecognized gain on the CMOs and the foreign exchange future contracts was not material. NOTES TO FINANCIAL STATEMENTS (Continued) 15. COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS ON ASSETS At October 31, 1995, commitments for capital expenditures in progress were approximately $56 million. At October 31, 1995, the Canadian operating subsidiary was contingently liable for retail customers' contracts and leases financed by a third party. The Company is subject to maximum recourse of $150 million on retail contracts and $11 million on retail leases. In addition, as of October 31, 1995, the Company is contingently liable for approximately $47 million for various guarantees, buyback programs and performance bonds; however, based on historical loss trends, the Company's exposure is not considered material. The Canadian operating subsidiary and certain subsidiaries included in Financial Services are parties to agreements which restrict the amounts which can be distributed to Transportation in the form of dividends or loans and advances which can be made. As of October 31, 1995, these subsidiaries had $410 million of net assets of which $212 million was restricted as to distribution. The Company and Transportation are obligated under certain agreements with public and private lenders of Navistar Financial 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, 1995. 16. LEGAL PROCEEDINGS In May 1993, a jury issued a verdict in favor of Vernon Klein Truck & Equipment, Inc. (Klein Truck) and against Transportation in the amount of $11 million in compensatory damages and $15 million in punitive damages. The Company appealed the verdict and in order to do so was required to post a bond collateralized with $30 million in cash. In November 1994, the Court of Appeals of the State of Oklahoma reversed the verdict and entered judgment in favor of Transportation on virtually all aspects of the case. Klein Truck appealed to the Oklahoma Supreme Court where the case is now pending. The bond and the related collateral will be released when the order of the Oklahoma Supreme Court is filed. The Company and its subsidiaries are subject to various other 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. NOTES TO FINANCIAL STATEMENTS (Continued) 17. ENVIRONMENTAL MATTERS In the fourth quarter of 1994, Transportation recorded a $20 million charge, net of $13 million of income taxes, as a loss of discontinued operations. The $33 million pretax charge consists of an $11 million payment to be made to the Economic Development Administration (EDA) and a $22 million charge for cleanup costs at production facilities of two formerly owned businesses: Wisconsin Steel and Solar Turbine, Inc. Transportation and the EDA, a division of the U.S. Department of Commerce, reached an agreement in the fourth quarter of 1994 in settlement of commercial and environmental disputes related to the Wisconsin Steel property. EDA and Transportation became 90% and 10% beneficiaries, respectively, of a trust which was created after the party that purchased Wisconsin Steel filed for bankruptcy. At the time of bankruptcy, EDA had guaranteed repayment of 90% and Transportation of 10% of loans made to Wisconsin Steel. The settlement provides that EDA transfer its interest in the trust to Transportation, which in turn will assume responsibility for completing the investigation of the environmental condition at the site and for any cleanup work that may be necessary. Transportation has agreed to pay EDA $11 million to settle various commercial issues as well as reimburse them for a portion of environmental response costs spent by EDA. The U.S. Department of Justice must approve the final settlement before the interest in the trust, or the property, is transferred to Transportation. At October 31, 1995, a final consent decree remained subject to approval by the U.S. Department of Justice and by Transportation. An agreement with Solar was signed during the third quarter of 1995. 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 costs and is provided for in the financial statements. The Company believes that, based on these calculations, its share of the potential additional costs for the cleanup of each site, other than the Wisconsin Steel and Solar sites, will not have a material effect on the Company's financial results. The Company reviews its accruals on a regular basis. NOTES TO FINANCIAL STATEMENTS (Continued) 18. PREFERRED AND PREFERENCE STOCKS The Company's Nonconvertible Junior Preference Stock Series A is held for the Retiree Supplemental Benefit Program by the Supplemental Trust which is currently entitled to elect two members to the Company's Board of Directors. The United Automobile, Aerospace and Agricultural Implement Workers of America (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, 1995, there was one share each of Series A and Series B Preference stock authorized and outstanding. The value of the preference shares is minimal. Other information pertaining to preferred and preference stocks outstanding is summarized as follows: Series G Convertible Series D Convertible Cumulative Preferred Junior Preference - ---------------------------------------------------------------------------- Number authorized ............ 4,800,000 3,000,000 Number issued ................ 4,800,000 3,000,000 Optional redemption price and $50 per share $25 per share liquidation preference ..... plus accrued plus accrued dividends dividends Conversion rate per share into Common Stock (subject to adjustment in certain circumstances) ..... 0.133 shares 0.3125 shares Ranking as to dividends and upon liquidation ....... Senior to all other Senior to Common; equity securities junior to Series G Dividend rate ................ Annual rate of $6.00 120% of the cash per share, dividends on payable quarterly Common Stock as declared on a common equivalent basis Dividends may be paid out of surplus as defined under Delaware corporation law. At October 31, 1995, the Company had such defined surplus of $857 million. - ---------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Continued) 19. COMMON STOCK Common Stock The Company has authorized 110 million shares of Common Stock with a par value of $.10 per share. Common shares outstanding exclude Common Stock held in treasury in the amount of 1,424,038 and 667,241 shares at October 31, 1995 and 1994, respectively. Included in the shares of Common Stock outstanding are 319,332 shares of restricted stock which have been issued in accordance with the provisions of the 1988 and 1994 Performance Incentive Plans. The market value of the restricted stock at the date of grant is recorded as unearned stock compensation in Shareowners' Equity and amortized to expense over the minimum periods of restriction. Unearned stock compensation was $4 million and $3 million at October 31, 1995 and 1994, respectively. In October 1993, the Company completed a public offering of 23,600,000 Common shares which realized gross and net proceeds of $516 million and $492 million, respectively. Class B Common Stock The Company has authorized 26,000,000 shares of Class B Common Stock of which 25,641,545 shares, originally valued at $513 million, were contributed in 1993 to a separate independent retiree Supplemental Trust. The Class B Common Stock has a par value of $.10 per share and also has restricted voting rights and transfer provisions. The per share value was determined by the closing price of the Common Stock on the New York Stock Exchange on the contribution date, less a discount factor of 20% reflecting restrictions on voting and transfer rights and for a control premium. The circumstances are limited under which the Supplemental Trust can transfer or sell Class B Common Stock and any Class B Common Stock transferred or sold will convert automatically into Common Stock. Any remaining Class B Common Stock will convert into Common Stock on June 30, 1998. During 1995 and 1994, the Company repurchased 742,255 and 511,173, respectively, of Class B Common shares which were converted to Common Stock and are held in treasury. Dividends on common stock All shares of Common Stock and Class B Common Stock share equally in dividends except that stock dividends are payable in shares of Common Stock to holders of that class and in Class B Common Stock to holders of that class. Upon liquidation, all shares of Common Stock and Class B Common Stock are entitled to share equally in the assets of the Company available for distribution to the holders of such shares. Dividends may be paid out of surplus as defined under Delaware corporation law. NOTES TO FINANCIAL STATEMENTS (Continued) 20. STOCK COMPENSATION PLANS The Navistar 1994 Performance Incentive Plan (Incentive Plan), which replaced the Navistar 1988 Performance Incentive Plan, provides for the granting of stock options and restricted stock to key employees as determined by the Committee on Organization of the Board of Directors (Committee). Under the Incentive Plan, one percent of the outstanding shares of Common Stock as of the end of the preceding year are reserved for issue each year. Any amount not used in one year may be used in the following year. Shares to be used under the Incentive Plan will be either shares authorized, but previously unissued, or shares reacquired by the Company. The Incentive Plan includes the granting of two types of stock option awards, non-qualified options and incentive options. Non-qualified and incentive options, which may be granted by the Committee in amounts and at times as it may determine, have a term of not more than ten years and one day and ten years, respectively, and are exercisable at a price equal to the fair market value of the stock on the day of the grant. Generally, these options are not exercisable during the first year. Payment for the exercise of any of the options may be made by cash or by delivering, at fair market value, shares of Common Stock already owned by the option-owner or by a combination of cash and shares. The following table summarizes changes in Common Stock under option plans for the years ended October 31: Number of shares 1995 1994 1993 - ---------------------------------------------------------------------------- Outstanding at beginning of the year ..... 1,146,154 639,234 675,269 Granted .................................. 635,900 614,560 2,500 Exercised ................................ - (8,850) (13,340) Terminated ............................... (43,750) (98,790) (25,195) --------- --------- -------- Outstanding at end of the year ........... 1,738,304 1,146,154 639,234 ========= ========= ======== Exercisable at October 31 ................ 1,122,804 554,374 636,984 ========= ========= ======= Available for grant ...................... - 146,406 346,839 ========= ========= ======= Average price per share - ---------------------------------------------------------------------------- Outstanding at October 31 ................ $ 51 $ 52 $ 56 Granted .................................. $ 12 $ 19 $ 25 Exercised ................................ $ - $ 22 $ 22 NOTES TO FINANCIAL STATEMENTS (Continued)
21. SELECTED QUARTERLY FINANCIAL DATA (Unaudited) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ------------- ------------- ------------- ------------- (Millions of dollars, except per share data) 1995 1994 1995 1994 1995 1994 1995 1994 - --------------------------------------------------------------------------------------------- Sales and revenues .... $1,416 $1,139 $1,640 $1,395 $1,514 $1,254 $1,772 $1,549 ====== ====== ====== ====== ====== ====== ====== ====== Manufacturing gross margin ........ 12.4% 13.1% 14.0% 11.9% 14.0% 12.7% 14.4% 13.5% ====== ====== ====== ====== ====== ====== ====== ====== Net income ............ $ 23 $ 16 $ 46 $ 23 $ 39 $ 20 $ 56 $ 23 Net income per common share..... $ .21 $ .12 $ .52 $ .21 $ .43 $ .17 $ .66 $ .22 Market price range - Common stock High ............ $17 1/2 $27 5/8 $16 3/8 $26 $16 5/8 $19 1/4 $15 1/8 $16 5/8 Low ............. $12 3/4 $22 3/8 $12 1/4 $19 3/8 $13 7/8 $12 3/8 $ 9 1/4 $12 1/2
Transactions between Manufacturing and Financial Services operations have been eliminated from the consolidated financial results. See also Note 1. Net income per common share is computed independently based on the weighted average number of Common and Class B Common shares at the end of each quarter. Therefore, the sum of the quarterly earnings per share does not equal the total for the year.
TEN YEAR SUMMARY OF SELECTED FINANCIAL AND STATISTICAL DATA ------------------------------------------------------------------------------------------------- For the Years Ended October 31 (Millions of dollars, except per share data) 1995 1994 1993 1992 ------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Total sales and revenues ......................... $ 6,342 $ 5,337 $ 4,721 $ 3,897 Net income (loss) of continuing operations ....... $ 164 $ 102 $ (273) $ (147) Net income (loss) ................................ $ 164 $ 82 $ (501) $ (212) Income (loss) per common share of continuing operations ....................... $ 1.83 $ .99 $ (8.63) $ (6.97) Net income (loss) per common share ............... $ 1.83 $ .72 $(15.19) $ (9.55) Average number of Common, Class B Common and dilutive common equivalent shares outstanding (millions) ......................... 74.3 74.6 34.9 25.3 ------------------------------------------------------------------------------------------------ FINANCIAL DATA Total assets ..................................... $ 5,566 $ 5,047 $ 5,060 $ 3,627 Debt Manufacturing ................................. $ 127 $ 127 $ 175 $ 187 Financial Services ............................ 1,330 1,091 1,199 1,218 ------- ------- ------- ------- Total debt ....................................... $ 1,457 $ 1,218 $ 1,374 $ 1,405 Shareowners' equity .............................. $ 870 $ 817 $ 775 $ 338 Total Manufacturing debt as a percent of total Manufacturing capitalization ................... 12.7% 13.4% 18.4% 35.6% Return on equity (a) ............................. 18.9% 12.5% (35.2)% (43.5)% ------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA Capital expenditures ............................. $ 139 $ 87 $ 110 $ 55 Engineering and research expense ................. $ 113 $ 97 $ 94 $ 92 ------------------------------------------------------------------------------------------------ OPERATING DATA North American market share (b) .................. 26.7% 27.0% 27.6% 28.4% Unit shipments Trucks ......................................... 110,200 95,000 87,200 73,200 OEM engines .................................... 156,100 130,600 118,200 97,400 Service parts sales .............................. $ 730 $ 714 $ 632 $ 571 (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) in the United States and Canada.
- --------------------------------------------------------------------- 1991 1990 1989 1988 1987 1986 - --------------------------------------------------------------------- $ 3,496 $ 3,903 $ 4,296 $ 4,321 $ 3,752 $ 3,632 $ (165) $ (11) $ 87 $ 259 $ 146 $ 2 $ (165) $ (11) $ 87 $ 244 $ 33 $ 2 $ (7.71) $ (1.56) $ 2.28 $ 8.94 $ 5.00 $ (1.40) $ (7.71) $ (1.56) $ 2.28 $ 8.36 $ .30 $ (1.40) 25.1 25.2 25.6 25.7 23.9 8.9 - --------------------------------------------------------------------- $ 3,443 $ 3,795 $ 3,609 $ 4,037 $ 3,287 $ 3,372 $ 154 $ 164 $ 176 $ 194 $ 206 $ 758 1,052 1,217 1,199 1,303 1,048 1,081 ------- ------- ------- ------- ------- ------- $ 1,206 $ 1,381 $ 1,375 $ 1,497 $ 1,254 $ 1,839 $ 577 $ 815 $ 914 $ 866 $ 643 $ 53 21.1% 16.8% 16.1% 18.2% 24.2% 93.5% (28.6)% (1.3)% 9.5% 29.9% 22.7% 3.8% - --------------------------------------------------------------------- $ 77 $ 182 $ 118 $ 127 $ 110 $ 70 $ 87 $ 84 $ 91 $ 80 $ 79 $ 62 - --------------------------------------------------------------------- 29.3% 27.2% 27.1% 26.7% 25.8% 26.8% 70,200 80,200 90,200 95,900 84,900 82,200 74,800 100,900 106,700 95,400 81,700 90,700 $ 530 $ 558 $ 544 $ 540 $ 480 $ 450
INFORMATION FOR OUR INVESTORS About Your Stock Navistar International Corporation Common Stock is listed on the New York, Chicago and Pacific Stock Exchanges and is quoted as "Navistar" in stock table listings in daily newspapers. The abbreviated stock symbol is "NAV." The stock transfer agent who can answer inquiries about your Navistar International Corporation Common Stock such as name changes, changes of address or missing certificates is: Harris Trust and Savings Bank, 311 West Monroe Street, 11th Floor, Chicago, Illinois 60606; Telephone: (312) 461- 3932. For information about other shareowner matters, contact: Investor Relations, Navistar International Corporation, 455 North Cityfront Plaza Drive, Chicago, Illinois 60611; Telephone: (312) 836-2143. There were approximately 66,284 owners of Common Stock at October 31, 1995. Annual Meeting The 1996 Annual Meeting of Shareowners is scheduled to take place at 10:15 a.m., CST on March 20, 1996, at the Art Institute of Chicago in the Arthur Rubloff Auditorium. Shareowners are invited to attend this meeting, take part in discussions of Company affairs and meet personally with the directors and officers responsible for the operations of Navistar. A Proxy Statement and Form of Proxy will be mailed to each shareowner on or about January 26, 1996. Commitment to Equal Employment Opportunity Navistar International Corporation has a longstanding commitment to equal employment opportunity dating back to 1919 when the Company issued its first written statement against discrimination in the workplace. Today, Navistar continues to comply with all federal, state and local employment laws; provides equal opportunity to all employees and applicants for employment; and prohibits discrimination in all employment practices because of age, race, sex, religion, national origin, disability, or veteran status. Corporate Headquarters The corporate offices of Navistar International Corporation and its principal subsidiary, Navistar International Transportation Corp., are located at 455 North Cityfront Plaza Drive, Chicago, Illinois 60611; Telephone: (312) 836-2000. Reports and Publications This Annual Report includes a substantial portion of the financial information and certain other data required to be filed with the Securities and Exchange Commission. A copy of the Company's 1995 Annual Report on Form 10-K to the Securities and Exchange Commission will be provided, without charge, to shareowners upon written request to the Corporate Secretary, Corporate Headquarters, after January 31, 1996. In order to provide shareowners with immediate access to financial information and news about the Company, Navistar distributes its corporate news releases through PR Newswire, an electronic news service, and files its financial statements with the Securities and Exchange Commission electronically through the EDGAR system. PR Newswire and EDGAR can be accessed by computer via the Internet, and through such services as America On-Line and CompuServe. In addition, this information can be accessed through such databases and information services as Lexis/Nexus, Dow Jones and Bloomberg, which frequently are available at libraries and brokerage firms. Navistar also offers a toll-free, "Company News on Call" service, which allows shareowners to receive copies of recent Navistar corporate news releases via telefax. To access this service, call (800) 758-5804, and enter Navistar's six digit code when prompted: 103895. Using a touch-tone phone, shareowners can select from a menu of news releases and request specific news releases to be faxed directly to them. Navistar encourages shareowners to take advantage of these electronic databases and the Company News on Call" service to access the Company's quarterly financial results on the same day that the results are announced. Navistar's fiscal 1996 quarterly financial results will be announced on the following dates: First quarter February 14, 1996 Second quarter May 15, 1996 Third quarter August 14, 1996 Fourth quarter December 4, 1996 News releases, Form 10-Qs, Navistar's Annual Environmental Health & Safety Report, and other publications are available by writing: Corporate Communications Navistar International Corporation 455 North Cityfront Plaza Drive Chicago, Illinois 60611 Trademarks Navistar logotype and Navistar are registered trademarks of Navistar International Corporation. The Diamond Road symbol and International are registered trademarks of Navistar International Transportation Corp. Directors and Officers (As of December 31, 1995)
- ------------------------------------------------------------------------------------------------------------------------------- NAVISTAR INTERNATIONAL NAVISTAR INTERNATIONAL CORPORATION TRANSPORTATION CORP. - ------------------------------------------------------------------------------------------------------------------------------- Board of Directors Principal Officers Principal Officers - ------------------------------------------------------------------ ---------------------------- ----------------------------- James C. Cotting Jerry E. Dempsey John R. Horne John R. Horne Chairman of the Board Chairman President Chairman, President Navistar International and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer Corporation PPG Industries Inc. Robert C. Lannert Robert C. Lannert William F. Andrews Diversified Global Manufacturer Executive Vice President Executive Vice President Chairman of Glass, Protective Coatings and Chief Financial Office and Chief Financial Officer Schrader Inc. and Chemicals Robert A. Boardman Manufacturer of Tire Valves John F. Fiedler Senior Vice President and Automotive Accessories President and General Counsel Group Vice Presidents Chairman and Chief Executive Officer Thomas M. Hough Scovill Fasteners, Inc. Borg Warner Automotive, Inc. Vice President John J. Bongiorno Manufacturer of Apparel Supplier of Engineered and Treasurer General Manager and Industrial Fasteners Components and Systems, J. Steven Keate Financial Services Wallace W. Booth primarily for Automotive Vice President David J. Johanneson Retired Chairman Drivetrain Applications and Controller Truck Businesses and Chief Executive Officer Mary Garst Steven K. Covey James T. O'Dare, Jr. Ducommun Incorporated Manager, Cattle Division Corporate Secretary Sales and Distribution Manufacturer of Garst Company Daniel C. Ustian Components and Assemblies Agri-Business Company General Manager for the Aerospace Industry Charles A. Haggerty Engine and Foundry Dr. Andrew F. Brimmer Chairman Dennis W. Webb President and Chief Executive Officer International Operations Brimmer & Company, Inc. Western Digital Corporation Economic and Financial Manufacturer of Disk Drives Consulting and Integrated Circuits Senior Vice Presidents Richard F. Celeste Dr. Arthur G. Hansen Managing General Partner Educational Consultant Robert A. Boardman Celeste & Sabety, Ltd. President Emeritus General Counsel Public Policy Consulting Firm Purdue University John M. Sheahin John D. Correnti John R. Horne Employee Relations Chief Executive Officer, President and Administration President and Vice Chairman and Chief Executive Officer Nucor Corporation Navistar International Steel Manufacturer Corporation Vice Presidents William C. Craig Robert C. Lannert Former Executive Vice President Executive Vice President Kirk A. Gutmann Mack Trucks and Chief Financial Officer Truck Engineering Manufacturer of Trucks Navistar International Thomas M. Hough Corporation Treasurer Walter J. Laskowski J. Steven Keate International Vice President Controller of the UAW Robert I. Morrison Corporate Development Thomas E. Rigsby Truck Manufacturing James L. Simonton Materials Management Dean P. Stanley Quality Management and Technology Brian B. Whalen Public Affairs Secretary Gregory Lennes Committees of the Board - --------------------------------------------------------------------------------------------------------------------------------- Executive Committee Finance Committee Public Policy Committee James C. Cotting, Chair Jerry E. Dempsey, Chair Mary Garst, Chair Wallace W. Booth Wallace W. Booth William F. Andrews Andrew F. Brimmer Andrew F. Brimmer Andrew F. Brimmer William C. Craig James C. Cotting Richard F. Celeste Jerry E. Dempsey William C. Craig Walter J. Laskowski Mary Garst Walter J. Laskowski John R. Horne Walter J. Laskowski Committee on Organization Audit Committee Wallace W. Booth, Chair Andrew F. Brimmer, Chair William F. Andrews Richard F. Celeste John D. Correnti John D. Correnti William C. Craig Mary Garst Jerry E. Dempsey Charles A. Haggerty Charles A. Haggerty Arthur G. Hansen Arthur G. Hansen
EX-21 8 EXHIBIT 21 NAVISTAR INTERNATIONAL CORPORATION AND SUBSIDIARIES ---------------------------------- SUBSIDIARIES OF THE REGISTRANT AS OF OCTOBER 31, 1995 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. Financial information for the domestic and foreign finance and insurance subsidiaries appears in the Statement of Income, Statement of Financial Condition and Statement of Cash Flow in the 1995 Annual Report to Shareowners. E-6 EX-27 9
5 1,000,000 YEAR OCT-31-1995 OCT-31-1995 485 555 1,882 (28) 416 0 1,447 (764) 5,566 0 1,457 2,132 0 244 (1,506) 5,566 6,125 6,342 5,288 5,782 206 5 87 262 (98) 164 0 0 0 164 1.83 2.20 The Company has adopted an unclassified presentation in the Statement of Financial Condition.
EX-28 10 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, 1995 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 847-734-4275 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 December 31, 1995, 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 J(1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-K Year Ended October 31, 1995
INDEX 10-K Page PART I Item 1. Business (A) 1 Item 2. Properties (A) 1 Item 3. Legal Proceedings 1 Item 4. Submission of Matters to a Vote of Security Holders (A) 1 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 2 Item 6. Selected Financial Data (A) 2 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (A) 3 Item 8. Financial Statements and Supplementary Data 9 Independent Auditors' Report 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40 PART III Item 10. Directors and Executive Officers of the Registrant (A) 40 Item 11. Executive Compensation (A) 40 Item 12. Security Ownership of Certain Beneficial Owners and Management (A) 40 Item 13. Certain Relationships and Related Transactions (A) 40 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 40 SIGNATURES - Principal Accounting Officer 41 - Directors 42 POWER OF ATTORNEY 42 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 J(1) (a) and (b) of Form 10-K and is, therefore, filing this Form with reduced disclosure format.
PART I Item 1. Business The registrant, Navistar Financial Corporation ("NFC"), was incorporated in Delaware in 1949 and is a wholly-owned subsidiary of Navistar International Transportation Corp. ("Transportation"), which is wholly-owned by Navistar International Corporation ("Navistar"). As used herein, the "Corporation" refers to Navistar Financial Corporation and its wholly-owned subsidiaries unless the context otherwise requires. The Corporation provides wholesale, retail, and to a lesser extent, lease financing in the United States for sales of new and used trucks sold by Transportation and Transportation's dealers. The Corporation also finances wholesale accounts and selected retail accounts receivable of Transportation. 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 the independent insurance agency system. Item 2. Properties The Corporation uses leased facilities to carry out most of the administrative and finance sales activities. Item 3. Legal Proceedings During 1992, auditors of the Illinois Department of Revenue ("Department") began an income tax audit of NFC for the fiscal years ended October 31, 1989, 1990 and 1991. On February 1, 1994, the Department issued a Notice of Deficiency to NFC for approximately $11.9 million. The Department has taken the position that nearly 100% of NFC's income during these years should be attributed to and taxed by Illinois. NFC maintains that the Department's interpretation and application of the law is incorrect and improper, and that the Department's intended result is constitutionally prohibited. NFC's outside counsel is of the opinion that it is more likely than not that NFC's position will prevail such that the Department's action will not have a material impact on NFC's earnings and financial position. In May 1993, a jury issued a verdict in favor of Vernon Klein Truck & Equipment, Inc. ("Klein Truck") and against Transportation and the Corporation in the amount of $10.8 million in compensatory damages and $15 million in punitive damages. Transportation appealed the verdict and, in November 1994, the Court of Appeals of the State of Oklahoma reversed the verdict and entered judgment in favor of Transportation on virtually all aspects of the case. Klein Truck appealed to the Oklahoma Supreme Court where the case is now pending. Item 4. Submission of Matters to a Vote of Security Holders Intentionally omitted. See the index page of this Report for explanation. PART II
Page Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 29
Item 6. Selected Financial Data Intentionally omitted. See the index page to this Report for explanation. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Customer demand for Class 5 through 8 trucks remained high in 1995, as the strength in the U.S. economy experienced during fiscal 1994 continued during fiscal 1995. As a result of the strong truck industry and economy, the financial strength and cash flows of many NFC customers continued to improve and NFC's delinquencies and losses remained low. The strong economy also contributed to high liquidity in the commercial financing markets during 1995. As a result, many financial institutions have increased their loan activity which gives NFC's customers more financing alternatives than normal. This competition has caused NFC to increase marketing efforts of its retail financing products and services and to reduce finance rates during the fiscal year. Financing Volume The Corporation's serviced receivables portfolio, which includes sold receivables, totaled $3.2 billion at October 31, 1995, up from $2.5 billion and $2.2 billion at October 31, 1994 and 1993, respectively. The increases year over year reflect the continued growth in the truck industry. During 1995, the Corporation supplied 93% of the wholesale financing of new trucks sold to Transportation's dealers, unchanged from 1994 and up from 90% in 1993. Acquisitions of wholesale notes increased $672 million, 29%, to $2,979 million in 1995 after a 17% increase to $2,307 million in 1994 from 1993. Serviced wholesale note balances were $854 million at October 31, 1995, up from $577 million and $559 million at October 31, 1994 and 1993, respectively. Acquisitions of retail notes and leases, net of unearned finance income, increased 20% to $1.1 billion in 1995 after a 19% increase to $.9 billion in 1994 from $.8 billion in 1993. The higher level of financing activity reflects increased sales by Transportation, especially of heavy trucks. The Corporation's share of the retail financing of new trucks manufactured by Transportation and sold in the United States was 14.4% in 1995 compared with 15.3% in 1994 and 1993. The Corporation's reduced penetration level of retail financing of Transportation's sales in 1995 was a result of competition and liquidity in the commercial financing markets. Serviced retail notes and lease financing balances were $1.9 billion at October 31, 1995, compared with $1.6 billion and $1.4 billion at October 31, 1994 and 1993, respectively. Owned net finance receivables balances, including subordinated interests in retail and wholesale receivables, increased to $1.5 billion at October 31, 1995, from $1.2 billion at October 31, 1994, and $1.3 billion at October 31, 1993. The increase in owned receivable balances resulted from higher financing volumes, partially offset by increases in sold note balances. Sold retail receivables balances increased to $1.2 billion at October 31, 1995, from $1.0 billion and $.5 billion at October 31, 1994 and 1993, respectively. Sold wholesale note balances were $500 million at October 31, 1995, a $200 million increase over 1994 and 1993. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations The components of net income for the three years ended October 31 are as follows:
($ Millions) 1995 1994 1993 Income before income taxes: Finance operations $53.1 $49.9 $51.6 Insurance operations 5.6 5.3 1.1 Supplemental Trust contribution - - (3.7) Income before taxes and cumulative effect 58.7 55.2 49.0 Taxes on income 22.5 21.2 17.7 Cumulative effect of changes in accounting policy - - 8.8 Net income $36.2 $34.0 $22.5
Income before taxes in 1995 was $58.7 million, a 6% increase from $55.2 million in 1994. Finance operations' income in 1995 was $3.2 million higher than 1994 as a result of higher finance receivables to support the demand for Transportation truck products and improvement in the Corporation's borrowing spread over market interest rates. This increase was partially offset by lower gains on sales of retail notes. Gains on sales of retail note receivables during 1995 were $5.2 million on sales of $740 million compared with gains of $11.8 million on sales of $1,033 million in 1994. Lower gains on sales resulted from reduced sales volumes and lower margins on retail note acquisitions from the second half of fiscal 1994 through the first quarter of fiscal 1995, as rising interest costs to fund retail note acquisitions could not be offset fully by increased retail note pricing. In a rising interest rate environment, this margin contraction is a typical occurrence for NFC as retail truck customers generally require finance rate commitments on purchases of trucks 30 to 90 days in advance of delivery. In addition, the Corporation funds the majority of its retail notes by selling the notes in the public market and the effective interest rate for each sale is based on a market interest rate at the time of sale which may be up to six months after the truck delivery date. The gains on sales in fiscal 1994 were primarily on sales in November and December, prior to the increase in market interest rates. During the last half of fiscal 1995, margins on retail note acquisitions have improved as market interest rates have declined; however, margins remain below historical levels due to increased competition in the commercial financing markets. Income before taxes of $55.2 million in 1994 increased 13% from $49.0 million in 1993, which included a $3.7 million pretax charge for the Corporation's portion of the Supplemental Trust contribution. See note 10 to the Consolidated Financial Statements. Finance operations' income in 1994 was $1.7 million lower than 1993 as a result of lower margins on retail financing and gains of $2.4 million less than those on 1993 sales of retail receivables offset in part by the increased volume of wholesale financing to support the increased demand for trucks. The Corporation's insurance subsidiary's 1994 income increased $4.2 million over 1993 as a result of improved Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations (Continued) underwriting results on truck liability insurance. The more significant elements of revenue and expense impacting net income for these years are discussed in the following paragraphs. Total revenue for 1995 was $228 million compared with $211 million and $232 million in 1994 and 1993, respectively. Retail note and lease financing revenue was $73 million in 1995 compared with $71 million and $102 million in 1994 and 1993, respectively. The 1995 improvement over 1994 is due to higher financing volume offset in part by lower gains on sold notes. Revenue in 1994 was 30% below 1993 as a higher proportion of retail notes was financed through the sale of receivables as the Corporation gained access to the asset-backed securitized market. When receivables are sold only the net gains on the sales, rather than the individual components of revenue and expense, are reported in the Statement of Consolidated Income. Wholesale note revenue increased 38% in 1995 to $54 million and increased 22% in 1994 from 1993 as a result of higher average outstanding note balances in support of increased demand for Transportation truck products. In addition, revenue in 1995 increased from higher average yields relating to a higher prime interest rate. Revenue from accounts increased in 1995 to $29 million from $22 million and $18 million in 1994 and 1993, respectively. The increase in 1995 and 1994 resulted from higher average outstanding balances in support of increased demand for Transportation truck products. In addition, revenue in 1995 increased from higher average yields relating to a higher prime interest rate. Servicing fee income increased to $18 million in 1995 from $17 million in 1994 and $11 million in 1993 as a result of higher levels of sold note receivable balances which the Corporation continues to service. Insurance premiums earned by Harco decreased 12% to $45 million in 1995 from $51 million in 1994 and 11% in 1994 from 1993. The decreases in 1995 and 1994 reflect reductions in written premiums of truck liability lines in response to adverse loss experience in those lines and to increased competition. Borrowing costs increased 20% in 1995 to $84 million from $70 million and $79 million in 1994 and 1993, respectively. The increase in 1995 from 1994 is primarily the result of higher debt balances to support increased wholesale note and account balances and higher market interest rates. These increased borrowing costs were offset by an improvement in the Corporation's borrowing spread over market interest rates as a result of the amended revolving debt agreement and the asset-backed commercial paper ("ABCP") program. See note 9 to the Consolidated Financial Statements. The decrease between 1994 and 1993 was the result of reduced debt required to finance the lower level of owned retail receivables, offset in part by higher interest rates. The ratio of debt to equity was 5.2:1, 4.8:1 and 5.5:1 at October 31, 1995, 1994 and 1993, respectively. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations (Continued) On July 1, 1993, Navistar implemented a restructured retiree health care and life insurance plan (the "Plan"), as discussed in note 10 to the Consolidated Financial Statements. As part of the Plan, Navistar contributed $300 million to pre-fund Plan benefit liabilities and common stock valued at $513 million to a Supplemental Benefit Trust to help pay for Plan benefits in the future. The Corporation recognized $3.7 million of expense as its portion of the Supplemental Benefit Trust contribution. Credit, collection and administrative expenses of $28 million were $2 million higher than 1994 primarily as a result of the provision for payments to employees as provided by Transportation's profit sharing agreement and the Corporation's management incentive programs. In addition, costs were higher due to increased retail note marketing efforts. The provision for losses on receivables totaled $2.6 million in 1995 compared with $2.3 million in 1994 and $1.5 million in 1993. Truck note and account write-offs (recoveries), including those on sold notes, totaled $(.8) million in 1995, $.9 million in 1994, and $.7 million in 1993. The provision amount exceeded the write-offs (recoveries) due to growth of receivables financed. At October 31, 1995, the Corporation's allowance for losses equaled .62% of net financing receivables, including sold receivables, compared with .65% and .69% as of October 31, 1994 and 1993, respectively. Insurance claims and underwriting expenses decreased to $47 million in 1995 from $54 million and $65 million in 1994 and 1993, respectively. The decline resulted from decreases in losses incurred in Harco's truck liability insurance lines. Additionally, insurance operating expenses were lower as a result of decreased commission costs associated with lower volumes of premiums written through general agents. Liquidity and Funds Management The Corporation's operations are substantially dependent upon the production and sale of Transportation's truck products. Navistar Financial has traditionally obtained the funds to provide financing to Transportation's dealers and retail customers from commercial paper, short- and long-term bank borrowings, medium- and long-term debt issues, sales of receivables and equity capital. The current debt ratings of the Corporation, detailed below, have made bank borrowings and sales of finance receivables the most economical sources of cash. The Corporation's insurance operations generate their funds through internal operations and have no external borrowings. Receivable sales were a significant source of funding in 1995 and 1994. 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 1995, the Corporation sold $740 million of retail notes, net of unearned finance income, through Navistar Financial Retail Receivables Corporation ("NFRRC"), a wholly- owned subsidiary, Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Funds Management (Continued) to two owner trusts. The owner trusts, in turn, sold $714 million of notes and $26 million of certificates to investors. Net proceeds from these sales were $693 million, after deducting $2 million for underwriting fees and $45 million to establish reserve accounts with the trusts as credit enhancement for the public sales. During 1994, the Corporation sold $1,033 million of retail notes receivable, $203 million through its bank receivable purchase facility and $830 million through NFRRC and owner trusts to public investors. Net proceeds from these sales were $952 million after the reduction of holdback reserves and credit enhancement. The net proceeds were used by the Corporation for general working capital purposes. At October 31, 1995, the remaining shelf registration available to NFRRC for issuance of asset-backed securities was $1,430 million. On November 14, 1995, NFRRC filed an additional registration with the Securities and Exchange Commission providing for the issuance from time to time of an additional $2,000 million of asset-backed securities. Since December 1990, the Corporation has utilized a $300 million revolving wholesale note sales trust providing for the continuous sale of eligible wholesale notes on a daily basis. On June 8, 1995, a new Navistar Financial Dealer Note Master Trust issued $200 million of 9.3 year asset-backed certificates to the public. The proceeds of $195 million, net of $2 million of expenses and underwriting fees and $3 million to fund a reserve account, were used by the Corporation for general working capital purposes. This issuance of $200 million of certificates during fiscal 1995 increased NFSC's revolving wholesale note sales trusts to $500 million. The sales trusts are comprised of three $100 million pools of notes maturing serially from 1997 to 1999 and the $200 million pool maturing in 2004. See note 9 to the Consolidated Financial Statements for a discussion of the Corporation's revolving credit agreement and asset-backed commercial paper program. In March 1995, ratings on the Corporation's debt were upgraded by Moody's Investors Service, Inc. ("Moody's"). Moody's raised its ratings for the Corporation's debt from Ba3 to Ba2 for senior debt and from B2 to B1 for subordinated debt. In March 1995, Duff & Phelps confirmed its debt ratings of BB+ for senior debt and BB for subordinated debt. In October 1993, ratings on the Corporation's debt were reviewed by Standard and Poor's Corporation ("Standard and Poor's"). Standard and Poor's raised its ratings for the Corporation's debt from B- to BB for senior debt and from CCC to B+ for subordinated debt. The Corporation's commercial paper is rated "not prime" by Moody's. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Funds Management (Continued) In November 1995, the Corporation sold $525 million of retail notes, net of unearned finance income, through NFRRC to an owner trust which, in turn, sold $507 million of notes and $18 million of certificates to investors. The proceeds of $499 million, after deducting $1 million for underwriting fees and $25 million to establish a reserve account with the trust as credit enhancement, were used by the Corporation for general working capital purposes. The Corporation manages sensitivity to interest rate changes by funding floating rate assets with floating rate debt, primarily borrowings under the bank revolving credit agreement, and fixed rate assets with fixed rate debt, equity and floating rate debt. Management has limited the amount of fixed rate assets funded with floating rate debt by selling retail receivables on a fixed rate basis and, to a lesser extent, by utilizing derivative financial instruments. See notes 1 and 13 to the Consolidated Financial Statements. Corporate policy does not allow the use of derivatives for speculative purposes. Business Outlook The demand for heavy trucks is forecast to soften during fiscal 1996 and correspondingly NFC's wholesale and retail financing activity is anticipated to be lower in 1996. The decline in the heavy truck industry may impact the financial strength of dealers and customers and NFC's ability to maintain the current level of portfolio quality. Competition will continue to put pressure on the Corporation's retail note acquisition activity and retail note margins. Management believes that collections on the outstanding receivables portfolio plus cash available from the Corporation's various funding sources will permit Navistar Financial to meet the financing requirements of Transportation's dealers and retail customers through 1996 and beyond. Page Item 8. Financial Statements and Supplementary Data Navistar Financial Corporation and Subsidiaries: Statement of Consolidated Income and Retained Earnings for the years ended October 31, 1995, 1994 and 1993 10 Statement of Consolidated Financial Condition as of October 31, 1995 and 1994 11 Statement of Consolidated Cash Flow for the years ended October 31, 1995, 1994 and 1993 12 Notes to Consolidated Financial Statements 13 Supplementary Financial Data 34 Independent Auditors' Report 39 Navistar Financial Corporation and Subsidiaries Statement of Consolidated Income and Retained Earnings Millions of dollars
Note For the years ended October 31 1995 1994 1993 Reference Revenues Retail notes and lease financing $ 73.3 $ 71.4 $101.9 Wholesale notes 54.1 39.2 32.0 Accounts 29.2 22.2 17.5 Servicing fee income 18.3 17.3 10.6 Insurance premiums earned 44.6 51.1 57.4 Marketable securities 8.7 9.6 12.5 Total 228.2 210.8 231.9 Expenses Cost of borrowing: Interest expense 75.1 62.7 74.6 8, 9 Other 9.1 7.1 4.7 Total 84.2 69.8 79.3 Supplemental Trust expense - - 3.7 10 Credit, collection and administrative 27.9 25.9 26.1 Provision for losses on receivables 2.6 2.3 1.5 6 Insurance claims and underwriting 46.7 54.0 65.2 Other expense, net 8.1 3.6 7.1 Total 169.5 155.6 182.9 Income Before Taxes on Income and Cumulative Effect of Changes in Accounting Policy 58.7 55.2 49.0 Taxes on Income 22.5 21.2 17.7 7 Income Before Cumulative Effect of Changes in Accounting Policy 36.2 34.0 31.3 Cumulative Effect of Changes in Accounting - - 8.8 10 Policy Net Income 36.2 34.0 22.5 Retained Earnings Beginning of year 56.8 48.4 48.5 Dividends paid (9.0) (25.6) (22.6) End of year $ 84.0 $ 56.8 $ 48.4 12
See Notes to Consolidated Financial Statements. Navistar Financial Corporation and Subsidiaries Statement of Consolidated Financial Condition Millions of dollars
Note As of October 31 1995 1994 Reference ASSETS Cash and Cash Equivalents $ 2.9 $ 28.3 Marketable Securities 131.8 130.5 4 Receivables Finance receivables 1,381.3 1,102.2 5 Allowance for losses (10.4) (8.2) 6 Receivables, net 1,370.9 1,094.0 Amounts Due from Sales of Receivables 247.8 193.0 5 Equipment on Operating Leases, Net 39.3 26.6 Repossessions 5.8 1.8 Reinsurance Receivables 24.8 33.7 Other Assets 51.4 26.9 Total Assets $1,874.7 $1,534.8 LIABILITIES AND SHAREOWNER'S EQUITY Short-Term Debt $ 50.5 $ 419.2 8 Accounts Payable 138.8 63.6 Accrued Income Taxes 12.0 2.3 Accrued Interest 12.1 11.3 Senior and Subordinated Debt 1,279.8 672.3 9 Dealers' Reserves 21.0 18.8 Unpaid Insurance Claims and Unearned Premiums 103.8 121.7 Shareowner's Equity 12 Capital stock (Par value $1.00, 1,600,000 shares issued and outstanding) and paid-in capital 171.0 171.0 Retained Earnings 84.0 56.8 Unrealized gains (losses) on marketable securities 1.7 (2.2) 4 Total 256.7 225.6 Total Liabilities and Shareowner's Equity $1,874.7 $1,534.8
See Notes to Consolidated Financial Statements. Navistar Financial Corporation and Subsidiaries Statement of Consolidated Cash Flow Millions of dollars
Note For the years ended October 31 1995 1994 1993 Reference Cash Flow From Operations Net income $ 36.2 $ 34.0 $ 22.5 Adjustments to reconcile net income to cash provided from operations: Gains on sales of receivables (5.2) (11.8) (14.2) 5 Depreciation and amortization 11.1 8.7 9.7 Provision for losses on receivables 2.6 2.3 1.5 6 Cumulative effect of changes in accounting policy - - 8.8 Supplemental Trust expense - - 3.7 Increase (decrease) in accounts payable and accrued liabilities 5.3 (3.5) (1.8) Increase in deferred income taxes .5 3.1 3.7 Increase (decrease) in accounts payable to affiliated companies 73.2 (0.9) 14.3 Increase (decrease) in unpaid insurance claims and unearned premiums, net of reinsurance receivables (8.9) (6.5) 10.7 Other (3.6) (5.4) (3.6) Total 111.2 20.0 55.3 Cash Flow From Investing Activities Purchase of retail notes and lease receivables (1,099.5) (915.9) (770.2) Principal collections on retail notes and lease receivables 123.4 180.9 337.4 Proceeds from sold retail notes 726.8 994.8 558.2 Acquisitions over cash collections of wholesale notes and accounts receivable (77.1) (140.0) (171.9) Purchase of marketable securities (61.9) (51.8) (58.1) Proceeds from sales of marketable securities 67.3 45.1 64.8 Increase in property and equipment leased to others (18.7) (5.3) (14.2) Total (339.7) 107.8 (54.0) Cash Flow From Financing Activities Net increase in commercial paper 31.3 19.2 - Net increase (decrease) in short-term bank borrowings (400.0) 325.0 75.0 Net increase (decrease) in bank revolving credit facility usage 405.0 (372.0) - Net increase in asset-backed commercial paper facility usage 275.8 - - Principal payments on term debt (100.0) (80.0) (99.0) Principal payments on subordinated debt - (100.0) - Proceeds from issuance of subordinated debt - 100.0 - Dividends paid to Transportation (9.0) (25.6) (22.6) Total 203.1 (133.4) (46.6) Decrease in Cash and Cash Equivalents (25.4) (5.6) (45.3) Cash and Cash Equivalents at Beginning of Year 28.3 33.9 79.2 Cash and Cash Equivalents at End of Year $ 2.9 $ 28.3 $ 33.9 Supplementary disclosure of cash flow information: Interest paid $ 74.3 $ 64.8 $ 79.3 Income taxes paid $ 14.6 $ 22.1 $ 13.5
See Notes to Consolidated Financial Statements. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 1995 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"). Revenue on Receivables Finance charges on retail notes and finance leases are recognized as income over the terms of the receivables using the interest method. Interest from interest-bearing notes and accounts is taken into income on the accrual basis. Allowance for Losses on Receivables The Corporation's allowance for losses on receivables is maintained at an amount management considers appropriate in relation to the outstanding receivables portfolio. Receivables are charged off to the allowance for losses as soon as they are determined to be uncollectible based on a note-by-note review, after all prelitigation collection efforts have been exhausted. Repossessions are carried at the lower of the unpaid net receivable balance or estimated realizable value of the equipment. Receivable Sales The Corporation 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. In a subordinated capacity, the Corporation retains excess servicing cash flows, a limited interest in the principal balances of the sold receivables and certain cash deposits provided as credit enhancements for investors. Gains or losses on sales of receivables are credited or charged to financing revenue in the period in which the sales occur. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES (Continued) Insurance Operations Insurance premiums are earned on a pro rata basis over the terms of the policies. Commission costs and premium taxes incurred in acquiring business are deferred and amortized on the same basis as such premiums are earned. The liability for unpaid insurance claims includes provisions for reported claims and an estimate of unreported claims based on past experience. Such provisions include an estimate of loss adjustment expense. The estimated liability for unpaid insurance claims is regularly reviewed and updated. Any change in such estimate is reflected in current operations. The Corporation's wholly-owned insurance subsidiary, Harco National Insurance Company ("Harco"), limits its exposure on any single loss occurrence by ceding reinsurance to other insurance enterprises. Reinsurance receivables including amounts related to unpaid insurance claims and prepaid reinsurance premiums are reported as assets in the Statement 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. 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, which are classified as available-for-sale, are reported at fair value. Unrealized gains or losses, net of deferred income taxes, are included as a separate component of shareowner's equity in the Statement of Consolidated Financial Condition. Derivative Financial Instruments The Corporation uses derivatives to reduce risks of interest rate volatility. All derivative financial instruments are held for purposes other than trading, and the Corporation's policy does not allow the use of derivatives for speculative purposes. Gains or losses related to hedges of anticipated sales of receivables are deferred and are recognized in income when the receivables are sold. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES (Continued) Reclassification Certain amounts for prior years have been reclassified to conform with the presentation used in the 1995 financial statements. 2. TRANSACTIONS WITH AFFILIATED COMPANIES The Corporation's primary business is the retail, wholesale, and, to a lesser extent,lease financing of products sold by Transportation and its dealers within the United States. Wholesale Notes, Wholesale Accounts and Retail Accounts Revenue In accordance with the agreements between the Corporation and Transportation relating to financing of wholesale notes, wholesale accounts and retail 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 of dealers from Transportation at the principal amount of the receivables. An acquisition fee applicable to purchases of wholesale notes secured by new equipment is charged to Transportation. The retail accounts are accounts of Transportation customers. Revenue collected from Transportation for wholesale notes, wholesale and retail accounts and leases was $55.7 in 1995, $50.7 in 1994 and $41.2 in 1993. 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. Since 1984, no maintenance payments have been required under these agreements. 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 $2.4 in 1995, $2.5 in 1994 and $2.3 in 1993. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 2. TRANSACTIONS WITH AFFILIATED COMPANIES (Continued) Short-Term Borrowings The Corporation had daily average short-term borrowings from Transportation of $93 in 1995 and $83 in 1994 on which interest accrued at the Corporation's incremental short-term borrowing rate. These borrowings, including $6 and $4 of interest expense in 1995 and 1994, respectively, were repaid during each of the fiscal years. Accounts Payable Accounts payable include $89.5 and $16.3 payable to Transportation at October 31, 1995 and 1994, respectively. 3. INDUSTRY SEGMENTS Information by industry segment is summarized as follows:
1995 1994 1993 Revenues: Finance operations $ 175.1 $ 150.6 $ 164.2 Insurance operations 53.1 60.2 67.7 Total revenue $ 228.2 $ 210.8 $ 231.9 Income before taxes on income and cumulative effect of changes in accounting policy: Finance operations $ 53.1 $ 49.9 $ 47.9 Insurance operations 5.6 5.3 1.1 Total income before taxes on income and cumulative effect of changes in accounting policy $ 58.7 $ 55.2 $ 49.0 Assets at end of year: Finance operations $1,701.9 $1,354.1 $1,473.5 Insurance operations 172.8 180.7 151.7 Total assets at end of year $1,874.7 $1,534.8 $1,625.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 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. The difference between amortized cost and fair value, net of deferred income taxes, is reflected as a separate component of shareowner's equity. Shareowner's equity was increased by net unrealized holding gains of $1.7 as of October 31, 1995, and decreased by net unrealized holding losses of $2.2 at October 31, 1994. The following table sets forth, by type of security issuer, the amortized cost and estimated market values at October 31, 1995 and 1994:
Amortized Gross Unrealized Fair Cost Gains Losses Value October 31, 1995 U.S. government securities $ 52.8 $ 1.2 $ .1 $ 53.9 Corporate debt securities 32.0 .2 .2 32.0 Mortgage- and asset-backed securities 32.7 .5 .1 33.1 Foreign governments 1.7 - - 1.7 Total debt securities $119.2 $ 1.9 $ .4 $120.7 Equity securities 10.0 1.7 .6 11.1 Total $129.2 $ 3.6 $ 1.0 $131.8 October 31, 1994 U.S. government securities $ 67.4 $ .4 $ 2.4 $ 65.4 Corporate debt securities 27.7 - .4 27.3 Mortgage- and asset-backed securities 28.3 .1 .7 27.7 Foreign governments 1.6 - - 1.6 Total debt securities $125.0 $ .5 $ 3.5 $122.0 Equity securities 8.8 .4 .7 8.5 Total $133.8 $ .9 $ 4.2 $130.5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 4. MARKETABLE SECURITIES (Continued) Contractual maturities of marketable debt securities at October 31, 1995, are as follows:
Amortized Fair Cost Value Due in one year or less $ 21.9 $ 21.9 Due after one year through five years 32.1 32.8 Due after five years through ten years 21.2 21.5 Due after ten years 11.3 11.4 86.5 87.6 Mortgage- and asset-backed securities 32.7 33.1 Total $ 119.2 $ 120.7
Proceeds from sales or maturities of marketable securities available for sale were $67.3 during 1995 and $45.1 during 1994. Gross gains of $.8 and $.9 and gross losses of $.6 and $.2 were realized on those sales in 1995 and 1994, respectively. All marketable securities at October 31, 1995 and 1994, were held by Harco, of which $23.2 and $29.5, 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:
1995 1994 Retail notes and lease financing $ 747.2 $ 513.9 Wholesale notes 268.2 230.6 Accounts: Retail 316.7 308.2 Wholesale 49.2 49.5 Total 365.9 357.7 Total finance receivables $1,381.3 $1,102.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES (Continued) Contractual maturities of finance receivables including unearned finance income at October 31, 1995, are summarized as follows:
Retail Wholesale Accounts Due in: 1996 $238.6 $181.3 $365.9 1997 203.0 86.9 - 1998 184.5 - - 1999 139.8 - - 2000 92.5 - - Due after 2000 7.7 - - Gross finance receivables 866.1 268.2 365.9 Unearned finance income 118.9 - - Total finance receivables $747.2 $268.2 $365.9
The actual cash collections from finance receivables will vary from the contractual cash flows because of sales, prepayments, extensions and renewals. The contractual maturities, therefore, should not be regarded as a forecast of future collections. 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:
1995 1994 Retail notes $1,173.2 $1,046.8 Wholesale notes 500.0 300.0 Total $1,673.2 $1,346.8
Gains or losses from the sales of receivables are recognized in the period in which such sales occur. As the allowance for credit losses is adequately provided prior to the receivable sales, gains from receivable sales are not reduced for expected credit losses. Included in "Retail notes and lease financing" revenue are gains totaling $5.2, $11.8 and $14.2 on retail note receivable sales of $740, $1,033 and $576 for the fiscal years ended October 31, 1995, 1994 and 1993, respectively. Gains on sales of wholesale receivables are not material as a result of their short maturities. The Corporation has two wholly-owned subsidiaries, Navistar Financial Retail Receivables Corporation ("NFRRC") and Navistar Financial Securities Corporation ("NFSC"), which have a limited purpose of purchasing retail and wholesale receivables, respectively, and transferring an undivided ownership interest in such notes to investors in exchange for pass-through notes and certificates. These subsidiaries have limited recourse on the sold NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES (Continued) 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. During fiscal 1995, in two separate sales, the Corporation sold a total of $740 of retail notes, net of unearned finance income, through NFRRC to two individual owner trusts. The owner trusts, in turn, sold $714 of notes and $26 of certificates to investors. The proceeds of $693, after deducting $2 for underwriting fees and $45 to establish reserve accounts with the trusts as credit enhancement, were used by the Corporation for general working capital purposes. At October 31, 1995, the remaining shelf registration available to NFRRC for issuance of asset-backed securities was $1,430. On November 14, 1995, NFRRC filed an additional registration with the Securities and Exchange Commission providing for the issuance from time to time of an additional $2,000 of asset-backed securities. At October 31, 1994, NFSC had in place a $300 revolving wholesale note sales trust providing for the continuous sale of eligible wholesale notes on a daily basis. On June 8, 1995, a new Navistar Financial Dealer Note Master Trust issued $200 of 9.3 year asset-backed certificates to the public. The proceeds of $195, net of $2 of expenses and underwriting fees and $3 to fund a reserve account, were used by the Corporation for general working capital purposes. Under the terms of the sale, the Corporation increased the amount subordinated to the investor's interest from $46.5 to $86.5. This issuance of $200 of certificates during fiscal 1995 increased NFSC's revolving wholesale note sales trusts to $500. The sales trusts are comprised of three $100 pools of notes maturing serially from 1997 to 1999 and the $200 pool maturing in 2004. The Corporation's retained interest in sold receivables and other related amounts are generally restricted and subject to limited recourse provisions. Holdback reserves were established pursuant to the limited recourse provisions of the retail note sales to private investors. The retail securitized sales structure requires the Corporation to maintain cash reserves with the trusts as credit enhancement for public sales. The cash reserves are held by the trusts and restricted for use by the securitized sales agreements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES (Continued) The following is a summary of amounts included in "Amounts Due from Sales of Receivables":
October 31 1995 1994 Cash held and invested by trusts $ 66.8 $ 51.5 Subordinated retained interests in wholesale receivables 86.3 46.5 Subordinated retained interests in retail receivables 12.2 14.1 Holdback reserves 43.7 64.4 Excess servicing fee and other 48.0 24.5 Allowance for credit losses (9.2) (8.0) Total $247.8 $193.0
6. ALLOWANCE FOR LOSSES The allowance for losses on receivables is summarized as follows:
1995 1994 1993 Total allowance for losses at beginning of year $16.2 $14.8 $14.0 Provision for losses 2.6 2.3 1.5 Net (losses) recoveries (charged) credited to allowance .8 (.9) (.7) Total allowance for losses at end of year $19.6 $16.2 $14.8 Allowance pertaining to: Owned notes $10.4 $ 8.2 $10.9 Sold notes 9.2 8.0 3.9 Total $19.6 $16.2 $14.8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 7. TAXES ON INCOME Deferred tax assets and liabilities are generally determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Recognition of deferred tax assets is allowed if future realization is more likely than not. Taxes on income are summarized as follows:
1995 1994 1993 Current: Federal $18.9 $15.1 $12.0 State and local 3.1 3.0 2.0 Total current 22.0 18.1 14.0 Deferred (primarily Federal) .5 3.1 3.7 Total $22.5 $21.2 $17.7
The effective tax rate of 38% in 1995 and 1994 and 36% in 1993 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, 1995 and 1994, comprised the following:
1995 1994 Deferred tax assets: Other postretirement benefits $2.8 $2.7 Unrealized losses on marketable securities - 1.2 Total deferred tax assets 2.8 3.9 Deferred tax liabilities: Depreciation and other 6.4 5.9 Unrealized gains on marketable securities 1.0 - Total deferred tax liabilities 7.4 5.9 Net deferred tax liabilities $4.6 $2.0
During 1992, auditors of the Illinois Department of Revenue ("Department") began an income tax audit of NFC for the fiscal years ended October 31, 1989, 1990 and 1991. On February 1, 1994, the Department issued a Notice of Deficiency to NFC for approximately $11.9 million. The Department has taken the position that nearly 100% of NFC's income during these years should be attributed to and taxed by Illinois. NFC maintains that the Department's interpretation and application of the law is incorrect and improper, and that the Department's intended result is constitutionally prohibited. NFC's outside counsel is of the opinion that it is more likely than not that NFC's position will prevail such that the Department's action will not have a material impact on NFC's earnings and financial position. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 8. 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. Short-Term Debt at October 31 is summarized as follows:
1995 1994 Commercial paper $50.5 $ 19.2 Short-term bank borrowings - 400.0 Total $50.5 $419.2
Information regarding short-term borrowings is as follows:
1995 1994 1993 Aggregate obligations outstanding: Daily average $ 37.8 $ 11.7 $ .6 Maximum month-end balance 81.1 419.2 75.0 Weighted average interest rate: On average daily borrowing 6.4% 5.4% 6.5% At October 31 6.3% 5.6% 6.5%
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 9 to the Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 9. SENIOR AND SUBORDINATED DEBT Senior and Subordinated Debt outstanding at October 31 is summarized as follows:
1995 1994 Bank revolving credit, at variable rates, due October 1998 $ 760.0 $ 355.0 Funding under asset-backed commercial paper program, at variable rates, maturing October 1998 302.3 - Senior term debt: Notes, medium-term, 9.50%, due 1996 117.5 217.5 Unamortized discount - (.2) Total senior term debt 117.5 217.3 Subordinated term debt: Senior Notes, 8 7/8%, due November 1998 100.0 100.0 Total senior and subordinated debt $1,279.8 $ 672.3
The weighted average interest rate on total debt, including short-term debt and the effect of discounts and related amortization, was 7.4%, 7.1% and 6.6% in 1995, 1994 and 1993, respectively. The aggregate annual maturities and required payments of debt are as follows: 1996, $117.5; 1998, $1,062.3 and 1999, $100.0. Effective November 9, 1994, the Corporation amended and restated its $727 bank revolving credit agreement, extending the maturity date to October 31, 1998 and expanding the commitment to $900. In addition, the purchasers' commitments under the $600 retail notes purchase facility agreement were terminated and the Corporation established a $300 asset-backed commercial paper ("ABCP") program supported by a bank liquidity facility with a maturity date of October 31, 1998. Under the terms of the ABCP program, a special purpose wholly-owned subsidiary of NFC purchases eligible receivables from NFC. All assets of the subsidiary are pledged to a Trust that funds the receivables with A1/P1 rated commercial paper. In addition, the assets may be sold to the Trust. Available funding under the amended and restated credit facility and the ABCP program was $148, of which $50 provided funding backup for the outstanding short-term debt at October 31, 1995. The remaining $98 when combined with unrestricted cash and cash equivalents made $101 available to fund the general business purposes of the Corporation at October 31, 1995. While the amended revolving credit facility removed certain dividend restrictions, 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. Consistent with the previous revolving credit agreement, the restated agreement grants security interests in substantially all of the Corporation's NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 9. SENIOR AND SUBORDINATED DEBT (Continued) assets to the Corporation's debtholders. Compensating cash balances are not required under the restated revolving credit facility. Facility fees are paid quarterly regardless of usage. As of October 31, 1995, approximately $208 of sold notes was outstanding under the $600 retail notes purchase facility. Participants of the facility will continue to own the receivables during the run-off. 10. RETIREMENT BENEFITS The Corporation provides postretirement benefits to substantially all of its employees. Expenses associated with postretirement benefits include pension expense for employees, retirees and surviving spouses, and postretirement health care and life insurance expense for employees, retirees, surviving spouses and dependents. The pension plans are non-contributory with benefits related to an employee's length of service and compensation rate. The Corporation's policy is to fund its qualified pension plan in accordance with applicable government regulations and to make additional payments as necessary to maintain full funding of the vested accumulated benefit obligation. For plan years which ended during the current fiscal year, all legal funding requirements have been met. Plan assets are primarily invested in a dedicated portfolio of long-term fixed income securities. In addition to providing pension benefits, the Corporation provides health care and life insurance for a majority of its retired employees. For most retirees, these benefits are defined by the terms of an agreement between Navistar and its employees, retirees and collective bargaining organizations which provides for postretirement health care and life insurance benefits (the "Plan"). The Plan, which was implemented on July 1, 1993, provided for cost sharing between Navistar and retirees in the form of premiums, co-payments and deductibles. A trust was established to provide a vehicle for funding of the health care liability through Navistar contributions and retiree premiums. A separate independent Retiree Supplemental Benefit Trust was also established to potentially reduce retiree premiums, co-payments and deductibles and provide additional benefits in the future. During 1993, the Corporation agreed to contribute $3.7 to the Supplemental Benefit Trust. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 10. RETIREMENT BENEFITS (Continued) Pension Expense Net pension cost includes the following:
1995 1994 1993 Service cost-benefits earned during the period $ .5 $ 1.0 $ .6 Interest cost on projected benefit obligation 2.8 2.7 2.8 Return on assets - actual (gain) loss (9.1) 3.3 (8.4) - deferred gain (loss) 5.8 (6.8) 5.2 Other costs (including amortization of transition amount) - .1 .1 Net pension cost $ - $ .3 $ .3
Pension Assets and Liabilities The plans' funded status and reconciliation to the Statement of Consolidated Financial Condition as of October 31 were as follows:
Plan in Which Plan in Which Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets 1995 1994 1995 1994 Actuarial present value of: Vested benefits $(31.8) $(25.8) $ (2.2) $ (1.8) Non-vested benefits (4.0) (3.0) (.1) (.1) Accumulated benefit obligation (35.8) (28.8) (2.3) (1.9) Effect of projected future compensation levels (.9) (.6) - - Total projected benefit obligation (36.7) (29.4) (2.3) (1.9) Plan assets at fair value 41.5 34.5 - - Funded status at October 31 4.8 5.1 (2.3) (1.9) Unrecognized net losses (gains) (4.2) (4.8) .6 .2 Unrecognized plan amendments .5 .5 - - Unrecognized net obligation as of transition date .1 .2 - - Net asset (liability) $ 1.2 $ 1.0 $ (1.7) $ (1.7)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 10. RETIREMENT BENEFITS (Continued) The weighted average rate assumptions used in determining the projected benefit obligation and pension expense were:
1995 1994 1993 Discount rate used to determine the present value of the projected benefit obligations 7.5% 9.2% 6.7% Expected long-term rate of return on plan assets 9.9% 9.0% 10.0% Expected rate of increase in future compensation levels 3.5% 3.5% 3.5%
Other Postretirement Benefits During 1993, the Corporation adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and recognized the transition obligation as a one-time, non-cash charge to earnings. The cumulative effect of this change in accounting policy, as of November 1, 1992, was $8.8, net of income taxes of $5.4. The components of expense for other postretirement benefits that are included in the Statement of Consolidated Income and Retained Earnings include the following:
1995 1994 1993 Service cost - benefits earned during the year $ .3 $ .2 $ .3 Interest cost on the accumulated benefit obligation .8 .7 .6 Expected return on assets - actual (gain)/loss (1.5) (.2) - - deferred gain/(loss) 1.2 - - Total cost of postretirement benefits other than pension $ .8 $ .7 $ .9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 10. RETIREMENT BENEFITS (Continued) The components of the liability for other postretirement benefits as of October 31, 1995 and 1994, were as follows:
1995 1994 Retirees and their dependents $(4.9) $(4.2) Active employees eligible to retire (2.4) (2.2) Other active participants (3.3) (2.6) Accumulated postretirement benefit obligation (APBO) (10.6) (9.0) Plan assets at fair value 4.5 2.8 APBO in excess of plan assets (6.1) (6.2) Unrecognized net loss .4 .7 Net liability $(5.7) $(5.5)
The expected return on plan assets was 10% for 1995 and 9% for 1994 and 1993. The weighted average of discount rates used to determine the accumulated postretirement benefit obligation was 7.7% and 8.9% at October 31, 1995 and 1994, respectively. For 1996, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 9.8%. The rate is projected to decrease to 5.0% in the year 2003 and remain at that level each year thereafter. If the cost trend rate assumptions were increased by one percentage point for each year, the accumulated postretirement benefit obligation would increase by approximately $1.7 and the associated expense recognized for the year ended October 31, 1995, would increase by an estimated $.2. 11. LEASES The Corporation is obligated under noncancelable operating leases for the majority of its office facilities and equipment. These leases are generally renewable and provide that property taxes and maintenance costs are to be paid by the lessee. At October 31, 1995, future minimum lease commitments under noncancelable operating leases with remaining terms in excess of one year are as follows: Year Ended October 31, 1996 $1.7 1997 1.6 1998 1.6 1999 1.5 2000 1.2 Thereafter .2 Total $7.8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 12. SHAREOWNER'S EQUITY The number of authorized shares of capital stock as of October 31, 1995 and 1994, 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. As discussed in note 9, the Corporation amended and restated its bank credit facility in November 1994 which, among other things, changed previous limitations on the Corporation's authority to pay dividends to Transportation. 13. FINANCIAL INSTRUMENTS Fair Value of Financial Instruments The carrying amounts and estimated fair values of the Corporation's financial instruments were as follows:
1995 1994 Carrying Fair Carrying Fair Amount Value Amount Value Financial assets: Finance receivables: Retail notes $ 680.8 $ 707.2 $ 452.0 $ 458.1 Wholesale notes 268.2 268.2 230.6 230.6 Accounts 365.9 365.9 357.7 357.7 Amounts due from sales of receivables 247.8 234.6 193.0 183.0 Financial liabilities: Senior and subordinated debt $1,279.8 $1,282.9 $ 672.3 $ 673.9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 13. FINANCIAL INSTRUMENTS (Continued) The methods and assumptions used to estimate the fair value of each class of financial instruments are summarized as follows: Cash and Cash Equivalents The carrying amount approximates fair value as a result of the short maturity of these instruments. Marketable Securities Fair value is estimated based on quoted market price. The cost and fair value of marketable securities is disclosed in note 4. Finance Receivables The fair value of truck retail notes is estimated by discounting the future cash flows using an estimated discount rate reflecting current rates paid to purchasers of similar types of receivables with similar credit, interest rate and prepayment risks. For other retail notes, primarily variable- rate notes that reprice frequently, and for wholesale notes and retail and wholesale accounts, the carrying amounts approximate fair value as a result of the short term nature of the receivables. Amounts Due from Sales of Receivables The fair values of excess servicing cash flows and other subordinated amounts due the Corporation arising from receivable sale transactions were derived by discounting expected cash flows at estimated current market rates. The fair value of cash deposits approximates their carrying value. Senior and Subordinated Debt For variable-rate borrowings under the bank revolving credit agreement that reprice frequently, the carrying amount approximates fair value. The fair values of notes and debentures are estimated based on quoted market prices where available and, where not available, on quoted market prices of debt with similar characteristics. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 13. FINANCIAL INSTRUMENTS (Continued) Derivative Financial Instruments The Corporation manages its exposure to fluctuations in interest rate changes by limiting the amount of fixed rate assets funded with variable rate debt by selling fixed rate retail receivables on a fixed rate basis and, to a lesser extent, by utilizing derivative financial instruments. These derivative financial instruments may include interest rate swaps, interest rate caps and forward interest rate contracts. The Corporation manages exposure to counterparty credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. Notional amounts are used to measure the volume of derivative financial instruments and do not represent exposure to credit loss. The Corporation enters into forward interest rate contracts to manage its exposure to fluctuations in funding costs from the anticipated securitization and sale of retail notes. The Corporation locks into an interest rate by entering into a forward contract on a U.S. Treasury security whose terms approximate those used to determine the selling price of the anticipated sale of receivables. Gains or losses incurred with the closing of these agreements are included as a component of the gain on sale of receivables. During June through October 1995, the Corporation entered into $325 of forward interest rate lock agreements on a Treasury maturing in 1997 related to the anticipated November 1995 sale of retail receivables. See also note 15. These hedge agreements, which were closed on October 18, 1995, in conjunction with the pricing of the sale, resulted in an immaterial loss which was deferred at October 31, 1995, and included in the gain on the sale of receivables recognized in November 1995. During fiscal 1994 and 1995, there were no swap agreements outstanding and only one interest rate cap purchased in 1985 for a notional amount of $50 which serves to hedge the interest cost of variable rate debt. The premium paid for this interest rate cap agreement has been fully amortized to interest expense. The effect of this cap on the Corporation's interest expense was not material. The Corporation's wholly-owned insurance subsidiary has investments in Collateralized Mortgage Obligations ("CMO's") of $33 which are included in the Corporation's marketable securities at October 31, 1995. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 14. LEGAL PROCEEDINGS In May 1993, a jury issued a verdict in favor of Vernon Klein & Equipment, Inc. ("Klein Truck") and against Transportation and the Corporation in the amount of $10.8 in compensatory damages and $15 in punitive damages. Transportation appealed the verdict and, in November 1994, the Court of Appeals of the State of Oklahoma reversed the verdict and entered judgment in favor of Transportation on virtually all aspects of the case. Klein Truck appealed to the Oklahoma Supreme Court where the case is now pending. The Corporation and its subsidiaries are subject to various other claims arising in the ordinary course of business, and are parties to various legal proceedings which constitute ordinary routine litigation incidental to the business of the Corporation and its subsidiaries. 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. 15. SUBSEQUENT EVENT In November 1995, the Corporation sold $525 of retail notes, net of unearned finance income, through NFRRC to an owner trust which, in turn, sold $507 of notes and $18 of certificates to investors. The Corporation initially sold $455 of retail notes receivable on November 1, 1995, and via a pre-funding feature in the agreement, subsequently sold an additional $70 of retail receivables on November 10, 1995. The proceeds of $499, after deducting $1 for underwriting fees and $25 to establish a reserve account with the trust as credit enhancement for the public sale, were used by the Corporation for general working capital purposes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 16. QUARTERLY FINANCIAL INFORMATION (unaudited)
1995 1st 2nd 3rd 4th Fiscal Quarter Quarter Quarter Quarter Year Revenues $50.9 $56.5 $64.1 $56.7 $228.2 Interest expense 17.1 20.4 19.1 18.5 75.1 Provision for losses on receivables .1 .5 .4 1.6 2.6 Net income 6.3 7.5 13.3 9.1 36.2
1994 1st 2nd 3rd 4th Fiscal Quarter Quarter Quarter Quarter Year Revenues $58.8 $50.2 $50.6 $51.2 $210.8 Interest expense 15.7 15.7 16.7 14.6 62.7 Provision for losses on receivables .8 .2 .1 1.2 2.3 Net income 10.9 8.0 8.6 6.5 34.0
SUPPLEMENTARY FINANCIAL DATA Five Year Summary of Financial and Operating Data Dollar amounts in millions
1995 1994 1993 1992 1991 Revenues and net income retained Revenues $ 228.2 $ 210.8 $ 231.9 $ 228.3 $ 235.9 Provision for losses on receivables 2.6 2.3 1.5 3.6 5.8 Interest expense 75.1 62.7 74.6 82.2 90.3 Other charges, net 91.8 90.6 106.8 96.1 86.6 Taxes on income 22.5 21.2 17.7 16.9 20.2 Cumulative effect of changes in accounting policy, net of income taxes - - 8.8 - - Net income 36.2 34.0 22.5 29.5 33.0 Dividends paid 9.0 25.6 22.6 16.0 74.0 Net income retained $ 27.2 $ 8.4 $ (.1) $ 13.5 $(41.0) Percent of net income to average shareowner's equity 15.0% 15.1% 10.3% 13.8% 15.0% Assets at end of year Cash and cash equivalents $ 2.9 $ 28.3 $ 33.9 $ 79.2 $ 16.0 Marketable securities 131.8 130.5 125.6 130.5 119.1 Finance receivables: Truck retail notes and lease financing 747.2 513.9 823.5 955.1 928.0 Wholesale notes 268.2 230.6 212.5 81.5 37.8 Accounts 365.9 357.7 245.1 204.3 162.9 Total 1,381.3 1,102.2 1,281.1 1,240.9 1,128.7 Allowance for losses (10.4) (8.2) (10.9) (12.4) (11.7) Finance receivables,net 1,370.9 1,094.0 1,270.2 1,228.5 1,117.0 Other assets 369.1 282.0 195.5 170.5 196.0 Total assets $1,874.7 $1,534.8 $1,625.2 $1,608.7 $1,448.1 Liabilities and shareowner's equity at end of year Commercial paper $ 50.5 $ 19.2 $ - $ - $ 143.8 Short-term bank borrowings - 400.0 75.0 - 40.0 Bank revolving credit 760.0 355.0 727.0 727.0 220.0 Asset-backed commercial paper facility 302.3 - - - - Medium-term notes 117.5 217.3 222.2 261.1 419.4 Long-term notes and debentures - - 75.0 135.0 135.0 Subordinated debt 100.0 100.0 100.0 94.9 93.7 Total debt 1,330.3 1,091.5 1,199.2 1,218.0 1,051.9 Other liabilities 287.7 217.7 206.6 171.2 190.2 Shareowner's equity 256.7 225.6 219.4 219.5 206.0 Total liabilities and shareowner's equity $1,874.7 $1,534.8 $1,625.2 $1,608.7 $1,448.1 Debt to equity ratio 5.2:1 4.8:1 5.5:1 5.5:1 5.1:1 Senior debt to capital funds ratio 3.4:1 3.0:1 3.4:1 3.6:1 3.2:1 Gross insurance premiums written $ 52.0 $ 59.0 $ 65.8 $ 69.2 $ 66.3 Number of employees at October 31 360 353 339 364 353
SUPPLEMENTARY FINANCIAL DATA (Continued) Gross Finance Receivables and Leases Acquired
Dollar amounts in millions 1995 1994 1993 1992 1991 Wholesale notes $2,979.4 $2,306.6 $1,977.6 $1,547.7 $1,461.0 Retail notes and leases: New 1,075.0 861.9 730.0 591.8 554.4 Used 242.3 217.2 168.4 185.9 192.8 Total 1,317.3 1,079.1 898.4 777.7 747.2 Total $4,296.7 $3,385.7 $2,876.0 $2,325.4 $2,208.2
Analysis of Finance Retail Notes Acquired
Average Down Payment Contractual as a Percent Average Terms of Retail Monthy in Months Sales Price Installment Number of Year Units New Used New Used New Used 1995 18,286 55 39 8.0% 16.7% $1,514 $1,003 1994 17,331 54 38 6.6 13.9 1,311 921 1993 15,879 53 34 6.2 17.0 1,248 786 1992 14,227 52 35 6.6 14.1 1,239 845 1991 13,768 52 37 7.2 13.5 1,286 875
SUPPLEMENTARY FINANCIAL DATA (Continued) Analysis of Gross Retail Notes and Lease Financing With Installments Past Due Over 60 Days
At October 31 ($ Millions) 1995 1994 1993 1992 1991 Original amount of notes and leases $ 1.2 $ 1.3 $ 2.6 $ 4.3 $ 3.9 Balance of notes and leases .5 .5 .7 2.1 1.9 Balance as a percent of total outstanding .06% .09% .08% .19% .18%
Analysis of Retail Note Repossessions
1995 1994 1993 1992 1991 Retail note repossessions acquired as a perrcentage of average retail note gross balance .92% .97% 1.95% 3.70% 4.45%
SUPPLEMENTARY FINANCIAL DATA (Continued) Analysis of Loss Experience
($ Millions) 1995 1994 1993 1992 1991 Net losses (recoveries): Retail notes and leases $ .3 $ .6 $(.1) $2.4 $3.0 Wholesale notes (.9) .1 .8 .8 2.8 Accounts (.2) .2 - - - Total $(.8) $ .9 $ .7 $3.2 $5.8 Percent net losses (recoveries) to liquidations: Retail notes and leases .03% .07% (.01)% .27% .41% Wholesale notes (.03) .01 .04 .06 .19 Total (.02)% .03% .03% .13% .26% Percent net losses (recoveries) to related average gross receivables outstanding: Retail notes and leases .02% .04% - .17% .21% Wholesale notes (.13) .03 .16 .20 .66 Accounts (.05) .08 - - - Total (.03)% .04% .03% .16% .29%
Includes loss experience on sold notes. Navistar Financial Corporation and Subsidiaries Statement of Financial Reporting Responsibility Management of Navistar Financial Corporation and its subsidiaries is responsible for the preparation and for the integrity and objectivity of the accompanying financial statements and other financial information in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based on management's estimates and judgments. The accompanying financial statements have been audited by Deloitte & Touche LLP, independent auditors. Management has made available to Deloitte & Touche LLP all the Corporation's financial records and related data, as well as the minutes of Directors' meetings. Management believes that all representations made to Deloitte & Touche LLP during its audit were valid and appropriate. Management is responsible for establishing and maintaining a system of internal controls throughout its operations that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use and the execution and recording of transactions in accordance with management's authorization. The system of internal controls which provides for appropriate division of responsibility is supported by written policies and procedures that are updated by management as necessary. The system is tested and evaluated regularly by the parent Company's internal auditors as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their audit in accordance with generally accepted auditing standards and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the Corporation's system of internal controls and takes the necessary actions that are cost-effective in the circumstances to respond appropriately to the recommendations presented. Management believes that the Corporation's system of internal controls accomplishes the objectives set forth in the first sentence of this paragraph. John J. Bongiorno President and Chief Executive Officer Phyllis E. Cochran Vice President and Controller Navistar Financial Corporation and Subsidiaries Independent Auditors' Report Navistar Financial Corporation: We have audited the financial statements of Navistar Financial Corporation and its subsidiaries listed in Item 8. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Navistar Financial Corporation and its subsidiaries at October 31, 1995 and 1994 and the results of their operations and their cash flow for each of the three years in the period ended October 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 10 to the consolidated financial statements, effective November 1, 1992, Navistar Financial Corporation changed its method of accounting for postretirement benefits other than pensions. /s/ DELOITTE & TOUCHE LLP -------------------------- Deloitte & Touche LLP December 18, 1995 Chicago, Illinois 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
Exhibit Form 10-K Number Description Page (3) Articles of Incorporation and By-Laws of the Registrant E-1 (4) Instruments Defining the Rights of Security Holders, including Indentures E-2 (10) Material Contracts E-3 (24) Power of Attorney 42 (27) Financial Data Schedule E-9
Reports on Form 8-K No reports on Form 8-K were filed for the three months ended October 31, 1995. 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 January 26, 1996 Phyllis E. Cochran Vice President and Controller (Principal Accounting Officer) NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES Exhibit 24 POWER OF ATTORNEY Each person whose signature appears below does hereby make, constitute and appoint John J. Bongiorno, Phyllis E. Cochran and William W. Jones and each of them acting individually, true and lawful attorneys-in-fact and agents with power to act with- out the other and with full power of substitution, to execute deliver and file, for and on such person's behalf, and in such person's name and capacity or capacities as stated below, any amendment, exhibit or supplement to the Form 10-K Report making such changes in the report as such attorney-in-fact deems appropriate. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date /s/JOHN J. BONGIORNO President and Chief Executive January 26, 1996 John J. Bongiorno Officer; Director (Principal Executive Officer) /s/R. WAYNE CAIN Vice President and Treasurer; January 26, 1996 R. Wayne Cain Director (Principal Financial Officer) /s/PHYLLIS E. COCHRAN Vice President and Controller; January 26, 1996 Phyllis E. Cochran Director (Principal Accounting Officer) /s/JORDAN H. FEIGER Vice President, Operations; January 26, 1996 Jordan H. Feiger Director /s/JOHN R. HORNE Director January 26, 1996 John R. Horne /s/THOMAS M. HOUGH Director January 26, 1996 Thomas M. Hough
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES (Continued) Signature Title Date /s/ROBERT C. LANNERT Director January 26, 1996 Robert C. Lannert /s/ROBERT I. MORRISON Director January 26, 1996 Robert I. Morrison /s/THOMAS D. SILVER Director January 26, 1996 Thomas D. Silver
Exhibit 3 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES ARTICLES OF INCORPORATION AND BY-LAWS The following documents of Navistar Financial Corporation are incorporated herein by reference: 3.1 Restated Certificate of Incorporation of Navistar Financial Corporation (as amended and in effect on December 15, 1987). Filed on Form 8-K dated December 17, 1987. Commission File No. 1-4146-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. E-1 Exhibit 4 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES The following instruments of Navistar Financial Corporation defining the rights of security holders, including indentures, are incorporated herein by reference: 4.1 Indenture, dated as of September 22, 1989, between the Corporation and The First National Bank of Chicago, as Trustee, succeeded by Bank One, Columbus, NA, as successor Trustee, for $400,000,000 of debt securities on terms determined at time of sale. Filed on Registration No. 33-31003. 4.2 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. E-2 Exhibit 10 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES MATERIAL CONTRACTS The following material contracts of Navistar Financial Corporation and Navistar International Transportation Corp. are incorporated herein by reference: 10.1 Pooling and Servicing Agreement dated as of December 1, 1990, among the Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, and Manufacturers Hanover Trust Company, as Trustee. Filed on Registration No. 33-36767. 10.2 Purchase Agreement dated as of December 1, 1990, between the Corporation and Navistar Financial Securities Corporation, as Purchaser, with respect to the Dealer Note Trust 1990. Filed on Registration No. 33-36767. 10.3 Security, Pledge and Trust Agreement between the Corporation and Bankers Trust Company, Trustee, dated as of April 26, 1993. Filed on Form 8-K dated April 30, 1993. Commission File No. 1-4146-1. 10.4 Amended and Restated Purchase Agreement among Truck Retail Instalment Paper Corp., as Seller, the Corporation, certain purchasers, Chemical Bank and Bank of America Illinois, formerly known as Continental Bank N.A. as Co- Agents, and J.P. Morgan Delaware as Administrative Agent, dated as of April 26, 1993. Filed on Form 8-K dated April 30, 1993. Commission File No. 1-4146-1. 10.5 Master Intercompany Agreement dated as of April 26, 1993, between the Corporation and Transportation. Filed on Form 8-K dated April 30, 1993. Commission File No. 1-4146-1. 10.6 Intercompany Purchase Agreement dated as of April 26, 1993, between the Corporation and Truck Retail Instalment Paper Corp. Filed on Form 8-K dated April 30, 1993. Commission File No. 1-4146-1. 10.7 Purchase Agreement dated as of November 10, 1993, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1993-A Owner Trust. Filed on Registration No. 33-50291. 10.8 Pooling and Servicing Agreement dated as of November 10, 1993, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1993-A Owner Trust, as Issuer. Filed on Registration No. 33-50291. E-3 Exhibit 10 (Continued) NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES MATERIAL CONTRACTS 10.9 Trust Agreement dated as of November 10, 1993, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1993-A Owner Trust. Filed on Registration No. 33-50291. 10.10 Indenture dated as of November 10, 1993, between Navistar Financial 1993-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1993- A Owner Trust. Filed on Registration No. 33-50291. 10.11 Purchase Agreement dated as of May 3, 1994, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1994-A Owner Trust. Filed on Registration No. 33-50291. 10.12 Pooling and Servicing Agreement dated as of May 3, 1994, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1994-A Owner Trust, as Issuer. Filed on Registration No. 33-50291. 10.13 Trust Agreement dated as of May 3, 1994, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1994-A Owner Trust. Filed on Registration No. 33-50291. 10.14 Indenture dated as of May 3, 1994, between Navistar Financial 1994-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994- A Owner Trust. Filed on Registration No. 33-50291. 10.15 Purchase Agreement dated as of August 3, 1994, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1994-B Owner Trust. Filed on Registration No. 33-50291. 10.16 Pooling and Servicing Agreement dated as of August 3, 1994, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1994-B Owner Trust, as Issuer. Filed on Registration No. 33-50291. 10.17 Trust Agreement dated as of August 3, 1994, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1994-B Owner Trust. Filed on Registration No. 33-50291. E-4 Exhibit 10 (Continued) NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES MATERIAL CONTRACTS 10.18 Indenture dated as of August 3, 1994, between Navistar Financial 1994-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994- B Owner Trust. Filed on Registration No. 33-50291. 10.19 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. 10.20 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. 10.21 Appendix A to Liquidity Agreement at Exhibit 10.20. Filed on Form 8-K dated November 4, 1994. Commission File No. 1- 4146-1. 10.22 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. 10.23 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. 10.24 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. 10.25 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. 10.26 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. E-5 Exhibit 10 (Continued) NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES MATERIAL CONTRACTS 10.27 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. 10.28 Retail Receivables Purchase Agreement dated as of November 7, 1994, between Truck Retail Instalment Paper Corp. and the Corporation. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.29 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. 10.30 Purchase Agreement dated as of December 15, 1994, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1994-C Owner Trust. Filed on Registration No. 33-55865. 10.31 Pooling and Servicing Agreement dated as of December 15, 1994, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1994-C Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.32 Trust Agreement dated as of December 15, 1994, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1994-C Owner Trust. Filed on Registration No. 33-55865. 10.33 Indenture dated as of December 15, 1994, between Navistar Financial 1994-C Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1994- C Owner Trust. Filed on Registration No. 33-55865. 10.34 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. 10.35 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. E-6 Exhibit 10 (Continued) NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES MATERIAL CONTRACTS 10.36 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. 10.37 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. 10.38 Pooling and Servicing Agreement dated as of June 8, 1995, among the Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, Chemical Bank, as 1990 Trust Trustee, and The Bank of New York, as Master Trust Trustee. Filed on Registration No. 33-87374. 10.39 Series 1995-1 Supplement to the Pooling and Servicing Agreement dated as of June 8, 1995, among the Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, and The Bank of New York, as Master Trust Trustee on behalf of the Series 1995-1 Certificateholders. Filed on Registration No. 33-87374. 10.40 Class A-4 Supplement to the 1990 Pooling and Servicing Agreement dated June 8, 1995, among the Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, and Chemical Bank (Successor to Manufacturers Hanover Trust Company), as Trustee. Filed on Registration No. 33-87374. 10.41 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. 10.42 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. 10.43 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. E-7 Exhibit 10 (Continued) NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES MATERIAL CONTRACTS 10.44 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. 10.45 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. E-8 -----END PRIVACY-ENHANCED MESSAGE-----