-----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, RnWVeS9XPToeKHHvYD9od4yFTbd1F1oQPKBP2KaXWzvRofZ0hyoPCy5Xtz1e3mbk 0H80iooM17KgWlWpxlR9TA== 0000808450-97-000002.txt : 19970123 0000808450-97-000002.hdr.sgml : 19970123 ACCESSION NUMBER: 0000808450-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19970122 SROS: CSE 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: 97508869 BUSINESS ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3128362032 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, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 1-9618 NAVISTAR INTERNATIONAL CORPORATION ---------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3359573 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 455 North Cityfront Plaza Drive, Chicago, Illinois 60611 -------------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (312) 836-2000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ----------------------------------------------- --------------------- Common stock, par value $0.10 per share New York Stock Exchange Chicago Stock Exchange Pacific 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 10, 1997, the aggregate market value of Common Stock (excluding Class B Common Stock) held by non-affiliates of the registrant was $474,914,546. As of January 10, 1997, the number of shares outstanding of the registrant's Common Stock was 49,341,771 and the Class B Common Stock was 24,292,606. Documents Incorporated by Reference ----------------------------------- 1996 Annual Report to Shareowners (Parts I, II and IV) 1996 Proxy Statement (Parts I and III) Navistar Financial Corporation 1996 Annual Report on Form 10-K (Part IV) NAVISTAR INTERNATIONAL CORPORATION FORM 10-K Year Ended October 31, 1996 INDEX 10-K Page --------- PART I Item 1. Business .......................................... 3 Item 2. Properties ........................................ 8 Item 3. Legal Proceedings ................................. 8 Executive Officers of the Registrant .............. 9 Item 4. Submission of Matters to a Vote of Security Holders ................................ 11 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 11 Item 6. Selected Financial Data ........................... 11 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Item 8. Financial Statements and Supplementary Data ....... 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................ 11 PART III Item 10. Directors and Executive Officers of the Registrant 12 Item 11. Executive Compensation ........................... 12 Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 12 Item 13. Certain Relationships and Related Transactions ... 12 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................ 12 SIGNATURES Principal Accounting Officer ............................... 14 Directors .................................................. 15 POWER OF ATTORNEY ............................................ 15 INDEPENDENT AUDITORS' REPORT ................................. 17 INDEPENDENT AUDITORS' CONSENT ................................ 17 SCHEDULE ..................................................... F-1 EXHIBITS ..................................................... E-1 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 two principal industry segments: manufacturing and financial services. Manufacturing operations are responsible for the manufacture and marketing of medium and heavy trucks, including school buses, mid- range diesel engines and service parts primarily in the United States and Canada as well as in selected export markets. Based on assets and revenues, manufacturing operations represent the majority of Transportation's business activities. The financial services operations consist of Navistar Financial Corporation (Navistar Financial), its domestic insurance subsidiary and the company's foreign finance and insurance subsidiaries. Navistar Financial's primary business is the retail and wholesale financing of products sold by the manufacturing operations and its dealers within the United States and the providing of commercial physical damage and liability insurance to the manufacturing operations' dealers and retail customers and to the general public through an independent insurance agency system. Industry segment data for 1996, 1995, and 1994 is summarized in Note 15 to the Financial Statements, which is incorporated herein by reference. THE MEDIUM AND HEAVY TRUCK INDUSTRY The market in which Navistar competes is subject to considerable volatility as it moves in response to cycles in the overall business environment and is particularly sensitive to the industrial sector which generates a significant portion of the freight tonnage hauled. Government regulation has impacted and will continue to impact trucking operations and efficiency and the specifications of equipment. The following table shows industry retail deliveries in the combined United States and Canadian markets for the five years ended October 31, in thousands of units: YEARS ENDED OCTOBER 31, ------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Class 5, 6 and 7 medium trucks and school buses .. 145.8 151.8 134.2 122.5 118.3 Class 8 heavy trucks ....... 195.4 228.8 205.4 166.4 125.2 ----- ----- ----- ----- ----- Total .................... 341.2 380.6 339.6 288.9 243.5 ===== ===== ===== ===== ===== Source: Monthly data provided 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 94,000 Class 5 through 8 trucks, including school buses, in the United States and Canada in fiscal 1996, an 8% decrease from the 101,700 units delivered in 1995. Navistar's combined share of the Class 5 through 8 truck market was 27.5% in 1996 and 26.7% in 1995. 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 16 fiscal years based on data obtained from the American Automobile Manufacturer's Association, the United States Motor Vehicle Manufacturer's Association and R.L. Polk & Company. PRODUCTS The following table illustrates the percentage of Transportation's manufacturing sales by class of product based on dollar amount: YEARS ENDED OCTOBER 31, ----------------------- PRODUCT CLASS 1996 1995 1994 - ------------- ---- ---- ---- Class 5, 6 and 7 medium trucks and school buses .. 35% 32% 32% Class 8 heavy trucks ....... 35 42 42 Service parts .............. 14 12 14 Engines .................... 16 14 12 ---- ---- ---- Total .................... 100% 100% 100% ==== ==== ==== Transportation manufactures a full line of products in the common carrier, private carrier, government/service, leasing, construction, energy/petroleum and student transportation markets. Transportation offers diesel-powered trucks and buses because of their improved fuel economy, ease of serviceability and greater durability over gasoline-powered vehicles. Transportation's Class 8 heavy trucks generally use diesel engines purchased from outside suppliers while Class 5, 6 and 7 medium trucks are powered by a proprietary line of mid-range diesel engines manufactured by Transportation. Based upon information published by R.L. Polk & Company, diesel-powered Class 5, 6 and 7 medium truck shipments represented 87% of all medium truck shipments for fiscal year 1996 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. ENGINE AND FOUNDRY Transportation builds diesel engines for use in its Class 5, 6 and 7 medium trucks, school buses, selected Class 8 heavy truck models and for sale to original equipment manufacturers in the United States and Canada. Transportation also sells engines for industrial, agricultural and marine applications. Transportation is the leading supplier of mid-range diesel engines in the 160-300 horsepower range according to data supplied by Power Systems Research of Minneapolis, Minnesota. Transportation has an agreement to supply its T444E electronically controlled diesel engine 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 of V8 and I6 engines to all original equipment manufacturers totaled a record 163,200 units in 1996, an increase of 6% from the 154,200 units shipped in 1995. SERVICE PARTS In the United States and Canada, Transportation operates 7 regional parts distribution centers, which allows it to offer 24-hour availability and same day shipment of the parts most frequently requested by customers. MARKETING AND DISTRIBUTION Transportation's truck products are distributed in virtually all key markets in the United States and Canada. Transportation's truck distribution and service network in these countries was composed of 957, 958 and 949 dealers and retail outlets at October 31, 1996, 1995 and 1994, respectively. Included in these totals were 504, 490 and 473 secondary and associate locations at October 31, 1996, 1995 and 1994, 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 110 major national account customers. Transportation's network of 13 Used Truck Centers in the United States provides trade-in support to the company's dealers and national account group, and markets all makes and models of reconditioned used trucks to owner-operators and fleet buyers. Both wholesale and retail trucks, components and service parts are exported to more than 70 countries around the world. FINANCIAL SERVICES 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 1996 and 1995, Navistar Financial provided wholesale financing for 94% and 93%, respectively, of the new truck units sold by Transportation to 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. Harbour Assurance Company of Bermuda Limited offers a variety of programs to the company, including general liability insurance, ocean cargo coverage for shipments to and from foreign distributors, and reinsurance coverage for various Transportation policies. IMPORTANT SUPPORTING OPERATIONS Third Party Sales Financing Agreements. In the United States, Transportation has an agreement with Associates Commercial Corporation to provide wholesale financing to certain of its truck dealers and retail financing to their customers. Navistar International Corporation Canada also has an agreement with a subsidiary of General Electric Canadian Holdings Limited to provide financing for Canadian dealers and customers. RESEARCH AND DEVELOPMENT Research and development activities, which are directed toward the introduction of new products and improvements of existing products and processes used in their manufacture, totaled $101 million, $91 million, and $88 million for 1996, 1995 and 1994, respectively. BACKLOG The backlog of unfilled truck orders (subject to cancellation or return in certain events) at October 31, 1996, 1995 and 1994 was $1,254 million, $2,581 million and $3,358 million, respectively. Although the backlog of unfilled orders is one of many indicators of market demand, other factors such as changes in production rates, available capacity, new product introductions and competitive pricing actions may affect point-in-time comparisons. EMPLOYEES The company employed 14,187, 16,079 and 14,910 individuals at October 31, 1996, 1995 and 1994, respectively. LABOR RELATIONS At October 31, 1996, the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represented 6,902 of the company's active employees in the United States, and the Canadian Auto Workers (CAW) represented 1,476 of the company's active employees in Canada. Other unions represented 1,022 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. In addition, the company entered into a collective bargaining agreement with the CAW in 1996, which expires on October 24, 1999. PATENTS AND TRADEMARKS Transportation continuously obtains patents on its inventions and, thus, owns a significant patent portfolio. Additionally, many of the components which Transportation purchases for its products are protected by patents that are owned or controlled by the component manufacturer. Transportation has licenses under third-party patents relating to its products and their manufacture, and Transportation grants licenses under its patents. The royalties paid or received under these licenses are not significant. No particular patent or group of patents is considered by Transportation to be essential to its business as a whole. Like all businesses which offer well-known products or services, Transportation's primary trademarks are an important part of its worldwide sales and marketing efforts, and provide instant identification of its products and services in the marketplace. To support these efforts, Transportation maintains, or has pending, registrations of its primary trademarks in those countries in which it does business or expects to do business. RAW MATERIALS AND ENERGY SUPPLIES Transportation purchases raw materials, parts and components from numerous outside suppliers but relies upon some suppliers for a substantial number of components for its truck products. 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. While the company believes that it has adequate assurances of continued supply, the inability of a supplier to deliver could have an adverse effect on production at certain of the company's manufacturing locations. IMPACT OF GOVERNMENT REGULATION Truck and engine manufacturers continue to face increasing governmental regulation of their products, especially in the areas of environment and safety. The company believes its products comply with all applicable environmental and safety regulations. As a diesel engine manufacturer, the company has incurred research and tooling costs to redesign its engine product lines to meet United States Environmental Protection Agency (U.S. EPA) and California Air Resources Board (CARB) emission standards effective for the 1994 model year. The company faces 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 a voluntary agreement (Statement of Principles) with U.S. EPA and CARB to achieve new reductions in ozone-causing exhaust emissions by 2004. As a result of the Statement of Principles, U.S. EPA issued a Notice of Proposed Rulemaking defining exhaust emission standards for the 2004 model year. A final rule is expected in the early part of 1997. The company must also satisfy California's emission standards in 2002 for engines used in medium-size vehicles (which includes vehicles up to 14,000 lbs. Gross Vehicle Weight Rating). The company expects that its diesel engines will be able to meet all of these standards within the required time-frame. 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 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. Truck manufacturers are also subject to various noise standards imposed by federal, state and local regulations. The engine is one of a truck's primary noise sources, and the company, therefore, works closely with original equipment manufacturers to develop strategies to reduce engine noise. The company is also subject to the National Traffic and Motor Vehicle Safety Act (Safety Act) and Federal Motor Vehicle Safety Standards (Safety Standards) promulgated by the National Highway Traffic Safety Administration. The company believes it is in compliance with the Safety Act and the Safety Standards. Expenditures to comply with various environmental regulations relating to the control of air, water and land pollution at production facilities and to control noise levels and emissions from Transportation's products have not been material except for two sites formerly owned by the company, Wisconsin Steel in Chicago, Illinois, and Solar Turbine in San Diego, California. In 1994, Transportation recorded a $20 million after- tax charge as a loss of discontinued operations for environmental liabilities and cleanup cost at these two sites. It is not expected that the costs of compliance with foreseeable environmental requirements will have a material effect on the company's financial position or operating results. ITEM 2. PROPERTIES In the United States and Canada, Transportation owns and operates 9 manufacturing and assembly operations, which contain approximately 9 million square feet of floor space. Four facilities manufacture and assemble trucks, 2 plants manufacture diesel engines, 2 locations produce gray iron castings and 1 facility produces molded fiberglass components. In addition, Transportation owns or leases other significant properties in the United States and Canada including vehicle and parts distribution centers, sales offices, an engineering center and its headquarters in Chicago. Transportation's principal research and engineering facilities are located in Fort Wayne, Indiana, and Melrose Park, Illinois. In addition, certain research is conducted at its manufacturing plants. All of Transportation's plants are being utilized and have been maintained adequately, are in good operating condition and are suitable for its current needs through productive utilization of the facilities. These facilities, together with planned capital expenditures, are expected to meet Transportation's manufacturing needs in the foreseeable future. A majority of the activity of the financial services operations is conducted from its leased headquarters in Rolling Meadows, Illinois. The financial services operations also lease 6 other office locations in the United States and share office space with other locations. ITEM 3. LEGAL PROCEEDINGS 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 routing 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, 1997. OFFICERS AND POSITIONS WITH NAME AGE NAVISTAR AND OTHER INFORMATION ---- --- ------------------------------ John R. Horne ....... 58 Chairman, President and Chief Executive Officer in 1996 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 Executive Officer, 1995-1996, President and Chief Operating Officer, 1990-1995, Group Vice President and General Manager, Engine and Foundry, 1990, and Vice President and General Manager, Engine and Foundry, 1983-1990. Donald DeFosset, Jr. . 48 Executive Vice President and President, Truck Group in 1996. Mr. DeFosset is also Executive Vice President, Truck Group of Transportation in 1996. Prior to this, Mr. DeFosset served as President, Allied Signal Safety Restraints Systems of Allied Signal Inc., 1993 - 1996, Group Executive and General Manager, Allied Signal Turbocharging and Truck Brake Systems, 1992 - 1993, and Vice President, Planning and Business Development in 1992 and served as Executive Vice President, Operations for Mack Trucks, 1989 - 1992. Robert C. Lannert ... 56 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 .. 49 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. EXECUTIVE OFFICERS (continued) OFFICERS AND POSITIONS WITH NAME AGE NAVISTAR AND OTHER INFORMATION ---- --- ------------------------------ Thomas M. Hough .... 51 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 .... 40 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 .... 45 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 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Navistar International Corporation Common Stock is listed on the New York, Chicago and Pacific Stock Exchanges under the abbreviated stock symbol "NAV." Information regarding high and low market price per share of Common Stock for each quarter of 1996 and 1995 is incorporated by reference from the 1996 Annual Report to Shareowners, page 37, filed as Exhibit 13 to this Form 10-K. There were approximately 62,307 owners of Common Stock at October 31, 1996. 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. PART III ITEMS 6, 7 AND 8 The information required by Items 6-8 is incorporated herein by reference from the 1996 Annual Report to Shareowners, filed as Exhibit 13 to this Form 10-K as follows: 1996 Annual Report Page ------ ITEM 6. SELECTED FINANCIAL DATA ....................... 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ......... 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ... 20 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 1996 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 (Continued) ITEMS 10, 11 AND 12 Information required by Items 10, 11 and 12 of this Form is incorporated herein by reference from Navistar's definitive Proxy Statement for the March 19, 1997 Annual Meeting of Shareowners. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Information required by Part IV (Item 14) of this form is incorporated herein by reference from Navistar International Corporation's 1996 Annual Report to Shareowners, filed as Exhibit 13 to this Form 10-K as follows: 1996 Annual Report Page ------ Financial Statements - -------------------- Independent Auditor's Report ........................... 19 Statement of Income for the years ended October 31, 1996, 1995 and 1994 ................ 20 Statement of Financial Condition as of October 31, 1996 and 1995 ...................... 21 Statement of Cash Flow for the years ended October 31, 1996, 1995 and 1994 .. 22 Notes to Financial Statements .......................... 23 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 1996 Annual Report to Shareowners. Finance and Insurance Subsidiaries: The financial statements of Navistar Financial Corporation for the years ended October 31, 1996, 1995 and 1994 appearing on pages 9 through 40 in the Annual Report on Form 10-K for Navistar Financial Corporation for the fiscal year ended October 31, 1996, Commission File No. 1-4146-1, are incorporated herein by reference and filed as Exhibit 28 to this Form 10-K. 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 Per Common Share ..... E-5 (13) Navistar International Corporation 1996 Annual Report to Shareowners ............ N/A (21) Subsidiaries of the Registrant ................. E-6 (23) Independent Auditors' Consent .................. 17 (24) Power of Attorney .............................. 15 (27) Financial Data Schedule N/A .................... N/A (28) Navistar Financial Corporation Annual Report on Form 10-K for the fiscal year ended October 31, 1996 ............................. 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 1996 Annual Report to Shareowners. Reports on Form 8-K - ------------------- No reports on Form 8-K were filed for the three months ended October 31, 1996. SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- SIGNATURE Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAVISTAR INTERNATIONAL CORPORATION - ---------------------------------- (Registrant) /s/ J. Steven Keate - ----------------------------------- J. Steven Keate January 22, 1997 Vice President and Controller (Principal Accounting Officer) EXHIBIT 24 SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- POWER OF ATTORNEY Each person whose signature appears below does hereby make, constitute and appoint John R. Horne and J. Steven Keate and each of them acting individually, true and lawful attorneys-in-fact and agents with power to act without the other and with full power of substitution, to execute, deliver and file, for and on such person's behalf, and in such person's name and capacity or capacities as stated below, any amendment, exhibit or supplement to the Form 10-K Report making such changes in the report as such attorney-in-fact deems appropriate. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date - ---------------------- --------------------------- ----------------- /s/ John R. Horne - ---------------------- John R. Horne Chairman of the Board, January 22, 1997 President and Chief Executive Officer, and Director (Principal Executive Officer) /s/ Robert C. Lannert - ---------------------- Robert C. Lannert Executive Vice President January 22, 1997 and Chief Financial Officer and Director (Principal Financial Officer) /s/ J. Steven Keate - ---------------------- J. Steven Keate Vice President January 22, 1997 and Controller (Principal Accounting Officer) /s/ William F. Andrews - ----------------------- William F. Andrews Director January 22, 1997 EXHIBIT 24 (CONTINUED) SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- SIGNATURES (Continued) /s/ Andrew F. Brimmer - ----------------------- Andrew F. Brimmer Director January 22, 1997 /s/ Richard F. Celeste - ----------------------- Richard F. Celeste Director January 22, 1997 /s/ John D. Correnti - ----------------------- John D. Correnti Director January 22, 1997 /s/ James C. Cotting - ----------------------- James C. Cotting Director January 22, 1997 /s/ William C. Craig - ----------------------- William C. Craig Director January 22, 1997 /s/ Jerry E. Dempsey - ----------------------- Jerry E. Dempsey Director January 22, 1997 /s/ John F. Fiedler - ----------------------- John F. Fiedler Director January 22, 1997 /s/ Mary Garst - ----------------------- Mary Garst Director January 22, 1997 /s/ Michael N. Hammes - ----------------------- Michael N. Hammes Director January 22, 1997 /s/ Walter J. Laskowski - ------------------------ Walter J. Laskowski Director January 22, 1997 /s/ William F. Patient - ------------------------ William F. Patient Director January 22, 1997 SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INDEPENDENT AUDITORS' REPORT Navistar International Corporation: We have audited the Statement of Financial Condition of Navistar International Corporation and Consolidated Subsidiaries as of October 31, 1996 and 1995, and the related Statements of Income and Cash Flow for each of the three years in the period ended October 31, 1996, and have issued our report thereon, dated December 16, 1996; such consolidated financial statements and report are included in your 1996 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 16, 1996 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 16, 1996, appearing and incorporated by reference in this Annual Report on Form 10-K of Navistar International Corporation for the year ended October 31, 1996. Deloitte & Touche LLP January 22, 1997 Chicago, Illinois
SCHEDULE II NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ============ VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 (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: 1996 ---- Uncollectible notes and accounts Allowance for written off and losses on Notes and accounts reserve adjustment, receivables .... receivable .... $ 28 $ 21 less recoveries ... $ 18 $ 31 ===== ===== ===== ===== 1995 ---- Uncollectible notes and accounts Allowance for written off and losses on Notes and accounts reserve adjustment, receivables .... receivable .... $ 25 $ 4 less recoveries ... $ 1 $ 28 ===== ===== ===== ===== 1994 ---- Uncollectible notes and accounts Allowance for written off and losses on Notes and accounts reserve adjustment, receivables .... receivable .... $ 36 $ 2 less recoveries ... $ 13 $ 25 ===== ===== ===== =====
F-1 EX-3 2 EXHIBIT 3 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- ARTICLES OF INCORPORATION AND BY-LAWS The following documents of Navistar International Corporation are incorporated herein by reference: 3.1 Restated Certificate of Incorporation of Navistar International Corporation effective July 1, 1993, filed as Exhibit 3.2 to Form 10-K dated October 31, 1993, which was filed on January 27, 1994, Commission File No. 1-9618. 3.2 The By-Laws of Navistar International Corporation effective April 14, 1995, filed as Exhibit 3.2 on Annual Report on Form 10-K dated October 31, 1995, which was filed on January 26, 1996, on Commission File No. 1-9618. E-1 EX-4 3 EXHIBIT 4 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES The following instruments of Navistar International Corporation and its principal subsidiary Navistar International Transportation Corp. and its principal subsidiary Navistar Financial Corporation defining the rights of security holders are incorporated herein by reference. 4.1 Indenture, dated as of March 1, 1968, between Navistar International Transportation Corp. and Manufacturers Hanover Trust Company, as Trustee, and succeeded by FIDATA Trust Company of New York, as successor Trustee, for 6 1/4% Sinking Fund Debentures due 1998 for $50,000,000. Filed on Registration No. 2-28150. 4.2 Indenture, dated as of June 15, 1974, between Navistar International Transportation Corp. and Harris Trust and Savings Bank, as Trustee, and succeeded by Commerce Union Bank, now known as Sovran Bank/Central South, as successor Trustee, for 9% Sinking Fund Debentures due 2004 for $150,000,000. Filed on Registration No. 2-51111. 4.3 Indenture, dated as of 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 4 EXHIBIT 10 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES --------------------------------- MATERIAL CONTRACTS The following documents of Navistar International Corporation and its affiliate Navistar Financial Corporation are incorporated herein by reference. 10.1 Navistar International Corporation 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 EXHIBIT 10 (CONTINUED) NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED 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. 10.17 Amendment No. 2 dated as of March 29, 1996, to the Amended and Restated Credit Agreement dated as of November 4, 1994, as amended by Amendment No. 1 dated as of December 15, 1995, among Navistar Financial, certain banks, certain Co-Arranger banks, and Morgan Guaranty Trust Company of New York, as Administrative Agent filed on Form 8-K dated June 5, 1996. Commission File No. 1-4146-1. 10.18 Indenture dated as of November 6, 1996, between Navistar Financial 1995-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996-A Owner Trust. Filed on Registration No. 33-55865. 10.19 Indenture dated as of November 6, 1996, between Navistar Financial 1995-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996-B Owner Trust. Filed on Registration No. 33-55865. E-4 EX-11 5 EXHIBIT 11 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE A. Primary: See the Statement of Income contained in the Navistar International Corporation 1996 Annual Report to Shareowners incorporated herein by reference. B. Full Dilution: Net income 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 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 1996 1995 1994 - --------------------------------- -------- -------- -------- Income of continuing operations ......... $ 65 $ 164 $ 102 Loss of discontinued operations ....... - - (20) -------- -------- -------- Net income ...................... $ 65 $ 164 82 -------- -------- -------- Average common and common equivalent shares (millions): Average common shares outstanding as adjusted per primary computation ....... 73.8 74.3 74.6 Assuming conversion of Series G . .6 .6 .6 -------- -------- -------- Average common and dilutive common equivalent shares as adjusted ................... 74.4 74.9 75.2 ======== ======== ======== Income per common share assuming full dilution (dollars): Continuing operations ........ $ .87 # $ 2.20 # $ 1.36 # Discontinued operations. - - (.27) -------- -------- -------- Net income ....................... $ .87 # $ 2.20 # $ 1.09 # ======== ======== ======== # 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 6 EXHIBIT 13 NAVISTAR INTERNATIONAL CORPORATION 1996 ANNUAL REPORT BUSINESS OVERVIEW TRUCK GROUP Navistar is the market share leader in the United States and Canada in combined school bus, medium- and heavy-duty truck sales, with 27.5% share through fiscal year end. The company has unmatched capabilities to deliver more value to customers"with more than 1,000 International dealers, eight parts distribution centers, 13 used truck centers and a financial services organization. - Heavy Truck (Class 8)"Navistar produces premium conventional tractors for long-haul over-the-highway usage, regular conventional cabover tractors for local and regional delivery, and severe service trucks for special applications in construction, mining and oil field applications. - Medium Truck (Class 5-7)"Navistar is the market share leader in the United States and Canada. Applications include regional delivery, beverage, recycling, refrigerated, utility, construction, towing, municipal and emergency rescue. - School Bus"Navistar is the market share leader in the United States and Canada and offers a range of small capacity and full-size conventional models. In addition, through AmTran, a wholly owned subsidiary, the company produces the Genesis and AmTran nameplates. - Service Parts"To support customers of the truck and bus business, Navistar has the largest truck service parts distribution network in the United States, Canada and Mexico with more than 1,000 dealer locations and eight parts distribution centers, offering more than 350,000 truck, engine and trailer aftermarket parts. Navistar also offers 24-hour availability of service parts and guaranteed national pricing on parts and service under its Fleet Charge system. ENGINE GROUP Navistar is a leader in the production of mid-range diesel engines, ranging from 175 to 300 horsepower. International engines are featured in all of the company's medium trucks, school buses and some heavy trucks. International engines are sold to other original equipment manufacturers (OEMs) in North America and export markets for use in light trucks and vans, and for marine, construction, agricultural and industrial use. FINANCIAL SERVICES Navistar Financial Corporation provides wholesale, retail and lease financing for Navistar's dealers and retail customers, and provides commercial physical damage and liability insurance coverage through its wholly owned subsidiary, Harco National Insurance Company. FINANCIAL SUMMARY (Millions of dollars, except per share data) 1996 1995 - ----------------------------------------------------------------------- FOR THE YEARS ENDED OCTOBER 31 Sales and revenues ................ $5,754 $6,342 Income before income taxes ........ $ 105 $ 262 Net income ........................ $ 65 $ 164 Net income per common share ....... $ .49 $ 1.83 Manufacturing gross margin ........ 12.5% 13.8% Return on equity .................. 7.1% 18.9% Cash and marketable securities .... $ 881 $1,040 Achievements - Unveiled a new five-point truck strategy designed to increase returns to shareowners by meeting 15% return on assets (ROA) targets. - Launched comprehensive capabilities in Mexico, including an assembly operation, a 24-dealer network and a centralized parts distribution operation. - Spun off Columbus Plastics Operation to focus capital on core truck and engine divisions. - Became the first diesel engine manufacturer to meet federal emission standards proposed for the year 2004. - Created a joint venture for production of highly complex severe service Paystar trucks at a focused operation in Garland, Texas. - Partnered with the Canadian Auto Workers in a labor agreement that achieves work rule changes allowing for manufacturing flexibility and cost savings. - Concentrated stripped chassis production at AmTran. - Introduced the Diamond SPEC truck ordering process to improve quality and delivery, while enhancing support services with Diamond PLUS"a new guarantee for truck uptime. - Delivered improvements in productivity and quality throughout the Engine Division. - Ranked number one for the second year in a row by American Truck Dealers survey, where dealers rate major manufacturers on truck product lines, service and support. - Broke ground for a 700,000 square-foot manufacturing facility in Escobedo, Mexico, to be completed in 1998 with annual production capacity of 14,000 vehicles to serve that market and Latin America. - Initiated roll out of a performance-driven culture process to drive financial results. LETTER TO SHAREOWNERS At Navistar, we've set our sights on a singular vision: to be the best truck and engine company in North America. This is a bold dream. To achieve it, we know we must change. Business as usual won't get us there. Being the best means creating real value for our shareowners. It means leading our industry in customer satisfaction. And, it means creating a climate for performance which challenges and motivates our employees. In 1996, we took significant steps to drive fundamental change throughout Navistar. - We strengthened the blend of executive management with the addition of Don DeFosset as executive vice president and president, Truck Group, and Bud Thompson, senior vice president, Employee Relations & Administration. - We also continued to change the make-up of our Board of Directors. In 1996, we added three new directors who lead preeminent companies: Borg-Warner Automotive, Inc., The Coleman Company, Inc. and The Geon Company. - We underwent an exhaustive review of our truck business, forged a five-point strategy to drive improved performance, and began rapidly implementing these strategies. - In our engine division, we reinforced our technological leadership by becoming the first in our industry to demonstrate our capability to meet proposed 2004 emissions standards. - And, we launched a companywide initiative to create a high performance company culture. This has been an effort led from the top down and created from the bottom up. While these actions position us to achieve our vision, our financial performance, which is reflected in our stock price, remains disappointing. This, too, must change. Two events in 1996 are particularly noteworthy in demonstrating our resolve to change and our departure from business as usual. First, for the last several years we have been working hard to develop a next generation of world-class medium trucks. In June, we were at the stage of the program where investment would escalate dramatically. Unfortunately, we were unable to reach agreement with the United Auto Workers on several issues critical to building the trucks profitably. So we terminated the program. This required a $35 million pretax charge to earnings and greatly disappointed our employees. Some called it a bold decision; it had to be made. We could not invest millions of dollars in an effort that would not deliver the kinds of operating returns that result in increased shareowner value. Second, we successfully negotiated a new contract in partnership with the Canadian Auto Workers. Under this agreement, our Chatham, Ontario assembly plant and the company overall is on the right track to becoming more competitive. The flexible work rules, reduced job classifications, and team assembly approach pave the way for large increases in productivity and quality. During the year, we also made progress on other initiatives. For example, our new Diamond SPEC modular truck offering, which greatly reduces product complexity, has been well received in the marketplace. We began to focus our truck manufacturing to reduce complexity in our plants. We are simplifying our assembly operations"from the models produced to the systems and processes involved. During the year, stripped chassis production was moved from our Springfield, Ohio assembly plant to our American Transportation Corporation (AmTran) subsidiary in Conway, Arkansas. Plans are underway to move our severe service trucks from our Chatham facility to a new joint venture in Texas early in 1997. Our objective is to focus these plants to achieve that 15% ROA target for our truck business. We aggressively expanded our presence in Mexico to take advantage of anticipated growth in that and other Latin American markets. Navistar now has 24 dealer locations in Mexico. During the year, we ramped up production at a contract manufacturing assembly operation to fill the near-term needs of these dealers, and we launched plans to build our own facility in Mexico with a capital appropriation of $167 million. This operation will meet our 15% ROA objective. We moved forward with new product programs in our premium conventional truck line which include upgrades that appeal to customers and that allow for platform and process improvements to improve profitability. In our engine division, we continued to develop new technologies and adopt electronics to improve our diesel engines' air and fuel management, to reduce emissions, to improve fuel economy and to deliver more power, torque and product performance features. And our finance subsidiary, Navistar Financial Corporation, exceeded their 15% ROA goal for the third year in a row. They also increased their retail market share to almost 26% in the heavy truck category, and 14% in medium truck. Yet, while Navistar Financial continues to see strong performance, in reality, the continued growth of Navistar Financial depends on our core truck business"in particular Class 8 trucks. These businesses will continue to work closely together to grow and build long- term viability. We also are encouraged by our efforts to create alliances with our supply base and by the long-term agreements we have forged with proven manufacturers of component parts. But at the end of the day, while we have many achievements to report, our financial performance must improve. The challenges we face are significant as pricing continues to create pressure, as we face a downturn in demand, and as competition intensifies. We have, however, a gameplan to address these challenges with the strategies we have in place. Combined with management's resolve and the talent and energy of our employees, we will achieve our dream. We will be the best truck and engine company in North America. John R. Horne Chairman, President and Chief Executive Officer REVIEW OF OPERATIONS We established two criteria as the foundation of our strategies to deliver acceptable returns to shareowners. Operating management must drive a 15% return on the assets (ROA) they manage, which will lead to corporate performance of 17.5% return on equity (ROE). These are tough targets. They demand change and require us to stretch. But we can no longer afford to conduct business as usual. In 1996, we reported net income of $65 million, reflecting lower truck sales and a one-time $35 million pretax charge when we terminated development of our next generation truck (NGT). At the same time, our manufacturing gross margin declined to 12.5% of sales in 1996, compared to 13.8% in 1995 and 12.8% in 1994. At the end of the year, we did not achieve our ROA and ROE objectives. To address our shareowners' requirements, we spent a great deal of time in 1996 developing strategies that will enable the company to achieve these objectives, and now it's time to deliver progress against those metrics. Only those initiatives and programs that demonstrate a potential for adequate returns will be funded in the future. Those that do not will be reworked, or they will not be funded. This year, our plan to build our next generation truck was contingent on reaching an agreement with the United Auto Workers on issues critical to producing the trucks and meeting the 15% ROA target for the truck business. When an agreement could not be reached, we terminated the program instead of investing in a program that would not deliver the targeted returns. While the initiative to produce NGT in Springfield was the preferred option, we're continuing to pursue new product development including working with the UAW to find ways to become more cost competitive. Our plan to establish operations in Mexico, on the other hand, can generate a 15% ROA and will provide opportunities for significant revenue growth. That's why we invested $17 million in developing our capabilities in Mexico during 1996 and received board approval for an additional $167 million to construct a 700,000 square-foot facility in Escobedo, Mexico. We expect to be in production by 1998"well positioned and with enough capacity to meet demand as the Mexican economy recovers, and for export to other Latin American markets. When we negotiated a new contract with the Canadian Auto Workers at our Chatham, Ontario assembly plant, the agreement also was based on achieving the 15% ROA target for the truck business. With work-rule changes that improve productivity and manufacturing flexibility, Chatham's ROA will improve by seven percentage points, bringing the truck business closer to its 15% goal. Recognizing the need to focus our capital investments on our core truck and engine businesses, we elected to sell our Columbus Plastics Operation, which manufactures plastic components for Navistar and other original equipment manufacturers. In line with our ROA and ROE metrics, we conducted an intensive education program in shareowner value for all of our managers throughout the Navistar organization. Our managers now are equipped with practical formulas for use in evaluating proposed programs and projects to ensure they meet our financial targets. Navistar now is better positioned"with metrics and strategies firmly established"to achieve strong financial performance. Now, it's time to deliver. Navistar unveiled a five-point truck strategy in 1996 that addresses an increasingly tough competitive environment in North America and our need to alter our cost structure to deliver strong financial performance across the business cycle. The strategy comprises a series of initiatives to improve quality, productivity and product development, and to drive profitable growth. These initiatives are supported by our financial services operations and a superior distribution system"a 1,000-location strong dealer franchise organization in the United States, Canada and Mexico; a comprehensive service parts network; and an expanding used truck organization. While the performance of the truck group was not acceptable, there were a number of achievements that will drive improved financial performance. One initiative within the truck strategy"reducing product complexity"resulted in a combination of manufacturing efficiencies and customer benefits. In 1996, we introduced upgrades of our International and Eagle 9200 and 9400 model premium conventional trucks featuring common chassis and standardized componentry. These enhancements reduce complexity in manufacturing to create efficiencies and improve quality. For customers, significant improvements in design, styling and features were implemented to enhance driver comfort and performance. We also introduced our Diamond SPEC truck ordering process and our Diamond PLUS support package at the American Trucking Association annual meeting. We took steps to reduce complexity in our manufacturing operations, within the framework of our union contracts, to focus our assembly plants on efficiently producing trucks and meeting marketplace demand. We began the transfer of stripped chassis from our Springfield, Ohio plant to our AmTran facility in Conway, Arkansas. Production of the International 8200 heavy truck will cease in 1997, furthering Springfield's transition to a medium-duty only facility. We also created a joint venture to focus production of the highly complex Paystar severe service trucks. This helps our Chatham, Ontario plant focus on building the International and Eagle 9000 models. In new product development, we introduced the International 9100 conventional truck"built on the same platform as other 9000 series models"to deliver a combination of benefits to local and regional transportation companies. These include an improved driver environment, the effective Diamond Spec and Diamond Plus systems, and a higher residual value than comparable vehicles. Longer term, our new family of premium conventional trucks, targeted for production in 1998, will enable us to provide improved performance and enhancements. We also were active in bringing new bus models to market, including the International 3400 shuttle and the rear engine transit bus. Over the past year, we moved aggressively to expand our presence in Mexico, which represents an opportunity for growth as we meet customers' needs there and in other Latin American markets. Our investment there will allow us to meet future demand as the Mexican economy recovers, and, within a few years, to reach out to new customers in Latin America. Finally, we continue to address issues to improve productivity. Most significant in 1996 was the agreement reached with the Canadian Auto Workers. Under the terms of the current three-year contract, significant productivity gains are possible through changes in job classifications, work rules and training. In all of our initiatives, we continue to focus on offering more to our customers through our superior distribution system. The performance of our school buses, and medium- and heavy-duty trucks drove us to the top of the industry in dealer satisfaction, as Navistar was rated tops in the American Truck Dealers "Dealer Attitude Survey" for two years running. Through our new Customer Satisfaction Process, introduced in 1996, our entire dealer network is focused on delivering measurable, continuous improvements. In our parts operation, we continue to be the truck industry benchmark for total parts support. We target those customers who can benefit from one-stop shopping for all their needs, bumper-to-bumper. We also introduced Fleet Charge Gold to offer customers opportunities to improve the ways they manage costs. In another effort, we've invested in business systems to improve the processing of customer orders, speed delivery of parts and link electronically with both customers and suppliers. Through innovative financing offered by Navistar Financial Corporation, we're arming our dealers with attractive and flexible financing choices for our customers. As we drive performance through our initiatives, we will not lose sight of the needs of our customers and dealers. As a worldwide leader in mid-range diesel engines, we have a formula for performance, combining innovative technologies with our desire to be the low-cost producer. Evidence of our leadership was illustrated by our achievements in shipping mid-range diesel engines to other original equipment manufacturers. In 1996, we shipped a record 163,200 units, which is a 6% increase from the previous year and a 25% improvement over 1994. In addition, we exceeded the 15% ROA target in 1996, but our challenge is to deliver these returns throughout the business cycle. To strengthen our leadership position and deliver a 15% ROA, we must stay in high gear, making continued gains in productivity, reducing costs, managing our inventories and assets, and delivering quality improvements across our entire product line. We've made significant strides in all of these areas, including a reduction in total man-hours per engine of more than 30% over the last two years. Over the past five years, the market response to our 7.3DI eight- cylinder engine has been extremely favorable. Since 1991, Ford, our largest OEM customer, has doubled orders for these engines for use in its full-size commercial pickup trucks. Our success with Ford, combined with sales to other OEM customers and off-highway applications, has resulted in solid growth. Our focus on growth in 1997 is on serving our major OEMs, continuing development of our I-6 business and meeting accelerating demand for our V- 8 engines. To ensure that we can continue to provide customers the best technology in the industry, we opened our Competitive Intelligence Center to benchmark our engines against the competition. By conducting in-depth analysis, we can continue to reduce costs and increase the value of our engines. For example, we identified and implemented 15 cost-reduction opportunities for our six-cylinder DT 466E engines to be implemented in the 1997 model year. On the product development front, we continue to enhance existing technologies to add tangible, bottom-line value. This year, we applied our HEUI (hydraulically-actuated electronically-controlled unit injector) technology to lead the industry in meeting future emission standards. Using our HEUI system, we became the first diesel engine manufacturer to meet stringent government-proposed emission standards for the year 2004. We reduced smog-producing nitrogen oxide (NOx) levels without increasing particulate emissions or sacrificing fuel economy. In developing winning technologies, we will continue to meet our customers' ongoing, changing needs. This long-term outlook, combined with an ability to deliver a 15% ROA in any business environment, will fuel profitable growth. We know that strategies alone won't do the job. To create an environment in which aggressive operating strategies can flourish, employees need to work effectively both individually and in teams. And that expectation of strong performance must be supported by a work climate that encourages and rewards behavior that benefits employees, customers and shareowners. After gathering ideas and opinions from employees at all levels throughout the company, we have a clear picture of what is needed to build the cultural foundation Navistar requires. They've told us, we've listened, and we've set a course for change. Change begins with the senior managers of the company. The old command and control management style won't work any more. Our people want to be involved in finding solutions for the challenges they face daily, and they want to work in an environment characterized by trust and mutual respect. To prepare themselves to lead the workforce toward this new environment, senior managers themselves are learning to be more effective team members"learning to build stronger, more effective work relationships. This training for managers is a small part of the development that's needed to help everyone at Navistar achieve top performance. We've made continuing education a requirement, not just an option. Our focus now extends beyond personal development to helping employees see the direct link between individual and company performance, and ultimately shareowner value. Management employees must now take at least 40 hours of core business and skills education per year including the technical training that's required to perform many jobs. We also partnered with the United Auto Workers to introduce a program, called "Joint Focus," to educate Navistar employees at all levels and locations about business realities. An important part of this course is helping employees see what drives our stock price, and how they as individuals play a role in the company's viability. As approximately one-third of the company's common stock is held by our employees through the Supplemental Trust, this learning can help them understand how tightly their personal financial well-being is intertwined with company performance. Helping to pilot the change to a performance-driven culture are our top 450 leaders. We established a Leadership Council with regular meetings and communications as a means to involve all management in improving company performance. After our first leadership conference, 98% of the participants said they had gained a deeper understanding of the company's strategies, vision and direction, and an appreciation for their role in helping Navistar achieve them. These individuals are charged with forging a common understanding of Navistar's vision and strategies throughout the organization and for delivering on performance commitments. Moreover, management's progress on corporate strategies will be rewarded through their annual incentive compensation. Navistar people have immense pride in our company and our products. Our challenge is to create a work environment that focuses this pride on delivering results. International expansion adds to the growth opportunities for both our truck and engine operations. During the past year, we moved aggressively to strengthen our presence in Mexico, a market that affords significant opportunities for growth and meets our 15% ROA requirement for investment. In 1996, we quickly launched manufacturing capabilities, a dealer network and a service parts business in Mexico with an investment of $17 million. A contract manufacturing agreement satisfies our need for short- term production capability for the International 4700 and 4900 medium trucks and International 9200 tractors. We produced 300 trucks in 1996, and achieved a 6% market share in Mexico. We expect to produce 1,000 trucks for Mexico in 1997. To serve long-range market demand, Navistar's Board of Directors approved a $167 million appropriation for construction of our own manufacturing facility in Escobedo, Nuevo Leon. The 700,000 square-foot plant will start production in 1998, and will have the capacity to produce 65 units per day on one shift. Volume will be increased as demand rises with the growing strength of the Mexican economy. Increased distribution needs will be served by an additional 30 dealer outlets scheduled to open by 1999. Our Mexico operations also will serve as a launch point for other Latin American countries, as Mexico enjoys favorable and cost effective trade agreements with many of these countries. Beyond this strategic initiative, we continue to grow our businesses in South Africa and the Middle East. As the heavy-duty truck market leader in South Africa, we forecast steady volume and sales growth, coupled with expansion opportunities into other nations in the South Africa Customs Union. In the Middle East, we project strong sales growth as rising oil prices stimulate economic growth and increased regional trade and transportation. As we expand into new markets, our continuing challenge will be to focus on profitable growth and invest in opportunities that will achieve a 15% ROA. FINANCIAL INFORMATION Financial Summary ........................................... 2 Management's Discussion and Analysis of Results of Operations and Financial Condition ..................... 11 Statement of Financial Reporting Responsibility ............. 18 Independent Auditors' Report ................................ 19 Financial Statements Statement of Income ....................................... 20 Statement of Financial Condition .......................... 21 Statement of Cash Flow .................................... 22 Notes to Financial Statements 1 Summary of accounting policies ......................... 23 2 Postretirement benefits ................................ 26 3 Income taxes ........................................... 29 4 Discontinued operations ................................ 31 5 Marketable securities .................................. 32 6 Receivables ............................................ 33 7 Inventories ............................................ 34 8 Property and equipment ................................. 34 9 Debt ................................................... 35 10 Other liabilities ...................................... 37 11 Financial instruments .................................. 38 12 Commitments, contingencies, restricted assets, concentrations and leases ............................ 40 13 Legal proceedings ...................................... 41 14 Environmental matters .................................. 41 15 Industry segment data .................................. 42 16 Preferred and preference stocks ........................ 43 17 Common shareowners' equity ............................. 44 18 Stock compensation plans ............................... 45 19 Selected quarterly financial data (unaudited) .......... 46 20 Supplemental financial information (unaudited) ......... 46 Five-Year Summary of Selected Financial and Statistical Data 48 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Certain statements under this caption constitute forward-looking statements" under the Reform Act, which involve risks and uncertainties. Navistar International Corporation's actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under the caption "Business Environment." Navistar International Corporation is a holding company and its principal operating subsidiary is Navistar International Transportation Corp. (Transportation). In this discussion and analysis, "company" refers to Navistar International Corporation and its consolidated subsidiaries. The company's manufacturing operations are engaged in the manufacture and marketing of Class 5 through 8 trucks, including school buses, mid-range diesel engines and service parts in the United States and Canada. These products are also sold to distributors in selected export markets. The financial services operations of the company provide wholesale, retail and lease financing, and commercial physical damage and liability insurance coverage to the company's dealers and retail customers and to the general public through an independent insurance agency system. The discussion and analysis reviews the operating and financial results, and liquidity and capital resources of manufacturing operations and financial services operations. Manufacturing operations include the financial results of the financial services operations included on a one- line basis under the equity method of accounting. Financial services operations include Navistar Financial Corporation (Navistar Financial), its domestic insurance subsidiary as well as the company's foreign finance and insurance companies. See Note 1 to the Financial Statements. RESULTS OF OPERATIONS The company reported net income of $65 million for 1996, or $0.49 per common share, reflecting lower sales and revenues and a one-time $35 million pretax charge for termination of its next generation truck program in the fourth quarter of 1996. Net income was $164 million, or $1.83 per common share, in 1995 and $82 million, or $0.72 per common share, in 1994. Net income in 1994 included a $20 million after-tax charge to discontinued operations related to environmental liabilities. The company's manufacturing operations reported income before income taxes of $22 million in 1996 compared with pretax income of $200 million in 1995 and $98 million in 1994. The 1996 operating results reflect a decline in demand for trucks as well as the charge for termination of the company's next generation truck program. The increase between 1995 and 1994 reflects higher sales of trucks and diesel engines as well as the effects of improved pricing and various cost improvement initiatives. The company's financial services operations, which include Navistar Financial, its domestic insurance subsidiary and the company's foreign finance and insurance subsidiaries, had income before income taxes of $83 million, $62 million and $60 million in 1996, 1995 and 1994, respectively. Navistar Financial's pretax income in 1996 was $81 million, a 37% increase from $59 million in 1995. The change is a result of higher income on sales of retail notes and increased volume of wholesale financing during the first nine months of 1996. The improved gains on sales resulted from higher margins on retail notes reflecting declining market interest rates prior to the date of sale. Navistar Financial's pretax income increased $4 million in 1995 from the $55 million reported in 1994. The change reflects 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 offset by a reduction in margins on retail financing. Earnings from the foreign finance and insurance subsidiaries were $2 million, $3 million and $5 million in 1996, 1995 and 1994, respectively. Sales and Revenues. Industry retail sales of Class 5 through 8 trucks totaled 341,200 units in 1996, a 10% decline from the 380,600 units sold in 1995 but comparable to the 339,600 units sold in 1994. Class 8 heavy truck sales totaled 195,400 units, a decline of 15% from the 228,800 units sold in 1995 and 5% from the 205,400 units sold in 1994. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, totaled 145,800 units in 1996, a 4% decrease from 1995 when 151,800 units were sold, but 9% higher than the 134,200 units sold in 1994. Industry sales of school buses, which accounted for 22% of the medium truck market, increased 7% over 1995 to 32,500 units. Sales and revenues of $5,754 million in 1996 were 9% lower than the $6,342 million reported in 1995 but 8% higher than the $5,337 million reported in 1994. Sales of trucks, mid-range diesel engines and service parts, for 1996 totaled $5,508 million, 10% below the $6,125 million reported for 1995 and 7% over the $5,153 million reported in 1994. The company maintained its position as sales leader in the combined United States and Canadian Class 5 through 8 truck market in 1996 with a 27.5% market share, an increase from both the 26.7% share in 1995 and the 27.0% share in 1994. (Sources: American Automobile Manufacturer's Association, the United States Motor Vehicle Manufacturer's Association and R. L. Polk & Company.) In 1996, the company's share of the Class 8 heavy truck market declined to 17.1% from 18.4% in 1995 and 19.6% in 1994, reflecting intense competition in this market. Shipments of mid-range diesel engines by the company to other original equipment manufacturers during 1996 were a record 163,200 units, a 6% increase from 1995 and a 25% improvement over 1994. Higher shipments to a domestic automotive manufacturer to meet consumer demand for the light trucks and vans which use this engine was the primary reason for the increase. Service parts sales of $760 million in 1996 increased from the $730 million reported in 1995 and were 6% higher than the $714 million reported in 1994 as a result of dealer and national account volume growth. Finance and insurance revenue for 1996 was $197 million, 18% higher than the $167 million reported in 1995 primarily as a result of higher income on sales of retail notes. Revenues from financial services operations increased 10% between 1995 and 1994 primarily as a result of higher wholesale and retail financing volume. Other income was $49 million in 1996 unchanged from 1995. Other income increased 56% between 1995 and 1994 as a result of increased interest income from higher cash, cash equivalents and marketable securities balances. Costs and Expenses. Manufacturing gross margin was 12.5% of sales in 1996, compared with 13.8% in 1995 and 12.8% in 1994. The decrease in gross margin is the result of lower sales volumes, more competitive pricing and the costs of terminating the next generation truck program. Factors which contributed to the change in gross margin between 1995 and 1994 included higher sales volumes and improved pricing offset by overtime costs and a provision for employee profit sharing. Engineering and research expense increased to $129 million in 1996 from $113 million in 1995 and $97 million in 1994 reflecting investment in new truck and engine products as well as improvements to existing products. Marketing and administrative expense was $319 million in 1996 compared with $307 million in 1995 and $265 million in 1994. The $12 million increase in the expense between 1995 and 1996 reflects investment in the implementation of the company's strategy to reduce costs and complexity in its manufacturing processes. The change between 1994 and 1995 is the result of higher sales and distribution costs, and an increase in the provision for payment to employees as provided by the company's performance incentive programs. Interest expense decreased slightly to $83 million in 1996 from $87 million in 1995 but was $8 million higher than the $75 million reported in 1994. The increase in this expense in 1996 and 1995 over 1994 was the result of higher debt balances required by the financial services operations to finance the increased wholesale note and account balances as well as higher interest rates in 1995. Finance service charges on sold receivables were $24 million in 1996, 17% lower than in 1995 but 50% higher than 1994 reflecting the pattern of truck unit sales over this period. LIQUIDITY AND CAPITAL RESOURCES Cash flow is generated from the manufacture and sale of trucks, mid- range diesel engines and service parts as well as product financing and insurance coverage provided to Transportation's dealers and retail customers by the financial services operations. Historically, funds to finance Transportation's products are obtained from a combination of commercial paper, short- and long-term bank borrowings, medium- and long-term debt issues, sales of finance receivables and equity capital. 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 through internal operations. Total cash, cash equivalents and marketable securities of the company amounted to $881 million at October 31, 1996, $1,040 million at October 31, 1995 and $861 million at October 31, 1994. Cash provided by operations during 1996 totaled $118 million, primarily from net income of $65 million, $37 million of noncash deferred income taxes and $92 million of other noncash items, principally depreciation. These amounts were partially offset by a net change in operating assets and liabilities of $76 million. Income tax expense for 1996 was $40 million, of which $3 million were cash payments to federal and certain state and local governments, while the remaining $37 million of federal and other taxes reduced the deferred tax asset. The net change in operating assets and liabilities of $76 million includes a $186 million decrease in receivables offset by a reduction in accounts payable of $110 million, higher inventories and a $106 million decrease in other liabilities. The change in receivables and inventories reflects lower demand for the company's products while the decline in accounts payable is a result of lower production. The change in other liabilities is the result of the payment to employees as required by the company's profit sharing agreements. Investment programs included a net decrease in marketable securities, as sales of securities exceeded purchases by $167 million. During 1996, the purchase of $1,108 million of retail notes and lease receivables was funded with $982 million in proceeds from the sale of receivables and principal collections of $125 million. Other investment activities used $73 million for an increase in property and equipment leased to others and $117 million to fund capital expenditures for truck product improvements, to increase mid-range diesel engine capacity and for programs to improve cost performance. Financing activities used cash to pay $29 million in dividends on the Series G Preferred shares and $136 million for principal payments on long- term debt offset by an $81 million increase in notes and debt outstanding under the bank revolving credit facility and asset-backed and other commercial paper programs. During 1996, Navistar Financial supplied 94% of the wholesale financing of new trucks sold to Transportation's dealers compared with 93% in 1995 and 1994. Navistar Financial's share of the retail financing of new trucks sold in the United States increased to 16% in 1996 compared with 14% in 1995 and 15% in 1994. The sale of finance receivables is a significant source of funding for the financial services operations. During 1996 and 1995, Navistar Financial sold $985 million and $740 million respectively, of retail notes through Navistar Finance Retail Receivables Corporation (NFRRC), a wholly owned subsidiary. In both years, the net proceeds were used for general working capital purposes. NFRRC has filed registration statements with the Securities and Exchange Commission which provide for the issuance of up to $5,000 million of asset-backed securities. At October 31, 1996, the remaining shelf registration available to NFRRC for issuance of asset-backed securities was $2,445 million. See Note 9 to the Financial Statements. Navistar Financial has a $925 million bank revolving credit facility, and a $400 million asset-backed commercial paper program supported by a bank liquidity facility which mature in March 2001. Navistar Financial also utilizes a $500 million revolving wholesale note sales trust that provides for the continuous sale of eligible wholesale notes on a daily basis. The sales trusts are comprised of three $100 million tranches of investor certificates maturing serially from 1997 to 1999 and a $200 million tranche maturing in 2004. The company finances capital expenditures principally through internally generated cash. Capital leasing is used to fund selected projects based on economic and operating factors. The company had outstanding capital commitments of $38 million at October 31, 1996 which consist of truck and engine development and ongoing facility maintenance programs. In November 1996, the company announced plans to spend $167 million, over the next 2 years, to construct a new truck assembly facility in Mexico. At October 31, 1996, the Canadian operating subsidiary was subject to maximum recourse of $164 million on retail contracts and $9 million on retail leases financed by a third party. In addition, the company is contingently liable for $45 million for various guarantees and buyback programs. Based on historic trends; however, the company's exposure is not considered material. The Canadian operating subsidiary and certain financial services subsidiaries had $260 million of assets which were restricted as to distribution to Transportation in the form of dividends, or loans and advances at October 31, 1996. The company and Transportation are obligated under certain agreements to maintain Navistar Financial'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, 1996. It is the opinion of management that, in the absence of significant unanticipated cash demands, current and forecasted cash flow will provide a basis of financing operating requirements, capital expenditures and anticipated payments of preferred dividends. Management also believes that collections on the outstanding receivables portfolios as well as funds available from various funding sources will permit the financial services operations to meet the financing requirements of the company's dealers and customers. ENVIRONMENTAL MATTERS As disclosed in Notes 4 and 14 to the Financial Statements, Transportation recorded a $20 million charge in 1994, 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. (Solar). 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 these 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, which in most cases consists of data related to quantities and characteristics of material generated at or shipped to each site as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable estimate is calculated of the company's share, if any, of the probable costs and is provided for in the financial statements. These obligations generally are recognized no later than completion of the remedial feasibility study and are not discounted to their present value. The company believes that, based on these calculations, its share of the potential 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. DERIVATIVE FINANCIAL INSTRUMENTS As disclosed in Notes 1 and 11 to the Financial Statements, the company uses derivative financial instruments to transfer or reduce the risks of foreign exchange and interest rate volatility, and potentially increase the return on invested funds. Company policy does not allow the use of derivatives for speculative purposes. The company's manufacturing operations, as conditions warrant, hedge foreign exchange exposure on the purchase of parts and materials from foreign countries and its exposure from sales of manufactured products in other countries. Contracted purchases of commodities for manufacturing may be hedged up to one year. The manufacturing operations had no foreign exchange exposure at October 31, 1996. 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. Between August and October 1996, Navistar Financial entered into $400 million of forward interest rate lock agreements which were closed in conjunction with the pricing of the sale of $487 million of retail receivables in November 1996. The unrecognized loss on the agreements at October 31, 1996, which was not material, was included in the gain recognized on the sale of receivables. Both manufacturing operations and Navistar Financial purchase collateralized mortgage obligations that have relatively stable cash flow patterns in relation to interest rate changes. PENDING ACCOUNTING STANDARDS The company has elected to adopt Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in 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. Accordingly, adoption of this standard will have no effect on the company's net income or financial position. In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which the company must adopt for all applicable transactions occurring after December 31, 1996. The standard is not expected to have a material effect on the company's net income or financial position. INCOME TAXES The Statement of Financial Condition at October 31, 1996 and 1995 includes a deferred tax asset of $1,030 million and $1,087 million, respectively, net of a valuation allowance of $309 million and $307 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 $1,987 million and temporary differences, which represent the cumulative expense of $1,507 million recorded in the Statement of Income that has not been deducted on the company's tax returns. The valuation allowance at October 31, 1996, assumes that it is more likely than not that approximately $815 million of cumulative tax losses will not be realized before their expiration date. Realization of the net deferred tax asset is dependent on the generation of approximately $2,700 million of future taxable income, of which an average of approximately $90 million would need to be generated annually for the 13- year period 1997 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 3 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 16-consecutive- year leadership in the combined market share of Class 5 through 8 trucks and recognition as a worldwide leading producer of mid-range diesel engines. The projected availability of taxable income to realize the tax benefit from net operating loss carryforwards and the reversal of temporary differences before expiration of these benefits are also considered. Management believes that, with the combination of available tax planning strategies and the maintenance of significant market share, earnings are achievable in order to realize the net deferred tax asset of $1,030 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 1996 1995 1994 - ----------------------------------------------------------------------- Income of continuing operations before income taxes ............. $ 105 $ 262 $ 158 Exclusion of (income) loss of foreign subsidiaries ......... 3 (11) (13) Loss of discontinued operations before income taxes ............. - - (33) State income taxes .......... (2) (2) (2) Temporary differences ....... (69) 69 24 Other ............................. - (4) 2 ------- ------- ------- Taxable income .................... $ 37 $ 314 $ 136 ------- ------- ------- 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. Although the general economy remained stable in 1996, demand for new trucks declined. This change reflected over capacity in the trucking industry as well as uncertainty over the future growth of the economy, causing freight carriers to scale back plans for modernizing and expanding their truck fleets. As a result, the Class 5 through 8 truck market experienced a significant decline in the rate of new truck orders. The decline in the number of new orders has reduced the company's order backlog to 20,900 units at October 31, 1996 from 47,100 units at October 31, 1995. Accordingly, retail deliveries in 1997 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 1997 United States and Canadian Class 8 heavy truck demand to be 170,000 units, a 13% decrease from 1996. Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast at 112,000 units, unchanged from 1996. Demand for school buses is expected to decline slightly in 1997 to 31,500 units. Mid-range diesel engine shipments by the company to original equipment manufacturers in 1997 are expected to be 176,500 units, 8% higher than in 1996. The company's service parts sales are projected to grow 6% to $809 million. STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY Management of Navistar International Corporation and its subsidiaries is responsible for the preparation and for the integrity and objectivity of the accompanying financial statements and other financial information in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based on management's estimates and judgments. The accompanying financial statements have been audited by Deloitte & Touche LLP, independent auditors, whose appointment is ratified by shareowner vote at the Annual Meeting. Management has made available to Deloitte & Touche LLP all the company's financial records and related data, as well as the minutes of the Board of Directors' meetings. Management believes that all representations made to Deloitte & Touche LLP during its audit were valid and appropriate. Management is responsible for establishing and maintaining a system of internal controls throughout its operations that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use and the execution and recording of transactions in accordance with management's authorization. The system of internal controls which provides for appropriate division of responsibility is supported by written policies and procedures that are updated by management, as necessary. The system is tested and evaluated regularly by the company's internal auditors as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their audit in accordance with generally accepted auditing standards and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the company's system of internal controls and takes the necessary actions that are cost-effective in the circumstances to respond appropriately to the recommendations presented. Management believes that the company's system of internal controls accomplishes the objectives set forth in the first sentence of this paragraph. The Audit Committee of the Board of Directors, composed of six non- employee Directors, meets periodically with the independent auditors, management, general counsel and internal auditors to satisfy itself that such persons are properly discharging their responsibilities regarding financial reporting and auditing. In carrying out these responsibilities, the Committee has full access to the independent auditors, internal auditors, general counsel and financial management in scheduled joint sessions or private meetings as in the Committee's judgment seem appropriate. Similarly, the company's independent auditors, internal auditors, general counsel and financial management have full access to the Committee and to the Board of Directors and each is responsible for bringing before the Committee or its Chair, in a timely manner, any matter deemed appropriate to the discharge of the Committee's responsibility. John R. Horne Chairman, President and Chief Executive Officer Robert C. Lannert Executive Vice President and Chief Financial Officer 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, 1996 and 1995, and the related Statements of Income and Cash Flow for each of the three years in the period ended October 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flow for each of the three years in the period ended October 31, 1996, in conformity with generally accepted accounting principles. Deloitte & Touche LLP December 16, 1996 Chicago, Illinois STATEMENT OF INCOME
Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- For the Years Ended October 31 (Millions of dollars, except per share data) 1996 1995 1994 - -------------------------------------------------------------------------------------- Sales and revenues Sales of manufactured products ............... $ 5,508 $ 6,125 $ 5,153 Finance and insurance revenue ................ 197 167 152 Other income ................................. 49 50 32 -------- -------- -------- Total sales and revenues ................... 5,754 6,342 5,337 -------- -------- -------- Costs and expenses Cost of products and services sold ........... 4,827 5,288 4,496 Postretirement benefits ...................... 220 206 176 Engineering and research expense ............. 129 113 97 Marketing and administrative expense ......... 319 307 265 Interest expense ............................. 83 87 75 Financing charges on sold receivables ........ 24 29 16 Insurance claims and underwriting expense .... 47 50 54 -------- -------- -------- Total costs and expenses ................... 5,649 6,080 5,179 -------- -------- -------- Income before income taxes ............... 105 262 158 Income tax expense ....................... 40 98 56 -------- -------- -------- Income of continuing operations .............. 65 164 102 Loss of discontinued operations .............. - - 20 -------- -------- -------- Net income ................................... 65 164 82 Less dividends on Series G preferred stock ... 29 29 29 -------- -------- -------- Net income applicable to common stock ........ $ 36 $ 135 $ 53 ======== ======== ======== - -------------------------------------------------------------------------------------- Income (loss) per common share Continuing operations ...................... $ .49 $ 1.83 $ .99 Discontinued operations .................... - - (.27) -------- -------- -------- Net income per common share .................. $ .49 $ 1.83 $ .72 ======== ======== ======== Average number of common and dilutive common equivalent shares outstanding (millions) ... 73.8 74.3 74.6 - -------------------------------------------------------------------------------------- See Notes to Financial Statements.
STATEMENT OF FINANCIAL CONDITION
Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- As of October 31 (Millions of dollars) 1996 1995 - ----------------------------------------------------------------------------------- ASSETS Cash and cash equivalents .......................... $ 487 $ 485 Marketable securities .............................. 394 555 -------- ------- 881 1,040 Receivables, net ................................... 1,655 1,854 Inventories ........................................ 463 416 Property and equipment, net ........................ 770 683 Investments and other assets ....................... 213 202 Intangible pension assets .......................... 314 284 Deferred tax asset, net ............................ 1,030 1,087 -------- -------- Total assets ....................................... $ 5,326 $ 5,566 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Liabilities Accounts payable, principally trade ................ $ 820 $ 933 Debt: Manufacturing operations ......................... 115 127 Financial services operations .................... 1,305 1,330 Postretirement benefits liability .................. 1,351 1,341 Other liabilities .................................. 819 965 -------- -------- Total liabilities .............................. 4,410 4,696 -------- -------- Commitments and contingencies Shareowners' equity Series G convertible preferred stock (liquidation preference $240 million) ............ 240 240 Series D convertible junior preference stock (liquidation preference $4 million) .............. 4 4 Common stock (51.0 million and 50.9 million shares issued)........................................... 1,642 1,641 Class B Common stock (24.3 million shares issued) .. 491 491 Retained earnings (deficit) - balance accumulated after the deficit reclassification as of October 31, 1987 ................................. (1,431) (1,478) Common stock held in treasury, at cost (1.6 million and 1.4 million shares held) ......... (30) (28) -------- -------- Total shareowners' equity ...................... 916 870 -------- -------- Total liabilities and shareowners' equity .......... $ 5,326 $ 5,566 ======== ======== - ----------------------------------------------------------------------------------- See Notes to Financial Statements.
STATEMENT OF CASH FLOW
Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- For the Years Ended October 31 (Millions of dollars) 1996 1995 1994 - -------------------------------------------------------------------------------------- Cash flow from operations Net income ...................................... $ 65 $ 164 $ 82 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization ............... 101 81 72 Deferred income taxes ....................... 37 89 51 Additional pension funding .................. - (72) - Provision for loss of discontinued operations - - 20 Other, net .................................. (9) (4) (26) Change in operating assets and liabilities: Receivables ................................. 186 (91) (173) Inventories ................................. (47) 35 (19) Prepaid and other current assets ............ 1 10 (4) Accounts payable ............................ (110) 63 99 Other liabilities ........................... (106) 142 52 -------- -------- -------- Cash provided by operations ................... 118 417 154 -------- -------- -------- Cash flow from investment programs Purchase of retail notes and lease receivables .. (1,108) (1,099) (916) Collections/sales of retail notes and lease receivables ......................... 1,107 850 1,176 Purchase of marketable securities ............... (585) (722) (710) Sales or maturities of marketable securities .... 752 480 621 Proceeds from property sold under sale/leaseback. 7 - 87 Capital expenditures ............................ (117) (139) (87) Property and equipment leased to others ......... (73) (19) (5) Other investment programs, net .................. (15) 8 36 -------- -------- -------- Cash provided by (used in) investment programs. (32) (641) 202 -------- -------- -------- Cash flow from financing activities Principal payments on debt ...................... (136) (121) (222) 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 ..................... 81 312 (28) Dividends paid .................................. (29) (29) (58) Repurchase of Class B Common stock .............. - (10) (12) -------- -------- -------- Cash provided by (used in) financing activities (84) 152 (220) -------- -------- -------- Cash and cash equivalents Increase (decrease) during the year ........... 2 (72) 136 At beginning of the year ...................... 485 557 421 -------- -------- -------- Cash and cash equivalents at end of the year .... $ 487 $ 485 $ 557 ======== ======== ======== - -------------------------------------------------------------------------------------- See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 1996 1. SUMMARY OF ACCOUNTING POLICIES Basis of Consolidation Navistar International Corporation is a holding company, whose principal operating subsidiary is Navistar International Transportation Corp. (Transportation). As used hereafter, "company" refers to Navistar International Corporation and its consolidated subsidiaries. The consolidated financial statements include the results of Transportation's manufacturing operations and its wholly owned financial services subsidiaries. The effects of transactions between the manufacturing and financial services operations have been eliminated to arrive at the consolidated totals. Transportation operates in two principal industry segments: manufacturing and financial services. Manufacturing operations are responsible for the manufacture and marketing of medium and heavy trucks, including school buses, mid-range diesel engines and service parts primarily in the United States and Canada as well as in selected export markets. Based on assets and revenues, manufacturing operations represent the majority of Transportation's business activities. The financial services operations consist of Navistar Financial Corporation (Navistar Financial), its domestic insurance subsidiary and the company's foreign finance and insurance subsidiaries. Navistar Financial's primary business is the retail and wholesale financing of products sold by the manufacturing operations and its dealers within the United States and the providing of commercial physical damage and liability insurance to the manufacturing operations' dealers and retail customers and to the general public through an independent insurance agency system. The distinction between current and long-term assets and liabilities in the Statement of Financial Condition is not meaningful when finance, insurance and manufacturing operations are combined; therefore, the company has adopted an unclassified presentation. Certain 1995 and 1994 amounts have been reclassified to conform with the presentation used in the 1996 financial statements. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Manufacturing operations recognize shipments of new trucks and service parts to independent dealers and retail customers as sales. Price allowances, expected in the normal course of business, and the cost of special incentive programs are recorded at the time of sale. Engine sales are recognized at the time of shipment to original equipment manufacturers. An allowance for losses on receivables is maintained at an amount that management considers appropriate in relation to the outstanding receivables portfolio and it is charged when receivables are determined to be uncollectible. NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) Revenue Recognition (continued) Financial services operations recognize finance charges on retail notes and finance leases as income over the term of the receivables on the accrual basis utilizing the interest method. Interest due from interest bearing notes and accounts is recognized on the accrual basis. Operating lease revenues are recognized on a straight-line basis over the life of the lease. Selected receivables are sold and securitized to public and private investors with limited recourse. Gains or losses on sales of receivables are credited or charged to revenue in the period in which the sale occurs. Financial services operations continue to service the sold receivables and receive a fee for such services from the investor. An allowance for losses is maintained at a level deemed appropriate based on loss experience and other factors and it is charged when receivables are determined to be uncollectible. Insurance premiums are earned on a prorata basis over the terms of the policies. Underwriting losses and outstanding loss reserve balances are based on individual case estimates of the ultimate cost of settlement, including actual losses, and determinations of amounts required for losses incurred but not reported. Cash and Cash Equivalents All highly liquid financial instruments with maturities of three months or less from date of purchase, consisting primarily of bankers' acceptances, commercial paper, United States government securities and floating rate notes, are classified as cash equivalents in the Statement of Financial Condition and Statement of Cash Flow. Marketable Securities Marketable securities are classified as available-for-sale securities and are reported at fair value. 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 periodically to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long- lived assets and the projected, undiscounted cash flows of the operations in which the long-lived assets are deployed. NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) Engineering and Research Expense Engineering and research expense, which includes research and development expenses and routine ongoing costs associated with improving existing products and manufacturing processes totaled $129 million, $113 million and $97 million in 1996, 1995 and 1994, respectively. Research and development expenses, which included activities for the introduction of new truck and diesel engine products and major improvements to existing products and processes, totaled $101 million, $91 million and $88 million in 1996, 1995 and 1994, respectively. Product Related Costs The company accrues warranty expense at the time of end product sale. Product liability expense is accrued based on the estimate of total future payments to settle product liability claims. Derivative Financial Instruments The company uses derivatives to transfer or reduce risks of foreign exchange and interest rate volatility and to potentially increase the return on invested funds. Navistar Financial, a wholly owned subsidiary of Transportation, 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. Pending Accounting Standards The company has elected to adopt Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in 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. Accordingly, adoption of this standard will have no effect on the company's net income or financial position. In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which the company must adopt for all applicable transactions occurring after December 31, 1996. The standard is not expected to have a material effect on the company's net income or financial position. NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS The company provides postretirement benefits to substantially all of its employees. Costs associated with postretirement benefits include pension expense for employees, retirees and surviving spouses, and postretirement health care and life insurance expense for employees, retirees, surviving spouses and dependents. In addition, as part of the 1993 restructured retiree health care and life insurance plans, profit sharing payments to an independent retiree trust are required. The cost of postretirement benefits is segregated as a separate component in the Statement of Income and is as follows: Millions of dollars 1996 1995 1994 - ----------------------------------------------------------------------- Pension expense ................... $ 160 $ 110 $ 108 Health/life insurance ............. 60 70 64 Profit sharing provision to Trust . - 26 4 ------- ------- ------- Total postretirement benefits expense ................ $ 220 $ 206 $ 176 ======= ======= ======= In the Statement of Financial Condition, the postretirement benefits liability of $1,351 million in 1996 and $1,341 million in 1995 includes $607 million and $587 million, respectively, for pension and $744 million and $754 million, respectively, for postretirement health care and life insurance benefits. Pension Benefits Generally, the pension plans are noncontributory with benefits related to an employee's length of service and compensation rate. The company's policy is to fund its pension plans in accordance with applicable United States and Canadian government regulations and to make additional payments as funds are available to achieve full funding of the vested accumulated benefit obligation. The pension plans vary in the extent to which they are funded, but for plan years which ended during the current year, all legal funding requirements have been met. Plan assets are invested primarily in dedicated portfolios of long-term fixed income securities with more recent contributions invested in equity securities. Pension Expense Net pension expense included in the Statement of Income is composed of the following: Millions of dollars 1996 1995 1994 - ----------------------------------------------------------------------- Service cost for benefits earned during the period ........ $ 34 $ 24 $ 34 Interest on projected benefit obligation .............. 231 232 211 Net amortization costs and other .. 104 57 50 Less expected return on assets .... (209) (203) (187) ------- ------- ------- Net pension expense ............... $ 160 $ 110 $ 108 ======= ======= ======= Actual return on assets .......... $ 188 $ 398 $ (127) ======= ======= ======= NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS (continued) Pension Expense (continued) "Amortization costs" shown in the above table include amortization of cumulative gains and losses over the expected remaining service life of employees, amortization of the initial transition liability over 15 years and amortization of plan amendments, recognized over the remaining service life of employees, except for those plan amendments arising from negotiated labor contracts, which are amortized over the length of the contract. Pension Assets and Liabilities Included in the Statement of Financial Condition is the minimum pension liability for certain unfunded pension plans. The adjustment for the minimum pension liability in the amounts of $623 million and $628 million are offset by intangible pension assets of $314 million and $284 million and accumulated reductions in shareowners' equity of $206 million and $220 million at October 31, 1996 and October 31, 1995, respectively. The changes in shareowners' equity are net of deferred income taxes of $103 million at October 31, 1996 and $124 million at October 31, 1995. The minimum pension liability will change from year to year as a result of revisions to actuarial assumptions, experience gains or losses and settlement rate changes. The funded status of the company's plans as of October 31, 1996 and 1995 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 1996 1995 1996 1995 - ----------------------------------------------------------------------- Actuarial present value of: Vested benefits ......... $ (59) $ (51) $(2,672) $ (2,612) Nonvested benefits ...... (7) (5) (270) (270) -------- -------- -------- -------- Accumulated benefit obligation .......... (66) (56) (2,942) (2,882) Effect of projected future compensation levels ..... (3) (4) (23) (27) -------- -------- -------- -------- Projected benefit obligation .............. (69) (60) (2,965) (2,909) Plan assets at fair value . 91 87 2,336 2,295 -------- -------- -------- -------- Funded status at October 31 22 27 (629) (614) Unamortized pension costs: Net losses .............. 11 9 332 372 Prior service costs ..... 6 1 113 50 (Asset) liability at date of transition . (1) (1) 200 233 Adjustment for the minimum liability ............... - - (623) (628) -------- -------- -------- -------- Net asset (liability) ..... $ 38 $ 36 $ (607) $ (587) ======== ======== ======== ======== NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS (continued) Pension Assets and Liabilities (continued) The weighted average rate assumptions used in determining pension costs and the projected benefit obligation were: 1996 1995 1994 - ---------------------------------------------------------------------- Discount rate used to determine present value of projected benefit obligation at end of year ................ 8.1% 7.8% 9.3% Expected long-term rate of return on plan assets for the year ................... 9.0% 9.9% 8.1% Expected rate of increase in future compensation levels .. 3.5% 3.5% 3.5% Other Postretirement Benefits In addition to providing pension benefits, the company provides health care and life insurance for a majority of its retired employees, spouses and certain dependents in the United States and Canada. In 1993, a trust was established to provide a vehicle for funding the health care liability through company contributions and retiree premiums. The funds in this trust are invested primarily in equity securities. The company is required to make a prefunding contribution of $200 million to the trust on or prior to June 30, 1998. The components of expense for other postretirement benefits included in the Statement of Income are as follows: Millions of dollars 1996 1995 1994 - ----------------------------------------------------------------------- Service cost for benefits earned during the year ......... $ 14 $ 10 $ 10 Interest cost on the accumulated benefit obligation and other ....................... 84 90 81 Less expected return on assets .... (38) (30) (27) ------- ------- ------- Net other postretirement benefits expense ............... $ 60 $ 70 $ 64 ======= ======= ======= Actual return on assets .......... $ 46 $ 65 $ 12 ======= ======= ======= The funded status of other postretirement benefits as of October 31 is as follows: Millions of dollars 1996 1995 - --------------------------------------------------------------------- Accumulated other postretirement benefit obligation (APBO): Retirees and their dependents . $ (773) $ (729) Active employees eligible to retire ....................... (244) (201) Other active participants ......... (208) (227) ------- ------- Total APBO ........................ (1,225) (1,157) Plan assets at fair value ......... 401 364 ------- ------- APBO in excess of plan assets ..... (824) (793) Unamortized prior service cost .... (6) - Unrecognized net loss ............. 86 39 ------- ------- Net liability ..................... $ (744) $ (754) ======= ======= NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS (continued) Other Postretirement Benefits (continued) The weighted average expected return on plan assets was 10.5% for 1996, 10% for 1995 and 9% for 1994. The weighted average of discount rates used to determine the accumulated other postretirement benefit obligation was 8.2% and 7.8% at October 31, 1996 and 1995, respectively. For 1997, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 8.2%. The rate is projected to decrease to 5.0% by the year 2004 and remain at that level each year thereafter. If the cost trend rate assumptions were increased by one percentage point for each year, the accumulated postretirement benefit obligation would increase by approximately $117 million and the associated expense recognized for the year ended October 31, 1996 would increase by an estimated $8 million. 3. INCOME TAXES The domestic and foreign components of income (loss) from continuing operations before income taxes consist of the following: Millions of dollars 1996 1995 1994 - ----------------------------------------------------------------------- Domestic ......................... $ 108 $ 251 $ 145 Foreign .......................... (3) 11 13 ------- ------- ------- Total income before income taxes . $ 105 $ 262 $ 158 ======= ======= ======= Taxes on income of continuing operations are analyzed by categories as follows: Millions of dollars 1996 1995 1994 - ----------------------------------------------------------------------- Current: Federal ........................ $ 1 $ 7 $ 3 State and local .............. 2 2 2 ------- ------- ------- Total current expense ........ 3 9 5 ------- ------- ------- Deferred: Federal ........................ 32 77 44 State and local .............. 5 12 7 Total deferred expense ....... 37 89 51 ------- ------- ------- Total income tax expense of continuing operations ....... $ 40 $ 98 $ 56 ======= ======= ======= The deferred tax expense does not represent cash payment of income taxes and was primarily generated by the utilization of net operating loss (NOL) carryforwards and the increase of temporary differences, and will not require future cash payments. Consolidated tax payments made during 1996, 1995 and 1994 were $3 million, $9 million and $5 million, respectively. NOTES TO FINANCIAL STATEMENTS (Continued) 3. INCOME TAXES (continued) The relationship of the tax expense to the income of continuing operations for 1996, 1995 and 1994 differs from the U.S. statutory rate (35%) because of state income taxes and the benefit of NOLs in foreign countries. The effective tax rates on the income of continuing operations for the years 1996, 1995 and 1994 were 38.1%, 37.4% and 35.4%, respectively. Undistributed earnings of foreign subsidiaries were $30 million and $28 million at October 31, 1996 and 1995, respectively. Taxes have not been provided on these earnings because no withholding taxes are applicable upon repatriation and U.S. tax would be substantially offset by utilization of NOL carryforwards. Taxpaying entities of the company offset all deferred tax assets and liabilities within each tax jurisdiction and present them in a single amount in the Statement of Financial Condition. The components of the deferred tax asset (liability) at October 31 are as follows: Millions of dollars 1996 1995 - --------------------------------------------------------------------- United States - ------------- Deferred tax assets: Net operating loss carryforwards . $ 753 $ 768 Alternative minimum tax .......... 11 10 Product liability ................ 57 60 Warranty ......................... 43 42 Other liabilities ................ 143 170 Postretirement benefits .......... 363 390 ------- ------- Total deferred tax assets ........ 1,370 1,440 ------- ------- Deferred tax liabilities: Prepaid pension assets ........... (12) (23) Depreciation ..................... (40) (42) ------- ------- Total deferred tax liabilities .... (52) (65) ------- ------- Total deferred tax asset ......... 1,318 1,375 Less valuation allowance ......... (288) (288) ------- ------- Net deferred tax asset ........... $ 1,030 $ 1,087 ======= ======= Foreign - ------- Deferred tax assets: Net operating loss carryforwards . $ 2 $ - Postretirement benefits .......... 19 19 ------- ------- Total deferred tax assets ........ 21 19 Less valuation allowance ......... (21) (19) ------- ------- Net deferred tax assets .......... - - Deferred tax liabilities --prepaid pension assets ....... (16) (16) ------- ------- Net deferred tax liabilities ..... $ (16) $ (16) ======= ======= NOTES TO FINANCIAL STATEMENTS (Continued) 3. INCOME TAXES (continued) A valuation allowance has been provided for those NOL carryforwards and temporary differences which are estimated to expire before they are utilized. Because the foreign tax carryforward period is relatively short, a full allowance has been provided against the total deferred tax assets. The valuation allowance increased $2 million during 1996 resulting from tax benefits associated with foreign NOLs. At October 31, 1996, the company had $1,982 million of domestic and $5 million of foreign NOL carryforwards available to offset future taxable income. Such carryforwards reflect income tax losses incurred which will expire as follows, in millions of dollars: 1998 .................. $ 202 1999 .................. 29 2000 .................. 300 2001 .................. 143 2002 .................. 47 2004 .................. 238 2005 .................. 7 2006 through 2009 ..... 1,021 ---------- Total ................. $ 1,987 ========== Additionally, the reversal of net temporary differences of $1,507 million as of October 31, 1996 will create net tax deductions which, if not utilized previously, will expire subsequent to 2009. 4. 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 14. NOTES TO FINANCIAL STATEMENTS (Continued) 5. 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: 1996 1995 ------------------- -------------------- Amortized Fair Amortized Fair Millions of dollars Cost Value Cost Value - --------------------------------------------------------------------- Corporate securities . $ 127 $ 126 $ 56 $ 56 U.S. government securities ......... 152 152 411 413 Mortgage and asset backed securities 94 94 65 66 Foreign government securities ......... 5 5 9 9 ------ ------ ------ ------ Total debt securities 378 377 541 544 Equity securities .... 14 17 10 11 ------ ------ ------ ------ Total marketable securities ......... $ 392 $ 394 $ 551 $ 555 ====== ====== ====== ====== Gross unrealized gains and losses on marketable securities at October 31, 1996 and 1995 are not material. Contractual maturities of marketable debt securities at October 31 are as follows: 1996 1995 ------------------- -------------------- Amortized Fair Amortized Fair Millions of dollars Cost Value Cost Value - --------------------------------------------------------------------- Due in one year or less $ 46 $ 46 $ 120 $ 120 Due after one year through five years . 208 208 318 320 Due after five years through ten years .. 24 23 27 27 Due after ten years .. 6 6 11 11 ------ ------ ------ ------ 284 283 476 478 Mortgage and asset- backed securities 94 94 65 66 ------ ------ ------ ------ Total debt securities ......... $ 378 $ 377 $ 541 $ 544 ====== ====== ====== ====== Proceeds from sales or maturities of investments in securities were $752 million during 1996 and $480 million during 1995. 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 $1 million, net of income taxes, at October 31, 1996 and $3 million, net of income taxes, at October 31, 1995. At October 31, 1996 and 1995, a domestic insurance subsidiary had $17 million and $23 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, 1996 and 1995. NOTES TO FINANCIAL STATEMENTS (Continued) 6. RECEIVABLES Receivables at October 31 are summarized by major classification as follows: Millions of dollars 1996 1995 - --------------------------------------------------------------------- Accounts receivable .............. $ 560 $ 588 Retail notes and lease financing . 733 747 Wholesale notes .................. 101 268 Amounts due from sales of receivables ................. 264 248 Reinsurance balance receivables .. 28 31 Allowance for losses ............. (31) (28) ------- ------- Total receivables, net ....... $ 1,655 $ 1,854 ======= ======= 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, net of underwriting costs, were $982 million in 1996, $727 million in 1995 and $995 million in 1994. Uncollected sold retail and wholesale receivable balances totaled $1,866 million and $1,673 million as of October 31, 1996 and 1995, respectively. Contractual maturities of accounts receivable, retail notes and lease financing and wholesale notes, including unearned finance income, at October 31, 1996 were: 1997 - $860 million, 1998 - $243 million, 1999 - $186 million, 2000 - $142 million, 2001 - $76 million, and 2002 and thereafter - $14 million. Unearned finance income totaled $127 million at October 31, 1996. NOTES TO FINANCIAL STATEMENTS (Continued) 7. INVENTORIES Inventories at October 31 are as follows: Millions of dollars 1996 1995 - --------------------------------------------------------------------- Finished products ................ $ 242 $ 167 Work in process .................. 97 91 Raw materials and supplies ....... 124 158 ------- ------- Total inventories ................ $ 463 $ 416 ======= ======= 8. PROPERTY AND EQUIPMENT At October 31, property and equipment includes the following: Millions of dollars 1996 1995 - --------------------------------------------------------------------- Land ............................. $ 12 $ 11 ------- ------- Buildings, machinery and equipment at cost: Plants ........................ 1,299 1,223 Distribution .................. 79 75 Other ......................... 222 138 ------- ------- Subtotal ................. 1,600 1,436 ------- ------- Total property ................ 1,612 1,447 Less accumulated depreciation and amortization ............ (842) (764) ------- ------- Total property and equipment, net ...... $ 770 $ 683 ======= ======= Total property includes property under capitalized lease obligations of $25 million at October 31, 1996 and $24 million at October 31, 1995. In addition, total property includes vehicles under operating leases to third parties of $116 million at October 31, 1996 and $49 million at October 31, 1995. NOTES TO FINANCIAL STATEMENTS (Continued) 9. DEBT Millions of dollars 1996 1995 - --------------------------------------------------------------------- Manufacturing operations Notes payable and current maturities of long-term debt ............ $ 14 $ 10 ------- ------- 6 1/4% Sinking Fund Debentures, due 1998 ..................... 3 6 9% Sinking Fund Debentures, due 2004 ..................... 53 60 8% Secured Note, due 2002 secured by plant assets 26 31 Capitalized leases and other ... 19 20 ------- ------- Total long-term debt ....... 101 117 ------- ------- Manufacturing operations debt .... 115 127 ------- ------- Financial services operations Commercial paper ............... 99 50 Current maturities of long-term debt ........... - 118 ------- ------- Total short-term debt ...... 99 168 ------- ------- Asset-backed commercial paper program, variable rate, due March 2001 ............... 402 302 Bank revolver, variable rate, due March 2001 .............. 704 760 ------- ------- Total senior debt .......... 1,106 1,062 ------- ------- Subordinated Term Debt - Senior notes, 8 7/8%, due November 1998 .......... 100 100 ------- ------- Total long-term debt ....... 1,206 1,162 ------- ------- Financial services operations debt ................ 1,305 1,330 ------- ------- Total debt ....................... $ 1,420 $ 1,457 ======= ======= Consolidated interest payments were $83 million, $82 million and $76 million in 1996, 1995 and 1994, respectively. Navistar Financial issues commercial paper with varying terms and has short-term borrowings with various banks on a noncommitted basis. Compensating cash balances and commitment fees are not required under these borrowings. NOTES TO FINANCIAL STATEMENTS (Continued) 9. DEBT (continued) The aggregate annual maturities and sinking fund requirements for debt for the years ended October 31 are as follows: Financial Manufacturing Services Millions of dollars Operations Operations Total - ------------------------------------------------------------------------- 1997 ............................. $ 14 $ 99 $ 113 1998 ............................. 22 - 22 1999 ............................. 16 100 116 2000 ............................. 15 - 15 2001 ............................. 15 1,106 1,121 Thereafter ....................... 33 - 33 Weighted average interest rate on total debt, including short-term, and the effect of discounts and related amortization for the years ended: October 31, 1996 .............. 8.1% 6.5% 6.7% October 31, 1995 .............. 9.0% 7.4% 7.6% Effective March 29, 1996, Navistar Financial amended and restated its bank revolving credit facility and its asset-backed commercial paper (ABCP) program, extending the maturity date of each facility to March 2001. In addition, the commitment of the bank revolving credit facility was expanded to $925 million, the ABCP facility was increased to $400 million, and a new pricing and fee schedule was established. The available funding under the ABCP program is $414 million, comprised of the $400 million liquidity facility and $14 million of trust certificates issued in connection with the ABCP trust. 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. The assets may also be sold to the trust. Available funding under the amended and restated credit agreement and ABCP program was $233 million, of which $99 million was used to back short- term debt at October 31, 1996. The remaining $134 million, when combined with unrestricted cash and cash equivalents, made $141 million available to fund the general business purposes of Navistar Financial at October 31, 1996. NOTES TO FINANCIAL STATEMENTS (Continued) 9. 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 has in place $500 million of revolving wholesale note sales trusts that provide for the continuous sale of eligible wholesale notes on a daily basis. The sales trusts are comprised of three $100 million tranches of investor certificates maturing serially from 1997 to 1999 and a $200 million tranche maturing in 2004. During 1996, Navistar Financial sold $985 million of retail notes, net of unearned finance income, through NFRRC in two separate sales to two individual owner trusts which in turn sold $946 million of notes and $39 million of certificates to investors. The net proceeds, after underwriting costs and credit enhancements, of $934 million were used by Navistar Financial for general working capital purposes. At October 31, 1996, the remaining shelf registration available to NFRRC for issuance of asset-backed securities was $2,445 million. In November 1996, Navistar Financial sold $487 million of retail notes through NFRRC. The net proceeds of $473 million were used for general working capital purposes. 10. OTHER LIABILITIES Major classifications of other liabilities at October 31 are as follows: Millions of dollars 1996 1995 - --------------------------------------------------------------------- Product liability and warranty ... $ 293 $ 294 Loss reserves and unearned premiums .......... 113 118 Employee incentive programs ...... 10 104 Payroll, commissions and employee related benefits .. 73 80 Long-term disability and workers' compensation ...... 55 66 Taxes ............................ 44 45 Environmental .................... 23 25 Interest ......................... 9 12 Other ............................ 199 221 ------- ------- Total other liabilities ........ $ 819 $ 965 ======= ======= During the fourth quarter of 1996, the company recorded a one-time $35 million pretax charge for termination of its next generation truck program. NOTES TO FINANCIAL STATEMENTS (Continued) 11. 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: 1996 1995 ------------------ ------------------- Carrying Fair Carrying Fair Millions of dollars Amount Value Amount Value - ------------------------------------------------------------------- Receivables, net ..... $1,655 $1,658 $1,854 $1,867 Investments and other assets ... 213 221 202 202 Debt ................. 1,420 1,414 1,457 1,460 Cash and cash equivalents approximate fair value. The cost and fair value of marketable securities are disclosed in Note 5. Customer receivables, 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 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) 11. FINANCIAL INSTRUMENTS (continued) Derivatives Held or Issued for Purposes Other Than Trading The company uses derivatives to transfer or reduce risks of foreign exchange and interest rate volatility and to potentially increase the return on invested funds. The company purchases collateralized mortgage obligations (CMOs) that have predetermined fixed-principal payment patterns which are relatively certain. These instruments totaled $94 million at October 31, 1996. At October 31, 1996, the unrecognized gain on 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. Between August and October 1996, Navistar Financial entered into $400 million of forward interest rate lock agreements on a Treasury note maturing in 1998 related to the anticipated November 1996 sale of retail receivables. These hedge agreements were closed in conjunction with the pricing of the sale, and the loss at October 31, 1996, which was not material, was deferred and included in the gain recognized on the sale of receivables in November 1996. NOTES TO FINANCIAL STATEMENTS (Continued) 12. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS, AND LEASES Commitments, contingencies and restricted assets At October 31, 1996, commitments for capital expenditures in progress were approximately $38 million. Navistar Financial's maximum exposure under all receivable sale recourse provisions at October 31, 1996 was $215 million; however, Navistar Financial's exposure is not considered material. At October 31, 1996, 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 $164 million on retail contracts and $9 million on retail leases. In addition, as of October 31, 1996, the company is contingently liable for approximately $45 million for various guarantees and buyback programs; however, based on historical loss trends, the company's exposure is not considered material. The Canadian operating subsidiary and certain subsidiaries included in financial services operations 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, 1996, these subsidiaries had $385 million of net assets of which $260 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 3 years ended October 31, 1996. Concentrations At October 31, 1996, the company employed 9,043 hourly workers and 5,143 salaried workers in the United States and Canada. Approximately 91% of the hourly employees and 23% of the salaried employees are represented by unions. Of these represented employees, 89% of the hourly workers and 93% of the salaried workers are represented by the United Automobile, Aerospace, and Agricultural Implement Workers of America (UAW) or the National Automobile, Aerospace, and Agricultural Implement Workers of Canada (CAW). The collective bargaining agreements with the UAW and the CAW expire on October 1, 1998 and October 24, 1999, respectively. Reflecting higher consumer demand for light trucks and vans, sales of mid-range diesel engines to a domestic automobile manufacturer have increased from 10% of consolidated sales and revenues in 1994 to 12% in 1995 and 14% in 1996. NOTES TO FINANCIAL STATEMENTS (Continued) 12. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS, AND LEASES 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. The majority of the company's lease payments are for operating leases. At October 31, 1996, future minimum lease payments under operating leases having lease terms in excess of one year are: 1997 - $33 million, 1998 - $30 million, 1999 - $29 million, 2000 - $29 million, 2001 - - $21 million and thereafter - $55 million. Total operating lease expense was $35 million in 1996, $42 million in 1995 and $38 million in 1994. Income received from sublease rentals was $6 million in 1996, 1995 and 1994, respectively. 13. LEGAL PROCEEDINGS The company and its subsidiaries are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings which constitute ordinary routine litigation incidental to the business of the company and its subsidiaries. In the opinion of the company's management, none of these proceedings or claims is material to the business or the financial condition of the company. 14. ENVIRONMENTAL MATTERS In the fourth quarter of 1994, Transportation recorded a $20 million charge, net of $13 million of income taxes, as a loss of discontinued operations related to environmental liabilities at production facilities of two formerly owned businesses, Wisconsin Steel and Solar Turbine, Inc. (Solar). Transportation reached an agreement with the Economic Development Administration, a division of the U.S. Department of Commerce, in 1994 in settlement of commercial and environmental disputes related to the Wisconsin Steel property. At October 31, 1996, the final consent decree remained subject to approval by the U.S. Department of Justice and by Transportation. The company has been named a potentially responsible party (PRP), in conjunction with other parties, in a number of cases arising under an environmental protection law known as the Superfund law. These cases involve sites which allegedly have received wastes from current or former company locations. Based on information available to the company, which in most cases consists of data related to quantities and characteristics of material generated at or shipped to each site as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable estimate is calculated of the company's share, if any, of the probable costs and is provided for in the financial statements. These obligations generally are recognized no later than completion of the remedial feasibility study and are not discounted to their present value. The company 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) 15. INDUSTRY SEGMENT DATA Information concerning operations by industry segment is as follows: Financial Manufacturing Services Millions of dollars Operations Operations Consolidated - ------------------------------------------------------------------------- October 31, 1996 - ---------------- Total sales and revenues ..... $5,550 $ 258 $5,754 Operating profit ............. 690 109 750 Depreciation and amortization. 90 11 101 Capital expenditures ......... 117 - 117 Identifiable assets .......... 3,815 1,843 5,326 October 31, 1995 - ---------------- Total sales and revenues ..... $6,168 $ 235 $6,342 Operating profit ............. 845 80 870 Depreciation and amortization. 75 6 81 Capital expenditures ......... 139 - 139 Identifiable assets .......... 4,018 1,922 5,566 October 31, 1994 - ---------------- Total sales and revenues ..... $5,178 $ 214 $5,337 Operating profit ............. 659 76 685 Depreciation and amortization. 68 4 72 Capital expenditures ......... 87 - 87 Identifiable assets .......... 3,724 1,582 5,047 Intersegment sales and revenues were not material in 1996, 1995 or 1994. Transactions between manufacturing operations and financial services operations have been eliminated from the consolidated column. NOTES TO FINANCIAL STATEMENTS (Continued) 16. PREFERRED AND PREFERENCE STOCKS The company's Nonconvertible Junior Preference Stock Series A is held for the Retiree Supplemental Benefit Program by the Supplemental Trust which is currently entitled to elect two members to the company's Board of Directors. The UAW holds the Nonconvertible Junior Preference Stock Series B and is currently entitled to elect one member of the company's Board of Directors. At October 31, 1996, there was one share each of Series A and Series B Preference stock authorized and outstanding. The value of the preference shares is minimal. Other information pertaining to preferred and preference stocks outstanding is summarized as follows: Series G Convertible Series D Convertible Cumulative Preferred Junior Preference - ------------------------------------------------------------------------- Number authorized and issued ........... 4,800,000 3,000,000 Number outstanding ..... 4,800,000 176,994 Optional redemption price $50 per share $25 per share and liquidation plus accrued plus accrued preference ........... 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 Senior to all other Senior to Common; and upon liquidation . 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, 1996, the company had such defined surplus of $903 million. - ------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Continued) 17. COMMON SHAREOWNERS' EQUITY Changes in the common shareowners' equity accounts are as follows: Millions of dollars 1996 1995 1994 - ----------------------------------------------------------------------- Common Stock Beginning of year ................. $ 1,641 $ 1,628 $ 1,615 Conversion of Class B Common Stock and other .......... 1 13 13 ------- ------- ------- End of year ....................... $ 1,642 $ 1,641 $ 1,628 ------- ------- ------- Class B Common Stock Beginning of year ................. $ 491 $ 501 $ 513 Repurchase of stock ............... - (10) (12) ------- ------- ------- End of year ....................... $ 491 $ 491 $ 501 ------- ------- ------- Retained Earnings (Deficit) Beginning of year ................. $(1,478) $(1,538) $(1,592) Net income ........................ 65 164 82 Preferred dividends ............... (29) (22) (36) Minimum pension liability adjustments and other ........... 11 (82) 8 ------- ------- ------- End of year ....................... $(1,431) $(1,478) $(1,538) ------- ------- ------- Common Stock Held in Treasury Beginning of year ................ $ (28) $ (18) $ (5) Repurchase of Common Stock and other ...................... (2) (10) (13) ------- ------- ------- End of year ...................... $ (30) $ (28) $ (18) ------- ------- ------- Common Stock The company has authorized 110 million shares of Common Stock with a par value of $.10 per share and 26 million shares of Class B Common Stock with a par value of $.10 per share and restricted voting rights and transfer provisions. At October 31, 1996 and 1995, there were 49.4 million and 49.5 million shares of Common Stock outstanding, net of Common Stock held in Treasury, respectively. The number of shares of Class B Common stock outstanding at October 31, 1996 and 1995 was 24.3 million. NOTES TO FINANCIAL STATEMENTS (Continued) 18. 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). The Incentive Plan includes the granting of two types of stock option awards, nonqualified options and incentive options. Nonqualified 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 1996 1995 1994 - ------------------------------------------------------------------------- Outstanding at beginning of the year...................... 1,738,304 1,146,154 639,234 Granted ........................... 692,000 635,900 614,560 Exercised ......................... - - (8,850) Terminated ........................ (131,780) (43,750) (98,790) --------- --------- --------- Outstanding at end of the year .... 2,298,524 1,738,304 1,146,154 ========= ========= ========= Exercisable at October 31 ......... 1,654,624 1,122,804 554,374 ========= ========= ========= Available for grant ............... - - 146,406 ========= ========= ========= Average price per share - ------------------------------------------------------------------------- Outstanding at October 31 ........ $ 50 $ 51 $ 52 Granted .......................... $ 10 $ 12 $ 19 Exercised ........................ $ - $ - $ 22 NOTES TO FINANCIAL STATEMENTS (Continued) 19. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter -------------- ---------------- --------------- ---------------- (Millions of dollars) 1996 1995 1996 1995 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------- Sales and revenues .. $1,432 $1,416 $1,480 $1,640 $1,391 $1,514 $1,451 $1,772 ====== ====== ====== ====== ====== ====== ====== ====== Manufacturing gross margin ............ 12.2% 12.4% 13.7% 14.0% 12.6% 14.0% 11.6% 14.4% ====== ====== ====== ====== ====== ====== ====== ====== Net income .......... $ 22 $ 23 $ 26 $ 46 $ 17 $ 39 $ - $ 56 Net income (loss) per common share . $ .20 $ .21 $ .26 $ .52 $ .13 $ .43 $ (.10) $ .66 Market price range - Common stock High .......... $12 1/8 $17 1/2 $12 $16 3/8 $12 $16 5/8 $10 3/8 $15 1/8 Low ........... $ 9 1/2 $12 3/4 $ 9 1/2 $12 1/4 $9 1/8 $13 7/8 $ 8 1/2 $9 1/4
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. 20. SUPPLEMENTAL FINANCIAL INFORMATION AS OF OCTOBER 31 AND FOR THE YEARS THEN ENDED(Unaudited) Navistar International Corporation (with financial services operations on an equity basis) in millions of dollars:
Condensed Statement of Income 1996 1995 1994 - -------------------------------------------- ------ ------ ------ Sales of manufactured products ............. $5,508 $6,125 $5,153 Other income ............................... 42 43 25 ------ ------ ------ Total sales and revenues .............. 5,550 6,168 5,178 ------ ------ ------ Cost of products sold ...................... 4,818 5,280 4,494 Postretirement benefits .................... 219 205 175 Engineering and research expense ........... 129 113 97 Marketing and administrative expense ....... 282 277 238 Other expenses ............................. 80 93 76 ------ ------ ------ Total costs and expenses ................... 5,528 5,968 5,080 ------ ------ ------ Income before income taxes Manufacturing operations ................. 22 200 98 Financial services operations ............ 83 62 60 ------ ------ ------ Income before income taxes ............. 105 262 158 Income tax expense ......................... 40 98 56 ------ ------ ------ Income of continuing operations ............ 65 164 102 Loss of discontinued operations ............ - - 20 ------ ------ ------ Net income ................................. $ 65 $ 164 $ 82 ====== ====== ======
NOTES TO FINANCIAL STATEMENTS (Continued) 20. SUPPLEMENTAL FINANCIAL INFORMATION AS OF OCTOBER 31 AND FOR THE YEARS THEN ENDED(Unaudited) (Continued)
Condensed Statement of Financial Condition 1996 1995 - --------------------------------------------- ------ ------ Cash, cash equivalents and marketable securities ................. $ 707 $ 876 Inventories ................................. 463 416 Property and equipment, net ................. 666 642 Equity in Financial Services subsidiaries ... 306 282 Other assets ................................ 643 715 Deferred tax asset, net ..................... 1,030 1,087 ------ ------ Total assets ........................... $3,815 $4,018 ====== ====== Accounts payable ............................ $ 771 $ 876 Postretirement benefits liabilities ......... 1,344 1,334 Other liabilities ........................... 784 938 Shareowners' equity ......................... 916 870 ------ ------ Total liabilities and shareowners' equity .............. $3,815 $4,018 ====== ====== Condensed Statement of Cash Flow 1996 1995 1994 - --------------------------------------------- ------ ------ ------ Cash flow from operations Net income .................................. $ 65 $ 164 $ 82 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization .......... 90 75 68 Equity in earnings of nonconsolidated companies, net of dividends received . (24) (28) (10) Deferred income taxes .................. 37 89 51 Other, net ............................. 4 (66) 8 Change in operating assets and liabilities .. (172) 166 81 ------ ------ ------ Cash provided by operations ................. - 400 280 ------ ------ ------ Cash flow from investment programs Purchase of marketable securities ........... (501) (646) (651) Sales or maturities of marketable securities. 665 399 569 Capital expenditures ........................ (117) (139) (87) Other investment programs, net .............. (8) 8 123 ------ ------ ------ Cash provided by (used in) investment programs 39 (378) (46) ------ ------ ------ Cash flow from financing activities ......... (48) (60) (112) ------ ------ ------ Cash and cash equivalents Increase (decrease) during the year ....... (9) (38) 122 At beginning of the year .................. 461 499 377 ------ ------ ------ Cash and cash equivalents at end of the year . $ 452 $ 461 $ 499 ====== ====== ======
NOTES TO FINANCIAL STATEMENTS (Continued)
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL AND STATISTICAL DATA - ----------------------------------------------------------------------------------------------------------- For the Years Ended October 31 Millions of dollars, except per share data market share, and units shipped) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Total sales and revenues ................ $5,754 $6,342 $5,337 $4,721 $3,897 Net income (loss) of continuing operations .............. 65 164 102 (273) (147) Net income (loss)(a) .................... 65 164 82 (501) (212) Income (loss) per common share of continuing operations .............. .49 1.83 .99 (8.63) (6.97) Net income (loss) per common share ...... .49 1.83 .72 (15.19) (9.55) Average number of Common, Class B Common and dilutive common equivalent shares outstanding (millions) ................ 73.8 74.3 74.6 34.9 25.3 ------------------------------------------------------------------------------------------------------- FINANCIAL DATA Total assets ............................ 5,326 5,566 5,047 5,060 3,627 Debt Manufacturing operations ............. 115 127 127 175 187 Financial services operations ........ 1,305 1,330 1,091 1,199 1,218 ------- ------- ------- ------- ------- Total debt .............................. 1,420 1,457 1,218 1,374 1,405 Shareowners' equity ...................... 916 870 817 775 338 Total manufacturing operations debt as a percent of total manufacturing capitalization ......................... 11.2% 12.7% 13.4% 18.4% 35.6% Return on equity (b) .................... 7.1% 18.9% 12.5% (35.2)% (43.5)% -------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Capital expenditures .................... 117 139 87 110 55 Engineering and research expense ........ 129 113 97 94 92 ------------------------------------------------------------------------------------------------------- OPERATING DATA United States and Canadian market share (c) 27.5% 26.7% 27.0% 27.6% 28.4% Unit shipments Trucks ................................ 95,200 112,200 95,000 87,200 73,200 OEM engines ........................... 163,200 154,200 130,600 118,200 97,400 Service parts sales ..................... 760 730 714 632 571 (a) In the third quarter of 1993, the company adopted SFAS 106 and SFAS 109 retroactive to November 1, 1992. (b) Return on equity is calculated based on income of continuing operations. (c) Based on retail deliveries of medium trucks (Classes 5, 6 and 7), including school buses, and heavy trucks (Class 8).
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) 461-3309. 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 62,307 owners of Common Stock at October 31, 1996. Annual Meeting The 1997 Annual Meeting of Shareowners is scheduled to take place at 10:15 a.m., CST on March 19, 1997, at the Art Institute of Chicago in the Arthur Rubloff Auditorium. Shareowners are invited to attend this meeting, take part in discussions of company affairs and meet personally with the directors and officers responsible for the operations of Navistar. A Proxy Statement and Form of Proxy will be mailed to each shareowner on or about February 7, 1997. Commitment to Equal Employment Opportunity Navistar International Corporation has a long-standing commitment to equal employment opportunity dating back to 1919 when the company issued its first written statement against discrimination in the workplace. Today, Navistar continues to be a leader in the industry in complying with all state and federal laws, local municipal laws and regulations governing employment. Navistar has continuously and aggressively implemented measures to ensure that all individuals regardless of age, race, sex, religion, national origin, disability, or veteran status are not discriminated against in regard to career opportunities within the company. Navistar has adopted policy standards and assurances for all employees and qualified applicants, pledging terms and conditions of employment to be equal for all individuals. Corporate Headquarters The corporate offices of Navistar International Corporation and its principal subsidiary, Navistar International Transportation Corp., are located at 455 North Cityfront Plaza Drive, Chicago, Illinois 60611; Telephone: (312) 836-2000. Reports and Publications A copy of the company's 1996 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, 1997. 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 1997 quarterly financial results will be announced on the following dates: First quarter February 13, 1997 Second quarter May 15, 1997 Third quarter August 14, 1997 Fourth quarter December 4, 1997 News releases, Form 10-Qs, Navistar's Annual Environmental Health & Safety Report, and other publications are available by writing: Corporate Communications Navistar International Corporation 455 North Cityfront Plaza Drive Chicago, Illinois 60611 Navistar also encourages shareowners to visit its home page on the World Wide Web at http://www.navistar.com. Trademarks Navistar logotype and Navistar are registered trademarks of Navistar International Corporation. The Diamond Road symbol and International are registered trademarks of Navistar International Transportation Corp. Additional registered trademarks include Eagle, Fleet Charge, Fleetrite, Skyrise, Paystar and Pro Sleeper. Diamond SPEC, Diamond PLUS and Diamond Services are trademarks of Navistar International Transportation Corp. Directors and Officers
Navistar International Corporation (As of December 31, 1996) - ----------------------------------------------------------------------------------------------------------------------------- Board of Directors Principal Officers John R. Horne John D. Correnti Mary Garst John R. Horne Chairman, President Chief Executive Officer, Manager, Cattle Division Chairman, President and Chief Executive Officer President and Vice Chairman Garst Company and Chief Executive Officer Navistar International Nucor Corporation Agri-Business Company Corporation Steel Manufacturer Committees: 1, 4, 5 [Chair] Donald DeFosset, Jr. Committees: 1[Chair] Committees: 2, 4, 6 Executive Vice President Michael N. Hammes and President Truck Group William F. Andrews James C. Cotting Chairman and Robert C. Lannert Chairman Former Chairman of the Board Chief Executive Officer Executive Vice President Schrader-Bridgeport and Chief Executive Officer The Coleman Company, Inc. and Chief Financial Officer International Inc. Navistar International Manufacturer and Distributor Robert A. Boardman Manufacturer of Tire Valves Corporation of Camping and Outdoor Senior Vice President and Valve Accessories Committees: 3, 5 Recreational Products and General Counsel Chairman and Hardware/Home Products Thomas M. Hough Scovill Fasteners, Inc. William C. Craig Committees: 3, 5 Vice President and Treasurer Manufacturers of Apparel Former Executive Vice President J. Steven Keate and Industrial Fasteners Mack Trucks Robert C. Lannert Vice President and Controller Committees: 1, 2, 3 [Chair], 6 Manufacturer of Trucks Executive Vice President Steven K. Covey Committees: 1, 2, 3 and Chief Financial Corporate Secretary Dr. Andrew F. Brimmer Officer President Jerry E. Dempsey Navistar International Brimmer & Company, Inc. Chairman and Corporation Economic and Financial Chief Executive Officer Consulting PPG Industries, Inc. Walter J. Laskowski Committees: Committees: 1, 3, 4 [Chair], Diversified Global Manufacturer International 1 Executive 5, 6 of Glass, Protective Coatings Vice President 2 Organization and Chemicals of the UAW 3 Finance Richard F. Celeste Committees: 1, 2 [Chair], Committees: 1, 3, 4 4 Audit Managing General Partner 3, 6 [Chair] 5 Public Policy Celeste & Sabety, Ltd. William F. Patient 6 Strategic Initiatives Public Policy Consulting Firm John F. Fiedler Chairman of the Board, Committees: 4,5 Chairman, President and President and Chief Executive Officer Chief Executive Officer Borg-Warner Automotive, Inc. The Geon Company Supplier of Engineered Manufacturer of Polyvinyl Components and Systems Chloride (PVC) Resins and Committees: 2, 5, 6 Compounds Committees: 2, 4 Navistar International Transportation Corp. - ---------------------------------------------------------------------------------------------------------------------------- Principal Officers Group Vice Presidents Senior Vice Presidents John R. Horne John J. Bongiorno Robert A. Boardman Thomas E. Rigsby Chairman, President General Manager General Counsel Truck Manufacturing and Chief Executive Officer Financial Services Joseph V. Thompson James L. Simonton Donald DeFosset, Jr. David J. Johanneson Employee Relations Purchasing and Executive Vice President Truck Businesses and Administration Supplier Development and President Truck Group James T. O'Dare, Jr. Brian B. Whalen Robert C. Lannert Sales and Distribution Vice Presidents Public Affairs Executive Vice President Daniel C. Ustian Thomas M. Hough and Chief Financial Officer General Manager Treasurer Secretary Engine and Foundry J. Steven Keate Dennis W. Webb Controller Gregory Lennes International Operations
EX-21 7 EXHIBIT 21 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- SUBSIDIARIES OF THE REGISTRANT AS OF OCTOBER 31, 1996 STATE OR COUNTRY IN WHICH SUBSIDIARY ORGANIZED --------- Subsidiary included in the financial statements, which is 100% owned: Navistar International Transportation Corp. .......... Delaware Subsidiaries that are 100% owned by Navistar International Transportation Corp.: Navistar International Corporation Canada .......... Canada Navistar Financial Corporation ..................... Delaware Subsidiaries and corporate joint ventures not shown by name in the above listing, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. E-6 EX-27 8
5 1,000,000 YEAR OCT-31-1996 OCT-31-1996 487 394 1686 (31) 463 0 1612 (842) 5326 0 1420 0 244 2133 (1461) 5326 5508 5754 4827 5649 220 21 83 105 (40) 65 0 0 0 65 0.49 0.49 The company has adopted an unclassified presentation in the Statement of Financial Condition.
EX-28 9 EXHIBIT 28 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1996 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, 1996, 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, 1996
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) 2 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's properties principally consist of office equipment and leased office space in Rolling Meadows, Illinois; Columbus, Ohio; Atlanta, Georgia; Plano, Texas; Mt. Laurel, New Jersey; and San Ramon, California. The office equipment owned and in use by the Corporation is not significant in relation to the total assets of the Corporation. Item 3. Legal Proceedings 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. Based on discussions with outside counsel, NFC's management 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. PART I (Continued) 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 Financing Volume The Corporation's serviced receivables portfolio, which includes sold receivables, totaled $3.3 billion at October 31, 1996, up from $3.2 billion and $2.5 billion at October 31, 1995 and 1994, respectively. In fiscal 1996 customer demand for Class 5 through 8 trucks declined approximately 9% compared with 1995 and was slightly higher than 1994 demand. In spite of lower customer demand and the continued highly competitive commercial financing market, fiscal 1996 acquisitions of retail notes and leases of $1.1 billion, net of unearned finance income, were equal to 1995. The Corporation's finance market share of new trucks manufactured by Transportation and sold in the United States increased to 16.3% in 1996 from 14.4% in 1995. Acquisitions in 1995 were $.2 billion higher than 1994 due to increased demand offset in part by lower finance market share of 14.4% in 1995 compared with 15.3% in 1994. Serviced retail notes and lease financing balances were $2.2 billion at October 31, 1996, compared with $1.9 billion and $1.6 billion at October 31, 1995 and 1994, respectively. During fiscal 1996, the Corporation supplied 94% of the wholesale financing of new trucks sold to Transportation's dealers, slightly higher than the 93% in 1995 and 1994. During 1996, Transportation dealers generally reduced inventory levels in response to lower customer demand. As a result, acquisitions of wholesale notes decreased $.3 billion, 9%, to $2.7 billion in 1996 after a 29% increase to $3.0 billion in 1995 from 1994. Serviced wholesale note balances were $685 million at October 31, 1996, compared to $854 million and $577 million at October 31, 1995 and 1994, respectively. Owned finance receivables balances, including subordinated interests in retail and wholesale receivables, decreased to $1.4 billion at October 31, 1996, from $1.5 billion at October 31, 1995 due primarily to lower wholesale financing. Balances in 1995 were $.2 billion higher than 1994 as a result of the higher level of wholesale and retail financing. Receivable sales were a significant source of funding during fiscal 1996 and 1995 and, as a result, sold retail receivable balances increased to $1.4 billion at October 31, 1996 from $1.2 billion and $1.0 billion at October 31, 1995 and 1994, respectively. Sold wholesale note balances were $500 million at October 31, 1996 and 1995 and $300 million at October 31, 1994. Results of Operations The Corporation's after tax return on equity was a record 18.1% in 1996 compared with 15.0% and 15.1% in 1995 and 1994, respectively. Income before taxes in 1996 was $81 million, a 37% increase from $59 million in 1995, primarily as a result of higher gains on sales of retail notes, higher levels Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations (Continued) of wholesale note balances during the first nine months of 1996 and higher retail and lease balances offset in part by a higher loss provision. Gains on sales of retail note receivables during 1996 were $20 million on sales of $985 million compared with gains of $5 million on sales of $740 million in 1995. The higher gains on sales resulted from higher margins on retail notes due to declining market interest rates prior to the sale in November 1995. During a declining interest rate environment, the Corporation's acquisition spreads improve as NFC's cost of borrowing differs from the time when interest rates are quoted to borrowers and the time when notes are acquired. In addition, the effective interest rate for each sale is based on a market interest rate at the time of the sale, which may be up to six months after the Corporation acquired the retail note. During fiscal 1995, the opposite impact was experienced by NFC on a sale in November 1994 as market interest rates were rising and a loss was recorded on that sale. Income before taxes of $59 million in 1995 increased 6% from $55 million in 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 the $740 million retail notes sold in 1995 were $5 million compared with $12 million on sales of $1,033 million in 1994. The more significant elements of revenue and expense impacting net income for these years are discussed in the following paragraphs: Retail note and lease financing revenue for 1996 was $98 million compared with $73 million and $71 million in 1995 and 1994, respectively. The 1996 improvement over 1995 is primarily due to higher gains on sold notes and higher average balances. The increase in 1995 revenues compared with 1994 is due to higher financing volume offset in part by lower gains on sold notes. Wholesale note revenue increased 5% in 1996 to $57 million as a result of higher average outstanding note balances in the first nine months of the fiscal year offset in part by lower average yields relating to a lower prime interest rate. In 1995 revenue increased 38% compared with 1994 as the level of wholesale financing was higher to support increased demand for Transportation truck products and higher average yields due to higher prime interest rates. Revenue from accounts decreased in 1996 to $27 million from $29 million in 1995 as the decline in customer demand caused a lower level of financing activity. Revenue in 1995 was 32% higher than 1994 due to higher outstanding balances in support of the increased demand for Transportation truck products and higher average yields due to higher prime interest rates. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations (Continued) Servicing fee income increased to $20 million in 1996 from $18 million in 1995 and $17 million in 1994 as a result of higher levels of sold note receivable balances which the Corporation continues to service. Insurance premiums earned by Harco decreased 6% to $42 million in 1996 from $45 million in 1995 and 12% in 1995 from 1994. The decreases in 1996 and 1995 reflect reductions in written premiums of truck liability lines in response to adverse loss experience in those lines and to increased competition. Borrowing costs decreased slightly in 1996 to $82 million from $84 million in 1995 after a significant increase in 1995 compared with $70 million in 1994. During 1996 the Corporation's weighted average interest rate on all debt declined to 6.5% from 7.4% in 1995 primarily due to the maturity of high fixed rate public debt during 1995 and 1996 and also due to lower market interest rates. The favorable rate impact was offset in part by higher debt balances to support receivable balances. The increase in 1995 from 1994 was primarily the result of higher debt balances to support increased wholesale note and account balances and higher market interest rates, offset in part by an improvement in the Corporation's borrowing spread over market interest rates as a result of the 1995 amendment to the revolving debt agreement and the asset-backed commercial paper ("ABCP") program. The ratio of debt to equity was 4.7:1, 5.2:1 and 4.8:1 at October 31, 1996, 1995, and 1994, respectively. Credit collection and administrative expenses were $28 million in 1996 and 1995 compared with $26 million in 1994. The $2 million increase in 1995 compared with 1994 was due to retail marketing efforts and incentive programs. The provision for losses on receivables totaled $9 million in 1996 compared with $3 million in 1995 and $2 million in 1994. As the trucking industry softened during 1996, the high level of new truck purchases in 1995 caused an over capacity in the trucking sector. This over capacity coupled with competitive freight rates and higher fuel costs impacted NFC's customers' abilities to meet obligations and has resulted in higher delinquencies, repossessions and credit losses. Notes and account write-offs (recoveries), including sold notes totaled $5 million in 1996, $(1) million in 1995 and $1 million in 1994. The Corporation's allowance for losses as a percentage of serviced finance receivables was .74%, .62% and .65% at October 31, 1996, 1995 and 1994, respectively. Insurance claims and underwriting expenses decreased to $44 million in 1996 from $47 million and $54 million in 1995 and 1994, respectively. The decline resulted from decreases in losses incurred in Harco's truck liability insurance lines and lower commission costs associated with lower volumes of premiums written through general agents. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 sales of receivables, commercial paper, short- and long-term bank borrowings, medium- and long-term debt issues 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 operation generates its funds through internal operations and has no external borrowings. Operations used $29 million in cash in 1996 as the cash provided from net income of $49 million was offset by a decrease in accounts payable reflecting the timing of payments to Transportation. Investment activities provided $95 million in cash primarily due to a $163 million decline in wholesale note and account balances, offset in part by higher retail and equipment leasing activity. During 1996, the purchase of $1,108 million retail notes and lease receivables was funded with $982 million proceeds from the sale of the receivables and principal collections of $125 million. The cash provided from investing activities was used to lower debt funding and to pay dividends of $26 million. See also the "Statement of Consolidated Cash Flow" on page 12. Over the last three years, operations provided $103 million in cash and proceeds from the sale of retail receivables totaled $2,704 million. These amounts were used mainly to fund receivable acquisitions of $2,747, net of principal collections on the receivables, and dividend payments of $61 million. Receivable sales were a significant source of funding in 1996 and 1995. 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 1996 and 1995, the Corporation sold $985 and $740 million, respectively, of retail notes, through Navistar Financial Retail Receivables Corporation ("NFRRC"), a wholly- owned subsidiary, to owner trusts which in turn sold notes and certificates to investors. At October 31, 1996, the remaining shelf registration available to NFRRC for issuance of asset- backed securities was $2.4 billion. The Corporation has a $500 million revolving wholesale note trust that provides for the continuous sale of eligible wholesale notes on a daily basis. The trust is funded by securities sold to the public comprised of three $100 million tranches of investor certificates maturing serially from 1997 to 1999 and a $200 million tranche of investor certificates maturing in 2004. See Note 5 to the Consolidated Financial Statements for further discussion. The Corporation has a $925 million bank revolving credit facility and a $400 million asset-backed commercial paper ("ABCP") program supported by a bank liquidity facility, which mature in March 2001. See Note 10 to the Consolidated Financial Statements for further discussion. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Funds Management (Continued) 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. In November 1996, the Corporation sold $487 million of retail notes, net of unearned finance income, through NFRRC to an owner trust which in turn sold notes and certificates to investors. A gain of $6.9 million was recognized on the sale. The Corporation manages sensitivity to interest rate changes by funding floating rate assets with floating rate debt, primarily borrowings under the bank revolving credit agreement, and fixed rate assets with fixed rate debt, equity and floating rate debt. Management has limited the amount of fixed rate assets funded with floating rate debt by selling retail receivables on a fixed rate basis and, to a lesser extent, by utilizing derivative financial instruments. See notes 1 and 14 to the Consolidated Financial Statements. Corporate policy prohibits the use of derivatives for speculative purposes. On February 1, 1994, the Illinois Department of Revenue ("Department") issued a Notice of Deficiency to the Corporation for approximately $12 million for the fiscal years 1989 throuth 1991. The Corporation maintains that the Department's interpretation and application of the law is incorrect and improper. Based on discussions with outside counsel, NFC's management is of the opinion that NFC's position will prevail and the Department's action will not have a material impact on NFC's financial condition. See Note 8 to the Consolidated Financial Statements for further discussion. Pending Accounting Standards In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which the Corporation must adopt for all applicable transactions occurring after December 31, 1996. The Corporation will apply SFAS No. 125 to securitization transactions occurring on or after January 1, 1997. The new standard is not expected to have a material effect on the Corporation's net income or financial condition. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Business Outlook The demand for heavy trucks is forecast to continue to soften during fiscal 1997 and correspondingly NFC's profitability and wholesale and retail financing activity are anticipated to be lower. 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 1997 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, 1996, 1995 and 1994 10 Statement of Consolidated Financial Condition as of October 31, 1996 and 1995 11 Statement of Consolidated Cash Flow for the years ended October 31, 1996, 1995 and 1994 12 Notes to Consolidated Financial Statements 13 Supplementary Financial Data 34 Independent Auditors' Report 39
Navistar Financial Corporoation and Subsidiaries Statement of Consolidated Income and Retained Earnings Millions of Dollars
For the years ended October 31 1996 1995 1994 Revenues Retail notes and lease financing $ 97.7 $ 73.3 $ 71.4 Wholesale notes 56.6 54.1 39.2 Accounts 26.6 29.2 22.2 Servicing fee income 20.5 18.3 17.3 Insurance premiums earned 42.0 44.6 51.1 Marketable securities 9.4 8.7 9.6 Total 252.8 228.2 210.8 Expenses Cost of borrowing: Interest expense (Notes 9 and 10) 73.2 75.1 62.7 Other 8.4 9.1 7.1 Total 81.6 84.2 69.8 Credit, collection and administrative 28.2 27.9 25.9 Provision for losses on receivables (Note 7) 9.3 2.6 2.3 Insurance claims and underwriting 44.4 46.7 54.0 Other expense, net 8.8 8.1 3.6 Total 172.3 169.5 155.6 Income Before Taxes 80.5 58.7 55.2 Taxes on Income (Note 8) 31.1 22.5 21.2 Net Income 49.4 36.2 34.0 Retained Earnings Beginning of year 84.0 56.8 48.4 Dividends paid (26.0) (9.0) (25.6) End of year (Note 13) $107.4 $ 84.0 $ 56.8
See Notes to Consolidated Financial Statements. Navistar Financial Corporation and Subsidiaries Statement of Consolidated Financial Condition Millions of Dollars
As of October 31 1996 1995 ASSETS Cash and Cash Equivalents $ 6.7 $ 2.9 Marketable Securities (Note 4) 128.1 131.8 Receivables Finance receivables (Note 5) 1,205.2 1,381.3 Allowance for losses (Note 7) (11.6) (10.4) Receivables, net 1,193.6 1,370.9 Amounts Due from Sales of Receivables (Note 5) 264.3 247.8 Equipment on Operating Leases, Net (Note 6) 101.1 39.3 Repossessions 13.2 5.8 Reinsurance Receivables 21.2 24.8 Other Assets 65.6 51.4 Total Assets $1,793.8 $1,874.7 LIABILITIES AND SHAREOWNER'S EQUITY Short-Term Debt (Note 9) $ 99.4 $ 50.5 Accounts Payable 66.7 138.8 Other Liabilities 19.7 24.1 Senior and Subordinated Debt (Note 10) 1,206.4 1,279.8 Dealers' Reserves 22.3 21.0 Unpaid Insurance Claims and Unearned Premiums 99.6 103.8 Commitments and Contingent Liabilities (Notes 8, 12 & 15) - - Shareowner's Equity (Note 13) Capital stock (Par value $1.00, 1,600,000 shares issued and outstanding) and paid-in capital 171.0 171.0 Retained earnings 107.4 84.0 Unrealized gains on marketable securities (Note 4) 1.3 1.7 Total 279.7 256.7 Total Liabilities and Shareowner's Equity $1,793.8 $1,874.7
See Notes to Consolidated Financial Statements. Navistar Financial Corporation and Subsidiaries Statement of Consolidated Cash Flow Millions of Dollars
For the years ended October 31 1996 1995 1994 Cash Flow From Operations Net income $ 49.4 $ 36.2 $ 34.0 Adjustments to reconcile net income to cash provided from operations: Gains on sales of receivables (Note 5) (20.2) (5.2) (11.8) Depreciation and amortization 15.3 11.1 8.7 Provision for losses on receivables (Note 7) 9.3 2.6 2.3 Increase (decrease) in accounts payable to affiliated companies (65.0) 73.2 (0.9) Other (17.3) (6.7) (12.3) Total (28.5) 111.2 20.0 Cash Flow From Investing Activities Proceeds from sold retail notes 982.1 726.8 994.8 Purchase of retail notes and lease receivables (1,107.6) (1,099.5) (915.9) Principal collections on retail notes and lease receivables 125.4 123.4 180.9 Acquisitions (over)/under cash collections of wholesale notes and accounts receivable 163.0 (77.1) (140.0) Purchase of marketable securities (63.0) (61.9) (51.8) Proceeds from sales and maturities of marketable securities 67.7 67.3 45.1 Increase in property and equipment leased to others (72.8) (18.7) (5.3) Total 94.8 (339.7) 107.8 Cash Flow From Financing Activities Net increase (decrease) in short-term debt 48.9 (368.7) 344.2 Net increase (decrease) in bank revolving credit facility usage (56.0) 405.0 (372.0) Net increase in asset-backed commercial paper facility usage 88.1 275.8 - Principal payments on long-term debt (117.5) (100.0) (180.0) Proceeds from issuance of long-term debt - - 100.0 Dividends paid to Transportation (26.0) (9.0) (25.6) Total (62.5) 203.1 (133.4) Increase/(Decrease) in Cash and Cash Equivalents 3.8 (25.4) (5.6) Cash and Cash Equivalents at Beginning of Year 2.9 28.3 33.9 Cash and Cash Equivalents at End of Year $ 6.7 $ 2.9 $ 28.3 Supplementary disclosure of cash flow information: Interest paid $ 76.3 $ 74.3 $ 64.8 Income taxes paid $ 32.2 $ 14.6 $ 22.1
See Notes to Consolidated Financial Statements. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 1996 MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Navistar Financial Corporation ("NFC") and its wholly-owned subsidiaries ("Corporation"). All significant intercompany accounts and transactions have been eliminated. All of the Corporation's capital stock is owned by Navistar International Transportation Corp. ("Transportation"), which is wholly owned by Navistar International Corporation ("Navistar"). Nature of Operations The Corporation'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. The Corporation also 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. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue on Receivables 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. Revenue on operating leases is recognized on a straight-line basis over the life of the lease. Recognition of revenue on receivables and leases is suspended when management determines the collection of future income is not probable. Income recognition is resumed if collection doubts are removed. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES (Continued) Allowance for Losses on Receivables The allowance for losses on receivables is established through a charge to the provision for losses. The allowance is an estimate of the amount adequate to absorb losses on existing receivables that may become uncollectible. The allowance is maintained at an amount management considers appropriate in relation to the outstanding receivables portfolio based on such factors as overall portfolio quality, historical loss experience and current economic conditions. Under various agreements, Transportation and its dealers may be liable for a portion of customer losses or may be required to repurchase the repossessed collateral at the receivable principal value. The Corporation's losses are net of these benefits. Receivables are charged off to the allowance for losses as soon as the receivable is determined to be uncollectible. Receivable Sales The Corporation securitizes and sells receivables to public and private investors with limited recourse. The Corporation continues to service the receivables, for which a servicing fee is received. Servicing fees are earned on a level yield basis over the terms of the related sold receivables and are included in servicing fee income. 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. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES (Continued) Income Taxes Navistar and its subsidiaries file a consolidated Federal income tax return which includes Transportation and the Corporation. Federal income taxes for the Corporation are computed on a separate consolidated return basis and are payable to Transportation. Cash and Cash Equivalents Cash and cash equivalents include money market funds and marketable securities with original maturities of three months or less, except for such securities held by the insurance operations which are included in marketable securities. Marketable Securities Marketable securities are classified as available-for-sale and are reported at fair value. Derivative Financial Instruments The Corporation uses derivatives to reduce its exposure to interest rate volatility. All derivative financial instruments are held for purposes other than trading, and the Corporation's policy prohibits the use of derivatives for speculative purposes. Gains or losses related to hedges of anticipated sales of receivables are deferred and are recognized in income when the receivables are sold. Pending Accounting Standards In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, ("SFAS No. 125") "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which the Corporation must adopt for all applicable transactions occurring after December 31, 1996. The Corporation will apply SFAS No. 125 to securitization transactions occurring on or after January 1, 1997. The new standard is not expected to have a material effect on the Corporation's net income or financial condition. Reclassification Certain amounts for prior years have been reclassified to conform with the presentation used in the 1996 financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 2. TRANSACTIONS WITH AFFILIATED COMPANIES Wholesale Notes, Wholesale Accounts and Retail Accounts In accordance with the agreements between the Corporation and Transportation relating to financing of wholesale notes, wholesale accounts and retail accounts, the Corporation receives interest income from Transportation at agreed upon interest rates applied to the average outstanding balances less interest amounts paid by dealers on wholesale notes and wholesale accounts. The Corporation purchases wholesale notes and accounts 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 was $49.8 in 1996, $55.7 in 1995 and $50.7 in 1994. Retail Notes and Lease Financing In accordance with agreements between the Corporation and Transportation, Transportation may be liable for certain losses on the finance receivables and may be required to repurchase the repossessed collateral at the receivable principal value. Losses recorded by Transportation were $9.5 in 1996 and $.6 in 1995 and 1994. 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 1996, $2.4 in 1995 and $2.5 in 1994. Short-Term Debt The Corporation had daily average short-term borrowings from Transportation of $85 in 1996 and $93 in 1995 on which interest accrued at the Corporation's incremental short-term borrowing rate. These borrowings, including $5 and $6 of interest expense in 1996 and 1995, respectively, were repaid during each of the fiscal years. Accounts Payable Accounts payable include $24.5 and $89.5 payable to Transportation at October 31, 1996 and 1995, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 3. INDUSTRY SEGMENTS Information by industry segment is summarized as follows:
1996 1995 1994 Revenues: Finance operations $ 201.6 $ 175.1 $ 150.6 Insurance operations 51.2 53.1 60.2 Total revenue $ 252.8 $ 228.2 $ 210.8 Income before taxes: Finance operations $ 74.2 $ 53.1 $ 49.9 Insurance operations 6.3 5.6 5.3 Total income before taxes $ 80.5 $ 58.7 $ 55.2 Assets at end of year: Finance operations $1,626.9 $1,701.9 $1,354.1 Insurance operations 166.9 172.8 180.7 Total assets at end of year $1,793.8 $1,874.7 $1,534.8
4. MARKETABLE SECURITIES The fair value of marketable securities is based on quoted market prices, when available. If a quoted price is not available, fair value is estimated using quoted market prices for similar financial instruments. The 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 $1.3 and $1.7 as of October 31, 1996 and 1995, respectively. The following table sets forth, by type of security issuer, the amortized cost and estimated market values at October 31, 1996 and 1995:
Amortized Gross Realized Fair Cost Gains Losses Value U.S. government and agency securities $ 41.7 $ .3 $ .5 $ 41.5 Corporate debt securities 29.1 .1 .4 28.8 Mortgage- and asset-backed securities 42.4 .2 .4 42.2 Foreign governments 1.5 - - 1.5 Total debt securities $ 114.7 $ .6 $ 1.3 $ 114.0 Equity securities 11.3 3.5 .7 14.1 Total $ 126.0 $ 4.1 $ 2.0 $ 128.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 4. MARKETABLE SECURITIES (Continued)
Amortized Gross Unrealized Fair October 31, 1995 Cost Gains Losses Value U.S. government and agency 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 - - .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
Contractual maturities of marketable debt securities at October 31, 1996, are as follows:
Amortized Fair Cost Value Due in one year or less $ 16.1 $ 16.0 Due after one year through five years 31.2 31.5 Due after five years through ten years 18.9 18.5 Due after ten years 6.1 5.8 72.3 71.8 Mortgage- and asset-backed securities 42.4 42.2 Total (Excludes Stocks) $ 114.7 $ 114.0
Actual maturities may differ from the contractual maturities because of prepayments by the issuers. Proceeds from sales or maturities of marketable securities available for sale were $67.7 during 1996 and $67.3 during 1995. Gross gains of $1.8 and $.8 and gross losses of $.5 and $.6 were realized on those sales in 1996 and 1995, respectively. All marketable securities at October 31, 1996 and 1995, were held by Harco, of which $16.7 and $23.2, respectively, were on deposit with various state departments of insurance or otherwise restricted as to use. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES Finance receivable balances, net of unearned finance income, at October 31 are summarized as follows:
1996 1995 Retail notes and lease financing $ 733.3 $ 747.2 Wholesale notes 100.5 268.2 Accounts: Retail 314.7 316.7 Wholesale 56.7 49.2 Total 371.4 365.9 Total finance receivables $1,205.2 $1,381.3
Contractual maturities of finance receivables including unearned finance income at October 31, 1996, are summarized as follows:
Retail Wholesale Accounts Due in: 1997 $230.7 $ 69.5 $371.4 1998 211.6 31.0 - 1999 186.4 - - 2000 142.3 - - 2001 75.5 - - Due after 2001 13.8 - - Gross finance receivables 860.3 100.5 371.4 Unearned finance income 127.0 - - Total finance receivables $733.3 $100.5 $371.4
The actual cash collections from finance receivables will vary from the contractual cash flows because of sales, prepayments, extensions and renewals. The contractual maturities, therefore, should not be regarded as a forecast of future collections. The Corporation's primary business is to provide wholesale, retail and lease financing for new and used trucks sold by Transportation and Transportation's dealers, and as a result the Corporation's receivables and leases have significant concentration in the trucking industry. On a geographic basis, there is not a disproportionate concentration of credit risk in any area of the United States. The Corporation retains as collateral a security interest in the equipment associated with wholesale notes, retail notes and leases other than accounts. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES (Continued) 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:
1996 1995 Retail notes $1,366.4 $1,173.2 Wholesale notes 500.0 500.0 Total $1,866.4 $1,673.2
Gains or losses from the sales of receivables are recognized in the period in which such sales occur. The allowance for credit losses is adequately provided prior to the receivable sales; therefore, gains from receivable sales are not reduced for expected credit losses. Included in "Retail notes and lease financing" revenue are gains totaling $20.2, $5.2 and $11.8 on retail note receivable sales of $985, $740 and $1,033 for the fiscal years ended October 31, 1996, 1995 and 1994, 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 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 1996, in two separate sales, the Corporation sold a total of $985 of retail notes, net of unearned finance income, through NFRRC to two individual owner trusts. The owner trusts, in turn, sold $946 of notes and $39 of certificates to investors. The proceeds of $934, net of underwriting fees and credit enhancements, were used by the Corporation for general working capital purposes. At October 31, 1996, the remaining shelf registration available to NFRRC for issuance of asset-backed securities was $2.4 billion. NFSC has in place a $500 revolving wholesale note trust that provides for the continuous sale of eligible wholesale notes on a daily basis. The issuance of a $200 tranche of investor certificates during fiscal 1995 increased NFSC's revolving wholesale note trust to $500. The trust is comprised of three $100 tranches of investor certificates maturing serially from 1997 to 1999 and a $200 tranche of investor certificates maturing in 2004. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES (Continued) 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. The following is a summary of amounts included in "Amounts Due from Sales of Receivables" as of October 31:
1996 1995 Cash held and invested by trusts $ 85.2 $ 66.8 Subordinated retained interests in wholesale 85.4 86.3 receivables Subordinated retained interests in retail 12.5 12.2 receivables Holdback reserves 31.7 43.7 Excess servicing fee and other 61.9 48.0 Allowance for credit losses (12.4) (9.2) Total $264.3 $247.8
6. INVESTMENT IN OPERATING LEASES Operating leases at year-end were as follows:
1996 1995 Investment in operating leases Vehicles and other equipment, at cost $116.4 $ 49.0 Less: Accumulated depreciation (15.3) (9.7) Net investment in operating leases $101.1 $ 39.3
Future minimum rentals on operating leases are as follows: 1997, $24.7; 1998, $22.2; 1999, $16.9; 2000, $11.1 and $5.3 thereafter. Each of these assets is depreciated on a straight- line basis over the term of the lease in an amount necessary to reduce the leased vehicle to its estimated residual value at the end of the lease term. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 7. ALLOWANCE FOR LOSSES The allowance for losses on receivables is summarized as follows:
1996 1995 1994 Total allowance for losses at beginning of year $19.6 $16.2 $14.8 Provision for losses 9.3 2.6 2.3 Net (losses) recoveries (charged) credited to allowance (4.9) .8 (.9) Total allowance for losses at end of year $24.0 $19.6 $16.2 Allowance pertaining to: Owned notes $11.6 $10.4 $ 8.2 Sold notes 12.4 9.2 8.0 Total $24.0 $19.6 $16.2
8. TAXES ON INCOME Taxes on income are summarized as follows:
1996 1995 1994 Current: Federal $26.4 $18.9 $15.1 State and local 4.4 3.1 3.0 Total current 30.8 22.0 18.1 Deferred (primarily Federal) .3 .5 3.1 Total $31.1 $22.5 $21.2
The effective tax rate of 38% differs from the statutory United States Federal tax rate of 35% primarily because of state and local income taxes. Deferred tax assets and liabilities at October 31, comprised the following:
1996 1995 Deferred tax assets: Other postretirement benefits $2.9 $2.8 Deferred tax liabilities: Depreciation and other 6.9 6.4 Unrealized gains on marketable securities .8 1.0 Total deferred tax liabilities 7.7 7.4 Net deferred tax liabilities $4.8 $4.6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 8.TAXES ON INCOME (Continued) 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. Based on discussions with outside counsel, NFC's management 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. 9. SHORT-TERM DEBT Commercial paper is issued by the Corporation with varying terms. The Corporation also has short-term borrowings with various banks on a non- committed basis. Compensating cash balances and commitment fees are not required under these agreements. Short-Term Debt outstanding at October 31 was comprised only of commercial paper. There were no short-term borrowings outstanding. Information regarding short-term debt is as follows:
1996 1995 1994 Aggregate obligations outstanding: Daily average $ 68.2 $ 37.8 $ 11.7 Maximum month-end balance 117.8 81.1 419.2 Weighted average interest rate: On average daily borrowing 6.0% 6.4% 5.4% At October 31 5.9% 6.3% 5.6%
Unused commitments under the Corporation's bank revolving credit facility and bank liquidity facility supporting the asset- backed commercial paper program are used as backup for outstanding short-term borrowings. See also Note 10 to the Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 10. SENIOR AND SUBORDINATED DEBT Senior and Subordinated Debt outstanding at October 31 is summarized as follows:
1996 1995 Bank revolving credit, at variable rates, due March 2001 $ 704.0 $ 760.0 Funding under asset-backed commercial paper program, at variable rates, due March 2001 402.4 302.3 Senior term debt: Notes, medium-term, 9.50%, due 1996 - 117.5 Subordinated term debt: Senior Notes, 8 7/8%, due November 1998 100.0 100.0 Total senior and subordinated debt $1,206.4 $1,279.8
The weighted average interest rate on total debt, including short-term debt and the effect of discounts and related amortization, was 6.5%, 7.4% and 7.1% in 1996, 1995 and 1994, respectively. The aggregate annual maturities and required payments of debt are as follows: 1999, $100.0; and 2001, $1,106.4. Effective March 29, 1996, the Corporation amended and restated its $900 million bank revolving credit facility and its $300 million asset-backed commercial paper ("ABCP") program supported by a bank liquidity facility, extending the maturity date of each facility to March 2001. In addition, the commitment of the bank revolving credit facility was expanded to $925 million, the ABCP facility was increased to $400 million and a new pricing and fee structure was established. The available funding under the ABCP program is $414 million which is comprised of the $400 million liquidity facility plus $14 million of trust certificates issued in connection with the formation of the ABCP Trust. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 10. SENIOR AND SUBORDINATED DEBT (Continued) Available funding under the amended and restated credit facility and the ABCP program was $233, of which $99 provided funding backup for the outstanding short-term debt at October 31, 1996. The remaining $134 when combined with unrestricted cash and cash equivalents made $141 available to fund the general business purposes of the Corporation at October 31, 1996. Under the terms of the revolving credit facility, the Corporation is required to maintain tangible net worth at a minimum of $175 and a debt to tangible net worth ratio of no greater than 7 to 1. Consistent with the previous revolving credit agreement, the amended agreement grants security interests in substantially all of the Corporation's assets to the Corporation's debtholders. Compensating cash balances are not required under the restated revolving credit facility. Facility fees are paid quarterly regardless of usage. 11. RETIREMENT BENEFITS The Corporation provides postretirement benefits to substantially all of its employees. Expenses associated with postretirement benefits include pension expense for employees, retirees and surviving spouses, and postretirement health care and life insurance expense for employees, retirees, surviving spouses and dependents. Pension Benefits Generally pension benefits are non-contributory with benefits related to an employee's length of service and compensation rate. Plan assets are primarily invested in a dedicated portfolio of long-term fixed income securities with the remainder invested in high quality equity securities. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. RETIREMENT BENEFITS (Continued) Pension Expense Net pension cost includes the following:
1996 1995 1994 Service cost for benefits earned during the period $ .7 $ .5 $ 1.0 Interest cost on projected benefit obligation 2.9 2.8 2.7 Return on assets - actual (gain) loss (3.2) (9.1) 3.3 - deferred gain (loss) (.4) 5.8 (6.8) Net amortization costs and other costs. .1 - .1 Net pension cost $ .1 $ - $ .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 1996 1995 1996 1995 Actuarial present value of: Vested benefits $(31.5) $ (31.8) $ (2.0) $ (2.2) Non-vested benefits (4.0) (4.0) (.1) (.1) Accumulated benefit obligation (35.5) (35.8) (2.1) (2.3) Effect of projected future compensation levels (.9) - - (1.0) Total projected benefit obligation (36.5) (36.7) (2.1) (2.3) Plan assets at fair value 42.7 41.5 - - Funded status at October 31 6.2 4.8 (2.1) (2.3) Unrecognized net losses (gains) (5.5) (4.2) .4 .6 Unrecognized plan amendments .5 .5 - - Unrecognized net obligation as of transition date .1 .1 - - Net asset (liability) $ 1.3 $ 1.2 $ (1.7) $ (1.7)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. RETIREMENT BENEFITS (Continued) The weighted average rate assumptions used in determining the projected benefit obligation and pension expense were:
1996 1995 1994 Discount rate used to determine the present value 7.9% 7.5% 9.2% of the projected benefit obligations Expected long-term rate of return on plan assets 8.9% 9.9% 9.0% Expected rate of increase in future compensation levels 3.5% 3.5% 3.5%
Other Postretirement Benefits The components of expense for other postretirement benefits that are included in the Statement of Consolidated Income and Retained Earnings include the following:
1996 1995 1994 Service cost for benefits earned during the year $ .4 $ .3 $ .2 Interest cost on the accumulated benefit obligation .8 .8 .7 Expected return on assets - actual (gain) loss .8 (1.5) (.2) - deferred gain (loss) (1.3) 1.2 - Total cost of other postretirement benefits $ .7 $ .8 $ .7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. RETIREMENT BENEFITS (Continued) The funded status of other postretirement benefits as of October 31, 1996 and 1995, were as follows:
1996 1995 Accumulated other postretirement benefit obligation (APBO): Retirees and their dependents $(4.9) $(4.9) Active employees eligible to retire (2.9) (2.4) Other active participants (3.4) (3.3) Total APBO (11.2) (10.6) Plan assets at fair value 3.9 4.5 APBO in excess of plan assets (7.3) (6.1) Unrecognized net loss 1.5 .4 Net liability $(5.8) $(5.7)
The expected return on plan assets was 10.5% for 1996, 10% for 1995 and 9% for 1994. The weighted average of discount rates used to determine the accumulated postretirement benefit obligation was 8.1% and 7.7% at October 31, 1996 and 1995, respectively. For 1997, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 8.1%. The rate is projected to decrease to 5.0% in the year 2004 and remain at that level each year thereafter. If the cost trend rate assumptions were increased by one percentage point for each year, the accumulated postretirement benefit obligation would increase by approximately $1.2 and the associated expense recognized for the year ended October 31, 1996, would increase by an estimated $.1. 12. LEASES The Corporation is obligated under noncancelable operating leases for the majority of its office facilities and equipment. These leases are generally renewable and provide that property taxes and maintenance costs are to be paid by the lessee. At October 31, 1996, future minimum lease commitments under noncancelable operating leases with remaining terms in excess of one year are as follows: Year Ended October 31, 1997 $1.7 1998 1.7 1999 1.6 2000 1.3 2001 .3 Thereafter - Total $6.6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 13. SHAREOWNER'S EQUITY The number of authorized shares of capital stock as of October 31, 1996 and 1995, 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. 14. FINANCIAL INSTRUMENTS Fair Value of Financial Instruments The carrying amounts and estimated fair values of the Corporation's financial instruments were as follows:
1996 1995 Carrying Fair Carrying Fair Amount Value Amount Value Financial assets: Finance receivables: Retail notes $ 662.5 $ 672.1 $ 680.8 $ 707.2 Wholesale notes 100.5 100.5 268.2 268.2 Accounts 371.4 371.4 365.9 365.9 Amounts due from sales of receivables 264.3 258.1 247.8 234.6 Financial liabilities: Senior and subordinated debt $1,206.4 $1,207.4 $1,279.8 $1,282.9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 14. 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 14. 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 or loss on sale of receivables. During August through October 1996, the Corporation entered into $400 of forward interest rate lock agreements on a Treasury maturing in 1998 related to the anticipated November 1996 sale of retail receivables. See also Note 16. These hedge agreements, which were closed in conjunction with the pricing of the sale, resulted in a $1.9 loss which was deferred at October 31, 1996, and included in the gain on the sale of receivables recognized in November 1996. The Corporation's wholly-owned insurance subsidiary has investments in Collateralized Mortgage Obligations ("CMO's") of $42 which are included in the Corporation's marketable securities at October 31, 1996. These securities have characteristics which reduce the Corporation's exposure to prepayment risk. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 15. LEGAL PROCEEDINGS 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. 16. SUBSEQUENT EVENT In November 1996, the Corporation sold $487 of retail notes, net of unearned finance income, through NFRRC to an owner trust which, in turn, sold notes and certificates to investors. A gain of $6.9 was recognized on the sale. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 17. QUARTERLY FINANCIAL INFORMATION (unaudited)
1996 1st 2nd 3rd 4th Fiscal Quarter Quarter Quarter Quarter Year Revenues $68.7 $60.7 $67.0 $56.4 $252.8 Interest expense 17.1 19.7 18.8 17.6 73.2 Provision for losses on receivables 1.1 1.6 1.7 4.9 9.3 Net income 16.6 8.7 15.6 8.5 49.4
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
SUPPLEMENTARY FINANCIAL DATA Five Year Summary of Financial and Operating Data Dollar amounts in millions
1996 1995 1994 1993 1992 Revenues and net income retained Revenues $ 252.8 $ 228.2 $ 210.8 $ 231.9 $ 228.3 Provision for losses on receivables 9.3 2.6 2.3 1.5 3.6 Interest expense 73.2 75.1 62.7 74.6 82.2 Other charges, net 89.8 91.8 90.6 106.8 96.1 Taxes on income 31.1 22.5 21.2 17.7 16.9 Cumulative effect of changes in accounting policy, net of income taxes - - - 8.8 - Net income 49.4 36.2 34.0 22.5 29.5 Dividends paid 26.0 9.0 25.6 22.6 16.0 Net income retained $ 23.4 $27.2 $ 8.4 $ (.1) $ 13.5 Percent of net income to average shareowner's equity 18.1% 15.0% 15.1% 10.3% 13.8% Assets at end of year Cash and cash equivalents $ 6.7 $ 2.9 $ 28.3 $ 33.9 $ 79.2 Marketable securities 128.1 131.8 130.5 125.6 130.5 Finance receivables: Truck retail notes and lease financing 733.3 747.2 513.9 823.5 955.1 Wholesale notes 100.5 268.2 230.6 212.5 81.5 Accounts 371.4 365.9 357.7 245.1 204.3 Total 1,205.2 1,381.3 1,102.2 1,281.1 1,240.9 Allowance for losses (11.6) (10.4) (8.2) (10.9) (12.4) Finance receivables, net 1,193.6 1,370.9 1,094.0 1,270.2 1,228.5 Other assets 465.4 369.1 282.0 195.5 170.5 Total assets $1,793.8 $1,874.7 $1,534.8 $1,625.2 $1,608.7 Liabilities and shareowner's equity at end of year Short-term borrowings $ 99.4 $ 50.5 $ 419.2 $ 75.0 $ - Bank revolving credit 704.0 760.0 355.0 727.0 727.0 Asset-backed commercial paper facility 402.4 302.3 - - - Medium-term notes - 117.5 217.3 222.2 261.1 Long-term notes and debentures - - - 75.0 135.0 Subordinated debt 100.0 100.0 100.0 100.0 94.9 Total debt 1,305.8 1,330.3 1,091.5 1,199.2 1,218.0 Other liabilities 208.3 287.7 217.7 206.6 171.2 Shareowner's equity 279.7 256.7 225.6 219.4 219.5 Total liabilities and shareowner's equity $1,793.8 $1,874.7 $1,534.8 $1,625.2 $1,608.7 Debt to equity ratio 4.7:1 5.2:1 4.8:1 5.5:1 5.5:1 Senior debt to capital funds ratio 3.2:1 3.4:1 3.0:1 3.4:1 3.6:1 Gross insurance premiums written $ 53.3 $ 52.0 $ 59.0 $ 65.8 $ 69.2 Number of employees at Oct. 31 352 360 353 339 364
SUPPLEMENTARY FINANCIAL DATA (Continued) Gross Finance Receivables and Leases Acquired
Dollar amounts in millions 1996 1995 1994 1993 1992 Wholesale notes $2,705.8 $2,979.4 $2,306.6 $1,977.6 $1,547.7 Retail notes and leases: New 1,064.1 1,075.0 861.9 730.0 591.8 Used 281.7 242.3 217.2 168.4 185.9 Total 1,345.8 1,317.3 1,079.1 898.4 777.7 Total $4,051.6 $4,296.7 $3,385.7 $2,876.0 $2,325.4
Analysis of Finance Retail Notes Acquired Average Down Payment Contractual as a Percent Average Term of Retail Monthly In Months Sales Price Installment Number of Year Units New Used New Used New Used 1996 19,521 55 42 8.0% 15.6% $1,394 $ 918 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
SUPPLEMENTARY FINANCIAL DATA (Continued) Analysis of Gross Retail Notes and Lease Financing With Installments Past Due Over 60 Days
At October 31 ($ Millions) 1996 1995 1994 1993 1992 Original amount of notes and leases $ 3.2 $ 1.2 $ 1.3 $ 2.6 $ 4.3 Balance of notes and leases 2.1 .5 .5 .7 2.1 Balance as a percent of total outstanting .25% .06% .09% .08% .19%
Analysis of Retail Note Repossessions 1996 1995 1994 1993 1992 Retail note repossessions acquired as a percentage of average retail note gross balance 3.15% .92% .97% 1.95% 3.70%
SUPPLEMENTARY FINANCIAL DATA (Continued) Analysis of Loss Experience
($ Millions) 1996 1995 1994 1993 1992 Net losses (recoveries): Retail notes and leases $5.1 $ .3 $ .6 $(.1) $2.4 Wholesale notes (.2) (.9) .1 .8 .8 Accounts - (.2) .2 - - Total $4.9 $(.8) $ .9 $ .7 $3.2 Percent net losses (recoveries) to liquidations: Retail notes and leases .48% .03% .07% (.01)% .27% Wholesale notes (.01) (.03) .01 .04 .06 Total .13% (.02)% .03% .03% .13% Percent net losses (recoveries) to related average gross receivables outstanding: Retail notes and leases .22% .02% .04% - .17% Wholesale notes (.02) (.13) .03 .16 .20 Accounts - (.05) .08 - - Total .14% (.03)% .04% .03% .16%
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, 1996 and 1995 and the results of their operations and their cash flow for each of the three years in the period ended October 31, 1996 in conformity with generally accepted accounting principles. /s/DELOITTE & TOUCHE LLP Deloitte & Touche LLP December 16, 1996 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
Reports on Form 8-K No reports on Form 8-K were filed for the three months ended October 31, 1996. 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 22, 1997 Phyllis E. Cochran Vice President and Controller (Principal Accounting Officer) NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES Exhibit 24 POWER OF ATTORNEY Each person whose signature appears below does hereby make, constitute and appoint John J. Bongiorno, Phyllis E. Cochran and William W. Jones and each of them acting individually, true and lawful attorneys-in-fact and agents with power to act without the other and with full power of substitution, to exe cute, 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 22, 1997 John J. Bongiorno Officer; Director (Principal Executive Officer) /s/R. WAYNE CAIN Vice President and Treasurer; January 22, 1997 R. Wayne Cain Director (Principal Financial Officer) /s/PHYLLIS E. COCHRAN Vice President and Controller; January 22, 1997 Phyllis E. Cochran Director (Principal Accounting Officer) /s/JORDAN H. FEIGER Vice President, Operations; January 22, 1997 Jordan H. Feiger Director /s/JOHN R. HORNE Director January 22, 1997 John R. Horne /s/THOMAS M. HOUGH Director January 22, 1997 Thomas M. Hough
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES SIGNATURES (Continued)
Signature Title Date /s/ROBERT C. LANNERT Director January 22, 1997 Robert C. Lannert /s/J. STEVEN KEATE Director January 22, 1997 J. Steven Keate /s/THOMAS D. SILVER Director January 22, 1997 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 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. 10.46 Amendment No. 1 dated as of March 29, 1996, to the Loan and Security Agreement dated as of November 7, 1994, between Truck Retail Instalment Paper Corp. ("TRIP") and NFC Asset Trust (the "Trust") filed on Form 8-K dated June 5, 1996. Commission File No. 1-4146-1. 10.47 Amendment No. 1 and Consent dated as of March 29, 1996, to the Liquidity Agreement dated as of November 7, 1994, among NFC Asset Trust, certain lenders, and Chemical Bank, as Administrative Agent for the lenders filed on Form 8-K dated June 5, 1996. Commission File No. 1-4146-1. 10.48 Amendment No. 2 dated as of March 29, 1996, to the Amended and Restated Credit Agreement dated as of November 4, 1994, as amended by Amendment No. 1 dated as of December 15, 1995, among the Corporation, certain banks, certain Co- Arranger banks, and Morgan Guaranty Trust Company of New York, as Administrative Agent filed on Form 8-K dated June 5, 1996. Commission File No. 1-4146-1. 10.49 Purchase Agreement dated as of May 30, 1996, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1996-A Owner Trust. Filed on Registration No. 33-55865. 10.50 Pooling and Servicing Agreement dated as of May 30, 1996, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1996-A Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.51 Trust Agreement dated as of May 30, 1996, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1996-A Owner Trust. Filed on Registration No. 33-55865. E-8 Exhibit 10 (Continued) NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES MATERIAL CONTRACTS 10.52 Indenture dated as of November 6, 1996, between Navistar Financial 1995-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996- A Owner Trust. Filed on Registration No. 33-55865. 10.53 Purchase Agreement dated as of November 6, 1996, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1996-B Owner Trust. Filed on Registration No. 33-55865. 10.54 Pooling and Servicing Agreement dated as of November 6, 1996, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1996-B Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.55 Trust Agreement dated as of November 6, 1996, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1996-B Owner Trust. Filed on Registration No. 33-55865. 10.56 Indenture dated as of November 6, 1996, between Navistar Financial 1995-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996- B Owner Trust. Filed on Registration No. 33-55865. E-9 -----END PRIVACY-ENHANCED MESSAGE-----