-----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, GU5aBGoC1b68RTgvWdsvak1mLcDUrOeAtIhhTSQkEB2mdaXxzMLvEFgTjZrARX3i QeMnPQnq5nDNGagK0di7og== 0000808450-99-000012.txt : 19991224 0000808450-99-000012.hdr.sgml : 19991224 ACCESSION NUMBER: 0000808450-99-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991223 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: SEC FILE NUMBER: 001-09618 FILM NUMBER: 99779553 BUSINESS ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3128362000 MAIL ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DRIVE 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 PAGE 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended October 31, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 1-9618 NAVISTAR INTERNATIONAL CORPORATION ---------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3359573 ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 455 North Cityfront Plaza Drive, Chicago, Illinois 60611 -------------------------------------------------- --------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (312) 836-2000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ----------------------------------------------- ------------------------ Common stock, par value $0.10 per share New York Stock Exchange Chicago Stock Exchange Pacific Exchange Preferred stock purchase rights New York Stock Exchange Chicago Stock Exchange Pacific Exchange Cumulative convertible junior preference stock, Series D (with $1.00 par value per share) New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days: Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of December 15, 1999 the aggregate market value of common stock held by non-affiliates of the registrant was $2,623,024,055. As of December 15, 1999 the number of shares outstanding of the registrant's common stock was 62,175,385. Documents Incorporated by Reference ----------------------------------- 1999 Annual Report to Shareowners (Parts I, II and IV) 1999 Proxy Statement (Parts I and III) Navistar Financial Corporation 1999 Annual Report on Form 10-K (Part IV) PAGE 2 NAVISTAR INTERNATIONAL CORPORATION FORM 10-K Year Ended October 31, 1999 INDEX 10-K Page --------- PART I Item 1. Business........................................... 3 Item 2. Properties......................................... 10 Item 3. Legal Proceedings.................................. 10 Executive Officers of the Registrant............... 11 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.................. 12 Item 6. Selected Financial Data............................ 12 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. 12 Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................ 12 Item 8. Financial Statements and Supplementary Data........ 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 13 PART III Item 10. Directors and Executive Officers of the Registrant. 13 Item 11. Executive Compensation............................. 13 Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 13 Item 13. Certain Relationships and Related Transactions..... 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 13 SIGNATURES Principal Accounting Officer.................................. 15 Directors .................................................... 16 POWER OF ATTORNEY................................................ 16 INDEPENDENT AUDITORS' REPORT..................................... 18 INDEPENDENT AUDITORS' CONSENT.................................... 18 SCHEDULE ........................................................ F-1 EXHIBITS ........................................................ E-1 PAGE 3 PART I ITEM 1. BUSINESS Navistar International Corporation is a holding company and its principal operating subsidiary is Navistar International Transportation Corp., referred to as "Transportation." As used hereafter, "Navistar" or "company" refers to Navistar International Corporation and its consolidated subsidiaries. Navistar operates in three principal industry segments: truck, engine (collectively called "manufacturing operations") and financial services. The company's truck segment is engaged in the manufacture and marketing of medium and heavy trucks, including school buses. The company's engine segment is engaged in the design and manufacture of mid-range diesel engines. The truck segment operates primarily in the United States (U.S.) and Canada as well as in Mexico, Brazil and other selected export markets while the engine segment operates primarily in the U.S. and Brazil. Based on assets and revenues, the truck and engine segments represent the majority of the company's business activities. The financial services operations consist of Navistar Financial Corporation (NFC), its domestic insurance subsidiary and the company's foreign finance and insurance subsidiaries. Industry and geographic segment data for 1999, 1998 and 1997 is summarized in Note 13 to the Financial Statements, which is incorporated herein by reference. PRODUCTS AND SERVICES The following table illustrates the percentage of the company's sales of products and services by segment based on dollar amount: YEARS ENDED OCTOBER 31, ----------------------------------------- PRODUCT CLASS 1999 1998 1997 - ------------- ---- ---- ---- Class 5, 6 and 7 medium trucks and school buses............. 32% 33% 33% Class 8 heavy trucks.............. 37 38 35 Truck service parts............... 8 9 10 --- --- ---- Total truck................ 77 80 78 Engine (including service parts) . 19 17 18 Financial services................ 4 3 4 --- --- ---- Total........................ 100% 100% 100% === === ==== The truck segment manufactures and distributes a full line of diesel-powered trucks and school buses in the common carrier, private carrier, government/service, leasing, construction, energy/petroleum and student transportation markets. The truck segment also provides customers with proprietary products needed to support the International truck and bus lines, together with a wide selection of other standard truck and trailer aftermarket parts. The company offers diesel-powered trucks and school buses because of their improved fuel economy, ease of serviceability and greater durability over gasoline-powered vehicles. PAGE 4 The truck and bus manufacturing operations in the U.S., Canada, Mexico and Brazil consist principally of the assembly of components manufactured by its suppliers, although the company produces its own mid-range diesel truck engines, sheet metal components (including cabs) and miscellaneous other parts. The engine segment designs and manufactures diesel engines for use in the company's Class 5, 6 and 7 medium trucks and school buses and selected Class 8 heavy truck models, and for sale to original equipment manufacturers (OEMs) in the U.S. and Mexico. This segment also sells engines for industrial, agricultural and marine applications. In addition, the engine segment provides customers with proprietary products needed to support the International engine lines, together with a wide selection of other standard engine and aftermarket parts. In February 1999, Navistar acquired a 50% interest in Maxion International Motores, S.A., the largest producer of diesel engines in South America. The joint venture produces the current Maxion products in addition to the Navistar 7.3 liter (7.3L) V-8 Turbo Diesel Engine. Based upon information published by R.L. Polk & Company, diesel-powered Class 5, 6 and 7 medium truck and bus shipments represented 90.4% of all medium shipments for fiscal 1999 in the U.S. and Canada. The financial services segment provides retail, wholesale and lease financing of products sold by the truck segment and its dealers within the U.S. as well as the company's wholesale accounts and selected retail accounts receivable. NFC's insurance subsidiary provides commercial physical damage and liability insurance to the truck segment's dealers and retail customers and to the general public through an independent insurance agency system. The foreign finance subsidiaries' primary business is to provide wholesale, retail and lease financing to the Mexican operations' dealers and retail customers. THE MEDIUM AND HEAVY TRUCK INDUSTRY The markets in which Navistar competes are subject to considerable volatility as they move in response to cycles in the overall business environment and are 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 the efficiency and specifications of equipment. The following table shows industry retail deliveries in the combined U.S. and Canadian markets for the five years ended October 31, in thousands of units: YEARS ENDED OCTOBER 31, ---------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Class 5, 6 and 7 medium trucks 179.5 160.0 150.6 145.8 151.8 and school buses............. Class 8 heavy trucks........... 286.0 232.0 196.8 195.4 228.8 ----- ----- ----- ----- ----- Total..................... 465.5 392.0 347.4 341.2 380.6 ===== ===== ===== ===== ===== Source: Monthly data derived from materials produced by Ward's Communications in the U.S. and the Canadian Vehicle Manufacturers Association. The company's first full year of operations in Mexico was 1997. Industry retail deliveries of Class 5 through 8 trucks and school buses in the Mexican market were 23,300 units, 21,800 units and 15,600 units in 1999, 1998 and 1997, respectively, based on monthly data provided by the Associacion Nacional de Productores de Autobuses, Camiones y Tractocamiones. PAGE 5 The company's first full year of operations in Brazil was 1999. Industry retail deliveries of Class 5 through 8 trucks in the Brazilian market were 44,300 units in 1999. The Class 5 through 8 truck markets in the U.S., Canada, Mexico and Brazil are highly competitive. Major U.S. domestic competitors include PACCAR, Ford and General Motors, as well as foreign-controlled domestic manufacturers, such as Freightliner and Sterling (DaimlerChrysler), Mack (Renault) and Volvo. In addition, manufacturers from Japan such as Hino, Isuzu, Nissan and Mitsubishi are competing in the U.S. and Canadian markets. In Mexico, the major domestic competitors are Kenmex (PACCAR) and Mercedes (DaimlerChrysler). In Brazil, the competition is with Mercedes (DaimlerChrysler), Volkswagon, Scania and Volvo. 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. The company's truck segment currently estimates $460 million in capital spending and $190 million in development expense through 2004 for development of its next generation vehicles. TRUCK MARKET SHARE The company delivered 119,300 Class 5 through 8 trucks, including school buses, in the U.S. and Canada in fiscal 1999, a 5% increase from the 113,900 units delivered in 1998. Navistar's 1999 market share of 25.6% in the combined U.S. and Canadian Class 5 through 8 truck market was constrained by the fact that continued industry demand for heavy and medium trucks outstripped system capacity. The company's market share in 1998 was 29.1%. The company delivered 4,800 Class 5 through 8 trucks, including school buses, in Mexico in 1999, a 17% increase from the 4,100 units delivered in 1998. Navistar's combined share of the Class 5 through 8 truck market in Mexico was 20.7% in 1999 and 18.7% in 1998. The company delivered 500 trucks in Brazil in 1999. Navistar's share of the truck market in Brazil was 1.0% in 1999. MARKETING AND DISTRIBUTION Navistar's truck products are distributed in virtually all key markets in the U.S. and Canada. The company's truck distribution and service network in these countries was composed of 927, 945 and 954 dealers and retail outlets at October 31, 1999, 1998 and 1997, respectively. Included in these totals were 517, 524 and 514 secondary and associate locations at October 31, 1999, 1998 and 1997, respectively. The company also has a dealer network in Mexico composed of 60, 44 and 38 dealer locations at October 31, 1999, 1998 and 1997, respectively, and a dealer network in Brazil composed of 14 dealer locations at October 31, 1999, and six dealer locations at October 31, 1998. Retail dealer activity is supported by five regional operations in the U.S. and general offices in Canada, Mexico and Brazil. The company has a national account sales group, responsible for 94 major U.S. national account customers. Navistar's network of 15 Used Truck Centers in the U.S. provides trade-in support to the company's dealers and national accounts group, and markets all makes and models of reconditioned used trucks to owner-operators and fleet buyers. Trucks, components and service parts are exported for wholesale and retail sale to more than 70 countries around the world. In the U.S. and Canada, the company operates seven regional parts distribution centers, which allow it to offer 24 hour availability and same day shipment of the parts most frequently requested by customers. The company also operates parts distribution centers in Mexico and Brazil. PAGE 6 ENGINE AND FOUNDRY Navistar is the leading supplier of mid-range diesel engines in the 160-300 horsepower range according to data supplied by Power Systems Research of Minneapolis, Minnesota. Navistar has an agreement to supply its 7.3L electronically controlled diesel engine to Ford Motor Company (Ford) through the year 2002 for use in all of Ford's diesel-powered light trucks and vans. Shipments to Ford account for approximately 91% of the engine segment's 7.3L shipments. Total engine units shipped reached 374,200 in 1999, a 25% increase over 1998. This excludes the 48,200 units shipped by Maxion International Motores, S.A., the company's 50% joint venture in Brazil. The company's shipments of engines to all OEMs totaled 286,500 units in 1999, an increase of 34% from the 213,700 units shipped in 1998. During 1997, Navistar entered into a 10-year agreement, effective with model year 2003, to supply Ford with a successor engine to the current 7.3L product for use in its diesel-powered super duty trucks and vans (over 8,500 lbs. GVW). In March 1998, the company was selected by Ford to negotiate an extended agreement to supply diesel engines for certain under 8,500 lbs. GVW light duty trucks and sport utility vehicles, such as the Ford Expedition, F-150 and F-250 pick-ups and Econoline 150 and 250 van models. To support this program the company has announced plans to open an engine assembly operation in Huntsville, Alabama. The company has approved a plan for up to $500 million in capital spending over the next four years in order to manufacture a next generation version of diesel engines. In addition, approximately $120 million of development expense was approved for the development of these engines. Included in these amounts are the company's planned investment in Huntsville, Alabama. FINANCIAL SERVICES NFC is a financial services organization that provides wholesale, retail and lease financing of new and used trucks sold by the company and its dealers in the U.S. NFC also finances the company's wholesale accounts and selected retail accounts receivable. Sales of new products (including trailers) of other manufacturers are also financed regardless of whether designed or customarily sold for use with the company's truck products. During 1999 and 1998, NFC provided wholesale financing for 96% and 95%, respectively, of the new truck units sold by the company to its dealers and distributors in the U.S., and retail and lease financing for 16% of all new truck units sold or leased by the company to retail customers in both 1999 and 1998. NFC's wholly owned domestic insurance subsidiary, Harco National Insurance Company, provides 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. Navistar's wholly owned subsidiaries, Arrendadora Financiera Navistar, Servicios Financieros Navistar and Navistar Comercial, provide wholesale, retail and lease financing to the truck segment's dealers and customers in Mexico. Harbour Assurance Company of Bermuda Limited, a wholly owned subsidiary of the company, 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 company policies. IMPORTANT SUPPORTING OPERATIONS Navistar International Corporation Canada has an agreement with a subsidiary of General Electric Capital Canada, Inc. to provide financing for Canadian dealers and customers. PAGE 7 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 $207 million, $138 million and $85 million for 1999, 1998 and 1997, respectively. BACKLOG The backlog of unfilled truck orders (subject to cancellation or return in certain events) at October 31, 1999, 1998 and 1997, was $3,352 million, $4,505 million and $2,360 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 18,600, 17,600 and 16,200 individuals at October 31, 1999, 1998 and 1997, respectively, worldwide. LABOR RELATIONS At October 31, 1999, the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represented 9,100 of the company's active employees in the U.S., and the National Automobile, Aerospace, and Agricultural Implement Workers of Canada (CAW) represented 2,100 of the company's active employees in Canada. Other unions represented 800 of the company's active employees in the U.S. and 800 of the company's active employees in Mexico. The company's master contract with the UAW expires on October 1, 2002. In June 1999, a new collective bargaining agreement was ratified by the CAW which expires on June 1, 2002. The contract allows the company to improve productivity through better use of work assignments and manpower utilization. PATENTS AND TRADEMARKS Navistar continuously obtains patents on its inventions and owns a significant patent portfolio. Additionally, many of the components which Navistar purchases for its products are protected by patents that are owned or controlled by the component manufacturer. Navistar has licenses under third-party patents relating to its products and their manufacture and grants licenses under its patents. The monetary royalties paid or received under these licenses are not significant. No particular patent or group of patents is considered by the company to be essential to its business as a whole. Navistar's primary trademarks are an important part of its worldwide sales and marketing efforts and provide instant identification of its products and services in the marketplace. To support these efforts, Navistar maintains, or has pending, registrations of its primary trademarks in those countries in which it does business or expects to do business. PAGE 8 RAW MATERIALS AND ENERGY SUPPLIES The company purchases raw materials, parts and components from numerous outside suppliers, but relies upon some suppliers for a substantial number of components for its truck and engine products. A majority of the company's requirements for raw materials and supplies is filled by single-source suppliers. The impact of an interruption in supply will vary by commodity. Some parts are generic to the industry while others are of a proprietary design requiring unique tooling which would require time to recreate. However, the company's exposure to a disruption in production as a result of an interruption of raw materials and supplies is no greater than the industry as a whole. In order to remedy any losses resulting from an interruption in supply, the company maintains contingent business interruption insurance for storms, fire and water damage. While the company believes that it has adequate assurances of continued supply, the inability of a supplier to deliver could have an adverse effect on production at certain of the company's manufacturing locations. The company's exposure in Mexico and Brazil to an interruption in local supply could result in an inability to meet local content requirements. Strong demand for International trucks coupled with record industry demand continues to outpace Navistar's near term capacity as well as the capacity of some key suppliers. Process improvements and capacity expansions are being implemented to enhance the company's ability to meet customer demand for its products. Navistar is currently meeting demand for International engines, for both International truck and OEMs. There are currently no engine component supplier capacity issues. The expansion of engine capacity in Brazil and in Huntsville, Alabama will enable Navistar to meet any future external customer needs in the light truck diesel market for the foreseeable future. PAGE 9 IMPACT OF GOVERNMENT REGULATION Truck and engine manufacturers continue to face heavy governmental regulation of their products, especially in the areas of environment and safety. The company believes its products comply with all applicable environmental and safety regulations. As a diesel engine manufacturer, the company has incurred research, development and tooling costs to design its engine product lines to meet United States Environmental Protection Agency (U.S. EPA) and California Air Resources Board (CARB) emission standards that will come into effect after the turn of the century. The company intends to provide engines that satisfy CARB's emission standards effective in 2002 for engines used in vehicles from 8,501 to 14,000 lbs. GVW, as well as heavy-duty engines that comply with more stringent CARB and U.S. EPA emission standards, promulgated in 1997, for 2004 and later model years. At the same time, Navistar expects to be able to meet all of the obligations it agreed to in the Consent Decree signed in October 1998 with the U.S. EPA and in a Settlement Agreement with CARB concerning alleged excess emissions of nitrogen oxides. Rulemaking is currently underway for emission standards for light and heavy-duty engines for 2004 and later model years. Navistar is actively participating in these rulemakings to ensure that its products can comply. In November 1999, CARB promulgated new emission standards for light-duty diesel engines which cover Navistar's new V-6 diesel engines. On the basis of available technology, compliance with the 2007 standards is dependent upon the availability of low sulfur diesel fuel. Navistar believes that CARB has exceeded its statutory authority in promulgating these emission standards and in November 1999 filed suit to overturn them. Even if the emission standards are not overturned, Navistar does not believe they will have a material effect on the company's financial condition or operating results. Canadian and Mexican heavy-duty engine emission regulations essentially mirror those of the U.S. EPA, except that compliance in Mexico is conditioned on availability of low-sulfur diesel fuel. The company's engines comply with Canadian and Mexican emission regulations, as well as those of Brazil. 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 OEMs to develop strategies to reduce engine noise. The company is also subject to the National Traffic and Motor Vehicle Safety Act (Safety Act) and Federal Motor Vehicle Safety Standards (Safety Standards) promulgated by the National Highway Traffic Safety Administration. The company believes it is in compliance with the Safety Act and the Safety Standards. Expenditures to comply with various environmental regulations relating to the control of air, water and land pollution at production facilities and to control noise levels and emissions from the company's products have not been material except for two sites formerly owned by the company: Wisconsin Steel in Chicago, Illinois, and Solar Turbine in San Diego, California. In 1994, the company recorded a $20 million after-tax charge as a loss of discontinued operations for environmental liabilities and cleanup cost at these two sites. It is not expected that the costs of compliance with foreseeable environmental requirements will have a material effect on the company's financial condition or operating results. PAGE 10 ITEM 2. PROPERTIES In North America, the company owns and operates 10 manufacturing and assembly operations which contain approximately 10 million square feet of floor space. Of these 10 facilities, six plants manufacture and assemble trucks, and four plants are used by the company's engine segment, of which two manufacture diesel engines and two produce grey iron castings. In addition, the company owns or leases other significant properties in the U.S. and Canada including vehicle and parts distribution centers, sales offices and two engineering centers, which serve the company's truck and engine segments, and its headquarters which is located in Chicago. The company's truck assembly facility located in Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the company as collateral for a $125 million revolving loan agreement. The truck segment's principal research and engineering facility is located in Fort Wayne, Indiana, and the engine segment's facility is located in Melrose Park, Illinois. In addition, certain research is conducted at each of the company's manufacturing plants. All of the company's plants are being utilized and have been adequately maintained, are in good operating condition and are suitable for its current needs through productive utilization of the facilities. In 1999, the company announced plans for a new plant in Huntsville, Alabama, to produce new high technology diesel engines. These facilities, together with planned capital expenditures, are expected to meet the company's manufacturing needs in the foreseeable future. A majority of the activity of the financial services operations is conducted from its leased headquarters in Rolling Meadows, Illinois. The financial services operations also lease 6 other office locations in the U.S. and one in Mexico. ITEM 3. LEGAL PROCEEDINGS The company and its subsidiaries are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings which constitute ordinary routine litigation incidental to the business of the company and its subsidiaries. In the opinion of the company's management, none of these proceedings or claims are material to the business or the financial condition of the company. PAGE 11 EXECUTIVE OFFICERS OF THE REGISTRANT The following selected information for each of the company's current executive officers was prepared as of December 15, 1999. OFFICERS AND POSITIONS WITH NAME AGE NAVISTAR AND OTHER INFORMATION - ------------- --- ------------------------------ John R. Horne.......... 61 Chairman, President and Chief Executive Officer since 1996 and a Director since 1990. Mr. Horne also is Chairman, President and Chief Executive Officer of Transportation since 1995 and a Director since 1987. Prior to this, Mr. Horne served as President and Chief Executive Officer, 1995-1996, President and Chief Operating Officer, 1990-1995. Robert C. Lannert...... 59 Executive Vice President and Chief Financial Officer and a Director since 1990. Mr. Lannert also is Executive Vice President and Chief Financial Officer of Transportation since 1990 and a Director since 1987. Robert A. Boardman..... 52 Senior Vice President and General Counsel since 1990. Mr. Boardman also is Senior Vice President and General Counsel of Transportation since 1990. Thomas M. Hough....... 54 Vice President and Treasurer since 1992. Mr. Hough also is Vice President and Treasurer of Transportation since 1992. Mark T. Schwetschenau. 43 Vice President and Controller since 1998. Mr. Schwetschenau also is Vice President and Controller of Transportation since 1998. Prior to this, Mr. Schwetschenau served as Vice President, Finance, Quaker Foods Division, the Quaker Oats Company, 1995-1997, and Director, Finance, Convenience Foods Division, the Quaker Oats Company, 1993-1995. Steven K. Covey....... 48 Corporate Secretary since 1990. Mr. Covey also is Associate General Counsel of Transportation since 1992. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable PAGE 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Navistar International Corporation common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange under the abbreviated stock symbol "NAV." Information regarding high and low market price per share of common stock for each quarter of 1999 and 1998 is incorporated by reference from the 1999 Annual Report to Shareowners, page 48, filed as Exhibit 13 to this Form 10-K. There were approximately 51,300 owners of common stock at October 31, 1999. Holders of common stock are entitled to receive dividends when and as declared by the board of directors out of funds legally available therefor, provided that, so long as any shares of the company's preferred stock and preference stock are outstanding, no dividends (other than dividends payable in common stock) or other distributions (including purchases) may be made with respect to the common stock unless full cumulative dividends, if any, on the shares of preferred stock and preference stock have been paid. Under the General Corporation Law of the State of Delaware, dividends may only be paid out of surplus or out of net profits for the fiscal year in which the dividend is declared or the preceding fiscal year, and no dividend may be paid on common stock at any time during which the capital of outstanding preferred stock or preference stock exceeds the net assets of the company. The company has not paid dividends on the common stock since 1980. The company does not expect to pay cash dividends on the common stock in the foreseeable future, and is subject to restrictions under the indentures for the $100 million 7% Senior Notes and the $250 million 8% Senior Subordinated Notes on the amount of cash dividends the company may pay and is subject to certain debt to equity ratios under the $125 million Mexican credit facility which may indirectly limit its ability to pay dividends. ITEMS 6, 7, 7A AND 8 The information required by Items 6-8 is incorporated herein by reference from the 1999 Annual Report to Shareowners, filed as Exhibit 13 to this Form 10-K as follows: 1999 Annual Report Page ---- ITEM 6. SELECTED FINANCIAL DATA....................... 51 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION..................... 2 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............... 7 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA... 14 With the exception of the aforementioned information (Part II; Items 5-8) and the information specified under Items 1 and 14 of this report, the 1999 Annual Report to Shareowners is not to be deemed filed as part of this report. ---------------------------------------------------------- PAGE 13 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEMS 10, 11 , 12 AND 13 Information required by Items 10, 11, 12 and 13 of this Form is incorporated herein by reference from Navistar's definitive Proxy Statement for the February 22, 2000 Annual Meeting of Shareowners. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Information required by Part IV (Item 14) of this form is incorporated herein by reference from Navistar International Corporation's 1999 Annual Report to Shareowners, filed as Exhibit 13 to this Form 10-K as follows: 1999 Annual Report Page ---- Financial Statements - -------------------- Independent Auditors' Report........................... 13 Statement of Income for the years ended October 31, 1999, 1998 and 1997. 14 Statement of Comprehensive Income for the years ended October 31, 1999, 1998 and 1997. 14 Statement of Financial Condition as of October 31, 1999 and 1998.................... 15 Statement of Cash Flow for the years ended October 31, 1999, 1998 and 1997. 16 Notes to Financial Statements.......................... 17 Form 10-K Page ---- Schedule - -------- II Valuation and Qualifying Accounts and Reserves....................... F-1 All other schedules are omitted because of the absence of the conditions under which they are required or because information called for is shown in the financial statements and notes thereto in the 1999 Annual Report to Shareowners. Finance and Insurance Subsidiaries: The financial statements of Navistar Financial Corporation for the years ended October 31, 1999, 1998 and 1997 appearing on pages 13 through 45 in the Annual Report on Form 10-K for Navistar Financial Corporation for the fiscal year ended October 31, 1999, Commission File No. 1-4146-1, are incorporated herein by reference and filed as Exhibit 28 to this Form 10-K. PAGE 14 Form 10-K Page -------------- Exhibits, Including Those Incorporated by Reference - ---------------------------------------------------- (3) Articles of Incorporation and By-Laws........ E-1 (4) Instruments Defining the Rights of Security Holders, Including Indentures..... E-2 (10) Material Contracts........................... E-5 (13) Navistar International Corporation 1999 Annual Report to Shareowners (only those portions incorporated herein by reference)....................... * (21) Subsidiaries of the Registrant............... E-11 (23) Independent Auditors' Consent................ 18 (24) Power of Attorney............................ 16 (27) Financial Data Schedule...................... * (28) Navistar Financial Corporation Annual Report on Form 10-K for the fiscal year ended October 31, 1999......... * *Filed only electronically with the Securities and Exchange Commission. All exhibits other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information called for is shown in the financial statements and notes thereto in the 1999 Annual Report to Shareowners. Exhibits, other than those incorporated by reference, have been included in copies of this report filed with the Securities and Exchange Commission. Shareowners of the company will be provided with copies of these exhibits upon written request to the Corporate Secretary at the address given on the cover page of this Form 10-K. Reports on Form 8-K - ------------------- No reports on Form 8-K were filed for the three months ended October 31, 1999. PAGE 15 SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES -------------------- SIGNATURE Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAVISTAR INTERNATIONAL CORPORATION - ---------------------------------- (Registrant) /s/ Mark T. Schwetschenau - ---------------------------------- Mark T. Schwetschenau December 22, 1999 Vice President and Controller (Principal Accounting Officer) PAGE 16 EXHIBIT 24 SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES -------------------- POWER OF ATTORNEY Each person whose signature appears below does hereby make, constitute and appoint John R. Horne, Robert C. Lannert and Mark T. Schwetschenau and each of them acting individually, true and lawful attorneys-in-fact and agents with power to act without the other and with full power of substitution, to execute, deliver and file, for and on such person's behalf, and in such person's name and capacity or capacities as stated below, any amendment, exhibit or supplement to the Form 10-K Report making such changes in the report as such attorney-in-fact deems appropriate. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date - -------------------------- -------------------------------- ----------------- /s/ John R. Horne - -------------------------- John R. Horne Chairman of the Board, December 22, 1999 President and Chief Executive Officer, and Director (Principal Executive Officer) /s/ Robert C. Lannert - -------------------------- Robert C. Lannert Executive Vice President December 22, 1999 and Chief Financial Officer and Director (Principal Financial Officer) /s/ Mark T. Schwetschenau - -------------------------- Mark T. Schwetschenau Vice President and Controller December 22, 1999 (Principal Accounting Officer) /s/ William F. Andrews - -------------------------- William F. Andrews Director December 22, 1999 PAGE 17 EXHIBIT 24 (CONTINUED) SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES --------------- SIGNATURES (Continued) /s/ Y. Marc Belton - ------------------------- Y. Marc Belton Director December 22, 1999 /s/ John D. Correnti - ------------------------- John D. Correnti Director December 22, 1999 /s/ Jerry E. Dempsey - ------------------------- Jerry E. Dempsey Director December 22, 1999 /s/ Dr. Abbie J. Griffin - ------------------------- Dr. Abbie J. Griffin Director December 22, 1999 /s/ Michael N. Hammes - ------------------------- Michael N. Hammes Director December 22, 1999 /s/ Allen J. Krowe - ------------------------- Allen J. Krowe Director December 22, 1999 /s/ William F. Patient - ------------------------- William F. Patient Director December 22, 1999 PAGE 18 SIGNATURE NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES --------------- INDEPENDENT AUDITORS' REPORT Navistar International Corporation: We have audited the Statement of Financial Condition of Navistar International Corporation and Consolidated Subsidiaries as of October 31, 1999 and 1998, and the related Statements of Income, Comprehensive Income, and of Cash Flow for each of the three years in the period ended October 31, 1999, and have issued our report thereon dated December 13, 1999; such consolidated financial statements and report are included in your 1999 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 13, 1999 Chicago, Illinois --------------- EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT Navistar International Corporation: We consent to the incorporation by reference in the Registration Statements, including post-effective amendments, No. 2-70979, No. 33-26847, No. 333-25783, No. 333-29735, No. 333-29739, No. 333-29301 and No. 333-77781 of Navistar International Corporation, all on Form S-8, of our reports dated December 13, 1999, relating to the financial statements and financial statement schedule of Navistar International Corporation and of the financial statements of Navistar Financial Corporation, appearing and incorporated by reference in this Annual Report on Form 10-K of Navistar International Corporation for the year ended October 31, 1999. Deloitte & Touche LLP December 22, 1999 Chicago, Illinois PAGE 1
SCHEDULE II NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ========== VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997 (MILLIONS OF DOLLARS) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- DESCRIPTION DEDUCTIONS FROM RESERVES BALANCE AT ADDITIONS DESCRIPTION DEDUCTED BEGINNING OF CHARGED TO BALANCE AT END OF RESERVES FROM YEAR INCOME DESCRIPTION AMOUNT OF YEAR ----------- -------- ------------ ---------- ----------- ------ -------------- Reserves deducted from assets to which they apply: 1999 Uncollectible notes and accounts Allowance for Notes and written off and losses on accounts reserve adjustment, receivables..... receivable..... $ 33 $ 4 less recoveries.... $ 1 $ 36 1998 Uncollectible notes and accounts Allowance for Notes and written off and losses on accounts reserve adjustment, receivables..... receivable..... $ 31 $ 3 less recoveries.... $ 1 $ 33 1997 Uncollectible notes and accounts Allowance for Notes and written off and losses on accounts reserve adjustment, receivables..... receivable..... $ 31 $ 14 less recoveries.... $ 14 $ 31 F-1
EX-3 2 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 Annual Report on Form 10-K dated October 31, 1993, which was filed on January 27, 1994, Commission File No. 1-9618, and amended as of May 4, 1998. 3.2 The By-Laws of Navistar International Corporation effective April 14, 1995, filed as Exhibit 3.2 on Annual Report on Form 10-K dated October 31, 1995, which was filed on January 26, 1996, on Commission File No. 1-9618. 3.3 Certificate of Designation, Preferences and Rights of Junior Participating Preferred Stock, Series A of Navistar International Corporation. Filed as Exhibit 3.3 to Form 10-Q dated June 11, 1999. Commission File No. 1-9618. E-1 EX-4 3 PAGE 1 EXHIBIT 4 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES The following instruments of Navistar International Corporation and its principal subsidiary Navistar International Transportation Corp. and its principal subsidiary Navistar Financial Corporation defining the rights of security holders are incorporated herein by reference. 4.1 Indenture, dated as of May 30, 1997, by and between Navistar Financial Corporation and The Fuji Bank and Trust Company, as Trustee, for 9% Senior Subordinated Notes due 2002 for $100,000,000. Filed on Registration No. 333-30167. 4.2 $125,000,000 Credit Agreement dated as of November 26, 1997, as amended by Amendment No. 1 dated as of February 4, 1998, and as amended by Amendment No. 2 dated as of July 10, 1998, among Navistar International Corporation Mexico, S.A. de C.V., Navistar International Corporation, certain banks, certain Co-Arranger banks, Bank of Montreal, as Paying Agent, and Bancomer, S.A., Institucion de Banca Multiple, Grupo Financiero, as Peso Agent and Collateral Agent. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b) (4) (iii). 4.3 Indenture, dated as of February 4, 1998, by and between Navistar International Corporation and Harris Trust and Savings Bank, as Trustee, for 7% Senior Notes due 2003 for $100,000,000. Filed on Registration No. 333-47063. 4.4 Indenture, dated as of February 4, 1998, by and between Navistar International Corporation and Harris Trust and Savings Bank, as Trustee, for 8% Senior Subordinated Notes due 2008 for $250,000,000. Filed on Registration No. 333-47063. 4.5 $45,000,000 Revolving Credit Agreement dated as of June 5, 1998 as amended by Amendment No. 1 dated as of January 1, 1999, and as amended by Amendment No. 2 dated as of April 9, 1999, as amended by Amendment No. 3 dated as of July 1999, among Arrendadora Financiera Navistar S.A., de C.V., Servicios Financieros Navistar S.A. de C.V. and Navistar Comercial, S.A. de C.V. and The First National Bank of Chicago. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.6 $200,000,000 Mexican Peso Revolving Credit Agreement dated as of October 20, 1998 as amended by Amendment No. 1 dated as of November 12, 1999, among Arrendadora Financiera Navistar S.A. de C.V., Servicios Financieros Navistar S.A. de C.V. and Navistar Comercial, S.A. de C.V. and Comerica Bank. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). E-2 PAGE 2 EXHIBIT 4 (CONTINUED) NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.7 $8,000,000 Mexican Peso Revolving Credit Agreement dated as of October 9, 1998 by and between Arrendadora Financiera Navistar S.A. de C.V. and Banco Bilbao Vizcaya. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.8 $27,000,000 Mexican Peso Revolving Credit Agreement dated as of October 9, 1998 by and between Servicios Financieros Navistar S.A. de C.V. and Banco Bilbao Vizcaya. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.9 Rights Agreement dated as of April 20, 1999 between Navistar International Corporation and Harris Trust and Savings Bank, as Rights Agent, including the form of Certificate of Designation, Preferences and Rights of Junior Participating Preferred Stock, Series A attached thereto as Exhibit A, and the form of Rights Certificate attached thereto as Exhibit B. Filed as Exhibit 1.1 to the company's Registration Statement on Form 8-A, dated April 20, 1999. Commission File No. 1-9618. 4.10 Indenture dated as of June 4, 1999, between Navistar Financial 1999-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1999-A Owner Trust. Filed on Registration No. 33-50291. 4.11 $30,000,000, Revolving Credit Agreement dated as of July 9, 1999 as amended by Amendment No. 1 dated as of September 15, 1999, among Arrendadora Financiera Navistar S.A. de C.V., Servicios Financieros Navistar S.A. de C.V. and Navistar Comercial, S.A. de C.V. and Banco Nacional de Mexico, S.A. de C.V. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.12 $20,000,000 Credit Agreement dated as of August 10, 1999 by and between Arrendadora Financiera Navistar S.A. de C.V. and Bancomer. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). E-3 PAGE 3 EXHIBIT 4 (CONTINUED) NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.13 $200,000,000 Mexican Peso Revolving Credit Agreement dated as of August 10, 1999 by and between Servicios Financieros Navistar S.A. de C.V. and Bancomer. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). ===== Instruments defining the rights of holders of other unregistered long-term debt of Navistar and its subsidiaries have been omitted from this exhibit index because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its consolidated subsidiaries. The Registrant agrees to furnish a copy of any such instrument to the Commission upon request. E-4 EX-10 4 PAGE 1 EXHIBIT 10 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES --------------------------------- MATERIAL CONTRACTS The following documents of Navistar International Corporation and its affiliate Navistar Financial Corporation are incorporated herein by reference. 10.1* Navistar International Corporation 1984 Stock Option Plan. Filed as Exhibit A to Proxy Statement dated February 6, 1984. Commission File No. 1-5236. 10.2 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. 10.3 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. 10.4 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 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. 10.5 Indenture dated as of May 30, 1996, between Navistar Financial 1996-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996-A Owner Trust. Filed on Registration No. 33-55865. 10.6 Indenture dated as of November 6, 1996, between Navistar Financial 1996-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996-B Owner Trust. Filed on Registration No. 33-55865. 10.7 Indenture dated as of May 7, 1997, between Navistar Financial 1997-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1997-A Owner Trust. Filed on Registration No. 33-55865. 10.8 Amendment No. 3 dated as of May 27, 1997, to the Amended and Restated Credit Agreement dated as of November 4, 1994, as amended by Amendment No. 1 dated as of December 15, 1995 and Amendment No. 2 dated as of March 29, 1996, among Navistar Financial Corporation, certain banks, certain Co-Arranger banks, and Morgan Guaranty Trust Company of New York, as Administrative Agent filed on Form 8-K dated June 17, 1997. Commission File No.1-4146-1. 10.9* Form of Executive Severance Agreement which is executed with all executive officers dated June 16, 1997. Filed as Exhibit 10.5 to Form 10-Q dated September 12, 1997. Commission File No. 1-9618. E-5 PAGE 2 EXHIBIT 10 (CONTINUED) NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES --------------------------------- MATERIAL CONTRACTS 10.10* Navistar International Corporation Stock Ownership Program. Filed as Exhibit 10.20 to Form 10-Q dated September 12, 1997. Commission File No. 1-9618. 10.11 Indenture dated as of November 5, 1997, between Navistar Financial 1997-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1997-B Owner Trust. Filed on Registration No. 33-64249. 10.12* Navistar 1988 Non-Employee Director Stock Option Plan amended as of March 20, 1996. Filed as Exhibit 10.19 to Form 10-K dated December 22, 1997. Commission File No. 1-9618. 10.13* Navistar 1998 Non-Employee Director Stock Option Plan. Filed as Exhibit 10.20 to Form 10-Q dated March 17, 1998. Commission File No. 1-9618. 10.14 Indenture dated as of June 4, 1998, between Navistar Financial 1998-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1998-A Owner Trust. Filed on Registration No. 33-64249. 10.15* Navistar International Corporation 1998 Interim Stock Plan. Filed as Exhibit 10.21 to Form 10-Q dated June 12, 1998. Commission File No. 1-9618. 10.16 Transfer and Administration Agreement dated as of November 13, 1998, between Navistar Financial Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Transferor, Park Avenue Receivables Corporation, as Purchaser, and The Chase Manhattan Bank, as Funding Agent and APA Bank. Filed on Form 8-K dated December 18, 1998. Commission File No. 33-64249. 10.17* Navistar 1994 Performance Incentive Plan amended as of October 13, 1998. Filed as Exhibit 10.19 to Form 10-K dated December 22, 1998. Commission File No. 1-9618. 10.18 Trust Agreement dated as of June 3, 1999, between Navistar Financial Retail Receivables Corporation, as Seller, and Chase Manhattan Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1999-A Owner Trust. Filed on Registration No. 33-50291. 10.19 Indenture dated as of June 3, 1999, between Navistar Financial 1999-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1999-A Owner Trust. Filed on Registration No. 333-62445. E-6 PAGE 3 EXHIBIT 10 (CONTINUED) NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES --------------------------------- MATERIAL CONTRACTS 10.20 Receivable Purchase Agreement dated as of November 12, 1999, between Navistar Financial Retail Receivables Corporation, as Seller, Navistar Financial Corporation, as Servicer, and Falcon Asset Securitization Corporation and International Securitization Corporation, as investors, and Bank One NA as agent and as Securities Intermediary, with respect to Navistar Financial 1999-B Multi-seller Asset-backed Commercial Paper Conduit. Filed on Registration No. 333-62445. The following documents of Navistar International Corporation are filed herewith: Form 10-K Page -------------- 10.21* Navistar 1998 Supplemental Stock Plan ** * Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c). ** Filed only electronically with the Securities and Exchange Commission. E-7 EX-10.21 5 Exhibit 10.21 NAVISTAR 1998 SUPPLEMENTAL STOCK PLAN SECTION I PURPOSE OF THE PLAN The purpose of this Navistar 1998 Supplemental Stock Plan ("Plan") is to provide an additional plan for the issuance of stock options and restricted stock for shares of the common stock of Navistar International Corporation to employees of Navistar International Corporation and its subsidiaries ("Corporation") to attract and retain highly qualified personnel, to provide key employees who hold positions of major responsibility the opportunity to earn incentive awards commensurate with the quality of individual performance, the achievement of performance goals and ultimately the increase in shareowner value. This Plan is separate from and intended to supplement the Navistar 1994 Performance Incentive Plan ("1994 Plan"). The Plan replaces the Navistar International Corporation 1998 Interim Stock Plan for grants or awards of stock made on and after the date of adoption of this Plan. SECTION II DEFINITIONS The terms used in this Plan are defined as specified in the 1994 Plan unless the context indicates to the contrary. SECTION III ELIGIBILITY Management will, from time to time, select and recommend to the Committee on Compensation and Governance of the Board of Directors of Navistar International Corporation ("Committee")(formerly named the Committee on Organization) Employees who are to become Participants in the Plan. Employees will be selected from those who, in the opinion of management, have substantial responsibility in a managerial or professional capacity. Employees selected for participation in the Plan may also be participants in the 1994 Plan, and E-8 participation in this Plan will not be considered participation in a plan that would affect their participation in the 1994 Plan. SECTION IV STOCK OPTIONS The Committee may grant Nonqualified Stock Options to Participants in the amount and at the time that the Committee approves. No Incentive Stock Options shall be granted under this Plan. Options shall be granted under the same terms and conditions as options granted under the 1994 Plan, as amended from time to time, but subject to the limitation on the number of shares contained in this Plan, and subject to the limitation that only treasury shares, and not newly issued shares, may be used for any grant. SECTION V RESTRICTED SHARES The Committee may award restricted shares for the purposes and under the same terms and conditions as specified in Sections VI and VIII, and the other provisions of the 1994 Plan, but subject to the limitations on the number of shares contained in this Plan, and subject to the limitation that only treasury shares, and not newly issued shares, may be used for any award to an officer of the Corporation. SECTION VI ADMINISTRATION OF THE PLAN Full power and authority to construe, interpret and administer the Plan is vested in the Committee. Decisions of the Committee will be final, conclusive and binding upon all parties, including the Corporation, shareowners and employees. The foregoing will include, but will not be limited to, all determinations by the Committee as to (i) the approval of Employees for participation in the Plan, (ii) the amount of the Awards, (iii) the performance levels at which different percentages of the Awards would be earned and all subsequent adjustments to such levels and (iv) the determination of all Awards. Any person who accepts any Award hereunder agrees to accept as final, conclusive and binding all determinations of the Committee. The Committee will have the right, in the case of employees not employed in the United States, to vary from the provision of the Plan to the extent the Committee deems appropriate in order to preserve the incentive features of the Plan. E-9 SECTION VII MODIFICATION, AMENDMENT OR TERMINATION The Committee may modify without the consent of the Participant (i) the Plan, (ii) the terms of any option previously granted or (iii) the terms of Restricted Shares previously awarded at any time, provided that, no such modification will, without the approval of the Board of Directors of the Corporation, increase the number of shares of Common Stock available hereunder. The Committee may terminate the Plan at any time. SECTION VIII RESERVATION OF SHARES The total number of shares of stock reserved and available for delivery pursuant to this Plan is 2 million shares of common stock of Navistar International Corporation. The number of shares reserved and available shall be increased by shares of stock subject to an option or award under this Plan or any other plan that is cancelled, expired, forfeited, settled in cash or otherwise terminated without a delivery of shares to the participant of the plan, including shares used to pay the option exercised price of an option issued under the Plan or any other plan or to pay taxes with respect to such an option. Only treasury shares, and not newly issued shares, may be reserved and made available for delivery. SECTION IX TERM OF THE PLAN The Plan shall be effective on the date of adoption by the Board of Directors and continue through December 16, 2003. SECTION X GOVERNING LAW The Plan will be governed by and interpreted pursuant to the laws of the State of Delaware, the place of incorporation of the Corporation. E-10 EX-13 6 EXHIBIT 13 FINANCIAL INFORMATION Management's Discussion and Analysis of Results of Operations and Financial Condition........................ 2 Statement of Financial Reporting Responsibility................ 12 Independent Auditors' Report................................... 13 Financial Statements Statement of Income.......................................... 14 Statement of Comprehensive Income............................ 14 Statement of Financial Condition............................. 15 Statement of Cash Flow....................................... 16 Notes to Financial Statements 1 Summary of accounting policies........................... 17 2 Postretirement benefits.................................. 22 3 Income taxes............................................. 25 4 Marketable securities.................................... 28 5 Receivables.............................................. 29 6 Inventories.............................................. 30 7 Property and equipment................................... 30 8 Debt..................................................... 31 9 Other liabilities........................................ 34 10 Financial instruments.................................... 35 11 Commitments, contingencies, restricted assets, concentrations and leases............................. 37 12 Legal proceedings and environmental matters.............. 38 13 Segment data............................................. 39 14 Preferred and preference stocks.......................... 42 15 Common shareowners' equity............................... 43 16 Earnings per share....................................... 45 17 Stock compensation plans................................. 46 18 Selected quarterly financial data (unaudited)............ 48 Supplemental Financial Information (unaudited)................. 49 Five-Year Summary of Selected Financial and Statistical Data......................................... 51 - 1 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Certain statements under this caption that are not purely historical constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. These forward-looking statements are based on current management expectations as of the date made. The company assumes no obligation to update any forward-looking statements. 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 captions "Year 2000" and "Business Environment." Navistar International Corporation is a holding company and its principal operating subsidiary is Navistar International Transportation Corp. (Transportation). In this discussion and analysis, "company" or "Navistar" refers to Navistar International Corporation and its consolidated subsidiaries. Navistar operates in three principal industry segments: truck, engine (collectively called "manufacturing operations") and financial services. The company's truck segment is engaged in the manufacture and marketing of Class 5 through 8 trucks, including school buses. The truck segment also provides customers with proprietary products needed to support the International truck and bus lines, together with a wide selection of other standard truck and trailer aftermarket parts. The truck segment operates primarily in the United States (U.S.) and Canada as well as in Mexico, Brazil and other selected export markets. The company's engine segment is engaged in the design and manufacture of mid-range diesel engines. The engine segment also provides customers with proprietary products needed to support the International engine lines, together with a wide selection of other standard engine and aftermarket parts. The engine segment operates primarily in the U.S. and Brazil. The financial services operations of the company provide wholesale, retail and lease financing, and domestic commercial physical damage and liability insurance coverage to the company's dealers and retail customers and to the general public through an independent insurance agency system. The discussion and analysis reviews the operating and financial results, and liquidity and capital resources of the manufacturing and financial services operations. Manufacturing operations reflect the financial results of the financial services operations included on a one-line basis under the equity method of accounting. Financial services operations include Navistar Financial Corporation (NFC) and the company's foreign finance companies. See Note 1 to the Financial Statements. RESULTS OF OPERATIONS The company reported net income of $544 million for 1999, or $8.20 per diluted common share, reflecting higher sales of engines as well as a $178 million reduction in the company's tax valuation allowance. Net income was $299 million, or $4.11 per diluted common share in 1998, and $150 million, or $1.65 per diluted common share in 1997. Net income in 1998 included a $45 million reduction in the company's tax valuation allowance. The company's manufacturing operations reported income before income taxes of $474 million in 1999 compared with $321 million in 1998 and $164 million in 1997. The truck segment's profits increased by 20% in 1999 and 91% in 1998 compared to revenue increases of 6% and 26%, respectively. The engine segment's profits increased by 58% in 1999 and 35% in 1998 compared to revenue increases of 21% and 22%, respectively. The truck and engine segments' profit increases during 1999 are attributable to economies of scale in engine production, improved truck pricing and various cost improvement initiatives by both the truck and engine segments. The truck and engine segments' profit increases during 1998 are attributable to economies of scale in truck and engine production, improved truck pricing and various other cost improvement initiatives by both the truck and engine segments. The truck and engine segments' revenue increases are attributable to increases in shipments of trucks and of mid-range diesel engines to other original equipment manufacturers (OEMs). The financial services segment's profit in 1999 was $28 million higher than in 1998. This is primarily attributable to the increase in NFC's pretax income and a legal settlement in favor of an insurance subsidiary of the company. NFC's - 2 - pretax income in 1999 was $101 million, a 19% increase from $85 million in 1998, primarily as a result of an increase in wholesale and retail financing activity and proportionally lower interest expense and debt levels resulting from a higher level of average outstanding accounts payable to affiliates. This was partially offset by a higher provision for losses and higher costs to service the larger portfolio. The financial services segment's profit in 1998 was $7 million higher than in 1997, primarily due to the $10 million increase in NFC's pretax income from the $75 million reported in 1997. This increase is primarily due to an increase in wholesale and retail financing activity partially offset by lower financing margins. Sales and Revenues. Sales and revenues of $8,647 million in 1999 were 10% higher than the $7,885 million reported in 1998 which was 24% higher than the $6,371 million reported in 1997. Sales of manufactured products totaled $8,326 million in 1999, 9% above the $7,629 million reported for 1998 which was a 24% increase from the $6,147 million reported in 1997. U.S. and Canadian industry retail sales of Class 5 through 8 trucks totaled 465,500 units in 1999, a 19% increase from the 392,000 units sold in 1998, and 34% higher than the 347,400 units sold in 1997. Class 8 heavy truck sales totaled 286,000 units, a 23% increase from the 232,000 units sold in 1998, and 45% higher than the 196,800 units sold in 1997. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, totaled 179,500 units in 1999, a 12% increase from 1998, when 160,000 units were sold, which was a 6% increase over the 150,600 units sold in 1997. Industry sales of school buses, which accounted for 19% of the medium truck market, increased approximately 3% from 1998 to 33,800 units. The company's 1999 market share of 25.6% in the combined U.S. and Canadian Class 5 through 8 truck market was constrained by the fact that continued industry demand for heavy and medium trucks outstripped system capacity. Market shares in 1998 and 1997 were 29.1% and 28.3%, respectively. (Sources: Ward's Communications and the Canadian Vehicle Manufacturers Association). Total engine units shipped reached 374,200 in 1999, a 25% increase over 1998. This excludes the 48,200 units shipped by Maxion International Motores S.A., the company's joint venture in Brazil. Shipments of mid-range diesel engines by the company to other OEMs during 1999 were a record 286,500 units, a 34% increase over the 213,700 units shipped in 1998, which represented a 16% improvement over 1997. Higher shipments to Ford Motor Company to meet consumer demand for the light trucks and vans which use this engine was the primary reason for the increases. Finance and insurance revenue was $256 million for 1999, a $55 million increase over 1998 revenue of $201 million, which was a $27 million increase over 1997 revenue of $174 million. These increases are primarily due to increased wholesale and retail financing. The 1999 increase in other income is primarily due to a legal settlement in favor of an insurance subsidiary of the company. Costs and Expenses. Manufacturing gross margin was 18.0% of sales in 1999, compared with 15.3% in 1998, and 14.2% in 1997. The increase in 1999 gross margin is primarily due to improved pricing and improved operating efficiencies. The 1998 improvement in margin was primarily due to improved operating efficiencies offset by provisions for employee profit sharing. Postretirement benefits expense of $216 million in 1999 increased $42 million from $174 million in 1998 and approximated the 1997 expense of $215 million. The 1999 increase is mainly a result of higher retiree healthcare expense and higher profit sharing provisions to a retiree trust ($23 million and $16 million, respectively). The 1998 decrease was mainly a result of higher expected return on plan assets and lower amortization of prior service cost ($69 million and $9 million, respectively) offset by higher profit sharing provisions to a retiree trust ($38 million). Engineering and research expense increased to $281 million in 1999 from $192 million in 1998 and $124 million in 1997. Approximately 50% and 35%, respectively, of these increases reflect the company's continuing investment in - 3 - its next generation vehicle (NGV) program and approximately 25% and 20%, respectively, of the 1999 and 1998 increases reflect investment in the next generation diesel (NGD) program. Sales, general and administrative expense was $486 million in 1999 compared with $427 million in 1998 and $365 million in 1997. The 1999 increase is primarily due to marketing programs and the operational implementation of the company's integrated truck and engine strategies ($13 million and $34 million, respectively). The change between 1998 and 1997 primarily reflects investment in the company's five-point truck strategy and an increase in the provision for payment to employees as provided by the company's performance incentive programs ($24 million and $20 million, respectively). Interest expense increased to $135 million in 1999 from $105 million in 1998 and $74 million in 1997. The increase in 1999 resulted, in part, from higher average receivable funding requirements driven by higher sales levels. Additionally, a portion of the increase in 1999 and the majority of the increase in 1998 is due to a $358 million net increase in manufacturing operations debt during 1998 driven by the issuance of $350 million of senior and senior subordinated notes in February 1998. Other expense for 1998 includes $14 million related to the secondary public offering of 19.9 million shares of the company's common stock which was completed in June 1998. LIQUIDITY AND CAPITAL RESOURCES Cash flow is generated from the manufacture and sale of trucks and mid-range diesel engines and their associated service parts as well as from product financing and insurance coverage provided to the company's dealers and retail customers by the financial services segment. The company's current debt ratings have made sales of finance receivables the most economic sources of funding for NFC. Insurance operations are self-funded. The company had working capital of $340 million at October 31, 1999, compared to $482 million at October 31, 1998. The decrease from 1998 to 1999 is primarily due to a net change in operating assets and liabilities of $439 million as described below, and $144 million of purchases of common stock offset by net sales and maturities of marketable securities of $330 million. Consolidated cash, cash equivalents and marketable securities of the company were $576 million at October 31, 1999, $1,064 million at October 31, 1998, and $965 million at October 31, 1997. Cash, cash equivalents and marketable securities available to manufacturing operations, including a 1999 $659 million intercompany receivable from NFC, which NFC is obligated to repay upon request, totaled $1,045 million at October 31, 1999, $1,010 million at October 31, 1998 and $901 million at October 31, 1997. Cash provided by operations during 1999 totaled $302 million, primarily from net income of $544 million. Income tax expense for 1999 was $47 million, primarily composed of cash payments of $40 million to federal and certain state, local and foreign governments. The net change in operating assets and liabilities of $439 million includes a $445 million increase in receivables, primarily due to a net increase in wholesale note and account balances. The change also includes a $129 million increase in inventory due to higher production levels, offset by a related $139 million increase in accounts payable. During 1999, investment programs used $451 million in cash principally to fund $498 million of capital expenditures and investments in affiliates. Capital expenditures were made primarily for the NGV and NGD programs, increased engine production capacity, and increased capacity, infrastructure and facility enhancements at the Escobedo, Mexico plant. Investment programs also used cash for a $160 million net increase in retail notes and lease receivables and a $108 million net increase in property and equipment leased to others. These were offset by a net decrease in marketable securities of $330 million. Financing activities provided an $88 million net increase in notes and debt outstanding under the bank revolving credit facility and other commercial paper programs, and a $39 million net increase in long-term debt. Additionally, $22 million was borrowed under the Mexican credit facility, of which approximately - 4 - half is denominated in Mexican pesos. These were offset by purchases of $144 million of common stock during 1999 in accordance with board approved spending levels for 1999 and 2000. Cash flow from the company's manufacturing and financial services operations is currently sufficient to cover planned investment in the business. Capital investments for 2000 are expected to be nearly $600 million including approximately $100 million for the NGV program and $200 million for the NGD program. In addition to the NGV and NGD programs, capital expenditures are planned to purchase lease options on engine equipment, to add a school bus facility in Tulsa, Oklahoma, and for normal improvements to existing facilities and products. The company had outstanding capital commitments of $505 million at October 31, 1999, including $91 million for the NGV program and $325 million through 2003 for the NGD program. The company currently estimates $460 million and $500 million in capital spending and $190 million and $120 million in development expense through 2004 for the NGV and NGD programs, respectively. Approximately $90 million and $20 million of the development expenses are planned for 2000. Included in the NGD amounts for capital spending and development expense are the company's planned investment to produce new high technology diesel engines in Huntsville, Alabama. During October 1999, the company's board of directors approved a new share repurchase program for as much as $243 million. Under the new repurchase program, shares will be purchased on the open market from time to time; however, the company cannot purchase more than 4.5 million shares through March 2001 without impairing the use of its tax loss carryforwards. Through November 1999, the company has purchased $46 million worth of shares under this program, including $11 million in fiscal 1999. The company's truck assembly facility in Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the company as collateral for a $125 million revolving Mexican credit facility. At October 31, 1999, $52 million of a Mexican subsidiary's receivables were pledged as collateral for bank borrowings. In addition, as of October 31, 1999, the company is contingently liable for approximately $204 million for various purchasing commitments, credit guarantees and buyback programs. Based on historical loss trends, the company's exposure is not considered material. Additionally, restrictions under the terms of the senior and senior subordinated notes and the Mexican credit facility include a limitation on indebtedness and a limitation on certain restricted payments. NFC has traditionally obtained funds to provide financing to the company's dealers and retail customers from sales of finance receivables, commercial paper, short and long-term bank borrowings, medium and long-term debt and equity capital. At October 31, 1999, NFC's funding consisted of sold finance receivables of $2,296 million, bank and other borrowings of $1,287 million, subordinated debt of $100 million, capital lease obligations of $323 million and equity of $280 million. Through the asset-backed markets, NFC has been able to fund fixed rate retail note receivables at rates offered to companies with investment grade ratings. During 1999, NFC sold $1,260 million of retail notes through Navistar Financial Retail Receivables Corporation (NFRRC), a wholly owned subsidiary of NFC. At October 31, 1999, the remaining shelf registration available to NFRRC for the public issuance of asset-backed securities was $2,257 million. Also, at October 31, 1999, Navistar Financial Securities Corporation, a wholly owned subsidiary of NFC, had in place a revolving wholesale note trust that provides for the funding of $600 million of wholesale notes. At October 31, 1999, available funding under NFC's bank revolving credit facility and the asset-backed commercial paper facility was $87 million, of which $35 million was used to back short-term debt. The remaining $52 million, when combined with unrestricted cash and cash equivalents, made $90 million available to fund the general business purposes of NFC. - 5 - In November 1999, NFC sold $533 million of retail notes, net of unearned finance income, through NFRRC to two multi-seller asset-backed commercial paper conduits sponsored by a major financial institution. The gain on the sale, which was not material, was recognized in November 1999. NFC's maximum contractual exposure under all receivable sale recourse provisions at October 31, 1999, was $257 million. However, management believes the recorded reserves for losses on sold receivables are adequate. See Note 5 to the Financial Statements. At October 31, 1999, NFC held forward interest rate contracts with notional amounts of $500 million and $75 million in anticipation of retail receivable sales to occur in November 1999 and March 2000, respectively. These contracts were entered into to reduce exposure to future changes in interest rates. NFC intends to close these positions on the pricing dates of the sales. Any resulting gain or loss will be included in the gain or loss on the sales of receivables. For the protection of investors in NFC's debt securities, NFC issued an interest rate cap. The notional amount of the cap, $374 million, amortizes based on the expected outstanding principal balance of the sold retail receivables. Under the terms of the cap agreement, NFC will make payments if interest rates exceed certain levels. The interest rate cap is recorded at fair value with changes in fair value recognized in income. At October 31, 1999, the impact on income was not material. In addition, the company held German mark, Japanese yen, and Canadian dollar forward contracts with notional amounts of $49 million, $13 million, and $10 million, respectively, and other derivative contracts with notional amounts of $19 million. At October 31, 1999, the unrealized net loss on these contracts was not material. At October 31, 1999, the Canadian operating subsidiary was contingently liable for retail customers' contracts and leases financed by a third party. The Canadian operating subsidiary is subject to maximum recourse of $251 million on retail contracts and $22 million on retail leases. The Canadian operating subsidiary, NFC and certain other subsidiaries included in the financial services operations are parties to agreements that may result in the restriction of amounts which can be distributed to Transportation in the form of dividends or loans and advances. At October 31, 1999, the maximum amount of dividends which were available for distribution under the most restrictive covenants was $220 million. The company and Transportation are obligated under certain agreements with public and private lenders of NFC to maintain the subsidiary's income before interest expense and income taxes at not less than 125% of its total interest expense. No income maintenance payments were required for the three years ended October 31, 1999. In May 1999, Moody's and Duff and Phelps raised the company's senior debt ratings from Ba1 and BB+ to Baa3 and BBB-, respectively and raised the company's subordinated debt ratings from Ba3 and BB- to Ba2 and BB, respectively. NFC's senior debt ratings increased from Ba1 and BBB- to Baa3 and BBB, respectively. NFC's subordinated debt ratings were also raised from Ba3 and BB+ to Ba2 and BBB-, respectively. It is the opinion of management that, in the absence of significant unanticipated cash demands, current and forecasted cash flow will provide a basis for financing operating requirements, capital investments and planned repurchases of common stock. 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 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, the Comprehensive Environmental Response, Compensation and Liability Act, popularly 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 - 6 - 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 are generally recognized no later than completion of the remedial feasibility study and are not discounted to their present value. The company reviews its accruals on a regular basis and believes that, based on these calculations, its share of the potential additional costs for the cleanup of each site will not have a material effect on the company's financial results. DERIVATIVE FINANCIAL INSTRUMENTS As disclosed in Notes 1 and 10 to the Financial Statements, the company uses derivative financial instruments to transfer or reduce the risks of foreign exchange and interest rate volatility, and potentially increase the return on invested funds. 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 the sale of manufactured products in other countries. Contracted purchases of commodities or manufacturing equipment may also be hedged. The financial services operations may use forward contracts to hedge the fair value of their fixed rate receivables against changes in market interest rates in anticipation of the sale of such receivables. The financial services operations also use interest rate swaps to reduce exposure to interest rate changes when they sell fixed rate receivables on a variable rate basis. For the protection of investors in NFC's debt securities, NFC may write interest rate caps when fixed rate receivables are sold on a variable rate basis. MARKET RISK DISCLOSURE The company's primary market risks include fluctuations in interest rates and currency exchange rates. The company is also exposed to changes in the prices of commodities used in its manufacturing operations and to changes in the prices of equity instruments owned by the company. Commodity price risk related to the company's current commodity financial instruments and equity price risk related to the company's current investments in equity instruments are not material. The company does not hold any material market risk sensitive instruments for trading purposes. The company has established policies and procedures to manage sensitivity to interest rate and foreign currency exchange rate market risk. These procedures include the monitoring of the company's level of exposure to each market risk, the funding of variable rate receivables with variable rate debt, and limiting the amount of fixed rate receivables which may be funded with floating rate debt. These procedures also include the use of derivative financial instruments to mitigate the effects of interest rate fluctuations and to reduce the exposure to exchange rate risk. Interest rate risk is the risk that the company will incur economic losses due to adverse changes in interest rates. The company measures its interest rate risk by estimating the net amount by which the fair value of all of its interest rate sensitive assets and liabilities would be impacted by selected hypothetical changes in market interest rates. Fair value is estimated using a discounted cash flow analysis. Assuming a hypothetical instantaneous 10% decrease in interest rates as of October 31, 1999 and 1998, the net fair value of these instruments would decrease by approximately $5 million in each year. The company's interest rate sensitivity analysis assumes a parallel shift in interest rate yield curves. The model, therefore, does not reflect the potential impact of changes in the relationship between short-term and long-term interest rates. Foreign currency risk is the risk that the company will incur economic losses due to adverse changes in foreign currency exchange rates. The company's primary exposure to foreign currency exchange fluctuations are the Canadian dollar/U.S. dollar and Mexican peso/U.S. dollar. At October 31, 1999 and 1998, the potential reduction in future earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to foreign currency - 7 - sensitive instruments would be approximately $10 million in each year. The foreign currency sensitivity model is limited by the assumption that all of the foreign currencies to which the company is exposed would simultaneously decrease by 10%, because such synchronized changes are unlikely to occur. The effects of foreign currency forward contracts have been included in the above analysis; however, the sensitivity model does not include the inherent risks associated with the anticipated future transactions denominated in foreign currency for which these forward contracts have been entered into for hedging purposes. YEAR 2000 In 1995, the company instituted a corporate-wide Year 2000 readiness project to identify all systems which will require modification or replacement, and to establish appropriate remediation and contingency plans to avoid an impact on the company's ability to continue to provide its products and services. Navistar has established a team of professionals within each of its sites and locations to implement and complete this initiative. In 1997, the company expanded its Year 2000 readiness project to include the company's products, external suppliers, dealers and facilities. The company's Year 2000 program is directed to four major areas: products, internal systems (including information technology (IT) and non-IT systems), suppliers and dealers. The company has completed its compliance review of virtually all of its products and has not learned of any products which it manufactures that will cease functioning or experience an interruption in operation as a result of the transition to the Year 2000. The internal systems portion of the project addresses personal computing; facilities, including the physical "machines" inside a plant or office complex; and computer business systems that are commonly run on larger mainframes and mid-range computers as well as the supporting infrastructure for the company's computer business systems. The company presently believes that it has identified all significant applications that require remediation, which in some cases will involve the replacement of the systems, to achieve Year 2000 readiness. Both internal and external resources are being used to make the required modifications and test for Year 2000 compliance. At November 30, 1999, the company estimates that it was 99.8% complete with the conversion or compliance checking of its internal systems including significant applications. The company is targeting the completion of the modifications and testing processes to all significant applications by mid-December 1999, which is prior to any anticipated impact on its operating systems. Remaining significant applications have contingency plans available. The company has completed assessing the Year 2000 readiness of its production and service parts suppliers through a supplier survey process designed and coordinated by the Automotive Industry Action Group (AIAG). Responses to these questionnaires have been received and based on these responses, individual supplier contacts and 160 on-site assessments, the company believes that the majority of these suppliers have successfully completed their Year 2000 readiness programs. In addition, contingency plans have been established for all suppliers to assure an uninterrupted flow of materials in the unlikely event there are some that have unexpected problems. NFC has received written assurances from its major suppliers of cash management services that their main treasury management products and required backroom processing have been tested and deemed ready for the Year 2000. The company is working with its independent dealers on their Year 2000 readiness and monitoring their progress. The company has contacted all dealers and is working with its certified Dealer Business Systems Vendors to assist the dealers in becoming Year 2000 compliant. Compliance of all certified dealers systems is targeted for completion in December 1999. The company's total cost of the Year 2000 project, which will be funded through operating cash flows, is estimated to be $32 million, including $26 million of estimated expense and $6 million of capital expenditures. Approximately $23 million has been expensed and approximately $6 million has - 8 - been capitalized through October 31, 1999. The remaining costs are estimated to be incurred in fiscal year 2000. The company's estimated annual expense for the Year 2000 project is not material to the company's fiscal 2000 information technology budget. Other non-Year 2000 information technology efforts have not been materially delayed or impacted by the Year 2000 project. The costs of the Year 2000 project and the dates on which the company believes it will complete the Year 2000 modifications and testing are based on management's best estimates, which were derived utilizing numerous assumptions regarding future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those currently anticipated. Examples of factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and embedded technology, and similar uncertainties. In addition, there can be no guarantee that the systems or products of other entities, including the company's independent dealers, on which the company relies will be converted on a timely basis, or that a failure to convert by another company, or a conversion that is incompatible with the company's systems, would not have a material adverse effect on the company. The company currently believes that the most reasonably likely worst case scenario with respect to the Year 2000 issue is the failure of a supplier, including utility suppliers, to become Year 2000 compliant, which could result in the temporary interruption of the supply of necessary products or services to a manufacturing facility. This could result in interruptions in production for a period of time, which in turn could result in potential lost sales and profits. Additionally, sales, general and administrative expense could increase if automated functions would need to be performed manually. The company currently believes that the most reasonably likely worst case scenario for its financial services operations with respect to the Year 2000 issue would be the inability to sustain its current level of performance and customer service. Additionally, a significant failure of the banking systems or key entities in the financial markets could adversely affect the financial services operations' ability to access various credit and money markets. As part of its continuous assessment process, each of the business locations have prepared contingency plans for critical business processes that will be placed into effect in the event of a Year 2000 problem. These plans identify when contingent actions should be taken and identify the resources necessary for a proper response. Review and testing of the contingency plans will continue through the remainder of 1999, along with the necessary training of people that will manage through the crossover into the Year 2000. Checklists have been established for each of the contingency plans, against which status will be measured as the crossover occurs. The first priority will be to determine that computing platforms, data base management systems and communication networks for both voice and data are functioning properly. Immediately following, a series of production applications have been scheduled to run, with the objective being to quickly identify any remaining Year 2000 problems, and to initiate corrective actions promptly. A Year 2000 command center structure has been established to facilitate the management of activities and communications, consisting of a central center and 10 subsidiary centers defined for the business locations. Staffing has been identified for each of the centers, along with the procedures to manage the implementation of the defined pre and post-Year 2000 activities. Navistar is using its best efforts to ensure that the Year 2000 impact on its critical systems and processes will not affect its supply of product, quality or service. However, in the event that the company is unable to complete its remedial actions described above and is unable to implement adequate contingency plans in the event problems arise, there could be a material adverse effect on the company's business, financial position or results of operations. - 9 - The preceding Year 2000 discussion contains various forward-looking statements which represent the company's beliefs or expectations regarding future events. When used in the Year 2000 discussion, the words "believes," "expects," "estimates," "planned," "could," and similar expressions are intended to identify forward-looking statements. Forward-looking statements include, without limitation, the company's expectations as to when it will complete the remediation and testing phases of its Year 2000 program as well as its Year 2000 contingency plans; its estimated cost of achieving Year 2000 readiness; and the company's belief that its internal systems and equipment will be Year 2000 compliant in a timely manner. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to, the availability of qualified personnel and other information technology resources; the ability to identify and remediate all date-sensitive lines of computer code or to replace embedded computer chips in affected systems or equipment; and the actions of governmental agencies or other third parties with respect to Year 2000 problems. NEW ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement defines whether or not certain costs related to the development or acquisition of internal use software should be expensed or capitalized, and is effective for fiscal years beginning after December 15, 1998. The company adopted this statement effective November 1, 1999. At planned 2000 spending levels, adoption of this statement will result in the company capitalizing approximately $25 million of certain costs that would have otherwise been expensed. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), to establish accounting and reporting requirements for derivative instruments. This standard requires recognition of all derivative instruments in the statement of financial condition as either assets or liabilities, measured at fair value. This statement additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. The company is currently assessing the impact of this statement on the company's results of operations, financial condition and cash flows. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which amends SFAS 133 by deferring for one year, the effective date of SFAS 133, to those fiscal years beginning after June 15, 2000. INCOME TAXES The Statement of Financial Condition at October 31, 1999 and 1998 includes a deferred tax asset of $896 million and $912 million, respectively, net of valuation allowances of $86 million and $264 million, respectively, related to future tax benefits. The deferred tax asset has been reduced by the valuation allowance as management believes it is more likely than not that some portion of the deferred tax asset may not be realized in the future. The deferred tax asset includes the tax benefits associated with cumulative tax losses of $1,134 million and temporary differences, which represent the cumulative expense of $1,224 million recorded in the Statement of Income that has not been deducted on the company's tax returns. The valuation allowance at October 31, 1999, assumes that it is more likely than not that approximately $226 million of cumulative tax losses will not be realized before their expiration date. Realization of the net deferred tax asset is dependent on the generation of approximately $2,400 million of future taxable income. Until the company has utilized its significant net operating loss carryforwards, the cash payment of U.S. federal income taxes will be minimal. See Note 3 to the Financial Statements. The company performs extensive analysis to determine the amount of the deferred tax asset. Such analysis is based on the premise that the company is, and will continue to be, a going concern and that it is more likely than not that deferred tax benefits will be realized through the generation of future - 10 - taxable income. Management reviews all available evidence, both positive and negative, to assess the long-term earnings potential of the company. The financial results are evaluated using a number of alternatives in economic cycles at various industry volume conditions. One significant factor considered is the company's role as a leading producer of heavy and medium trucks and school buses and mid-range diesel engines. As a result of the increase in 1999 industry demand, the continued successful implementation of the company's manufacturing strategies, changes in the company's operating structure, and other positive operating indicators, management reviewed its projected future taxable income and evaluated the impact of these changes on its deferred tax asset valuation allowance. This review was completed during the third quarter of 1999 and resulted in a reduction to the deferred tax asset valuation allowance of $178 million which has been recorded as a reduction of income tax expense resulting in an effective tax rate of 8%. In addition, a $45 million reduction in the allowance was recorded during the fourth quarter of 1998 based on a similar review. 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 $896 million. Reconciliation of the company's income before income taxes for financial statement purposes to U.S. taxable income for the years ended October 31 is as follows: Millions of dollars 1999 1998 1997 - ----------------------------------------------------------------------------- Income before income taxes .... $ 591 $ 410 $ 242 Exclusion of income of foreign subsidiaries ..... (102) (7) (3) State income taxes ............ (4) (3) (2) Temporary differences.......... 72 (175) 145 Other ........................ (7) (26) 6 -------- -------- -------- Taxable income......... $ 550 $ 199 $ 388 ======== ======== ======== BUSINESS ENVIRONMENT Sales of Class 5 through 8 trucks have historically been cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates and the earnings and cash flow of dealers and customers. Reflecting the stability of the general economy, demand for new trucks remained strong during 1999. The decrease in the number of new truck orders has decreased the company's order backlog to a more normal level of 57,300 units at October 31, 1999, from 72,100 units at October 31, 1998. The company continually evaluates order receipts and backlog throughout the year and will balance production with demand as appropriate. The company currently projects 2000 U.S. and Canadian Class 8 heavy truck demand to be 245,000 units, a 14% decrease from 1999. Although lower, this level of demand is still considered strong allowing Navistar to produce at record capacity levels. Process improvements and capacity expansions have been implemented to enhance the company's ability to meet customer demand for its products. Class 5, 6 and 7 medium truck demand, excluding school buses is forecast at 128,000 units, 12% lower than in 1999. Demand for school buses is expected to decrease only 5% in 2000 to 32,000 units. Mid-range diesel engine shipments by the company to OEMs in 2000 are expected to be 324,000 units, 13% higher than in 1999. In 1999, the company announced that it had finalized a joint venture with a Brazilian diesel engine producer to manufacture diesel engines in South America. In June 1999, the employees represented by Local 127 of the Canadian Auto Workers voted to ratify a new three-year labor agreement. The new contract extends through June 1, 2002. Increased labor and pension costs associated with the new contract are expected to be offset by work rule changes that provide increased manufacturing flexibility. - 11 - STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY Management of Navistar International Corporation and its subsidiaries is responsible for the preparation and for the integrity and objectivity of the accompanying financial statements and other financial information in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based on management's estimates and judgments. The accompanying financial statements have been audited by Deloitte & Touche LLP, independent auditors. Management has made available to Deloitte & Touche LLP all the company's financial records and related data, as well as the minutes of the board of directors' meetings. Management believes that all representations made to Deloitte & Touche LLP during its audit were valid and appropriate. Management is responsible for establishing and maintaining a system of internal controls throughout its operations that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use and the execution and recording of transactions in accordance with management's authorization. Management believes that the company's system of internal controls is adequate to accomplish these objectives. The system of internal controls, which provides for appropriate division of responsibility, is supported by written policies and procedures that are updated by management, as necessary. The system is tested and evaluated regularly by the company's internal auditors as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their audit in accordance with generally accepted auditing standards and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the company's system of internal controls and takes the necessary actions that are cost-effective in the circumstances to respond appropriately to the recommendations presented. The Audit Committee of the board of directors, composed of five 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 seems 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 - 12 - 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, 1999 and 1998, and the related Statements of Income, Comprehensive Income and of Cash Flow for each of the three years in the period ended October 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flow for each of the three years in the period ended October 31, 1999, in conformity with generally accepted accounting principles. Deloitte & Touche LLP December 13, 1999 Chicago, Illinois - 13 - STATEMENT OF INCOME Navistar International Corporation and Consolidated Subsidiaries --------------------------------------- For the Years Ended October 31 Millions of dollars, except share data 1999 1998 1997 - ------------------------------------------------------------------------------- Sales and revenues Sales of manufactured products....... $ 8,326 $ 7,629 $ 6,147 Finance and insurance revenue........ 256 201 174 Other income......................... 65 55 50 -------- -------- -------- Total sales and revenues........ 8,647 7,885 6,371 -------- -------- -------- Costs and expenses Cost of products and services sold... 6,862 6,498 5,292 Postretirement benefits.............. 216 174 215 Engineering and research expense..... 281 192 124 Sales, general and administrative expense......... 486 427 365 Interest expense..................... 135 105 74 Other expense........................ 76 79 59 -------- -------- -------- Total costs and expenses........ 8,056 7,475 6,129 -------- -------- -------- Income before income taxes.. 591 410 242 Income tax expense.......... 47 111 92 -------- -------- -------- Net income........................... 544 299 150 Less dividends on Series G preferred stock........... - 11 29 -------- -------- -------- Net income applicable to common stock.................... $ 544 $ 288 $ 121 ======== ======== ======== - ------------------------------------------------------------------------------- Earnings per share Basic........................... $ 8.34 $ 4.16 $ 1.66 Diluted......................... $ 8.20 $ 4.11 $ 1.65 Average shares outstanding (millions) Basic........................... 65.2 69.1 73.1 Diluted......................... 66.4 70.0 73.6 - ------------------------------------------------------------------------------- STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED OCTOBER 31 Millions of dollars 1999 1998 1997 - ------------------------------------------------------------------------------- Net income........................... $ 544 $ 299 $ 150 -------- -------- -------- Other comprehensive income (loss), net of tax: Minimum pension liability adjustment, net of tax of $(81), $76 and $(6) million.... 152 (144) 9 Foreign currency translation adjustments and other.......... (18) 5 2 -------- -------- -------- Other comprehensive income (loss), net of tax......................... 134 (139) 11 -------- -------- -------- Comprehensive income................. $ 678 $ 160 $ 161 ======== ======== ======== See Notes to Financial Statements. - 14 - STATEMENT OF FINANCIAL CONDITION Navistar International Corporation and Consolidated Subsidiaries ------------------------- As of October 31 Millions of dollars 1999 1998 - ------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents................ $ 243 $ 390 Marketable securities.................... 138 259 Receivables, net......................... 1,550 1,352 Inventories.............................. 625 507 Deferred tax asset, net.................. 229 194 Other assets............................. 57 39 -------- -------- Total current assets.......................... 2,842 2,741 Marketable securities......................... 195 415 Finance and other receivables, net............ 1,268 844 Property and equipment, net................... 1,475 1,106 Investments and other assets.................. 207 127 Prepaid and intangible pension assets......... 274 238 Deferred tax asset, net....................... 667 718 -------- -------- Total assets ................................ $ 6,928 $ 6,189 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Liabilities Current liabilities Current maturities of long-term debt..... $ 192 $ 186 Accounts payable, principally trade...... 1,399 1,265 Other liabilities........................ 911 808 -------- -------- Total current liabilities..................... 2,502 2,259 Debt: Manufacturing operations............... 445 446 Financial services operations.......... 1,630 1,490 Postretirement benefits liability............. 634 862 Other liabilities............................. 426 363 -------- -------- Total liabilities.................... 5,637 5,420 -------- -------- Commitments and contingencies Shareowners' equity Series D convertible junior preference stock.. 4 4 Common stock (75.3 million shares issued)............. 2,139 2,139 Retained earnings (deficit)................... (297) (829) Accumulated other comprehensive loss.......... (197) (331) Common stock held in treasury, at cost (12.1 million and 9.1 million shares held) (358) (214) -------- -------- Total shareowners' equity............ 1,291 769 -------- -------- Total liabilities and shareowners' equity..... $ 6,928 $ 6,189 ======== ======== - ------------------------------------------------------------------------------- See Notes to Financial Statements. - 15 - STATEMENT OF CASH FLOW Navistar International Corporation and Consolidated Subsidiaries -------------------------------------- For the Years Ended October 31 Millions of dollars 1999 1998 1997 - ------------------------------------------------------------------------------ Cash flow from operations Net income........................... $ 544 $ 299 $ 150 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization.... 174 159 120 Deferred income taxes............ 185 149 82 Deferred tax asset valuation allowance adjustment........... (178) (45) - Postretirement benefits funding less than (in excess of) expense........................ 47 (373) (128) Other, net....................... (31) (16) (51) Change in operating assets and liabilities: Receivables.................. (445) (192) (194) Inventories.................. (129) (13) (25) Prepaid and other current assets....... (24) (1) 4 Accounts payable............. 139 192 288 Other liabilities............ 20 202 137 -------- -------- -------- Cash provided by operations...... 302 361 383 -------- -------- -------- Cash flow from investment programs Purchases of retail notes and lease receivables.............. (1,442) (1,263) (970) Collections/sales of retail notes and lease receivables.............. 1,282 1,071 1,054 Purchases of marketable securities... (396) (837) (512) Sales or maturities of marketable securities........... 726 521 557 Capital expenditures................. (427) (302) (169) Property and equipment leased to others................... (108) (125) (42) Investment in affiliates............. (71) (7) 8 Capitalized interest and other....... (15) (6) (8) -------- -------- -------- Cash used in investment programs. (451) (948) (82) -------- -------- -------- Cash flow from financing activities Issuance of debt..................... 174 493 211 Principal payments on debt........... (135) (119) (46) Net increase (decrease) in notes and debt outstanding under bank revolving credit facility and commercial paper programs.......... 88 348 (285) Mexican credit facility.............. 22 84 - Debt and equity issuance costs....... (3) (26) (7) Purchases of common stock............ (144) (189) (23) Proceeds from reissuance of treasury shares................. - 28 - Redemption of Series G preferred stock........... - (240) - Dividends paid....................... - (11) (29) -------- -------- -------- Cash provided by (used in) financing activities.......... 2 368 (179) -------- -------- -------- Cash and cash equivalents (Decrease) increase during the year.................. (147) (219) 122 At beginning of the year........... 390 609 487 -------- -------- -------- Cash and cash equivalents at end of the year................. $ 243 $ 390 $ 609 ======== ======== ======== - ------------------------------------------------------------------------------- See Notes to Financial Statements. - 16 - NOTES TO FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 1999 1. SUMMARY OF ACCOUNTING POLICIES Basis of Consolidation Navistar International Corporation is a holding company, whose principal operating subsidiary is Navistar International Transportation Corp. (Transportation). As used hereafter, "company" or "Navistar" refers to Navistar International Corporation and its consolidated subsidiaries. Navistar operates in three principal industry segments: truck, engine (collectively called "manufacturing operations") and financial services. The company's truck segment is engaged in the manufacture and marketing of Class 5 through 8 trucks, including school buses, and operates primarily in the United States (U.S.) and Canada as well as in Mexico, Brazil and other selected export markets. The company's engine segment is engaged in the design and manufacture of mid-range diesel engines and operates primarily in the U.S. and Brazil. The financial services operations of the company provide wholesale, retail and lease financing, and domestic commercial physical damage and liability insurance coverage to the company's dealers and retail customers and to the general public through an independent insurance agency system. The consolidated financial statements include the results of the company's manufacturing operations and its wholly owned financial services subsidiaries. The effects of transactions between the manufacturing and financial services operations have been eliminated to arrive at the consolidated totals. Certain 1998 and 1997 amounts have been reclassified to conform with the presentation used in the 1999 financial statements. During 1999, the company adopted a classified balance sheet format; 1998 balances have been reclassified to conform with the presentation used in 1999. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. - 17 - NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) Revenue Recognition Truck operations recognize shipments of new trucks and service parts to 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 (OEMs). An allowance for losses on receivables is maintained at an amount that management considers appropriate in relation to the outstanding receivables portfolio, and it is charged when receivables are determined to be uncollectible. Financial services operations recognize finance charges on finance receivables as income over the term of the receivables utilizing the interest method. Operating lease revenues are recognized on a straight-line basis over the life of the lease. Selected receivables are securitized and sold 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. An allowance for losses is maintained at a level deemed appropriate based on such factors as overall portfolio quality, historical loss experience and current economic conditions. Insurance premiums are earned on a prorata basis over the terms of the policies. The liability for unpaid insurance claims includes provisions for reported claims and an estimate of unreported claims based on past experience. Cash and Cash Equivalents All highly liquid financial instruments with maturities of three months or less from date of purchase, consisting primarily of bankers' acceptances, commercial paper, U.S. government securities and floating rate notes, are classified as cash equivalents in the Statements of Financial Condition and Cash Flow. Marketable Securities Marketable securities are classified as available-for-sale securities and are reported at fair value. The difference between amortized cost and fair value is recorded as a component of accumulated other comprehensive loss in shareowners' equity, net of applicable deferred taxes. Securities with remaining maturities of less than twelve months and other investments needed for current cash requirements are classified as current within the Statement of Financial Condition. All equity securities are classified as current because they are highly liquid financial instruments which can be readily converted to cash. All other securities are classified as non-current. Inventories Inventories are valued at the lower of average cost or market. - 18 - NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) Property and Other Long-Lived Assets Significant expenditures for replacement of equipment, tooling and pattern equipment, and major rebuilding of machine tools are capitalized. Depreciation and amortization are generally provided on the straight-line basis over the estimated useful lives of the assets, which average 35 years for buildings and improvements and eight years for machinery and equipment. Gains and losses on property disposals are included in other income and expense. The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets and the projected, undiscounted cash flows of the operations in which the long-lived assets are deployed. Engineering and Research Expense Engineering and research expense includes research and development expenses and routine ongoing costs associated with improving existing products and manufacturing processes. Research and development expenses, which include activities for the introduction of new truck and engine products and major improvements to existing products and processes, totaled $207 million, $138 million and $85 million in 1999, 1998 and 1997, 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. Financial services operations may use forward contracts to hedge the fair value of its fixed rate receivables against changes in market interest rates in anticipation of the sale of such receivables. Financial services operations also use interest rate swaps to reduce exposure to interest rate changes when they sell fixed rate receivables on a variable rate basis. For the protection of investors in Navistar Financial Corporation's (NFC) debt securities, NFC may write interest rate caps when fixed rate receivables are sold on a variable rate basis. The company also uses derivatives such as forward contracts to reduce its exposure to foreign exchange volatility. Derivative financial instruments are generally held for purposes other than trading. Income recognition of changes in fair values of the derivatives is deferred until the derivative instruments are closed. Gains or losses related to hedges of anticipated transactions are deferred until they are recognized in income when the effects of the anticipated transactions are recognized in earnings. The principal balance of receivables expected to be sold by NFC equals or exceeds the notional amount of open forward contracts. Additionally, the value of committed purchases denominated in currencies other than the functional currency generally exceeds the notional amount of related open derivative contracts. - 19 - NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) Foreign Currency The financial statements of foreign subsidiaries are translated to U.S. dollars using the period-end exchange rate for assets and liabilities and a weighted-average exchange rate for each period for revenues and expenses. The local currency is the functional currency for the company's foreign subsidiaries and translation adjustments for these subsidiaries are recorded as a component of accumulated other comprehensive loss in shareowners' equity. Effective February 1, 1999, the functional currency of the company's Mexican subsidiaries changed from the U.S. dollar to the Mexican peso because Mexico's economy is no longer considered highly inflationary. The effect of this change was not material. Translation gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred, except for those transactions which hedge purchase commitments and for those intercompany balances which are designated as long-term investments. Net income included a foreign currency transaction loss of $10 million in 1999 and foreign currency transaction gains of $4 million in 1998 and $2 million in 1997. New Accounting Pronouncements Effective November 1, 1998, Navistar adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components. Financial statements for prior periods have been reclassified as required by this statement. Effective November 1, 1998, Navistar adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). See Note 13 to the Financial Statements. - 20 - NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF ACCOUNTING POLICIES (continued) New Accounting Pronouncements (continued) In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement defines whether or not certain costs related to the development or acquisition of internal use software should be expensed or capitalized, and is effective for fiscal years beginning after December 15, 1998. The company adopted this statement effective November 1, 1999. At planned 2000 spending levels, adoption of this statement will result in the company capitalizing approximately $25 million of certain costs that would have otherwise been expensed. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), to establish accounting and reporting requirements for derivative instruments. This standard requires recognition of all derivative instruments in the statement of financial condition as either assets or liabilities, measured at fair value. This statement additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," which amends SFAS 133 by deferring for one year the effective date of SFAS 133, to those fiscal years beginning after June 15, 2000. The company is currently assessing the impact of SFAS 133 on the company's results of operations, financial condition and cash flows. - 21 - 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 and postretirement health care expenses for employees, retirees and surviving spouses and dependents. In addition, as part of the 1993 restructured health care and life insurance plans, profit sharing payments to the Retiree Supplemental Benefit Trust (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 1999 1998 1997 - ------------------------------------------------------------------------------- Pension expense...................... $ 77 $ 74 $ 129 Health/life insurance................ 65 42 66 Profit sharing provision to Trust.... 74 58 20 -------- -------- -------- Total postretirement benefits expense $ 216 $ 174 $ 215 ======== ======== ======== Generally, the pension plans are non-contributory. The company's policy is to fund its pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional payments as funds are available to achieve full funding of the accumulated benefit obligation. At October 31, 1999, all legal funding requirements had been met. In 2000, the company expects to contribute approximately $85 million to its pension plans to meet legal requirements. In 1993, the Retiree Health Benefit Trust was established to provide a vehicle for funding the health care liability through company contributions and retiree premiums. The company made a required prefunding contribution of $200 million to this trust during 1998. Postretirement Benefits Expense Net periodic benefits expense included in the Statement of Income is composed of the following: Pension Benefits Other Benefits ---------------- -------------- Millions of dollars 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------ Service cost for benefits earned during the period........ $ 34 $ 37 $ 34 $ 16 $ 14 $ 13 Interest on obligation........ 229 231 238 107 98 96 Amortization costs and other......... 99 88 99 15 2 - Less expected return on assets.. (285) (282) (242) (73) (72) (43) ----- ----- ----- ----- ----- ----- Net postretirement benefits expense.. $ 77 $ 74 $ 129 $ 65 $ 42 $ 66 ===== ===== ===== ===== ===== ===== - 22 - NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS (continued) Postretirement Benefits Expense (continued) "Amortization costs and other" include amortization of cumulative gains and losses over the expected remaining service life of employees and amortization of the initial transition liability over 15 years. Also included is the expense related to yearly lump-sum payments to retirees required by negotiated labor contracts, expense related to defined contribution plans and amortization of plan amendments. Plan amendments are recognized over the remaining service life of employees, except for those plan amendments arising from negotiated labor contracts, which are amortized over the length of the contract. The funded status of the company's plans as of October 31, 1999 and 1998 and a reconciliation with amounts recognized in the Statement of Financial Condition are provided below. Pension Benefits Other Benefits ---------------- -------------- Millions of dollars 1999 1998 1999 1998 - ------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year.............. $3,481 $3,299 $1,560 $1,374 Service cost........................ 34 37 16 14 Interest on obligation.............. 229 231 107 98 Amendments.......................... 8 - 4 - Actuarial net (gain) loss........... (157) 186 52 164 Benefits paid....................... (287) (272) (103) (90) ------ ------ ------ ------ Benefit obligation at end of year... $3,308 $3,481 $1,636 $1,560 ------ ------ ------ ------ Change in plan assets Fair value of plan assets at beginning of year.............. $3,032 $2,900 $ 693 $ 486 Actual return on plan assets........ 348 187 118 47 Employer contribution............... 12 212 10 210 Benefits paid....................... (279) (267) (57) (50) ------ ------ ------ ------ Fair value of plan assets at end of year.................... $3,113 $3,032 $ 764 $ 693 ------ ------ ------ ------ Funded status....................... $ (195) $ (449) $(872) $ (867) Unrecognized actuarial net loss..... 342 587 331 344 Unrecognized transition amount...... 100 133 - - Unrecognized prior service cost..... 56 69 - (5) ------ ------ ------ ------ Net amount recognized............... $ 303 $ 340 $ (541) $ (528) ====== ====== ====== ====== Amounts recognized in the Statement of Financial Condition consist of: Prepaid benefit cost................ $ 148 $ 39 $ - $ - Accrued benefit liability - current......................... (95) (17) (58) (55) - noncurrent...................... (151) (389) (483) (473) Intangible asset.................... 126 199 - - Accumulated other comprehensive loss 275 508 - - ------ ------ ------ ------ Net amount recognized............... $ 303 $ 340 $ (541) $ (528) ====== ====== ====== ====== - 23 - NOTES TO FINANCIAL STATEMENTS (Continued) 2. POSTRETIREMENT BENEFITS (continued) Postretirement Benefits Expense (continued) The accumulated other comprehensive loss included in shareowners' equity is recorded in the Statement of Financial Condition net of deferred income taxes of $91 million and $172 million at October 31, 1999 and 1998, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $2,057 million, $2,056 million and $1,814 million, respectively, as of October 31, 1999, and $3,393 million, $3,336 million and $2,931 million respectively, as of October 31, 1998. During 1998, the pension plans purchased 3 million shares of the company's common stock. At October 31, 1998, these shares accounted for approximately 2% of the plans' assets. During 1999, the pension plans sold all of their shares of the company's common stock. The weighted average rate assumptions used in determining expenses and benefit obligations were: Pension Benefits Other Benefits ---------------- -------------- Millions of dollars 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------ Discount rate used to determine present value of benefit obligation at end of year...... 7.9% 6.8% 7.3% 8.0% 7.1% 7.4% Expected long-term rate of return on plan assets for the year........ 9.7% 9.7% 9.8% 10.8% 10.8% 11.1% Expected rate of increase in future compensation levels. 3.5% 3.5% 3.5% N/A N/A N/A For 2000, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 9.7%. The rate is projected to decrease to 5.0% by the year 2005 and remain at that level each year thereafter. The effect of changing the health care cost trend rate by one-percentage point for each future year is as follows: One-Percentage- One-Percentage- Point Increase Point Decrease --------------- --------------- Effect on total of service and interest cost components.... $ 19 $ (16) Effect on postretirement benefit obligation.............. 192 (163) - 24 - NOTES TO FINANCIAL STATEMENTS (Continued) 3. INCOME TAXES The domestic and foreign components of income before income taxes consist of the following: Millions of dollars 1999 1998 1997 - ------------------------------------------------------------------------------- Domestic......................... $ 489 $ 403 $ 239 Foreign.......................... 102 7 3 -------- -------- -------- Total income before income taxes. $ 591 $ 410 $ 242 ======== ======== ======== The components of income tax expense consist of the following: Millions of dollars 1999 1998 1997 - ------------------------------------------------------------------------------- Current: Federal........................ $ 11 $ 4 $ 8 State and local................ 4 3 2 Foreign........................ 25 - - -------- -------- -------- Total current expense............ 40 7 10 -------- -------- -------- Deferred: Federal........................ 154 127 71 State and local................ 23 19 11 Foreign........................ 8 3 - -------- -------- -------- Total deferred expense........... 185 149 82 -------- -------- -------- Less valuation allowance adjustment..................... (178) (45) - -------- -------- -------- Total income tax expense......... $ 47 $ 111 $ 92 ======== ======== ======== 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 1999, 1998 and 1997 were $40 million, $7 million and $10 million, respectively. The relationship of the tax expense to income before taxes for 1999, 1998 and 1997 differs from the U.S. statutory rate (35%) because of state income taxes and the benefit of NOL carryforwards in foreign countries. Also, the 1999 and 1998 effective tax rates reflect a $178 million and $45 million reduction in the deferred tax asset valuation allowance, respectively. A valuation allowance has been provided for those NOL carryforwards and temporary differences which are estimated to expire before they are utilized. The effective tax rates for 1999, 1998 and 1997 were 8.0%, 27.0% and 38.0%, respectively. As a result of continued strong industry demand, the continued successful implementation of the company's manufacturing strategies, changes in the company's operating structure, and other positive operating indicators, management reviewed its projected future taxable income and evaluated the impact of these changes on its deferred tax asset valuation allowance. This review was completed during the third quarter of 1999 and resulted in a reduction to the deferred tax asset valuation allowance of $178 million which reduced income tax expense during the third quarter of 1999. In addition, a $45 million reduction in the allowance was recorded during the fourth quarter of 1998 based on a similar review. - 25 - NOTES TO FINANCIAL STATEMENTS (Continued) 3. INCOME TAXES (continued) Undistributed earnings of foreign subsidiaries were $126 million and $50 million at October 31, 1999 and 1998, respectively. Taxes have not been provided on these earnings because no withholding taxes are applicable upon repatriation and any U.S. tax would be substantially offset by the utilization of NOL carryforwards. Taxpaying entities of the company offset all deferred tax assets and liabilities within each tax jurisdiction. The components of the deferred tax asset (liability) at October 31 are as follows: Millions of dollars 1999 1998 - ------------------------------------------------------------------------------- United States - ------------- Deferred tax assets: Net operating loss carryforwards........ $ 397 $ 590 Alternative minimum tax................. 35 24 Postretirement benefits................. 266 347 Product liability and warranty.......... 116 106 Employee incentive programs............. 77 79 Other liabilities....................... 129 153 -------- -------- Total deferred tax assets............... 1,020 1,299 -------- -------- Deferred tax liabilities: Prepaid pension assets.................. (102) (117) Depreciation ......................... (22) (30) -------- -------- Total deferred tax liabilities.......... (124) (147) -------- -------- Total deferred tax assets............... 896 1,152 Less valuation allowance................ (65) (243) -------- -------- Net deferred U.S. tax assets............ $ 831 $ 909 -------- -------- Foreign - ------- Deferred tax assets: Net operating loss carryforwards........ $ 34 $ 5 Other accrued liabilities............... 52 19 -------- -------- Total deferred tax assets............... 86 24 Less valuation allowance................ (21) (21) -------- -------- Net deferred foreign tax assets......... $ 65 $ 3 -------- -------- Total net deferred tax assets........... $ 896 $ 912 -------- -------- Deferred foreign tax liabilities: Prepaid pension assets.................. $ (45) $ (13) Depreciation ......................... (30) (7) Other................................... (12) - -------- -------- Total deferred foreign tax liabilities.. $ (87) $ (20) ======== ======== Amounts recognized in the Statement of Financial Condition: Deferred tax assets..................... $ 896 $ 912 Less current portion............... (229) (194) -------- -------- Long-term deferred tax asset....... $ 667 $ 718 ======== ======== Other long-term liabilities............. $ (87) $ (20) ======== ======== - 26 - NOTES TO FINANCIAL STATEMENTS (Continued) 3. INCOME TAXES (continued) At October 31, 1999, the company had $1,045 million of domestic and $89 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: 2007......................................... $ 75 2008......................................... 816 2009......................................... 37 2011......................................... 179 Indefinite................................... 27 ------- Total........................................ $ 1,134 ======= Additionally, the reversal of net temporary differences of $1,224 million as of October 31, 1999 will create net tax deductions which, if not utilized previously, will expire subsequent to 2011. - 27 - NOTES TO FINANCIAL STATEMENTS (Continued) 4. MARKETABLE SECURITIES The fair value of marketable securities is estimated based on quoted market prices, when available. If a quoted price is not available, fair value is estimated using quoted market prices for similar financial instruments. Information related to the company's marketable securities at October 31 is as follows: 1999 1998 -------------------- -------------------- Amortized Fair Amortized Fair Millions of dollars Cost Value Cost Value - ------------------------------------------------------------------------------ Corporate securities......... $ 172 $ 170 $ 386 $ 388 U.S. government securities... 82 82 171 174 Mortgage and asset-backed securities.... 55 54 85 86 Foreign government securities 5 5 6 7 ------ ------ ------ ------ Total debt securities.... 314 311 648 655 ------ ------ ------ ------ Equity securities............ 22 22 17 19 ------ ------ ------ ------ Total marketable securities.. $ 336 $ 333 $ 665 $ 674 ====== ====== ====== ====== Contractual maturities of marketable debt securities at October 31 are as follows: 1999 1998 -------------------- -------------------- Amortized Fair Amortized Fair Millions of dollars Cost Value Cost Value - ------------------------------------------------------------------------------ Due in one year or less..... $ 147 $ 146 $ 239 $ 240 Due after one year through five years ....... 95 94 297 301 Due after five years through 10 years ......... 10 10 17 18 Due after 10 years ......... 7 7 10 10 ------ ------ ------ ------ 259 257 563 569 Mortgage and asset-backed securities.. 55 54 85 86 ------ ------ ------ ------ Total debt securities ..... $ 314 $ 311 $ 648 $ 655 ====== ====== ====== ====== Gross gains and losses realized on sales or maturities of marketable securities were not material for each of the two years. At October 31, 1999 and 1998, a domestic insurance subsidiary had $11 million and $13 million, respectively, of marketable securities which were on deposit with various state departments of insurance or otherwise not available. These securities are included in total marketable securities balances at October 31, 1999 and 1998. - 28 - NOTES TO FINANCIAL STATEMENTS (Continued) 5. RECEIVABLES Receivables at October 31 are summarized by major classification as follows: Millions of dollars 1999 1998 - ------------------------------------------------------------------------------- Accounts receivable ................... $ 816 $ 661 Retail notes and lease financing....... 1,061 925 Wholesale notes........................ 592 261 Amounts due from sales of receivables....................... 244 246 Notes receivable....................... 117 109 Other.................................. 24 27 Allowance for losses................... (36) (33) -------- -------- Total receivables, net............. 2,818 2,196 Less current portion............... (1,550) (1,352) -------- -------- Finance and other receivables, net. $ 1,268 $ 844 ======== ======== The financial services segment purchases the majority of the wholesale notes receivable and some retail notes and accounts receivable arising from the company's operations. A portion of NFC's funding for retail and wholesale notes comes from sales of receivables by NFC to third parties with limited recourse. NFC's maximum contractual exposure under all receivable sale recourse provisions at October 31, 1999 was $257 million; however, management believes that the allowance for credit losses on sold receivables is adequate. Proceeds from sales of retail notes receivable, net of underwriting costs, were $1,192 million in 1999, $953 million in 1998 and $958 million in 1997. Uncollected sold retail and wholesale receivable balances totaled $2,296 million and $2,145 million as of October 31, 1999 and 1998, respectively. In November 1999, NFC sold $533 million of retail notes, net of unearned finance income, through Navistar Financial Retail Receivables Corporation (NFRRC) to two multi-seller asset-backed commercial paper conduits sponsored by a major financial institution. The gain on sales, which was not material, was recognized in November 1999. Contractual maturities of accounts receivable, retail notes and lease financing and wholesale notes, including unearned finance income, at October 31, 1999 were: 2000 - $1,550 million, 2001 - $443 million, 2002 - $245 million, 2003 - - $188 million, 2004 - $148 million and thereafter - $49 million. Unearned finance income totaled $154 million at October 31, 1999. Notes receivable are due upon demand from a limited partnership that invests in S&P 500 stock index arbitrage. - 29 - NOTES TO FINANCIAL STATEMENTS (Continued) 6. INVENTORIES Inventories at October 31 are as follows: Millions of dollars 1999 1998 - ------------------------------------------------------------------------------- Finished products.......................... $ 285 $ 225 Work in process............................ 95 69 Raw materials and supplies................. 245 213 -------- -------- Total inventories.......................... $ 625 $ 507 ======== ======== 7. PROPERTY AND EQUIPMENT At October 31, property and equipment includes the following: Millions of dollars 1999 1998 - ------------------------------------------------------------------------------- Land ...................................... $ 20 $ 18 Buildings, machinery and equipment at cost: Plants................................ 1,627 1,419 Distribution.......................... 102 94 Construction in progress.............. 313 130 Net investment in operating leases.... 283 218 Other ................................ 253 203 -------- -------- Total property........................ 2,598 2,082 -------- -------- Less accumulated depreciation and amortization.................... (1,123) (976) -------- -------- Total property and equipment, net. $ 1,475 $ 1,106 ======== ======== Total property includes property under capitalized lease obligations of $24 million and $25 million at October 31, 1999 and 1998, respectively. Future minimum rentals on net investments in operating leases are: 2000 - $68 million, 2001 - $58 million, 2002 - $44 million, 2003 - $27 million and thereafter - $13 million. Each of these assets is depreciated on a straight-line basis over the term of the lease in an amount necessary to reduce the leased vehicle to its estimated residual value at the end of the lease term. Capitalized interest for 1999, 1998, and 1997 was $15 million, $12 million, and $2 million, respectively. - 30 - NOTES TO FINANCIAL STATEMENTS (Continued) 8. DEBT Millions of dollars 1999 1998 - ------------------------------------------------------------------------------- Manufacturing operations Notes payable and current maturities of long-term debt..................... $ 31 $ 4 -------- -------- 8% Senior Subordinated Notes, due 2008 250 250 7% Senior Notes, due 2003............. 100 100 Mexican credit facility............... 83 84 Capitalized leases and other.......... 12 12 -------- -------- Total long-term debt................ 445 446 -------- -------- Manufacturing operations debt............. 476 450 -------- -------- Financial services operations Commercial paper...................... 35 22 Current maturities of long-term debt.. 126 160 -------- -------- Total short-term debt............... 161 182 -------- -------- Bank revolvers, variable rates, due 2001-2005....................... 867 815 Asset-backed commercial paper program, variable rate, due 2001............. 413 401 -------- -------- Total senior debt................... 1,280 1,216 9% Subordinated Senior Notes, due 2002............................ 100 100 Capitalized leases, 4.1% to 6.3%, due serially through 2006........... 250 174 -------- -------- Total long-term debt................ 1,630 1,490 -------- -------- Financial services operations debt........ 1,791 1,672 -------- -------- Total debt................................ $ 2,267 $ 2,122 ======== ======== The effective annual interest rate on manufacturing notes payable was 7.7% in 1999, 6.8% in 1998 and 8.3% in 1997. Consolidated interest payments were $134 million, $95 million and $66 million in 1999, 1998 and 1997, respectively. - 31 - NOTES TO FINANCIAL STATEMENTS (Continued) 8. DEBT (continued) During 1998, the company arranged financing for $164 million of funds denominated in U.S. dollars and Mexican pesos to be used for investment in the company's Mexican manufacturing and financial services operations. As of October 31, 1999, borrowings outstanding under these arrangements were $106 million, of which 54% is denominated in dollars and 46% in pesos. The interest rates on the dollar-denominated debt are at a negotiated fixed rate or a variable rate based either on LIBOR or the Federal Funds Rate. On peso-denominated debt, the interest rate is based on the Interbank Interest Equilibrium Rate. The effective interest rate for the combined dollar and peso denominated debt was 18% for 1999 and 17% for 1998. NFC issues commercial paper with varying terms and has short-term borrowings with various banks on a noncommitted basis. Compensating cash balances and commitment fees are not required under these borrowings. The aggregate annual maturities for debt for the years ended October 31 are as follows: Financial Manufacturing Services Millions of dollars Operations Operations Total - ------------------------------------------------------------------------------- 2000................ $ 31 $ 161 $ 192 2001................ 33 1,341 1,374 2002................ 47 172 219 2003................ 110 84 194 2004 and thereafter. 255 33 288 -------- -------- -------- Total.......... $ 476 $ 1,791 $ 2,267 ======== ======== ======== Weighted average interest rate on total debt, including short-term, and the effect of discounts and related amortization for the years ended: October 31, 1999... 10.1% 5.6% 6.6% October 31, 1998... 9.3% 6.4% 7.1% At October 31, 1999, NFC has a $925 million contractually committed bank revolving credit facility and a $400 million asset-backed commercial paper (ABCP) program supported by a bank liquidity facility plus $14 million of trust certificates issued in connection with the formation of the ABCP trust. Available funding under the bank revolving credit facility and the ABCP program was $87 million, of which $35 million provided funding backup for the outstanding short-term debt at October 31, 1999. NFC's wholly owned subsidiaries, Navistar Financial Securities Corporation (NFSC) and NFRRC, have a limited purpose of purchasing retail and wholesale receivables, respectively, and transferring an undivided ownership interest in such notes to investors. The subsidiaries have limited recourse on the sold receivables and their assets are available to satisfy the claims of their creditors prior to such assets becoming available to NFC or affiliated companies. - 32 - NOTES TO FINANCIAL STATEMENTS (Continued) 8. DEBT (continued) NFSC has in place a revolving wholesale note trust that provides for the funding of $600 million of wholesale notes. The trust is comprised of three $200 million tranches maturing in 2003, 2004 and 2008. During fiscal 1999, in two separate sales, NFC sold a total of $1,260 million of retail notes, net of unearned finance income, through NFRRC. The combined gain recognized on the sale of these notes was $12 million. The aggregate shelf registration available to NFRRC for issuance of asset-backed securities is $2,257 million. NFC has entered into various sale/leaseback agreements involving vehicles subject to retail finance and operating leases with end users. The outstanding balances are classified under financial services operations as capitalized leases. These agreements grant the purchasers a security interest in the underlying end user leases. - 33 - NOTES TO FINANCIAL STATEMENTS (Continued) 9. OTHER LIABILITIES Major classifications of other liabilities at October 31 are as follows: Millions of dollars 1999 1998 - ------------------------------------------------------------------------------- Product liability and warranty........... $ 337 $ 323 Employee incentive programs.............. 212 215 Payroll, commissions and employee-related benefits......... 103 104 Postretirement benefits liability........ 153 72 Loss reserves and unearned premiums...... 102 105 Taxes.................................... 163 67 Sales and marketing...................... 56 54 Long-term disability and workers' compensation.............. 48 53 Environmental............................ 22 27 Interest................................. 16 22 Other.................................... 125 129 -------- -------- Total other liabilities............... 1,337 1,171 Less current portion.............. (911) (808) -------- -------- Other long-term liabilities....... $ 426 $ 363 ======== ======== - 34 - NOTES TO FINANCIAL STATEMENTS (Continued) 10. FINANCIAL INSTRUMENTS Fair Value of Financial Instruments The carrying amounts of financial instruments, as reported in the Statement of Financial Condition and described in various Notes to the Financial Statements, and their fair values at October 31 are as follows: 1999 1998 -------------------- -------------------- Carrying Fair Carrying Fair Millions of dollars Amount Value Amount Value - ------------------------------------------------------------------------------ Total receivables, net....... $2,818 $2,824 $2,196 $2,216 Long-term investments and other assets........... 207 206 127 130 Total debt................... 2,267 2,256 2,122 2,119 Cash and cash equivalents approximate fair value. The cost and fair value of marketable securities are disclosed in Note 4. The fair value of notes receivable and retail notes is estimated by discounting expected cash flows at estimated current market rates. Customer receivables, wholesale notes and retail and wholesale accounts approximate fair value as a result of the short-term nature of the receivables. The fair value of investments and other assets is estimated based on quoted market prices or by discounting future cash flows. The short-term debt and variable-rate borrowings under NFC's bank revolving credit agreement, which are repriced frequently, approximate fair value. The fair value of long-term debt is estimated based on quoted market prices, when available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar financial instruments or discounting future cash flows. - 35 - NOTES TO FINANCIAL STATEMENTS (Continued) 10. FINANCIAL INSTRUMENTS (continued) Derivatives Held or Issued for Purposes Other Than Trading The company uses derivatives to transfer or reduce risks of foreign exchange and interest rate volatility, and to potentially increase the return on invested funds. The company periodically enters into forward contracts in order to reduce exposure to exchange rate risk related to purchases denominated in currencies other than the functional currency. The financial services operations manage exposures to fluctuations in interest rates by limiting the amount of fixed rate assets funded with variable rate debt generally by selling fixed rate receivables on a fixed rate basis and by utilizing derivative financial instruments. These derivative financial instruments may include interest rate swaps, interest rate caps and forward contracts. The fair value of these instruments is subject to risk as the instruments may become less valuable due to changes in market conditions or interest rates. NFC manages exposure to counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. NFC's credit exposure is limited to the fair value of contracts with a positive fair value at the reporting date. Notional amounts are used to measure the volume of derivative financial instruments and do not represent exposure to credit loss. The financial services operations enter into forward contracts to manage their exposure to fluctuations in the fair value of retail notes anticipated to be sold. The financial services operations manage such risk by entering into forward contracts to sell fixed debt securities or forward interest rate swaps whose fair value is highly correlated with that of its receivables. Income recognition of changes in fair value of the derivatives is deferred until the derivative instruments are closed. Gains or losses incurred with the closing of these agreements are included as a component of the gain or loss on sale of receivables. In November 1998, NFC sold $545 million of fixed rate retail receivables to a multi-seller asset-backed commercial paper conduit sponsored by a major financial institution on a variable rate basis. For the protection of investors, NFC issued an interest rate cap. The notional amount of the cap, $374 million, amortizes based on the expected outstanding principal balance of the sold retail receivables. Under the terms of the cap agreement, NFC will make payments if interest rates exceed certain levels. The interest rate cap is recorded at fair value with changes in fair value recognized in income. As of October 31, 1999, the impact on income was not material. At October 31, 1999, NFC held forward interest rate contracts with notional amounts of $500 million and $75 million in anticipation of retail receivable sales to occur in November 1999 and March 2000, respectively. In addition, the company held German mark, Japanese yen and Canadian dollar forward contracts with notional amounts of $49 million, $13 million, and $10 million, respectively, and other derivative contracts with notional amounts of $19 million. At October 31, 1999, the unrealized net loss on these contracts was not material. - 36 - NOTES TO FINANCIAL STATEMENTS (Continued) 11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS AND LEASES Commitments, Contingencies and Restricted Assets At October 31, 1999, commitments for capital expenditures in progress were approximately $505 million. The company's truck assembly facility located in Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the company as collateral for the $125 million revolving Mexican credit facility. At October 31, 1999, $52 million of a Mexican subsidiary's receivables were pledged as collateral for bank borrowings. In addition, as of October 31, 1999, the company is contingently liable for approximately $204 million for various purchasing commitments, credit guarantees and buyback programs. Based on historical loss trends, the company's exposure is not considered material. Additionally, restrictions under the terms on the senior and senior subordinated notes and Mexican credit facility include a limitation on indebtedness and a limitation on certain restricted payments. At October 31, 1999, the Canadian operating subsidiary was contingently liable for retail customers' contracts and leases financed by a third party. The Canadian operating subsidiary is subject to maximum recourse of $251 million on retail contracts and $22 million on retail leases. The Canadian operating subsidiary, NFC and certain other subsidiaries included in financial services operations are parties to agreements that may result in the restriction of amounts which can be distributed to Transportation in the form of dividends or loans and advances. At October 31, 1999, the maximum amount of dividends which were available for distribution under the most restrictive covenants was $220 million. The company and Transportation are obligated under certain agreements with public and private lenders of NFC to maintain the subsidiary's income before interest expense and income taxes at not less than 125% of its total interest expense. No income maintenance payments were required for the three years ended October 31, 1999. Concentrations At October 31, 1999, the company employed 10,800 hourly workers and 6,700 salaried workers in the United States and Canada. Approximately 98% of the hourly employees and 21% of the salaried employees are represented by unions. Of these represented employees, 92% of the hourly workers and 100% of the salaried workers are represented by the United Automobile, Aerospace, and Agricultural Implement Workers of America (UAW) or the National Automobile, Aerospace, and Agricultural Implement Workers of Canada (CAW). The company's current master contract with the UAW expires on October 1, 2002. The collective bargaining agreement with the CAW expires on June 1, 2002. Additionally, of the company's 1,070 employees in Mexico, approximately 71% are represented by a union. Reflecting higher consumer demand for light trucks and vans, sales of mid-range diesel engines to Ford Motor Company by the engine segment were 17% of consolidated sales and revenues in 1999 and 14% in both 1998 and 1997. The company has a 10-year agreement, effective with model year 2003, to continue supplying Ford Motor Company with diesel engines for use in its diesel-powered light trucks and vans. - 37 - NOTES TO FINANCIAL STATEMENTS (Continued) 11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS, AND LEASES (continued) Leases The company has long-term noncancellable leases for use of various equipment and facilities. Lease terms are generally for five to 25 years and, in many cases, provide for renewal options. The company is generally obligated for the cost of property taxes, insurance and maintenance. The company leases office buildings, distribution centers, furniture and equipment, machinery and equipment, and computer equipment. The majority of the company's lease payments are for operating leases. At October 31, 1999, future minimum lease payments under operating leases having lease terms in excess of one year are: 2000 - $43 million, 2001 - $33 million, 2002 - $21 million, 2003 - $19 million, 2004 - $9 million and thereafter - $26 million. Total operating lease expense was $30 million in 1999, $36 million in 1998 and $40 million in 1997. Income received from sublease rentals was $7 million in 1999 and 1998 and $6 million in 1997. 12. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS The company and its subsidiaries are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings which constitute ordinary routine litigation incidental to the business of the company and its subsidiaries. In the opinion of the company's management, none of these proceedings or claims is material to the business or the financial condition of the company. The company has been named a potentially responsible party (PRP), in conjunction with other parties, in a number of cases arising under an environmental protection law, the Comprehensive Environmental Response, Compensation, and Liability Act, popularly 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 are generally recognized no later than completion of the remedial feasibility study and are not discounted to their present value. The company reviews its accruals on a regular basis and believes that, based on these calculations, its share of the potential additional costs for the cleanup of each site will not have a material effect on the company's financial results. - 38 - NOTES TO FINANCIAL STATEMENTS (Continued) 13. SEGMENT DATA Effective November 1, 1998, Navistar adopted SFAS 131. Segment data for 1998 and 1997 has been restated. Under the provisions of the new standard, Navistar has three reportable segments: truck, engine and financial services. The company's reportable segments are organized according to the products and the markets they each serve. The company's truck segment manufactures and distributes a full line of diesel-powered trucks and school buses in the common carrier, private carrier, government/service, leasing, construction, energy/petroleum and student transportation markets. The truck segment also provides customers with proprietary products needed to support the International truck and bus lines, together with a wide selection of standard truck and trailer aftermarket parts. The company's engine segment designs and manufactures diesel engines for use in the company's Class 5, 6 and 7 medium trucks and school buses and selected Class 8 heavy truck models, and for sale to OEMs in the U.S. and Mexico. This segment also sells engines for industrial, agricultural and marine applications. In addition, the engine segment provides customers with proprietary products needed to support the International engine lines, together with a wide selection of standard engine and aftermarket parts. The company's financial services segment consists of NFC, its domestic insurance subsidiary and the company's foreign finance and insurance subsidiaries. NFC's primary business is the retail, wholesale and lease financing of products sold by the truck segment and its dealers within the U.S. as well as the company's wholesale accounts and selected retail accounts receivable. NFC's insurance subsidiary provides commercial physical damage and liability insurance to the truck segment's dealers and retail customers and to the general public through an independent insurance agency system. The foreign finance subsidiaries' primary business is to provide wholesale, retail and lease financing to the Mexican operations' dealers and retail customers. The company evaluates the performance of its operating segments based on operating profits, which exclude certain corporate items, and retiree pension and medical expense. Additionally, the operating profits of the company's truck and engine segments exclude most interest revenue and expense items. Intersegment sales are transferred at prices established by an agreement between the buying and selling locations. - 39 - NOTES TO FINANCIAL STATEMENTS (Continued) 13. SEGMENT DATA (continued) Reportable operating segment data follows: Financial Millions of dollars Truck Engine Services Total - --------------------- ----------------------------------------------------- For the year ended October 31, 1999 ----------------------------------------------------- External revenues..... $6,628 $1,698 $ 273 $8,599 Intersegment revenues. - 681 71 752 ------ ------ ------ ------ Total revenues... $6,628 $2,379 $ 344 $9,351 ====== ====== ====== ====== Interest expense...... $ - $ - $ 103 $ 103 Depreciation.......... 62 59 48 169 Segment profit........ 295 294 102 691 As of October 31, 1999 ----------------------------------------------------- Segment assets........ $1,852 $ 814 $3,009 $5,675 Capital expenditures (a).... 199 213 110 522 For the year ended October 31, 1998 ----------------------------------------------------- External revenues..... $6,276 $1,353 $ 219 $7,848 Intersegment revenues............ - 606 67 673 ------ ------ ------ ------ Total revenues... $6,276 $1,959 $ 286 $8,521 ====== ====== ====== ====== Interest expense...... $ - $ - $ 82 $ 82 Depreciation.......... 54 63 35 152 Segment profit........ 246 186 74 506 As of October 31, 1998 ----------------------------------------------------- Segment assets........ $1,379 $ 584 $2,310 $4,273 Capital expenditures (a).... 184 107 127 418 For the year ended October 31, 1997 ----------------------------------------------------- External revenues..... $4,999 $1,148 $ 185 $6,332 Intersegment revenues............ - 461 54 515 ------ ------ ------ ------ Total revenues... $4,999 $1,609 $ 239 $6,847 ====== ====== ====== ====== Interest expense...... $ - $ - $ 73 $ 73 Depreciation.......... 47 43 22 112 Segment profit........ 129 138 67 334 As of October 31, 1997 ----------------------------------------------------- Segment assets........ $1,284 $ 526 $1,860 $3,670 Capital expenditures (a).... 113 43 44 200 (a) Capital expenditures include the net increase in property and equipment leased to others. - 40 - NOTES TO FINANCIAL STATEMENTS (Continued) 13. SEGMENT DATA (continued) Reconciliation to the consolidated financial statements as of and for the years ended October 31 is as follows: Millions of dollars 1999 1998 1997 - ------------------------------------------------------------------------------- Segment sales and revenues.......... $9,351 $8,521 $6,847 Other income........................ 48 37 39 Intercompany........................ (752) (673) (515) ------ ------ ------ Consolidated sales and revenues..... $8,647 $7,885 $6,371 ====== ====== ====== Segment profit...................... $ 691 $ 506 $ 334 Corporate items..................... (103) (118) (126) Manufacturing net interest income... 3 22 34 ------ ------ ------ Consolidated pretax income.......... $ 591 $ 410 $ 242 ====== ====== ====== Segment interest expense............ $ 103 $ 82 $ 73 Manufacturing expense and eliminations.................. 32 23 1 ------ ------ ------ Consolidated interest expense....... $ 135 $ 105 $ 74 ====== ====== ====== Segment depreciation and amortization expense.......... $ 169 $ 152 $ 112 Corporate expense................... 5 7 8 ------ ------ ------ Consolidated depreciation and amortization expense.......... $ 174 $ 159 $ 120 ====== ====== ====== Segment assets...................... $5,675 $4,273 $3,670 Cash and marketable securities...... 327 869 777 Deferred taxes...................... 896 912 934 Corporate intangible pension assets. 92 124 154 Other corporate and eliminations.... (62) 11 (19) ------ ------ ------ Consolidated assets................. $6,928 $6,189 $5,516 ====== ====== ====== Segment capital expenditures (a).... $ 522 $ 418 $ 200 Corporate capital expenditures...... 13 9 11 ------ ------ ------ Consolidated capital expenditures... $ 535 $ 427 $ 211 ====== ====== ====== (a) Capital expenditures include the net increase in property and equipment leased to others. Information concerning principal geographic areas as of and for the years ended October 31 was as follows: Millions of dollars 1999 1998 1997 - ------------------------------------------------------------------------------- Revenues United States..................... $7,700 $7,065 $5,807 Foreign countries................. 947 820 564 Property and equipment United States..................... $1,188 $ 885 $ 711 Foreign countries................. 287 221 124 - 41 - NOTES TO FINANCIAL STATEMENTS (Continued) 14. PREFERRED AND PREFERENCE STOCKS The company's Nonconvertible Junior Preference Stock Series A was held for the Retiree Supplemental Benefit Program by the Supplemental Trust. This stock was redeemed in October 1999 at a redemption price of $1.00 per share. 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, 1999, there was one share of Series B Preference stock authorized and outstanding. The value of the preference share is minimal. On April 20, 1999, the company's board of directors adopted a shareholder rights plan (Rights Plan) and declared a rights dividend of one preferred share purchase right (Right) for each outstanding share of common stock (Common Shares) of the company to shareowners of record as of the close of business on May 3, 1999. Subject to the terms of the Rights Plan, each Right entitles the registered holder to purchase from the company one one-thousandth of a share of Series A Junior Participating Preferred Stock of the company (Preferred Shares) at a price of $175 per one one-thousandth of a Preferred Share, subject to adjustment. The Rights are exercisable only if a person or group (Acquiring Person) acquires 15% or more of the outstanding Common Shares and commences a tender offer for 15% or more of the outstanding Common Shares. Upon any such occurrence, each Right will entitle its holder (other than the Acquiring Person and certain related parties) to purchase, at the Right's then current exercise price, a number of Common Shares having a market value of two times such price. Similarly, in the event the company is acquired in a merger or other business combination and is not the surviving corporation, each Right (other than Rights owned by the Acquiring Person and certain related parties) shall thereafter be exercisable for a number of shares of common stock of the acquiring company having a market value of two times the exercise price of the Right. Subject to certain conditions, the Rights are redeemable by the company's board of directors for $0.01 per Right and are exchangeable for Common Shares. The Rights have no voting power and initially expire on May 3, 2009. During 1998, the company redeemed all 4.8 million shares of its $6.00 Series G Convertible Cumulative Preferred Stock at a redemption price of $50 per share plus accrued dividends. At October 31, 1999, there were 168,000 shares of Series D Convertible Junior Preference Stock (Series D) outstanding and 3 million authorized and issued with an optional redemption price and liquidation preference of $25 per share plus accrued dividends. The Series D converts into common stock (subject to adjustment in certain circumstances) at .3125 per share. The Series D ranks senior to common stock as to dividends and liquidation and receives dividends at a rate of 120% of the cash dividends on common stock as declared on an as-converted basis. Under the General Corporation Law of the State of Delaware (DGCL), dividends may only be paid out of surplus or out of net profits for the fiscal year in which the dividend is declared or the preceding fiscal year, and no dividend may be paid on common stock at any time during which the capital of outstanding preferred stock or preference stock exceeds the net assets of the company. At October 31, 1999, the company had a surplus of $1,283 million as defined under DGCL. - 42 - NOTES TO FINANCIAL STATEMENTS (Continued) 15. COMMON SHAREOWNERS' EQUITY Changes in certain shareowners' equity accounts are as follows: Millions of dollars 1999 1998 1997 - ------------------------------------------------------------------------------- Common Stock Beginning of year.................. $ 2,139 $ 1,659 $ 1,642 Conversion of Class B common stock and other........... - 480 17 -------- -------- -------- End of year ..................... $ 2,139 $ 2,139 $ 1,659 ======== ======== ======== Class B Common Stock Beginning of year................. $ - $ 471 $ 491 Conversion/repurchase of stock.... - (471) (20) -------- -------- -------- End of year .................... $ - $ - $ 471 ======== ======== ======== Retained Earnings (Deficit) Beginning of year................. $ (829) $ (1,109) $ (1,228) Net income .................... 544 299 150 Preferred dividends............... - (11) (29) Other ........................... (12) (8) (2) -------- -------- -------- End of year .................... $ (297) $ (829) $ (1,109) ======== ======== ======== Common Stock Held in Treasury Beginning of year.................. $ (214) $ (53) $ (30) Repurchase of common stock and other........................ (144) (189) (23) Reissuance of treasury shares...... - 28 - -------- -------- -------- End of year ..................... $ (358) $ (214) $ (53) ======== ======== ======== Common Stock The company has authorized 110 million shares of common stock with a par value of $.10 per share. At October 31, 1999 and 1998, there were 63.2 million and 66.2 million shares of common stock outstanding, net of common stock held in treasury, respectively. - 43 - NOTES TO FINANCIAL STATEMENTS (Continued) 15. COMMON SHAREOWNERS' EQUITY (continued) Common Stock (continued) In January 1998, the company repurchased 3.2 million shares of the Class B common stock that was outstanding. During June 1998, a secondary public offering of the common stock of the company was completed, in which the Navistar International Transportation Corp. Retiree Supplemental Benefit Trust (Trust) sold approximately 19.9 million shares of common stock at an offering price of $26.50 per share. These shares represented the Class B common stock held by the Trust which automatically converted into common stock upon the sale. In conjunction with this offering, the company purchased 2 million of the shares being offered. The company did not receive any proceeds from the sale of the shares in the offering. In addition, the underwriters exercised their over-allotment option and elected to purchase 1.1 million shares from the company at $26.50 per share. The company offset the dilution through open market purchases. During 1999, the company purchased $133 million of shares as approved by the board of directors in 1998. Additional purchases of $11 million were made in 1999 under a new share repurchase program approved by the board in October 1999. This program provides for the purchase of up to $243 million of shares on the open market from time to time, however, the company cannot purchase more than 4.5 million shares through March 2001 without impairing the use of its tax loss carryforward. Through November 1999, the company purchased an additional $35 million under the new program. Accumulated Other Comprehensive Income (Loss) The components of accumulated other comprehensive loss as of October 31 are as follows (in millions of dollars): Foreign Minimum Currency Accumulated Pension Translation Other Liability Adjustments Comprehensive Adjustments And Other Loss ----------- ----------- ------------- 1999 ..... $ (184) $ (13) $ (197) 1998 ..... (336) 5 (331) 1997 ..... (192) - (192) In the Statement of Comprehensive Income, the tax effects of foreign currency translation adjustments and other were not material for each of the years in the three year period ended October 31, 1999. - 44 - NOTES TO FINANCIAL STATEMENTS (Continued) 16. EARNINGS PER SHARE Earnings per share was computed as follows: Millions of dollars, except share and per share data 1999 1998 1997 - ------------------------------------------------------------------------------- Net income......................... $ 544 $ 299 $ 150 Less dividends on Series G preferred stock...... - 11 29 ------ ------ ------ Net income applicable to common stock (Basic and Diluted) ....... $ 544 $ 288 $ 121 ====== ====== ====== Average shares outstanding (millions) Basic............................ 65.2 69.1 73.1 Dilutive effect of options outstanding and other dilutive securities.......... 1.2 .9 .5 ------ ------ ------ Diluted.......................... 66.4 70.0 73.6 ====== ====== ====== Earnings per share Basic............................ $ 8.34 $ 4.16 $ 1.66 Diluted.......................... 8.20 4.11 1.65 Unexercised employee stock options to purchase .2 million, .5 million and 1.5 million shares of Navistar common stock during the years ended October 31, 1999, 1998 and 1997, respectively, were not included in the computation of diluted shares outstanding because the exercise prices were greater than the average market prices of Navistar common stock. Additionally, the diluted calculations for 1998 and 1997 exclude the effects of the conversion of the Series G preferred stock as such conversion would have been anti-dilutive. - 45 - NOTES TO FINANCIAL STATEMENTS (Continued) 17. STOCK COMPENSATION PLANS The company has stock-based compensation plans, approved by the Committee on Compensation and Governance of the board of directors, which provide for granting of stock options to employees for purchase of common stock at the fair market value of the stock on the date of grant. The grants generally have a 10-year life. The company has elected to continue to account for stock option grants to employees and directors in accordance with Accounting Principles Board Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for fixed stock options because the exercise prices of the stock options equal the market value of the company's common stock at the date of grant. Had compensation cost for the plans been determined based upon the fair value at the grant date consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," pro forma net income would have been $542 million in 1999, $297 million in 1998 and $147 million in 1997; pro forma diluted earnings per share would have been $8.16 in 1999, $4.09 in 1998 and $1.61 in 1997; and pro forma basic earnings per share would have been $8.30 in 1999, $4.14 in 1998 and $1.62 in 1997. The pro forma effect on net income for 1999 and 1998 may not be representative of the pro forma effect on net income of future years as in 1999 and 1998, one-third of the options granted became exercisable on each of the first, second and third anniversaries of grant. Prior to 1998, grants were generally exercisable after one year. The weighted-average fair values at date of grant for options granted during 1999, 1998 and 1997 were $8.15, $7.53 and $5.71, respectively, and were estimated using the Black-Scholes option-pricing model with the following assumptions: 1999 1998 1997 ---- ---- ---- Risk-free interest rate........... 4.5% 5.7% 6.6% Dividend yield.................... 0% 0% 0% Expected volatility............... 35.1% 31.9% 29.8% Expected life in years............ 4.0 3.5 10.0 The following summarizes stock option activity for the years ended October 31: 1999 1998 1997 -------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares in thousands Shares Price Shares Price Shares Price - ------------------- -------------------------------------------------------- Options outstanding at beginning of year 2,538 $20.29 2,430 $18.73 2,346 $20.34 Granted......... 1,271 27.16 809 23.93 876 10.13 Exercised....... (563) 41.28 (592) 28.52 (715) 12.45 Canceled........ (144) 25.82 (109) 45.45 (77) 28.52 ----- ------ ----- ------ ----- ------ Options outstanding at year-end... 3,102 $23.30 2,538 $20.29 2,430 $18.73 ===== ====== ===== ====== ===== ====== Options exercisable at year-end... 1,468 $19.94 1,765 $18.73 1,579 $23.35 ===== ====== ===== ====== ===== ====== Options available for grant at year-end...... 1,564 443 - ===== ===== ===== - 46 - NOTES TO FINANCIAL STATEMENTS (Continued) 17. STOCK COMPENSATION PLANS (continued) The following table summarizes information about stock options outstanding and exercisable at October 31, 1999.
Outstanding Options Options Exercisable - ------------------------------------------------------------------------------- ----------------------------------- Weighted Number Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price $ 9.31 - $ 13.75 742 6.2 $ 11.08 742 $ 11.08 17.40 - 26.70 2,045 8.0 24.80 535 23.75 27.95 - 37.51 144 6.2 33.80 82 35.74 38.10 - 61.90 171 4.5 49.54 109 49.64
- 47 - NOTES TO FINANCIAL STATEMENTS (Continued) 18. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ---------------------------------------------------------------------------------------------------- Millions of dollars, except per share data 1999 1998 1999 1998 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Sales and revenues.......... $1,924 $1,727 $2,287 $2,042 $1,878 $1,874 $2,558 $ 2,242 Manufacturing gross margin.. 16.5% 13.4% 17.9% 14.4% 18.3% 14.5% 19.1% 18.2% Net income.................. $ 61 $ 38 $ 96 $ 67 $ 255 $ 50 $ 132 $ 144 Earnings per share Basic..................... $ .92 $ .43 $ 1.44 $ .90 $ 3.94 $ .73 $ 2.08 $ 2.16 Diluted................... $ .91 $ .42 $ 1.42 $ .89 $ 3.86 $ .72 $ 2.04 $ 2.14 Net income excluding tax valuation allowance adjustments (a)........... $ 61 $ 38 $ 96 $ 67 $ 77 $ 50 $ 132 $ 99 Market price range-common stock High.................... $34 3/8 $28 $53 1/2 $35 7/8 $56 1/4 $34 $51 11/16 $28 1/2 Low..................... $21 1/8 $20 1/16 $32 1/8 $27 1/4 $41 $26 1/8 $36 1/4 $17 (a) In the third quarter of 1999 and in the fourth quarter of 1998, the company benefited from reductions to the deferred tax asset valuation allowance of $178 million and $45 million, respectively.
- 48 - SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited) The following supplemental financial information is provided based upon the continuing interest of certain shareholders and creditors. Navistar International Corporation (with financial services operations on an equity basis) in millions of dollars AS OF OCTOBER 31 AND FOR THE YEARS THEN ENDED Condensed Statement of Income 1999 1998 1997 - ---------------------------------- ------ ------ ------ Sales of manufactured products.... $8,326 $7,629 $6,147 Other income...................... 49 49 44 ------ ------ ------ Total sales and revenues........ 8,375 7,678 6,191 ------ ------ ------ Cost of products sold............. 6,826 6,464 5,274 Postretirement benefits........... 216 174 214 Engineering and research expense.. 281 192 124 Sales, general and administrative expense...... 433 390 332 Other expense..................... 145 137 83 ------ ------ ------ Total costs and expenses........ 7,901 7,357 6,027 ------ ------ ------ Income before income taxes Manufacturing operations........ 474 321 164 Financial services operations... 117 89 78 ------ ------ ------ Income before income taxes.... 591 410 242 Income tax expense............ 47 111 92 ------ ------ ------ Net income........................ $ 544 $ 299 $ 150 ====== ====== ====== Condensed Statement of Financial Condition 1999 1998 - ---------------------------------- ------ ------ Cash, cash equivalents and marketable securities....... $ 386 $ 904 Inventories....................... 604 492 Property and equipment, net....... 1,188 883 Equity in nonconsolidated subsidiaries.... 377 324 Other assets...................... 1,527 822 Deferred tax asset, net........... 896 912 ------ ------ Total assets................. $4,978 $4,337 ====== ====== Accounts payable, principally trade............... $1,386 $1,235 Postretirement benefits liability....................... 776 927 Other liabilities................. 1,525 1,406 Shareowners' equity............... 1,291 769 ------ ------ Total liabilities and shareowners' equity........ $4,978 $4,337 ====== ====== - 49 - SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited) Navistar International Corporation (with financial services operations on an equity basis) in millions of dollars AS OF OCTOBER 31 AND FOR THE YEARS THEN ENDED Condensed Statement of Cash Flow 1999 1998 1997 - -------------------------------- ------ ------ ------ Cash flow from operations Net income........................ $ 544 $ 299 $ 150 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization 126 123 97 Deferred income taxes...... 185 149 82 Deferred tax asset valuation allowance adjustment............... (178) (45) - Postretirement benefits funding less than (in excess of) expense... 47 (373) (128) Equity in earnings of investees, net of dividends received....... (18) (1) (8) Other, net................. (18) 9 (18) Change in operating assets and liabilities......... (25) 331 263 ------ ------ ------ Cash provided by operations...... 663 492 438 ------ ------ ------ Cash flow from investment programs Purchases of marketable securities.................... (323) (772) (428) Sales or maturities of marketable securities...... 651 449 454 Capital expenditures............ (425) (300) (167) Receivable from financial services operations........... (553) (7) (99) Investment in affiliates........ (71) (7) 8 Capitalized interest and other.. (17) (1) (9) ------ ------ ------ Cash used in investment programs (738) (638) (241) ------ ------ ------ Cash used in financing activities.................... (109) (76) (76) ------ ------ ------ Cash and cash equivalents (Decrease) increase during the period............ (184) (222) 121 At beginning of year........... 351 573 452 ------ ------ ------ Cash and cash equivalents at end of the period......... $ 167 $ 351 $ 573 ====== ====== ====== - 50 - FIVE-YEAR SUMMARY OF SELECTED FINANCIAL AND STATISTICAL DATA For the Years Ended October 31 (Millions of dollars, except share data, units shipped and percentages) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS Sales and revenues.......... $8,647 $7,885 $6,371 $5,754 $6,342 Net income.................. 544 299 150 65 164 Earnings per share Basic................... 8.34 4.16 1.66 .49 1.83 Diluted (c)............. 8.20 4.11 1.65 .49 1.83 Net income excluding tax valuation allowance adjustments (a)........... 366 254 150 65 164 Average number of shares outstanding (millions) Basic................... 65.2 69.1 73.1 73.7 74.2 Diluted................. 66.4 70.0 73.6 73.8 74.3 - ------------------------------------------------------------------------------- FINANCIAL DATA Total assets................ $6,928 $6,189 $5,516 $5,326 $5,566 Long-term debt Manufacturing operations.. $ 445 $ 446 $ 80 $ 99 $ 117 Financial services operations............... 1,630 1,490 1,070 1,206 1,162 ------ ------ ------ ------ ------ Total debt.................. $2,075 $1,936 $1,150 $1,305 $1,279 ====== ====== ====== ====== ====== Shareowners' equity......... 1,291 769 1,020 916 870 Total manufacturing operations' long-term debt as a percent of total manufacturing capitalization............ 25.2% 36.6% 7.2% 9.6% 11.7% Return on equity............ 42.2% 38.9% 14.7% 7.1% 18.9% - ------------------------------------------------------------------------------- SUPPLEMENTAL DATA Capital expenditures........ $ 427 $ 302 $ 169 $ 111 $ 136 Engineering and research expense.......... 281 192 124 129 113 - ------------------------------------------------------------------------------- OPERATING DATA Manufacturing gross margin.. 18.0% 15.3% 14.2% 12.5% 13.8% United States and Canadian market share (b)................. 25.6% 29.1% 28.3% 27.5% 26.9% Unit shipments worldwide Trucks.................. 129,000 127,500 104,400 95,200 112,200 OEM engines............. 286,500 213,700 184,000 163,200 154,200 (a) In fiscal years 1999 and 1998, the company benefited from reductions to the company's deferred tax asset valuation allowance of $178 million and $45 million, respectively. (b) Based on retail deliveries of medium trucks (Classes 5, 6 and 7), including school buses, and heavy trucks (Class 8). (c) Diluted earnings per share excluding tax valuation allowance adjustments for the years 1999 to 1995 were $5.52, $3.47, $1.65, $.49 and $1.83, respectively. - 51 - EX-21 7 EXHIBIT 21 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- SUBSIDIARIES OF THE REGISTRANT AS OF OCTOBER 31, 1999 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-11 EX-27 8
5 1,000,000 YEAR OCT-31-1999 OCT-31-1999 243 333 2845 27 625 2842 2598 1123 6928 2502 2075 0 4 2139 (852) 6928 8326 8647 6862 8056 216 4 135 591 47 544 0 0 0 544 8.34 8.20
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, 1999 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 incorporation or organization) Identification No.) 2850 West Golf Road Rolling Meadows, Illinois 60008 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 847-734-4000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ As of November 30, 1999, the number of shares outstanding of the registrant's common stock was 1,600,000. THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL TRANSPORTATION CORP. AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-K Year Ended October 31, 1999 INDEX Page PART I Item 1. Business (A).................................................. 1 Item 2. Properties (A)................................................ 1 Item 3. Legal Proceedings............................................. 1 Item 4. Submission of Matters to a Vote of Security Holders (A).......................................... 1 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................... 1 Item 6. Selected Financial Data (A)................................... 1 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (A)....................... 2 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 10 Item 8. Financial Statements.......................................... 12 Statement of Financial Reporting Responsibility............... 37 Independent Auditors' Report.................................. 38 Supplementary Financial Data.................................. 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................... 42 PART III Item 10. Directors and Executive Officers of the Registrant (A)................................................. 42 Item 11. Executive Compensation (A)..................................... 42 Item 12. Security Ownership of Certain Beneficial Owners and Management (A)............................................. 42 Item 13. Certain Relationships and Related Transactions (A)............................................... 42 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................ 42 SIGNATURES - Principal Accounting Officer ............................ 43 - Directors................................................ 44 POWER OF ATTORNEY....................................................... 44 INDEX TO EXHIBITS....................................................... E-1 (A)- Omitted or amended as the registrant is a wholly-owned subsidiary of Navistar International Transportation Corp. and meets the conditions set forth in General Instructions I(1) (a) and (b) of Form 10-K and is, therefore, filing this Form with the reduced disclosure format. PART I Item 1. Business The registrant, Navistar Financial Corporation ("NFC"), was incorporated in Delaware in 1949 and is a wholly-owned subsidiary of Navistar International Transportation Corp. ("Transportation"), which is wholly-owned by Navistar International Corporation ("Navistar"). As used herein, the "Corporation" refers to Navistar Financial Corporation and its wholly-owned subsidiaries unless the context otherwise requires. The Corporation is a commercial financing organization that provides wholesale, retail and lease financing in the United States for sales of new and used trucks sold by Transportation and Transportation's dealers. The Corporation also finances wholesale accounts and selected retail accounts receivable of Transportation. Sales of new products (including trailers) of other manufacturers are also financed regardless of whether designed or customarily sold for use with Transportation's truck products. Harco National Insurance Company, NFC's wholly-owned insurance subsidiary, provides commercial physical damage and liability insurance coverage to Transportation's dealers and retail customers, and to the general public through an independent insurance agency system. Item 2. Properties The Corporation's properties principally consist of office equipment and leased office space in Rolling Meadows, Illinois; Columbus, Ohio; Duluth, Georgia; Plano, Texas; Mt. Laurel, New Jersey; and San Ramon, California. The office equipment owned and in use by the Corporation is not significant in relation to the total assets of the Corporation. Item 3. Legal Proceedings There were no material pending legal proceedings other than ordinary, routine litigation incidental to the business of the Corporation. Item 4. Submission of Matters to a Vote of Security Holders Intentionally omitted. See the index page of this Report for explanation. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters See Note 13 to Consolidated Financial Statements. Item 6. Selected Financial Data Intentionally omitted. See the index page of this Report for explanation. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements under this caption, which involve risks and uncertainties, constitute "forward-looking statements" under the Securities Reform Act. Navistar Financial Corporation's actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under the headings "Year 2000", "Business Outlook" and "Quantitative and Qualitative Disclosures About Market Risk." Financing Volume In response to the continued strong U.S. economy, customer demand for Class 5 through 8 trucks in fiscal 1999 was 19% and 34% higher than 1998 and 1997, respectively. The strong economy continued to contribute to high liquidity in the commercial financing markets, which gives the Corporation's customers more financing alternatives. This continuing, highly competitive financing market has caused the Corporation to increase marketing efforts for its retail and wholesale financing products and services and to reduce finance rates offered during the fiscal year. Financing support provided to retail customers over the last three years was as follows: 1999 1998 1997 ---- ---- ---- Retail and Lease Financing: ($ millions) Finance market share of new International trucks sold in the U.S. 16.4% 16.0% 13.2% Purchases of receivables and equipment leased to others $1,526 $1,397 $1,036 Serviced retail notes and lease financing balances (including sold notes) at October 31 $3,003 $2,579 $2,253 As a result of the Corporation's higher finance market share and the higher truck industry demand in 1999, purchases of receivables and equipment leased to others were 9% above 1998. During fiscal 1999 the serviced portfolio grew 16% to $3.0 billion. Purchases of receivables and equipment leased to others in 1998 grew 14% above 1997 as a result of the higher finance market share and truck industry demand. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Financing Volume (continued) Financing support provided to Transportation's dealers over the last three years was as follows: 1999 1998 1997 ---- ---- ---- Wholesale Financing: ($ millions) Percent of wholesale financing of new International trucks sold to Transportation's dealers in the U.S. 96% 95% 94% Purchases of receivables $4,188 $3,813 $2,773 Serviced wholesale note balances (including sold notes) at October 31 $1,226 $1,039 $691 In spite of the strong liquidity in the commercial financing market, the Corporation's finance percentage of new International trucks sold to Transportation's dealers increased slightly to 96% from 95% and 94% in 1998 and 1997, respectively. In response to the strong industry demand, the volume of receivables purchased in 1999 was 10% higher than 1998 which was 38% higher than 1997. Results of Operations The components of net income over the last three years were as follows: 1999 1998 1997 ---- ---- ---- Income before income taxes: ($ millions) Finance operations $96.4 $79.2 $68.6 Insurance operations 5.0 6.0 6.0 ----- ----- ----- Income before income taxes 101.4 85.2 74.6 Taxes on income 38.9 32.3 28.9 ---- ----- ----- Net income $62.5 $52.9 $45.7 ===== ===== ===== Return on average equity 22.1% 18.5% 16.1% The Corporation's 1999 return on average equity was a record 22.1% in 1999, compared with 18.5% and 16.1% in 1998 and 1997, respectively. The increase over 1998 was due primarily to higher finance receivable balances, resulting from an increase in Transportation's sales, and a higher level of average outstanding accounts payable to affiliates which proportionately lowered debt levels and interest expense. This was offset, in part, by a higher provision for losses, higher costs to service the larger portfolio, and the competitive commercial financing market which continued to put pressure on retail and wholesale finance margins. The 1998 increase over 1997 is primarily due to the higher level of wholesale and retail financing, partially offset by lower financing margins and higher costs to service the larger portfolio. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations - Finance Operations: Retail note and lease financing revenue for 1999 was $161 million compared with $136 million and $106 million in 1998 and 1997, respectively. The 18% growth in fiscal 1999 is due to higher retail financing activities and continued growth in lease financing, offset in part by lower yields. Included in retail note and lease financing revenue is operating lease revenue of $62 million, $46 million and $29 million in 1999, 1998 and 1997, respectively. The higher operating lease revenue is the result of an increase in vehicles under operating leases due to a market shift toward lease financing. For operating leases, the Corporation recognizes the entire lease payment as revenue and records depreciation expense on the assets under lease. Also included in retail note and lease finance revenue are gains on sales of retail note receivables of $12 million, $15 million and $13 million in 1999, 1998 and 1997, respectively. The lower gains on sales of retail note receivables in fiscal 1999 resulted from lower retail note margins and increased credit spreads in the capital market. In fiscal 1999 wholesale note revenue increased 45% to $63 million versus 1998, primarily as a result of the higher level of wholesale financing activity, offset in part by lower yields in response to the lower average prime interest rate in 1999 and the competitive commercial financing market. Wholesale note revenue increased 20% in 1998 to $43 million as a result of the higher level of wholesale financing activity, offset in part by lower yields in response to competitive commercial financing market. Borrowing costs increased 7% in 1999 to $95 million from $88 million in 1998 primarily due to higher average receivable funding requirements, offset in part by a higher level of average outstanding accounts payable to affiliates and lower average interest rates. The higher level of average outstanding accounts payable to affiliates reduced debt levels and resulted in a reduction in borrowing costs of $13 million for fiscal year 1999. The Corporation's weighted average interest rate on all debt was 5.6% in 1999 and 6.4% in 1998 and 1997. The decrease in the Corporation's weighted average interest rate is primarily a result of the decrease in market interest rates and a lower outstanding subordinated term debt balance. Borrowing costs increased 21% in 1998 to $88 million from $73 million in 1997 primarily due to higher average receivable funding requirements. The ratio of debt to equity was 6.1:1, 5.8:1, and 4.3:1 at October 31, 1999, 1998 and 1997, respectively. Credit, collection and administrative expenses increased to $43 million in 1999 from $36 million and $31 million in 1998 and 1997, respectively. The increase in 1999 compared with 1998 and 1997 was primarily due to higher costs to service the larger portfolio and costs associated with year 2000 initiatives. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations - Finance Operations (continued) The provision for losses on receivables totaled $6 million in 1999 compared with $1 million in 1998 and $3 million in 1997. The increase in 1999 compared to 1998 is primarily due to a non-recurring loss recovery in 1998 and the increase in serviced finance receivable balances. Notes and account write-offs, net of recoveries, including sold notes, were $5 million in 1999, less than one million in 1998 and $2 million in 1997. The Corporation's allowance for losses as a percentage of serviced finance receivables was .55%, .64% and .72% at October 31, 1999, 1998 and 1997, respectively. Depreciation and other expenses in 1999 increased to $44 million from $30 million in 1998 and $19 million in 1997. The increase is primarily the result of a larger investment in equipment under operating leases. Insurance Operations: Harco National Insurance Company's ("Harco") pretax income was $5 million in 1999 and $6 million in both 1998 and 1997. Harco's gross premiums written in 1999 were $47 million, consistent with 1998 and 2% below 1997. The insurance industry continues to be over capitalized which results in a highly competitive market and places pressure on Harco's volume and margins. The ratio of losses to earned premiums was 72% during 1999, compared to 70% in 1998 and 1997. Liquidity and Funds Management The Corporation has traditionally obtained the funds to provide financing to Transportation's dealers and retail customers from sales of receivables, commercial paper, short and long-term bank borrowings, medium and long-term debt and equity capital. The Corporation's current debt ratings have made sales of finance receivables the most economical source of funding. The Corporation's insurance operation generates its funds through internal operations and has no external borrowings. In May 1999, Moody's and Duff and Phelps raised the Corporation's senior debt ratings from Ba1 and BBB- to Baa3 and BBB, respectively, while also raising the subordinated debt ratings from Ba3 and BB+ to Ba2 and BBB-, respectively. In January 1998, Standard and Poors raised the Corporation's senior debt ratings from BB to BB+, while the subordinated debt ratings were also raised from B+ to BB-. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Funds Management (continued) Operations provided $654 million of cash in 1999 primarily as a result of an increase in accounts payable to affiliates. The cash provided by operations was used primarily for investing activities of $637 million, of which $410 million supported wholesale note and account financing, and to pay dividends of $60 million. Financing activities, excluding dividends, provided $68 million. During 1999, the purchase of $1,526 million of retail receivables and equipment leased to others was funded primarily with $1,192 million of proceeds from the sale of receivables, principal collections on retail notes and lease receivables of $88 million, and $68 million net increase in total debt. See also the "Statements of Consolidated Cash Flow" on page 14. Over the last three years, operations provided an aggregate of $864 million in cash and proceeds from the sale of retail receivables totaled $3,102 million. These amounts were used principally to fund the purchase of finance receivables and equipment leased to others of $3,661, net of principal collections on the receivables, and to pay dividends of $157 million. Receivable sales were a significant source of funding in 1999, 1998 and 1997. Through the asset-backed public market and private placement sales, the Corporation has been able to fund fixed rate retail note receivables at rates offered to companies with investment grade ratings. During fiscal 1999, in two separate sales, the Corporation sold a total of $1,260 million of retail notes, net of unearned finance income, through Navistar Financial Retail Receivables Corporation ("NFRRC"), a wholly owned subsidiary of the Corporation. The Corporation sold $545 million of retail notes in November 1998 to a multi-seller asset-backed commercial paper conduit sponsored by a major financial institution and $715 million of retail notes in June 1999 to an owner trust which, in turn, issued securities which were sold to investors. During fiscal 1998 and 1997, the Corporation sold $1,001 and $987 million, respectively, of retail notes, through "NFRRC", to owner trusts, which in turn, issued securities which were sold to investors. The aggregate shelf registration available to NFRRC for issuance of asset-backed securities is $2,257 million. At October 31, 1999, Navistar Financial Securities Corporation ("NFSC"), a wholly-owned subsidiary of the Corporation, had a revolving wholesale note trust that provides for the funding of $600 million of wholesale notes. All eligible wholesale notes are sold to the trust through NFSC. During 1999, a $100 million tranche of investor certificates matured. As of October 31, 1999, the trust is comprised of three $200 million tranches of investor certificates maturing in 2003, 2004 and 2008. During fiscal 1999, 1998 and 1997, the Corporation entered into sale/leaseback agreements involving vehicles subject to retail finance leases and operating leases with end users. Total proceeds were $160 million, $144 million and $111 million in 1999, 1998 and 1997, respectively. The outstanding capital lease obligations at October 31, 1999 were $323 million. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Funds Management (continued) The Corporation has a $925 million bank revolving credit facility and a $400 million asset-backed commercial paper ("ABCP") program supported by a bank liquidity facility, which mature in March 2001. See Note 10 to the Consolidated Financial Statements for further discussion. As of October 31, 1999, available funding under the bank revolving credit facility and the ABCP program was $87 million, of which $35 million provided funding backup for the outstanding short-term debt. The remaining $52 million, when combined with unrestricted cash and cash equivalents, made $90 million available to fund the general business purposes of the Corporation. The Corporation manages its exposure to fluctuations in interest rates by limiting the amount of fixed rate assets funded with variable rate debt generally by selling fixed rate receivables on a fixed rate basis and by utilizing derivative financial instruments. These derivative financial instruments may include forward contracts, interest rate swaps and interest rate caps. As of October 31, 1999, the Corporation had a total of $500 million of forward interest rate contracts outstanding in anticipation of a November 1999 sale of retail receivables and a $75 million forward starting swap contract in anticipation of a March 2000 sale of retail receivables. These forward contracts were entered into to reduce exposure to future changes in interest rates. The Corporation closes the forward contract positions on the pricing date of the sale and any gain or loss is included in the gain on the sale of receivables. The unrealized loss was immaterial at October 31, 1999. In November 1998, the Corporation sold fixed rate retail receivables to a multi-seller asset-backed commercial paper conduit sponsored by a major financial institution on a variable rate basis. For the protection of investors, the Corporation issued an interest rate cap. The notional amount of the cap amortizes based on the expected outstanding principal balance of the sold retail receivables. Under the terms of the cap agreement, the Corporation will make payments if interest rates exceed certain levels. As of October 31, 1999 the cap had a notional amount of $374 million and a fair value of $1 million. In November 1999, the Corporation sold $533 million of retail notes, net of unearned finance income, through NFRRC to two multi-seller asset-backed commercial paper conduits sponsored by a major financial institution. A $2 million gain will be recognized in fiscal year 2000. Lower retail note margins and increased credit spreads in the capital market have reduced the realized gains on sales of receivables in fiscal 1999 and 2000. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Year 2000 The Corporation has identified all significant information technology ("IT") applications that required remediation, which in some cases involved the replacement of systems, to ensure Year 2000 compliance. Internal and external resources were used to make the required modifications and to test for Year 2000 compliance. As of November 30, 1999, the Corporation is 100% complete with the modifications and testing process of all significant IT systems. Total costs connected with the remediation of the Corporation's significant IT systems totaled $2 million in 1999, $3 million in 1998 and $1 million in 1997. Approximately 25% of the total costs, representing investment in purchased IT systems, were capitalized and will be depreciated over three to five years. The total cost of the Year 2000 project has not had nor is it anticipated to have a material impact on the Corporation's financial position or results of operations and has been funded through operating cash flows. While certain aspects of the Corporation's businesses could operate on a manual basis for a period of time, in the event the Corporation experiences interruptions due to the transition to the Year 2000, the Corporation currently believes that the most reasonably likely worst case scenario would be the inability to sustain its current level of performance and customer service. Additionally, a significant failure of the banking systems or key entities in the financial markets could adversely affect the Corporation's ability to access various credit and money markets. The Corporation has received written assurances from its significant suppliers of cash management services that they will be able to operate in the Year 2000 and beyond, without interruption in service. While the Corporation believes that it does not have significant exposure to other significant suppliers' Year 2000 problems, it has collected compliance assurances from such other significant suppliers. As part of its continuous assessment process, the Corporation has prepared contingency plans for critical business processes that will be placed into effect in the event of a Year 2000 problem. These plans identify when contingent actions should be taken and identify the resources necessary for a proper response. Review and testing of the contingency plans will continue through the remainder of 1999, along with the necessary training of people that will manage through the crossover into the Year 2000. Checklists have been established for each of the contingency plans, against which status will be measured as the crossover occurs. The first priority will be to determine that computing platforms, data base management systems and communication networks for both voice and data are functioning properly. Immediately following, a series of production applications have been scheduled to run, with the objective being to quickly identify any remaining Year 2000 problems, and to initiate corrective actions promptly. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Year 2000 (continued) A Year 2000 command center structure has been established to facilitate the management of activities and communications. Staffing has been identified, along with the procedures to manage the implementation of the defined pre and post - -Year 2000 activities. The Corporation is using its best efforts to ensure that the Year 2000 impact on its critical systems and processes will not affect its level of performance and customer service. However, in the event that the Corporation is unable to implement adequate contingency plans in the event problems arise, there could be a material adverse effect on the Corporation's business, financial position or results of operations. New Accounting Standards In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Development or Obtained for Internal Use." This statement defines whether or not certain costs related to the development or acquisition of internal use software should be expensed or capitalized and is effective for fiscal years beginning after December 15, 1998. The company will adopt this statement effective November 1, 1999. At planned fiscal year 2000 spending levels, adoption of this statement will not have a material impact on the results of operations, financial condition and cash flow. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to establish accounting and reporting standards for derivative instruments. This statement requires recognition of all derivative instruments in the statement of financial condition as either assets or liabilities, measured at fair value. This statement additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income, depending on the intended use of the derivatives. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which amends SFAS 133 by deferring its effective date for one year, to those fiscal years beginning after June 15, 2000. The Corporation is currently assessing the impact of these statements on its results of operations, financial condition and cash flow. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Business Outlook The truck industry in 2000 is forecasted to decrease approximately 13% from 1999. The competitive commercial financing market will continue to put pressure on the Corporation's retail and wholesale financing activity and margins. Increased volatility in the capital markets is likely to put additional pressure on the funding rates offered to the Corporation in the asset-backed public market, commercial paper markets and other debt financing markets. 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 2000 and beyond. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Corporation is exposed to market risk primarily due to fluctuations in interest rates. Interest rate risk arises from the funding of a portion of the Corporation's fixed rate receivables with floating rate debt and from the Corporation's investment in fixed income securities. The Corporation has managed exposure to interest rate changes by funding floating rate receivables with floating rate debt and fixed rate receivables with fixed rate debt, floating rate debt and equity capital. Management has reduced the net exposure which results from the funding of fixed rate receivables with floating rate debt by generally selling fixed rate receivables on a fixed rate basis and by utilizing derivative financial instruments. The Corporation does not use derivative financial instruments for trading purposes. The Corporation maintains investments in marketable securities. The securities are classified as available for sale and are recorded on the Statements of Consolidated Financial Condition at fair value with unrealized gains or losses reported as a separate component of shareowner's equity, net of applicable deferred taxes. As of October 31, 1999, the fair value of the Corporation's marketable securities portfolio was $102 million, consisting of $81 million invested in debt securities and $21 million invested in equity securities. Item 7A. Quantitative and Qualitative Disclosures About Market Risk (continued) The Corporation measures its interest rate risk by estimating the net amount by which the fair value of all interest rate sensitive assets and liabilities, including derivative financial instruments, would be impacted by selected hypothetical changes in market interest rates. Assuming a hypothetical 10% increase in interest rates as of October 31, 1999, the estimated net fair asset value would decrease by approximately $5 million. Equity price risk arises when the Corporation could incur economic losses due to adverse changes in a particular stock index or price. The Corporation's investments in equity securities are exposed to equity price risk and the fair value of the portfolio is correlated to the S&P 500. Management estimates that an immediate 10% change in the S&P 500 would affect the fair value of its equity securities by approximately $2 million. Item 8. Financial Statements and Supplementary Data Page Navistar Financial Corporation and Subsidiaries: Consolidated Financial Statements: Statements of Consolidated Income and Retained Earnings for the years ended October 31, 1999, 1998 and 1997............. 13 Statements of Comprehensive Income for the years ended October 31, 1999, 1998 and 1997........................... 13 Statements of Consolidated Financial Condition as of October 31, 1999 and 1998 ...................................... 14 Statements of Consolidated Cash Flow for the years ended October 31, 1999, 1998 and 1997................................. 15 Notes to Consolidated Financial Statements......................... 16 Statement of Financial Reporting Responsibility....................... 37 Independent Auditors' Report.......................................... 38 Supplementary Financial Data.......................................... 39 Navistar Financial Corporation and Subsidiaries ------------------------------------------------------------------------------ Statements of Consolidated Income and Retained Earnings ------------------------------------------------------------------------------ Millions of Dollars
For the years ended October 31 1999 1998 1997 ---------------------------------------------------------------------------- Revenues Retail notes and lease financing.......... $161.3 $135.8 $105.8 Wholesale notes........................... 62.8 43.3 36.1 Accounts.................................. 35.6 33.3 31.2 Servicing fee income...................... 23.8 21.6 20.0 Insurance premiums earned................. 35.7 32.3 33.3 Marketable securities..................... 8.8 9.6 8.5 ------ ------ ------ Total................................. 328.0 275.9 234.9 ------ ------ ------ Expenses Cost of borrowing: Interest expense...................... 88.6 81.0 65.9 Other................................. 6.1 7.1 7.0 ------ ------ ------ Total................................. 94.7 88.1 72.9 Credit, collection and administrative..... 42.5 36.1 31.0 Provision for losses on receivables....... 6.2 0.8 2.5 Insurance claims and underwriting......... 39.1 35.6 35.1 Depreciation expense and other............ 44.1 30.1 18.8 ------ ------ ------ Total................................. 226.6 190.7 160.3 ------ ------ ------ Income Before Taxes............................ 101.4 85.2 74.6 Taxes on Income................................ 38.9 32.3 28.9 ------ ------ ------ Net Income..................................... 62.5 52.9 45.7 Retained Earnings Beginning of year......................... 109.0 113.1 107.4 Dividends paid............................ (60.3) (57.0) (40.0) ------ ------ ------ End of year............................... $111.2 $109.0 $113.1 ====== ====== ====== Statements of Comprehensive Income - ------------------------------------------------------------------------------- For the years ended October 31 1999 1998 1997 ---------------------------------------------------------------------------- Net Income..................................... $ 62.5 $ 52.9 $ 45.7 Other comprehensive (loss) income, net of tax: Unrealized (losses)gains on marketable securities (net of tax of $(1.9), $(0.7) and $1.5).......................... (3.2) (1.2) 2.4 Minimum pension liability adjustment (net of tax of $(0.1), $(0.6) and $0.0)... (0.2) (1.0) 0.0 ------ ------ ------ Other comprehensive (loss) income, net of tax.. (3.4) (2.2) 2.4 ------ ------ ------ Comprehensive Income........................... $ 59.1 $ 50.7 $ 48.1 ====== ====== ======
See Notes to Consolidated Financial Statements. Navistar Financial Corporation and Subsidiaries - ------------------------------------------------------------------------------- Statements of Consolidated Financial Condition - ------------------------------------------------------------------------------- Millions of Dollars
As of October 31 1999 1998 - ------------------------------------------------------------------------------- ASSETS Cash and Cash Equivalents...............................$ 38.6 $ 14.1 Marketable Securities................................... 101.7 108.0 Receivables Finance receivables................................ 2,075.9 1,523.7 Allowance for losses............................... (13.4) (12.8) -------- -------- Receivables, net............................... 2,062.5 1,510.9 Amounts Due from Sales of Receivables................... 244.5 245.9 Equipment on Operating Leases, Net...................... 266.7 217.7 Repossessions........................................... 21.0 14.4 Other Assets............................................ 114.1 101.9 -------- -------- Total Assets............................................$2,849.1 $2,212.9 ======== ======== LIABILITIES AND SHAREOWNER'S EQUITY Short-Term Debt.........................................$ 34.5 $ 21.8 Net Accounts Payable to Affiliates...................... 706.9 136.8 Other Liabilities....................................... 49.5 57.1 Senior and Subordinated Debt............................ 1,675.8 1,611.2 Dealers' Reserves....................................... 24.2 24.0 Unpaid Insurance Claims and Unearned Premiums........... 77.9 80.5 Commitments and Contingencies........................... - - Shareowner's Equity Capital stock (Par value $1.00, 1,600,000 shares issued and outstanding) and paid-in capital... 171.0 171.0 Retained earnings.................................... 111.2 109.0 Accumulated other comprehensive (loss) income...... (1.9) 1.5 -------- -------- Total.......................................... 280.3 281.5 -------- -------- Total Liabilities and Shareowner's Equity...............$2,849.1 $2,212.9 ======== ========
See Notes to Consolidated Financial Statements. Navistar Financial Corporation and Subsidiaries - ------------------------------------------------------------------------------- Statements of Consolidated Cash Flow - ------------------------------------------------------------------------------- Millions of Dollars
For the years ended October 31 1999 1998 1997 - ------------------------------------------------------------------------------- Cash Flow From Operations Net income.................................. $ 62.5 $ 52.9 $ 45.7 Adjustments to reconcile net income to cash provided from operations: Gains on sales of receivables............. (11.5) (15.3) (13.4) Depreciation and amortization............. 47.1 35.4 22.5 Provision for losses on receivables....... 6.2 0.8 2.5 Increase in accounts payable to affiliates........................... 570.1 5.3 107.0 Other..................................... (20.8) (10.5) (22.3) ------- ------- ------- Total.............................. 653.6 68.6 142.0 ------- ------- ------- Cash Flow From Investing Activities Proceeds from sold retail notes............. 1,191.6 952.6 958.2 Purchase of retail notes and lease receivables.........................(1,417.2) (1,262.8) (969.7) Principal collections on retail notes and lease receivables....................... 88.1 116.4 93.8 Acquisitions over cash collections of wholesale notes and accounts receivable. (410.3) (105.8) (59.9) Purchase of marketable securities........... (53.1) (43.1) (65.3) Proceeds from sales and maturities of marketable securities................... 57.1 50.3 84.8 Purchase of equipment leased to others...... (108.7) (134.2) (66.3) Sale of equipment leased to others.......... 15.2 8.9 23.8 ------- ------- ------- Total.............................. (637.3) (417.7) (0.6) ------- ------- ------- Cash Flow From Financing Activities Net increase (decrease) in short-term debt.. 12.7 (119.2) 41.6 Net increase (decrease) in bank revolving credit facility usage......... 25.0 422.0 (311.0) Net increase (decrease) in asset-backed commercial paper facility usage......... 4.4 6.0 (15.3) Principal payments on long-term debt........ (133.3) (43.6) (21.6) Proceeds from long-term debt................ 159.7 144.3 208.9 Dividends paid to Transportation............ (60.3) (57.0) (40.0) ------- ------- ------- Total.............................. 8.2 352.5 (137.4) ------- ------- ------- Increase in Cash and Cash Equivalents............ 24.5 3.4 4.0 Cash and Cash Equivalents at Beginning of Year... 14.1 10.7 6.7 ------- ------- ------- Cash and Cash Equivalents at End of Year......... $ 38.6 $ 14.1 $ 10.7 ======= ======= ======= Supplementary disclosure of cash flow information: Interest paid............................... $ 92.3 $ 80.4 $ 59.7 Income taxes paid........................... $ 39.4 $ 36.4 $ 23.8
See Notes to Consolidated Financial Statements. NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 1999 MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Navistar Financial Corporation ("NFC") and its wholly-owned subsidiaries ("Corporation"). All significant intercompany accounts and transactions have been eliminated. All of the Corporation's capital stock is owned by Navistar International Transportation Corp. ("Transportation"), which is wholly-owned by Navistar International Corporation ("Navistar"). Nature of Operations The Corporation is a commercial financing organization that provides retail, wholesale and lease financing of products sold by Transportation and its dealers within the United States. The Corporation also provides commercial physical damage and liability insurance coverage to Transportation's dealers and retail customers and to the general public through an independent insurance agency system. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue on Receivables Revenue from finance receivables is recognized using the interest method. Revenue on operating leases is recognized on a straight-line basis over the life of the lease. Recognition of revenue is suspended when management determines the collection of future income is not probable. Income recognition is resumed if collection doubts are removed. 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 required to absorb losses on existing receivables that may become uncollectible. The allowance is maintained at an amount management considers appropriate in relation to the outstanding receivables portfolio based on such factors as overall portfolio quality, historical loss experience and current economic conditions. Under various agreements, Transportation and its dealers may be liable for a portion of customer losses or may be required to repurchase the repossessed collateral at the receivable principal value. The Corporation's losses are net of these benefits. Receivables are charged off to the allowance for losses when the receivable is determined to be uncollectible. Receivable Sales The Corporation securitizes and sells receivables to public and private investors with limited recourse. The Corporation continues to service the receivables, for which a servicing fee is received. Servicing fees are earned on a level yield basis over the terms of the related sold receivables and are included in servicing fee income. Gains or losses on sales of receivables are credited or charged to financing revenue in the period in which the sales occur. An adequate allowance for credit losses is provided prior to the receivable sales. Insurance Operations Insurance premiums written by the Corporation's wholly-owned insurance subsidiary, Harco National Insurance Company ("Harco"), are earned on a pro rata basis over the terms of the policies. Commission costs and premium taxes incurred in acquiring business are deferred and amortized on the same basis as related premiums are earned. The liability for unpaid insurance claims includes provisions for reported claims and an estimate of unreported claims based on past experience. Such provisions include an estimate of loss adjustment expense. The estimated liability for unpaid insurance claims is regularly reviewed and updated. Any change in such estimate is reflected in current operations. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES (continued) Insurance Operations (continued) Harco limits its exposure on any single loss occurrence by ceding reinsurance to other insurance enterprises. Reinsurance receivables, including amounts related to unpaid insurance claims and prepaid reinsurance premiums, are reported as other assets in the Statements of Consolidated Financial Condition. Income Taxes Navistar and its subsidiaries file a consolidated federal income tax return, which includes Transportation and the Corporation. Federal income taxes for the Corporation are computed on a separate consolidated return basis and are payable to Transportation. Cash and Cash Equivalents Cash and cash equivalents include money market funds and marketable securities with original maturities of three months or less, except for such securities held by the insurance operations which are included in marketable securities. Marketable Securities Marketable securities are classified as available-for-sale and are reported at fair value. The difference between amortized cost and fair value is recorded as an adjustment to accumulated other comprehensive income, net of applicable deferred taxes. 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. Derivative Financial Instruments All derivative financial instruments, such as forward contracts, interest rate swaps and interest rate caps, are held for purposes other than trading. The Corporation's policy prohibits the use of derivative financial instruments for speculative purposes. The Corporation generally uses derivative financial instruments to reduce its exposure to interest rate volatility. The Corporation may use forward contracts to hedge the fair value of its fixed rate receivables against changes in market interest rates in anticipation of the sale of such receivables. The principal balance of receivables expected to be sold by the Corporation equals or exceeds the notional amount of open forward contracts. The Corporation may use interest rate swaps to reduce exposure to interest rate changes when it sells fixed rate receivables on a variable rate basis. Gains or losses incurred with the closing of forward contracts and interest rate swaps are included in the net gain or loss on sale of receivables. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 1. SUMMARY OF ACCOUNTING POLICIES (continued) Derivative Financial Instruments (continued) For the protection of investors, the Corporation may write interest rate caps when fixed rate receivables are sold on a variable rate basis. The Corporation will make payments under the terms of the written caps if interest rates exceed certain levels. The written caps are recorded at fair value with subsequent changes in fair value recognized in income. New Accounting Standards Effective November 1, 1998, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components. Financial statements for prior periods have been reclassified as required by this statement. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Development or Obtained for Internal Use." This statement defines whether or not certain costs related to the development or acquisition of internal use software should be expensed or capitalized and is effective for fiscal years beginning after December 15, 1998. The company will adopt this statement effective November 1, 1999. At planned fiscal year 2000 spending levels, adoption of this statement will not have a material impact on the results of operations, financial condition and cash flow. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to establish accounting and reporting standards for derivative instruments. This statement requires recognition of all derivative instruments in the statement of financial condition as either assets or liabilities, measured at fair value. This statement additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income, depending on the intended use of the derivatives. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which amends SFAS 133 by deferring its effective date for one year, to those fiscal years beginning after June 15, 2000. The Corporation is currently assessing the impact of these statements on its results of operations, financial condition and cash flow. Reclassification Certain prior year amounts have been reclassified to conform with the presentation used in the 1999 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 from Transportation at the principal amount of the receivables. Revenue collected from Transportation was $71.5 in 1999, $67.2 in 1998 and $54.7 in 1997. 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 $3.5 in 1999, $10.7 in 1998 and $10.1 in 1997. Support Agreements Under provisions of certain public and private financing arrangements, agreements with Transportation and Navistar provide that the Corporation's consolidated income before interest expense and income taxes will be maintained at not less than 125% of its consolidated interest expense. No income maintenance payments were required during the three-year period ended October 31, 1999. Administrative Expenses The Corporation pays a fee to Transportation for data processing and other administrative services based on the actual cost of services performed. The amount of the fee was $2.6 in 1999 and 1998 and $2.1 in 1997. Accounts Payable Accounts payable to affiliates, which are obligated to be repaid upon request, were $706.9, $136.8 and $131.5 at October 31, 1999, 1998 and 1997, respectively. The higher level of average outstanding accounts payable to affiliates reduced debt levels and resulted in a reduction in borrowing costs of $12.5 for fiscal 1999. The reduction in borrowing costs for fiscal 1998 and 1997 was not material. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 3. INDUSTRY SEGMENTS Effective November 1, 1998, the Corporation adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." Segment data for 1998 and 1997 has been restated. Under the provisions of the new standard, the Corporation has two reportable segments: finance and insurance. Information by industry segment is summarized as follows: 1999 1998 1997 - ------------------------------------------------------------------------------- Revenues: Finance operations....................$ 283.8 $ 234.3 $ 193.5 Insurance operations.................. 44.2 41.6 41.4 ------- ------- ------- Total revenues......................$ 328.0 $275.9 $ 234.9 ======= ======= ======= Income before taxes: Finance operations....................$ 96.4 $ 79.2 $ 68.6 Insurance operations.................. 5.0 6.0 6.0 ------- ------- ------- Total income before taxes........$ 101.4 $ 85.2 $ 74.6 ======= ======= ======= Assets at end of year: Finance operations....................$2,707.1 $2,067.0 $1,659.3 Insurance operations.................. 142.0 145.9 151.3 ------- ------- ------- Total assets at end of year.........$2,849.1 $2,212.9 $1,810.6 ======= ======= ======= 4. MARKETABLE SECURITIES The following table sets forth, by type of security, the amortized cost and estimated fair values at October 31: 1999 1998 --------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - ------------------------------------------------------------------------------- U.S. government and agency securities...................$ 23.7 $ 23.4 $ 21.7 $ 23.2 Mortgage and asset-backed securities............. 31.7 31.3 38.2 38.7 Corporate debt and other securities..... 26.5 26.4 28.4 28.6 ------- ------- ------- ------- Total debt securities............... 81.9 81.1 88.3 90.5 Equity securities....................... 20.8 20.6 15.6 17.5 ------- ------- ------- ------- Total...............................$ 102.7 $ 101.7 $ 103.9 $ 108.0 ======= ======= ======= ======= Net unrealized gains and (losses) on marketable securities were $(1.0) and $4.1 at October 31, 1999 and 1998, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 4. MARKETABLE SECURITIES (continued) Contractual maturities of marketable debt securities at October 31, 1999 are as follows: Amortized Fair Cost Value - ------------------------------------------------------------------------------- Due in one year or less................................. $ 7.1 $ 7.1 Due after one year through five years................... 27.4 27.4 Due after five years through ten years.................. 8.5 8.4 Due after ten years..................................... 7.2 6.9 ------ ------ 50.2 49.8 Mortgage- and asset-backed securities................... 31.7 31.3 ------ ------ Total debt securities............................... $81.9 $81.1 ====== ====== Actual maturities may differ from the contractual maturities because of prepayments. Proceeds from sales or maturities of marketable securities available for sale were $57.1 during 1999 and $50.3 during 1998. The related net realized gains were $3.2 and $3.3 in 1999 and 1998, respectively. All marketable securities at October 31, 1999 and 1998 were held by Harco, of which $10.6 and $12.6, respectively, were on deposit with various state departments of insurance or otherwise restricted as to use. 5. FINANCE RECEIVABLES Finance receivable balances, net of unearned finance income, at October 31 are summarized as follows: 1999 1998 - ------------------------------------------------------------------------------- Retail notes and lease financing........................ $1,039.7 $915.9 Wholesale notes......................................... 528.7 224.9 Accounts: Retail............................................. 437.7 312.9 Wholesale.......................................... 69.8 70.0 -------- -------- Total.......................................... 507.5 382.9 -------- -------- Total finance receivables................. $2,075.9 $1,523.7 ======== ======== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES (continued) Contractual maturities of finance receivables including unearned finance income at October 31, 1999, are summarized as follows: Retail Wholesale Accounts - -------------------------------------------------------------------------------- Due in fiscal year: 2000 ................................ $ 313.5 $ 336.8 $ 507.5 2001 ................................ 251.0 191.9 - 2002 ................................ 244.8 - - 2003 ................................ 188.3 - - 2004 ................................ 147.7 - - Due after 2004............................. 48.8 - - -------- ------- ------- Gross finance receivables........... 1,194.1 528.7 507.5 Unearned finance income.................... 154.4 - - -------- ------- ------- Total finance receivables........... $1,039.7 $ 528.7 $ 507.5 ======== ======= ======= The actual cash collections from finance receivables may 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. 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: 1999 1998 - ------------------------------------------------------------------------------- Retail notes....................................... $1,696.0 $1,445.4 Wholesale notes.................................... 600.0 700.0 -------- -------- Total......................................... $2,296.0 $2,145.4 ======== ======== 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 5. FINANCE RECEIVABLES (continued) During fiscal 1999, in two separate sales, the Corporation sold a total of $1,260 of retail notes, net of unearned finance income, through NFRRC. The Corporation sold $545 of retail notes in November 1998 to a multi-seller asset-backed commercial paper conduit sponsored by a major financial institution and $715 of retail notes in June 1999 to an owner trust which, in turn, issued securities which were sold to investors. The aggregate shelf registration available to NFRRC for issuance of asset-backed securities is $2,257. At October 31, 1999, NFSC has in place a revolving wholesale note trust that provides for the funding of $600 of wholesale notes. During 1999, a $100 tranche of investor certificates matured. As of October 31, 1999 the trust is comprised of three $200 tranches of investor certificates maturing in 2003, 2004 and 2008. NFRRC and NFSC have limited recourse on the sold receivables and their assets are available to satisfy the claims of their creditors prior to such assets becoming available to the Corporation or affiliated companies. The terms of receivable sales require the Corporation to maintain cash reserves with the trusts and conduits as credit enhancement. The use of cash reserves held by the trusts and conduits is restricted under the terms of the securitized sales agreements. The maximum exposure under all receivable sale recourse provisions at October 31, 1999 was $257.3; however, management believes the recorded reserves for losses are adequate. The following is a summary of amounts included in Amounts Due from Sales of Receivables as of October 31: 1999 1998 - ------------------------------------------------------------------------------- Cash held and invested by trusts.......................... $111.6 $100.4 Subordinated retained interests in wholesale receivables.. 96.8 114.5 Subordinated retained interests in retail receivables..... 41.4 34.9 Interest only receivables................................. 7.5 8.7 Allowance for credit losses............................... (12.8) (12.6) ------ ------ Total................................................ $244.5 $245.9 ====== ====== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 6. INVESTMENT IN OPERATING LEASES Operating leases at year-end were as follows: 1999 1998 - ------------------------------------------------------------------------------- Investment in operating leases: Vehicles and other equipment, at cost.............. $353.7 $271.1 Less: Accumulated depreciation.................... (87.0) (53.4) ------ ------ Net investment in operating leases.............. $266.7 $217.7 ====== ====== Future minimum rentals on operating leases are as follows: 2000, $67.7; 2001, $57.7; 2002, $44.4; 2003, $27.3; 2004, $10.6; and $1.8 thereafter. Each of these assets is depreciated on a straight-line basis over the term of the lease in an amount necessary to reduce the leased vehicle to its estimated residual value at the end of the lease term. 7. ALLOWANCE FOR LOSSES The allowance for losses on receivables is summarized as follows: 1999 1998 1997 - ------------------------------------------------------------------------------- Total allowance for losses at beginning of year....... $25.4 $24.5 $24.0 Provision for losses.................................. 6.2 0.8 2.5 Net (losses) recoveries (charged) credited to allowance............................ (5.4) 0.1 (2.0) ----- ----- ----- Total allowance for losses at end of year.... $26.2 $25.4 $24.5 ===== ===== ===== Allowance pertaining to: Owned notes...................................... $13.4 $12.8 $12.0 Sold notes....................................... 12.8 12.6 12.5 ----- ----- ----- Total........................................ $26.2 $25.4 $24.5 ===== ===== ===== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 8. TAXES ON INCOME Taxes on income are summarized as follows: 1999 1998 1997 - ------------------------------------------------------------------------------- Current: Federal.......................................... $30.6 $24.7 $29.6 State and local.................................. 4.9 3.3 4.1 ----- ----- ----- Total current................................ 35.5 28.0 33.7 Deferred (primarily Federal).......................... 3.4 4.3 (4.8) ----- ----- ----- Total........................................ $38.9 $32.3 $28.9 ===== ===== ===== The effective tax rate of approximately 38% in each of the three years ended October 31, 1999 differs from the statutory United States Federal tax rate of 35% primarily because of state and local income taxes. The net deferred tax liability is included in other liabilities on the Statements of Financial Condition. Deferred tax assets and liabilities at October 31 comprised the following: 1999 1998 - ------------------------------------------------------------------------------- Deferred tax assets: Other postretirement benefits.......................... $3.1 $2.9 Unrealized losses on marketable securities............. 0.4 - ---- ---- Total deferred tax assets.......................... 3.5 2.9 Deferred tax liabilities: Depreciation and other................................. 9.2 5.8 Unrealized gains on marketable securities.............. - 1.5 ---- ---- Total deferred tax liabilities..................... 9.2 7.3 ---- ---- Net deferred tax liabilities....................... $5.7 $4.4 ==== ==== 9. SHORT-TERM DEBT Commercial paper is issued by the Corporation with varying terms. The Corporation also has short-term borrowings with various banks on a non-committed basis. Compensating cash balances and commitment fees are not required under these agreements. Information regarding short-term debt is as follows: 1999 1998 1997 - ------------------------------------------------------------------------------- Aggregate obligations outstanding: Daily average................................... $ 16.6 $106.1 $109.7 Maximum month-end balance....................... 50.8 148.8 145.0 Weighted average interest rate: On average daily borrowing...................... 5.7% 6.1% 6.1% At October 31................................... 5.7% 6.1% 6.1% NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 9. SHORT-TERM DEBT (continued) Unused commitments under the Corporation's bank revolving credit facility and bank liquidity facility supporting the asset-backed commercial paper program are used as backup for outstanding short-term borrowings. See also Note 10 to the Consolidated Financial Statements. 10. SENIOR AND SUBORDINATED DEBT Senior and subordinated debt outstanding at October 31 is summarized as follows: 1999 1998 - ------------------------------------------------------------------------------- Bank revolving credit facility, at variable rates, due March 2001.......................... $ 840.0 $ 815.0 Funding under asset-backed commercial paper program ("ABCP"), at variable rates, due March 2001.......................... 412.7 400.7 Capital lease obligations, 4.10% to 6.34%, due serially through 2006...................... 323.1 213.3 Subordinated term debt: Senior Notes, 8 7/8%, due November 1998........ - 82.2 Senior Notes, 9%, due June 2002................ 100.0 100.0 -------- -------- Total senior and subordinated debt.... $1,675.8 $1,611.2 ======== ======== The weighted average interest rate on total debt, including short-term debt and the effect of discounts and related amortization, was 5.6% in 1999 and 6.4% in 1998 and 1997. The aggregate annual maturities and required payments of senior and subordinated debt are as follows: Fiscal year ended October 31 2000 $ 73.5 2001 1,341.1 2002 171.9 2003 67.8 2004 21.2 2005 and thereafter 0.3 -------- Total $1,675.8 ======== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 10. SENIOR AND SUBORDINATED DEBT (continued) At October 31, 1999, the Corporation had a $925 contractually committed bank revolving credit facility and a $400 ABCP program supported by a bank liquidity facility. Available funding under the ABCP program is comprised of the $400 liquidity facility plus $14 of trust certificates issued in connection with the formation of the ABCP trust. Under the terms of the ABCP program, Truck Retail Instalment Paper Company ("TRIP"), a special purpose wholly-owned subsidiary of the Corporation, purchases eligible receivables from the Corporation. All assets of TRIP are pledged to a trust that funds the receivables with A1/P1 rated commercial paper. Available funding under the bank revolving credit facility and the ABCP program was $87, of which $35 provided funding backup for the outstanding short-term debt at October 31, 1999. the remaining $52 when combined with unrestricted cash and cash equivalents made $90 available to fund the general business purposes of the Corporation at October 31, 1999. Under the terms of the bank revolving credit facility, the Corporation is required to maintain tangible net worth at a minimum of $175 and a debt to tangible net worth ratio of no greater than 7 to 1. The bank revolving credit agreement grants security interests in substantially all of the Corporation's assets to the Corporation's debt holders. Compensating cash balances are not required under the bank revolving credit facility. Facility fees are paid quarterly regardless of usage. During fiscal 1999 and 1998, the Corporation entered into sale/leaseback agreements involving vehicles subject to retail finance and operating leases with end users. The balances are classified under senior and subordinated debt as capital lease obligations. In connection with the sale and leaseback of certain of its leasing portfolio assets, the Corporation and its subsidiary, Harco Leasing, Inc. ("HLC"), have established Navistar Leasing Company ("NLC"), a Delaware business trust. NLC holds legal title to leased vehicles and is the lessor on substantially all leases originated by the Corporation. The assets of NLC have been and will continue to be allocated into various beneficial interests issued by NLC. HLC owns one such beneficial interest in NLC and HLC has transferred other beneficial interests issued by NLC to purchasers under sale/leaseback agreements. Neither the beneficial interests held by purchasers under sale/leaseback agreements or the assets represented thereby, nor legal interest in any assets of NLC, are available to HLC, the Corporation or its creditors. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. POSTRETIREMENT BENEFITS The Corporation provides postretirement benefits to a majority of its employees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees and surviving spouses and dependents. Generally, the pension plans are non-contributory. The Corporation's policy is to fund its pension plans in accordance with applicable United States government regulations. At October 31, 1999, all legal funding requirements had been met. Postretirement Expense Net periodic benefit cost included in the Statements of Consolidated Income is composed of the following: Pension Benefits Other Benefits - ------------------------------------------------------- --------------------- 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------- --------------------- Service cost for benefits earned during the period.... $ 0.7 $ 1.0 $ 0.8 $0.3 $ 0.4 $ 0.4 Interest cost on obligation...... 3.4 3.1 3.0 1.0 0.8 0.9 Net amortization costs and other. 0.2 0.1 - 0.1 - - Less expected return on assets... (5.0) (4.7) (4.0) (0.7) (0.7) (0.5) ----- ----- ----- ---- ----- ----- Net postretirement. (income) expense $(0.7) $(0.5) $(0.2) $0.7 $ 0.5 $ 0.8 ===== ===== ===== ==== ===== ===== "Amortization costs" include amortization of cumulative gains and losses over the expected remaining service life of employees and amortization of the initial transition liability over 15 years and amortization of plan amendments. Plan amendments are recognized over the remaining service life of employees. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. POSTRETIREMENT BENEFITS (continued) Postretirement Expense (continued) The funded status of the Corporation's plans as of October 31, 1999 and 1998 and a reconciliation with amounts recognized in the Statements of Consolidated Financial Condition are as follows: Pension Benefits Other Benefits --------------------- ------------------ 1999 1998 1999 1998 - -------------------------------------------------------- ------------------ Change in benefit obligation Benefit obligation at beginning of year........................ $51.5 $44.0 $14.0 $11.6 Service cost...................... 0.7 1.0 0.3 0.4 Interest on obligation............ 3.4 3.1 1.0 0.8 Actuarial net loss (gain)......... (4.4) 6.1 - 1.5 Benefits paid..................... (2.7) (2.7) (0.4) (0.3) ----- ----- ----- ----- Benefit obligation at end of year........................ $48.5 $51.5 $14.9 $14.0 ===== ===== ===== ===== Change in plan asset Fair value of plan assets at beginning of year.............. $53.0 $50.1 $ 6.7 $ 4.4 Actual return on plan assets...... 3.4 5.3 1.1 0.4 Employer contribution............. - - 0.3 2.1 Benefits paid..................... (2.5) (2.4) (0.3) (0.2) ----- ----- ------ ----- Fair value of plan assets at year-end....................... $53.9 $53.0 $ 7.8 $ 6.7 ===== ===== ===== ===== Funded status..................... $ 5.4 $ 1.5 $(7.0) $(7.3) Unrecognized actuarial net (gain) loss.................... (4.0) (1.1) 2.2 2.8 Unrecognized transition amount.... 0.1 0.1 - - Unrecognized prior service cost... 0.4 0.4 - - ----- ----- ----- ----- Net amount recognized............. $ 1.9 $ 0.9 $(4.8) $(4.5) ===== ===== ===== ===== Amounts recognized in the Statements of Consolidated Financial Condition consists of: Prepaid benefit cost........ $ 3.5 $ 2.4 $ - $ - Accrued benefit liability... (3.5) (3.1) (4.8) (4.5) Intangible asset............ - - - - Accumulated reduction in shareowner's equity...... 1.9 1.6 - - ----- ----- ----- ----- Net amount recognized. $ 1.9 $ 0.9 $(4.8) $(4.5) ===== ===== ===== ===== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 11. POSTRETIREMENT BENEFITS (continued) Postretirement Expense (continued) The accumulated reduction in shareowner's equity is recorded in the Statement of Financial Condition net of deferred income taxes of $0.7 at October 31, 1999. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets were $3.5, $3.5, and $0.0, respectively, as of October 31, 1999, and $3.3, $3.1 and $0.0, respectively, as of October 31, 1998. The weighted average rate assumptions used in determining expenses and benefit obligations were: Pension Benefits Other Benefits - ------------------------------------------------------------------------------- 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------- Discount rate used to determine present value of benefit obligation at year-end........... 7.8% 6.7% 7.2% 8.0% 7.1% 7.4% Expected long-term rate of return on plan asset for the year......................... 9.6% 9.6% 9.6% 10.8% 10.8% 11.1% Expected rate of increase in future compensation levels....... 3.5% 3.5% 3.5% N/A N/A N/A For 1999, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 9.7%. The rate is projected to decrease to 5.0% by the year 2005 and remain at that level each year thereafter. The effect of changing the health care cost trend rate is as follows: 1-Percentage- 1-Percentage- Point Increase Point Decrease - ------------------------------------------------------------------------------- Effect on total of service and interest cost components................................... $0.3 $(0.2) Effect on postretirement benefit obligation..... 2.3 (1.9) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 12. LEASES The Corporation is obligated under non-cancelable operating leases for the majority of its office facilities and equipment. These leases are generally renewable and provide that property taxes and maintenance costs are to be paid by the lessee. At October 31, 1999, future minimum lease commitments under non-cancelable operating leases with remaining terms in excess of one year are as follows: Year Ended October 31, 2000.................................. $ 1.9 2001.................................. 1.8 2002.................................. 1.6 2003.................................. 1.6 2004.................................. 1.5 Thereafter............................ 2.0 ----- Total................................. $10.4 ===== 13. SHAREOWNER'S EQUITY The number of authorized shares of capital stock as of October 31, 1999 and 1998, 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 14. FINANCIAL INSTRUMENTS Fair Value of Financial Instruments The carrying amounts and estimated fair values of the Corporation's financial instruments were as follows: 1999 1998 ---------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - ------------------------------------------------------------------------------- Financial assets: Finance receivables: Retail notes................... $ 851.9 $ 858.6 $ 775.3 $ 797.6 Wholesale notes and accounts... 1,036.2 1,036.2 607.8 607.8 Amounts due from sales of receivables.................... 244.5 242.5 245.9 243.8 Financial liabilities: Senior and subordinated debt....... 1,352.7 1,353.7 1,397.9 1,401.4 The carrying amount of cash and cash equivalents approximates fair value. The cost and fair value of marketable securities are disclosed in Note 4. The fair value of retail notes is estimated by discounting the future contractual cash flows using an estimated discount rate reflecting current rates paid to purchasers of similar types of receivables with similar credit, interest rate and prepayment risks. For wholesale notes and retail and wholesale accounts, all of which reprice monthly, the carrying amounts approximate fair value as a result of the short-term nature of the receivables. The fair value of cash deposits included above in amounts due from sales of receivables approximates their carrying value. The fair values of other amounts due from sales of receivables were derived by discounting expected cash flows at estimated current market rates. For fixed rate debt, the fair value is estimated based on quoted market prices where available and, where not available, on quoted market prices of debt with similar characteristics. The estimated fair values for all other financial instruments approximate their carrying values due to the short-term nature or variable interest terms inherent in the financial instruments. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 14. FINANCIAL INSTRUMENTS (continued) Derivatives Held or Issued for Purposes Other Than Trading The Corporation manages its exposure to fluctuations in interest rates by limiting the amount of fixed rate assets funded with variable rate debt generally by selling fixed rate receivables on a fixed rate basis and by utilizing derivative financial instruments. These derivative financial instruments may include forward contracts, interest rate swaps and interest rate caps. The fair value of these instruments is subject to market risk as the instruments may become less valuable due to changes in market conditions or interest rates. The Corporation manages exposure to counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. The Corporation does not require collateral or other security to support derivative financial instruments with credit risk. The Corporation's counter-party credit exposure is limited to the fair value of contracts with a positive fair value at the reporting date. At October 31, 1999, the Corporation's derivative financial instruments had a negative net fair value. Notional amounts are used to measure the volume of derivative financial instruments and do not represent exposure to credit loss. The Corporation enters into derivative financial instruments to manage its exposure to fluctuations in the fair value of retail notes anticipated to be sold. The Corporation manages such risk by entering into forward contracts to sell fixed debt securities or forward interest rate swaps whose fair value is highly correlated with that of the Corporation's receivables. Income recognition of changes in the fair value of the derivatives is deferred until the derivative instruments are closed. Gains or losses incurred with the closing of these agreements are included as a component of the gain or loss on sale of receivables. As of October 31, 1999, outstanding derivative financial instruments consisted of the following: Notional Amount Fair Value - ------------------------------------------------------------------------------- Forward interest rate contracts in anticipation of November 1999 sale of retail receivables............ $500 $ 0.0 Forward starting swap contract in anticipation of March 2000 sale of retail receivables............... $ 75 $(0.2) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 14. FINANCIAL INSTRUMENTS (continued) In November 1998, the Corporation sold fixed rate retail receivables to a multi-seller asset-backed commercial paper conduit sponsored by a major financial institution on a variable rate basis. For the protection of investors, the Corporation issued an interest rate cap. The notional amount of the cap amortizes based on the expected outstanding principal balance of the sold retail receivables. Under the terms of the cap agreement, the Corporation will make payments if interest rates exceed certain levels. As of October 31, 1999 the cap had a notional amount of $374 million and a fair value of $1 million. The interest rate cap is recorded at fair value with changes in fair value recognized in income. 15. COMPREHENSIVE INCOME The components of accumulated other comprehensive income (loss), net of taxes, are as follows: Accumulated Unrealized Minimum Other Gains (Losses) Pension Comprehensive On Securities Liability Income (Loss) - ------------------------------------------------------------------------------- Balance at October 31, 1996 $ 1.3 $ - $ 1.3 Change in 1997 2.4 - 2.4 ----- ----- ----- Balance at October 31, 1997 3.7 - 3.7 Change in 1998 (1.2) (1.0) (2.2) ----- ----- ----- Balance at October 31, 1998 2.5 (1.0) 1.5 Change in 1999 (3.2) (0.2) (3.4) ----- ----- ----- Balance at October 31, 1999 $(0.7) $(1.2) $(1.9) ===== ===== ===== 16. LEGAL PROCEEDINGS The Corporation is subject to various claims arising in the ordinary course of business, and is party to various legal proceedings which constitute ordinary routine litigation incidental to the business of the Corporation. In the opinion of the Corporation's management, none of these proceedings or claims are material to the business or the financial condition of the Corporation. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MILLIONS OF DOLLARS 17. SUBSEQUENT EVENT In November 1999, the Corporation sold $533 of retail notes, net of unearned finance income, through NFRRC to two multi-seller asset-backed commercial paper conduits sponsored by a major financial institution. A $2.2 million gain was recognized in November 1999. 18. QUARTERLY FINANCIAL INFORMATION (unaudited)
1999 ---------------------------------------------------- 1st 2nd 3rd 4th Fiscal Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------- Revenues.................. $79.2 $79.2 $85.1 $84.5 $328.0 Interest expense.......... 22.2 21.5 20.6 24.3 88.6 Provision for losses on receivables....... 1.3 1.9 1.3 1.7 6.2 Net income................ 14.5 15.0 17.7 15.3 62.5 1998 ---------------------------------------------------- 1st 2nd 3rd 4th Fiscal Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------- Revenues.................. $62.6 $64.1 $79.3 $69.9 $275.9 Interest expense.......... 15.7 20.3 23.2 21.8 81.0 Provision for losses on receivables....... 0.4 0.8 (2.6) 2.2 0.8 Net income................ 13.4 10.7 17.7 11.1 52.9
- ------------------------------------------------------------------------------- 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 accompanying consolidated financial statements of Navistar Financial Corporation and its subsidiaries as of October 31, 1999 and 1998 and for each of the three years in the period ended October 31, 1999, listed in Item 8. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Navistar Financial Corporation and its subsidiaries as of October 31, 1999 and 1998 and the results of their operations and their cash flow for each of the three years in the period ended October 31, 1999 in conformity with generally accepted accounting principles. /s/DELOITTE & TOUCHE LLP Deloitte & Touche LLP December 13, 1999 Chicago, Illinois SUPPLEMENTARY FINANCIAL DATA Five Year Summary of Financial and Operating Data Dollar amounts in millions
1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- Results of Operations: Revenues............... $ 328.0 $ 275.9 $ 234.9 $ 252.8 $ 228.2 Net income ............ 62.5 52.9 45.7 49.4 36.2 Dividends paid ........ 60.3 57.0 40.0 26.0 9.0 Percent of net income to average shareowner's equity.............. 22.1% 18.5% 16.1% 18.1% 15.0% Financial Data: Finance receivables, net................. $2,062.5 $1,510.9 $1,211.2 $1,193.6 $1,370.9 Total assets .......... 2,849.1 2,212.9 1,810.6 1,793.8 1,874.7 Total debt ............ 1,710.3 1,633.0 1,223.7 1,305.8 1,330.3 Shareowner's equity ... 280.3 281.5 287.8 279.7 256.7 Debt to equity ratio .. 6.1:1 5.8:1 4.3:1 4.7:1 5.2:1 Senior debt to capital funds ratio......... 4.2:1 3.1:1 2.1:1 3.2:1 3.4:1 Number of employees at October 31............. 399 394 358 352 360
SUPPLEMENTARY FINANCIAL DATA (Continued) Gross Finance Receivables and Leases Acquired - -------------------------------------------------------------------------------
($ Millions) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- Wholesale notes.............. $4,188.5 $3,812.8 $2,772.8 $2,705.8 $2,979.4 Retail notes and leases: New..................... 1,519.7 1,358.0 976.2 1,064.1 1,075.0 Used ................... 286.4 309.2 270.3 281.7 242.3 -------- -------- -------- -------- -------- Total............... 1,806.1 1,667.2 1,246.5 1,345.8 1,317.3 -------- -------- -------- -------- -------- Total .................. $5,994.6 $5,480.0 $4,019.3 $4,051.6 $4,296.7 ======== ======== ======== ======== ========
Serviced (including sold notes) Retail Notes and Leases With Installments Past Due Over 60 Days - -------------------------------------------------------------------------------
At October 31 ($ Millions) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- Original amount of notes and leases................ $ 40.4 $ 33.6 $ 31.8 $ 14.0 $ 4.2 Balance of notes and leases.... 17.9 16.5 16.2 8.0 2.2 Balance as a percent of total outstanding......... 0.53% 0.57% 0.64% 0.32% 0.10%
Retail Note and Lease Repossessions (including sold notes) - -------------------------------------------------------------------------------
1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- Retail note and lease repossessions acquired as a percentage of average serviced retail note and lease balances............ 1.82% 2.26% 2.69% 3.08% 0.92%
SUPPLEMENTARY FINANCIAL DATA (Continued) Credit Loss Experience on Serviced (including sold notes) Receivables - ------------------------------------------------------------------------------- Net losses (recoveries): Retail notes and leases .... $5.5 $ .2 $2.2 $5.1 $ .3 Wholesale notes ............ (.2) (.3) (.2) (.2) (.9) Accounts.................... .1 - - - (.2) ---- ---- ---- ---- ---- Total .................. $5.4 $(.1) $2.0 $4.9 $(.8) ==== ==== ==== ==== ==== Percent net losses (recoveries) to liquidations: Retail notes and leases .. .41% .02% .18% .48% .03% Wholesale notes .......... - (.01) (.01) (.01) (.03) Total ................ .10% - .05% .13% (.02)% Percent net losses (recoveries) to related average gross receivables outstanding: Retail notes and leases .. .18% .01% .09% .22% .02% Wholesale notes .......... (.02) (.04) (.02) (.02) (.13) Accounts.................. .02 - - - (.05) Total ................ .12% - .06% .14% (.03)%
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None PART III Items 10, 11, 12 and 13 Intentionally omitted. See the index page of this Report for explanation. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Financial Statements See Index to Financial Statements in Item 8. Financial Statement Schedules All schedules are omitted because of the absence of the conditions under which they are required or because information called for is shown in the financial statements and notes thereto. Exhibits, Including Those Incorporated By Reference See Index to Exhibits. Reports on Form 8-K No reports on Form 8-K were filed for the three months ended October 31, 1999. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAVISTAR FINANCIAL CORPORATION (Registrant) By: /s/PHYLLIS E. COCHRAN December 22, 1999 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 execute, deliver and file, for and on such person's behalf, and in such person's name and capacity or capacities as stated below, any amendment, exhibit or supplement to the Form 10-K Report making such changes in the report as such attorney-in-fact deems appropriate. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date /s/JOHN J. BONGIORNO President and Chief Executive December 22, 1999 - --------------------- John J. Bongiorno Officer; Director (Principal Executive Officer) /s/R. WAYNE CAIN Vice President and Treasurer; December 22, 1999 - --------------------- R. Wayne Cain Director (Principal Financial Officer) /s/PHYLLIS E. COCHRAN Vice President and Controller; December 22, 1999 - --------------------- Phyllis E. Cochran Director (Principal Accounting Officer) /s/JOHN R. HORNE Director December 22, 1999 - --------------------- John R. Horne /s/THOMAS M. HOUGH Director December 22, 1999 - --------------------- Thomas M. Hough NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES SIGNATURES (Continued) Signature Title Date /s/ROBERT C. LANNERT Director December 22, 1999 - --------------------- Robert C. Lannert /s/MARK SCHWETSCHENAU Director December 22, 1999 - --------------------- Mark Schwetschenau /s/THOMAS D. SILVER Director December 22, 1999 - --------------------- Thomas D. Silver NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS The following documents of Navistar Financial Corporation are incorporated herein by reference: 3.1 Restated Certificate of Incorporation of Navistar Financial Corporation (as amended and in effect on December 15, 1987). Filed on Form 8-K dated December 17, 1987. Commission File No. 1-4146-l. 3.2 The By-Laws of Navistar Financial Corporation (as amended February 29, 1988). Filed on Form 10-K dated January 19, 1989. Commission File No. 1-4146-1. 4.1 Indenture dated as of May 30, 1997 by and between the Corporation and The Fuji Bank and Trust Company, as Trustee, for 9% Senior Subordinated Notes due 2002 for $100,000,000. Filed on Registration No. 333-30167. 10.1 Master Inter-company Agreement dated as of April 26, 1993, between the Corporation and Transportation. Filed on Form 8-K dated April 30, 1993. Commission File No. 1-4146-1. 10.2 Inter-company Purchase Agreement dated as of April 26, 1993, between the Corporation and Truck Retail Instalment Paper Corp. Filed on Form 8-K dated April 30, 1993. Commission File No. 1-4146-1. 10.3 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. 10.4 Liquidity Agreement dated as of November 7, 1994, among NFC Asset Trust, as Borrower, Chemical Bank, Bank of America Illinois, The Bank of Nova Scotia, and Morgan Guaranty Trust Company of New York, as Co-Arrangers, and Chemical Bank, as Administrative Agent. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.5 Appendix A to Liquidity Agreement at Exhibit 10.4. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.6 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. 10.7 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. E-1 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.8 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. 10.9 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. 10.10 Servicing Agreement dated as of November 7, 1994, between the Corporation, as Servicer, and NFC Asset Trust. Filed on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1. 10.11 Receivable 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. 10.12 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. 10.13 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. 10.14 Pooling and Servicing Agreement dated as of June 8, 1995, among Navistar Financial Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, The Chase Manhattan Bank (survivor in the merger between The Chase Manhattan Bank and Chemical Bank which was the survivor in the merger between Chemical Bank and Manufacturers Hanover Trust Company), as 1990 Trust Trustee, and The Bank of New York, as Master Trust Trustee. Filed on Registration No. 33-87374. 10.15 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. 10.16 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. E-2 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.17 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. 10.18 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. 10.19 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. 10.20 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. 10.21 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. 10.22 Trust Agreement dated as of May 30, 1996, between Navistar Financial Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1996-A Owner Trust. Filed on Registration No. 33-55865. 10.23 Indenture dated as of May 30, 1996, between Navistar Financial 1996-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996-A Owner Trust. Filed on Registration No. 33-55865. 10.24 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. E-3 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.25 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. 10.26 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. 10.27 Indenture dated as of November 6, 1996, between Navistar Financial 1996-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1996-B Owner Trust. Filed on Registration No. 33-55865. 10.28 Purchase Agreement dated as of May 7, 1997, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1997-A Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.29 Pooling and Servicing Agreement dated as of May 7, 1997, among the Corporation as Servicer, Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1997-A Owner Trust, as Issuer. Filed on Registration No. 33-55865. 10.30 Trust Agreement dated as of May 7, 1997, between Navistar Financial Retail Receivables Corporation, as Seller, and Chase Manhattan Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1997-A Owner Trust. Filed on Registration No. 33-55865. 10.31 Indenture dated as of May 7, 1997, between Navistar Financial 1997-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1997-A Owner Trust. Filed on Registration No. 33-55865. 10.32 Amendment No. 3 dated as of May 27, 1997, to the Amended and Restated Credit Agreement dated as of November 4, 1994, as amended by Amendment No. 1 dated as of December 15, 1995 and Amendment No. 2 dated as of March 29, 1996, among the Corporation, certain banks, certain Co-Arranger banks, and Morgan Guaranty Trust Company of New York, as Administrative Agent filed on Form 8-K dated June 17, 1997. Commission File No. 1-4146-1. E-4 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.33 Series 1997-1 Supplement to the Pooling and Servicing Agreement dated as of August 19, 1997, among Navistar Financial Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, and the Bank of New York, as Master Trust Trustee on behalf of the Series 1997-1 Certificateholders. Filed on Registration No. 333-30737. 10.34 Purchase Agreement dated as of November 5, 1997, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1997-B Owner Trust, as Issuer. Filed on Registration No. 33-64249. 10.35 Pooling and Servicing Agreement dated as of November 5, 1997, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1997-B Owner Trust, as Issuer. Filed on Registration No. 33-64249. 10.36 Trust Agreement dated as of November 5, 1997, between Navistar Financial Retail Receivables Corporation, as Seller, and Chase Manhattan Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1997-B Owner Trust. Filed on Registration No. 33-64249. 10.37 Indenture dated as of November 5, 1997, between Navistar Financial 1997-B Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1997-B Owner Trust. Filed on Registration No. 33-64249. 10.38 Series 1998-1 Supplement to the Pooling and Servicing Agreement dated as of July 17, 1997, among Navistar Financial Corporation, as Servicer, Navistar Financial Securities Corporation, as Seller, and the Bank of New York, as Master Trust Trustee on behalf of the Series 1998-1 Certificateholders. Filed on Registration No. 333-30737. 10.39 Purchase Agreement dated as of June 4, 1998, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1998-A Owner Trust, as Issuer. Filed on Registration No. 33-64249. 10.40 Pooling and Servicing Agreement dated as of June 4, 1998, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1998-A Owner Trust, as Issuer. Filed on Registration No. 33-64249. E-5 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.41 Trust Agreement dated as of June 4, 1998, between Navistar Financial Retail Receivables Corporation, as Seller, and Chase Manhattan Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1998-A Owner Trust. Filed on Registration No. 33-64249. 10.42 Indenture dated as of June 4, 1998, between Navistar Financial 1998-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1998-A Owner Trust. Filed on Registration No. 33-64249. 10.43 Purchase Agreement dated as of November 13, 1998, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1998-B Multi-seller Asset-backed Commercial Paper Conduit, as Issuer. Filed on Form 8-K dated December 18, 1998. Commission File No. 33-64249. 10.44 Transfer and Administration Agreement dated as of November 13, 1998, between the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Transferor, Park Avenue Receivables Corporation, as Purchaser, and The Chase Manhattan Bank, as Funding Agent and APA Bank. Filed on Form 8-K dated December 18, 1998. Commission File No. 33-64249. 10.45 Purchase Agreement dated as of June 3, 1999, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1999-A Owner Trust, as Issuer. Filed on Registration No. 333-62445. 10.46 Pooling and Servicing Agreement dated as of June 3, 1999, among the Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Seller, and Navistar Financial 1999-A Owner Trust, as Issuer. Filed on Registration No. 333-62445. 10.47 Trust Agreement dated as of June 3, 1999, between Navistar Financial Retail Receivables Corporation, as Seller, and Chase Manhattan Bank Delaware, as Owner Trustee, with respect to Navistar Financial 1999-A Owner Trust. Filed on Registration No. 333-62445. 10.48 Indenture dated as of June 3, 1999, between Navistar Financial 1999-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 1999-A Owner Trust. Filed on Registration No. 333-62445. E-6 NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 10.49 Receivable Purchase Agreement dated as of November 12, 1999, between Navistar Financial Retail Receivables Corporation, as Seller, the Corporation, as Servicer, and, Falcon Asset Securitization Corporation and International Securitization Corporation, as investors, and Bank One NA as agent and as Securities Intermediary, with respect to Navistar Financial 1999-B Multi-seller Asset-backed Commercial Paper Conduit. Filed on Registration No. 333-62445. 10.50 Receivable Sale dated as of November 12, 1999, between the Corporation and Navistar Financial Retail Receivables Corporation, as Purchaser, with respect to Navistar Financial 1999-B Multi-seller Asset-backed Commercial Paper Conduit, as Issuer. Filed on Registration No. 333-62445. 27.1 Financial Data Schedule for Article 5 of Regulation S-X, Item 601(c) for the year ended October 31, 1999. E-7 -----END PRIVACY-ENHANCED MESSAGE-----