Building a New Company

Building A New Company

Our vision is to be the best truck and engine company.

[Navistar 1999 Annual Report] The Navistar Business Model

VISION

OPERATIONAL EXCELLENCE STRATEGIES DEMAND CREATION HIGH-PERFORMANCE CULTURE

OUR VISION is to be the best truck and engine company.

OUR STRATEGIES provide us with the road map for building on our success in a focused way.

DEMAND CREATION means understanding our own strengths and our customers’ needs.

OUR HIGH-PERFORMANCE CULTURE mobilizes our people to achieve our vision.

OPERATIONAL EXCELLENCE delivers products and services with a focus on quality.

ABOUT OUR ANNUAL REPORT The theme of the 1999 CONTENTS annual report is “Building A New Company.” There’s no better way to describe our year in 1999 than to talk Letter to Shareowners 2 with some of the people who made it happen. We visited Review of Operations 4 with an International® dealer, an owner/operator and an Index of Financial Information 17 employee, along with several of the company’s senior Management’s Discussion and Analysis 18 executives. We hope you enjoy their candid responses Information for Our Investors 46 to our questions. What they describe is a year in which our team achieved great things, attained record results Company Profile and Locations 47 and built toward an even brighter future. We also introduced Directors and Officers 48 an exciting new logo for International that clearly captures the heritage and forward momentum of our brand. The new ON THE COVER logo appears on the back cover. All of us have rededicated ourselves to achieve what our brand promises: “International 1 Trina Fischer prepares to install a cylinder-head gasket on a 7.3-litre mid-range diesel engine at the Indianapolis engine plant. listens, understands and delivers the best ways to move our 2 Valere Casier puts the finishing touches on a windshield of an customers ahead. On the road and in their business.” International 9000i at the Chatham, Ontario assembly plant. 3 Contruction is proceeding at the new NGV facility. 4 Ray Turner lubricates an injector hose on a 7.3-litre mid-range diesel engine at the Indianapolis location. 5 A new International 9000i fully assembled and ready for delivery. 1

[Financial Summary]

Millions of Dollars, Except Per Share Data and Percentages For the Years Ended October 31 1999 1998 Sales and revenues $8,647 $7,885 Income before income taxes $ 591 $ 410 Net income $ 544 $ 299 Net income, excluding tax valuation allowance adjustments $ 366 $ 254 Diluted earnings per share $ 8.20 $ 4.11 Diluted earnings per share, excluding tax valuation allowance adjustments $ 5.52 $ 3.47 Manufacturing gross margin 18.0% 15.3% Return on equity 42.2% 38.9%

ACHIEVEMENTS OF 1999 Launched first new products series since 1995— with an International T444E diesel engine, the International 9000i and 5000i series trucks a continuous regenerative trap and ultra-low and the enhanced in-line 6-cylinder premium sulfur diesel fuel diesel family of engines, the International 530E Broke ground for a Navistar and Siemens and DT466E Automotive joint venture in Richland County, Awarded new contract with Ford to produce S.C., which will develop and manufacture diesel engines for use in vehicles under low-pressure, common-rail digital valve fuel 8,500 lbs. GVW injectors for use in diesel fuel systems Committed to building a new $250 million Ratified a new three-year labor agreement high technology engine plant in Huntsville, with the Canadian Auto Workers at the Ala., to produce next generation diesel engines Chatham assembly plant, nearly five months Approved a new $243 million share repurchase ahead of schedule program, based on anticipated strong operating Recognized in The Wall Street Journal ’s “ T h i r d performance in fiscal 2000 Annual Guide to America’s Best and Worst Established Maxion International Motores Companies” as The Ninth Best Performer S.A., a joint venture with Brazil’s largest diesel Ranked 29th among Business Week’s Top 50 engine producer, to manufacture diesel engines companies of the Standard & Poor’s 500, in South America and then moved up to 11th on the magazine’s Introduced Green Diesel TechnologySM to “six month report card” the Environmental Protection Agency, using Celebrated Navistar Financial Corporation’s an International rear engine school bus fitted (NFC) 50th anniversary by delivering over 15 percent ROE for the sixth year in a row

42.2% $544 $8,647 38.9% $7,885 $6,371 $299 $5,754

14.7% $150 7.1% $65

96 97 98 99 96 97 98 99 96 97 98 99

RETURN ON EQUITY NET INCOME SALES AND REVENUES ($ in millions) ($ in millions) [To Our Shareowners]

Winners focus on what is important, now and over the long term. In 1999, we made fundamental improvements in the way we do business as a company. We proved that we know how to set targets, how to meet them and how to keep doing that over time. Our people set big goals, and held themselves accountable for achieving them. Here’s what we accomplished relative to 1998:

Sales of $8.6 billion, up 10 percent Net income of $366 million, up 44 percent Earnings per share of $5.52, up 59 percent

All these improvements exclude the benefits of our deferred tax NEW PARTNERSHIPS We expanded to South America asset valuation allowance adjustments. with a major customer, Ford, in place, and served it through For the third year in a row, we raised our target for return on our partnership with Maxion Motores. We also established shareholder equity. For the third year in a row, we hit that new a progressive new labor contract with the Canadian Auto target. And we achieved this substantially improved performance Workers that ensures our Chatham facility will continue even though we continued to invest heavily in programs to be competitive well into the future. designed to support future growth. Year over year, we spent NEW FACILITIES We began the construction of new brick- an additional $125 million on new product development and and-mortar facilities, including our new cab stamping plant start-ups. We also spent $498 million on capital investments. in Springfield, our new engine plant at Huntsville and our Just look at the building blocks we put in place this year: new Chicago suburban office facility at Cantera. We complet- NEW PRODUCTS We had the smoothest new product introduced plant expansions in Escobedo and Garland. We made mas- tions in our history, including new heavy and severe service sive changes in Springfield to support the next generation vehi- products, the International 9000i and 5000i, and a new line cle, so that all of the required infrastructure will be in place of more robust, in-line six-cylinder engines, the International well in advance of this new product’s introduction in mid- 530E and DT466E. We also made great progress on our next 2001. We announced a new facility in South Carolina generation vehicle and next generation diesel engine, which for our fuel-injection joint venture with Siemens Automotive, will power us in the new millennium. And we forged ahead and in December 1999, a new plant in Tulsa, Okla., to produce with a 2000 capital investment program of $600 million that our integrated conventional school buses, which will revolu- includes major investments in these next generation vehicle tionize the industry. and diesel programs. NEW MANAGEMENT TEAM We strengthened our senior man- NEW BRAND IDENTITY We developed a new International logo agement team when Steve Keate was promoted to president that builds on the best of our tradition and brings it into the of the truck group. We also named Dan Ustian president of 21st century. We rededicated ourselves to achieve what our the engine group and John Bongiorno president of financial brand promises: “International understands and delivers the services, in confirmation of their major contributions as leaders best ways to move our customers ahead. On the road and of these groups. All these senior managers have consistently in their business.” delivered strong results, a sense of vision for the future, and a focus on the things that really count. 2 3

EXECUTIVE COUNCIL A newly organized executive council is leading Navistar into the next century. Pictured are (left to right) Robert A. Boardman, senior vice president and general counsel; Pamela J. Hamilton, senior vice president, human resources and administration; Daniel C. Ustian, president, engine and foundry group; John R. Horne, chairman, president and chief executive officer; J. Steven Keate, president, truck group; Robert C. Lannert, executive vice president and chief financial officer; and John J. Bongiorno, president, financial services.

NEW ATTITUDE Of all our accomplishments this year, I’m A special note. In August 1999, we were deeply saddened proudest of this one. Looking around the company, there’s by the death of board member Jack Laskowski, United Auto a new culture of accountability. Our people deliver on their Workers vice president. Jack will be remembered as a visionary commitments. They don’t look for excuses, they look for and pragmatic leader. He was also a builder, committed to solutions. forging a true sense of partnership between management In January, our plants in Indianapolis, Springfield, Fort Wayne, and represented employees. We will miss Jack. Chatham, Waukesha and Melrose Park were all hit by major blizzards. No one came to me, as some might have in the past, and used the bad weather as an excuse for poor performance. Instead, people fought back. They rounded up four-wheel- drive vehicles and brought in enough people to get the lines going. So when we held operating reviews at the end of January, John R. Horne our managers were able to tell me what their teams had done Chairman, President and Chief Executive Officer to make up for the weather. With all these building blocks in place, we are well positioned December 16, 1999 for success, whichever way the industry may go. Each of our businesses is healthier than it was one year ago. They add up to a diverse company that is well positioned to succeed. And we are committed to doing it, year after year. 19% Engine

4% Financial Services

77% Truck

Business Overview [ ] PERCENT OF SALES AND REVENUES

BUSINESS PROFILE PRODUCT LINE LOCATIONS ACCOMPLISHMENTS

HEAVY VEHICLE CENTER INTERNATIONAL 8000* Chatham, Ont., where the Launched first new product series (CLASS 8) AND 9000i* SERIES International 9000i series is since 1995: International 9000i series International brand premium *Also available in Eagle trim assembled; Springfield, Ohio, trucks conventional tractors for package for superior styling where the International 8000 Ratified new three-year contract with and driver comfort long-haul, over-the-highway uses and series trucks are produced. the Canadian Auto Workers at the regular conventional trucks for local and Select models are also produced Chatham assembly plant, nearly regional delivery in Garland, Texas and Escobedo, five months ahead of schedule Nuevo Leon, Mexico

SEVERE SERVICE VEHICLE INTERNATIONAL 2000, Garland, Texas, where the Launched new International 5000i CENTER (CLASS 8) 4000 (tandem axle) AND International 5000i series is pro- series trucks 5000i SERIES International brand trucks duced exclusively; and Springfield, Expanded Garland plant, raising for construction, waste and home of the International 4000 capacity levels to 25 trucks per day other on/off highway applications and 2000 trucks

MEDIUM VEHICLE CENTER INTERNATIONAL 4000 Springfield, where more than Ranked number one in medium truck (CLASS 5-7) AND 1000 SERIES 5 million trucks have been resale value for the sixth straight year International brand trucks assembled since the plant for International 4000 series, based with applications including opened in 1963; Conway, Ark., on the NADA (National Automobile regional delivery, beverage, refrigeration, where the 1000 series stripped Dealers Association) Official utilities, towing, municipalities and chassis are manufactured; and Commercial Guide emergency rescue Escobedo, Nuevo Leon, Mexico Attained a 75 percent level of stock trucks ordered through the Diamond SPEC system

BUS VEHICLE CENTER INTERNATIONAL 3000 Springfield, where more school Led the industry with a 59.5 percent International brand school SERIES CHASSIS, bus chassis are produced than share of the school bus chassis buses and chassis with a range AMTRAN BUS BODIES anywhere else; Conway, where market AND INTEGRATED AmTran bus bodies are integrated Committed to produce integrated of small capacity and full-size TRANSIT SCHOOL conventional models. In addition, through BUSES with the chassis; and Tulsa, Okla., conventional school buses at a new a wholly owned subsidiary, produces school where the company will manufac- $45 million facility in Tulsa bus bodies and integrated transit school ture integrated school buses buses for the AmTran nameplate

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BUSINESS PROFILE PRODUCT LINE LOCATIONS ACCOMPLISHMENTS

ENGINE AND FOUNDRY INTERNATIONAL T444E Melrose Park, Ill., joined the Established first new engine products since GROUP Indianapolis facility in Industry 1994: the enhanced in-line 6-cylinder premium INTERNATIONAL DT466E Leader in production Week’s Top 25 Best Plants in diesel family of engines, the International 530E

of mid-range diesel INTERNATIONAL 530E America; Indianapolis, Ind., cele- and DT466E engines, ranging from 160 to 300 brates its millionth Power Stroke® Awarded new contract with Ford Motor horsepower. Marketed under the engine and is home to a foundry Company to produce engines for vehicles International brand name and that produces precision grey iron under 8,500 lbs. GVW produced for other original castings; Waukesha, Wis., Announced new $250 million high technology equipment manufacturers producer of ductile iron castings. plant in Huntsville, Ala., to design and produce All four plants passed the new these engines QS-9000 Third Edition standards Broke ground on Navistar’s and Siemens’ new certification, effective January 1, plant in Richland, S.C., which will develop and 1999, with flying colors. manufacture low-pressure, common-rail digital valve fuel injectors for use in diesel fuel systems Achieved QS-9000 certification for all engine and foundry facilities Increased production to 1,400 from 1,200 engines per day at Indianapolis plant; achieved outstanding equipment uptime of approximately 85 percent and attained throughput with a first-time yield of more than 90 percent Established Maxion International Motores S.A., a joint venture with Brazil’s largest diesel engine producer to manufacture diesel engines in South America

MEXICO, BRAZIL AND INTERNATIONAL 9000 Escobedo, Nuevo Leon, Mexico, Named to Top Ten in “Respect for EXPORT OPERATIONS AND 4000 SERIES where the company built a world- Environment” by Espansion magazine TRUCKS ARE ASSEM- Assembly operations class assembly facility; and export for the Escobedo Assembly Plant BLED IN MEXICO AND for the International BRAZIL; OTHER MODELS locations in Dubai, United Arab Expanded International dealer network brand, supported by dealerships ARE SHIPPED TO Emirates; Johannesburg, in Mexico to 60 dealer locations, and in and financial services in Mexico EXPORT LOCATIONS Republic of South Africa; and Brazil to 14 dealer locations and Brazil to serve Latin America, Miami, Fla. Expanded Escobedo production capacity as well as export capabilities to 90 trucks per shift

PARTS OPERATIONS FLEET CHARGE Parts distribution centers and other Achieved more than a 97 percent fill rate BUSINESS CENTER facilities are located strategically Increased use of the Diamond Advantage DIAMOND ADVANTAGE Largest truck and for speed in delivery to dealers purchase card by 350 percent

engine parts distribu- FLEETRITE PARTS and customers: Atlanta, Ga.; Achieved 5 percent improvement in tion organization in United States, Baltimore, Md.; Dallas, Texas; expense-to-shipment ratio Canada and Mexico with more than DIAMOND CONNECTION Richmond, Calif.; West Chicago, Shipping quality improved by 10 percent 1,000 International dealer locations Ill.; Burlington, Ont.; Edmonton, Record integrity improved by 30 percent Alberta; Cuautitlan, Mexico; São Productivity improved by 10 percent Paulo, Brazil; Shawnee Mission, Kan.; Marshfield, Mo.; Brantford, Ont.; and Westchester, Ill.

NAVISTAR FINANCIAL WHOLESALE FINANCING Rolling Meadows, Ill.; Celebrated NFC’s 50th anniversary CORPORATION Atlanta, Ga.; Columbus, Ohio; Delivered a minimum of 15 percent ROE RETAIL FINANCING Provider of financing Dallas, Texas; Mexico City; for the sixth year in a row

for retail customers LEASE FINANCING Mt. Laurel, N.J.; and Financed more than 95 percent of dealer and International dealers, as well as San Ramon, Calif. new International truck floor plans needs insurance coverage PROPERTY AND CASUALTY INSURANCE COVERAGE 1

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8 1 Mark Richards primes a 7.3-liter mid-range diesel engine with oil at the Indianapolis engine plant. 2 Construction crew welding main framework at the new NGV facility in Springfield, Ohio. 3 Jason Soest spot welds reinforcement headers on the International 9000i cab. 4 Construction is underway 7 at the new NGV facility. 5 Lisa Harris installs a rocker arm on a 7.3-liter mid-range diesel engine at Indianapolis. 6 Deanne Logan installs doors and final prep of cabs at the Springfield body plant. 7 A freshly painted International 9000i prepares for the assembly line at Chatham. 8 Steve Dorth, senior corporate buyer, develops new strategies. 9 Steve Keate, president, Truck Group 6 7

[Q What has the truck group built this year?]

A I think this will be remembered as a year going forward. We are feeling good about what we’ve when we built on our vision of how to deliver accomplished, but also realistic about what we still need to the International brand for customers. We moved do. We are moving away from being all things to all people. forward aggressively with new products and new For example, we decided to get out of the domestic cabover facilities to build those products. These invest- business. That was a tough decision, but it just was not a ments will pay off in an even brighter future. We profitable business for us. Now, we are focused on customers who recognize that we understand their business and improve introduced the new International 9000i series, their profitability. featuring improved driver comfort and operating economies. We moved to integrate chassis and Q Manufacturing trucks and buses is a complex body in a way that leads the industry and has process. Sometimes supply issues can lead to many advantages for the customer, including delays. How are you planning to meet demand? improved economy and dependability. Our plans A We had some challenges this year when we ran low on for the next generation vehicle at Springfield transmissions at Springfield, and we addressed the issue head-on are on target and on budget. We’ve started by putting our engineering folks directly in suppliers’ facilities. building prototypes. And in December 1999, Our suppliers generally do great work. Our COMPASS pro- we announced plans for our new integrated gram, Cost Management Partners Sharing Savings, generated bus plant site in Tulsa, Okla. over 230 ideas from 174 suppliers which will save more than $20 million on an annualized basis, with suppliers sharing in Q How did you deliver for the customer? the savings. The program will save over $160 million over the A The Springfield plant produced more trucks and buses next five years. than originally forecast for the year, even though the plant Navistar’s financial results have been good experienced some delays in late summer as we switched over Q to new processes. Demand for our heavy products was so high the last few years, with the benefit of a strong that other plants pitched in to support Chatham, including U.S. economy. How will you succeed if there’s Garland and Escobedo. We’ve ramped up medium production an economic downturn? at Escobedo, and have also raised the production rates at A Truck sales track with truck tonnage, which continues Garland. We continued building our dealer network, the to grow. However, we’ve taken some key steps to prepare largest and most responsive in the industry. We expanded our for times when there will be fewer orders coming in. We’ve International dealer network in Mexico, where there are 60 reduced the cyclicality of our business, with more emphasis dealer locations, and Brazil, where we currently have 14 dealers. on medium and bus. We are driving unnecessary costs out of the system. We have a high-performance workforce that What are the biggest challenges facing the Q is committed to deliver NGV, stay focused on the customer, truck group as it moves to the next level, and and succeed when the industry slows down. If we can continue how are you working to meet them? to provide clarity about what our goals are, then align our A The organization has come a long way. This year, we made people behind those goals, give them the right resources progress on product innovation, cost reduction and marketing and empower them to do what it takes to get the job done, focus. We also achieved a new three-year labor agreement we will be unbeatable in the marketplace. with the Canadian Auto Workers which makes us competitive

“ The Springfield plant produced more trucks and buses than originally forecast for the year.

Steve Keate ” President, Truck Group

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4 1 View from inside an International 9000i cab at the Chatham, Ontario assembly plant. 2 International 9000i series trucks waiting to be shipped. 3 Walter Waleru, senior corporate buyer, 3 brainstorms new ideas. 4 Scott Russehen works on chassis line at the Chatham location. 5 William “Dollar Bill” Smith installs push rods at the Q What are the engine group’s strategies for growth? Indianapolis engine [ ] plant. 6 Dan Ustian, president, A We will continue to be a focused manufacturer, aligned with Engine and Foundry Group. our major customers. With that strong alignment, we will grow dieselization within the applications we serve and seek new applications for diesel globally. With International truck, we will seek to grow into niche areas of regional hauling in the Class 8 market and in construction vocations with our severe service business. This year, we introduced a new, more robust line of in-line, six-cylinder diesel engines, the International 530E and DT466E. With Ford, we will grow dieselization opportunities in the over 8,500 lbs. GVW pickup truck markets, look to the over 19,500 lbs. GVW markets and under 8,500 lbs. GVW markets to expand our business. This year, we secured a major growth opportunity: to design, then manufacture engines for use in Ford vehicles under 8,500 lbs. GVW.

Q How is the engine group In 1999, we proved out some major new trying to build its leadership technologies for our future fuel systems, through technology? including a high-speed fuel injector that uses digital valve proprietary technology A Our fuel system and electronic from Sturman Engine Systems, LLC. engine control technology enables us to Our engineers can leverage the speed lead the industry both in products and and electronic flexibility of the digital in clean air solutions. At the same time, valve injection technology to control our manufacturing process technology emissions, noise, fuel economy and enables us to lower our cost structure performance. and bring added value to our customers.

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Q What are you doing to make Q How are you working diesel power the right choice to improve manufacturing for more customers, and the processes? clear choice for those who A Through our focused manufacturing support clean air goals? strategy, which improves quality by A We are committed to International reducing complexity, while also improv- Green Diesel TechnologySM because of ing our cost structure by fully utilizing diesel’s many environmental advantages, our assets. Using focused manufacturing, including reduction of greenhouse gases we were able to expand our production that contribute to global warming. We to 1,400 engines a day at Indianapolis. have a record of leading the industry We worked seven days a week, 24 hours in achieving clean air goals, including a day, achieved outstanding equipment being the first in the industry to achieve uptime of approximately 85 percent and 1999 EPA certification for all of our attained throughput with a first-time diesel engines. Early this fiscal year, yield of more than 90 percent. This year, we introduced two new International our Melrose Park plant joined our Indy T444E engines that offer low emission facility in Industry Week’s Top 25 best vehicle ratings, support the government’s plants in America. And all of our engine 5 clean fuel fleet vehicle program and pro- and foundry facilities received QS9000 vide a diesel solution for customers who certifications, which is an industry were confronted with a costly alternative award for quality objectives, the first fuel decision. We can do even better. time each plant was considered. Using new technologies such as a What protects you against continuous regenerative particulate trap, Q which we demonstrated this year, we an economic downturn? think we can virtually eliminate particu- A Diesel has inherent advantages, lates. However, just as modern gasoline including high performance, durability, engines required unleaded fuel and low- reliability and fuel economy. We are sulfur fuel, we need the oil companies to making diesel an ever better choice for commit to the production of ultra-low our customers by aggressively addressing sulfur fuel that will enable our technology all the issues that confront the industry, to achieve its full potential. including noise, odor and smoke. Compared with our competition, we have outstanding asset utilization and well-managed sales, general and administrative expenses. As we strategically grow our scale, with improved products that leverage a common electro-hydraulic technology platform, we will drive our cost structure even lower. All this adds up to our having both the best technology and the best value, which are both tremendous advantages in the marketplace. And when these advantages are added to the strength of diesel, it should provide us with both stability and growth. 6

“ We are committed to International Green Diesel TechnologySM because of diesel’s many environmental advantages.

Dan Ustian ” President, Engine and Foundry Group 1 Q You oversee human resources and other administrative issues. What big issues has [ Navistar dealt with in this area? ]

A We’ve invested in developing our future leadership, because to sustain our success, we need to keep growing our people. Our new Leadership Resource Planning gives us a first-class tool for succession planning, identifying and cultivating talent. We’ve also built Navistar University, which will train our future leaders by giving them the training tools they need, often in a convenient electronic format. 2 Q The company’s labor relations were sometimes rocky, especially back in the 1980s. How are you forging a new partnership with your unions? A Today’s partnership with our unions is based on respect for people and performance. Our plant leadership and our union leadership have realized that our agendas overlap, including health, safety and ergonomics. We communicate and share information in advance of when it’s needed, because we feel we can trust each other. The biggest achievement this year was that management and Local 127 of the Canadian Auto Workers achieved a mutually beneficial three-year contract at our Chatham assembly plant, nearly five months ahead of schedule. This agreement is a key step in enabling the Chatham plant to continue its major role in producing our heavy vehicles, years into the future. 3 Q What is Navistar actively doing to protect the environment? A This year, Navistar was recognized for our leadership on the environment by groups as far-ranging as the Illinois Environmental Protection Agency, the California Truck Association and Espansion magazine in Mexico. We are actively pursuing ISO 14001 accreditation throughout the company. We are also changing people’s minds about diesel. We spoke out at the EPA hearings on Tier II emissions standards in Philadelphia, and outside the hearing, we demonstrated that diesel can be just as clean as compressed natural gas or any other viable fuel. Our demonstration used an International rear engine school bus fitted with an International T444E diesel engine, a continuous regenerative trap and ultra-low sulfur diesel fuel.

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“ Our new Leadership Resource Planning gives us a first-class tool for succession planning, identifying and cultivating talent.

Pamela Hamilton” Senior Vice President, Human Resources and Administration

Q What progress did Navistar make in diversity? A We have established employee diversity teams at all our locations, and we are working hard to increase our minority dealers and suppliers. It’s just the right thing to do, and it also means that we’ll continue to mirror our customer base as it becomes more diverse.

Q What progress has been made on high-performance culture? A Management is listening to the people on the shop floor, and doing something with the results. Our “Face-to-Face” executive meetings, where every member of senior management gets out monthly to meet with small groups of employees on the shop floor, has become a way of life. We’ve made Climate for Performance training available to every employee, creating some of the largest effectiveness training sessions ever held for represented employees—literally thousands of people at a time. This was a monumental undertaking, and it has made a demonstrable difference in the way we do business.

Q What progress has been made on quality and related issues? A We certified 23 Master Black Belts this year, growing their ranks to more than 180. The Black Belts have established a new database to track the details of their projects, and more than 80 new projects have been tracked so far. Also, an additional 105 employees, including all 45 of the company’s senior executives, took part in the Six Sigma quality training during the year. We’ve also made tremendous progress in the related field of activity based management. This year, the Cost Management Congress awarded us the Corporate Renegade Award for our progress in that area.

1 Roger Garringer, Q Overall, what has Navistar built this year? welder, on the cab A sense that our success is no fluke—it’s real. We used to have only some of assembly line at the A Springfield body plant. the elements of a winning team, but we were sometimes disjointed. Now, we have 2 New electric robots turned the corner on the doubts we had in the past. By reducing bureaucracy, we help facilitate the paint are improving our efficiency in many areas without even making a capital investment. line at the Springfield, Ohio operations We’re eliminating silos and focusing on what we all need to accomplish together. facility. It’s a great feeling. 3 Completed International 9000i cab ready for chassis assembly at the Chatham assembly plant. 4 Pamela Hamilton, senior vice president, Human Resources and Administration. 1

2 1 Paul Buller tacking a Pro Sleeper.® 2 Brenda Donahue assembles instrument panels at the Chatham assembly plant. 3 Glen Evans tightens anchor bolts for fuel injectors at the Indianapolis engine plant. 3 4 Todd Robertson assembles window 5 channels on the International 9000i at the Chatham, Ontario plant. 5 Kevin Galbraith mounts tires at the Chatham plant. 6 Dick Sweebe, president and CEO, Diamond 4 International, North Little Rock, Ark.

[Q How closely do you identify with the International brand?]

A I’ve sold International products for 27 years. I’ve been an International dealer for 17 years, and before that, I worked for 10 years with International Harvester. So International has basically been my whole career. I have lots of respect for the organization and the people in it. I don’t intend to have any other line. I’m gonna go home with the girl I took to the dance. In September, we opened a new, state-of-the-art dealership facility for our Diamond International dealership in North Little Rock, Ark. It includes two buildings on 22 acres, with 75,000 square feet under roof. Since it’s right off Interstate 40, the nation’s busiest highway for truck traffic, it gives International trucks a proper showcase.

Q What are International’s competitive advantages? A The dealer organization represents more than 400 dealers with nearly 1,000 locations, more than twice as many as the nearest competitor. Some dealerships have been family operations for two, three or four generations. Compared with the competition, we have great name recognition. Our leasing organization, IdeaLease, gives dealers the ability to do whatever the customer wants to do, whether it’s own, lease, rent or get contract maintenance. No other dealer organization can do all the things ours can. The dealer organization gives International extra skill at listening to the customer. Generally, the company makes the right decisions. But dealers need to keep challenging International on what customers need and want.

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“ International was the first to focus on the lowest cost of ownership over the life cycle of the vehicle.

Dick Sweebe ” President and CEO, Diamond Companies

Q What does International stand for in the mind overall, their lines today are totally different from their lines of the customer? in the early ’90s. And International has avoided a lot of the A The name stands for a great heritage—words like reliability, catastrophic problems their competitors have had with their stability, quality and consistency. Our medium line is recognized new truck lines. They have a tried and true product that is as the premier product in the world today, both the truck and reliable, with parts that are readily available, and that technicians engine. Heavy is also a reliable product that, over the last 30 or are trained to handle. We just got the International 9000i 40 years, more often than not, has been the leader in innovation. heavy product this fall. It’s already been well accepted by the customer. It’s more stylish, more aerodynamic. Customers have Q Can you provide some examples of made lots of positive comments about the interior amenities. innovation? Typically, International’s been a fleet-type truck, but it’s A Well, International was the first to focus on the lowest cost changed its image to appeal to the owner/operator. Residual of ownership over the life cycle of the vehicle. It’s important values will improve as well. to the customer who depends on that truck to make a living. Q What do you see for the future? We were the first dealer to introduce the Diamond Connection, a parts inventory control system that goes into the customer’s A The business is going to get harder, not easier. The market place of business. We were the first to introduce Fleet Charge, will get more competitive. The rate of change will accelerate. a card enabling you to get service parts on the road through There will be consolidation among dealers. International the dealer organization. We pioneered electronic engines in dealers are very excited about NGV, which will come out in the medium line. We developed other new advancements spring 2001. It will be a totally new product, with an enhanced in the catalog entry system. The list goes on and on. proprietary engine. NGV is going to have Lexus-type quality, with an emphasis on fit and finish, ergonomics and driver Q What about product innovation? amenities. Something’s going on today. International is more A International doesn’t get full credit for all its product focused on the customer than in the past. International has innovations. Over the last few years International has made listened better to the customer, to the dealer and to the com- evolutionary, not revolutionary, changes year-to-year. But pany’s own employees. We need to stay out in front with that. 1

[Q What does the International brand stand for, in your mind?]

A I’ve been driving an Q When did you purchase your International since 1978. I’ve first International? had five in all, and I’ve got A I’ve owned my own International pictures of every one of them. truck since 1982. The first one was a I feel I’ve had a good experience ’79 International TranStar Two. In 1983, with International. They’ve I traded it in for a new International done a good job for me. Right 9670. It was a two-tone brown with a now, I haul freight nationally black stripe through it. I kept it until and mostly get home on 1990, when I bought an International weekends to see my wife conventional, a 9400, with a big square hood and a set-back axle. I kept that and daughter. When I started, one until November 1994, when I was working for a flour mill International came out with a Pro right here in town, running Sleeper and I bought a new 1995. around to big industrial bakeries That was a unibody truck, so much nicer. in about 10 Midwestern states. Much more floor room, and easier to Most of us drivers rotated get in and out of the sleeper. I traded through the company’s trucks, that one in a year ago April for the one which were TranStar Two I have now. cabovers. That’s where I got What do you think about the started with International. Q products today? A I’d say the trucks have been through a lot of changes, which have been good. The cruise control is so much nicer. The injection system keeps the fuel warmed up in the winter, so there are no get-up problems. I do wish the heat would come up lower in the dash, say foot level. The passenger seat is lower now, so there’s as much clearance as the driver’s seat. The tilting, telescopic steering wheels, that’s a big improvement. The wiring harness is much better today. In ’83, I used to have

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1 André Neefs 6 Angela Taylor and assembles an air Brian Jeffries 15 harness at the install an exhaust Chatham, Ontario system at the Chatham, assembly plant. Ontario plant. 2 A new International 7 Steve Hille, 9000i Pro Sleeper® owner/operator, rolls off the assembly Teutopolis, Ill. line at the Chatham location. 6 3 Jim O’Neill inspects mirror positioning at Chatham. 4 Multicolored sun visors ready for assembly. 5 Hydraulic cab lift at the new NGV facility at Springfield.

problems with the switches in the big Q What motivates you to buy console for the first year or two. Now International? everything works good. The truck I have A Being an owner/operator is getting now is a 1999 9400 series, red, and to be a hard business, like every other I’d consider it loaded. It’s the O and business. You want to get your costs as O package. It’s got twin air breathers, low as you can, or there’s nothing left. dual exhaust, aluminum wheels, marker When I buy a new truck, I look at the lights under the sleeper and the door total cost. I like the Diamond SPEC panel. In my opinion, it looks a lot warranty. That gives you a 100 percent nicer than a fleet truck. warranty the second year. If things show up the second year, they’re covered. The Q How important is the dealer truck I’ve got now, I ordered through in all this? Diamond SPEC. You need to be careful A Well, I’ve bought all my trucks from about the truck you buy. You need it the same dealership. It’s about five miles to be reliable. You need to be there on up the road, in Effingham. I’ve been out work days. You have to be on time, or on the road a lot, and I talk to a lot of the shippers will just get a new carrier. drivers, and I’d say this dealership has International’s performance is good. 7 treated me real well. They do good work A friend of mine still has his first there. If a driver needs something done, International conventional. It’s a 1990, they’ll do it. It’s no big rosy picture, just and he’s got 930,000 miles on it. the truth. The dealer network is good too. I have been to both coasts, and International has dealerships all over. If you need to get a part on the road, there’s likely to be one nearby. I try to keep up my maintenance so there’s no surprises. But once I was in Memphis when a brake light switch went bad, and I found an International dealer right away. “ I feel I’ve had a good experience with International. They’ve done a good job for me.

Steve Hille ” Owner/Operator, Teutopolis, Ill. 1

“ It’s rewarding to share ideas and find acceptance of new ideas. It’s challenging and keeps you thinking.

Jennifer Holmes ” ABM corporate team, Chatham assembly plant

[Q What would you say Navistar has accomplished this year?]

A At Chatham, the successful launch of the A The launch of the new heavy truck means we are finding International 9000i was a big thing this year. In better ways to serve our customers and be innovative, not rest activity based management (ABM), which is my on our laurels. Also, it’s great that we are going back to the focus, the biggest thing was the implementation International brand. Seeing the ads, people feel a little prouder of activity based budgeting at the site. than we were. People identify with International. People know us as that. So I think branding was a big and powerful thing Q Tell us about ABM. this year. A Activity based management is a concept that allows our Q Have you seen a change in Navistar’s business leaders new insight into our businesses by focusing workforce? What about relations between on what we do and how much it costs. This new insight Navistar and its unions? has changed the way we look at operational and strategic decision-making. It means you’re really focused on the A We’re trying to get the right people doing the right jobs, activities that count. aligning our departments, reassigning managers to doing what they are best at. People are also changing, due to Climate for Q What do you like about working at Navistar? Performance and Coaching for Performance. Here at Chatham, A We have great people to work with and work for. The we have a really good team environment. Both management ABM team is striving to give our internal customers quality and workers try to succeed as an entire company. Help each and timely data that facilitates the best decisions for the other out. Everyone’s very open and approachable. You can company. It’s rewarding to share ideas and find acceptance walk up to any person on the line and they’ll explain their job, of new ideas. It’s challenging and it keeps you thinking. talk about problems, the weather, sports, anything.

Q What is in the air at Navistar? Is there a new Q What do you see about employees’ attitudes attitude compared with the past? toward quality? A I think there is. With the Face-to-Face meetings at the A I know the pride Chatham has in building quality trucks. facilities, John Horne, Steve Keate and other executives have Around here, every time people see one of the International come out and had really candid conversations with everyone. 9000i series trucks, they know it was made at Chatham. It shows respect for people, because people aren’t being kept Everyone here really strives to get the truck built right the in the dark. When you keep communications open, people first time. The feeling hit an all-time high at the end of the feel it’s a team environment. year, when there were only three red tags on hand. Usually there are around 50 at that time of year. Q Of everything you witnessed or took part in 2 this year, what told you the most about where the company is going?

1 Jennifer Holmes, ABM corporate team, Chatham assembly plant. 2 Steve Rigby assembles a new grille at the Chatham, Ontario location.

16 17

[Table of Contents]

Management’s Discussion and Analysis of Results of Operations and Financial Condition 18 Statement of Financial Reporting Responsibility 25 Independent Auditors’ Report 25 Financial Statements

Statement of Income 26 Statement of Comprehensive Income 26 Statement of Financial Condition 27 Statement of Cash Flow 28 Notes to Financial Statements

1 Summary of accounting policies 29 2 Postretirement benefits 30 3 Income taxes 32 4 Marketable securities 33 5 Receivables 34 6 Inventories 34 7 Property and equipment 34 8 Debt 35 9 Other liabilities 36 10 Financial instruments 36 11 Commitments, contingencies, restricted assets, concentrations and leases 37 12 Legal proceedings and environmental matters 37 13 Segment data 38 14 Preferred and preference stocks 39 15 Common shareowners’ equity 40 16 Earnings per share 40 17 Stock compensation plans 41 18 Selected quarterly financial data (unaudited) 42 Supplemental Financial Information (unaudited) 43 Five-Year Summary of Selected Financial and Statistical Data 45 [Management’s Discussion and Analysis of Results of Operations and Financial Condition]

Certain statements under this caption that are not purely historical 35% in 1998 compared to revenue increases of 21% and 22%, constitute “forward-looking statements” under the Private Securities respectively. The truck and engine segments’ profit increases Litigation Reform Act of 1995 and involve risks and uncertainties. during 1999 are attributable to economies of scale in engine These forward-looking statements are based on current manage- production, improved truck pricing and various cost improvement expectations as of the date made. The company assumes no ment initiatives by both the truck and engine segments. The obligation to update any forward-looking statements. Navistar truck and engine segments’ profit increases during 1998 are International Corporation’s actual results may differ significantly attributable to economies of scale in truck and engine produc- from the results discussed in such forward-looking statements. tion, improved truck pricing and various other cost improve- Factors that might cause such a difference include, but are not ment initiatives by both the truck and engine segments. The limited to, those discussed under the captions “Year 2000” and truck and engine segments’ revenue increases are attributable “Business Environment.” to increases in shipments of trucks and of mid-range diesel Navistar International Corporation is a holding company engines to other original equipment manufacturers (OEMs). and its principal operating subsidiary is Navistar International The financial services segment’s profit in 1999 was $28 Transportation Corp. (Transportation). In this discussion million higher than in 1998. This is primarily attributable to and analysis, “company” or “Navistar” refers to Navistar the increase in NFC’s pretax income and a legal settlement in International Corporation and its consolidated subsidiaries. favor of an insurance subsidiary of the company. NFC’s pretax Navistar operates in three principal industry segments: truck, income in 1999 was $101 million, a 19% increase from $85 engine (collectively called “manufacturing operations”), and million in 1998, primarily as a result of an increase in whole- financial services. The company’s truck segment is engaged in sale and retail financing activity and proportionally lower the manufacture and marketing of Class 5 through 8 trucks, interest expense and debt levels resulting from a higher level including school buses. The truck segment also provides cus- of average outstanding accounts payable to affiliates. This was tomers with proprietary products needed to support the partially offset by a higher provision for losses and higher costs International truck and bus lines, together with a wide selec- to service the larger portfolio. The financial services segment’s tion of other standard truck and trailer aftermarket parts. The profit in 1998 was $7 million higher than in 1997, primarily truck segment operates primarily in the United States (U.S.) due to the $10 million increase in NFC’s pretax income from and Canada as well as in Mexico, Brazil and other selected the $75 million reported in 1997. This increase is primarily export markets. The company’s engine segment is engaged in due to an increase in wholesale and retail financing activity the design and manufacture of mid-range diesel engines. The partially offset by lower financing margins. engine segment also provides customers with proprietary prod- Sales and Revenues. Sales and revenues of $8,647 million ucts needed to support the International engine lines, together in 1999 were 10% higher than the $7,885 million reported with a wide selection of other standard engine and aftermarket in 1998, which was 24% higher than the $6,371 million parts. The engine segment operates primarily in the U.S. reported in 1997. Sales of manufactured products totaled and Brazil. The financial services operations of the company $8,326 million in 1999, 9% above the $7,629 million reported provide wholesale, retail and lease financing, and domestic for 1998, which was a 24% increase from the $6,147 million commercial physical damage and liability insurance coverage reported in 1997. to the company’s dealers and retail customers and to the gener- U.S. and Canadian industry retail sales of Class 5 through al public through an independent insurance agency system. 8 trucks totaled 465,500 units in 1999, a 19% increase from the The discussion and analysis reviews the operating and 392,000 units sold in 1998, and 34% higher than the 347,400 financial results, and liquidity and capital resources of the man- units sold in 1997. Class 8 heavy truck sales totaled 286,000 ufacturing and financial services operations. Manufacturing units, a 23% increase from the 232,000 units sold in 1998, operations reflect the financial results of the financial services and 45% higher than the 196,800 units sold in 1997. Industry operations included on a one-line basis under the equity method sales of Class 5, 6 and 7 medium trucks, including school of accounting. Financial services operations include Navistar buses, totaled 179,500 units in 1999, a 12% increase from Financial Corporation (NFC) and the company’s foreign 1998, when 160,000 units were sold, which was a 6% increase finance companies. See Note 1 to the Financial Statements. over the 150,600 units sold in 1997. Industry sales of school RESULTS OF OPERATIONS The company reported net buses, which accounted for 19% of the medium truck market, income of $544 million for 1999, or $8.20 per diluted com- increased approximately 3% from 1998 to 33,800 units. mon share, reflecting higher sales of engines as well as a $178

million reduction in the company’s tax valuation allowance. 286,500 465,500 Net income was $299 million, or $4.11 per diluted common 392,000 share in 1998, and $150 million, or $1.65 per diluted common 213,700 341,200 347,400 share in 1997. Net income in 1998 included a $45 million 163,200 184,000 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. 96 97 98 99 96 97 98 99

The engine segment’s profits increased by 58% in 1999 and OEM DIESEL ENGINE SHIPMENTS INDUSTRY RETAIL SALES (units) (Class 5-8) (units) 18 19 [Management’s Discussion and Analysis of Results of Operations and Financial Condition]

The company’s 1999 market share of 25.6% in the combined in 1999 resulted, in part, from higher average receivable funding U.S. and Canadian Class 5 through 8 truck market was con- requirements driven by higher sales levels. Additionally, a portion strained by the fact that continued industry demand for heavy of the increase in 1999 and the majority of the increase in 1998 and medium trucks outstripped system capacity. Market shares is due to a $358 million net increase in manufacturing opera- in 1998 and 1997 were 29.1% and 28.3%, respectively. tions debt during 1998 driven by the issuance of $350 million (Sources: Ward’s Communications and the Canadian Vehicle of senior and senior subordinated notes in February 1998. Manufacturers Association.) Other expense for 1998 includes $14 million related to the Total engine units shipped reached 374,200 in 1999, a secondary public offering of 19.9 million shares of the company’s 25% increase over 1998. This excludes the 48,200 units common stock which was completed in June 1998. shipped by Maxion International Motores S.A., the company’s joint venture in Brazil. Shipments of mid-range diesel engines LIQUIDITY AND CAPITAL RESOURCES Cash flow is generat- by the company to other OEMs during 1999 were a record ed from the manufacture and sale of trucks and mid-range 286,500 units, a 34% increase over the 213,700 units shipped diesel engines and their associated service parts as well as from in 1998, which represented a 16% improvement over 1997. product financing and insurance coverage provided to the Higher shipments to Ford Motor Company to meet consumer company’s dealers and retail customers by the financial services demand for the light trucks and vans which use this engine segment. The company’s current debt ratings have made sales was the primary reason for the increases. of finance receivables the most economic sources of funding Finance and insurance revenue was $256 million for 1999, for NFC. Insurance operations are self-funded. a $55 million increase over 1998 revenue of $201 million, The company had working capital of $340 million at October which was a $27 million increase over 1997 revenue of 31, 1999, compared to $482 million at October 31, 1998. The $174 million. These increases are primarily due to increased decrease from 1998 to 1999 is primarily due to a net change wholesale and retail financing. in operating assets and liabilities of $439 million as described The 1999 increase in other income is primarily due to a legal below, and $144 million of purchases of common stock offset by settlement in favor of an insurance subsidiary of the company. net sales and maturities of marketable securities of $330 million. Consolidated cash, cash equivalents and marketable securi- Costs and Expenses. Manufacturing gross margin was ties of the company were $576 million at October 31, 1999, 18.0% of sales in 1999, compared with 15.3% in 1998, $1,064 million at October 31, 1998, and $965 million at and 14.2% in 1997. The increase in 1999 gross margin is October 31, 1997. Cash, cash equivalents and marketable secu- primarily due to improved pricing and improved operating rities available to manufacturing operations, including a 1999 efficiencies. The 1998 improvement in margin was primarily $659 million intercompany receivable from NFC, which NFC due to improved operating efficiencies offset by provisions is obligated to repay upon request, totaled $1,045 million at for employee profit sharing. October 31, 1999, $1,010 million at October 31, 1998 and Postretirement benefits expense of $216 million in 1999 $901 million at October 31, 1997. increased $42 million from $174 million in 1998 and approxi- Cash provided by operations during 1999 totaled $302 million, mated the 1997 expense of $215 million. The 1999 increase is primarily from net income of $544 million. Income tax expense mainly a result of higher retiree healthcare expense and higher for 1999 was $47 million, primarily composed of cash pay- profit sharing provisions to a retiree trust ($23 million and $16 ments of $40 million to federal and certain state, local and million, respectively). The 1998 decrease was mainly a result of foreign governments. higher expected return on plan assets and lower amortization of The net change in operating assets and liabilities of prior service cost ($69 million and $9 million, respectively) offset $439 million includes a $445 million increase in receivables, by higher profit sharing provisions to a retiree trust ($38 million). primarily due to a net increase in wholesale note and account Engineering and research expense increased to $281 million balances. The change also includes a $129 million increase in in 1999 from $192 million in 1998 and $124 million in 1997. inventory due to higher production levels, offset by a related Approximately 50% and 35%, respectively, of these increases $139 million increase in accounts payable. reflect the company’s continuing investment in its next genera- During 1999, investment programs used $451 million in tion vehicle (NGV) program and approximately 25% and cash principally to fund $498 million of capital expenditures 20%, respectively, of these increases reflect investment in the and investments in affiliates. Capital expenditures were made next generation diesel (NGD) program. primarily for the NGV and NGD programs, increased engine Sales, general and administrative expense was $486 million production capacity, and increased capacity, infrastructure and in 1999 compared with $427 million in 1998 and $365 million in 1997. The 1999 increase is primarily due to marketing 18.0% $427 programs and the operational implementation of the compa- 14.2% 15.3% $302 ny’s integrated truck and engine strategies ($13 million 12.5% and $34 million, respectively). The change between 1998 and 1997 primarily reflects investment in the company’s five-point $169 truck strategy and an increase in the provision for payment to $111 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 96 97 98 99 96 97 98 99 $105 million in 1998 and $74 million in 1997. The increase MANUFACTURING CAPITAL EXPENDITURES GROSS MARGIN ($ in millions) [Management’s Discussion and Analysis of Results of Operations and Financial Condition]

facility enhancements at the Escobedo, Mexico plant. receivables, commercial paper, short and long-term bank Investment programs also used cash for a $160 million net borrowings, medium and long-term debt and equity capital. increase in retail notes and lease receivables and a $108 million At October 31, 1999, NFC’s funding consisted of sold finance net increase in property and equipment leased to others. These receivables of $2,296 million, bank and other borrowings were offset by a net decrease in marketable securities of $330 of $1,287 million, subordinated debt of $100 million, capital million. lease obligations of $323 million and equity of $280 million. Financing activities provided an $88 million net increase Through the asset-backed markets, NFC has been able to in notes and debt outstanding under the bank revolving fund fixed rate retail note receivables at rates offered to compa- credit facility and other commercial paper programs, and nies with investment grade ratings. During 1999, NFC sold a $39 million net increase in long-term debt. Additionally, $1,260 million of retail notes through Navistar Financial Retail $22 million was borrowed under the Mexican credit facility, Receivables Corporation (NFRRC), a wholly owned subsidiary of which approximately half is denominated in Mexican pesos. of NFC. At October 31, 1999, the remaining shelf registration These were offset by purchases of $144 million of common available to NFRRC for the public issuance of asset-backed secu- stock during 1999 in accordance with board approved spend- rities was $2,257 million. Also, at October 31, 1999, Navistar ing levels for 1999 and 2000. Financial Securities Corporation, a wholly owned subsidiary Cash flow from the company’s manufacturing and financial of NFC, had in place a revolving wholesale note trust that services operations is currently sufficient to cover planned provides for the funding of $600 million of wholesale notes. investment in the business. Capital investments for 2000 are At October 31, 1999, available funding under NFC’s bank expected to be nearly $600 million including approximately revolving credit facility and the asset-backed commercial paper $100 million for the NGV program and $200 million for the facility was $87 million, of which $35 million was used to back NGD program. In addition to the NGV and NGD programs, short-term debt. The remaining $52 million, when combined capital expenditures are planned to purchase lease options with unrestricted cash and cash equivalents, made $90 million on engine equipment, to add a school bus facility in Tulsa, available to fund the general business purposes of NFC. Oklahoma, and for normal improvements to existing facilities In November 1999, NFC sold $533 million of retail notes, and products. The company had outstanding capital commit- net of unearned finance income, through NFRRC to two ments of $505 million at October 31, 1999, including $91 mil- multi-seller asset-backed commercial paper conduits sponsored lion for the NGV program and $325 million through 2003 for by a major financial institution. The gain on the sale, which the NGD program. was not material, was recognized in November 1999. The company currently estimates $460 million and $500 NFC’s maximum contractual exposure under all receivable million in capital spending and $190 million and $120 million sale recourse provisions at October 31, 1999, was $257 mil- in development expense through 2004 for the NGV and NGD lion. However, management believes the recorded reserves programs, respectively. Approximately $90 million and $20 mil- for losses on sold receivables are adequate. See Note 5 to the lion of the development expenses are planned for 2000. Included Financial Statements. in the NGD amounts for capital spending and development At October 31, 1999, NFC held forward interest rate con- expense are the company’s planned investment to produce new tracts with notional amounts of $500 million and $75 million high technology diesel engines in Huntsville, Alabama. in anticipation of retail receivable sales to occur in November During October 1999, the company’s board of directors 1999 and March 2000, respectively. These contracts were approved a new share repurchase program for as much as entered into to reduce exposure to future changes in interest $243 million. Under the new repurchase program, shares will rates. NFC intends to close these positions on the pricing dates be purchased on the open market from time to time; however, of the sales. Any resulting gain or loss will be included in the the company cannot purchase more than 4.5 million shares gain or loss on the sales of receivables. For the protection of through March 2001 without impairing the use of its tax loss investors in NFC’s debt securities, NFC issued an interest rate carryforwards. Through November 1999, the company has cap. The notional amount of the cap, $374 million, amortizes purchased $46 million worth of shares under this program, based on the expected outstanding principal balance of the including $11 million in fiscal 1999. sold retail receivables. Under the terms of the cap agreement, The company’s truck assembly facility in Escobedo, Mexico NFC will make payments if interest rates exceed certain levels. is encumbered by a lien in favor of certain lenders of the company The interest rate cap is recorded at fair value with changes in as collateral for a $125 million revolving Mexican credit facility. fair value recognized in income. At October 31, 1999, the At October 31, 1999, $52 million of a Mexican subsidiary’s impact on income was not material. receivables were pledged as collateral for bank borrowings. In In addition, the company held German mark, Japanese yen addition, as of October 31, 1999, the company is contingently and Canadian dollar forward contracts with notional amounts liable for approximately $204 million for various purchasing of $49 million, $13 million and $10 million, respectively, and commitments, credit guarantees and buyback programs. Based other derivative contracts with notional amounts of $19 million. on historical loss trends, the company’s exposure is not con- At October 31, 1999, the unrealized net loss on these contracts sidered material. Additionally, restrictions under the terms was not material. of the senior and senior subordinated notes and the Mexican At October 31, 1999, the Canadian operating subsidiary credit facility include a limitation on indebtedness and a was contingently liable for retail customers’ contracts and leases limitation on certain restricted payments. financed by a third party. The Canadian operating subsidiary NFC has traditionally obtained funds to provide financing to is subject to maximum recourse of $251 million on retail con- the company’s dealers and retail customers from sales of finance tracts and $22 million on retail leases. The Canadian operating

20 21 [Management’s Discussion and Analysis of Results of Operations and Financial Condition]

subsidiary, NFC and certain other subsidiaries included in the Contracted purchases of commodities or manufacturing financial services operations are parties to agreements that may equipment may also be hedged. result in the restriction of amounts which can be distributed to The financial services operations may use forward contracts Transportation in the form of dividends or loans and advances. to hedge the fair value of their fixed rate receivables against At October 31, 1999, the maximum amount of dividends changes in market interest rates in anticipation of the sale of which were available for distribution under the most restrictive such receivables. The financial services operations also use inter- covenants was $220 million. est rate swaps to reduce exposure to interest rate changes when The company and Transportation are obligated under they sell fixed rate receivables on a variable rate basis. For the certain agreements with public and private lenders of NFC to protection of investors in NFC’s debt securities, NFC may maintain the subsidiary’s income before interest expense and write interest rate caps when fixed rate receivables are sold income taxes at not less than 125% of its total interest expense. on a variable rate basis. No income maintenance payments were required for the three years ended October 31, 1999. MARKET RISK DISCLOSURE The company’s primary In May 1999, Moody’s and Duff and Phelps raised the market risks include fluctuations in interest rates and currency company’s senior debt ratings from Ba1 and BB+ to Baa3 and exchange rates. The company is also exposed to changes in the BBB–, respectively and raised the company’s subordinated debt prices of commodities used in its manufacturing operations ratings from Ba3 and BB– to Ba2 and BB, respectively. NFC’s and to changes in the prices of equity instruments owned by senior debt ratings increased from Ba1 and BBB– to Baa3 and the company. Commodity price risk related to the company’s BBB, respectively. NFC’s subordinated debt ratings were also current commodity financial instruments and equity price risk raised from Ba3 and BB+ to Ba2 and BBB–, respectively. related to the company’s current investments in equity instru- It is the opinion of management that, in the absence of ments are not material. The company does not hold any mate- significant unanticipated cash demands, current and forecasted rial market risk sensitive instruments for trading purposes. cash flow will provide a basis for financing operating require- The company has established policies and procedures ments, capital investments and planned repurchases of com- to manage sensitivity to interest rate and foreign currency mon stock. Management also believes that collections on the exchange rate market risk. These procedures include the outstanding receivables portfolios as well as funds available monitoring of the company’s level of exposure to each market from various funding sources will permit the financial services risk, the funding of variable rate receivables with variable rate operations to meet the financing requirements of the compa- debt, and limiting the amount of fixed rate receivables which ny’s dealers and customers. may be funded with floating rate debt. These procedures also include the use of derivative financial instruments to mitigate ENVIRONMENTAL MATTERS The company has been named a the effects of interest rate fluctuations and to reduce the potentially responsible party (PRP), in conjunction with other exposure to exchange rate risk. parties, in a number of cases arising under an environmental Interest rate risk is the risk that the company will incur protection law, the Comprehensive Environmental Response, economic losses due to adverse changes in interest rates. The Compensation and Liability Act, popularly known as the company measures its interest rate risk by estimating the net Superfund law. These cases involve sites which allegedly have amount by which the fair value of all of its interest rate sensi- received wastes from current or former company locations. tive assets and liabilities would be impacted by selected hypo- Based on information available to the company, which, in thetical changes in market interest rates. Fair value is estimated most cases, consists of data related to quantities and character- using a discounted cash flow analysis. Assuming a hypothetical istics of material generated at, or shipped to, each site as well instantaneous 10% decrease in interest rates as of October 31, as cost estimates from PRPs and/or federal or state regulatory 1999 and 1998, the net fair value of these instruments would agencies for the cleanup of these sites, a reasonable estimate is decrease by approximately $5 million in each year. The compa- calculated of the company’s share, if any, of the probable costs ny’s interest rate sensitivity analysis assumes a parallel shift in and is provided for in the financial statements. These obliga- interest rate yield curves. The model, therefore, does not reflect tions are generally recognized no later than completion of the the potential impact of changes in the relationship between remedial feasibility study and are not discounted to their pre- short-term and long-term interest rates. sent value. The company reviews its accruals on a regular basis Foreign currency risk is the risk that the company will incur and believes that, based on these calculations, its share of the economic losses due to adverse changes in foreign currency potential additional costs for the cleanup of each site will not exchange rates. The company’s primary exposure to foreign have a material effect on the company’s financial results. currency exchange fluctuations are the Canadian dollar/U.S. dollar and Mexican peso/U.S. dollar. At October 31, 1999 and DERIVATIVE FINANCIAL INSTRUMENTS As disclosed in 1998, the potential reduction in future earnings from a hypo- Notes 1 and 10 to the Financial Statements, the company uses thetical instantaneous 10% adverse change in quoted foreign derivative financial instruments to transfer or reduce the risks currency spot rates applied to foreign currency sensitive instru- of foreign exchange and interest rate volatility, and potentially ments would be approximately $10 million in each year. The increase the return on invested funds. foreign currency sensitivity model is limited by the assumption The company’s manufacturing operations, as conditions that all of the foreign currencies to which the company is warrant, hedge foreign exchange exposure on the purchase exposed would simultaneously decrease by 10%, because of parts and materials from foreign countries and its exposure such synchronized changes are unlikely to occur. The effects from the sale of manufactured products in other countries. of foreign currency forward contracts have been included in the above analysis; however, the sensitivity model does not [Management’s Discussion and Analysis of Results of Operations and Financial Condition]

include the inherent risks associated with the anticipated future becoming Year 2000 compliant. Compliance of all certified transactions denominated in foreign currency for which these dealers systems is targeted for completion in December 1999. forward contracts have been entered into for hedging purposes. The company’s total cost of the Year 2000 project, which will be funded through operating cash flows, is estimated to YEAR 2000 In 1995, the company instituted a corporate-wide be $32 million, including $26 million of estimated expense and Year 2000 readiness project to identify all systems which will $6 million of capital expenditures. Approximately $23 million require modification or replacement, and to establish appropri- has been expensed and approximately $6 million has been ate remediation and contingency plans to avoid an impact on capitalized through October 31, 1999. The remaining costs the company’s ability to continue to provide its products and are estimated to be incurred in fiscal year 2000. The company’s services. Navistar has established a team of professionals within estimated annual expense for the Year 2000 project is not material each of its sites and locations to implement and complete to the company’s fiscal 2000 information technology budget. this initiative. In 1997, the company expanded its Year 2000 Other non-Year 2000 information technology efforts have not readiness project to include the company’s products, external been materially delayed or impacted by the Year 2000 project. suppliers, dealers and facilities. The costs of the Year 2000 project and the dates on which The company’s Year 2000 program is directed to four the company believes it will complete the Year 2000 modifica- major areas: products, internal systems (including information tions and testing are based on management’s best estimates, technology (IT) and non-IT systems), suppliers and dealers. which were derived utilizing numerous assumptions regarding The company has completed its compliance review of future events, including the continued availability of certain virtually all of its products and has not learned of any products resources, third party modification plans and other factors. which it manufactures that will cease functioning or experience However, there can be no guarantee that these estimates will be an interruption in operation as a result of the transition to the achieved, and actual results could differ materially from those Year 2000. currently anticipated. Examples of factors that might cause The internal systems portion of the project addresses per- such material differences include, but are not limited to, sonal computing; facilities, including the physical “machines” the availability and cost of personnel trained in this area, the inside a plant or office complex; and computer business ability to locate and correct all relevant computer codes and systems that are commonly run on larger mainframes and embedded technology, and similar uncertainties. In addition, mid-range computers as well as the supporting infrastructure there can be no guarantee that the systems or products of other for the company’s computer business systems. The company entities, including the company’s independent dealers, on which presently believes that it has identified all significant applications the company relies will be converted on a timely basis, or that that require remediation, which in some cases will involve the a failure to convert by another company, or a conversion that replacement of the systems, to achieve Year 2000 readiness. is incompatible with the company’s systems, would not have Both internal and external resources are being used to make the a material adverse effect on the company. required modifications and test for Year 2000 compliance. At The company currently believes that the most reasonably November 30, 1999, the company estimates that it was 99.8% likely worst case scenario with respect to the Year 2000 issue is complete with the conversion or compliance checking of its the failure of a supplier, including utility suppliers, to become internal systems including significant applications. The company Year 2000 compliant, which could result in the temporary is targeting the completion of the modifications and testing interruption of the supply of necessary products or services to processes to all significant applications by mid-December a manufacturing facility. This could result in interruptions in 1999, which is prior to any anticipated impact on its operating production for a period of time, which in turn could result in systems. Remaining significant applications have contingency potential lost sales and profits. Additionally, sales, general and plans available. administrative expense could increase if automated functions The company has completed assessing the Year 2000 readiness would need to be performed manually. of its production and service parts suppliers through a supplier The company currently believes that the most reasonably survey process designed and coordinated by the Automotive likely worst case scenario for its financial services operations Industry Action Group (AIAG). Responses to these question- with respect to the Year 2000 issue would be the inability to naires have been received and based on these responses, sustain its current level of performance and customer service. individual supplier contacts and 160 on-site assessments, Additionally, a significant failure of the banking systems or the company believes that the majority of these suppliers have key entities in the financial markets could adversely affect the successfully completed their Year 2000 readiness programs. financial services operations’ ability to access various credit In addition, contingency plans have been established for all and money markets. suppliers to assure an uninterrupted flow of materials in the As part of its continuous assessment process, each of the unlikely event there are some that have unexpected problems. business locations have prepared contingency plans for critical NFC has received written assurances from its major business processes that will be placed into effect in the event suppliers of cash management services that their main treasury of a Year 2000 problem. These plans identify when contingent management products and required backroom processing have actions should be taken and identify the resources necessary for been tested and deemed ready for the Year 2000. a proper response. Review and testing of the contingency plans The company is working with its independent dealers on will continue through the remainder of 1999, along with the their Year 2000 readiness and monitoring their progress. The necessary training of people that will manage through the company has contacted all dealers and is working with its cer- crossover into the Year 2000. tified Dealer Business Systems Vendors to assist the dealers in

22 23 [Management’s Discussion and Analysis of Results of Operations and Financial Condition]

Checklists have been established for each of the contingency requirements for derivative instruments. This standard requires plans, against which status will be measured as the crossover recognition of all derivative instruments in the statement of occurs. The first priority will be to determine that computing financial condition as either assets or liabilities, measured at platforms, data base management systems and communication fair value. This statement additionally requires changes in the networks for both voice and data are functioning properly. fair value of derivatives to be recorded each period in current Immediately following, a series of production applications have earnings or comprehensive income depending on the intended been scheduled to run, with the objective being to quickly use of the derivatives. The company is currently assessing identify any remaining Year 2000 problems, and to initiate the impact of this statement on the company’s results of oper- corrective actions promptly. ations, financial condition and cash flows. In June 1999, the A Year 2000 command center structure has been established FASB issued Statement of Financial Accounting Standards to facilitate the management of activities and communications, No. 137, “Accounting for Derivative Instruments and Hedging consisting of a central center and 10 subsidiary centers defined Activities—Deferral of the Effective Date of FASB Statement for the business locations. Staffing has been identified for each No. 133,” which amends SFAS 133 by deferring for one year, of the centers, along with the procedures to manage the imple- the effective date of SFAS 133, to those fiscal years beginning mentation of the defined pre- and post-Year 2000 activities. after June 15, 2000. Navistar is using its best efforts to ensure that the Year 2000 impact on its critical systems and processes will not affect its supply INCOME TAXES The Statement of Financial Condition at of product, quality or service. However, in the event that the com- October 31, 1999 and 1998 includes a deferred tax asset of pany is unable to complete its remedial actions described above $896 million and $912 million, respectively, net of valuation and is unable to implement adequate contingency plans in the allowances of $86 million and $264 million, respectively, relat- event problems arise, there could be a material adverse effect on ed to future tax benefits. The deferred tax asset has been the company’s business, financial position or results of operations. reduced by the valuation allowance as management believes The preceding Year 2000 discussion contains various forward- it is more likely than not that some portion of the deferred looking statements which represent the company’s beliefs or tax asset may not be realized in the future. expectations regarding future events. When used in the Year The deferred tax asset includes the tax benefits associated 2000 discussion, the words “believes,” “expects,” “estimates,” with cumulative tax losses of $1,134 million and temporary “planned,” “could” and similar expressions are intended to differences, which represent the cumulative expense of identify forward-looking statements. Forward-looking state- $1,224 million recorded in the Statement of Income that has ments include, without limitation, the company’s expectations not been deducted on the company’s tax returns. The valuation as to when it will complete the remediation and testing phases allowance at October 31, 1999, assumes that it is more likely of its Year 2000 program as well as its Year 2000 contingency than not that approximately $226 million of cumulative tax plans; its estimated cost of achieving Year 2000 readiness; and losses will not be realized before their expiration date. the company’s belief that its internal systems and equipment Realization of the net deferred tax asset is dependent on the will be Year 2000 compliant in a timely manner. All forward- generation of approximately $2,400 million of future taxable looking statements involve a number of risks and uncertainties income. Until the company has utilized its significant net that could cause the actual results to differ materially from operating loss carryforwards, the cash payment of U.S. federal the projected results. Factors that may cause these differences income taxes will be minimal. See Note 3 to the Financial include, but are not limited to, the availability of qualified per- Statements. sonnel and other information technology resources; the ability The company performs extensive analysis to determine the to identify and remediate all date-sensitive lines of computer amount of the deferred tax asset. Such analysis is based on the code or to replace embedded computer chips in affected systems premise that the company is, and will continue to be, a going or equipment; and the actions of governmental agencies or concern and that it is more likely than not that deferred tax other third parties with respect to Year 2000 problems. benefits will be realized through the generation of future taxable income. Management reviews all available evidence, both NEW ACCOUNTING PRONOUNCEMENTS In March 1998, positive and negative, to assess the long-term earnings potential the American Institute of Certified Public Accountants issued of the company. The financial results are evaluated using a Statement of Position 98-1, “Accounting for the Costs of number of alternatives in economic cycles at various industry Computer Software Developed or Obtained for Internal Use.” volume conditions. One significant factor considered is the This statement defines whether or not certain costs related to company’s role as a leading producer of heavy and medium the development or acquisition of internal use software should trucks and school buses and mid-range diesel engines. be expensed or capitalized, and is effective for fiscal years As a result of the increase in 1999 industry demand, beginning after December 15, 1998. The company adopted the continued successful implementation of the company’s this statement effective November 1, 1999. At planned 2000 manufacturing strategies, changes in the company’s operating spending levels, adoption of this statement will result in the structure, and other positive operating indicators, management company capitalizing approximately $25 million of certain reviewed its projected future taxable income and evaluated costs that would have otherwise been expensed. the impact of these changes on its deferred tax asset valuation In June 1998, the Financial Accounting Standards Board allowance. This review was completed during the third quarter (FASB) issued Statement of Financial Accounting Standards of 1999 and resulted in a reduction to the deferred tax asset No. 133, “Accounting for Derivative Instruments and Hedging valuation allowance of $178 million which has been recorded Activities” (SFAS 133), to establish accounting and reporting as a reduction of income tax expense resulting in an effective [Management’s Discussion and Analysis of Results of Operations and Financial Condition]

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.

24 25 [Statement of Financial Reporting Responsibility]

Management of Navistar International Corporation and standards and perform such tests of transactions and balances its subsidiaries is responsible for the preparation and for the as they deem necessary. Management considers the recommen- integrity and objectivity of the accompanying financial state- dations of its internal auditors and independent auditors ments and other financial information in this report. The concerning the company’s system of internal controls and takes financial statements have been prepared in accordance with the necessary actions that are cost-effective in the circumstances generally accepted accounting principles and include amounts to respond appropriately to the recommendations presented. that are based on management’s estimates and judgments. The Audit Committee of the board of directors, composed The accompanying financial statements have been audited of five non-employee directors, meets periodically with the by Deloitte & Touche LLP, independent auditors. Management independent auditors, management, general counsel and inter- has made available to Deloitte & Touche LLP all the company’s nal auditors to satisfy itself that such persons are properly dis- financial records and related data, as well as the minutes of charging their responsibilities regarding financial reporting and the board of directors’ meetings. Management believes that all auditing. In carrying out these responsibilities, the Committee representations made to Deloitte & Touche LLP during its has full access to the independent auditors, internal auditors, audit were valid and appropriate. general counsel and financial management in scheduled joint Management is responsible for establishing and maintaining sessions or private meetings as in the Committee’s judgment a system of internal controls throughout its operations that seems appropriate. Similarly, the company’s independent audi- provides reasonable assurance as to the integrity and reliability tors, internal auditors, general counsel and financial manage- of the financial statements, the protection of assets from unau- ment have full access to the Committee and to the board of thorized use and the execution and recording of transactions directors and each is responsible for bringing before the in accordance with management’s authorization. Management Committee or its Chair, in a timely manner, any matter believes that the company’s system of internal controls is ade- deemed appropriate to the discharge of the Committee’s quate to accomplish these objectives. The system of internal con- responsibility. trols, 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 John R. Horne Robert C. Lannert their audit in accordance with generally accepted auditing Chairman, President and Executive Vice President

[Independent Auditors’ Report]

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 Chief Executive Officer and Chief Financial Officer made by management, as well as evaluating the overall financial Navistar International Corporation, statement presentation. We believe that our audits provide a Its Directors and Shareowners: reasonable basis for our opinion. In our opinion, the accompanying consolidated financial We have audited the Statement of Financial Condition of statements present fairly, in all material respects, the financial Navistar International Corporation and Consolidated position of Navistar International Corporation and Subsidiaries as of October 31, 1999 and 1998, and the related Consolidated Subsidiaries at October 31, 1999 and 1998, and Statements of Income, Comprehensive Income and of Cash the results of their operations and their cash flow for each of Flow for each of the three years in the period ended October the three years in the period ended October 31, 1999, in 31, 1999. These consolidated financial statements are the conformity with generally accepted accounting principles. 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 Deloitte & Touche LLP we plan and perform the audit to obtain reasonable assurance December 13, 1999 Chicago, Illinois [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.

26 27 [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. [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.

28 29 [Notes to Financial Statements For the Three Years Ended October 31, 1999]

1 SUMMARY OF ACCOUNTING POLICIES vices. An allowance for losses is maintained at a level deemed BASIS OF CONSOLIDATION Navistar International appropriate based on such factors as overall portfolio quality, Corporation is a holding company, whose principal operating historical loss experience and current economic conditions. subsidiary is Navistar International Transportation Corp. Insurance premiums are earned on a prorata basis over the (Transportation). As used hereafter, “company” or “Navistar” terms of the policies. The liability for unpaid insurance claims refers to Navistar International Corporation and its consolidat- includes provisions for reported claims and an estimate of ed subsidiaries. Navistar operates in three principal industry unreported claims based on past experience. segments: truck, engine (collectively called “manufacturing CASH AND CASH EQUIVALENTS All highly liquid financial operations”) and financial services. instruments with maturities of three months or less from date The company’s truck segment is engaged in the manu- of purchase, consisting primarily of bankers’ acceptances, com- facture and marketing of Class 5 through 8 trucks, including mercial paper, U.S. government securities and floating rate school buses, and operates primarily in the United States notes, are classified as cash equivalents in the Statements of (U.S.) and Canada as well as in Mexico, Brazil and other Financial Condition and Cash Flow. selected export markets. The company’s engine segment is engaged in the design and manufacture of mid-range diesel MARKETABLE SECURITIES Marketable securities are engines and operates primarily in the U.S. and Brazil. The classified as available-for-sale securities and are reported at fair financial services operations of the company provide wholesale, value. The difference between amortized cost and fair value is retail and lease financing and domestic commercial physical recorded as a component of accumulated other comprehensive damage and liability insurance coverage to the company’s loss in shareowners’ equity, net of applicable deferred taxes. dealers and retail customers and to the general public through Securities with remaining maturities of less than twelve months an independent insurance agency system. and other investments needed for current cash requirements The consolidated financial statements include the results of are classified as current within the Statement of Financial the company’s manufacturing operations and its wholly owned Condition. All equity securities are classified as current financial services subsidiaries. The effects of transactions because they are highly liquid financial instruments which between the manufacturing and financial services operations can be readily converted to cash. All other securities are have been eliminated to arrive at the consolidated totals. classified as non-current. Certain 1998 and 1997 amounts have been reclassified to conform with the presentation used in the 1999 financial state- INVENTORIES Inventories are valued at the lower of average ments. During 1999, the company adopted a classified balance cost or market. sheet format; 1998 balances have been reclassified to conform PROPERTY AND OTHER LONG-LIVED ASSETS Significant with the presentation used in 1999. expenditures for replacement of equipment, tooling and pattern USE OF ESTIMATES The preparation of financial statements equipment, and major rebuilding of machine tools are capital- in conformity with generally accepted accounting principles ized. Depreciation and amortization are generally provided requires management to make estimates and assumptions on the straight-line basis over the estimated useful lives of the that affect the reported amounts of assets and liabilities and assets, which average 35 years for buildings and improvements disclosure of contingent assets and liabilities at the date of and eight years for machinery and equipment. Gains and the financial statements and the reported amounts of revenues losses on property disposals are included in other income and expenses during the reporting period. Actual results could and expense. The carrying amount of all long-lived assets differ from those estimates. is evaluated periodically to determine if adjustment to the depreciation and amortization period or to the unamortized REVENUE RECOGNITION Truck operations recognize ship- balance is warranted. Such evaluation is based principally ments of new trucks and service parts to dealers and retail on the expected utilization of the long-lived assets and the customers as sales. Price allowances, expected in the normal projected, undiscounted cash flows of the operations in which course of business, and the cost of special incentive programs the long-lived assets are deployed. are recorded at the time of sale. Engine sales are recognized at the time of shipment to original equipment manufacturers ENGINEERING AND RESEARCH EXPENSE Engineering and (OEMs). An allowance for losses on receivables is maintained research expense includes research and development expenses at an amount that management considers appropriate in rela- and routine ongoing costs associated with improving existing tion to the outstanding receivables portfolio, and it is charged products and manufacturing processes. Research and develop- when receivables are determined to be uncollectible. ment expenses, which include activities for the introduction Financial services operations recognize finance charges on of new truck and engine products and major improvements finance receivables as income over the term of the receivables to existing products and processes, totaled $207 million, $138 utilizing the interest method. Operating lease revenues are million and $85 million in 1999, 1998 and 1997, respectively. recognized on a straight-line basis over the life of the lease. PRODUCT RELATED COSTS The company accrues warranty Selected receivables are securitized and sold to public and expense at the time of end product sale. Product liability private investors with limited recourse. Gains or losses on sales expense is accrued based on the estimate of total future pay- of receivables are credited or charged to revenue in the period ments to settle product liability claims. in which the sale occurs. Financial services operations continue to service the sold receivables and receive a fee for such ser- [Notes to Financial Statements]

1 SUMMARY OF ACCOUNTING POLICIES (continued) about Segments of an Enterprise and Related Information” DERIVATIVE FINANCIAL INSTRUMENTS The company uses (SFAS 131). See Note 13 to the Financial Statements. derivatives to transfer or reduce risks of foreign exchange and In March 1998, the American Institute of Certified Public interest rate volatility and to potentially increase the return on Accountants issued Statement of Position 98-1, “Accounting invested funds. Financial services operations may use forward for the Costs of Computer Software Developed or Obtained contracts to hedge the fair value of its fixed rate receivables for Internal Use.” This statement defines whether or not cer- against changes in market interest rates in anticipation of the tain costs related to the development or acquisition of internal sale of such receivables. Financial services operations also use use software should be expensed or capitalized, and is effective interest rate swaps to reduce exposure to interest rate changes for fiscal years beginning after December 15, 1998. The com- when they sell fixed rate receivables on a variable rate basis. For pany adopted this statement effective November 1, 1999. At the protection of investors in Navistar Financial Corporation’s planned 2000 spending levels, adoption of this statement will (NFC) debt securities, NFC may write interest rate caps when result in the company capitalizing approximately $25 million fixed rate receivables are sold on a variable rate basis. The com- of certain costs that would have otherwise been expensed. pany also uses derivatives such as forward contracts to reduce In June 1998, the Financial Accounting Standards Board its exposure to foreign exchange volatility. (FASB) issued Statement of Financial Accounting Standards Derivative financial instruments are generally held for No. 133, “Accounting for Derivative Instruments and Hedging purposes other than trading. Income recognition of changes Activities” (SFAS 133), to establish accounting and reporting in fair values of the derivatives is deferred until the derivative requirements for derivative instruments. This standard requires instruments are closed. Gains or losses related to hedges of recognition of all derivative instruments in the statement of anticipated transactions are deferred until they are recognized financial condition as either assets or liabilities, measured at fair in income when the effects of the anticipated transactions are value. This statement additionally requires changes in the fair recognized in earnings. The principal balance of receivables value of derivatives to be recorded each period in current earn- expected to be sold by NFC equals or exceeds the notional ings or comprehensive income depending on the intended use amount of open forward contracts. Additionally, the value of the derivatives. In June 1999, the FASB issued Statement of committed purchases denominated in currencies other than of Financial Accounting Standards No. 137, “Accounting for the functional currency generally exceeds the notional amount Derivative Instruments and Hedging Activities—Deferral of of related open derivative contracts. the Effective Date of FASB Statement No. 133,” which amends SFAS 133 by deferring for one year the effective date of SFAS FOREIGN CURRENCY The financial statements of foreign 133, to those fiscal years beginning after June 15, 2000. The subsidiaries are translated to U.S. dollars using the period-end company is currently assessing the impact of SFAS 133 on exchange rate for assets and liabilities and a weighted-average the company’s results of operations, financial condition and exchange rate for each period for revenues and expenses. cash flows. 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 2 POSTRETIREMENT BENEFITS comprehensive loss in shareowners’ equity. Effective February 1, The company provides postretirement benefits to substantially 1999, the functional currency of the company’s Mexican sub- all of its employees. Costs associated with postretirement bene- sidiaries changed from the U.S. dollar to the Mexican peso fits include pension and postretirement health care expenses because Mexico’s economy is no longer considered highly infla- for employees, retirees and surviving spouses and dependents. tionary. The effect of this change was not material. Translation In addition, as part of the 1993 restructured health care and gains and losses arising from fluctuations in currency exchange life insurance plans, profit sharing payments to the Retiree rates on transactions denominated in currencies other than Supplemental Benefit Trust (Trust) are required. the functional currency are recognized in earnings as incurred, The cost of postretirement benefits is segregated as a separate except for those transactions which hedge purchase commit- component in the Statement of Income and is as follows: ments, and for those intercompany balances which are desig-

nated as long-term investments. Net income included a foreign MILLIONS OF DOLLARS 1999 1998 1997 currency transaction loss of $10 million in 1999 and foreign currency transaction gains of $4 million in 1998 and $2 mil- Pension expense $ 77 $ 74 $129 lion in 1997. Health/life insurance 65 42 66 Profit sharing provision to Trust 74 58 20 NEW ACCOUNTING PRONOUNCEMENTS Effective November 1, 1998, Navistar adopted Statement of Financial Total postretirement Accounting Standards No. 130, “Reporting Comprehensive benefits expense $216 $174 $215 Income,” which establishes standards for reporting and display of comprehensive income and its components. Financial state- Generally, the pension plans are non-contributory. The ments for prior periods have been reclassified as required by company’s policy is to fund its pension plans in accordance this statement. Effective November 1, 1998, Navistar adopted with applicable U.S. and Canadian government regulations Statement of Financial Accounting Standards No. 131, and to make additional payments as funds are available to “Disclosures achieve full funding of the accumulated benefit obligation. At October 31, 1999, all legal funding requirements had been

30 31 [Notes to Financial Statements]

met. In 2000, the company expects to contribute approximately The funded status of the company’s plans as of October 31, $85 million to its pension plans to meet legal requirements. 1999 and 1998 and a reconciliation with amounts recognized in the Statement of Financial Condition are provided below. 2 POSTRETIREMENT BENEFITS (continued) In 1993, the Retiree Health Benefit Trust was established PENSION BENEFITS OTHER BENEFITS

to provide a vehicle for funding the health care liability through MILLIONS OF DOLLARS 1999 1998 1999 1998 company contributions and retiree premiums. The company made a required prefunding contribution of $200 million to CHANGE IN BENEFIT this trust during 1998. OBLIGATION Benefit obligation at POSTRETIREMENT BENEFITS EXPENSE Net periodic bene- beginning of year $3,481 $3,299 $1,560 $1,374 fits expense included in the Statement of Income is composed Service cost 34 37 16 14 of the following: Interest on obligation 229 231 107 98 PENSION BENEFITS Amendments 8— 4— Actuarial net (gain) loss (157) 186 52 164 MILLIONS OF DOLLARS 1999 1998 1997 Benefits paid (287) (272) (103) (90) Service cost for benefits earned Benefit obligation at during the period $34 $37 $34 end of year $3,308 $3,481 $1,636 $1,560 Interest on obligation 229 231 238 Amortization costs and other 99 88 99 CHANGE IN PLAN ASSETS Less expected return on assets (285) (282) (242) Fair value of plan assets at Net pension benefits expense $ 77 $ 74 $ 129 beginning of year $3,032 $2,900 $ 693 $ 486 Actual return on plan assets 348 187 118 47 OTHER BENEFITS Employer contribution 12 212 10 210 Benefits paid (279) (267) (57) (50) MILLIONS OF DOLLARS 1999 1998 1997 Fair value of plan assets at Service cost for benefits earned end of year $3,113 $3,032 $ 764 $ 693 during the period $16 $14 $13 Interest on obligation 107 98 96 Funded status $ (195) $ (449) $ (872) $ (867) Amortization costs and other 15 2 — Unrecognized actuarial net loss 342 587 331 344 Less expected return on assets (73) (72) (43) Unrecognized transition Net other benefits expense $65 $42 $66 amount 100 133 — — Unrecognized prior “Amortization costs and other” include amortization of service cost 56 69 — (5) cumulative gains and losses over the expected remaining service life of employees and amortization of the initial transition Net amount recognized $ 303 $ 340 $ (541) $ (528) liability over 15 years. Also included is the expense related to yearly lump-sum payments to retirees required by negotiated AMOUNTS RECOGNIZED labor contracts, expense related to defined contribution plans IN THE STATEMENT OF and amortization of plan amendments. Plan amendments are FINANCIAL CONDITION recognized over the remaining service life of employees, except CONSIST OF: for those plan amendments arising from negotiated labor con- Prepaid benefit cost $ 148 $ 39 $ — $ — tracts, which are amortized over the length of the contract. 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)

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. [Notes to Financial Statements]

2 POSTRETIREMENT BENEFITS (continued) The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $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)

3 INCOME TAXES The deferred tax expense does not represent cash payment The domestic and foreign components of income before of income taxes and was primarily generated by the utilization income taxes consist of the following: 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 MILLIONS OF DOLLARS 1999 1998 1997 were $40 million, $7 million and $10 million, respectively. Domestic $489 $403 $239 The relationship of the tax expense to income before taxes Foreign 102 7 3 for 1999, 1998 and 1997 differs from the U.S. statutory rate Total income before income taxes $591 $410 $242 (35%) because of state income taxes and the benefit of NOL carryforwards in foreign countries. Also, the 1999 and 1998 The components of income tax expense consist of the following: 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 carry- MILLIONS OF DOLLARS 1999 1998 1997 forwards and temporary differences which are estimated to CURRENT: expire before they are utilized. The effective tax rates for 1999, Federal $11 $ 4 $ 8 1998 and 1997 were 8.0%, 27.0% and 38.0%, respectively. State and local 432As a result of continued strong industry demand, the continued successful implementation of the company’s manufac- Foreign 25 — — turing strategies, changes in the company’s operating structure, Total current expense 40 7 10 and other positive operating indicators, management reviewed its projected future taxable income and evaluated the impact DEFERRED: of these changes on its deferred tax asset valuation allowance. Federal 154 127 71 This review was completed during the third quarter of 1999 State and local 23 19 11 and resulted in a reduction to the deferred tax asset valuation Foreign 83—allowance of $178 million which reduced income tax expense Total deferred expense 185 149 82 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. Less valuation Undistributed earnings of foreign subsidiaries were allowance adjustment (178) (45) — $126 million and $50 million at October 31, 1999 and 1998, Total income tax expense $ 47 $111 $ 92 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.

32 33 [Notes to Financial Statements]

3 INCOME TAXES (continued) At October 31, 1999, the company had $1,045 million Taxpaying entities of the company offset all deferred tax assets of domestic and $89 million of foreign NOL carryforwards and liabilities within each tax jurisdiction. The components of available to offset future taxable income. Such carryforwards the deferred tax asset (liability) at October 31 are as follows: reflect income tax losses incurred which will expire as follows, in millions of dollars:

MILLIONS OF DOLLARS 1999 1998 2007 $75 UNITED STATES 2008 816 DEFERRED TAX ASSETS: 2009 37 Net operating loss carryforwards $ 397 $ 590 2011 179 Alternative minimum tax 35 24 Indefinite 27 Postretirement benefits 266 347 Total $1,134 Product liability and warranty 116 106 Employee incentive programs 77 79 Additionally, the reversal of net temporary differences of $1,224 Other liabilities 129 153 million as of October 31, 1999 will create net tax deductions Total deferred tax assets 1,020 1,299 which, if not utilized previously, will expire subsequent to 2011.

DEFERRED TAX LIABILITIES: 4 MARKETABLE SECURITIES Prepaid pension assets (102) (117) The fair value of marketable securities is estimated based on Depreciation (22) (30) quoted market prices, when available. If a quoted price is not Total deferred tax liabilities (124) (147) available, fair value is estimated using quoted market prices for similar financial instruments. Total deferred tax assets 896 1,152 Information related to the company’s marketable securities Less valuation allowance (65) (243) at October 31 is as follows: Net deferred U.S. tax assets $ 831 $ 909 1999 1998 FOREIGN AMORTIZED FAIR AMORTIZED FAIR DEFERRED TAX ASSETS: MILLIONS OF DOLLARS COST VALUE COST VALUE Net operating loss carryforwards $34$ 5 Corporate securities $172 $170 $386 $388 Other accrued liabilities 52 19 U.S. government Total deferred tax assets 86 24 securities 82 82 171 174 Less valuation allowance (21) (21) Mortgage and asset- Net deferred foreign tax assets $65$ 3 backed securities 55 54 85 86 Foreign government Total net deferred tax assets $ 896 $ 912 securities 55 67 Total debt securities 314 311 648 655 DEFERRED FOREIGN TAX LIABILITIES: Equity securities 22 22 17 19 Prepaid pension assets $ (45) $ (13) Depreciation (30) (7) Total marketable securities $336 $333 $665 $674 Other (12) — Total deferred foreign tax liabilities $ (87) $ (20) Contractual maturities of marketable debt securities at October 31 are as follows: AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL CONDITION: 1999 1998 Deferred tax assets $ 896 $ 912 Less current portion (229) (194) AMORTIZED FAIR AMORTIZED FAIR MILLIONS OF DOLLARS COST VALUE COST VALUE Long-term deferred tax asset $ 667 $ 718 Due in one year or less $147 $146 $239 $240 Other long-term liabilities $ (87) $ (20) 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 [Notes to Financial Statements]

4 MARKETABLE SECURITIES (continued) Contractual maturities of accounts receivable, retail notes Gross gains and losses realized on sales or maturities of and lease financing and wholesale notes, including unearned marketable securities were not material for each of the two finance income, at October 31, 1999 were: 2000–$1,550 years. At October 31, 1999 and 1998, a domestic insurance million, 2001–$443 million, 2002–$245 million, 2003– subsidiary had $11 million and $13 million, respectively, $188 million, 2004–$148 million and thereafter–$49 million. of marketable securities which were on deposit with various Unearned finance income totaled $154 million at October 31, state departments of insurance or otherwise not available. 1999. Notes receivable are due upon demand from a limited These securities are included in total marketable securities partnership that invests in S&P 500 stock index arbitrage. balances at October 31, 1999 and 1998. 6 INVENTORIES 5 RECEIVABLES Inventories at October 31 are as follows: Receivables at October 31 are summarized by major classification as follows: MILLIONS OF DOLLARS 1999 1998 Finished products $285 $225 MILLIONS OF DOLLARS 1999 1998 Work in process 95 69 Accounts receivable $ 816 $ 661 Raw materials and supplies 245 213 Retail notes and lease financing 1,061 925 Total inventories $625 $507 Wholesale notes 592 261 Amounts due from sales of receivables 244 246 Notes receivable 117 109 7 PROPERTY AND EQUIPMENT Other 24 27 At October 31, property and equipment includes the following: Allowance for losses (36) (33) Total receivables, net 2,818 2,196 MILLIONS OF DOLLARS 1999 1998 Less current portion (1,550) (1,352) Land $20$18 Finance and other receivables, net $ 1,268 $ 844 BUILDINGS, MACHINERY AND EQUIPMENT AT COST: The financial services segment purchases the majority of the wholesale notes receivable and some retail notes and accounts Plants 1,627 1,419 receivable arising from the company’s operations. Distribution 102 94 A portion of NFC’s funding for retail and wholesale notes Construction in progress 313 130 comes from sales of receivables by NFC to third parties with Net investment in operating leases 283 218 limited recourse. NFC’s maximum contractual exposure under Other 253 203 all receivable sale recourse provisions at October 31, 1999 was Total property 2,598 2,082 $257 million; however, management believes that the allowance for credit losses on sold receivables is adequate. Proceeds from Less accumulated depreciation sales of retail notes receivable, net of underwriting costs, were and amortization (1,123) (976) $1,192 million in 1999, $953 million in 1998 and $958 mil- Total property and equipment, net $ 1,475 $1,106 lion in 1997. Uncollected sold retail and wholesale receivable balances totaled $2,296 million and $2,145 million as of Total property includes property under capitalized lease October 31, 1999 and 1998, respectively. obligations of $24 million and $25 million at October 31, In November 1999, NFC sold $533 million of retail notes, 1999 and 1998, respectively. Future minimum rentals on net net of unearned finance income, through Navistar Financial investments in operating leases are: 2000–$68 million, Retail Receivables Corporation (NFRRC) to two multi-seller 2001–$58 million, 2002–$44 million, 2003–$27 million asset-backed commercial paper conduits sponsored by a major and thereafter–$13 million. Each of these assets is depreciated financial institution. The gain on sales, which was not material, on a straight-line basis over the term of the lease in an amount was recognized in November 1999. 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.

34 35 [Notes to Financial Statements]

8 DEBT The aggregate annual maturities for debt for the years ended October 31 are as follows: MILLIONS OF DOLLARS 1999 1998

MANUFACTURING OPERATIONS FINANCIAL MANUFACTURING SERVICES Notes payable and current maturities of MILLIONS OF DOLLARS OPERATIONS OPERATIONS TOTAL long-term debt $31$ 4 2000 $ 31 $ 161 $ 192 8% Senior Subordinated Notes, due 2008 250 250 2001 33 1,341 1,374 7% Senior Notes, due 2003 100 100 2002 47 172 219 Mexican credit facility 83 84 2003 110 84 194 Capitalized leases and other 12 12 2004 and thereafter 255 33 288 Total long-term debt 445 446 Total $476 $1,791 $2,267 Manufacturing operations debt 476 450 WEIGHTED AVERAGE INTEREST RATE ON TOTAL FINANCIAL SERVICES OPERATIONS DEBT, INCLUDING SHORT- Commercial paper 35 22 TERM, AND THE EFFECT OF DISCOUNTS AND RELATED Current maturities of long-term debt 126 160 AMORTIZATION FOR THE YEARS ENDED: Total short-term debt 161 182 October 31, 1999 10.1% 5.6% 6.6% Bank revolvers, variable rates, due 2001-2005 867 815 October 31, 1998 9.3% 6.4% 7.1% Asset-backed commercial paper program, variable rate, due 2001 413 401 At October 31, 1999, NFC has a $925 million con- Total senior debt 1,280 1,216 tractually committed bank revolving credit facility and a 9% Subordinated Senior Notes, due 2002 100 100 $400 million asset-backed commercial paper (ABCP) program Capitalized leases, 4.1% to 6.3%, supported by a bank liquidity facility plus $14 million of trust due serially through 2006 250 174 certificates issued in connection with the formation of the Total long-term debt 1,630 1,490 ABCP trust. Available funding under the bank revolving credit facility and the ABCP program was $87 million, of which Financial services operations debt 1,791 1,672 $35 million provided funding backup for the outstanding Total debt $2,267 $2,122 short-term debt at October 31, 1999. NFC’s wholly owned subsidiaries, Navistar Financial The effective annual interest rate on manufacturing notes Securities Corporation (NFSC) and NFRRC, have a limited payable was 7.7% in 1999, 6.8% in 1998 and 8.3% in 1997. purpose of purchasing retail and wholesale receivables, respec- Consolidated interest payments were $134 million, $95 mil- tively, and transferring an undivided ownership interest in such lion and $66 million in 1999, 1998 and 1997, respectively. notes to investors. The subsidiaries have limited recourse on During 1998, the company arranged financing for the sold receivables and their assets are available to satisfy the $164 million of funds denominated in U.S. dollars and claims of their creditors prior to such assets becoming available Mexican pesos to be used for investment in the company’s to NFC or affiliated companies. Mexican manufacturing and financial services operations. NFSC has in place a revolving wholesale note trust that As of October 31, 1999, borrowings outstanding under provides for the funding of $600 million of wholesale notes. these arrangements were $106 million, of which 54% is The trust is comprised of three $200 million tranches maturing denominated in dollars and 46% in pesos. The interest rates in 2003, 2004 and 2008. on the dollar-denominated debt are at a negotiated fixed rate During fiscal 1999, in two separate sales, NFC sold a total of or a variable rate based either on LIBOR or the Federal Funds $1,260 million of retail notes, net of unearned finance income, Rate. On peso-denominated debt, the interest rate is based on through NFRRC. The combined gain recognized on the sale the Interbank Interest Equilibrium Rate. The effective interest of these notes was $12 million. The aggregate shelf registration rate for the combined dollar and peso denominated debt was available to NFRRC for issuance of asset-backed securities is 18% for 1999 and 17% for 1998. $2,257 million. 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. [Notes to Financial Statements]

8 DEBT (continued) The fair value of investments and other assets is estimated NFC has entered into various sale/leaseback agreements based on quoted market prices or by discounting future involving vehicles subject to retail finance and operating leases cash flows. with end users. The outstanding balances are classified under The short-term debt and variable-rate borrowings under financial services operations as capitalized leases. These agree- NFC’s bank revolving credit agreement, which are repriced ments grant the purchasers a security interest in the underlying frequently, approximate fair value. The fair value of long-term end user leases. 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 9 OTHER LIABILITIES instruments or discounting future cash flows. Major classifications of other liabilities at October 31 are as follows: 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, MILLIONS OF DOLLARS 1999 1998 and to potentially increase the return on invested funds. Product liability and warranty $ 337 $ 323 The company periodically enters into forward contracts Employee incentive programs 212 215 in order to reduce exposure to exchange rate risk related Payroll, commissions and to purchases denominated in currencies other than the employee-related benefits 103 104 functional currency. Postretirement benefits liability 153 72 The financial services operations manage exposures to fluctuations in interest rates by limiting the amount of fixed rate Loss reserves and unearned premiums 102 105 assets funded with variable rate debt generally by selling fixed Ta x e s 163 67 rate receivables on a fixed rate basis and by utilizing derivative Sales and marketing 56 54 financial instruments. These derivative financial instruments Long-term disability and may include interest rate swaps, interest rate caps and forward workers’ compensation 48 53 contracts. The fair value of these instruments is subject to risk Environmental 22 27 as the instruments may become less valuable due to changes Interest 16 22 in market conditions or interest rates. NFC manages exposure Other 125 129 to counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be Total other liabilities 1,337 1,171 expected to fully perform under the terms of such agreements. Less current portion (911) (808) NFC’s credit exposure is limited to the fair value of contracts Other long-term liabilities $ 426 $ 363 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. 10 FINANCIAL INSTRUMENTS The financial services operations enter into forward contracts to manage their exposure to fluctuations in the fair value of FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying retail notes anticipated to be sold. The financial services opera- amounts of financial instruments, as reported in the Statement of tions manage such risk by entering into forward contracts to sell Financial Condition and described in various Notes to the fixed debt securities or forward interest rate swaps whose fair Financial Statements, and their fair values at October 31 are as value is highly correlated with that of its receivables. Income follows: recognition of changes in fair value of the derivatives is deferred until the derivative instruments are closed. Gains or losses 1999 1998 incurred with the closing of these agreements are included

CARRYING FAIR CARRYING FAIR as a component of the gain or loss on sale of receivables. MILLIONS OF DOLLARS AMOUNT VALUE AMOUNT VALUE In November 1998, NFC sold $545 million of fixed rate Total receivables, net $2,818 $2,824 $2,196 $2,216 retail receivables to a multi-seller asset-backed commercial paper conduit sponsored by a major financial institution Long-term investments on a variable rate basis. For the protection of investors, NFC and other assets 207 206 127 130 issued an interest rate cap. The notional amount of the cap, Total debt 2,267 2,256 2,122 2,119 $374 million, amortizes based on the expected outstanding principal balance of the sold retail receivables. Under the terms Cash and cash equivalents approximate fair value. The cost of the cap agreement, NFC will make payments if interest and fair value of marketable securities are disclosed in Note 4. rates exceed certain levels. The interest rate cap is recorded at The fair value of notes receivable and retail notes is estimated fair value with changes in fair value recognized in income. As by discounting expected cash flows at estimated current market of October 31,1999, the impact on income was not material. rates. Customer receivables, wholesale notes and retail and At October 31, 1999, NFC held forward interest rate con- wholesale accounts approximate fair value as a result of the tracts with notional amounts of $500 million and $75 million short-term nature of the receivables. in anticipation of retail receivable sales to occur in November 1999 and March 2000, respectively. In addition, the company

36 37 [Notes to Financial Statements]

10 FINANCIAL INSTRUMENTS (continued) Reflecting higher consumer demand for light trucks and held German mark, Japanese yen and Canadian dollar forward vans, sales of mid-range diesel engines to Ford Motor Company contracts with notional amounts of $49 million, $13 million by the engine segment were 17% of consolidated sales and rev- and $10 million, respectively, and other derivative contracts enues in 1999 and 14% in both 1998 and 1997. The company with notional amounts of $19 million. At October 31, 1999, has a 10-year agreement, effective with model year 2003, to the unrealized net loss on these contracts was not material. continue supplying Ford Motor Company with diesel engines for use in its diesel-powered light trucks and vans.

11 COMMITMENTS, CONTINGENCIES, RESTRICTED LEASES The company has long-term noncancellable leases for ASSETS, CONCENTRATIONS AND LEASES use of various equipment and facilities. Lease terms are generally for five to 25 years and, in many cases, provide for renewal COMMITMENTS, CONTINGENCIES AND RESTRICTED options. The company is generally obligated for the cost of ASSETS At October 31, 1999, commitments for capital property taxes, insurance and maintenance. The company leases expenditures in progress were approximately $505 million. office buildings, distribution centers, furniture and equipment, The company’s truck assembly facility located in Escobedo, machinery and equipment, and computer equipment. Mexico is encumbered by a lien in favor of certain lenders of the The majority of the company’s lease payments are for company as collateral for the $125 million revolving Mexican operating leases. At October 31, 1999, future minimum credit facility. At October 31, 1999, $52 million of a Mexican lease payments under operating leases having lease terms in subsidiary’s receivables were pledged as collateral for bank bor- excess of one year are: 2000–$43 million, 2001–$33 million, rowings. In addition, as of October 31, 1999, the company is 2002–$21 million, 2003–$19 million, 2004–$9 million contingently liable for approximately $204 million for various and thereafter–$26 million. Total operating lease expense purchasing commitments, credit guarantees and buyback was $30 million in 1999, $36 million in 1998 and $40 million programs. Based on historical loss trends, the company’s in 1997. Income received from sublease rentals was $7 million exposure is not considered material. Additionally, restrictions in 1999 and 1998, and $6 million in 1997. 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. 12 LEGAL PROCEEDINGS AND At October 31, 1999, the Canadian operating subsidiary ENVIRONMENTAL MATTERS was contingently liable for retail customers’ contracts and leas- The company and its subsidiaries are subject to various claims es financed by a third party. The Canadian operating arising in the ordinary course of business, and are parties to subsidiary is subject to maximum recourse of $251 million on various legal proceedings which constitute ordinary routine retail contracts and $22 million on retail leases. The Canadian litigation incidental to the business of the company and its operating subsidiary, NFC and certain other subsidiaries subsidiaries. In the opinion of the company’s management, included in financial services operations are parties to agree- none of these proceedings or claims is material to the business ments that may result in the restriction of amounts which or the financial condition of the company. can be distributed to Transportation in the form of dividends The company has been named a potentially responsible or loans and advances. At October 31, 1999, the maximum party (PRP), in conjunction with other parties, in a number amount of dividends which were available for distribution of cases arising under an environmental protection law, the under the most restrictive covenants was $220 million. Comprehensive Environmental Response, Compensation, The company and Transportation are obligated under and Liability Act, popularly known as the Superfund law. certain agreements with public and private lenders of NFC These cases involve sites which allegedly have received wastes to maintain the subsidiary’s income before interest expense from current or former company locations. Based on infor- and income taxes at not less than 125% of its total interest mation available to the company, which, in most cases, consists expense. No income maintenance payments were required of data related to quantities and characteristics of material for the three years ended October 31, 1999. generated at or shipped to each site as well as cost estimates CONCENTRATIONS At October 31, 1999, the company from PRPs and/or federal or state regulatory agencies for the employed 10,800 hourly workers and 6,700 salaried workers cleanup of these sites, a reasonable estimate is calculated of the in the United States and Canada. Approximately 98% of company’s share, if any, of the probable costs and is provided the hourly employees and 21% of the salaried employees for in the financial statements. These obligations are generally are represented by unions. Of these represented employees, recognized no later than completion of the remedial feasibility 92% of the hourly workers and 100% of the salaried workers study and are not discounted to their present value. The com- are represented by the United Automobile, Aerospace, and pany reviews its accruals on a regular basis and believes that, Agricultural Implement Workers of America (UAW) or the based on these calculations, its share of the potential additional National Automobile, Aerospace, and Agricultural Implement costs for the cleanup of each site will not have a material effect Workers of Canada (CAW). The company’s current master on the company’s financial results. 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. [Notes to Financial Statements]

13 SEGMENT DATA Reportable operating segment data follows: Effective November 1, 1998, Navistar adopted SFAS 131. Segment data for 1998 and 1997 has been restated. Under the FINANCIAL MILLIONS OF DOLLARS TRUCK ENGINE SERVICES TOTAL provisions of the new standard, Navistar has three reportable

segments: truck, engine and financial services. The company’s FOR THE YEAR ENDED OCTOBER 31, 1999 reportable segments are organized according to the products External revenues $6,628 $1,698 $ 273 $8,599 and the markets they each serve. The company’s truck segment manufactures and distributes Intersegment revenues — 681 71 752 a full line of diesel-powered trucks and school buses in the com- Total revenues $6,628 $2,379 $ 344 $9,351 mon carrier, private carrier, government/service, leasing, construc- Interest expense $ — $ — $ 103 $ 103 tion, energy/petroleum and student transportation markets. Depreciation 62 59 48 169 The truck segment also provides customers with proprietary Segment profit 295 294 102 691 products needed to support the International truck and bus lines, together with a wide selection of standard truck and AS OF OCTOBER 31, 1999 trailer aftermarket parts. Segment assets $1,852 $ 814 $3,009 $5,675 The company’s engine segment designs and manufactures Capital expenditures(a) 199 213 110 522 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, FOR THE YEAR ENDED OCTOBER 31, 1998 and for sale to OEMs in the U.S. and Mexico. This segment External revenues $6,276 $1,353 $ 219 $7,848 also sells engines for industrial, agricultural and marine appli- Intersegment revenues — 606 67 673 cations. In addition, the engine segment provides customers with proprietary products needed to support the International Total revenues $6,276 $1,959 $ 286 $8,521 engine lines, together with a wide selection of standard engine Interest expense $—$— $82$82 and aftermarket parts. Depreciation 54 63 35 152 The company’s financial services segment consists of NFC, Segment profit 246 186 74 506 its domestic insurance subsidiary and the company’s foreign finance and insurance subsidiaries. NFC’s primary business AS OF OCTOBER 31, 1998 is the retail, wholesale and lease financing of products sold Segment assets $1,379 $ 584 $2,310 $4,273 by the truck segment and its dealers within the U.S. as well as Capital expenditures(a) 184 107 127 418 the company’s wholesale accounts and selected retail accounts receivable. NFC’s insurance subsidiary provides commercial FOR THE YEAR ENDED OCTOBER 31, 1997 physical damage and liability insurance to the truck segment’s External revenues $4,999 $1,148 $ 185 $6,332 dealers and retail customers and to the general public through Intersegment revenues — 461 54 515 an independent insurance agency system. The foreign finance Total revenues $4,999 $1,609 $ 239 $6,847 subsidiaries’ primary business is to provide wholesale, retail and lease financing to the Mexican operations’ dealers and Interest expense $—$— $73$73 retail customers. Depreciation 47 43 22 112 The company evaluates the performance of its operating Segment profit 129 138 67 334 segments based on operating profits, which exclude certain corporate items, and retiree pension and medical expense. AS OF OCTOBER 31, 1997 Additionally, the operating profits of the company’s truck and Segment assets $1,284 $ 526 $1,860 $3,670 engine segments exclude most interest revenue and expense Capital expenditures(a) 113 43 44 200 items. Intersegment sales are transferred at prices established by an agreement between the buying and selling locations. (a)Capital expenditures include the net increase in property and equipment leased to others.

38 39 [Notes to Financial Statements]

13 SEGMENT DATA (continued) 14 PREFERRED AND PREFERENCE STOCKS Reconciliation to the consolidated financial statements as of The company’s Nonconvertible Junior Preference Stock Series and for the years ended October 31 is as follows: A was held for the Retiree Supplemental Benefit Program by the Supplemental Trust. This stock was redeemed in October

MILLIONS OF DOLLARS 1999 1998 1997 1999 at a redemption price of $1.00 per share. The UAW holds the Nonconvertible Junior Preference Stock Series B Segment sales and revenues $9,351 $8,521 $6,847 and is currently entitled to elect one member of the company’s Other income 48 37 39 board of directors. At October 31, 1999, there was one share Intercompany (752) (673) (515) of Series B Preference stock authorized and outstanding. Consolidated sales and revenues $8,647 $7,885 $6,371 The value of the preference share is minimal. On April 20, 1999, the company’s board of directors adopted Segment profit $ 691 $ 506 $ 334 a shareholder rights plan (Rights Plan) and declared a rights Corporate items (103) (118) (126) dividend of one preferred share purchase right (Right) for Manufacturing net interest income 32234each outstanding share of common stock (Common Shares) Consolidated pretax income $ 591 $ 410 $ 242 of the company to shareowners of record as of the close of Segment interest expense $ 103 $ 82 $ 73 business on May 3, 1999. Subject to the terms of the Rights Manufacturing expense and Plan, each Right entitles the registered holder to purchase from eliminations 32 23 1 the company one one-thousandth of a share of Series A Junior Participating Preferred Stock of the company (Preferred Shares) Consolidated interest expense $ 135 $ 105 $ 74 at a price of $175 per one one-thousandth of a Preferred Share, Segment depreciation and subject to adjustment. The Rights are exercisable only if a per- amortization expense $ 169 $ 152 $ 112 son or group (Acquiring Person) acquires 15% or more of the Corporate expense 578outstanding Common Shares and commences a tender offer for Consolidated depreciation and 15% or more of the outstanding Common Shares. Upon any amortization expense $ 174 $ 159 $ 120 such occurrence, each Right will entitle its holder (other than the Acquiring Person and certain related parties) to purchase, at Segment assets $5,675 $4,273 $3,670 the Right’s then current exercise price, a number of Common Cash and marketable securities 327 869 777 Shares having a market value of two times such price. Similarly, Deferred taxes 896 912 934 in the event the company is acquired in a merger or other Corporate intangible pension assets 92 124 154 business combination and is not the surviving corporation, Other corporate and eliminations (62) 11 (19) each Right (other than Rights owned by the Acquiring Person and certain related parties) shall thereafter be exercisable for a Consolidated assets $6,928 $6,189 $5,516 number of shares of common stock of the acquiring company Segment capital expenditures(a) $ 522 $ 418 $ 200 having a market value of two times the exercise price of the Corporate capital expenditures 13 9 11 Right. Subject to certain conditions, the Rights are redeemable Consolidated capital by the company’s board of directors for $0.01 per Right and expenditures $ 535 $ 427 $ 211 are exchangeable for Common Shares. The Rights have no voting power and initially expire on May 3, 2009. (a)Capital expenditures include the net increase in property and equipment leased During 1998, the company redeemed all 4.8 million shares to others. of its $6.00 Series G Convertible Cumulative Preferred Stock at a redemption price of $50 per share plus accrued dividends. Information concerning principal geographic areas as of and At October 31, 1999, there were 168,000 shares of Series D for the years ended October 31 was as follows: Convertible Junior Preference Stock (Series D) outstanding and 3 million authorized and issued with an optional redemp- MILLIONS OF DOLLARS 1999 1998 1997 tion price and liquidation preference of $25 per share plus REVENUES accrued dividends. The Series D converts into common stock United States $7,700 $7,065 $5,807 (subject to adjustment in certain circumstances) at .3125 Foreign countries 947 820 564 per share. The Series D ranks senior to common stock as to dividends and liquidation and receives dividends at a rate PROPERTY AND EQUIPMENT of 120% of the cash dividends on common stock as declared United States $1,188 $ 885 $ 711 on an as-converted basis. Foreign countries 287 221 124 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. [Notes to Financial Statements]

15 COMMON SHAREOWNERS’ EQUITY During 1999, the company purchased $133 million of shares Changes in certain shareowners’ equity accounts are as follows: 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. MILLIONS OF DOLLARS 1999 1998 1997 This program provides for the purchase of up to $243 million COMMON STOCK of shares on the open market from time to time, however, Beginning of year $2,139 $ 1,659 $ 1,642 the company cannot purchase more than 4.5 million shares Conversion of Class B through March 2001 without impairing the use of its tax common stock and other — 480 17 loss carryforward. Through November 1999, the company purchased an additional $35 million under the new program. End of year $2,139 $ 2,139 $ 1,659 CLASS B COMMON STOCK ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Beginning of year $ — $ 471 $ 491 The components of accumulated other comprehensive loss as Conversion/repurchase of stock — (471) (20) of October 31 are as follows: End of year $ — $ — $ 471 FOREIGN RETAINED EARNINGS (DEFICIT) MINIMUM CURRENCY ACCUMULATED PENSION TRANSLATION OTHER Beginning of year $ (829) $(1,109) $(1,228) MILLIONS LIABILITY ADJUSTMENTS COMPREHENSIVE Net income 544 299 150 OF DOLLARS ADJUSTMENTS AND OTHER LOSS Preferred dividends — (11) (29) 1999 $(184) $(13) $(197) Other (12) (8) (2) 1998 (336) 5 (331) End of year $ (297) $ (829) $(1,109) 1997 (192) — (192) COMMON STOCK HELD In the Statement of Comprehensive Income, the tax effects IN TREASURY of foreign currency translation adjustments and other were Beginning of year $ (214) $ (53) $ (30) not material for each of the years in the three year period Repurchase of common stock ended October 31, 1999. and other (144) (189) (23) Reissuance of treasury shares —28— 16 EARNINGS PER SHARE End of year $ (358) $ (214) $ (53) Earnings per share was computed as follows:

COMMON STOCK The company has authorized 110 million MILLIONS OF DOLLARS, shares of common stock with a par value of $.10 per share. EXCEPT SHARE AND PER SHARE DATA 1999 1998 1997 At October 31, 1999 and 1998, there were 63.2 million Net income $544 $299 $150 and 66.2 million shares of common stock outstanding, net Less dividends on Series G of common stock held in treasury, respectively. preferred stock —1129 In January 1998, the company repurchased 3.2 million Net income applicable to common shares of the Class B common stock that was outstanding. stock (Basic and Diluted) $544 $288 $121 During June 1998, a secondary public offering of the common stock of the company was completed, in which the Navistar AVERAGE SHARES International Transportation Corp. Retiree Supplemental OUTSTANDING (MILLIONS) Benefit Trust (Trust) sold approximately 19.9 million shares Basic 65.2 69.1 73.1 of common stock at an offering price of $26.50 per share. Dilutive effect of options These shares represented the Class B common stock held outstanding and other by the Trust which automatically converted into common dilutive securities 1.2.9.5 stock upon the sale. In conjunction with this offering, the Diluted 66.4 70.0 73.6 company purchased 2 million of the shares being offered. The company did not receive any proceeds from the sale EARNINGS PER SHARE of the shares in the offering. In addition, the underwriters Basic $8.34 $4.16 $1.66 exercised their over-allotment option and elected to purchase Diluted 8.20 4.11 1.65 1.1 million shares from the company at $26.50 per share. The company offset the dilution through open market purchases. 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.

40 41 [Notes to Financial Statements]

17 STOCK COMPENSATION PLANS forma diluted earnings per share would have been $8.16 in The company has stock-based compensation plans, approved 1999, $4.09 in 1998 and $1.61 in 1997; and pro forma basic by the Committee on Compensation and Governance of the earnings per share would have been $8.30 in 1999, $4.14 in board of directors, which provide for granting of stock options 1998 and $1.62 in 1997. The pro forma effect on net income to employees for purchase of common stock at the fair market for 1999 and 1998 may not be representative of the pro forma value of the stock on the date of grant. The grants generally effect on net income of future years as in 1999 and 1998, have a 10-year life. one-third of the options granted became exercisable on each The company has elected to continue to account for stock of the first, second and third anniversaries of grant. Prior to option grants to employees and directors in accordance with 1998, grants were generally exercisable after one year. Accounting Principles Board Opinion No. 25 and related The weighted-average fair values at date of grant for options interpretations. Accordingly, no compensation cost has been granted during 1999, 1998 and 1997 were $8.15, $7.53 and recognized for fixed stock options because the exercise prices $5.71, respectively, and were estimated using the Black-Scholes of the stock options equal the market value of the company’s option-pricing model with the following assumptions: common stock at the date of grant. Had compensation cost for the plans been determined based upon the fair value at the 1999 1998 1997 grant date consistent with Statement of Financial Accounting Risk-free interest rate 4.5% 5.7% 6.6% Standards No. 123, “Accounting for Stock-Based Dividend yield 0% 0% 0% Compensation,” pro forma net income would have been $542 million Expected volatility 35.1% 31.9% 29.8% in 1999, $297 million in 1998 and $147 million in 1997; pro 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 —

The following table summarizes information about stock options outstanding and exercisable at October 31, 1999.

OUTSTANDING OPTIONS OPTIONS EXERCISABLE WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) 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 [Notes to Financial Statements]

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 3 1 7 1 11 1 High $34⁄8 $28 $ 53⁄2 $35⁄8 $56⁄4 $34 $51⁄16 $28⁄2 1 1 1 1 1 1 Low $21⁄8 $20⁄16 $32⁄8 $27⁄4 $41 $26⁄8 $36⁄4 $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.

42 43 [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 [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

44 45 [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(a) 8.20 4.11 1.65 .49 1.83 Net income excluding tax valuation allowance adjustments(b) 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(c) 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)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. (b)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. (c)Based on retail deliveries of medium trucks (Classes 5, 6 and 7), including school buses, and heavy trucks (Class 8). [Information for Our Investors]

ABOUT YOUR STOCK Navistar International Corporation services as America On-Line and CompuServe. In addition, common stock is listed on the New York Stock Exchange, this information can be accessed through such databases the Chicago Stock Exchange and the Pacific Exchange and is and information services as Lexis/Nexus, Dow Jones and quoted as “Navistar” in stock table listings in daily newspapers. Bloomberg which frequently are available at libraries and The abbreviated stock symbol is “NAV.” brokerage firms. The stock transfer agent who can answer inquiries about Navistar also offers a toll-free, “Company News on Call” your Navistar International Corporation common stock such service, which allows shareowners to receive copies of recent as name changes, changes of address or missing certificates is: Navistar corporate news releases via telefax. To access this Harris Trust and Savings Bank, 311 West Monroe Street, 11th service, call (800) 758-5804, and enter Navistar’s six digit Floor, Chicago, Illinois 60606; Telephone: (312) 360-5101. code when prompted: 103895. Using a touch-tone phone, For information about other shareowner matters, contact: shareowners can select from a menu of news releases and Investor Relations, Navistar International Corporation, request specific news releases to be faxed directly to them. 455 North Cityfront Plaza Drive, Chicago, Illinois 60611; Navistar encourages shareowners to take advantage of these Telephone: (312) 836-2143. electronic databases and the “Company News on Call” service There were approximately 51,300 owners of common to access the company’s quarterly financial results on the same stock at October 31, 1999. day that the results are announced. Navistar’s 2000 quarterly financial results will be announced on the following dates: ANNUAL MEETING The 2000 Annual Meeting of Shareowners is scheduled to take place at 11:00 a.m., CST on FIRST QUARTER February 15, 2000 February 22, 2000, at the University of Chicago–Gleacher SECOND QUARTER May 16, 2000 Center. THIRD QUARTER August 15, 2000 Shareowners are invited to attend this meeting, take part FOURTH QUARTER December 5, 2000 in discussions of company affairs and meet personally with the directors and officers responsible for the operations of Navistar. Quarterly reports on Form 10-Q, Navistar’s Annual A Proxy Statement and Form of Proxy will be mailed to Environmental Health & Safety Report and other publications each shareowner on or about January 18, 2000. are available by writing: Corporate Communications, Navistar International Corporation, 455 North Cityfront Plaza Drive, COMMITMENT TO EQUAL EMPLOYMENT OPPORTUNITY Chicago, Illinois 60611. Navistar International Corporation has a long-standing commit- Navistar also invites shareowners to visit its home page on ment to equal employment opportunity dating back to 1919 the World Wide Web at http://www.navistar.com for current when the company issued its first written statement against company developments and to request financial documents. discrimination in the workplace. Today, Navistar continues to be a leader in the industry TRADEMARKS Navistar logotype and Navistar are in complying with all state and federal laws, local municipal registered trademarks of Navistar International Corporation. laws and regulations governing employment. Navistar has The Diamond Road symbol and International are registered continuously and aggressively implemented measures to ensure trademarks of Navistar International Transportation Corp. that all individuals regardless of age, race, sex, religion, national Additional registered trademarks include Eagle, Fleet Charge, origin, disability or veteran status are not discriminated against Fleetrite, Skyrise, Paystar and Pro Sleeper. Diamond SPEC, in regard to career opportunities within the company. Diamond PLUS and Diamond Services are trademarks of Navistar has adopted policy standards and assurances for Navistar International Transportation Corp. all employees and qualified applicants, pledging terms and conditions of employment to be equal for all individuals.

CORPORATE HEADQUARTERS The corporate offices of Navistar International Corporation and its principal subsidiary, Navistar International Transportation Corp., are located at 455 North Cityfront Plaza Drive, Chicago, Illinois 60611. Telephone: (312) 836-2000.

REPORTS AND PUBLICATIONS A copy of the company’s 1999 Annual Report on Form 10-K to the Securities and Exchange Commission will be provided, without charge, to shareowners upon written request to the Corporate Secretary, Corporate Headquarters, after January 31, 2000. In order to provide shareowners with immediate access to financial information and news about the company, Navistar distributes its corporate news releases through PR Newswire, an electronic news service, and files its financial statements with the Securities and Exchange Commission electronically through the EDGAR system. PR Newswire and EDGAR can be accessed by computer via the Internet, and through such

46 47 [1999 Company Profile and Locations]

Navistar International Corporation manufactures and markets medium, severe service and heavy trucks, school buses and mid-range diesel engines in North America, Latin America and selected export markets under the International brand. The company also is a leading supplier of mid-range diesel engines in the 160 to 300 horsepower range. The company’s products, parts and services are sold through a network of 1,000 International dealer outlets in the United States, Canada, Brazil and Mexico, more than 90 dealers in 75 countries, nine parts distribution centers and 15 used truck centers. Navistar also provides financing for its customers and distributors principally through its wholly owned subsidiary, Navistar Financial Corporation.

CORPORATE HEADQUARTERS ENGINEERING AND USED TRUCK CENTERS Chicago, Illinois TECHNICAL CENTERS Atlanta, Georgia Baltimore, Maryland MANUFACTURING FACILITIES Truck Engineering Charlotte, North Carolina American Transportation Corporation Fort Wayne, Indiana Chicago, Illinois School Bus Assembly Engine Engineering Columbus, Ohio Conway, Arkansas Melrose Park, Illinois Dallas, Texas Brazil Assembly Operation PURCHASING AND SUPPLIER Denver, Colorado (A contract manufacturing agreement) DEVELOPMENT Detroit, Michigan Medium and Heavy Truck Assembly Westchester, Illinois Houston, Texas Caxias, Rio Grande do Sul Indianapolis, Indiana

Chatham Assembly Plant PARTS OPERATIONS Kansas City, Missouri Heavy Truck Assembly Westchester, Illinois Nashville, Tennessee Chatham, Ontario Brantford, Ontario Oakland, California Marshfield, Missouri Philadelphia, Pennsylvania

Printed on recycled paper Printed on recycled Indianapolis Casting Corporation

A Shawnee Mission, Kansas Tampa, Florida Precision Grey Iron Castings Indianapolis, Indiana PARTS DISTRIBUTION CENTERS NAVISTAR FINANCIAL

Litho Inc. CORPORATION Indianapolis Engine Plant Atlanta, Georgia Mid-range Diesel Engines Baltimore, Maryland Rolling Meadows, Illinois

Printing Burlington, Ontario Indianapolis, Indiana NAVISTAR INTERNATIONAL Cuautitlan, Mexico Melrose Park Engine Plant CORPORATION CANADA Dallas, Texas Mid-range Diesel Engines Hamilton, Ontario Edmonton, Alberta Melrose Park, Illinois Richmond, California NAVISTAR DE MEXICO Mexico Assembly Operation São Paulo, Brazil Mexico City, D.F.

The Henderson Company Medium and Heavy Truck Assembly West Chicago, Illinois Escobedo, Nuevo Leon NAVISTAR DO REGIONAL SALES OFFICES BRASIL, LTDA Springfield Assembly Plant Atlanta, Georgia Typography Typography School Bus, Medium, Severe Service and Porto Alegre, Rio Grande do Sul Dallas, Texas Heavy Truck Assembly Hamilton, Ontario Springfield, Ohio Mt. Laurel, New Jersey 1 Kelli Deal installs doors and final prep Springfield Body Plant Russell Ingram Oakbrook Terrace, Illinois of cabs at the Springfield body plant. Fabricated Truck Components San Ramon, California Springfield, Ohio EXPORT SALES OFFICES SST Truck Company Photography Dubai, United Arab Emirates 1 Severe Service Truck Assembly Johannesburg, South Africa Garland, Texas Miami, Florida Waukesha Manufacturing Facility Ductile Iron Castings and Machining Waukesha, Wisconsin Olver Dunlop Associates Design 1

[1999 Officers]

2 Navistar International VICE PRESIDENTS Transportation Corp. Thomas M. Hough PRINCIPAL OFFICERS Treasurer

John R. Horne Mark T. Schwetschenau Chairman, President and Controller

Chief Executive Officer James L. Simonton

Robert C. Lannert Purchasing and Executive Vice President and Supplier Development

Chief Financial Officer Brian B. Whalen Public Affairs PRESIDENTS

1 Connie Newton, John J. Bongiorno SECRETARY production employee Financial Services Gregory Lennes on the Springfield body plant’s cab assembly line. J. Steven Keate 2 International 4000 series Truck Group awaiting delivery at Daniel C. Ustian Diamond International, North Little Rock, Ark. Engine and Foundry Group

GROUP VICE PRESIDENTS

David J. Johanneson General Manager Medium Truck Vehicle Center

Dennis W. Webb General Manager Heavy Truck Vehicle Center

SENIOR VICE PRESIDENTS

Robert A. Boardman General Counsel

Pamela J. Hamilton Human Resources and Administration

48 BOARD OF DIRECTORS (Left to right) Dr. Abbie J. Griffin, Jerry E. Dempsey, William F. Andrews, Michael N. Hammes, John R. Horne, John D. Correnti, Allen J. Krowe, William F. Patient, Robert C. Lannert and Y. Marc Belton.

[1999 Directors and Corporate Officers]

BOARD OF DIRECTORS Jerry E. Dempsey PRINCIPAL OFFICERS Retired Chairman and John R. Horne Chief Executive Officer John R. Horne Chairman, President and Chief PPC Industries, Inc. Chairman, President and Executive Officer Diversified, Global Manufacturer Chief Executive Officer Navistar International Corporation of Glass, Protective Coatings Robert C. Lannert Committees: 1 [Chair] and Chemicals Executive Vice President and William F. Andrews Committees: 1, 2 [Chair], 3 Chief Financial Officer Chairman Dr. Abbie J. Griffin Robert A. Boardman Scovill Fasteners, Inc. Professor of Business Administration Senior Vice President and Manufacturers of Apparel and University of Illinois, General Counsel Industrial Fasteners Urbana-Champaign and Chairman Committees: 3, 4 Thomas M. Hough Northwestern Steel and Wire Company Vice President and Treasurer Manufacturer of Steel Rods, Michael N. Hammes Wires and Beams Chairman and Chief Executive Officer Mark T. Schwetschenau Committees: 1, 2, 3 [Chair] Guide Corporation Vice President and Controller

Automotive Supplier of Steven K. Covey Y. Marc Belton Lighting Systems Corporate Secretary Senior Vice President Committees: 2, 3 General Mills Inc. President, Big G Division Allen J. Krowe Committees: Leading Manufacturer of Consumer Retired Vice Chairman 1. Executive Food Products Texaco, Inc. 2. Compensation and Governance Committees: 2, 4 Global Energy Company 3. Finance Committees: 1, 3, 4 [Chair] 4. Audit John D. Correnti Chairman and Chief Executive Officer Robert C. Lannert Birmingham Steel Corporation Executive Vice President and Steel Manufacturer Chief Financial Officer Committees: 2, 4 Navistar International Corporation

William F. Patient Retired Chairman of the Board and Chief Executive Officer The Geon Company Manufacturer of Polyvinyl Chloride (PVC) Resins and Compounds Committees: 2, 4 Navistar International Corporation 455 North Cityfront Plaza Drive Chicago, Illinois 60611

PR427