EXHIBIT 10.34 THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AMENDED AND RESTATED NAVISTAR INTERNATIONAL CORPORATION STOCK OWNERSHIP PROGRAM (Effective as of October 15, 2002) INTRODUCTION On June 16, 1997, the Board of Directors (the "Board") of Navistar International Corporation (the "Company") approved the terms of the Stock Ownership Program, and on April 17, 2001 and October 15, 2002, the Board approved certain amendments thereto (as amended, the "Program") in which all officers and senior managers in Pay Levels 9-12 (the "Participants") will participate. The Program will require you to make a substantial investment in the common stock of the Company. This memorandum describes the terms of the Program. Senior management and the Board believe that, in order for the Company to become the best truck and engine company in North America, senior management of the Company must have a significant ownership stake in the Company. The Program requires you and every other member of senior management to acquire such an ownership stake, and to do so promptly. The goal of the Program is to secure your individual commitment to the management team that intends to implement the vision for the Company and our shareholders, by requiring you to make an "at risk" investment of personal funds as well as career success in the Company. In this way, the Program will reinforce the behavior of every member of senior management to act like an owner. In connection with the adoption of the Program, the Board also approved certain changes to the executive severance agreements that the Company enters into with Officers and Senior Managers. The new terms of the severance agreement enhance your protection in the event of termination of employment or a change in control of the Company. In this way, the Company is making a greater commitment to you at the same time as you are making a greater commitment to the Company. THE STOCK OWNERSHIP REQUIREMENT Mandatory Ownership Requirement. The Program imposes a mandatory requirement that you own a specified amount of the Company's common stock, $0.10 par value per share ("Stock"). Failure to continuously own the required amounts of Stock at the times required under the Program will constitute grounds for termination of your employment with the Company and its subsidiaries. Required Levels of Stock Ownership. Under the Program, you will be required to own a number of shares calculated by reference to your salary, a multiplier assigned to your pay level, and the average of the high and low prices of Stock (rounded down to the nearest dollar) on the date the Program became effective, June 16, 1997 (the "Effective Date"), which was $17.00 per share. The actual number of shares you will be required to own under the Program (the "Ownership Requirement") will be specified in Exhibit A, which will be sent to you under separate cover. E-10 EXHIBIT 10.34 (continued) Your Ownership Requirement will not vary with changes in the market price of Stock during the life of the Program, subject to the Board's right of review. Nor will your Ownership Requirement change if your salary is increased or decreased but you remain in the same Pay Level. Unless otherwise determined by the Board, in the event you are promoted to a higher Pay Level after you become subject to the Program, you will become subject to the Ownership Requirement applicable to that Pay Level, based on your then-current base salary. The additional number of shares needed to meet your new Ownership Requirement will be calculated based on the average of the high and low prices of Stock (rounded down to the nearest dollar) on the date of your promotion (net of the dollar amount associated with your original Ownership Requirement using the average of the high and low prices of Stock (rounded down to the nearest dollar) on the date you became subject to the Program). For example, assume a Participant in Pay Level 10 is required to own 13,235 shares based on a $150,000 salary, a multiplier of 1.5 times his salary and a $17.00 market price on the Effective Date. Further assume that the Participant is promoted to Pay Level 11 at a salary of $200,000 when the market price of the Stock on his date of promotion is $20. The additional number of shares needed to satisfy his new Ownership Requirement is 11,250, calculated as follows: Level 10: 150,000 Salary x 1.5 Pay Level Multiplier 225,000 Divided by 17.00 = 13,235* Original Ownership Requirement ====== Level 11: 200,000 Salary x 2.25 Pay Level Multiplier 450,000 -224,995 (17.00 x 13,235) 225,005 Divided by 20.00 = 11,250* Additional Ownership Requirement ====== *Rounded down to the nearest number of whole shares. In the case of a person who becomes subject to the Program after the Effective Date (i.e., is promoted to Pay Level 9 or above or newly hired at Pay Level 9 or above), the Ownership Requirement for that person's salary and Pay Level will apply based upon the average of the high and low prices of Stock (rounded down to the nearest dollar) on the date he or she becomes subject to the Program. The Board intends to review the Ownership Requirements every three years, but reserves the right to adjust the Ownership Requirements at any time in its sole discretion to reflect, among other things, market conditions and the Company's ongoing executive compensation programs. Time to Meet Ownership Requirement. The Ownership Requirement will be phased in, so that you will be required to own shares representing: (i) one-fifth of your Ownership Requirement (the "Initial Ownership Requirement") by the 60th day after the date you become subject to the Program (the "1st Tranche Deadline"); E-11 EXHIBIT 10.34 (continued) (ii) three-fifths of your Ownership Requirement (the "Second Ownership Requirement") by 36 months after the date you become subject to the Program (the "2nd Tranche Deadline"); and (iii) the full amount of your Ownership Requirement (the "Final Ownership Requirement") by 60 months after the date you become subject to the Program (the "Ownership Deadline"). In the case of any promoted or newly hired member of management, any additional or new Ownership Requirement will be phased in so that one-fifth of such additional or new Ownership Requirement must be met on the 60th day after the promotion or hiring, three-fifths after 36 months, and in full after 60 months. Deadlines applicable to any original Ownership Requirement will not be altered. Restriction on Sales or Dispositions of Stock. Once your Ownership Requirement is met, you must continue to own sufficient Stock to meet the Ownership Requirement until the Ownership Requirement lapses (as discussed below) or the Program is terminated. The Program is indefinite in duration, although it may be terminated or modified at any time by the Board. Under the Program, you may not sell or dispose of any shares of Stock that you own (as determined under the Program) at any time that you have not met the full Ownership Requirement, or to the extent the sale or disposition would cause your ownership to fall below your Ownership Requirement. This means that, for example, even if you own shares in excess of one-fifth of your Ownership Requirement between the 1st Tranche Deadline and the 2nd Tranche Deadline, you could not sell such excess shares. You can only sell shares if you have met your full Ownership Requirement. As stated above, the sale or disposition of shares in violation of the Program's requirements will constitute grounds for termination of employment. The Program does not impose a legal restriction on the transferability of the shares (other than Deferred Shares and Premium Shares, discussed below), but imposes the potential penalty of termination (and forfeiture of Deferred Shares and Premium Shares, as discussed below). Thus, it is up to you to ensure that shares subject to the Program are not sold. The Program does not prohibit a pledge of shares as security for a loan, but if the shares are disposed of as a result of such pledge (for example, due to a default by you on such loan), such disposition will constitute grounds for termination of employment under the Program. Short positions and "put equivalent" derivative securities positions will be deemed dispositions for purposes of the Program. If you are an officer of the Company subject to the reporting and short-swing profits liability provisions of Section 16 of the Securities Exchange Act of 1934, any purchases you make in the open market in order to meet your Ownership Requirement will be non-exempt transactions, which could potentially be matched with any sale within less than six months before the purchase or six months after the purchase to yield short-swing profits liability. E-12 EXHIBIT 10.34 (continued) All purchases and sales of Stock in the market are subject to federal and state laws prohibiting transactions while in possession of certain material non-public information, and to Company Policies prohibiting trading on the basis of material non-public information. Under the Company's policies, you are required to pre-clear any transaction with the Company's General Counsel or Corporate Secretary. All shares purchased or sold must be reported to the Office of the Secretary on Exhibit B. Shares Deemed Owned Under the Program. Shares of Stock that count toward meeting your Ownership Requirement are shares in which you have an exclusive pecuniary interest, and shares in which you and members of your immediate family have an exclusive pecuniary interest if such members have consented to such shares being deemed owned by you for purposes of the Program. This would include shares of Stock owned directly by you, either in record name or in a brokerage account, shares owned by you as a participant in the Company's 401(k) Retirement Savings Plan, shares acquired under the share purchase features of the Program, including units representing Deferred Shares and Premium Shares acquired under the Program (discussed below), and shares or share units under any other plan or program of the Company or any subsidiary if and to the extent so designated by the administrator of the Program. In addition, shares of restricted Stock held under any Company plan under which the vesting conditions are not dependent upon the achievement of a performance goal will count toward meeting your Ownership Requirements; provided, however, that in the event you have irrevocably elected stock withholding in connection with an award of such restricted Stock, the number of such shares that count toward meeting your Ownership Requirements will be reduced to the net number of such shares remaining after applying a 44.5% rate of withholding (rounded down to the nearest whole share). On the other hand, shares of restricted Stock held under any Company plan that may or may not vest depending on the achievement of a performance goal will not be deemed to be owned by you until such time as such shares have become vested, and shares which may be acquired upon exercise of an option (whether or not then exercisable) will not be deemed owned by you until such option is duly exercised. In this regard, the surrender or withholding of shares of Stock to pay the exercise price or tax withholding with respect to an option or vesting of restricted Stock will not be deemed a sale or disposition of such shares for purposes of the Program. Shares in which any other person (other than an immediate family member if such member has consented as aforesaid) has a pecuniary interest will not be deemed to be owned by you for purposes of the Program, and will not be subject to restrictions on sale or disposition. Lapse of Ownership Requirement; Change in Control. Your Ownership Requirement will lapse upon your termination of employment for any reason. In addition, all Ownership Requirements lapse upon a Change in Control. For purposes of the Program, a "Change in Control" will be deemed to have occurred if (i) any "person" or "group" (as such terms are used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934), other than employee or retiree benefit plans or trusts sponsored or established by the Company or International Truck and Engine Corporation ("International"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) the following individuals cease for any reason to constitute more than three-fourths of the number of directors then serving on the Board: individuals who, on the E-13 EXHIBIT 10.34 (continued) date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved by the vote of at least two-thirds (2/3) of the directors then still in office or whose appointment, election or nomination was previously so approved or recommended; (iii) any dissolution or liquidation of the Company or International or sale or disposition of all or substantially all (more than 50%) of the assets of the Company or of International occurs; or (iv) as the result of, or in connection with, any cash tender offer, exchange offer, merger or other business combination, sale of assets, proxy or consent solicitation, contested election or substantial stock accumulation (a "Control Transaction"), the members of the Board immediately prior to the first public announcement relating to such Control Transaction shall immediately thereafter, or within two years, cease to constitute a majority of the Board. Notwithstanding the foregoing, the sale or disposition of any or all of the assets or stock of Navistar Financial Corporation shall not be deemed a Change in Control. Ownership Reporting and Certification. Participants will be required to periodically file reports as to their ownership of shares of Stock under the Program, including purchases, sales or dispositions of Stock. ACQUISITIONS OF SHARES UNDER THE PROGRAM Overview. The Program includes a number of features to enable Participants to acquire shares, as well as features to encourage Participants to make a substantial and prompt commitment to meeting their Ownership Requirements. Company Loans To Meet Ownership Requirements. In accordance with Section 402 of the Sarbanes-Oxley Act of 2002, effective July 30, 2002, the Company will no longer extend or arrange for credit to Participants to assist them in meeting their Ownership Requirements. Any loans extended to Participants to assist them in meeting their Ownership Requirements prior to July 30, 2002 will be grand-fathered and remain in effect in accordance with the terms and conditions as contained in their promissory note. Acquisitions From the Company. The Program provides for acquisitions of shares of Stock from the Company, by purchase and through the crediting of units representing shares as an incentive to Participants to promptly acquire shares to meet their Ownership Requirements. A Participant may acquire shares from the Company as follows: o Salary Reduction. Up to four-fifths of your Ownership Requirement may be satisfied by salary reduction. You may purchase units representing shares ("Deferred Shares") by electing to have your salary reduced, on a pre-tax basis, over any period up to five years. You may elect to apply an amount between 10% and 50% of your future monthly salary to such purchases. Your election must be made within 30 days after becoming subject to the Program, or if you are already participating in the Program, your election to purchase Deferred Shares through salary reduction must be made at least 6 months in advance of the date your salary reduction is to begin. In the event of a promotion in Pay Level that results in an increase in your Ownership Requirement, you may increase an existing salary E-14 EXHIBIT 10.34 (continued) reduction election, or make a salary reduction election if there is not one currently in effect, within 20 days of your being notified of the promotional increase. If you make a salary reduction election, you will acquire Deferred Shares at the date your salary reduction would otherwise have been paid to you in an amount determined by dividing (i) the amount of the salary reduction to be applied to the purchase by (ii) the average of the high and low prices of a share of Stock as set forth in the New York Stock Exchange Composite Transactions listing published in the Wall Street Journal or equivalent financial publication (the "Fair Market Value") on the date your salary reduction would have been otherwise payable (or if that date is not a trading day, on the most recent previous trading date). Deferred Shares acquired through the application of your salary reduction will vest immediately, but vested Deferred Shares generally will not be settled by delivery of actual Stock until your termination of employment (as described below). You may terminate your election with respect to any future salary reduction that has not yet been applied to acquire Deferred Shares by giving six months advance notice to the Company. o Annual Incentive Payouts. You may purchase Deferred Shares by electing to have a portion of future annual incentive payments to which you may become entitled under any plan of the Company applied, on a pre-tax basis, to such purchases. You may elect to apply an amount between 50% and 100% of your future annual incentives to such purchases. Your election may be made on an annual basis and must be made prior to January 1st of each fiscal year. If you make this election, you will acquire Deferred Shares at the date an annual incentive payment would otherwise be made to you in an amount determined by dividing the amount of the annual incentive to be applied to the purchase by the Fair Market Value of Deferred Shares at the date the annual incentive would have been otherwise payable. Deferred Shares acquired through the application of annual incentive payouts will vest immediately, but vested Deferred Shares generally will not be settled by delivery of actual Stock until your termination of employment (as described below). o Premium Shares. Units representing shares ("Premium Shares") will be credited to an account for the Participant as a reward for certain acquisitions of shares, as follows: - - To the extent any shares comprising your Initial Ownership Requirement consist of restricted Stock awarded by the Company or are purchased on or before the 60th day after you become subject to the Program in the open market or from the Company (including by exercise of options or Deferred Shares acquired by salary reduction) using personal funds or funds obtained from a source other than the Company, you will be credited (as of the 60th day after you become subject to the Program) with a number of Premium Shares equal to 15% of such shares. To the extent any shares comprising your Second Ownership Requirement (less your Initial Ownership Requirement) consist of restricted Stock awarded by the Company or are purchased on or before the 18th month after the date you become subject to the Program in the open market or from the Company (including by exercise of options or Deferred Shares acquired by salary reduction but excluding Deferred Shares acquired by elective deferral of annual incentive payments and all Premium Shares), you will be credited (as of the 18th month after the date you become subject to the Program) with a number of Premium Shares equal to 25% of such shares. To the extent any shares comprising your Final Ownership E-15 EXHIBIT 10.34 (continued) Requirement (less your Second Ownership Requirement) consist of restricted Stock awarded by the Company or are purchased on or before the 36th month after the date you become subject to the Program, in the open market or from the Company (including by exercise of options or Deferred Shares acquired by salary reduction or elective deferral of annual incentive payments, but excluding all Premium Shares), you will be credited (as of the 18th month after the date you become subject to the Program) with a number of Premium Shares equal to 25% of such shares. - - Deferred Shares acquired by salary reduction will be counted as shares owned by the Participant for purposes of determining a Participant's eligibility to earn Premium Shares. - - If you acquire Deferred Shares as a result of your election to apply 50% of any future annual incentive payment toward their purchase, you will be credited with a number of Premium Shares equal to 5% of the number of Deferred Shares so acquired; if you acquire Deferred Shares as a result of your election to apply 100% of any future annual incentive payment toward their purchase, you will be credited with a number of Premium Shares equal to 15% of the number of Deferred Shares so acquired; and if you acquire Deferred Shares as a result of your election to apply more than 50% but less than 100% of any future annual incentive payment toward their purchase, you will be credited with a number of Premium Shares determined by interpolating on a straight-line basis between 5% and 15% of the number of Deferred Shares so acquired. Premium Shares credited to you in connection with an annual incentive will be credited as of the date the annual incentive would have been otherwise payable. Terms of Deferred Shares and Premium Shares. Deferred Shares and Premium Shares will be credited to a Participant's account in whole shares (rounded down to the nearest whole number). For each such Deferred or Premium Share credited to a Participant's account on a record date for a dividend, a dollar amount will be paid to the Participant at the dividend payment date equal to the amount of dividends paid on one share; provided, however, that the Committee on Compensation and Governance may require any extraordinary dividend to be deemed reinvested in additional Deferred Shares or Premium Shares (as the case may be) at the Fair Market Value of shares at the dividend payment date. Deferred Shares and Premium Shares may not be transferred or disposed of by a Participant. All Premium Shares are forfeitable until such time as they have vested. In the event the Committee on Compensation and Governance elects to require an extraordinary dividend to be deemed reinvested in additional Deferred Shares or Premium Shares, such Deferred Shares and Premium Shares acquired through dividend reinvestment on unvested Deferred Shares and unvested Premium Shares ("Original Shares") will vest at the times and in proportion to the vesting of the Original Shares. Deferred Shares and Premium Shares acquired through dividend reinvestment on vested Deferred Shares and vested Premium Shares will be immediately vested. Deferred Shares acquired by application of salary reduction or by application of annual incentive payments are fully vested (i.e., non-forfeitable) at all times. E-16 EXHIBIT 10.34 (continued) Except as described above with respect to extraordinary dividends deemed to be reinvested in additional Premium Shares, Premium Shares vest in equal installments on each of the first three anniversaries of the date on which they are credited, or earlier upon the occurrence of a Change in Control or termination of employment due to death, disability, or retirement approved in advance by the Committee on Compensation and Governance. In the event a Participant's employment with the Company or its subsidiaries terminates for any reason, any unvested Deferred Shares and unvested Premium Shares shall be immediately forfeited. In addition, in the event a Participant sells or otherwise disposes of other purchased shares in respect of which Premium Shares were credited, all of the Participant's unvested Premium Shares shall be immediately forfeited. A Participant shall not be treated as having sold or otherwise disposed of purchased shares in respect of which Premium Shares were credited unless he or she has sold or disposed of shares in excess of the number of his or her shares in respect of which no Premium Shares were credited. Each vested Deferred Share and each vested Premium Share will be settled by delivery of one share of Stock. Such settlement shall occur within ten days after a Participant's termination of employment (or, in the case of a Participant who retires, such later date as may have been elected by a Participant under procedures approved by the Program administrator); provided, however, that settlement shall be accelerated to the date immediately prior to a Change in Control (subject to any deferral of settlement as may have been elected by a Participant under procedures approved by the Program administrator). Deferred Shares and Premium Shares will be appropriately adjusted by the Board in the event of stock splits, stock dividends and other extraordinary, special, and non-recurring dividends, and other extraordinary corporate events. Right to Put Shares to the Company. A Participant under the Program has the right, in the event of a Change in Control by action of the UAW or the Supplementary Trust, to "put" to the Company any shares of Stock acquired by the Participant on and after the date such Participant becomes subject to the Program (other than Premium Shares) and owned under the Program immediately prior to the Change in Control, on the following terms and conditions (the "Put Right"). The Put Right represents a right of the Participant to sell, and an obligation of the Company to buy, each share of Stock (other than a Premium Share) acquired under the Program, exercisable by the Participant during a period of 30 days following such Change in Control (as defined above). The purchase price ("strike price")payable by the Company to the Participant for each share to be sold to the Company upon a Participant's exercise of the Put Right shall equal the amount paid per share by the Participant; provided, however, that if the Participant exercises the Put Right as to all shares purchased with a loan from the Company under the Program, the purchase price for such shares shall be deemed to be the greater of the aggregate purchase price of such shares or the unpaid balance (principal plus accrued interest) on the loan, and such purchase price shall be applied to the repayment in full of such unpaid loan balance (with any remaining amount paid to the Participant together with interest thereon as specified in their promissory note). The Participant may exercise the Put Right as to all or less than all of the shares subject to the Put Right, and shall identify such shares in a manner sufficient to identify the original purchase price of the shares as to which the Put Right is exercised. E-17 EXHIBIT 10.34 (continued) Notwithstanding the Company's power to terminate or amend the Program, the Company may not terminate or amend the Put Right following a Change in Control in a manner adverse to a Participant without his or her written consent. MARKET PRICE RANGE For the three years ending December 31, 2001, the high and low sales price for the Company's Stock for the periods indicated was as follows: Stock Price Year Ending High Low December 31, 2001 $ 41.20 $ 21.78 December 31, 2000 $ 48.00 $ 18.25 December 31, 1999 $ 56.25 $ 27.13 Prior to investing in the Stock, Participants are encouraged to obtain current information concerning the price of the Stock: RISK FACTORS OWNERSHIP OF THE STOCK INVOLVES CERTAIN RISKS. PARTICIPANTS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS WELL AS OTHER INFORMATION INCLUDED IN THIS MEMORANDUM BEFORE MAKING AN INVESTMENT IN THE STOCK OFFERED BY THE PROGRAM. The Company's Profitability Could Suffer Due to the Considerable Volatility of the Markets in Which It Competes The Company's ability to be profitable depends in part on the varying conditions in the medium truck, heavy truck, severe service vehicles, school bus, mid-range diesel engine and service parts markets. The markets in which the Company competes is subject to considerable volatility. Such markets move in response to cycles in the overall business environment and are particularly sensitive to the industrial sector, which generates a significant portion of the freight tonnage hauled. Truck and engine demand also depend on general economic conditions, interest rate levels and fuel costs. The Company Operates in the Highly Competitive North American Truck Market, Which May Require It to Discount Its Prices, Thereby Lowering the Company's Margins The North American truck market in which the Company competes is highly competitive. The Company's major U.S. domestic competitors include PACCAR, Ford and General Motors Corporation, as well as foreign-controlled domestic manufacturers, such as Freightliner (Daimler Chrysler), Sterling (Daimler Chrysler) and Mack/Volvo. In addition, manufacturers from Japan such as Hino (Toyota), Isuzu, Nissan and Mitsubishi, are attempting to increase their North American sales levels. The intensity of this competition, which is expected to continue, results in price discounting and margin pressures throughout the industry and adversely affects the Company's ability to increase or maintain vehicle prices. Many of the Company's competitors have greater financial resources than it, which may place the E-18 EXHIBIT 10.34 (continued) Company at a competitive disadvantage in responding to substantial industry changes. These industry changes may include changes in governmental regulations that require major additional capital expenditures. In addition, certain of the Company's competitors may have lower overall labor costs. The Company's Business May be Adversely Impacted by Work Stoppages and Other Labor Relations Matters The Company is subject to risk of work stoppages and other labor relations matters because its workforce is highly unionized. Any prolonged work stoppage or strike at any one of the Company's principal manufacturing facilities could have a negative impact on its business, financial condition and results of operations. The Loss of Ford, the Company's Largest Customer, Would Have a Negative Impact on the Company's Business, Financial Condition and Results of Operations Ford accounted for approximately 21% of Company revenues during fiscal 2001, 18% for fiscal 2000 and 17% for fiscal 1999. In addition, Ford accounted for approximately 82%, 76% and 75% of Company diesel engine unit volume in fiscal 2001, fiscal 2000 and fiscal 1999, respectively. Although the Company has agreements with Ford that continue through 2012, these agreements provide that it will supply Ford's requirements for particular models, rather than for manufacturing a specific quantity of products. The loss of Ford as a customer or a significant decrease in demand for the models or a group of related models that utilize Company products would have a negative impact on the Company's business, financial condition and results of operations. The Failure to Meet the Company's Future Capital Requirements Would Hinder Company Product Development Initiatives The Company's current product development initiatives, including its next generation vehicle, or NGV, and next generation diesel engine, or NGD, programs, will require significant capital to fund development activities and capital expenditures. Historically, the Company has relied on cash balances, cash provided by operations and borrowings to meet the Company's funding requirements. The amount of cash generated by Company business varies with industry volumes in the medium and heavy truck markets. No assurance can be given that the Company will have the cash balances necessary to implement the NGV or NGD programs and to meet its other capital requirements or that financing will be available or, if available, that it will be available on satisfactory terms. The future availability of financing will depend on many factors, including the Company's earnings, credit ratings, the outlook for truck industry demand and the capital resources of financial institutions. In addition, restrictive covenants in the Company's financing agreements may limit how much debt financing it can raise, and a need to preserve its net operating losses may limit our ability to raise equity financing. If adequate funds are not available, the Company may be required to cut back or discontinue its product development or capital improvement programs. E-19 EXHIBIT 10.34 (continued) The Costs Associated With Complying With Environmental and Safety Regulations Could Lower the Company's Margins Truck and engine manufacturers continue to face heavy governmental regulation of their products, especially in the areas of environment and safety. As a diesel engine manufacturer, the Company has incurred research, development and tooling costs to design its engine product lines to meet new United States Environmental Protection Agency, or EPA, and California Air Resources Board, or CARB, emission standards. In addition, the Company expects to continue to incur research, design and tooling costs to achieve further reductions in ozone-causing exhaust emissions by 2004 in accordance with the settlement agreement the Company entered into with the EPA and CARB . The Company expects that its diesel engines will be able to meet all of these standards within the required time frames. Truck manufacturers also are subject to various noise standards imposed by federal, state and local regulations, and to the National Traffic and Motor Vehicle Safety Act and Federal Motor Vehicle Safety Standards promulgated by the National Highway Traffic Safety Administration. Complying with such laws and regulations has added and will continue to add to the cost of Company products, and increases the capital-intensive nature of the Company's business. If the present level of price competition continues, it may become increasingly difficult for manufacturers of engines and trucks to recover these costs and, accordingly, lower margins may result. The Company Has Significant Underfunded Postretirement Obligations The Company has significant underfunded postretirement obligations. In the event the Company's pension plans are terminated for any reason and plan assets are insufficient to meet guaranteed liabilities, the Pension Benefit Guaranty Corporation, or PBGC, may have a right to take over these plans as their administrator and trustee. In this event, the actual present value of guaranteed pension liabilities may be determined in a manner different from that used by the Company to determine its unfunded vested pension liability, which determinations could result in a higher level of underfunding. Subject to certain limitations, the PBGC would have a claim against the Company to the extent that plan assets were not sufficient to meet the actuarial present value of guaranteed liabilities. The Company's Ability to Use Net Operating Loss Carryovers to Reduce Future Tax Payments may be Limited if There is a Change in Ownership of the Company Currently there is no annual limitation on the Company's ability to use NOLs to reduce future income taxes. However, if an ownership change as defined in Section 382 of the Internal Revenue Code of 1986, as amended, occurs with respect to the Company's capital stock, its ability to use NOLs would be limited to specific annual amounts. Generally, an ownership change occurs if certain persons or groups increase their aggregate ownership by more than 50 percentage points of our total capital stock in any three-year period. If an ownership change occurs, the Company's ability to use domestic NOLs to reduce income taxes is limited to an annual amount based on the Company's fair market value immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate. The long-term tax-exempt E-20 EXHIBIT 10.34 (continued) interest rate is published monthly by the Internal Revenue Service. NOLs that exceed the Section 382 limitation in any year continue to be allowed as carryforwards for the remainder of the 15- or 20-year carryforward period and can be used to offset taxable income for years within the carryover period subject to the limitation in each year. The Company's use of new NOLs arising after the date of an ownership change would not be affected. It is impossible for us to ensure that an ownership change will not occur in the future. In addition, the Company may decide in the future that it is necessary or in its interest to take certain actions, which result in an ownership change. If a more than 50% ownership change were to occur, use of the Company's NOLs to reduce payments of federal income tax may be deferred to later years within the 15- or 20-year carryover period, or, if the carryover period for any loss year expires, the use of the remaining NOLs for the loss year will be prohibited. Anti-takeover Effect of Certain Charter and Statutory Provisions The Company's certificate of incorporation provides that the affirmative vote of holders of the greater of (a) a majority of the voting power of all common stock or (b) at least 85% of the shares of common stock present at a meeting is required to approve certain mergers and consolidations or a sale of all or substantially all of the Company's assets, or a supermajority transaction. Accordingly, any holder of 15% or more of the aggregate outstanding common stock represented at any meeting of shareowners will be able to block any supermajority transaction. The Company's certificate of incorporation and by-laws also contain provisions which (1) permit the Company to issue so-called "flexible" preferred stock, (2) provide for a classified board of directors (which has the effect under Delaware law of precluding shareowners from removing directors without cause), (3) limit the filling of board vacancies to the remaining directors, and (4) prohibit shareowners from taking action by written consent or calling special meetings. The Company also is subject to Section 203 of the Delaware General Corporation Law, or DGCL, which restricts it from engaging in certain business combinations with "interested stockholders." The fact that the Company's utilization of its net operating losses could be adversely affected by a change of control also could have an anti-takeover effect. Although not intended, the foregoing provisions may adversely affect the marketability of the common stock by discouraging potential investors from acquiring stock of the Company. In addition, these provisions could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving the Company, or impede an attempt to acquire a significant or controlling interest in the Company, even if such events might be beneficial to the Company and its shareowners. Possible Volatility of the Company Share Price Increases the Risk of Your Investment Numerous factors may significantly affect the market price for the Company's common stock. Such factors include the announcement of new products or other strategic initiatives by the Company or its competitors, technological innovations by the Company or its competitors, the growth and expansion of the Company's business, trends and uncertainties affecting the truck manufacturing industry as a whole, issuances and repurchases of common stock, quarterly variations in the Company's operating results or the operating results of the Company's competitors, investors' expectations of the Company's prospects, changes in earnings estimates by analysts or reported results that vary materially from such E-21 EXHIBIT 10.34 (continued) estimates and general economic and other conditions, including the cyclical nature of the Company's business. In addition, in recent years the stock market has experienced extreme price fluctuations. This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the common stock. FEDERAL INCOME TAX CONSEQUENCES Shares purchased in the open market or from the Company under the Program with personal funds or the proceeds of a loan, which are held in the form of actual shares, will represent share ownership by the Participant, so that gains or losses realized upon the ultimate disposition of such shares will be capital gains or losses to the Participant. Deferred Shares and Premium Shares will be rights acquired on a pre-tax basis, so that their settlement by issuance and delivery of shares will result in ordinary income to the Participant equal to the then-fair market value of the shares delivered. Employment taxes (FICA and Medicare) will be due and payable when Deferred Shares and Premium Shares vest, even though income tax liability will be deferred until shares are delivered. Interest on a Company loan will be treated as "investment interest" and will be deductible by a Participant when paid, subject to the limitations applicable to "investment interest." Deloitte & Touche LLP has rendered an opinion that the exercise of a Put Right will not result in a Participant's recognition of income, gain or loss to the extent the amount paid by the Company equals the amount paid per share by the Participant. The foregoing is a general summary of certain Federal income tax consequences. Participants are urged to consult their personal tax advisors regarding the tax consequences of their participation in the Program. OTHER INFORMATION Administrator. The Program is administered by the Company's Senior Vice President, Human Resources and Administration. Program Not Otherwise Tax-Qualified or Subject to ERISA. The Program is not qualified under Code Section 401(a) and is intended to qualify for the "top hat" exemption from the requirements of the Employee Retirement Income Security Act of 1974, as amended. Registration: Additional Information. On June 16, 1997, the Company filed a registration statement on Form S-8 (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") registering under the Securities Act of 1933, as amended (the "Securities Act"), the offer and sale of up to 650,000 shares in connection with the Program. Certain documents filed by the Company with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), before the Company filed the Registration Statement, including the Company's then-most recent Annual Report on Form 10-K, as well as periodic reports, current reports, and proxy statements filed after the date of such Registration Statement, are E-22 EXHIBIT 10.34 (continued) incorporated by reference into the Registration Statement. These documents are also incorporated by reference into this memorandum and form part of the prospectus for the Program under the Registration Statement. The Company may from time to time update this memorandum to reflect material changes relating to the Program. Such updated information, which will be delivered to Officers and Senior Managers subject to the Program, should be read in conjunction with this memorandum and the other documents that form part of the prospectus for the Program, except to the extent that statements in this memorandum and the other documents have been modified or superseded by statements in a subsequent memorandum or other document forming part of the prospectus for the Program. The Company will provide without charge to each person subject to the Program, upon the written or oral request of such person, a copy of any or all of the documents incorporated by reference herein (except that exhibits to such documents will not be provided without charge unless such exhibits are specifically incorporated by reference into such documents), a copy of any or all other documents constituting part of the prospectus for the Program previously delivered to such person, and a copy of any or all other documents required to be delivered to such persons by SEC rules. Such requests, and requests for additional information about the Program and its administrator, should be directed to: Navistar International Corporation 4201 Winfield Road Warrenville, Illinois 60555 (630) 753-2149 The Company will deliver to each person to whom offers and sales are made under the Program, who otherwise does not receive such material, copies of all future reports, proxy statements, and other communications distributed to its shareowners, generally no later than the time such material is sent to shareowners. E-23
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10-K Filing
Navistar International (NAV) 10-K2002 FY Annual report
Filed: 13 Dec 02, 12:00am