**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

# **FORM 10-K**

# ** **

**FOR ANNUAL AND TRANSITION REPORTS**

**PURSUANT TO SECTIONS 13 OR 15(d) OFTHE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**(Mark One)**

**ý****    ****ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31,2005**

 

**OR**

 

**o****    ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For transition period from                     to                     **

 

**Commission File No. 0-12553**

 

**PACCAR FINANCIAL CORP.**

(Exact name of Registrant as specified in itscharter)

 
| **Washington**                                   | ** ** | **91-6029712**                        |
|--------------------------------------------------|------------|---------------------------------------|
| (State of incorporation)                         |       | (I.R.S. Employer  Identification No.) |
|                                             |       |                                  |
| **777 106th Avenue  N.E., Bellevue, Washington** | ** ** | **98004**                             |
| (Address of principal  executive offices)        |       | (Zip Code)                            |

 

**(425) 468-7100**

(Registrant’s telephone number, including areacode)

 

Securities registered pursuant to Section 12(b) ofthe Act:

 
| **Title of Each Class**            | ** ** | **Name of Each Exchange on Which  Registered** |
|------------------------------------|------------|------------------------------------------------|
|                               |       |                                           |
| Series J Medium-Term  Notes   |       |                                           |
| $50 Million Due May 12,  2006 |       | New York Stock Exchange                        |

 

Securities registered pursuant to Section 12(g) ofthe Act:

 

**None**

(Title of Class)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes: ý No:o

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes: o No: ý

 

Note-Checking the mark above will not relieve any registrant required to file reportspursuant to Section 13 or Section 15(d) of the Exchange Act fromtheir obligations under those sections.

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter periods that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.            Yes:ý   No: o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K.   ý

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer: o |   | Accelerated filer: o |   | Non-accelerated filer: ý |
|---------------------------------|--------|---------------------------|--------|------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12(b)-2of the Act).       Yes: o   No: ý

 

Theaggregate market value of the voting stock held by non-affiliates of theregistrant as of June 30, 2005:  **None**

 

Thenumber of shares outstanding of the registrant’s classes of common stock as of January 31,2006:

 

###### Common Stock,$100 par value — 145,000 shares

 

THEREGISTRANT IS A WHOLLY-OWNED INDIRECT SUBSIDIARY OF PACCAR INC AND MEETS THECONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I) (1) (a) AND (b) OFFORM 10-K AND IS, THEREFORE, FILING THIS FORM WITH THE REDUCEDDISCLOSURE FORMAT.

 

 

----

 

**PACCARFinancial Corp.**

 

**INDEX**

 
| **PART I**   |                                                                                                                |       |       |
|-------------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
|              |                                                                                                                |       |       |
| **Item 1.**       | **Business**                                                                                                        | ** ** | ** ** |
| **Item 1A.**      | **Risk Factors**                                                                                                    | ** ** | ** ** |
| Item 2.           | Properties                                                                                                          |       |       |
| Item 3.           | Legal Proceedings                                                                                                   |       |       |
| Item 4.           | Submission of Matters to a  Vote of Security Holders                                                                |       |       |
|              |                                                                                                                |       |       |
| **PART II**  |                                                                                                                |       |       |
|              |                                                                                                                |       |       |
| Item 5.           | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities |       |       |
| Item 6.           | Selected Financial Data                                                                                             |       |       |
| Item 7.           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                         |       |       |
| Item 7A.          | Quantitative and Qualitative  Disclosures about Market Risk                                                         |       |       |
| Item 8.           | Financial Statements and  Supplementary Data                                                                        |       |       |
| Item 9.           | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                               |       |       |
| Item 9A.          | Controls and  Procedures                                                                                            |       |       |
| Item 9B.          | Other Information                                                                                                   |       |       |
|              |                                                                                                                |       |       |
| **PART III** |                                                                                                                |       |       |
|              |                                                                                                                |       |       |
| Item 10.          | Directors and Executive  Officers of the Registrant                                                                 |       |       |
| Item 11.          | Executive Compensation                                                                                              |       |       |
| Item 12.          | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                     |       |       |
| Item 13.          | Certain Relationships and  Related Transactions                                                                     |       |       |
| Item 14.          | Principal  Accounting Fees and Services                                                                             |       |       |
|              |                                                                                                                |       |       |
| **PART IV**  |                                                                                                                |       |       |
|              |                                                                                                                |       |       |
| Item 15.          | Exhibits,  Financial Statement Schedules                                                                            |       |       |

 

1

----

 

**PACCARFinancial Corp.**

(Millions of Dollars)

 

**PART I**

 

#### **ITEM 1 AND 1A.**    BUSINESSAND RISK FACTORS

#### ** **

## GENERAL

 

PACCAR Financial Corp.

 

PACCAR Financial Corp.(the “Company”), a Washington corporation, was organized in 1961 as awholly-owned subsidiary of PACCAR Inc (“PACCAR”) to finance the sale of PACCARproducts. In 2000, PACCAR transferred the stock of the Company to PACCARFinancial Services Corporation (“PFSC”), a wholly-owned subsidiary of PACCAR.

 

The Company principallyprovides financing and leasing of PACCAR-manufactured trucks and relatedequipment sold through PACCAR’s independent dealer network in the UnitedStates. The Company also finances dealer inventories of new and usedtransportation equipment. The Company’s PacLease division franchises PACCARdealerships to engage in full-service and finance leasing. In selected markets,PacLease directly engages in full-service leasing with its customers throughCompany-owned stores and on a limited basis through PACCAR dealerships.

 

### PACCAR

 

PACCAR has two principal industry segments, (1) design,manufacture and distribution of light-, medium- and heavy-duty trucks andrelated aftermarket distribution of parts and (2) finance and leasingservices provided to customers and dealers. PACCAR distributes trucks and partsprimarily through its independent dealer network. PACCAR’s finance and leasingactivities are principally related to PACCAR products and associated equipment.Other manufactured products include industrial winches.

 

PACCAR and its subsidiaries design andmanufacture heavy-duty diesel trucks which are marketed under the Peterbilt,Kenworth and DAF nameplates. These vehicles, which are built in four plants inthe United States, three in Europe and one each in Australia, Canada andMexico, are used worldwide for over-the-road and off-highway hauling offreight, petroleum, wood products, construction and other materials.

 

PACCAR, through its Peterbilt and KenworthDivisions, competes in the North American medium-duty (Class 6/7) marketsprimarily with conventional models. These medium-duty trucks are assembled atPACCAR’s Ste. Therese, Quebec plant and at PACCAR’s facility in Mexicali,Mexico. PACCAR competes in the European light/medium (6 to 15 metric ton)commercial vehicle market with DAF cab-over-engine trucks assembled in the UnitedKingdom by Leyland, one of PACCAR’s wholly-owned subsidiaries. Commercialtrucks and related replacement parts comprise the largest segment of PACCAR’sbusiness, accounting for 94% of total 2005 net sales and revenues.

 

Substantially all trucks and related partsare sold to independently-owned dealers. The Kenworth and Peterbilt nameplatesare marketed and distributed by separate divisions in the U.S. and a foreignsubsidiary in Canada. The Kenworth nameplate is also marketed and distributedby foreign subsidiaries in Mexico and Australia. The DAF nameplate is marketedand distributed throughout Europe and Australia by a foreign subsidiaryheadquartered in The Netherlands. A U.S. division, PACCAR International, alsomarkets all three nameplates outside each of Kenworth’s, Peterbilt’s and DAF’sprimary markets. The decision to operate as a subsidiary or as a division isincidental to Truck Segment operations and reflects legal, tax and regulatoryrequirements in the various countries where PACCAR operates.

 

Therewere three other principal competitors in the U.S. and Canada Class 8truck market in 2005. PACCAR’s share of that market was 23.1% of retail salesin 2005. PACCAR’s share of the Class 6 and 7 truck market in 2005 was9.2%.  In Europe there were five otherprincipal competitors in the commercial vehicle market in 2005, includingparent companies to two competitors of PACCAR in the United States. PACCAR’ssubsidiary, DAF, had a 13.7% share of the Western European heavy-duty marketand a 9.4% share of the light/medium market. These markets are highlycompetitive in price, quality and service, and PACCAR is not 

 

2

----

 

dependent  on any single customer for its sales. Thereare no significant seasonal variations.

 

Inaddition to the Company, which provides financing, leasing and full-servicetruck leasing in the United States, PACCAR offers similar financing programsfor PACCAR products through other wholly-owned finance companies in Mexico,Canada, Australia, the United Kingdom, The Netherlands, Belgium, Germany,France, Italy and Spain.  PACCAR alsoconducts full-service leasing operations through wholly-owned subsidiaries inCanada and Mexico.

 

PACCAR’scommon stock, $1 par value, is traded on the NASDAQ National Market under thesymbol “PCAR”. PACCAR and the Company are subject to the informationalrequirements of the Securities Exchange Act of 1934 and, in accordancetherewith, file reports and other information with the Securities and ExchangeCommission (the “Commission”). All reports, proxy statements and otherinformation filed by PACCAR and the Company with the Commission may beinspected and copied at the public reference facility maintained by theCommission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 orthrough the Commission’s internet site at www.sec.gov.

 

BUSINESS OF THE COMPANY

 

TheCompany operates primarily in one industry segment, truck and related equipmentfinancing in the United States. The Company provides financing to customers anddealers for new Kenworth and Peterbilt trucks, used trucks, truck trailers andallied equipment. The Company’s PacLease division franchises PACCAR dealershipsto engage in full-service and finance leasing. In selected markets, PacLeasedirectly engages in full-service leasing with its customers throughCompany-owned stores and on a limited basis through PACCAR dealerships.

 

TheCompany currently conducts business with most PACCAR dealers in the UnitedStates. The volume of the Company’s business is significantly affected byPACCAR’s sales of trucks to its dealers and competition from other financingsources.

 

Asof December 31, 2005, the Company employed 301 full-time employees, noneof whom are represented by a collective bargaining agent. The Company considersrelations with its employees to be good.

 

#### **RISKFACTORS**

#### ** **

The Company is exposed to certain risks anduncertainties that could have a material adverse impact to the Company’sfinancial condition and operating results, including:

 

Sales of PACCAR Products

 

The Company’s business is substantiallydependent upon the sale of PACCAR products and its ability to offer competitivefinancing in the U.S.  Changes in thevolume of sales of PACCAR products due to a variety of reasons, could impactthe level of business of the Company. Refer to the “Relationships with PACCAR and Affiliates” section inthis Business section and Note D – Transactions with PACCAR and Affiliatesfor further discussion regarding the Company’s relationship with PACCAR.

 

Credit Risk

 

Credit risk, including counterparty creditrisk in derivative transactions, is the risk of loss arising from the failureof a customer, dealer or counterparty to meet the terms of any contract withthe Company or otherwise fail to perform as agreed.  The Company may be exposed to a greater creditrisk in periods of adverse economic conditions since it becomes more difficultfor customers and dealers to perform as agreed and could also cause a decreasein the value of the Company’s collateral. Refer to the “Results of Operations” section of the MD&A, Item7A. “Quantitative and Qualitative Disclosures about Market Risk” and Note E –Derivative Financial Instruments for further discussion regarding the Company’sexposure to this risk.

 

3

----

 

Residual Value Risk

 

Residual value risk is the risk that theestimated residual value at lease origination, for the Company’s operatingleases and certain direct financing leases, will not be recoverable.  When the market value of these leased assetsat contract maturity is less than its contractual residual value, there is ahigher probability of lease returns to the Company.  This exposes the Company to greater risk ofloss at lease termination.  Refer to theCritical Accounting Policy on “Equipment on Operating Leases” in the MD&A section forfurther discussion regarding the Company’s exposure to this risk.

 

Market Risk

 

Market risk isthe risk that changes in market interest rates or prices will negatively impactthe Company’s income and capital structure. Policies governing market risk exposure are established and periodicallyreviewed by the Company’s senior management. Refer to Item 7A. “Quantitative and Qualitative Disclosures about MarketRisk” for further discussion regarding the Company’s exposure to this risk.

 

**THE COMPANY’S PRODUCTS**

 

Retail Customers

 

The Company offers thefollowing products to retail customers:

 

Retail Contracts andLoans The Company purchases contracts from dealers and receivesassignments of the contracts and a first lien security interest in the vehiclesfinanced (“Retail Contracts”). Certain Retail Contracts with third partyleasing companies may also include an assignment to the Company of the relatedlease and rental payments due. Retail Contracts purchased by the Company havefixed or floating interest rates.

 

TheCompany also makes loans to the end users of the vehicles financed that aresecured by a first lien security interest in the vehicles (“Loans”). Loans havefixed or floating interest rates.

 

Direct Financing Leases The Companyoffers direct financing lease contracts where it is treated as the owner of theequipment for tax purposes and generally retains the tax depreciation (“DirectFinancing Leases”). The lessee is responsible for the payment of property andsales taxes, licenses, maintenance and other operating items. The lessee isobligated to maintain the equipment and to insure the equipment againstcasualty and liability losses.

 

Mostof the Company’s Direct Financing Leases contain a Terminal Rental AdjustmentClause, which requires the lessee to guarantee to the Company a stated residualvalue upon disposition of the equipment at the end of the direct financinglease term.

 

Operating Leases The Companyoffers operating lease contracts (“Operating Leases”) where the Company ownsthe equipment. The lessee is responsible for the payment of property and salestaxes, licenses, maintenance and other operating items. The lessee is obligatedto maintain the equipment and to insure the equipment against casualty andliability losses.

 

Atthe end of the operating lease term, the lessee has the option to return theequipment to the Company or purchase the equipment at its fair market value.

 

Insurance The Companysells physical damage insurance through PACCAR dealers who are licensedinsurance agents as well as through licensed agents of the Company. The Companyretains the premium revenues and loss exposure for the policies, which areissued through an unrelated regulated insurance carrier.

 

TheCompany offers physical damage and liability insurance on new and used trucksand trailers to its full-service lease customers. The Company retains premiumand loss exposure for the policies that are issued through an unrelatedregulated insurance 

 

4

----

 

carrier. To limit itsexposure the Company has acquired insurance coverage for losses above specifiedlevels from a third party insurance carrier.

 

Dealers/Franchisees

 

The Company offers thefollowing products to PACCAR dealers and PacLease franchisees:

 

Master Notes Master notecontracts (“Master Notes”) are an alternative form of retail financing offeredto select dealers for new and used trucks. Retail installment contractsoriginated by the dealer for new or used trucks which  meet the Company’s requirement as to form,terms and creditworthiness for Retail Contracts are pledged to the Company ascollateral for direct, full recourse loans by the Company to the dealer. MasterNotes have fixed or floating interest rates.

 

Wholesale Contracts The Companyprovides wholesale financing for new and used truck and trailer inventories fordealers (“Wholesale Contracts”). Wholesale Contracts are secured by theinventories financed. The amount of credit extended by the Company for eachtruck is generally limited to the invoice price of new equipment and to thewholesale value of used equipment. Interest charged under Wholesale Contractsis based upon floating interest rates.

 

Dealer Loans The Companymakes secured loans to selected Peterbilt and Kenworth dealers (“Dealer Loans”).The purpose of these loans includes the financing of real estate, fixed assets,working capital and dealership acquisitions. Dealer Loans have fixed orfloating interest rates.

 

Full-Service Leasing The Companyalso conducts full-service leasing operations under the PacLease trade name.Selected dealers are franchised to provide full-service leasing, which includesthe equipment, maintenance, parts, taxes and licenses all in a combined contractwith the customer. The Company provides the franchisees with equipmentfinancing and managerial support. The Company also operates full-service leaseoutlets in selected markets on its own behalf.

 

Insurance The Companycharges a fee to provide insurance coverage, through an unrelated regulatedinsurance carrier, on new trucks, used trucks and trailer inventory to dealershaving Wholesale Contracts with the Company.

 

CUSTOMER CONCENTRATION,PAST DUE ACCOUNTS AND LOSS EXPERIENCE

 

Customer Concentration

 

The Company’s customers are concentrated in thetransportation industry throughout the United States. The Company does not havecontractual arrangements for the periods ended December 31, 2005, 2004 and2003, with any one party (customers, dealers and/or franchises) that accountfor 10% or more of total Interest and Other Revenue or Finance and LeaseReceivables.

 

Past Due Receivables andAllowance for Losses

 

Anaccount is considered past due by the Company if any portion of an installmentis due and unpaid for more than 30 days. In periods of adverse economicconditions, past due levels, repossessions and credit losses generallyincrease.

 

TheCompany maintains an allowance for losses on receivables at a level that itconsiders to be adequate to cover management’s estimates of losses inherent inthe portfolio.

 

Forfurther discussion of the allowance for losses, see “Management’s Discussionand Analysis of Financial Condition and Results of Operations.”

 

5

----

 

COMPETITION AND ECONOMICFACTORS

 

Thecommercial truck and trailer finance and leasing business is highly competitiveamong banks, commercial finance companies, captive finance companies andleasing companies. Many of these institutions have substantially greaterfinancial resources than the Company and may borrow funds at lower rates.

 

Thedealers are the primary source of contracts acquired by the Company. However,dealers are not required to obtain financing from the Company and they have avariety of other sources that may be used for wholesale and customer financingof trucks. Retail purchasers also have a variety of sources available tofinance truck purchases.

 

Theability of the Company to compete in its market is principally based on therates, terms and conditions that the Company offers dealers and retailpurchasers, as well as the specialized services it provides. Rates, terms andconditions are based on the Company’s desire to provide flexible financing andservices to satisfy dealer and customer needs, the ability of the Company toborrow funds at competitive rates and the Company’s need to earn an adequatereturn on its invested capital. The Company’s business is also affected bychanges in market interest rates, which in turn are related to general economicconditions, demand for credit, inflation and governmental policies. Seasonalityis not a significant factor in the Company’s business.

 

Thevolume of receivables available to be acquired by the Company from dealers islargely dependent upon the number of Kenworth and Peterbilt trucks sold in theUnited States. Sales of medium- and heavy-duty trucks depend on the capitalequipment requirements of the transportation industry, which in turn areinfluenced by growth and cyclical variations in the economy. Medium- andheavy-duty truck sales are also sensitive to economic factors such as fuelcosts, interest rates, insurance premiums, federal excise and highway usetaxes, taxation on the acquisition and use of capital goods, as well asgovernment regulations.

 

REGULATION AND SIMILARMATTERS

 

Incertain states, the Company is subject to retail installment sales orinstallment loan statutes and related regulations, the terms of which vary fromstate to state. These laws may require the Company to be licensed as a salesfinance company and may regulate disclosure of finance charges and other termsof retail installment contracts. The Company is subject to substantive statefranchise regulations and federal and state uniform franchise disclosure lawsin connection with the offering of PacLease full-service truck leasing andrental franchises to PACCAR truck dealers. The Company also owns and operatesseveral such truck leasing and rental business locations, which are subject toapplicable state licensing laws. The Company is subject to state insuranceregulations in connection with its licensed insurance salesmen. The Company isalso subject to certain provisions of federal law relating tonon-discrimination in the granting of credit.

 

SOURCES OF FUNDS

 

TheCompany’s primary sources of funds are commercial paper and medium-term noteborrowings in the public capital markets, collections on loans and leases,retained earnings and to a lesser extent bank loans and capital contributionsfrom PFSC. The Company’s profitable investment in additional receivables isdependent upon its ability to raise funds at competitive rates in the publicand private debt markets. The receivables and leases that are financed areeither fixed rate or floating rate with terms that range from 12 to 84 months.

 

Toreduce the risk of changes in interest rates that could affect interestmargins, the Company obtains funds with interest rate characteristics similarto the corresponding assets. Fixed rate assets are primarily funded with bothfixed and floating rate medium-term notes and floating rate commercial paper.Interest rate swaps are combined with commercial paper or floating ratemedium-term notes to convert floating rate debt to fixed rate debt. Floatingrate assets are funded primarily with commercial paper with maturities of threemonths or less and floating rate medium-term notes. As a result, the Company’sinterest margin on existing business does not 

 

6

----

 

change significantlyfrom changes in interest rates.

 

TheCompany enters into interest rate swap contracts to achieve its matched fundingobjectives and to reduce total borrowing costs relative to its primaryborrowing sources – commercial paper and medium-term notes. Fixed rate swaps,matched to floating rate borrowings, are used to lock in the funding cost offixed rate assets. As of December 31, 2005, the total notional principalamount of interest rate swap contracts outstanding was $2,463.7, all of whichresult in a fixed rate payment obligation. The notional amount is used tomeasure the volume of these contracts and does not represent exposure to creditloss. In the event of default by a counterparty, the risk in these transactionsis the cost of replacing the interest-rate contract at current market rates.Management believes the risk of incurring such losses is remote and any losseswould be immaterial. The permitted types of interest rate swap contracts, theirtransaction limits and related approval authorizations have been established bythe Company’s senior management and Board of Directors. The interest ratecontracts outstanding are regularly reported to, and reviewed by, the Company’ssenior management.

 

The Company participates with PACCAR and certain otherPACCAR affiliates in syndicated credit facilities of $1,500.0 at December 31,2005.  Of this amount, $500.0 expires in July 2006and $1,000.0 expires in July 2010. PACCAR intends to replace these credit facilities as they expirewith facilities of similar amounts.

 

Of the facilities, $1,120.0 is available for use by theCompany and/or PACCAR and certain other PACCAR affiliates.  Of theremaining $380.0, $300.0 is only available for use by PACCAR’s Canadiansubsidiaries and $80.0 is only available for use by PACCAR’s Australianfinancial subsidiary.  These creditfacilities are used to provide backup liquidity for the Company’s commercialpaper and maturing medium-term notes. The Company is liable only for its ownborrowings under these credit facilities. There were no borrowings under thesecredit facilities in the years ended December 31, 2005 and 2004.

 

Asof December 31, 2005, the Company had $100.0 of medium-term notes duewithin 12 months and outstanding under a $2,500.0 shelf registrationstatement.  The Company also had $1,700.0of medium-term notes outstanding under a $3,000.0 shelf registration statement,of which $1,150.0 are due within 12 months. See “Note F – Borrowings” in the Notes to Financial Statements forfurther information on medium-term notes.

 

Anindenture of the Company dated as of December 1, 1983, as amended by afirst supplemental indenture dated June 19, 1989 (Exhibit 4.1), withrespect to the Company’s medium-term notes which are publicly issued from timeto time, contains restrictions limiting secured debt which may be incurred bythe Company and any subsidiary.

 

RELATIONSHIP WITH PACCARAND AFFILIATES

 

General

 

Theoperations of the Company are fundamentally affected by its relationship withPACCAR. Sales of PACCAR products are the Company’s principal source offinancing business. The Company receives administrative support from and paysdividends to PFSC and may occasionally borrow funds from or lend money toPACCAR and/or its affiliates. The Company’s principal office is located in thecorporate headquarters building of PACCAR (owned by PACCAR). The Company alsoleases office space from two facilities owned by PACCAR and two facilitiesleased by PACCAR. Since the directors of the Company are all executives ofPACCAR and PACCAR is the sole owner of PFSC’s outstanding voting common stock,PACCAR can determine the course of the Company’s business.

 

TheCompany periodically loans funds to certain foreign finance and leasingaffiliates of PACCAR. These foreign affiliates have Support Agreements withPACCAR, similar to the Company’s Support Agreement described below. The foreignaffiliates operate in the United Kingdom, The Netherlands, Mexico, Canada andAustralia, and any resulting currency exposure is fully hedged. The foreignaffiliates primarily provide financing and leasing of PACCAR-manufacturedtrucks and related equipment sold through 

 

7

----

 

PACCAR’s independent dealer networks in Europe, Mexico, Canada andAustralia. The Company will not make loans to the foreign affiliates in excessof the equivalent of $375.0 United States dollars, unless the amount in excessof such limits is guaranteed by PACCAR. The Company periodically reviews thefunding alternatives for these affiliates, and these limits may be revised inthe future.

 

PFSCcharges the Company for certain administrative services it provides and certainservices the Company receives indirectly from PACCAR. As of December 31,2005, PFSC employed 179 full-time employees, none of whom are represented by acollective bargaining agent. The costs are charged to the Company based uponthe Company’s specific use of the services at PFSC’s or PACCAR’s cost.Management considers these charges reasonable and similar to the costs thatwould be incurred if the Company were on a stand-alone basis. See “Note D –Transactions with PACCAR and Affiliates” in the Notes to Financial Statements.

 

Support Agreement

 

TheCompany and PACCAR are parties to a Support Agreement that obligates PACCAR toprovide, when required, financial assistance to the Company to assure that theCompany maintains a ratio of net earnings available for fixed charges to fixedcharges (as defined in the Agreement) of at least 1.25 to 1 for any fiscalyear. The Support Agreement also requires PACCAR to own, directly orindirectly, all outstanding voting stock of the Company. The required ratio wasmet for the years ended December 31, 2005, 2004 and 2003 withoutassistance. See “Note D – Transactions with PACCAR and Affiliates” in the Notesto Financial Statements.

 

TheCompany and PACCAR may amend or terminate any or all of the provisions of theSupport Agreement upon 30 days notice, with copies of the notice being sent toall nationally recognized statistical rating organizations (“NRSROs”) whichhave issued ratings with respect to debt of the Company (“Rated Debt”). Suchamendment or termination will be effective only if (i) two NRSROs confirmin writing that their ratings with respect to any Rated Debt would remain thesame after such amendment or termination, or (ii) the notice of amendmentor termination provides that the Support Agreement will continue in effect withrespect to Rated Debt outstanding on the effective date of such amendment ortermination unless such debt has been paid or defeased pursuant to theindenture or other agreement applicable to such debt, or (iii) the holdersof at least two-thirds of the aggregate principal amount of all outstandingRated Debt with original maturity in excess of 270 days consent in writing tosuch amendment or termination, provided that the holders of Rated Debt havingan original maturity of 270 days or less shall continue to have the benefits ofthe Support Agreement until the maturity of such debt.

 

TheSupport Agreement expressly states that PACCAR’s commitments to the Companythereunder do not constitute a PACCAR guarantee of payment of any indebtednessor liability of the Company to others and do not create rights against PACCARin favor of persons other than the Company. There are no guarantees, direct orindirect, by PACCAR of payment of any indebtedness of the Company.

 

OTHER DISCLOSURES

 

TheCompany’s filings on Form 10-K, 10-Q and 8-K and any amendments to thosereports can be reached through a link on the Company’s website, www.paccarfinancial.com,or PACCAR Inc’s website, www.paccar.com, free of charge as soon as reasonablypracticable after the report is electronically filed with, or furnished to, theSecurities and Exchange Commission.

 

**ITEM 2.****    ****PROPERTIES**

 

TheCompany’s principal office is located in the corporate headquarters building ofPACCAR (owned by PACCAR) at 777 106th Avenue N.E., Bellevue,Washington 98004. The Company owns two full-service leasing facilities inTexas.

 

8

----

 

Otheroffices and leasing facilities of the Company are located in leased premisesincluding two facilities owned by PACCAR and two facilities leased by PACCAR.The Company considers all its properties to be suitable for their intendedpurpose. Annual lease rentals for these premises in the aggregate are notmaterial in relation to expenses as a whole.

 

**ITEM 3.****    ****LEGAL PROCEEDINGS**

 

TheCompany is a party to various routine legal proceedings incidental to itsbusiness involving the collection of accounts and other matters. The Companydoes not consider such matters to be material with respect to the business orfinancial condition of the Company as a whole.

 

**ITEM4.****    ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

Notapplicable.

 

**PART II**

 

**ITEM5.****    ****MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

Alloutstanding common stock is owned by PFSC; therefore, there is no tradingmarket in the Company’s common stock.

 

Cashdividends in the amount of $70.0 and $69.0 were declared and paid to PFSC in2005 and 2004, respectively. There were no cash dividends declared or paidduring 2003.

 

9

----

 

**ITEM6.****    ****SELECTED FINANCIAL DATA**

 

Thefollowing table summarizes selected financial data for the Company. Theinformation with respect to each of the five years in the period ended December 31,2005 has been derived from the Company’s audited financial statements.

 

**Balance Sheet Data**

 
| ** **                      | ** ** | **As of December 31** | ** **  |
|---------------------------------|------------|----------------------------|-------------|
| ** **                      | ** ** | **2005**                   | ** **  | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                            |       |                       |        |   |   |   |   |   |   |   |   |
| Total Assets                    | ** ** | **$**                      | **4,778.7** |   | $ | 3,970.7 |   | $ | 3,473.3 |   | $ | 3,511.5 |   | $ | 3,562.6 |   |
| Total Liabilities               | ** ** | **4,066.1**                |        | 3,295.6 |   | 2,834.8 |   | 2,955.6 |   | 3,039.6 |   |
| Total Stockholder’s Equity | ** ** | **712.6**                  |        | 675.1 |   | 638.5 |   | 555.9 |   | 523.0 |   |
|                                 |            |                            |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Income Statement Data**

 
| ** **                                                                     | ** ** | **Year ended December 31** | ** **  |
|--------------------------------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                                                     | ** ** | **2005**                        | ** **  | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Interest and other revenue                                                     | ** ** | **$**                           | **409.3**   |   | $ | 320.9 |   | $ | 285.0 |   | $ | 292.6 |   | $ | 345.9 |   |
|                                                                           |       |                            |        |   |   |   |   |   |   |   |   |
| Total  expenses before assumption of interest expense by PACCAR                | ** ** | **289.3**                       |        | 209.5 |   | 206.9 |   | 247.6 |   | 338.0 |   |
| Assumption  of interest expense by  PACCAR (1)                                 | ** ** | **—**                      |        | — |   | — |   | — |   | (17.0 | ) |
| Total  expenses                                                                | ** ** | **289.3**                       |        | 209.5 |   | 206.9 |   | 247.6 |   | 321.0 |   |
|                                                                           |       |                            |        |   |   |   |   |   |   |   |   |
| Income  before income taxes                                                    | ** ** | **120.0**                       |        | 111.4 |   | 78.1 |   | 45.0 |   | 24.9 |   |
| Income taxes                                                                   | ** ** | **46.0**                        |        | 42.2 |   | 30.8 |   | 17.7 |   | 9.7 |   |
|                                                                           |       |                            |        |   |   |   |   |   |   |   |   |
| Income  before cumulative effect of accounting change                          | ** ** | **74.0**                        |        | 69.2 |   | 47.3 |   | 27.3 |   | 15.2 |   |
| Cumulative  effect of accounting change (net of tax)                           | ** ** | **—**                      |        | — |   | — |   | — |   | .4 |   |
|                                                                           |       |                            |        |   |   |   |   |   |   |   |   |
| Net income                                                                     | ** ** | **$**                           | **74.0**    |   | $ | 69.2 |   | $ | 47.3 |   | $ | 27.3 |   | $ | 15.6 |   |
|                                                                           |       |                            |        |   |   |   |   |   |   |   |   |
| Ratio of  Earnings to Fixed Charges Pursuant to SEC Reporting Requirements (2) | ** ** | **2.17**                        | **x**       | 2.61 | x | 1.98 | x | 1.39 | x | 1.16 | x |
|                                                                           |       |                            |        |   |   |   |   |   |   |   |   |
| Ratio of  Earnings to Fixed Charges Pursuant to the Support Agreement          | ** ** | **2.83**                        | **x**  | 3.26 | x | 2.33 | x | 1.53 | x | 1.25 | x |

 

----

(1)          In order tomaintain the ratio of earnings to fixed charges in 2001, PACCAR providedearnings support of $17.0 through the assumption of the Company’s interestexpense. No earnings support was provided for the years ending December 31,2005, 2004, 2003, or 2002.

 

(2)          For thepurposes of this ratio, earnings consist of income before income taxes plusfixed charges. Fixed charges consist of interest expense plus a portion of rentexpense (which is deemed representative of an interest factor). The method ofcomputing the ratio of earnings to fixed charges shown above complies with SECreporting requirements (see Exhibit 12.1) but differs from the methodcalled for in the Support Agreement between the Company and PACCAR (see Exhibit 12.2).

 

10

----

 

**ITEM7.****    ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND****RESULTS OF OPERATIONS**(Millions of Dollars)

 

**Results of Operations**

 
| ** **                                                                                                                                                        | ** ** | **Year ended December 31** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                                                                                                                                        | ** ** | **2005**                        | ** **  | **2004** | ** ** | **2003** | ** ** |
| Average earning  assets                                                                                                                                           | ** ** | **$**                           | **4,121.6** | ** ** | $ | 3,412.5 |   | $ | 3,192.4 |   |
| Interest and  other revenue                                                                                                                                       | ** ** | **409.3**                       | ** **  | 320.9 |   | 285.0 |   |
| Income  before taxes                                                                                                                                              | ** ** | **120.0**                       | ** **  | 111.4 |   | 78.1 |   |
| Net income                                                                                                                                                        | ** ** | **74.0**                        | ** **  | 69.2 |   | 47.3 |   |
|                                                                                                                                                              |       |                            | ** **  |   |   |   |   |
| Allowance  for Losses:                                                                                                                                            |       |                            | ** **  |   |   |   |   |
| Balance at  beginning of year                                                                                                                                     | ** ** | **$**                           | **67.1**    | ** ** | $ | 67.4 |   | $ | 66.9 |   |
| Provision  for losses                                                                                                                                             | ** ** | **14.2**                        | ** **  | 4.3 |   | 19.6 |   |
| Credit  losses                                                                                                                                                    | ** ** | **(7.3**                        | **)**       | (8.9 | ) | (23.8 | ) |
| Recoveries                                                                                                                                                        | ** ** | **3.3**                         | ** **  | 4.3 |   | 4.7 |   |
|                                                                                                                                                              | ** ** | ** **                      | ** **  |   |   |   |   |
| Balance at  end of year                                                                                                                                           | ** ** | **$**                           | **77.3**    | ** ** | $ | 67.1 |   | $ | 67.4 |   |
|                                                                                                                                                              | ** ** | ** **                      | ** **  | ** ** |   |   |   |   |   |   |
| Ratios:                                                                                                                                                           |       |                            | ** **  |   |   |   |   |
| Credit  losses net of recoveries ($4.0 in 2005) to average net receivables ($3,746.7  in 2005)                                                                    | ** ** | **.11**                         | **%**       | .15 | % | .63 | % |
|                                                                                                                                                              | ** ** | ** **                      | ** **  |   |   |   |   |
| Allowance  for losses ($77.3 in 2005) to year-end net receivables ($4,178.9 in 2005)                                                                              | ** ** | **1.85**                        | **%**       | 1.98 | % | 2.27 | % |
|                                                                                                                                                              | ** ** | ** **                      | ** **  |   |   |   |   |
| Year-end  finance and lease receivables and leases past due, over 30 days, ($29.8 in  2005) to year-end retail contracts and lease receivables ($3,758.8 in 2005) | ** ** | **.79**                         | **%**       | .91 | % | 1.84 | % |

 

TheCompany’s portfolio is concentrated with customers in the heavy and medium dutytruck transportation industry.  Theportfolio is comprised of retail loans and leases, dealer wholesale financingand dealer master notes as follows:

 
| ** **                 | ** ** | **As of December 31** | ** **  |
|----------------------------|------------|----------------------------|-------------|
| ** **                 | ** ** | **2005**                   | ** **  | **2004** | ** ** | **2003** | ** ** |
| Retail loans               | ** ** | **$**                      | **2,481.8** | ** ** | **58** | **%** | $ | 2,157.8 |   | 62 | % | $ | 1,886.0 |   | 62 | % |
| Retail leases              | ** ** | **977.3**                  | ** **  | **23** | **%** | 787.2 |   | 22 | % | 700.6 |   | 23 | % |
| Dealer wholesale financing | ** ** | **626.9**                  | ** **  | **14** | **%** | 373.7 |   | 11 | % | 312.3 |   | 10 | % |
| Dealer master notes        | ** ** | **206.0**                  | ** **  | **5** | **%** | 171.2 |   | 5 | % | 142.8 |   | 5 | % |
| Total portfolio            | ** ** | **$**                      | **4,292.0** | ** ** | **100** | **%** | $ | 3,489.9 |   | 100 | % | $ | 3,041.7 |   | 100 | % |

 

Theprovision for losses in 2005 of $14.2 increased $9.9 from the $4.3 in 2004,reflecting the impact of a 23% increase in the portfolio.

 

11

----

 

In2005, credit losses of $7.3 decreased by $1.6 compared to the $8.9 of creditlosses in 2004 and by $16.5 compared to the $23.8 of credit losses in2003.  Stronger truck market conditionsin the past two years have contributed to customers’ ability to make timelypayments on their obligations to the Company. Increased demand for transportation services allowed the Company’scustomers to earn greater profits and generally pass higher fuel costs throughto their customers in the form of surcharges. Industry conditions also helped maintain used truck values supportingthe collateral underlying the Company’s receivables.

 

In2005, recoveries of accounts previously written off of $3.3 decreased $1.0 and$1.4 from $4.3 and $4.7 in 2004 and 2003, respectively.  This is due to the lower credit lossesexperienced in the past two years.

 

Thehigher proportion of dealer wholesale financing and master notes to the totalportfolio in 2005 reduced the ratio of the allowance for losses to netreceivables, which decreased to 1.85% at December 2005 from 1.98% at December 2004.  Also, the reduction in over 30 day past duesat December 2004 from December 2003 contributed to the lowerpercentage in the allowance for losses to net receivables, which decreased to1.98% at December 2004 from 2.27% at December 2003.

 

Theestimation methods and factors considered for determining the allowance duringthe periods included in this filing have been consistently applied and arediscussed further under Critical Accounting Policies.  There have been no significant changes incustomer contract terms during the periods.

 

**2005 Compared to 2004:**

 

TheCompany’s net income of $74.0 in 2005 increased 7% from $69.2 in 2004. Theprofit improvement primarily resulted from a higher finance margin (revenuesminus borrowing, lease and insurance expenses) partially offset by a higherprovision for losses from a growing portfolio. Interest and other revenue increased 28% to $409.3 from $320.9 in 2004due to higher earning assets and higher interest rates.  Average earning assets increased 21% due tohigher new loan and lease volume and increased dealer wholesale financing fromhigher PACCAR truck production.  Interestand other borrowing expenses increased 49% to $106.4 in 2005 due to a 27%increase in average debt balances and higher interest rates.  Depreciation and other operating lease andrental expenses increased 38% to $98.7 in 2005 from $71.6 in 2004 primarily dueto continued growth in operating lease assets. The increase in the provision for losses on receivables was discussedabove.  The Company’s 2005 effectiveincome tax rate of 38.3% was comparable to the 37.9% in 2004.

 

**2004 Compared to 2003:**

 

TheCompany’s net income increased 46% to $69.2 in 2004 from $47.3 in 2003.  A higher finance margin and a lower provisionfor losses contributed to the profit improvement.  Interest and other revenue increased 13% to$320.9 from $285.0 in 2003 primarily due to higher earning assets, offset bylower interest rates. Average earning assets increased due to higher new loanand lease volume from higher PACCAR truck production.  Interest and other borrowing expensesdecreased 14% to $71.6 in 2004 due to lower interest rates offset somewhat byhigher average debt balances. Depreciation and other operating lease and rentalexpenses increased 52% to $71.6 in 2004 from $47.2 in 2003 due to strong growthin operating lease assets.   The decreasein the provision for losses on receivables was discussed above.  The Company’s 2004 effective income tax ratedecreased to 37.9% from 39.4% in 2003 due to a lower effective state income taxrate.

 

**Company Outlook**

 

Thefuture profitability of the Company is primarily dependent on the generation ofnew business and on the level of credit losses experienced.  Asset growth in 2006 is primarily dependentupon the level of truck sales financed and the impact of competition.  Continued strength in the general economy andthe related demand for freight transportation may positively impact the levelof truck sales financed.  However,continued high diesel prices and successive interest rate increases couldnegatively impact future truck sales financed as well as existing customers’ability to make timely payments which increases the risk of loss inherent inthe portfolio. 

 

12

----

 

**Funding and Liquidity**

 

The Company manages its capital structureconsistent with industry standards. Since 1983, the Company has registered debtsecurities under the Securities Act of 1933 for offering to the public. In December 2003,the Company filed a shelf registration statement under which $3,000.0 of medium-termnotes could be issued as needed.  As of December 31,2005, $1,300.0 of such securities were available for issuance.

 

TheCompany believes that it has sufficient financial capabilities to continuefunding receivables, servicing debt and paying dividends through internallygenerated funds, access to public and private debt markets, lines of credit andother financial resources.  The increasein borrowings to $3,605.6 at December 31, 2005 from $2,880.8 at December 31,2004 was mainly due to originations of finance and other receivables andequipment on operating lease additions exceeding collections and cash providedby operations.

 

TheCompany’s investment grade credit ratings continue to provide access to capitalmarkets at competitive interest rates. The Company’s debt ratings at December 31,2005 are as follows:

 
| ** **            | ** ** | **Moody’s** | ** ** | **Standard  and Poor’s** | ** ** |
|-----------------------|------------|------------------|------------|-------------------------------|------------|
| Commercial paper      |       | P-1              |       | A-1+                          |       |
| Senior unsecured debt |       | A1               |       | AA-                           |       |

 

TheCompany’s strong credit ratings are primarily based on PACCAR’s operating cashflow, demand for its quality products and substantial financial assets.  Access to financing at competitive rateswould be negatively impacted by a downgrade in these credit ratings.

 

Thefollowing summarizes the Company’s contractual cash commitments at December 31,2005:

 
| ** **       | ** ** | **Maturity**            | ** ** | ** **              | ** ** |
|------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **       | ** ** | **Less than  One Year** | ** ** | **More than  One Year** | ** ** | **Total** | ** ** |
| Borrowings       |       | $                       | 3,155.6    |                    | $          | 450.0 |   | $ | 3,605.6 |   |
| Operating Leases |       | .8                      |       | 1.1                     |       | 1.9 |   |
| Total            |       | $                       | 3,156.4    |                    | $          | 451.1 |   | $ | 3,607.5 |   |

 

Asdescribed in Note F to the financial statements, borrowings consist ofmedium-term notes and commercial paper. Included in the $3,155.6 of borrowings that mature in less than one yearare $100.0 of medium-term extendible notes. These extendible notes have an initial maturity of 13 months, which canbe extended at the investor’s option to a final maturity of 5 years.  The interest rate adjustment to LIBOR on thenotes increases each year by a nominal, predetermined amount. The Company hasoperating leases for office space, truck leasing facilities and officeequipment.

 

Inaddition, the Company had loan and lease commitments of $291.4 expiring withinone year. These commitments represent commitments to fund new retail loan andlease contracts.

 

**Critical Accounting Policies:**

 

Inthe preparation of the Company’s financial statements, in accordance withaccounting principles generally accepted in the United States, management usesestimates and makes judgments and assumptions that affect asset and liabilityvalues and the amounts reported as income and expense during the periodspresented. The following are accounting policies which, in the opinion ofmanagement, are particularly sensitive and which, if actual results aredifferent, may have a material impact on the financial statements.

 

13

----

 

Equipment on OperatingLeases

 

Indetermining the estimated residual values for equipment on operating leases,and certain direct financing leases, the Company considers the length of thelease term, the truck model and anticipated market demand and the expectedusage of the truck. If the sales price of the trucks at the end of the leaseterm differs significantly from the Company’s estimate, a gain or loss willresult. The Company believes its residual setting policies are appropriate;however, future market conditions, changes in government regulations and otherfactors outside the Company’s control can impact the ultimate sales price oftrucks returned under these contracts. Residual values are reviewed regularlyand adjusted downward if market conditions warrant. See “Note A – SignificantAccounting Policies” in the Notes to Financial Statements.

 

Allowance for Credit Losses

 

The Company determines the allowance forcredit losses on its retail loan and lease, wholesale and master noteportfolios based on a combination of historical information and current marketconditions.  This analysis is dependenton estimates, including assumptions regarding collectibility of past-dueaccounts, repossession rates and the recovery rate on the underlyingcollateral.  Loss estimates have beenestablished from historical collection and loss information using past dueaccount data which has demonstrated a strong correlation to future creditlosses.

 

The Companyindividually evaluates bankrupt accounts, accounts which have significantamounts past due and other large accounts with higher risk ($68.5 million at December 31,2005 or 1.8% of the total outstanding receivables).  It evaluates all other customers as a groupbased on past due categories (i.e., 90+, 60-90, 30-59 and less than 30 dayspast due), as well as current account balances. The Company has developed a range of specific loss estimates for each ofits retail, wholesale and dealer master note portfolios based on historicalexperience, taking into account loss frequency and severity in both strong andweak truck market conditions.  Lossestimates at December 31, 2005 range from less than 1% on current accountsto 35% on certain accounts over 90 days past due.  A projection is made of the range ofestimated credit losses inherent in the portfolio from which an amount isdetermined as probable based on current market conditions, including dieselprices, interest rates and other factors representing leading indicatorsimpacting the creditworthiness of our borrowers and their ability torepay.  The Company further considers theimpact of dealer recourse, cash recoveries and used equipment collateralrecoveries.  The projected amount is thencompared to the balance in the allowance and appropriate adjustments are made.

 

Although certain retail contracts acquiredfrom dealers include full or partial dealer recourse for the credit loss, thisis a minor and decreasing component of the portfolio (8% of the retailportfolio at December 31, 2005).  Forwholesale and dealer master note portfolios, dealer recourse (includingpersonal guarantees and pledging of dealership assets) is present insubstantially all the loan arrangements. Cash recoveries and used equipment collateral recoveries generally varywith market conditions.

 

**Forward Looking Statements**

 

Certain information presented in this Form 10-Kcontains forward-looking statements made pursuant to the Private SecuritiesLitigation Reform Act of 1995, which are subject to risks and uncertainties thatmay affect actual results. Risks and uncertainties include, but are not limitedto: national and local economic, political and industry conditions; changes inthe levels of new business volume due to unit fluctuations in new PACCAR trucksales; changes in competitive factors; changes affecting the profitability oftruck owners and operators; price changes impacting equipment costs andresidual values; changes in costs and availability of external funding sources;and legislation and governmental regulation.

 

14

----

 

**ITEM7A.   QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Market Risk andDerivative Financial Instruments

 

Inthe normal course of business, the Company issues various financial instrumentsthat expose the Company to market risk associated with market interest rates.Policies and procedures have been established by the Company to manage thesemarket risks through the use of various derivative financial instruments. TheCompany does not engage in derivatives trading, market-making or otherspeculative activities.

 

Thefollowing is a sensitivity analysis for the Company’s derivatives that haveinterest rate risk. These instruments are held for other than trading purposes.The gains or losses in the following table represent the changes in thefinancial instruments’ fair values that would result from a 100 basis pointincrease from the current market rate at December 31, 2005 and 2004.

 

**Fair Value Gains (Losses)**

(Millions of Dollars)

 
| ** **                                                                                             | ** ** | **Year ended December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                             | ** ** | **2005**                        | ** ** | **2004** | ** ** |
|                                                                                                   |       |                            |       |   |   |
| Assets                                                                                                 |       |                            |       |   |   |
| Retail  notes, contracts and wholesale financing, net of unearned interest, less  allowance for losses | ** ** | **$**                           | **(36.6**  | **)** | $ | (30.7 | ) |
|                                                                                                   |       |                            | ** ** |   |   |
| Liabilities                                                                                            |       |                            | ** ** |   |   |
| Debt                                                                                                   | ** ** | **.2**                          | ** ** | .4 |   |
| Interest  rate swaps related to debt                                                                   | ** ** | **35.6**                        | ** ** | 27.5 |   |
|                                                                                                   |       |                            | ** ** |   |   |
| Total                                                                                                  | ** ** | **$**                           | **(.8**    | **)** | $ | (2.8 | ) |

 

**ITEM8.****    ****FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

Thefinancial statements of the Company and related schedules described under Item15, “Exhibits, Financial Statement Schedules” are included following this page.

 

15

----

 

Report of IndependentRegistered Public Accounting Firm

 

Board of Directors

PACCAR FinancialServices Corporation and PACCAR Financial Corp.

 

 

We have audited theaccompanying balance sheets of PACCAR Financial Corp. (a wholly-ownedsubsidiary of PACCAR Financial Services Corporation) as of December 31,2005 and 2004, and the related statements of income, cash flows, stockholder’sequity and comprehensive income for each of the three years in the period endedDecember 31, 2005. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard  (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting.  Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of PACCAR Financial Corp. at December 31,2005 and 2004, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2005 in conformity withU.S. generally accepted accounting principles.

 

 
|   | /s/ Ernst &  Young LLP |   |
|--------|---------------------------------|--------|

 

 

Seattle, Washington

February 17, 2006

 

16

----

 

##### **STATEMENTSOF INCOME**

(Millions of Dollars)

 
| ** **                                                  | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                        |       |                            |       |   |   |   |   |
| Interest and fee income                                     | ** ** | **$**                           | **248.6**  |   | $ | 200.3 |   | $ | 201.9 |   |
| Operating lease and rental income                           | ** ** | **120.1**                       |       | 87.3 |   | 60.0 |   |
| Insurance premiums and other revenue                        | ** ** | **40.6**                        |       | 33.3 |   | 23.1 |   |
| ** **                                                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **TOTAL INTEREST AND OTHER REVENUE**                        | ** ** | **409.3**                       |       | 320.9 |   | 285.0 |   |
|                                                        |       |                            |       |   |   |   |   |
| Interest and other borrowing expenses                       | ** ** | **106.4**                       |       | 71.6 |   | 83.2 |   |
| Depreciation and other operating lease and  rental expenses | ** ** | **98.7**                        |       | 71.6 |   | 47.2 |   |
| Insurance claims and other expenses                         | ** ** | **22.7**                        |       | 17.1 |   | 13.5 |   |
| Selling, general and administrative  expenses               | ** ** | **47.3**                        |       | 44.9 |   | 43.4 |   |
| Provision for losses on receivables                         | ** ** | **14.2**                        |       | 4.3 |   | 19.6 |   |
|                                                        |       |                            |       |   |   |   |   |
| **TOTAL EXPENSES**                                          | ** ** | **289.3**                       |       | 209.5 |   | 206.9 |   |
| ** **                                                  | ** ** | ** **                      |       |   |   |   |   |
| **INCOME BEFORE INCOME TAXES**                              | ** ** | **120.0**                       |       | 111.4 |   | 78.1 |   |
| ** **                                                  | ** ** | ** **                      |       |   |   |   |   |
| Income taxes                                                | ** ** | **46.0**                        |       | 42.2 |   | 30.8 |   |
|                                                        | ** ** | ** **                      |       |   |   |   |   |
| **NET INCOME**                                              | ** ** | **$**                           | **74.0**   |   | $ | 69.2 |   | $ | 47.3 |   |

 

Earnings per share anddividends per share are not reported because the Company is a wholly-ownedsubsidiary of PACCAR Financial Services Corporation.

 

17

----

 

 

**BALANCE SHEETS**

(Millions of Dollars)

 
| ** **                                                                                                                                    | ** ** | **As of December 31** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|
| ** **                                                                                                                                    | ** ** | **2005**                   | ** **  | **2004** | ** ** |
|                                                                                                                                          |       |                       |        |   |   |
| **ASSETS**                                                                                                                                    |       |                       |        |   |   |
|                                                                                                                                          |       |                       |        |   |   |
| Cash                                                                                                                                          | ** ** | **$**                      | **19.0**    |   | $ | 18.2 |   |
| Finance and other receivables, net of  allowance for losses (2005 - $77.3 and 2004 - $67.1)                                                   | ** ** | **4,214.7**                |        | 3,422.8 |   |
| Loans to PACCAR Inc and affiliates                                                                                                            | ** ** | **50.7**                   |        | 130.1 |   |
| Equipment on operating leases, net of  depreciation (2005 - $119.1 and 2004 - $73.4)                                                          | ** ** | **421.3**                  |        | 357.8 |   |
| Other assets                                                                                                                                  | ** ** | **73.0**                   |        | 41.8 |   |
|                                                                                                                                          |       |                       |        |   |   |
| **TOTAL ASSETS**                                                                                                                              | ** ** | **$**                      | **4,778.7** |   | $ | 3,970.7 |   |
|                                                                                                                                          |       |                       |        |   |   |
| **LIABILITIES**                                                                                                                               |       |                       |        |   |   |
|                                                                                                                                          |       |                       |        |   |   |
| Accounts payable, accrued expenses and  other                                                                                                 | ** ** | **$**                      | **156.9**   |   | $ | 133.3 |   |
| Commercial paper                                                                                                                              | ** ** | **1,805.6**                |        | 1,050.8 |   |
| Medium-term notes                                                                                                                             | ** ** | **1,800.0**                |        | 1,830.0 |   |
| Income taxes – current and deferred                                                                                                      | ** ** | **303.6**                  |        | 281.5 |   |
|                                                                                                                                          |       |                       |        |   |   |
| **TOTAL LIABILITIES**                                                                                                                         | ** ** | **$**                      | **4,066.1** |   | $ | 3,295.6 |   |
|                                                                                                                                          |       |                       |        |   |   |
| **STOCKHOLDER’S EQUITY**                                                                                                                 |       |                       |        |   |   |
|                                                                                                                                          |       |                       |        |   |   |
| Preferred stock, par value $100 per share, 6%  noncumulative and nonvoting, 450,000 shares authorized, 310,000 shares issued  and outstanding | ** ** | **$**                      | **31.0**    |   | $ | 31.0 |   |
| Common stock, par value $100 per share, 200,000  shares authorized, 145,000 shares issued and outstanding                                     | ** ** | **14.5**                   |        | 14.5 |   |
| Additional paid-in capital                                                                                                                    | ** ** | **170.0**                  |        | 150.7 |   |
| Retained earnings                                                                                                                             | ** ** | **477.5**                  |        | 473.5 |   |
| Accumulated other comprehensive income                                                                                                        | ** ** | **19.6**                   |        | 5.4 |   |
|                                                                                                                                          |       |                       |        |   |   |
| **TOTAL STOCKHOLDER’S EQUITY**                                                                                                           | ** ** | **712.6**                  |        | 675.1 |   |
|                                                                                                                                          |       |                       |        |   |   |
| **TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                           | ** ** | **$**                      | **4,778.7** |   | $ | 3,970.7 |   |

 

See Notes to FinancialStatements

 

18

----

 

**STATEMENTS OF CASH FLOWS**

(Millions of Dollars)

 
| ** **                                                               | ** ** | **Year ended December 31** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                               | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                     |       |                            |       |   |   |   |   |
| **OPERATING ACTIVITIES**                                                 |       |                            |       |   |   |   |   |
|                                                                     |       |                            |       |   |   |   |   |
| Net income                                                               | ** ** | **$**                           | **74.0**   | ** ** | $ | 69.2 |   | $ | 47.3 |   |
| Items included in net income not affecting  cash:                        |       |                            | ** ** |   |   |   |   |
| Depreciation and amortization                                            | ** ** | **72.8**                        | ** ** | 52.2 |   | 34.9 |   |
| Provision for losses on receivables                                      | ** ** | **14.2**                        | ** ** | 4.3 |   | 19.6 |   |
| Provision for deferred taxes                                             | ** ** | **(.2**                         | **)**      | 68.2 |   | 15.1 |   |
| Increase (decrease) in payables and other                                | ** ** | **27.6**                        | ** ** | (23.1 | ) | (9.7 | ) |
|                                                                     |       |                            | ** ** |   |   |   |   |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                            | ** ** | **188.4**                       | ** ** | 170.8 |   | 107.2 |   |
|                                                                     |       |                            | ** ** |   |   |   |   |
| **INVESTING ACTIVITIES**                                                 |       |                            | ** ** |   |   |   |   |
|                                                                     |       |                            | ** ** |   |   |   |   |
| Finance and other receivables originated                                 | ** ** | **(1,980.6**                    | **)**      | (1,662.6 | ) | (1,192.4 | ) |
| Collections on finance and other  receivables                            | ** ** | **1,428.6**                     | ** ** | 1,298.9 |   | 1,358.6 |   |
| Net increase in wholesale receivables                                    | ** ** | **(253.3**                      | **)**      | (61.3 | ) | (3.8 | ) |
| Net decrease (increase) in loans to PACCAR  Inc and affiliates           | ** ** | **79.4**                        | ** ** | 136.3 |   | (73.1 | ) |
| Acquisition of equipment on operating  leases, primarily from PACCAR Inc | ** ** | **(165.9**                      | **)**      | (218.3 | ) | (116.1 | ) |
| Proceeds from disposal of equipment                                      | ** ** | **35.5**                        | ** ** | 14.8 |   | 6.6 |   |
| Other                                                                    | ** ** | **(4.6**                        | **)**      | (2.9 | ) | 5.9 |   |
|                                                                     |       |                            | ** ** |   |   |   |   |
| **NET CASH USED IN INVESTING ACTIVITIES**                                | ** ** | **(860.9**                      | **)**      | (495.1 | ) | (14.3 | ) |
|                                                                     |       |                            | ** ** |   |   |   |   |
| **FINANCING ACTIVITIES**                                                 |       |                            | ** ** |   |   |   |   |
| ** **                                                               |       |                            | ** ** |   |   |   |   |
| Net increase (decrease) in commercial paper                              | ** ** | **754.8**                       | ** ** | 36.3 |   | (106.1 | ) |
| Proceeds from medium-term notes                                          | ** ** | **550.0**                       | ** ** | 1,150.0 |   | 630.0 |   |
| Payments of medium-term notes and other  borrowings                      | ** ** | **(580.0**                      | **)**      | (800.0 | ) | (634.0 | ) |
| Dividends paid                                                           | ** ** | **(70.0**                       | **)**      | (69.0 | ) | — |   |
| Payment of advances (to) from PACCAR Inc                                 | ** ** | **(.8**                         | **)**      | .9 |   | (3.1 | ) |
| Capital contributions                                                    | ** ** | **19.3**                        | ** ** | 18.8 |   | 15.9 |   |
|                                                                     |       |                            | ** ** |   |   |   |   |
| **NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES**                 | ** ** | **673.3**                       | ** ** | 337.0 |   | (97.3 | ) |
|                                                                     |       |                            | ** ** |   |   |   |   |
| **NET INCREASE (DECREASE) IN CASH**                                      | ** ** | **.8**                          | ** ** | 12.7 |   | (4.4 | ) |
|                                                                     |       |                            | ** ** |   |   |   |   |
| **CASH AT BEGINNING OF YEAR**                                            | ** ** | **18.2**                        | ** ** | 5.5 |   | 9.9 |   |
|                                                                     |       |                            | ** ** |   |   |   |   |
| **CASH AT END OF YEAR**                                                  | ** ** | **$**                           | **19.0**   | ** ** | $ | 18.2 |   | $ | 5.5 |   |

 

See Notes to FinancialStatements

 

19

----

 

**STATEMENTS OF STOCKHOLDER’SEQUITY**

(Millions of Dollars)

 
| ** **                                                       | ** ** | **Year ended December 31** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                       | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                             |       |                            |       |   |   |   |   |
| **PREFERRED  STOCK,** $100 par value                             |       |                            |       |   |   |   |   |
|                                                             |       |                            |       |   |   |   |   |
| Balance at beginning of year                                     | ** ** | **$**                           | **31.0**   | ** ** | $ | 31.0 |   | $ | 31.0 |   |
| Balance at end of year                                           | ** ** | **31.0**                        | ** ** | 31.0 |   | 31.0 |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| **COMMON  STOCK,** $100 par value                                |       |                            | ** ** |   |   |   |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| Balance at beginning of year                                     | ** ** | **14.5**                        | ** ** | 14.5 |   | 14.5 |   |
| Balance at end of year                                           | ** ** | **14.5**                        | ** ** | 14.5 |   | 14.5 |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| **ADDITIONAL  PAID-IN CAPITAL**                                  |       |                            | ** ** |   |   |   |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| Balance at beginning of year                                     | ** ** | **150.7**                       | ** ** | 131.9 |   | 116.0 |   |
| Investments from PACCAR Financial Services  Corporation          | ** ** | **19.3**                        | ** ** | 18.8 |   | 15.9 |   |
| Balance at end of year                                           | ** ** | **170.0**                       | ** ** | 150.7 |   | 131.9 |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| **RETAINED  EARNINGS**                                           |       |                            | ** ** |   |   |   |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| Balance at beginning of year                                     | ** ** | **473.5**                       | ** ** | 473.3 |   | 426.0 |   |
| Net income                                                       | ** ** | **74.0**                        | ** ** | 69.2 |   | 47.3 |   |
| Cash dividends paid                                              | ** ** | **(70.0**                       | **)**      | (69.0 | ) | — |   |
| Balance at end of year                                           | ** ** | **477.5**                       | ** ** | 473.5 |   | 473.3 |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| **ACCUMULATED OTHER COMPREHENSIVE INCOME  (LOSS)**               |       |                            | ** ** |   |   |   |   |
| ** **                                                       |       |                            | ** ** |   |   |   |   |
| Accumulated unrealized net gain (loss) on  derivative contracts: |       |                            | ** ** |   |   |   |   |
| Balance at beginning of year                                     | ** ** | **5.4**                         | ** ** | (12.2 | ) | (31.6 | ) |
| Net unrealized gains                                             | ** ** | **14.2**                        | ** ** | 17.6 |   | 19.4 |   |
| Balance at end of year                                           | ** ** | **19.6**                        | ** ** | 5.4 |   | (12.2 | ) |
|                                                             |       |                            | ** ** |   |   |   |   |
| **TOTAL STOCKHOLDER’S EQUITY**                              | ** ** | **$**                           | **712.6**  | ** ** | $ | 675.1 |   | $ | 638.5 |   |

 

See Notes to FinancialStatements

 

20

----

 

**STATEMENTS OF COMPREHENSIVEINCOME**

(Millions of Dollars)

 
| ** **                                  | ** ** | **Year ended December 31** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                  | ** ** | **$**                           | **74.0**   |   | $ | 69.2 |   | $ | 47.3 |   |
| Other comprehensive income, net of tax      |       |                            |       |   |   |   |   |
| Unrealized net gain on derivative contracts | ** ** | **14.2**                        |       | 17.6 |   | 19.4 |   |
| Net other comprehensive income              | ** ** | **14.2**                        |       | 17.6 |   | 19.4 |   |
|                                        |       |                            |       |   |   |   |   |
| **TOTAL  COMPREHENSIVE INCOME**             | ** ** | **$**                           | **88.2**   |   | $ | 86.8 |   | $ | 66.7 |   |

 

See Notes to FinancialStatements

 

21

----

 

**PACCAR Financial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE A – SIGNIFICANT ACCOUNTINGPOLICIES**

** **

Description ofOperations: PACCAR Financial Corp. (the “Company”),is a wholly-owned subsidiary of PACCAR Financial Services Corporation (“PFSC”).PFSC is a wholly-owned subsidiary of PACCAR Inc (“PACCAR”).  The Company primarily provides financing of PACCAR-manufacturedtrucks and related equipment sold by authorized dealers. The Company alsofinances dealer inventories of transportation equipment and franchises PACCARdealerships to engage in full-service and finance leasing. The operations ofthe Company are fundamentally affected by its relationship with PACCAR.

 

Due to the nature of theCompany’s business, customers are concentrated in the transportation industrythroughout the United States. Generally, all receivables are collateralized bythe equipment being financed. The risk of credit losses related to thisconcentration has been considered in establishing the allowance for losses.

 

Use of Estimates: Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Actual results could differ from those estimates.

 

Allowance for Losses:The provision for losses on net finance and other receivables is charged toincome in an amount sufficient to maintain the allowance for losses at a levelconsidered adequate to cover estimated credit losses, net of recoveries,inherent in the portfolio. Receivables are charged to this allowance when, inthe judgment of management, they are deemed uncollectible (generally uponrepossession of the collateral). With respect to certain retail contractsacquired from dealers, the dealer retains liability, up to specified limits, forthe credit loss. The amount and collectibility of dealer recourse provisionshave been considered in establishing the allowance for losses on finance andother receivables.

 

Revenue Recognition: Interestincome from finance receivables and other receivables is recognized using theinterest method. Certain loan origination costs are deferred and amortized tointerest income. For operating leases, rental revenue is recognized on astraight-line basis over the lease term.

 

Recognition of interestincome and rental revenue are suspended when management determines thatcollection is not probable (generally after 90 days past due). Recognition isresumed if the receivable becomes contractually current and the collection ofamounts is again considered probable.

 

Equipment on OperatingLeases: Equipment on operating leases is recorded at cost and isdepreciated on the straight-line basis to its estimated residual value.Residual values are reviewed regularly and adjusted downward if marketconditions warrant.

 

Income Taxes: TheCompany is included in the consolidated federal income tax return of PACCAR.Income taxes for the Company are determined on a separate return basis, and anyrelated tax liability is paid by the Company to PACCAR and any related taxbenefit is paid by PACCAR to the Company.

 

Reclassifications: Certainprior-year amounts have been reclassified to conform to the 2005 presentation.

 

22

----

 

**NOTE B – FINANCE AND OTHERRECEIVABLES**

 

Terms for finance and otherreceivables at origination range from 12 to 84 months. Repayment experienceindicates some receivables will be paid prior to contract maturity, while someothers will be extended or renewed. Accordingly, the maturities of receivablespresented here should not be regarded as a forecast of future collections.

 

The Company’s financeand other receivables are as follows:

 
| ** **                                                                                           | ** ** | **Year ended December 31** | ** **  |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                                                                           | ** ** | **2005**                        | ** **  | **2004** | ** ** |
| Retail contracts and loans due within:                                                               |       |                            |        |   |   |
| One year                                                                                             | ** ** | **$**                           | **953.8**   | ** ** | $ | 830.1 |   |
| Two years                                                                                            | ** ** | **685.7**                       | ** **  | 609.0 |   |
| Three years                                                                                          | ** ** | **526.7**                       | ** **  | 467.7 |   |
| Four years                                                                                           | ** ** | **339.0**                       | ** **  | 269.8 |   |
| Five years                                                                                           | ** ** | **142.6**                       | ** **  | 119.9 |   |
| Six years and beyond                                                                                 | ** ** | **20.4**                        | ** **  | 17.8 |   |
| ** **                                                                                           |       | **2,668.2**                     | ** **  | 2,314.3 |   |
|                                                                                                 |       |                            | ** **  |   |   |
| Wholesale financing                                                                                  | ** ** | **626.9**                       | ** **  | 373.7 |   |
| Direct financing leases (including  unguaranteed residual values of $30.5 in 2005 and $41.4 in 2004) | ** ** | **1,120.9**                     | ** **  | 888.9 |   |
| Interest and other receivables                                                                       | ** ** | **47.8**                        | ** **  | 38.4 |   |
| Unearned interest:                                                                                   |       |                            | ** **  |   |   |
| Retail Contracts and loans                                                                           | ** ** | **(28.2**                       | **)**       | (23.7 | ) |
| Direct financing leases                                                                              | ** ** | **(143.6**                      | **)**       | (101.7 | ) |
|                                                                                                 |       |                            | ** **  |   |   |
| ** **                                                                                           |       | **4,292.0**                     | ** **  | 3,489.9 |   |
|                                                                                                 |       |                            | ** **  |   |   |
| Less allowance for losses                                                                            | ** ** | **(77.3**                       | **)**       | (67.1 | ) |
|                                                                                                 |       |                            | ** **  |   |   |
| Finance and other receivables                                                                        | ** ** | **$**                           | **4,214.7** | ** ** | $ | 3,422.8 |   |

 

Future minimum leasepayments on direct financing leases totaled $1,090.4 at December 31, 2005and are due as follows: $273.2 in 2006; $235.9 in 2007; $202.2 in 2008; $185.9in 2009; $124.0 in 2010 and $69.2 in 2011 and beyond.

 

23

----

 

The allowance for losseson finance and other receivables is summarized as follows:

 
| ** **                        | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **2005**                        | ** ** | **2004** | ** ** |
|                              |       |                            |       |   |   |
| Balance at  beginning of year     | ** ** | **$**                           | **67.1**   | ** ** | $ | 67.4 |   |
| Provision  for losses             | ** ** | **14.2**                        | ** ** | 4.3 |   |
| Credit  losses, net of recoveries | ** ** | **(4.0**                        | **)**      | (4.6 | ) |
|                              |       |                            | ** ** |   |   |
| Balance at  end of year           | ** ** | **$**                           | **77.3**   | ** ** | $ | 67.1 |   |

 

At December 31,2005 and 2004, the recorded investments in retail contracts and loans that wereconsidered to be impaired were $18.5 and $17.8, respectively. Included in theallowance for losses were specific reserves of $3.0 and $3.2 on these impairedretail contracts and loans. The average recorded investment in impaired retailcontracts and loans during the years ended December 31, 2005, 2004 and2003, was $19.5, $21.9 and $40.9, respectively. The Company recognized interestincome of $.5, $.2 and $.5 for the years ended December 31, 2005, 2004 and2003, respectively, on those impaired retail contracts and loans, all of whichwere recognized in income upon receipt of cash.

 

**NOTE C – EQUIPMENT ON OPERATINGLEASES**

** **

Terms of operatingleases at origination range from 18 to 72 months.  The total future annual minimum rentalpayments to be received for equipment on non-cancelable operating leasesbeginning January 1, 2006 of $183.7 are due as follows: $73.9 in 2006;$56.6 in 2007; $38.1 in 2008; $14.0 in 2009 and $1.1 in 2010.  Depreciation expense related to equipment onoperating leases was $67.1, $44.9, and $27.3 in 2005, 2004 and 2003,respectively. Substantially all equipment on operating leases is manufacturedby PACCAR.

 

**NOTE D – TRANSACTIONS WITH PACCARAND AFFILIATES**

** **

The Company and PACCAR areparties to a Support Agreement that obligates PACCAR to provide, when required,financial assistance to the Company to ensure that the Company maintains aratio of net earnings available for fixed charges to fixed charges (as definedin the Agreement) of at least 1.25 to 1 for any fiscal year. The required ratiofor the years ended December 31, 2005, 2004 and 2003 was met withoutassistance. The Support Agreement also requires PACCAR to own, directly orindirectly, all outstanding voting stock of the Company.

 

PFSC charges the Companyfor certain administrative services it provides and certain services theCompany receives indirectly from PACCAR. The costs are charged to the Companybased upon the Company’s specific use of the services at PFSC’s or PACCAR’scost. Management considers these charges reasonable and similar to the coststhat would be incurred if the Company were on a stand-alone basis. Fees forservices of $19.3, $18.8, and $15.9 in 2005, 2004 and 2003, respectively, werecharged to the Company. PFSC recognizes certain of these administrativeservices as an additional investment in the Company. The Company records theinvestment as additional paid-in capital.

 

Cash dividends in theamount of $70.0 and $69.0 were declared and paid in 2005 and 2004,respectively.  There were no cashdividends declared or paid during 2003.

 

24

----

 

The Company’s principaloffice is located in the corporate headquarters building of PACCAR (owned byPACCAR). The Company also leases office space from two facilities owned byPACCAR and two facilities leased by PACCAR.

 

The Company’s employeesare covered by a defined benefit pension plan, an unfunded post-retirementmedical and life insurance plan and a defined contribution plan sponsored byPACCAR. Separate allocations of plan assets and defined benefit planobligations relating to the Company have not been made. Expenses charged to theCompany by PACCAR for the defined benefit pension plan and the unfundedpost-retirement medical and life insurance plan were $1.1, $.9 and $.8, foryears 2005, 2004 and 2003, respectively. Expenses incurred by the Company forthe defined contribution plan benefits were $1.1, $1.1 and $1.0 for years 2005,2004 and 2003, respectively.

 

Financing and cashmanagement is partly provided through unsecured short-term advances to and fromPACCAR. Net annual interest paid to PACCAR was $.1 for each of the years ended2005, 2004 and 2003.

 

Periodically, theCompany borrows funds from PACCAR and makes loans to PACCAR. Loans outstandingto PACCAR were $.6 and $14.8 at December 31, 2005 and 2004, respectively.Loans outstanding from PACCAR were $.2 and $1.0 at December 31, 2005 and2004, respectively.

 

PACCAR has issuedletters of credit as of December 31, 2005 in the amount of $5.9 on behalfof the Company to guarantee funds for payment to insured franchises and theircustomers for any future insurance losses.

 

The Company periodicallyloans funds to certain foreign finance and leasing affiliates of PACCAR. Theseforeign affiliates have Support Agreements with PACCAR, similar to the Company’sSupport Agreement. The foreign affiliates operate in the United Kingdom, TheNetherlands, Mexico, Canada and Australia, and any resulting currency exposureis fully hedged. The foreign affiliates primarily provide financing and leasingof PACCAR-manufactured trucks and related equipment sold through PACCAR’sindependent dealer networks in Europe, Mexico, Canada and Australia. TheCompany will not make loans to the foreign affiliates in excess of theequivalent of $375.0 United States dollars, unless the amount in excess of suchlimits is guaranteed by PACCAR. The Company periodically reviews the fundingalternatives for these affiliates, and these limits may be revised in thefuture. There was a total of $50.1 in loans outstanding to foreign affiliatesoperating in the United Kingdom and The Netherlands at December 31, 2005.There was a total of $115.3 in loans outstanding to foreign affiliatesoperating in the United Kingdom and The Netherlands at December 31, 2004.There were no loans outstanding to other foreign affiliates for those periods.Interest income earned on affiliate loans was $2.3, $3.5 and $3.2 in 2005, 2004and 2003, respectively.

 

Included within accountspayable, accrued expenses and other is $17.9 and $5.7 payable to PACCAR’s truckdivisions at December 31, 2005 and 2004, respectively.

 

**NOTE E – DERIVATIVE FINANCIALINSTRUMENTS**

** **

The Company does notengage in derivatives trading, market-making or other speculative activities.Derivative financial instruments are used as hedges to manage exposuresto fluctuations in interest rates and foreign currency exchange rates. TheCompany documents its risk management strategy and hedge effectiveness at the inceptionof and during the term of each hedge. The Company, in the normal course ofbusiness, enters into various interest-rate contracts, includinginterest-rate and currency swaps. Interest-rate contracts generallyinvolve the exchange of fixed and floating rate interest payments without theexchange of the underlying principal. These contracts are used to manageexposures to fluctuations in interest rates. Net amounts paid or received arereflected as adjustments to interest expense. At December 31, 2005, theCompany had 157 interest rate contracts outstanding with various financialinstitutions. The notional amount of these contracts totaled $2,463.7, withamounts expiring over the next six years. The notional amount is used tomeasure the volume of these contracts and does not represent exposure to creditloss. In the event of default by a counterparty, the risk 

 

25

----

 

in these transactions isthe cost of replacing the interest-rate contract at current market rates. TheCompany has established minimum credit ratings of the counterparties and limitsits exposure to any one counterparty. Management believes that the risk ofnonperformance by the counterparties is remote.

 

Floating to fixed rateswaps effectively convert an equivalent amount of commercial paper and variablerate medium-term notes to fixed rate debt. Notional maturities for the sixyears beginning January 1, 2006 are $729.8, $806.2, $603.9, $231.8, $80.0and $12.0. The weighted average pay rate on these floating to fixed rate swapswas 3.68%. The weighted average receive rate of 4.34% offsets rates onassociated debt obligations.

 

All derivatives are reported at fair value and included in “Otherassets” or “Accounts payable, accrued expenses and other” in the accompanyingbalance sheets depending on the individual derivative contracts estimated fairvalue. The unrealized gain or loss on the effective portion of derivatives thathave been designated as cash flow hedging instruments arising from the changein fair value is initially reported in Other Comprehensive Income (OCI). Theremaining unrealized gain or loss, if any, is recognized currently in earnings.For fair value hedge transactions, changes in the fair value of the derivativeinstrument are generally offset in the income statement by changes in the fairvalue of the item being hedged. Hedge ineffectiveness for 2005, 2004 and 2003was not material. Amounts in accumulated OCI are reclassified into interestexpense in the same period in which the hedged forecasted transactionaffects earnings. Net gains and losses from interest-rate contracts arerecognized as an adjustment to interest expense. Of the accumulated netunrealized gain included in OCI as of December 31, 2005, $11.1 of incomeis expected to be reclassified to interest expense in 2006. The fixed interestearned on finance receivables will offset the amount recognized in interestexpense resulting in a stable interest margin consistent with the Company’sinterest rate risk management strategy.

 

26

----

 

**NOTE F – BORROWINGS**

 

Borrowings aresummarized as follows:

 
| ** **                       | ** ** | **Effective** | ** ** | **As of December 31,** | ** **  |
|----------------------------------|------------|---------------|------------|-----------------------------|-------------|
| ** **                       | ** ** | **Rate***     | ** ** | **2005**                    | ** **  | **2004** | ** ** |
|                             |       |          |       |                        |        |   |   |
| Commercial  paper                | ** ** | **3.73**      | **%**      | **$**                       | **1,805.6** |   | $ | 1,050.8 |   |
| Fixed rate  medium-term notes    | ** ** | **2.50**      | **%**      | **50.0**                    |        | 50.0 |   |
| Floating  rate medium-term notes | ** ** | **3.81**      | **%**      | **1,750.0**                 |        | 1,780.0 |   |
| Total                            | ** ** | **3.75**      | **%**      | **$**                       | **3,605.6** |   | $ | 2,880.8 |   |

 

----

*The effective rate isthe weighted average rate as of December 31, 2005 and includes the effectsof interest rate swap agreements.

 

Interest expense onborrowings amounted to $101.2, $67.9, and $78.8 for 2005, 2004 and 2003,respectively.

 

Cash paid for interest(net of swap interest received) was $106.1 in 2005, $69.0 in 2004, and $82.5 in2003.

 

Principal amounts ofmedium-term notes due over the next five years beginning January 1, 2006are $1,350.0 in 2006, $250.0 in 2007 and $200.0 in 2008.

 

In 2005, the Companyissued, and has outstanding at December 31, 2005, $100.0 of extendible floatingrate medium-term notes under its shelf registration.  The extendible notes have an initial maturityof 13 months, which can be extended at the investor’s option to a finalmaturity of 5 years.  The interest rateadjustment to LIBOR on the notes increases each year by a nominal,predetermined amount.  These extendiblemedium-term notes are included as principal amounts due in 2006.

 

At December 31, 2005,there was $1,300.0 of medium-term debt available for issuance under a currentlyoutstanding shelf registration statement.

 

**NOTE G – CREDIT ARRANGEMENTS**

** **

TheCompany participates with PACCAR and certain other PACCAR affiliates insyndicated credit facilities of $1,500.0 at December 31, 2005.  Of this amount, $500.0 expires in July 2006and $1,000.0 expires in July 2010. PACCAR intends to replace these credit facilities as they expirewith facilities of similar amounts.

 

Ofthe facilities, $1,120.0 is available for use by the Company and/or PACCAR andcertain other PACCAR affiliates.  Of the remaining $380.0, $300.0 is onlyavailable for use by PACCAR’s Canadian subsidiaries and $80.0 is only availablefor use by PACCAR’s Australian financial subsidiary.  These credit facilities are used to providebackup liquidity for the Company’s commercial paper and maturing medium-termnotes. The Company is liable only for its own borrowings under these creditfacilities. There were no borrowings under these credit facilities in the yearsended December 31, 2005 and 2004.

 

27

----

 

**NOTE H – INCOME TAXES**

 

The provision for incometaxes consisted of the following:

 
| ** **                    | ** ** | **Year ended December 31** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                          |       |                            |       |   |   |   |   |
| Current  provision (benefit)  |       |                            |       |   |   |   |   |
| Federal                       | ** ** | **$**                           | **44.0**   |   | $ | (26.9 | ) | $ | 8.0 |   |
| State                         | ** ** | **2.2**                         |       | .9 |   | 7.7 |   |
| ** **                    |       | **46.2**                        |       | (26.0 | ) | 15.7 |   |
|                          |       |                            |       |   |   |   |   |
| Deferred  provision (benefit) | ** ** | **(.2**                         | **)**      | 68.2 |   | 15.1 |   |
|                          |       |                            |       |   |   |   |   |
| ** **                    |       | **$**                           | **46.0**   |   | $ | 42.2 |   | $ | 30.8 |   |

 

A reconciliation betweenthe statutory federal income tax rate to the actual provision for income taxesis shown below:

 
| ** **                        | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                              |       |                            |       |   |   |   |   |
| Tax at the  statutory rate of 35% | ** ** | **$**                           | **42.0**   |   | $ | 39.0 |   | $ | 27.3 |   |
| Effect of  state income taxes     | ** ** | **3.9**                         |       | 3.2 |   | 3.0 |   |
| Other                             | ** ** | **.1**                          |       | — |   | .5 |   |
| ** **                        |       | **$**                           | **46.0**   |   | $ | 42.2 |   | $ | 30.8 |   |

 

Cash paid/(received) forincome taxes was $32.7 in 2005, ($20.2) in 2004 and $16.0 in 2003.

 

Deferred income taxassets and liabilities consisted of the following:

 
| ** **                            | ** ** | **As of December 31** | ** ** |
|---------------------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| Deferred tax  liability:              |       |                       |       |   |   |
| Asset capitalization and depreciation | ** ** | **$**                      | **326.1**  |   | $ | 320.2 |   |
| Other                                 | ** ** | **13.2**                   |       | 5.9 |   |
|                                  | ** ** | ** **                 |       |   |   |
| Deferred tax  assets:                 |       |                       |       |   |   |
| Allowance for losses on receivables   | ** ** | **(29.6**                  | **)**      | (25.7 | ) |
| Other                                 | ** ** | **(9.5**                   | **)**      | (8.8 | ) |
|                                  |       |                       |       |   |   |
| Net deferred  tax liability           | ** ** | **$**                      | **300.2**  |   | $ | 291.6 |   |

 

28

----

 

**NOTE I – FAIR VALUES OF FINANCIALINSTRUMENTS**

 

The following methodsand assumptions were used by the Company in estimating its fair valuedisclosures for financial instruments:

 

Cash: Thecarrying amount reported in the balance sheets is stated at fair value.

 

Net Receivables: Forfloating rate loans and wholesale financing, fair values are based on carryingvalues. For fixed rate loans, fair values are estimated using discounted cashflow analysis based on interest rates currently being offered for loans withsimilar terms to borrowers of similar credit quality. The carrying amount ofaccrued interest and other receivables approximates its fair value. Directfinancing lease receivables and the related allowance for losses have beenexcluded from the accompanying table.

 

Commercial Paper andMedium-Term Notes: The carrying amounts of the Company’scommercial paper and floating rate medium-term notes approximate their fairvalue. The fair value of the Company’s fixed rate medium-term notes isestimated using discounted cash flow analysis, based on the Company’s current incrementalborrowing rates for similar types of borrowing arrangements.

 

Derivative Instruments*:* Derivative instruments are carried at fair value. Fairvalues for the Company’s interest-rate contracts are based on costs that wouldbe incurred to terminate existing agreements and enter into new agreements withsimilar notional amounts, maturity dates and counterparties’ credit standing atcurrent market interest rates.

 

Accounts Payable, Accrued Expenses and Other:**Carrying amounts approximate fair value and have beenexcluded from the accompanying table.

 

Financial instrumentswhere the recorded carrying amount is not at fair value are as follows:

 
| ** **                    | ** ** | **As of December 31** | ** **  |
|-------------------------------|------------|----------------------------|-------------|
| ** **                    | ** ** | **2005**                   | ** **  | **2004** | ** ** |
| ** **                    | ** ** | **Carrying  Amount**       | ** **  | **Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
|                          |       |                       |        |   |   |   |   |   |   |
| Net  receivables              | ** ** | **$**                      | **3,207.9** | ** ** | **$** | **3,167.2** |   | $ | 2,612.5 |   | $ | 2,605.3 |   |
| Fixed rate  medium-term notes | ** ** | **50.0**                   | ** **  | **49.6** |   | 50.0 |   | 49.7 |   |
|                               |            |                            |             |  |  |  |  |  |  |  |  |  |  |

 

29

----

 

**NOTE J – STOCKHOLDER’S EQUITY**

 

**Preferred Stock**

 

The Company’s Articlesof Incorporation provide that the 6%, noncumulative, nonvoting preferred stock(100% owned by PFSC) is redeemable only at the option of the Company’s Board ofDirectors.

 

**Other Comprehensive Income**

 

The components of othercomprehensive income with the related tax effects are as follows:

 
| ** **                               | ** ** | **Pretax  Amount** | ** ** | **Tax Effect** | ** ** | **Net Amount** | ** ** |
|------------------------------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
|                                     |       |               |       |           |       |           |       |
| **2005**                                 |       |               |       |           |       |           |       |
| ** **                               |       |               |       |           |       |           |       |
| Other  comprehensive income:             | ** ** | ** **         | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net holding gain on derivative contracts | ** ** | **$**              | **24.3**   | ** **     | **$**      | **(9.3**       | **)**      | **$** | **15.0** | ** ** |
| Reclassification adjustment              | ** ** | **(1.3**           | **)**      | **.5**         | ** ** | **(.8**        | **)**      |
| Net other  comprehensive income          | ** ** | **$**              | **23.0**   | ** **     | **$**      | **(8.8**       | **)**      | **$** | **14.2** | ** ** |
|                                     |       |               |       |           |       |           |       |
| **2004**                                 |       |               |       |           |       |           |       |
| ** **                               |       |               |       |           |       |           |       |
| Other  comprehensive income:             |       |               |       |           |       |           |       |
| Net holding gain on derivative contracts |       | $                  | 7.2        |           | $          | (2.8           | )          | $ | 4.4 |   |
| Reclassification adjustment              |       | 21.3               |       | (8.1           | )          | 13.2           |       |
| Net other  comprehensive income          |       | $                  | 28.5       |           | $          | (10.9          | )          | $ | 17.6 |   |
|                                     |       |               |       |           |       |           |       |
| **2003**                                 |       |               |       |           |       |           |       |
| ** **                               |       |               |       |           |       |           |       |
| Other  comprehensive income:             |       |               |       |           |       |           |       |
| Net holding loss on derivative contracts |       | $                  | (10.1      | )              | $          | 4.0            |       | $ | (6.1 | ) |
| Reclassification adjustment              |       | 41.5               |       | (16.0          | )          | 25.5           |       |
| Net other  comprehensive income          |       | $                  | 31.4       |           | $          | (12.0          | )          | $ | 19.4 |   |

 

30

----

 

**NOTE K – QUARTERLY RESULTS** (Unaudited)

 
| ** **                  | ** ** | **QUARTER** | ** ** |
|-----------------------------|------------|-------------|------------|
| ** **                  | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|                        |       |        |       |   |   |   |   |   |   |
| **2005**                    |       |        |       |   |   |   |   |   |   |
|                        |       |        |       |   |   |   |   |   |   |
| Interest and  other revenue |       | $           | 91.1       |   | $ | 98.2 |   | $ | 106.4 |   | $ | 113.6 |   |
| Income  before income taxes |       | 29.6        |       | 28.8 |   | 30.6 |   | 31.0 |   |
| Net income                  |       | 18.3        |       | 17.7 |   | 18.9 |   | 19.1 |   |
|                        |       |        |       |   |   |   |   |   |   |
| **2004**                    |       |        |       |   |   |   |   |   |   |
|                        |       |        |       |   |   |   |   |   |   |
| Interest and  other revenue |       | $           | 72.0       |   | $ | 77.4 |   | $ | 82.2 |   | $ | 89.3 |   |
| Income  before income taxes |       | 24.4        |       | 28.0 |   | 29.1 |   | 29.9 |   |
| Net income                  |       | 15.1        |       | 17.4 |   | 18.0 |   | 18.7 |   |

 

**NOTE L – COMMITMENTS ANDCONTINGENCIES**

 

The Company is a partyto various routine legal proceedings incidental to its business involving thecollection of accounts and other matters. The Company does not consider suchmatters to be material with respect to the business or financial condition ofthe Company as a whole. In addition, at December 31, 2005, the Company hasloan and lease commitments of $291.4 expiring within one year. Thesecommitments represent commitments to fund new retail loan and lease contracts.

 

31

----

 

**ITEM 9.****         ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

** **

Theregistrant has not had any disagreements with its independent auditors onaccounting or financial disclosure matters.

 

**ITEM9A.****      ****CONTROLS AND PROCEDURES**

** **

An evaluation was performed under the supervisionand with the participation of the Company’s management, including the principalexecutive officer and principal financial officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in rules 13a-15(e) and 15d-15(e) promulgated under theSecurities Exchange Act of 1934, as amended) as of December 31, 2005 (“EvaluationDate”). Based on that evaluation, the principal executive officer and principalfinancial officer of the Company concluded that the disclosure controls and proceduresin place at the Company were adequate to ensure that information required to bedisclosed by the Company, including its consolidated subsidiaries (the Companyhas no subsidiaries), in reports that the Company files or submits under theExchange Act, is recorded, processed, summarized and reported on a timely basisin accordance with applicable rules and regulations. There have been nochanges in the Company’s internal controls over financial reporting during thefourth quarter of 2005 that have materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting.

 

**ITEM 9B.****      ****OTHER INFORMATION**

 

Notapplicable.

 

**PART III**

 

**ITEMS 10, 11, 12 AND 13**

 

These items omitted pursuant to Form 10-KGeneral Instruction (I)(1)(a) and (b).

 

**ITEM14.****      ****PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

Audit Fees

Audit fees charged to the Company by PACCAR were $.5 and $.4 for 2005and 2004, respectively.

 

Other Fees

The registrant has no audit-related, tax or other fees billed and/orpaid during 2005 or 2004 for services provided by the principal accountant.

 

All fees are approved in advance by the PACCAR Inc audit committee.

 

32

----

 

**PART IV**

 

**ITEM15.****      ****EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

** **

(1) Listing offinancial statements

 

Thefollowing financial statements of the Company are included in Item 8:

 

Statementsof Income – Years Ended December 31, 2005, 2004 and 2003

 

BalanceSheets – December 31, 2005 and 2004

 

Statementsof Cash Flows – Years Ended December 31, 2005, 2004 and 2003

 

Statementsof Stockholder’s Equity – Years Ended December 31, 2005, 2004 and 2003

 

Statementsof Comprehensive Income – Years Ended December 31, 2005, 2004 and 2003

 

Notesto Financial Statements – December 31, 2005, 2004 and 2003

 

(2) Listing offinancial statement schedules

 

Allschedules are omitted because the required matter or conditions are not presentor because the information required by the schedules is submitted as part ofthe consolidated financial statements and notes thereto.

 

(3) Listing ofExhibits

 

Theexhibits required by Item 601 of Regulation S-K are listed in the accompanying Exhibit Index.

 

33

----

 

SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | PACCAR Financial Corp. |
|--------|------------------------|
|   |                   |
|   |                   |   |
|   | By                     | /s/ Timothy M. Henebry |   |
|   |                   | Timothy M. Henebry |
|   |                   | President |

 

Date: February 27,2006

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant as of theabove date and in the capacities indicated.

 
| (1)    | Principal Executive  Officer          |                      |
|--------|---------------------------------------|---------------------------|
|   |                                  |                      |
|   |                                  |                      |
|   |                                  | /s/ Mark C. Pigott        |   | Chairman |
|   |                                  | Mark C. Pigott            |   |
|   |                                  |                      |
| (2)    | Principal Financial  Officer          |                      |
|   |                                  |                      |
|   |                                  |                      |
|   |                                  | /s/ Michael A.  Tembreull |   | Vice Chairman |
|   |                                  | Michael A. Tembreull      |   |
|   |                                  |                      |
| (3)    | Principal Accounting  Officer         |                      |
|   |                                  |                      |
|   |                                  |                      |
|   |                                  | /s/ Brice J. Poplawski    |   | Controller |
|   |                                  | Brice J. Poplawski        |   |
|   |                                  |                      |
| (4)    | A Majority of the  Board of Directors |                      |
|   |                                  |                      |
|   |                                  |                      |
|   |                                  | /s/ Timothy M. Henebry    |   |   |
|   |                                  | Timothy M. Henebry        |   |
|   |                                  |                      |
|   | Kenneth R. Gangl*                     |                      |
|   | Thomas E. Plimpton*                   |                      |

 

----

| *By    | /s/ Timothy M. Henebry |   |   |
|--------|------------------------|--------|--------|
|   | Timothy M. Henebry     |   |
|   | Attorney-in-fact       |   |

 

34

----

 

**EXHIBIT INDEX**

 
| 3.1    |   | Restated Articles of  Incorporation of the Company, as amended (incorporated by reference to  Exhibit 3.1 to the Company’s Annual Report on Form 10-K dated  March 26, 1985. Amendment incorporated by reference to Exhibit 19.1  to the Company’s Quarterly Report on Form 10-Q dated August 13,  1985, File Number 0-12553).                                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2    |   | By-laws of the  Company, as amended (incorporated by reference to Exhibit 3.2 to the  Company’s Registration Statement on Form 10 dated October 20, 1983,  File Number 0-12553).                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1    |   | Indenture for Senior  Debt Securities dated as of December 1, 1983 and first Supplemental  Indenture dated as of June 19, 1989 between the Company and Citibank,  N.A. (incorporated by reference to Exhibit 4.1 to the Company’s Annual  Report on Form 10-K dated March 26, 1984, File Number 0-12553 and  Exhibit 4.2 to the Company’s Registration Statement on Form S-3  dated June 23, 1989, Registration Number 33-29434). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5    |   | Forms of Medium-Term  Note, Series J (incorporated by reference to Exhibits 4.2A and 4.2B to  the Company’s Registration Statement on Form S-3 dated March 2,  2000, Registration Number 333-31502).                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | Form of Letter of  Representation among the Company, Citibank, N.A. and The Depository Trust  Company, Series J (incorporated by reference to Exhibit 4.3 to the  Company’s Registration Statement on Form S-3 dated March 2, 2000,  Registration Number 333-31502).                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Forms of Medium-Term  Note, Series K (incorporated by reference to Exhibits 4.2A and 4.2B to  the Company’s Registration Statement on Form S-3 dated December 23,  2003, Registration Number 333-111504).                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | Form of Letter of  Representation among the Company, Citibank, N.A. and The Depository Trust  Company, Series K (incorporated by reference to Exhibit 4.3 to the  Company’s Registration Statement on Form S-3 dated December 23,  2003, Registration Number 333-111504).                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1   |   | Support Agreement  between the Company and PACCAR dated as of June 19, 1989 (incorporated  by reference to Exhibit 28.1 to the Company’s Registration Statement on  Form S-3 dated June 23, 1989, Registration Number 33-29434).                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.1   |   | Statement re:  computation of ratio of earnings to fixed charges of the Company pursuant to  SEC reporting requirements for each of the five years ended December 31,  2001 - 2005.                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.2   |   | Statement re:  computation of ratio of earnings to fixed charges of the Company pursuant to  the Support Agreement with PACCAR for each of the five years ended  December 31, 2001 - 2005.                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.3   |   | Statement re:  computation of ratio of earnings to fixed charges of PACCAR and subsidiaries  pursuant to SEC reporting requirements for each of the five years ended  December 31, 2001 - 2005.                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23     |   | Consent of Independent  Auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 25.1   |   | Power of attorney of  certain officers and directors.                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification  - Certification of Principal Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification  - Certification of Principal Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 32.1   |   | Section 1350 Certifications -  Certification pursuant to Rule 13a-14(b) and Section 906 of  the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350).                                                                                                                                                                                                                                                                                                       |

 

Other exhibits listed inItem 601 of Regulation S-K are not applicable.

 

35

----