**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

 

# **FORM 10-K**

 

**FOR ANNUAL AND TRANSITION REPORTSPURSUANT TO SECTIONS 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**(Mark One)**

| **ý**                                                                                                                                                                                                                                                     |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  (NO FEE REQUIRED)**     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                           |   |                                                                                                             |
| **For the fiscal year ended December 31, 2003**                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                           |
| **OR**                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                           |
| **o**                                                                                                                                                                                                                                                          |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  (NO FEE REQUIRED)** |
|                                                                                                                                                                                                                                                           |   |                                                                                                             |
| **For  transition period from                     to                    ** |
|                                                                                                                                                                                                                                                           |   |                                                                                                             |
| **Commission  File No. 0-12553**                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                |        |                                                                                                                  |  |  |

 

|                                                          | **PACCAR FINANCIAL CORP.**                              |                   |
|---------------------------------------------------------------|---------------------------------------------------------|------------------------|
|                                                          | (Exact  name of Registrant as specified in its charter) |                   |
|                                                          |                                                    |                   |   |   |
|                                                          | **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 area code)   |
|                                                         |   |   |
| Securities  registered pursuant to Section 12(b) of the 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) of the Act: |
| **None**                                                     |
| (Title  of Class)                                            |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter periods that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for at least the past 90 days. Yes  ý  No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act). Yes  o  No ý

 

Theaggregate market value of the voting stock held by non-affiliates of theregistrant as of June 30, 2003:

**None**

 

Theaggregate market value of the voting stock held by non-affiliates of theregistrant as of February 29, 2004:

**None**

 

Thenumber of shares outstanding of the registrant’s classes of common stock as ofFebruary 29, 2004:

 

**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) OF FORM 10-KAND IS, THEREFORE, FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

 

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**PACCAR Financial Corp.**

 

**INDEX**

 
| **PART I**   |        |
|--------------|-------------|
|         |        |   |   |
|         | **Item 1.** | **Business** |   |
|         | 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 and Related Stockholder Matters |   |
|         | Item 6.     | Selected Financial Data |   |
|         | Item  7.    | Management’s  Discussion and Analysis of Results of Operations and Financial Condition |   |
|         | 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 |   |
|         |        |   |   |
| **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 |   |
|         | Item  13.   | Certain  Relationships and Related Transactions |   |
|         | Item  14.   | Principal  Accountant Fees and Services |   |
|         |        |   |   |
| **PART IV**  |        |   |
|         |        |   |   |
|         | Item  15.   | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K |   |

 

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**PACCAR Financial Corp.**

(Millionsof Dollars)

 

**PART I**

 

#### **ITEM 1.          BUSINESS**

 

## **GENERAL**

 

PACCAR Financial Corp.

 

PACCARFinancial Corp. (the “Company”), a Washington corporation, was organized in1961 as a wholly-owned subsidiary of PACCAR Inc (“PACCAR”) to finance the saleof PACCAR products. In 2000, PACCAR transferred the stock of the Company toPACCAR Financial Services Corporation (“PFSC”), a wholly-owned subsidiary ofPACCAR.

 

TheCompany provides financing and leasing of trucks and related equipment manufacturedprimarily by PACCAR and sold through PACCAR’s independent dealer network in theUnited States. The Company finances dealer inventories of transportationequipment. The Company's PacLease division franchises PACCAR dealerships toengage 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.

 

### PACCAR

 

PACCAR has two principal industry segments,(1) design, manufacture and distribution of light-, medium- and heavy-dutytrucks and related aftermarket distribution of parts and (2) finance andleasing services provided to customers and dealers. PACCAR distributes trucksand parts primarily through its independent dealer network. PACCAR’s financeand leasing activities are principally related to PACCAR products andassociated equipment. Other manufactured products include industrial winches.

 

PACCAR and its subsidiaries design andmanufacture heavy-duty diesel trucks which are marketed under the Peterbilt,Kenworth, DAF and Foden nameplates. These vehicles, which are built in fourplants in the United States, three in Europe and one each in Australia, Canadaand Mexico, are used worldwide for over-the-road and off-highway hauling offreight, petroleum, wood products, construction and other materials. Commercialtrucks and related replacement parts comprise the largest segment of PACCAR’sbusiness, accounting for 93% of total 2003 net sales and revenues.

 

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 theUnited Kingdom by Leyland, one of PACCAR’s wholly-owned subsidiaries.

 

Substantially all trucks and related partsare sold to dealers, which are independent except for a small number of factorybranches. The Kenworth and Peterbilt nameplates are marketed and distributed byseparate divisions in the U.S. and a foreign subsidiary in Canada. The Kenworthnameplate is also marketed and distributed by foreign subsidiaries in Mexicoand Australia. The DAF and Foden nameplates are marketed and distributed byforeign subsidiaries headquartered in the Netherlands and United Kingdom,respectively. A U.S. division, PACCAR International, also markets all fournameplates outside each of Kenworth’s, Peterbilt’s, DAF’s and Foden’s primarymarkets. The decision to operate as a subsidiary or as a division is incidentalto Truck Segment operations and reflects legal, tax and regulatory requirementsin the various countries where PACCAR operates.

 

There were three otherprincipal competitors in the U.S. and Canada Class 8 truck market in 2003.PACCAR’s share of that market was 23.5% of retail sales in 2003. In Europethere were five other principal competitors in the commercial vehicle market in2003, including parent companies to two competitors of PACCAR in the UnitedStates. PACCAR’s subsidiary, DAF, had a 12.7% share of the Western Europeanheavy-duty market

 

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andan 8.7% share of the light/medium market. These markets are highly competitivein price, quality and service, and PACCAR is not dependent on any singlecustomer for its sales. There are no significant seasonal variations.

 

In addition to theCompany, which provides financing, leasing and full-service truck leasing inthe United States, PACCAR offers similar financing programs for PACCAR productsthrough other wholly-owned finance companies in Mexico, Canada, Australia, theUnited Kingdom, the Netherlands, Belgium, Germany, France, Italy and Spain.PACCAR also conducts full-service leasing operations through wholly-ownedsubsidiaries in Canada 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.

 

BUSINESSOF THE COMPANY

 

The Company operatesprimarily in one industry segment, truck and related equipment financing in theUnited States. The Company provides financing to customers and dealers for newKenworth and Peterbilt trucks, used trucks, truck trailers and alliedequipment. The Company's PacLease division franchises PACCAR dealerships toengage in full-service and finance leasing. In selected markets, PacLease directly engages in full-service leasingwith its customers through Company-owned stores and on a limited basis throughPACCAR dealerships.

 

The Company currentlyconducts business with most PACCAR dealers in the United States. The volume ofthe Company’s business is significantly affected by PACCAR’s sales of trucks toits dealers and competition from other financing sources.

 

As of December 31, 2003,the Company employed 274 full-time employees, none of whom are represented by acollective bargaining agent. The Company considers relations with its employeesto be good.

 

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TheCompany’s Products

 

RetailCustomers

 

RetailContracts 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.

 

DirectLoans The Company also makes loans to the end users of thevehicles financed that are secured by a first lien security interest in thevehicles (“Direct Loans”). Direct Loans have fixed or floating interest rates.

 

DirectFinancing Leases The Company offers direct financinglease contracts where it is treated as the owner of the equipment for taxpurposes and generally retains the tax depreciation (“Direct FinancingLeases”). 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.

 

Most of the Company’sDirect Financing Leases contain a Terminal Rental Adjustment Clause, whichrequires the lessee to guarantee to the Company a stated residual value upondisposition of the equipment at the end of the direct financing lease term.

 

OperatingLeases The Company offers operating lease contracts (“OperatingLeases”) where the Company owns the equipment. The lessee is responsible forthe payment of property and sales taxes, licenses, maintenance and otheroperating items. The lessee is obligated to maintain the equipment and toinsure the equipment against casualty and liability losses.

 

At the end of theoperating lease term, the lessee has the option to return the equipment to theCompany or purchase the equipment at it’s 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.

 

The Company offersphysical damage and liability insurance on new and used trucks and trailers toits full-service lease customers. The Company retains premium and loss exposurefor the policies that are issued through an unrelated, regulated insurancecarrier. To limit its exposure the Company has acquired insurance coverage forlosses above specified levels from a third party insurance carrier.

 

Dealers/Franchises

 

MasterNotes Master note contracts (“Master Note”) are an alternativeform of retail financing offered to select dealers for new and used trucks.Retail installment contracts originated by the dealer for new or used trucksand meeting the Company’s requirement as to form, terms and creditworthinessfor Retail Contracts are pledged to the Company as collateral for direct, fullrecourse loans by the Company to the dealer. Master Notes have fixed orfloating interest rates.

 

WholesaleContracts The Company provides wholesale financing for new and usedtruck and trailer inventories for dealers (“Wholesale Contracts”). WholesaleContracts are secured by the inventories financed. The amount of creditextended by the Company for each truck is generally limited to the invoiceprice of new equipment and to the wholesale value of used equipment. Interestunder Wholesale Contracts is based upon floating interest rates.

 

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DealerLoans The Company makes loans to selected Peterbilt and Kenworthdealers (“Dealer Loans”). The purpose of these loans includes the financing ofreal estate, fixed assets, working capital and dealership acquisitions. DealerLoans may have fixed or floating interest rates.

 

Full-ServiceLeasing The Company also conducts full-service leasing operationsunder the PacLease trade name. Selected dealers are franchised to providefull-service leasing. 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.

 

CUSTOMERCONCENTRATION, PAST DUE ACCOUNTS AND LOSS EXPERIENCE

 

CustomerConcentration

 

TheCompany’s customers are concentrated in the transportation industry throughoutthe United States. However, for the periods ended December 31, 2003, 2002 and2001, the Company does not have contractual arrangements with any one party(customers, dealers and/or franchises) that account for 10% or more of totalInterest and Other Revenue.

 

PastDue Receivables and Allowance for Losses

 

An account is consideredpast due by the Company if any portion of an installment is due and unpaid formore than 30 days. In periods of adverse economic conditions, past due levels,repossessions and credit losses generally increase.

 

The Company maintains anallowance for losses on receivables at a level that it considers to be adequateto cover management’s estimates of losses.

 

For further discussionof the allowance for losses, see “Management’s Discussion and Analysis ofResults of Operations and Financial Condition.”

 

COMPETITIONAND ECONOMIC FACTORS

 

The commercial truck andtrailer finance and leasing business is highly competitive among banks,commercial finance companies, captive finance companies and leasing companies.Many of these institutions have substantially greater financial resources thanthe Company and may borrow funds at lower rates.

 

The dealers are theprimary source of contracts acquired by the Company. However, dealers are notrequired to obtain financing from the Company, and they have a variety of othersources that may be used for wholesale and customer financing of trucks. Retailpurchasers also have a variety of sources available to finance truck purchases.

 

The ability of theCompany to compete in its market is principally based on the rates, terms andconditions that the Company offers dealers and retail purchasers, as well asthe specialized services it provides. Rates, terms and conditions are based onthe Company’s desire to provide flexible financing and services to satisfydealer and customer needs, the ability of the Company to borrow funds atcompetitive rates and the Company’s need to earn an adequate return on itsinvested capital. The Company’s business is also affected by changes in marketinterest rates, which in turn are related to general economic conditions,demand for credit, inflation and governmental policies. Seasonality is not asignificant factor in the Company’s business.

 

5

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The volume ofreceivables available to be acquired by the Company from dealers is largelydependent upon the number of Kenworth and Peterbilt trucks sold in the UnitedStates. Sales of medium- and heavy-duty trucks depend on the capital equipmentrequirements of the transportation industry, which in turn are influenced bygrowth and cyclical variations in the economy. Medium- and heavy-duty trucksales are also sensitive to economic factors such as fuel costs, interestrates, insurance premiums, federal excise and highway use taxes, taxation onthe acquisition and use of capital goods, as well as government regulations.

 

REGULATIONAND SIMILAR MATTERS

 

In certain states, theCompany is subject to retail installment sales or installment loan statutes andrelated regulations, the terms of which vary from state to state. These lawsmay require the Company to be licensed as a sales finance company and mayregulate disclosure of finance charges and other terms of retail installmentcontracts. The Company is subject to substantive state franchise regulationsand federal and state uniform franchise disclosure laws in connection with theoffering of PacLease full service truck leasing and rental franchises to PACCARtruck dealers. The Company also owns and operates several such truck leasingand rental business locations, which are subject to applicable state licensinglaws. The Company is subject to state insurance regulations in connection withits licensed insurance salesmen. The Company is also subject to certainprovisions of federal law relating to non-discrimination in the granting ofcredit.

 

SOURCESOF FUNDS

 

The Company’s primarysources of funds are commercial paper and publicly issued medium-term noteborrowings in the capital markets, collections on loans and leases, retainedearnings and to a lesser extent bank loans and capital contributions from PFSC.The Company’s profitable acquisition of additional receivables is dependentupon its ability to raise funds at competitive rates in the public and privatedebt markets. The receivables and leases that are financed are either fixedrate or floating rate with terms that range from 12 to 84 months.

 

To reduce the risk ofchanges in interest rates that could affect interest margins, the Companyobtains funds with interest rate characteristics similar to the correspondingassets. Fixed rate assets are funded primarily with publicly offeredmedium-term notes and commercial paper. Interest rate swaps are combined withcommercial paper or floating rate medium-term notes to convert floating ratedebt to fixed rate debt. Floating rate assets are funded primarily withcommercial paper with maturities of three months or less and floating ratemedium-term notes. As a result, the Company’s interest margin on existingbusiness does not change significantly as interest rates change.

 

The Company enters intointerest rate swap contracts as a tool 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, 2003, the total notional principal amountof interest rate swap contracts outstanding was $1,521.1, all of which resultin a fixed rate payment obligation. The notional amount is used to measure thevolume of these contracts and does not represent exposure to credit loss. TheCompany’s risk in these transactions is the cost of replacing, at currentmarket rates, these contracts in the event of default by the counterparty.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 participateswith PACCAR and certain other PACCAR affiliates in syndicated credit facilitiesof $1,500.0 at December 31, 2003 of which $1,350.0 is available for use by theCompany and/or PACCAR and certain other PACCAR affiliates. The creditfacilities mature as follows, $750.0 expires in July 2004 and $750.0 expires inJuly 2006. These credit facilities are used to provide backup liquidity for theCompany’s short-term

 

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borrowings.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, 2003 or 2002.

 

As of December 31, 2003,the Company had $1,480.0 of medium-term notes outstanding under a $2,500.0shelf registration statement (fully utilized as of October 20, 2003), $800.0 ofwhich are due within 12 months. The Company filed a new $3,000.0 shelfregistration statement which became effective January 16, 2004. See “Note F –Borrowings” in the Notes to Financial Statements for further information onmedium-term notes.

 

An indenture of theCompany dated as of December 1, 1983, as amended by a first supplementalindenture dated June 19, 1989 (Exhibit 4.1), with respect to the Company’smedium-term notes which are publicly issued from time to time, containsrestrictions limiting secured debt which may be incurred by the Company and anysubsidiary.

 

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RELATIONSHIPWITH PACCAR AND 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 other facilities owned by PACCAR. Since thedirectors of the Company are all executives of PACCAR or its affiliatedcompanies and PACCAR is the sole owner of PFSC’s outstanding voting commonstock, PACCAR can determine the course of the Company’s business.

 

The Company periodicallyloans funds to certain foreign finance and leasing affiliates of PACCAR. Thesevarious affiliates have Support Agreements with PACCAR, similar to theCompany’s Support Agreement. The foreign affiliates operate in the UnitedKingdom, the Netherlands, Mexico, Canada and Australia, and any resultingcurrency exposure is fully hedged. The foreign affiliates provide financing andleasing of trucks and related equipment manufactured primarily by PACCAR andsold through 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 $300.0 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.

 

PFSC charges the Companyfor certain administrative services it provides and certain services theCompany receives indirectly from PACCAR. As of December 31, 2003, PFSC employed161 full-time employees, none of whom are represented by a collectivebargaining agent. The costs are charged to the Company based upon the Company’sspecific use of the services at PFSC’s or PACCAR’s cost. Management considersthese charges reasonable and similar to the costs that would be incurred if theCompany were on a stand-alone basis. See “Note D – Transactions with PACCAR andAffiliates” in the Notes to Financial Statements.

 

SupportAgreement

 

The Company and PACCARare parties to a Support Agreement that obligates PACCAR to provide, whenrequired, financial assistance to the Company to assure that the Companymaintains a ratio of net earnings available for fixed charges to fixed charges(as defined) of at least 1.25 to 1 for any fiscal year. The Support Agreementalso requires PACCAR to own, directly or indirectly, all outstanding votingstock of the Company. The required ratio was met for the years ended December31, 2003 and 2002 without assistance. In order to maintain the ratio of 1.25 to1 in 2001, PACCAR provided earnings support by assuming $17.0 of the Company’sinterest expense. See “Note D – Transactions with PACCAR and Affiliates” in theNotes to Financial Statements.

 

The Company and PACCARmay amend or terminate any or all of the provisions of the Support Agreementupon 30 days notice, with copies of the notice being sent to all nationallyrecognized statistical rating organizations (“NRSROs”) which have issuedratings with respect to debt of the Company (“Rated Debt”). Such amendment ortermination will be effective only if (i) two NRSROs confirm in writing thattheir ratings with respect to any Rated Debt would remain the same after suchamendment or termination, or (ii) the notice of amendment or terminationprovides that the Support Agreement will continue in effect with respect toRated Debt outstanding on the effective date of such amendment or terminationunless such debt has been paid or defeased pursuant to the indenture or otheragreement applicable to such debt, or (iii) the holders of at least two-thirdsof the aggregate principal amount of all outstanding Rated Debt with originalmaturity in excess of 270 days consent in writing to such amendment ortermination, provided that the holders of Rated Debt having an originalmaturity of 270 days or less shall continue to have the benefits of the SupportAgreement until the maturity of such debt.

 

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The Support Agreementexpressly states that PACCAR’s commitments to the Company thereunder do notconstitute a PACCAR guarantee of payment of any indebtedness or liability ofthe Company to others and do not create rights against PACCAR in favor ofpersons other than the Company. There are no guarantees, direct or indirect, byPACCAR of payment of any indebtedness of the Company.

 

OTHERDISCLOSURES

 

The Company’s filings onForm 10-K, 10-Q and 8-K and any amendments to those reports can be reachedthrough a link on the Company’s website, www.paccarfinancial.com, or PACCARInc’s website, www.paccar.com, free of charge as soon as reasonably practicableafter the report is electronically filed with, or furnished to, the Securitiesand Exchange Commission.

 

**ITEM 2.          PROPERTIES**

 

The Company’s principaloffice is located in the corporate headquarters building of PACCAR (owned byPACCAR) at 777 106th Avenue N.E., Bellevue, Washington 98004. TheCompany owns two full-service leasing facilities in Texas.

 

Other offices andleasing facilities of the Company are located in leased premises including twofacilities owned by PACCAR. The Company considers all its properties to besuitable for their intended purpose. Annual lease rentals for these premises inthe aggregate are not material in relation to expenses as a whole.

 

**ITEM 3.          LEGALPROCEEDINGS**

 

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.

 

**ITEM 4.          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Not applicable.

 

**PART II**

 

**ITEM 5.          MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

All outstanding commonstock is owned by PFSC; therefore, there is no trading market in the Company’scommon stock.

 

Acash dividend in the amount of $11.0 was declared and paid in the secondquarter of 2002. There were no cash dividends paid to PFSC during 2003 or 2001.

 

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**ITEM 6.  SELECTEDFINANCIAL DATA**

 

The following tablesummarizes selected financial data for the Company. The information withrespect to each of the five years in the period ended December 31, 2003 hasbeen derived from the Company’s audited financial statements.

 

**BalanceSheet Data**

 
|                             |   | **As of December 31** |        |
|----------------------------------|--------|-----------------------|-------------|
|                             |   | **2003**              |        | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                             |   |                  |        |   |   |   |   |   |   |   |   |
| Total Assets                     |   | **$**                 | **3,473.3** |   | $ | 3,511.5 |   | $ | 3,562.6 |   | $ | 4,119.4 |   | $ | 3,732.3 |   |
| Total Liabilities                |   | **2,834.8**           |        | 2,955.6 |   | 3,039.6 |   | 3,597.2 |   | 3,260.0 |   |
| Total Stockholder’s  Equity |   | **638.5**             |        | 555.9 |   | 523.0 |   | 522.2 |   | 472.3 |   |
|                                  |        |                       |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**IncomeStatement Data**

 
|                                                                           |   | **Year ended December 31** |      |
|--------------------------------------------------------------------------------|--------|----------------------------|-----------|
|                                                                           |   | **2003**                   |      | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Interest and other  revenue                                                    |   | **$**                      | **285.0** |   | $ | 292.6 |   | $ | 345.9 |   | $ | 376.3 |   | $ | 304.9 |   |
|                                                                           |   |                       |      |   |   |   |   |   |   |   |   |
| Total expenses before  assumption of interest expense by PACCAR                |   | **206.9**                  |      | 247.6 |   | 338.0 |   | 322.3 |   | 243.3 |   |
| Assumption of interest  expense by PACCAR (1)                                  |   | **—**                 |      | — |   | (17.0 | ) | — |   | — |   |
| Total expenses                                                                 |   | **206.9**                  |      | 247.6 |   | 321.0 |   | 322.3 |   | 243.3 |   |
|                                                                           |   |                       |      |   |   |   |   |   |   |   |   |
| Income before income  taxes                                                    |   | **78.1**                   |      | 45.0 |   | 24.9 |   | 54.0 |   | 61.6 |   |
| Income taxes                                                                   |   | **30.8**                   |      | 17.7 |   | 9.7 |   | 21.0 |   | 23.8 |   |
|                                                                           |   |                       |      |   |   |   |   |   |   |   |   |
| Income before  cumulative effect of accounting change                          |   | **47.3**                   |      | 27.3 |   | 15.2 |   | 33.0 |   | 37.8 |   |
| Cumulative effect of  accounting change (net of tax)                           |   | **—**                 |      | — |   | .4 |   | — |   | — |   |
|                                                                           |   |                       |      |   |   |   |   |   |   |   |   |
| Net income                                                                     |   | **$**                      | **47.3**  |   | $ | 27.3 |   | $ | 15.6 |   | $ | 33.0 |   | $ | 37.8 |   |
|                                                                           |   |                       |      |   |   |   |   |   |   |   |   |
| Ratio of Earnings to  Fixed Charges Pursuant to SEC reporting Requirements (2) |   | 1.98                       | x         | 1.39 | x | 1.16 | x | 1.26 | x | 1.40 | x |
|                                                                           |   |                       |      |   |   |   |   |   |   |   |   |
| Ratio of Earnings to  Fixed Charges Pursuant to the Support Agreement          |   | 2.33                       | x         | 1.53 | x | 1.25 | x | 1.31 | x | 1.46 | x |

 

----

(1)  Inorder to maintain the ratio of earnings to fixed charges in 2001, PACCARprovided earnings support of $17.0 through the assumption of the Company’sinterest expense. No earnings support was provided for the years endingDecember 31, 1999 - 2000 and 2002 - 2003.

 

(2)  Forthe purposes 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 method calledfor in the Support Agreement between the Company and PACCAR (see Exhibit 12.2).

 

10

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**ITEM 7.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION**(Millions ofDollars)

 

**Results of Operations**

 
|                             |   | **Year ended December 31** |        |
|----------------------------------|--------|----------------------------|-------------|
|                             |   | **2003**                   |        | **2002** |   | **2001** |   |
| Average earning assets           |   | **$**                      | **3,140.5** | ** ** | $ | 3,214.1 |   | $ | 3,629.3 |   |
| Interest and other  revenue      |   | **285.0**                  | ** **  | 292.6 |   | 345.9 |   |
| Income before taxes              |   | **78.1**                   | ** **  | 45.0 |   | 24.9 |   |
| Net income                       |   | **47.3**                   | ** **  | 27.3 |   | 15.6 |   |
|                             |   |                       | ** **  |   |   |   |   |
| Allowance for Losses:            |   |                       | ** **  |   |   |   |   |
| Balance at beginning  of year    |   | **$**                      | **66.9**    | ** ** | $ | 66.2 |   | $ | 65.4 |   |
| Provision for losses             |   | **19.6**                   | ** **  | 42.2 |   | 80.8 |   |
| Credit losses net of  recoveries |   | **(19.1**                  | **)**       | (41.5 | ) | (80.0 | ) |
| Balance at end of year           |   | **$**                      | **67.4**    | ** ** | $ | 66.9 |   | $ | 66.2 |   |

 
| Ratios:                                                                                                                                                |   |     |   |   |   |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|--------|--------|--------|--------|
| Credit losses net of  recoveries ($19.1 in 2003) to average net receivables and equipment on  operating leases ($3,140.5 in 2003)                      |   | **.61**  | **%**  | 1.29   | %      | 2.20   | %      |
| Allowance for losses  ($67.4 in 2003) to year-end net receivables and equipment on operating leases  ($3,172.9 in 2003)                                |   | **2.12** | **%**  | 2.04   | %      | 1.98   | %      |
| Year-end retail  receivables and leases past due, over 60 days, ($31.2 in 2003) to year-end  retail contracts and lease receivables ($2,714.8 in 2003) |   | **1.15** | **%**  | 1.91   | %      | 3.11   | %      |

 

**2003 Compared to 2002:**

 

The Company’s net incomeincreased 73% to $47.3 in 2003 from $27.3 in 2002. The profit improvementresulted from both a lower provision for losses and a higher finance margin.Interest and other revenue decreased 3% to $285.0 from $292.6 in 2002 due tolower earning assets and lower interest rates partially offset by higheroperating lease and rental income. Although 2003 new truck volume wasconsistent with 2002 levels, average earning assets decreased slightly due tocontinued runoff of the portfolio. Interest and other borrowing expensesdecreased 30% to $83.2 in 2003 due to lower average debt balances and interestrates. Depreciation and other operating lease and rental expenses increased 48%to $47.2 in 2003 from $31.9 in 2002 primarily due to higher operating leaseassets. Lower levels of past due accounts and repossessions contributed to the provisionfor losses on receivables decreasing 54% to $19.6 in 2003 compared to $42.2 in2002.

 

**2002 Compared to 2001:**

 

The Company’s net incomeincreased 75% to $27.3 in 2002 from $15.6 in 2001. The improvement in netincome was the result of a lower provision for losses on receivables partiallyoffset by a decrease in finance margin. Interest and other revenue decreased15% to $292.6 over the same period due to lower earning assets and lowerinterest rates. Average earning assets decreased 11% in 2002 to $3,214.1 from$3,629.3 in 2001 due to collections on accounts exceeding new business volume.The provision for losses on receivables decreased 48% to $42.2 in 2002 comparedto $80.8 in 2001. In 2002, the Company experienced lower levels of past duesand repossessions as well as a lower loss per repossession compared with 2001.

 

11

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The Company and PACCARare parties to a Support Agreement which obligates PACCAR to provide, whenrequired, financial assistance to the Company to assure that the Companymaintains a ratio of net earnings available for fixed charges to fixed charges(as defined) of at least 1.25 to 1 for any fiscal year. The required ratio forthe year ended December 31, 2002 was met without assistance. In order tomaintain the ratio of earnings to fixed charges in 2001, PACCAR providedearnings support by assuming $17.0 of the Company’s interest expense. Withoutearnings support the Company’s net income would have been $5.1.

 

**Company Outlook**

 

The outlook for theCompany is dependent on the generation of new business and by the level ofcredit losses experienced. Asset growth is likely, consistent with theanticipated improvement in the general economy and the resulting increase intruck sales. Some economic weakness, as well as high fuel and insurance costs,could exert pressure on the profit margins of truck operators and result in areturn to higher past-due accounts and repossessions.

 

**Funding and Liquidity**

 

TheCompany manages its capital structure consistent with industry standards. Since1983, the Company has registered debt securities under the Securities Act of1933 for offering to the public. A $2,500.0 shelf registration statement filedin 2000 had been fully utilized as of October 20, 2003. The Company filed a new$3,000.0 shelf registration statement which became effective on January 16,2004. The Company expects to use the shelf offering proceeds for generalcorporate purposes, which may include debt repayment.

 

The Company believesthat it has sufficient financial capabilities to continue funding receivablesand servicing debt through internally generated funds, access to public andprivate debt markets, lines of credit, and other financial resources.

 

The Company’s investmentgrade credit ratings continue to provide access to capital markets atcompetitive interest rates. The Company’s debt ratings at December 31, 2003 areas follows:

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

 

12

----

 

Thefollowing summarizes the Company’s contractual cash commitments at December 31,2003:

 
|             |   | **Maturity**            |    |                    |   |
|------------------|--------|-------------------------|---------|-------------------------|--------|
|             |   | **Less than  One Year** |    | **More than  One Year** |   | **Total** |   |
| Borrowings       |   | $                       | 1,814.5 |                    | $      | 680.0 |   | $ | 2,494.5 |   |
| Operating Leases |   | .6                      |    | 1.5                     |   | 2.1 |   |
|             |   |                    |    |                    |   |   |   |
| Total            |   | $                       | 1,815.1 |                    | $      | 681.5 |   | $ | 2,496.6 |   |

 

As described in Note Fto the financial statements, borrowings consist primarily of term debt andcommercial paper. The Company has operating leases for office space, truck leasingfacilities and office equipment. In addition, the Company had loan and leasecommitments of $178.4 expiring within one year. These commitments representcommitments to fund new retail loan and lease contracts.

 

**Critical Accounting Policies:**

 

In the preparation ofthe Company’s financial statements, in accordance with Accounting PrinciplesGenerally Accepted in the United States, management uses estimates and makesjudgments and assumptions that affect asset and liability values and theamounts reported as income and expense during the periods presented. Thefollowing are accounting policies which, in the opinion of management, areparticularly sensitive and which, if actual results are different, may have amaterial impact on the financial statements.

 

Equipmenton Operating Leases

 

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 CreditLosses

 

Theestablishment of the allowance for credit losses on financial servicesreceivables is dependent on estimates, including assumptions regardingcollectibility of past due accounts, repossession rates and the recovery rateon the underlying collateral. The Com­pany believes its reserve-settingpolicies adequately take into account the known risks in­herent in thefinancial services portfolio. If there are significant variations in the actualresults from those estimates, the provision for credit losses and operatingearnings may be adversely impacted. See “Note A – Significant AccountingPolicies” in the Notes to Financial Statements.

 

**Forward Looking Statements**

 

Certain information presented in this Form 10-K containsforward-looking statements made pursuant to the Private Securities LitigationReform Act of 1995, which are subject to risks and uncertainties that mayaffect actual results. Risks and uncertainties include, but are not limited to:national and local economic, political and industry conditions; changes in thelevels 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

 

13

----

 

impacting equipment costs and residual values; changesin costs and availability of external funding sources; and legislation andgovernmental regulation.

 

**ITEM 7A.       QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

MarketRisk and Derivative Financial Instruments

 

In the normal course ofbusiness, the Company issues various financial instruments that expose the Companyto market risk associated with market interest rates. Policies and procedureshave been established by the Company to manage these market risks through theuse of various derivative financial instruments. The Company does not engage inderivatives trading, market-making or other speculative activities.

 

The following is asensitivity analysis for the Company’s derivatives that have interest raterisk. These instruments are held for other than trading purposes. The gains orlosses in the following table represent the changes in the financialinstruments’ fair values that would result from a 100 basis point increase ofthe current market rate at December 31, 2003 and 2002.

 

**Fair Value Gains (Losses)**

(Millionsof Dollars)
|                                                                                                   |   | **Year ended December 31** |       |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------|------------|
|                                                                                                   |   | **2003**                   |       | **2002** |   |
|                                                                                                   |   |                       |       |   |   |
| Assets                                                                                                 |   |                       |       |   |   |
| Retail notes,  contracts and wholesale financing, net of unearned interest, less allowance  for losses |   | **$**                      | **(26.4**  | **)** | $ | (23.9 | ) |
|                                                                                                   |   |                       | ** ** |   |   |
| Liabilities                                                                                            |   |                       | ** ** |   |   |
| Long-term debt                                                                                         |   | **.7**                     | ** ** | .5 |   |
| Interest rate swaps  related to financial services debt                                                |   | **20.5**                   | ** ** | 20.1 |   |
|                                                                                                   |   |                       | ** ** |   |   |
| Total                                                                                                  |   | **$**                      | **(5.2**   | **)** | $ | (3.3 | ) |

 

**ITEM 8.          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

The financial statementsof the Company and related schedules described under Item 15, “Exhibits,Financial Statement Schedules, and Reports on Form 8-K,” are included followingthis page.

 

14

----

 

Reportof Ernst & Young LLP, Independent Auditors

 

Boardof Directors

PACCARFinancial Services Corporation and PACCAR Financial Corp.

 

Wehave audited the accompanying balance sheets of PACCAR Financial Corp. (awholly-owned subsidiary of PACCAR Financial Services Corporation) as ofDecember 31, 2003 and 2002, the related statements of income, cash flows,stockholder’s equity and comprehensive income for each of the three years inthe period ended December 31, 2003. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of PACCAR Financial Corp. at December31, 2003 and 2002, and the results of its operations and its cash flows foreach of the three years in the period ended December 31, 2003 in conformitywith accounting principles generally accepted in the United States.

 
|                                    |   |   |   | /s/  Ernst & Young LLP |   |
|-----------------------------------------|--------|--------|--------|---------------------------------|--------|
|                                    |   |   |   |                            |   |
| Seattle,  Washington  February 18, 2004 |   |   |   |                            |   |

 

15

----

 

**PACCAR Financial Corp.**

 

**STATEMENTS OF INCOME**

(Millionsof Dollars)

 
|                                                        |   | **Year ended December 31** |      |
|-------------------------------------------------------------|--------|----------------------------|-----------|
|                                                        |   | **2003**                   |      | **2002** |   | **2001** |   |
|                                                        |   |                       |      |   |   |   |   |
| Interest and fee  income                                    |   | **$**                      | **202.9** |   | $ | 230.9 |   | $ | 291.6 |   |
| Operating lease and  rental income                          |   | **60.0**                   |      | 41.5 |   | 35.1 |   |
| Insurance premiums and  other revenue                       |   | **22.1**                   |      | 20.2 |   | 19.2 |   |
|                                                        |   |                       |      |   |   |   |   |
| **TOTAL  INTEREST AND OTHER REVENUE**                       |   | **285.0**                  |      | 292.6 |   | 345.9 |   |
|                                                        |   |                       |      |   |   |   |   |
| Interest and other  borrowing expenses (1)                  |   | **83.2**                   |      | 118.9 |   | 159.5 |   |
| Depreciation and other  operating lease and rental expenses |   | **47.2**                   |      | 31.9 |   | 28.2 |   |
| Insurance claims and  underwriting expenses                 |   | **12.5**                   |      | 11.7 |   | 10.3 |   |
| Selling general and  administrative expenses                |   | **44.4**                   |      | 42.9 |   | 42.2 |   |
| Provision for losses  on receivables                        |   | **19.6**                   |      | 42.2 |   | 80.8 |   |
|                                                        |   |                       |      |   |   |   |   |
| **TOTAL  EXPENSES**                                         |   | **206.9**                  |      | 247.6 |   | 321.0 |   |
|                                                        |   |                       |      |   |   |   |   |
| **INCOME  BEFORE INCOME TAXES AND ACCOUNTING CHANGE**       |   | **78.1**                   |      | 45.0 |   | 24.9 |   |
| Income taxes                                                |   | **30.8**                   |      | 17.7 |   | 9.7 |   |
|                                                        |   |                       |      |   |   |   |   |
| **NET  INCOME BEFORE ACCOUNTING CHANGE**                    |   | **47.3**                   |      | 27.3 |   | 15.2 |   |
|                                                        |   |                       |      |   |   |   |   |
| Cumulative effect of  accounting change (net of tax)        |   | **—**                 |      | — |   | .4 |   |
|                                                        |   |                       |      |   |   |   |   |
| **NET  INCOME**                                             |   | **$**                      | **47.3**  |   | $ | 27.3 |   | $ | 15.6 |   |

 

Earningsper share and dividends per share are not reported because the Company is awholly-owned subsidiary of PACCAR Financial Services Corporation.

 

SeeNotes to Financial Statements

 

----

(1)                                  Interest andother borrowing expense for the year ended December 31, 2001 after theassumption of interest expense of $17.0 by PACCAR. See “Note D – Transactionswith PACCAR and Affiliates.”

 

16

----

 

**PACCAR Financial Corp.**

 

**BALANCESHEETS**

(Millionsof Dollars)

 
|                                                                                                                                          |   | **As of December 31** |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|-------------|
|                                                                                                                                          |   | **2003**              |        | **2002** |   |
|                                                                                                                                          |   |                  |        |   |   |
| **ASSETS**                                                                                                                                    |   |                  |        |   |   |
|                                                                                                                                          |   |                  |        |   |   |
| Cash                                                                                                                                          |   | **$**                 | **5.5**     | ** ** | $ | 9.9 |   |
| Finance and other  receivables, net of allowance for losses (2003 - $67.4 and 2002 - $66.9)                                                   |   | **2,976.7**           | ** **  | 3,156.2 |   |
| Loans to PACCAR Inc  and affiliates                                                                                                           |   | **265.0**             | ** **  | 192.0 |   |
| Equipment on operating  leases, net of depreciation (2003 - $44.3 and 2002 - $26.8)                                                           |   | **198.7**             | ** **  | 122.3 |   |
| Other assets                                                                                                                                  |   | **27.4**              | ** **  | 31.1 |   |
|                                                                                                                                          |   |                  | ** **  |   |   |
| **TOTAL  ASSETS**                                                                                                                             |   | **$**                 | **3,473.3** | ** ** | $ | 3,511.5 |   |
|                                                                                                                                          |   |                  | ** **  |   |   |
| **LIABILITIES**                                                                                                                               |   |                  | ** **  |   |   |
|                                                                                                                                          |   |                  | ** **  |   |   |
| Accounts payable,  accrued expenses and other                                                                                                 |   | **$**                 | **134.4**   | ** ** | $ | 166.4 |   |
| Commercial paper                                                                                                                              |   | **1,014.5**           | ** **  | 1,120.6 |   |
| Medium-term notes and  other borrowings                                                                                                       |   | **1,480.0**           | ** **  | 1,484.0 |   |
| Income taxes – current  and deferred                                                                                                     |   | **205.9**             | ** **  | 184.6 |   |
|                                                                                                                                          |   |                  | ** **  |   |   |
| **TOTAL  LIABILITIES**                                                                                                                        |   | **$**                 | **2,834.8** | ** ** | $ | 2,955.6 |   |
|                                                                                                                                          |   |                  | ** **  |   |   |
| **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 $100 per share, 200,000 shares authorized, 145,000 shares issued and  outstanding                                    |   | **14.5**              | ** **  | 14.5 |   |
| Additional paid-in  capital                                                                                                                   |   | **131.9**             | ** **  | 116.0 |   |
| Retained earnings                                                                                                                             |   | **473.3**             | ** **  | 426.0 |   |
| Accumulated other  comprehensive loss                                                                                                         |   | **(12.2**             | **)**       | (31.6 | ) |
|                                                                                                                                          |   |                  | ** **  |   |   |
| **TOTAL  STOCKHOLDER’S EQUITY**                                                                                                          |   | **638.5**             | ** **  | 555.9 |   |
|                                                                                                                                          |   |                  | ** **  |   |   |
| **TOTAL  LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                          |   | **$**                 | **3,473.3** | ** ** | $ | 3,511.5 |   |

 

SeeNotes to Financial Statements

 

17

----

 

**PACCAR Financial Corp.**

 

**STATEMENTS OF CASH FLOWS**

(Millionsof Dollars)

 
|                                                                     |   | **Year ended December 31** |       |
|--------------------------------------------------------------------------|--------|----------------------------|------------|
|                                                                     |   | **2003**                   |       | **2002** |   | **2001** |   |
|                                                                     |   |                       |       |   |   |   |   |
| **OPERATING  ACTIVITIES**                                                |   |                       |       |   |   |   |   |
|                                                                     |   |                       |       |   |   |   |   |
| Net income                                                               |   | **$**                      | **47.3**   | ** ** | $ | 27.3 |   | $ | 15.6 |   |
| Items included in net  income not affecting cash:                        |   |                       | ** ** |   |   |   |   |
| Depreciation and  amortization                                           |   | **34.9**                   | ** ** | 21.9 |   | 17.6 |   |
| Provision for losses  on receivables                                     |   | **19.6**                   | ** ** | 42.2 |   | 80.8 |   |
| Provision for deferred  taxes                                            |   | **15.1**                   | ** ** | 25.1 |   | 7.2 |   |
| (Decrease) increase in  payables and other                               |   | **(9.8**                   | **)**      | 3.2 |   | (25.1 | ) |
|                                                                     |   |                       | ** ** |   |   |   |   |
| **NET  CASH PROVIDED BY OPERATING ACTIVITIES**                           |   | **107.1**                  | ** ** | 119.7 |   | 96.1 |   |
|                                                                     |   |                       | ** ** |   |   |   |   |
| **INVESTING  ACTIVITIES**                                                |   |                       | ** ** |   |   |   |   |
|                                                                     |   |                       | ** ** |   |   |   |   |
| Finance and other  receivables originated                                |   | **(1,186.3**               | **)**      | (1,185.3 | ) | (1,067.5 | ) |
| Collections on finance  and other receivables                            |   | **1,358.6**                | ** ** | 1,422.1 |   | 1,507.6 |   |
| Net (increase)  decrease in wholesale receivables                        |   | **(3.8**                   | **)**      | (121.4 | ) | 139.6 |   |
| Net increase in loans  to PACCAR Inc and affiliates                      |   | **(73.0**                  | **)**      | (28.8 | ) | (100.3 | ) |
| Acquisition of  equipment on operating leases, primarily from PACCAR Inc |   | **(116.1**                 | **)**      | (95.5 | ) | (16.1 | ) |
| Proceeds from disposal  of equipment                                     |   | **6.6**                    | ** ** | 8.4 |   | 9.0 |   |
| Acquisition of  equipment                                                |   | **(.2**                    | **)**      | (.7 | ) | (2.7 | ) |
|                                                                     |   |                       | ** ** |   |   |   |   |
| **NET  CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES**                 |   | **(14.2**                  | **)**      | (1.2 | ) | 469.6 |   |
|                                                                     |   |                       | ** ** |   |   |   |   |
| **FINANCING  ACTIVITIES**                                                |   |                       | ** ** |   |   |   |   |
|                                                                     |   |                       | ** ** |   |   |   |   |
| Net decrease in  commercial paper and other short-term borrowings        |   | **(106.1**                 | **)**      | (153.9 | ) | (535.0 | ) |
| Proceeds from  medium-term notes                                         |   | **630.0**                  | ** ** | 845.0 |   | 425.0 |   |
| Payments of medium-term  notes and other borrowings                      |   | **(634.0**                 | **)**      | (826.6 | ) | (461.7 | ) |
| Dividends paid                                                           |   | **—**                 | ** ** | (11.0 | ) | — |   |
| Payment of advances  (to) from PACCAR Inc                                |   | **(3.1**                   | **)**      | 2.9 |   | (5.0 | ) |
| Capital contributions                                                    |   | **15.9**                   | ** ** | 16.5 |   | 16.9 |   |
|                                                                     |   |                       | ** ** |   |   |   |   |
| **NET  CASH USED IN FINANCING ACTIVITIES**                               |   | **(97.3**                  | **)**      | (127.1 | ) | (559.8 | ) |
|                                                                     |   |                       | ** ** |   |   |   |   |
| **NET  (DECREASE) INCREASE IN CASH**                                     |   | **(4.4**                   | **)**      | (8.6 | ) | 5.9 |   |
|                                                                     |   |                       | ** ** |   |   |   |   |
| **CASH  AT BEGINNING OF YEAR**                                           |   | **9.9**                    | ** ** | 18.5 |   | 12.6 |   |
|                                                                     |   |                       | ** ** |   |   |   |   |
| **CASH  AT END OF YEAR**                                                 |   | **$**                      | **5.5**    | ** ** | $ | 9.9 |   | $ | 18.5 |   |

 

SeeNotes to Financial Statements

 

18

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**PACCAR Financial Corp.**

 

**STATEMENTS OF STOCKHOLDER’S EQUITY**

(Millionsof Dollars)

 
|                                                      |   | **Year ended December 31** |       |
|-----------------------------------------------------------|--------|----------------------------|------------|
|                                                      |   | **2003**                   |       | **2002** |   | **2001** |   |
|                                                      |   |                       |       |   |   |   |   |
| **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                             |   | **116.0**                  | ** ** | 99.5 |   | 82.6 |   |
| Investments from  PACCAR Financial Services Corporation   |   | **15.9**                   | ** ** | 16.5 |   | 16.9 |   |
| Balance at end of year                                    |   | **131.9**                  | ** ** | 116.0 |   | 99.5 |   |
|                                                      |   |                       | ** ** |   |   |   |   |
| **RETAINED  EARNINGS**                                    |   |                       | ** ** |   |   |   |   |
|                                                      |   |                       | ** ** |   |   |   |   |
| Balance at beginning  of year                             |   | **426.0**                  | ** ** | 409.7 |   | 394.1 |   |
| Net income                                                |   | **47.3**                   | ** ** | 27.3 |   | 15.6 |   |
| Cash dividends paid                                       |   | **—**                 | ** ** | (11.0 | ) | — |   |
| Balance at end of year                                    |   | **473.3**                  | ** ** | 426.0 |   | 409.7 |   |
|                                                      |   |                       | ** ** |   |   |   |   |
| **ACCUMULATED  OTHER COMPREHENSIVE LOSS**                 |   |                       | ** ** |   |   |   |   |
|                                                      |   |                       |       |   |   |   |   |
| Accumulated unrealized  net loss on derivative contracts: |   |                       |       |   |   |   |   |
| Balance at beginning  of year                             |   | **(31.6**                  | **)**      | (31.7 | ) | — |   |
| Net unrealized gains  (losses)                            |   | **19.4**                   | ** ** | .1 |   | (31.7 | ) |
| Balance at end of year                                    |   | **(12.2**                  | **)**      | (31.6 | ) | (31.7 | ) |
|                                                      |   |                       | ** ** |   |   |   |   |
| **TOTAL  STOCKHOLDER’S EQUITY**                      |   | **$**                      | **638.5**  | ** ** | $ | 555.9 |   | $ | 523.0 |   |

 

SeeNotes to Financial Statements

 

19

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**PACCAR Financial Corp.**

 

**STATEMENTSOF COMPREHENSIVE INCOME**

(Millionsof Dollars)

 
|                                                |   | **Year ended December 31** |       |
|-----------------------------------------------------|--------|----------------------------|------------|
|                                                |   | **2003**                   |       | **2002** |   | **2001** |   |
|                                                |   |                       |       |   |   |   |   |
| Net Income                                          |   | **$**                      | **47.3**   | ** ** | $ | 27.3 |   | $ | 15.6 |   |
| Other comprehensive  income (loss), net of tax      |   |                       | ** ** |   |   |   |   |
| Unrealized net gain  (loss) on derivative contracts |   | **19.4**                   | ** ** | .1 |   | (31.7 | ) |
| Net other  comprehensive income (loss)              |   | **19.4**                   | ** ** | .1 |   | (31.7 | ) |
|                                                |   |                       | ** ** |   |   |   |   |
| **TOTAL  COMPREHENSIVE INCOME (LOSS)**              |   | **$**                      | **66.7**   | ** ** | $ | 27.4 |   | $ | (16.1 | ) |

 

SeeNotes to Financial Statements

 

20

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**PACCAR Financial Corp.**

 

**NOTES TO FINANCIAL STATEMENTS**

(Millionsof Dollars)

 

**NOTE A–SIGNIFICANT ACCOUNTING POLICIES**

 

Descriptionof Operations: PACCAR Financial Corp. (the “Company”),a wholly-owned subsidiary of PACCAR Financial Services Corporation (“PFSC”),provides financing of trucks and related equipment manufactured primarily byPACCAR Inc (“PACCAR”) and sold by authorized dealers. The Company also financesdealer 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. PFSC isa wholly-owned subsidiary of PACCAR. Sales of PACCAR products are the Company’sprincipal source of financing business.

 

Dueto the nature of the Company’s business, customers are concentrated in thetransportation industry throughout the United States. Generally, allreceivables are collateralized by the equipment being financed. The risk ofcredit losses related to this concentration has been considered in establishingthe allowance for losses.

 

Useof Estimates: The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions that affect theamounts reported in the financial statements and accompanying notes. Actualresults 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.Receivables are charged to this allowance when, in the judgment of management,they are deemed uncollectible (generally upon repossession of the collateral).With respect to certain retail contracts acquired from dealers, the dealerretains liability, up to specified limits, for the credit loss. The amount andcollectibility of dealer recourse provisions have been considered inestablishing the allowance for losses on receivables.

 

RevenueRecognition: Interest income from financereceivables and other receivables is recognized using the interest method.Certain loan origination costs are deferred and amortized to interest income.For operating leases, rental revenue is recognized on a straight-line basisover the lease term.

 

Recognitionof interest income and rental revenue are suspended when management determinesthat collection is not probable (generally after 90 days past due). Recognitionis resumed if the receivable becomes contractually current and the collectionof amounts is again considered probable.

 

Equipmenton Operating Leases: Equipment on operating leases isrecorded at cost and is depreciated on the straight-line basis to its estimatedresidual value. Residual values are reviewed regularly and adjusted downward ifmarket conditions warrant.

 

IncomeTaxes: The Company is included in the consolidated federal incometax return of PACCAR. Income taxes for the Company are determined on a separatereturn basis, and any related tax liability is paid by the Company to PACCARand any related tax benefit is paid by PACCAR to the Company.

 

Reclassifications: Certainprior-year amounts have been reclassified to conform to the 2003 presentation.

 

21

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**NOTE B–FINANCE AND OTHER RECEIVABLES**

 

Termsfor finance and other receivables range from 12 to 84 months. Repaymentexperience indicates some receivables will be paid prior to contract maturity,while others will be extended or renewed. Accordingly, the maturities of receivablespresented here should not be regarded as a forecast of future collections.

 

TheCompany’s finance and other receivables are as follows:

 
|                                                                                    |   | **Year ended December 31** |        |
|-----------------------------------------------------------------------------------------|--------|----------------------------|-------------|
|                                                                                    |   | **2003**                   |        | **2002** |   |
| Retail contracts and  direct loans due within:                                          |   |                       |        |   |   |
| One year                                                                                |   | **$**                      | **781.8**   | ** ** | $ | 885.5 |   |
| Two years                                                                               |   | **543.3**                  | ** **  | 588.4 |   |
| Three years                                                                             |   | **368.4**                  | ** **  | 389.7 |   |
| Four years                                                                              |   | **222.5**                  | ** **  | 193.8 |   |
| Five years                                                                              |   | **90.7**                   | ** **  | 81.9 |   |
| Six years and beyond                                                                    |   | **12.2**                   | ** **  | 7.9 |   |
|                                                                                    |   | **2,018.9**                |        | 2,147.2 |   |
| Wholesale financing                                                                     |   | **312.3**                  | ** **  | 308.5 |   |
| Direct financing  leases (including residual values of $47.5 in 2003 and $51.5 in 2002) |   | **787.8**                  | ** **  | 880.6 |   |
| Interest and other  receivables                                                         |   | **33.5**                   | ** **  | 30.4 |   |
|                                                                                    |   |                       | ** **  |   |   |
|                                                                                    |   | **3,152.5**                |        | 3,366.7 |   |
|                                                                                    |   |                       | ** **  |   |   |
| Less allowance for  losses                                                              |   | **(67.4**                  | **)**       | (66.9 | ) |
|                                                                                    |   |                       | ** **  |   |   |
|                                                                                    |   | **3,085.1**                |        | 3,299.8 |   |
|                                                                                    |   |                       | ** **  |   |   |
| Unearned interest:                                                                      |   |                       | ** **  |   |   |
| Retail notes and  contracts                                                             |   | **(21.2**                  | **)**       | (38.4 | ) |
| Direct financing  leases                                                                |   | **(87.2**                  | **)**       | (105.2 | ) |
|                                                                                    |   |                       | ** **  |   |   |
|                                                                                    |   | **(108.4**                 | **)**       | (143.6 | ) |
|                                                                                    |   |                       | ** **  |   |   |
| Finance and other  receivables                                                          |   | **$**                      | **2,976.7** | ** ** | $ | 3,156.2 |   |

 

Futureminimum lease payments on direct financing leases totaled $740.3 at December31, 2003 and are due as follows: $235.3 in 2004; $191.6 in 2005; $137.0 in2006; $91.1 in 2007; $50.6 in 2008; and $34.7 in 2009 and beyond.

 

22

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Theallowance for losses on receivables is summarized as follows:

 
|                              |   | **Year ended December 31** |       |
|-----------------------------------|--------|----------------------------|------------|
|                              |   | **2003**                   |       | **2002** |   |
|                              |   |                       |       |   |   |
| Balance at beginning  of year     |   | **$**                      | **66.9**   | ** ** | $ | 66.2 |   |
| Provision for losses              |   | **19.6**                   | ** ** | 42.2 |   |
| Credit losses, net of  recoveries |   | **(19.1**                  | **)**      | (41.5 | ) |
|                              |   |                       | ** ** |   |   |
| Balance at end of year            |   | **$**                      | **67.4**   | ** ** | $ | 66.9 |   |

 

AtDecember 31, 2003 and 2002, the recorded investments in retail contracts anddirect loans that were considered to be impaired were $32.7 and $49.4,respectively. Included in the allowance for losses were specific reserves of$6.5 and $12.1 on these impaired notes and contracts. The average recordedinvestment in impaired notes and contracts during the years ended December 31,2003 and 2002, was $40.9 and $63.2, respectively. The Company recognizedinterest income of $.5, $1.2 and $2.4 for the years ended December 31, 2003,2002 and 2001, respectively, on those impaired loans, all of which wasrecognized using the cash basis method of income recognition.

 

**NOTE C–EQUIPMENT ON OPERATING LEASES**

 

Termsof operating leases range up to 60 months. Future annual minimum rentalpayments to be received for equipment on non-cancelable operating leasesbeginning January 1, 2004 were: $29.8 in 2004; $26.2 in 2005; $17.8 in 2006;$8.7 in 2007 and $.70 in 2008. Interest and other revenue includes contingentrentals of $8.7, $7.2 and $6.3 in 2003, 2002 and 2001, respectively.Depreciation expense related to equipment on operating leases was $27.3, $15.3and $12.1 in 2003, 2002 and 2001, respectively. Substantially all equipment onoperating leases is manufactured by PACCAR.

 

**NOTE D–TRANSACTIONS WITH PACCAR AND AFFILIATES**

 

TheCompany and PACCAR are parties to a Support Agreement that obligates PACCAR toprovide, when required, financial assistance to the Company to ensure that theCompany maintains a ratio of net earnings available for fixed charges to fixedcharges (as defined) of at least 1.25 to 1 for any fiscal year. The requiredratio for the years ended December 31, 2003 and 2002 was met withoutassistance. In order to maintain the ratio of earnings to fixed charges in2001, PACCAR provided earnings support by assuming $17.0 of the Company’sinterest expense. Without earnings support the Company would have earned netincome of $5.1. The Support Agreement also requires PACCAR to own, directly or indirectly,all outstanding voting stock of the Company.

 

PFSCcharges the Company for certain administrative services it provides and certainservices the Company receives indirectly from PACCAR. The costs are charged tothe Company based upon the Company’s specific use of the services at PFSC’s orPACCAR’s cost. Management considers these charges reasonable and similar to thecosts that would be incurred if the Company were on a stand-alone basis. Feesfor services of $15.9, $16.5 and $16.4 in 2003, 2002 and 2001, respectively,were charged 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. A cash dividend in the amount of $11.0was declared and paid in the second quarter of 2002. There were no cashdividends paid during 2003 or 2001.

 

TheCompany’s principal office is located in the corporate headquarters building ofPACCAR (owned by PACCAR). The Company also leases office space from two otherfacilities owned by PACCAR.

 

23

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TheCompany’s employees are covered by a defined benefit pension plan, an unfundedpost-retirement medical and life insurance plan, and a defined contributionplan sponsored by PACCAR. Separate allocations of plan assets and definedbenefit plan obligations relating to the Company have not been made. Expensescharged to the Company by PACCAR for the defined benefit pension plan and theunfunded post-retirement medical and life insurance plan were $.8, $.9, and $.9for years 2003, 2002 and 2001, respectively. Expenses incurred by the Companyfor the defined contribution plan benefits were $1.0, $.9 and $.9 for years2003, 2002 and 2001, respectively.

 

Financingand cash management is partly provided through unsecured short-term advances toand from PACCAR. Net annual interest paid to PACCAR was $.1 in 2003, 2002 and2001.

 

Periodically,the Company borrows funds from PACCAR and makes loans to PACCAR. Loans outstandingto PACCAR were $54.5 and $38.7 at December 31, 2003 and 2002, respectively.There were no loans outstanding from PACCAR at December 31, 2003. Loansoutstanding from PACCAR were $2.9 at December 31, 2002.

 

PACCARhas issued letters of credit as of December 31, 2003 in the amount of $6.1 onbehalf of the Company to guarantee funds for payment to insured franchises andtheir customers for any future insurance losses.

 

TheCompany periodically loans funds to certain foreign finance and leasingaffiliates of PACCAR. These various affiliates have Support Agreements withPACCAR, similar to the Company’s Support Agreement. The foreign affiliatesoperate in the United Kingdom, the Netherlands, Mexico, Canada and Australia,and any resulting currency exposure is fully hedged. The foreign affiliatesprovide financing and leasing of trucks and related equipment manufacturedprimarily by PACCAR and sold through PACCAR’s independent dealer networks inEurope, Mexico, Canada and Australia. The Company will not make loans to theforeign affiliates in excess of the equivalent of $300.0 United States dollars,unless the amount in excess of such limits is guaranteed by PACCAR. The Companyperiodically reviews the funding alternatives for these affiliates, and theselimits may be revised in the future. There was a total of $210.5 in loansoutstanding to foreign affiliates operating in the United Kingdom and theNetherlands at December 31, 2003. There was a total of $153.3 in loansoutstanding to foreign affiliates operating in the United Kingdom, theNetherlands and Mexico at December 31, 2002. There were no loans outstanding toother foreign affiliates for those periods. Interest income earned on affiliateloans was $3.2, $3.3 and $3.0 in 2003, 2002 and 2001, respectively.

 

Includedwithin accounts payable, accrued expenses and other is $6.3 and $2.0 payable toPACCAR’s truck divisions at December 31, 2003 and 2002, respectively.

 

**NOTE E–DERIVATIVE FINANCIAL INSTRUMENTS**

 

TheCompany does not engage in derivatives trading, market-making or otherspeculative activities. Derivative financial agreements are used as hedgesto manage exposures to fluctuations in interest rates and foreign currencyexchange rates. The Company documents its risk management strategy and hedgeeffectiveness at the inception of and during the term of each hedge. TheCompany in the normal course of business enters into various interest-ratecontracts, including interest-rate and currency swaps. Interest-ratecontracts generally involve the exchange of fixed and floating rate interestpayments without the exchange of the underlying principal. These contracts areused to manage exposures to fluctuations in interest rates. Net amounts paid orreceived are reflected as adjustments to interest expense. At December 31,2003, the Company had 100 interest rate contracts outstanding with variousfinancial institutions. The notional amount of these contracts totaled$1,521.1, with amounts expiring annually over the next five years. The notionalamount is used to measure the volume of these contracts and does not representexposure to credit loss. In the event of default by a counterparty, the risk inthese transactions is the cost of replacing the interest-rate contract atcurrent market rates. The Company has

 

24

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establishedminimum credit ratings of the counterparties and limits its exposure to any onecounterparty. Management believes that the risk of nonperformance by thecounterparties is very low.

 

Floatingto fixed rate swaps effectively convert an equivalent amount of commercialpaper and other variable rate debt to fixed rate debt. Notional maturities forthe five years beginning January 1, 2004 are $561.7, $572.9, $235.0, $120.5 and$31.0. The weighted average pay rate of 3.58% approximates the Company’s netcost of funds. The weighted average receive rate of 1.17% offsets rates onassociated debt obligations.

 

Allderivatives are reported at fair value and included in “Other assets” or“Accounts payable, accrued expenses & other” in the accompanying balancesheets. The gain or loss on the effective portion of derivatives that have beendesignated as cash flow hedging instruments arising from the change in fairvalue is initially reported in OCI. The remaining gain or loss, if any, isrecognized currently in earnings. For fair value hedge transactions, changes inthe fair value of the derivative instrument are generally offset in the incomestatement by changes in the fair value of the item being hedged. Hedge ineffectivenesswas immaterial for 2003, 2002 and 2001. Amounts in accumulated OCI arereclassified into interest expense in the same period in which thehedged forecasted transaction affects earnings. Net gains and losses frominterest-rate contracts are recognized as an adjustment to interest expense. Ofthe accumulated net loss included in OCI as of December 31, 2003, $13.1 isexpect­ed to be reclassified to interest expense in 2004. 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.

 

25

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**NOTE F–BORROWINGS**

 

Borrowingsare summarized as follows:

 
|                             |   | **Effective  Rate*** |       | **As of December 31,** |        |
|----------------------------------|--------|----------------------|------------|------------------------|-------------|
|                             |   |                 | **2003**   |                   | **2002**    |   |
|                             |   |                 |       |                   |        |   |   |
| Commercial paper                 |   | **2.89**             | **%**      | **$**                  | **1,014.5** |   | $ | 1,120.6 |   |
| Fixed rate medium-term  notes    |   | **2.79**             | **%**      | **55.0**               |        | 105.0 |   |
| Floating rate  medium-term notes |   | **2.62**             | **%**      | **1,425.0**            |        | 1,375.0 |   |
| Other fixed rate  borrowings     |   | **—**           | **%**      | **—**             |        | 4.0 |   |
|                             |   |                 | ** ** |                   |        |   |   |
| Total                            |   | **2.73**             | **%**      | **$**                  | **2,494.5** |   | $ | 2,604.6 |   |

 

----

*Theeffective rate is the weighted average rate as of December 31, 2003 andincludes the effects of interest rate swap agreements.

 

Interestexpense on borrowings, before the interest expense assumption of $17.0 in 2001by PACCAR, amounted to $78.8, $114.7, and $171.5 for 2003, 2002 and 2001,respectively.

 

Principalamounts of medium-term notes and other fixed rate borrowings due over the nextfive years beginning January 1, 2004 are $800.0 in 2004, $580.0 in 2005, and$100.0 in 2006.

 

TheCompany periodically files a shelf registration statement under the Securitiesand Exchange Act of 1933. A $2,500.0 shelf registration statement filed in 2000had been fully utilized as of October 20, 2003. The Company filed a new$3,000.0 shelf registration statement which became effective January 16, 2004.

 

Cashpaid for interest (net of swap interest received) was $82.5 in 2003, $120.9 in2002, and $165.0 in 2001.

 

**NOTE G–CREDIT ARRANGEMENTS**

 

TheCompany participates with PACCAR and certain other PACCAR affiliates insyndicated credit facilities of $1,500.0 at December 31, 2003 of which $1,350.0is available for use by the Company and/or PACCAR and certain other PACCARaffiliates. These credit facilities are used to provide backup liquidity forthe Company’s short-term borrowings. The Company is liable only for its ownborrowings under this credit facility. There were no borrowings outstandingunder these facilities at December 31, 2003 and 2002.

 

26

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**NOTE H–INCOME TAXES**

 

Theprovision for income taxes consists of the following:

 
|                         |   | **Year ended December 31** |       |
|------------------------------|--------|----------------------------|------------|
|                         |   | **2003**                   |       | **2002** |   | **2001** |   |
|                         |   |                       |       |   |   |   |   |
| Current provision  (benefit) |   |                       |       |   |   |   |   |
| Federal                      |   | $                          | **12.5**   | ** ** | $ | (9.0 | ) | $ | .6 |   |
| State                        |   | **3.2**                    | ** ** | 1.6 |   | 1.9 |   |
|                         |   | **15.7**                   |       | (7.4 | ) | 2.5 |   |
|                         |   |                       | ** ** |   |   |   |   |
| Deferred provision           |   | **15.1**                   | ** ** | 25.1 |   | 7.2 |   |
|                         |   |                       | ** ** |   |   |   |   |
|                         |   | $                          | **30.8**   |   | $ | 17.7 |   | $ | 9.7 |   |

 

Areconciliation between the statutory federal income tax rate to the actualprovision for income taxes is shown below:

 
|                              |   | **Year ended December 31** |     |
|-----------------------------------|--------|----------------------------|----------|
|                              |   | **2003**                   |     | **2002** |   | **2001** |   |
|                              |   |                       |     |   |   |   |   |
| Tax at the statutory  rate of 35% |   | **$**                      | **27.3** |   | $ | 15.8 |   | $ | 8.7 |   |
| Effect of state income  taxes     |   | **3.0**                    |     | 1.8 |   | .9 |   |
| Other                             |   | **.5**                     |     | .1 |   | .1 |   |
|                              |   | **$**                      | **30.8** |   | $ | 17.7 |   | $ | 9.7 |   |

 

Cashpaid/ (received) for income taxes was $16.0 in 2003, $(.2) in 2002, and $(4.4)in 2001.

 

Deferredincome tax assets and liabilities consisted of the following:

 
|                                   |   | **As of December 31** |       |
|----------------------------------------|--------|-----------------------|------------|
|                                   |   | **2003**              |       | **2002** |   |
| Deferred tax  liability:               |   |                  |       |   |   |
| Asset capitalization  and depreciation |   | **$**                 | **253.5**  | ** ** | $ | 236.6 |   |
|                                   |   |                  | ** ** |   |   |
| Deferred tax assets:                   |   |                  | ** ** |   |   |
| Allowance for losses  on receivables   |   | **(25.9**             | **)**      | (26.3 | ) |
| Derivative liability                   |   | **(7.6**              | **)**      | (19.6 | ) |
| Other                                  |   | **(7.5**              | **)**      | (5.3 | ) |
|                                   |   |                  | ** ** |   |   |
| Net deferred tax  liability            |   | **$**                 | **212.5**  | ** ** | $ | 185.4 |   |

 

27

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**NOTE I–FAIR VALUES OF FINANCIAL INSTRUMENTS**

 

Thefollowing methods and assumptions were used by the Company in estimating itsfair value disclosures for financial instruments:

 

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

 

NetReceivables: For floating rate loans and wholesalefinancings, fair values are based on carrying values. For fixed rate loans,fair values are estimated using discounted cash flow analysis based on interestrates currently being offered for loans with similar terms to borrowers ofsimilar credit quality. The carrying amount of accrued interest and otherreceivables approximates its fair value. Direct financing lease receivables andthe related loss provisions have been excluded from the accompanying table.

 

CommercialPaper, Medium-Term Notes and Other Fixed Rate Borrowings: Thecarrying amounts of the Company’s commercial paper and floating ratemedium-term notes approximates its fair value. The fair value of the Company’sfixed rate medium-term notes and other fixed rate borrowings is estimated usingdiscounted cash flow analysis, based on the Company’s current incrementalborrowing rates for similar types of borrowing arrangements.

 

DerivativeInstruments: Derivative instruments are carried atfair value. Fair values for the Company’s interest-rate and foreign exchangecontracts are based on costs that would be incurred to terminate existingagreements and enter into new agreements with similar notional amounts,maturity dates and counterparties’ credit standing at current market interestrates.

 

AccountsPayable, Accrued Expenses and Other: Carrying amountsapproximate fair value and have been excluded from the accompanying table.

 

Financialinstruments of the Company, where the recorded carrying amount is not at fairvalue, are as follows:

 
|                                                          |   | **As of December 31** |        |
|---------------------------------------------------------------|--------|-----------------------|-------------|
|                                                          |   | **2003**              |        | **2002** |   |
|                                                          |   | **Carrying  Amount**  |        | **Fair Value** |   | **Carrying  Amount** |   | **Fair Value** |   |
|                                                          |   |                  |        |   |   |   |   |   |   |
| Net receivables                                               |   | $                     | **2,258.9** |   | $ | **2,278.5** |   | $ | 2,367.8 |   | $ | 2,424.9 |   |
| Fixed rate medium-term  notes and other fixed rate borrowings |   | **55.0**              |        | **55.8** |   | 109.0 |   | 111.6 |   |
|                                                               |        |                       |             |  |  |  |  |  |  |  |  |  |  |

 

28

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**NOTE J–STOCKHOLDER’S EQUITY**

 

**Preferred Stock**

 

TheCompany’s Articles of Incorporation provide that the 6%, noncumulative,nonvoting preferred stock (100% owned by PFSC) is redeemable only at the optionof the Company’s Board of Directors.

 

**Other Comprehensive Income**

 

Thecomponents of other comprehensive income (loss) with the related tax effectsare as follows:

 
|                                                             |   | **Pretax  Amount** |       | **Tax Effect** |   | **Net Amount** |       |
|------------------------------------------------------------------|--------|--------------------|------------|----------------|--------|----------------|------------|
|                                                             |   |               |       |           |   |           |       |
| **2003**                                                         |   |               |       |           |   |           |       |
| Other comprehensive income (loss):                               |   |               |       |           |   |           |       |
| Net holding loss on derivative contracts                         |   | **$**              | **(10.1**  | **)**          | **$**  | **4.0**        | ** ** | **$** | **(6.1** | **)** |
| Reclassification adjustment                                      |   | **41.5**           | ** ** | **(16.0**      | **)**  | **25.5**       | ** ** |
| Net other comprehensive income (loss)                            |   | **$**              | **31.4**   | ** **     | **$**  | **(12.0**      | **)**      | **$** | **19.4** | ** ** |
|                                                             |   |               |       |           |   |           |       |
| **2002**                                                         |   |               |       |           |   |           |       |
| Other comprehensive income (loss):                               |   |               |       |           |   |           |       |
| Net holding loss on derivative contracts                         |   | $                  | (48.3      | )              | $      | 18.5           |       | $ | (29.8 | ) |
| Reclassification adjustment                                      |   | 48.5               |       | (18.6          | )      | 29.9           |       |
| Net other comprehensive income (loss)                            |   | $                  | .2         |           | $      | (.1            | )          | $ | .1 |   |
|                                                             |   |               |       |           |   |           |       |
| **2001**                                                         |   |               |       |           |   |           |       |
| Other comprehensive income (loss):                               |   |               |       |           |   |           |       |
| Cumulative effect of accounting change for  derivative contracts |   | $                  | (23.8      | )              | $      | 9.2            |       | $ | (14.6 | ) |
| Net holding loss on derivative contracts                         |   | (35.7              | )          | 13.6           |   | (22.1          | )          |
| Reclassification adjustment                                      |   | 8.1                |       | (3.1           | )      | 5.0            |       |
| Net other comprehensive income (loss)                            |   | $                  | 51.4       |           | $      | 19.7           |       | $ | (31.7 | ) |

 

29

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

 
|                        |   | **QUARTER** |   |
|-----------------------------|--------|-------------|--------|
|                        |   | **First**   |   | **Second** |   | **Third** |   | **Fourth** |   |
|                        |   |        |   |   |   |   |   |   |   |
| **2003**                    |   |        |   |   |   |   |   |   |   |
|                        |   |        |   |   |   |   |   |   |   |
| Interest and other  revenue |   | $           | 70.6   |   | $ | 71.0 |   | $ | 71.2 |   | $ | 72.2 |   |
| Income before income  taxes |   | 17.0        |   | 18.3 |   | 20.4 |   | 22.4 |   |
| Net income                  |   | 10.4        |   | 11.2 |   | 12.5 |   | 13.2 |   |
|                        |   |        |   |   |   |   |   |   |   |
| **2002**                    |   |        |   |   |   |   |   |   |   |
|                        |   |        |   |   |   |   |   |   |   |
| Interest and other  revenue |   | $           | 72.4   |   | $ | 72.4 |   | $ | 73.4 |   | $ | 74.4 |   |
| Income before income  taxes |   | 3.6         |   | 8.8 |   | 14.7 |   | 17.9 |   |
| Net income                  |   | 2.1         |   | 5.4 |   | 8.9 |   | 10.9 |   |

 

**NOTE L–COMMITMENTS AND CONTINGENCIES**

 

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.

 

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

 

The registrant has nothad any disagreements with its independent auditors on accounting or financialdisclosure matters.

 

**ITEM9A.       CONTROLS AND PROCEDURES**

 

An evaluation was performedunder the supervision and with the participation of the Company’s management,including the principal executive officer and principal financial officer, ofthe effectiveness of the design and operation of the Com­pany’s disclosurecontrols and procedures (as defined in rules 13a-15(e) and 15d-15(e)promulgated under the Securities Exchange Act of 1934, as amended) as ofDecember 31, 2003 (“Evaluation Date”). Based on that evaluation, the principalexecutive officer and principal financial officer of the Company concluded thatthe disclosure controls and procedures in place at the Company were adequate toensure that information required to be disclosed by the Company, including itsconsolidated subsidiaries (the Company has no subsidiaries), in reports thatthe Company files or submits under the Exchange Act, is recorded, processed,summarized and reported on a timely basis in accordance with applicable rulesand regulations. There have been no significant changes in the Company’sinternal controls over financial reporting during the fourth quarter of 2003that have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

**PART III**

 

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

 

These items omittedpursuant to Form 10-K General Instruction (I)(1)(a) and (b).

 

**ITEM14.       PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

Audit Fees

Audit fees charged to theCompany by PACCAR were $.2 and $.2 for 2003 and 2002, respectively.

 

Audit-RelatedFees

The registrant was billed andpaid audit related fees of $.03 and $.02 in 2003 and 2002, respectively. Thesefees relate to quarterly compliance reporting requirements of the registrantpursuant to the outstanding shelf registration statement.

 

Tax and AllOther Fees

The registrant has no tax orother fees billed and/or paid during 2003 or 2002 for services provided by theprincipal accountant.

 

All fees are approved by thePACCAR Inc audit committee, which functions as the Company’s audit committee.

 

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**PARTIV**

 

**ITEM15.       EXHIBITS, FINANCIAL STATEMENTSCHEDULES, AND REPORTS ON FORM 8-K**

 

(a)LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

 

The following financialstatements of the Company are included in Item 8:

 
| Statements  of Income – Years Ended December 31, 2003, 2002 and 2001                    |
|----------------------------------------------------------------------------------------------|
|                                                                                         |
| Balance Sheets  –December 31, 2003 and 2002                                             |
|                                                                                         |
| Statements  of Cash Flows – Years Ended December 31, 2003, 2002 and 2001                |
|                                                                                         |
| Statements of  Stockholder’s Equity – Years Ended December 31, 2003, 2002 and 2001 |
|                                                                                         |
| Statements of  Comprehensive Income – Years Ended December 31, 2003, 2002 and 2001      |
|                                                                                         |
| Notes to Financial  Statements – December 31, 2003, 2002 and 2001                       |

 

All schedules for whichprovision is made in the applicable accounting regulation of the Securities andExchange Commission are not required under the related instructions, areinapplicable or have been otherwise disclosed and, therefore, have been omitted.

 

Listing of Exhibits

 

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

 

(b)REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 2003

 

There were no reports onForm 8-K for the quarter ended December 31, 2003.

 

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SIGNATURES

 

Pursuantto the requirements 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:  March 12, 2004

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant as ofthe above 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   |                      |   |

 

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**PACCAR Financial Corp.**

**EXHIBIT INDEX**

 

3.1                                 RestatedArticles of Incorporation of the Company, as amended (incorporated by referenceto 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’sQuarterly Report on Form 10-Q dated August 13, 1985, File Number 0-12553).

 

3.2                                 By-laws ofthe Company, as amended (incorporated by reference to Exhibit 3.2 to theCompany’s Registration Statement on Form 10-Q dated October 20, 1983, FileNumber 0-12553).

 

4.1                                 Indenture forSenior Debt Securities dated as of December 1, 1983 and first SupplementalIndenture 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 onForm 10-K dated March 26, 1984, File Number 0-12553 and Exhibit 4.2 to theCompany’s Registration Statement on Form S-3 dated June 23, 1989, RegistrationNumber 33-29434).

 

4.4                                 Forms ofMedium-Term Note, Series I (incorporated by reference to Exhibits 4.2A and 4.2Bto the Company’s Registration Statement on Form S-3 dated September 10, 1998,Registration Number 333-63153).

 

Formof Letter of Representation among the Company, Citibank, N.A. and TheDepository Trust Company, Series I (incorporated by reference to Exhibit 4.3 tothe Company’s Registration Statement on Form S-3 dated September 10, 1998,Registration Number 333-63153).

 

4.5                                 Forms ofMedium-Term Note, Series J (incorporated by reference to Exhibits 4.2A and 4.2Bto the Company’s Registration Statement on Form S-3 dated March 2, 2000,Registration Number 333-31502).

 

Formof Letter of Representation among the Company, Citibank, N.A. and TheDepository Trust Company, Series J (incorporated by reference to Exhibit 4.3 tothe Company’s Registration Statement on Form S-3 dated March 2, 2000,Registration Number 333-31502).

 

4.6                                 Forms ofMedium-Term Note, Series K (incorporated by reference to Exhibits 4.2A and 4.2Bto the Company’s Registration Statement on Form S-3 dated December 23, 2003,Registration Number 333-111504).

 

Formof Letter of Representation among the Company, Citibank, N.A. and TheDepository Trust Company, Series K (incorporated by reference to Exhibit 4.3 tothe Company’s Registration Statement on Form S-3 dated December 23, 2003,Registration Number 333-111504).

 

10.1                           SupportAgreement between the Company and PACCAR dated as of June 19, 1989(incorporated by reference to Exhibit 28.1 to the Company’s RegistrationStatement on Form S-3 dated June 23, 1989, Registration Number 33-29434).

 

12.1                           Statementre: computation of ratio of earnings to fixed charges of the Company pursuantto SEC reporting requirements for each of the five years ended December 31,1999 - 2003.

 

12.2                           Statementre: computation of ratio of earnings to fixed charges of the Company pursuantto the Support Agreement with PACCAR for each of the five years ended December31, 1999 - 2003.

 

12.3                           Statementre: computation of ratio of earnings to fixed charges of PACCAR andsubsidiaries pursuant to SEC reporting requirements for each of the five yearsended December 31, 1999 - 2003.

 

23                                    Consent ofIndependent Auditors

 

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25.1                           Power ofattorney of certain officers and directors

 

31.1                        Rule13a-14(a)/15d-14(a) Certification - Certification of Principal ExecutiveOfficer.

 

31.2                        Rule13a-14(a)/15d-14(a) Certification - Certification of Principal FinancialOfficer.

 

32.1                           Section1350 Certifications - Certification pursuant to Rule 13a-14(b) and Section 906of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350).

 

Other exhibits listed in Item601 of Regulation S-K are not applicable.

 

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