**UNITED STATES**

**SECURITIES 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, 2002**                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                             |
| **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                       ** |
|                                                                                                                                                                                                                                                                                                  |                                                                                                                  |  |  |

 

**CommissionFile 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**    |   |                                          |
| **$25  Million Due July 15, 2003** |   | **New  York Stock Exchange**                  |
|                               |   |                                          |

 

| Securities registered  pursuant to Section 12(g) of the Act: |
|--------------------------------------------------------------|
|                                                         |   |   |
| **None**                                                     |
| (Title of Class)                                             |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter periods that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for atleast the past 90 days.  Yes  ýNo o.

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  Yes  o  No ý

 

The aggregate marketvalue of the voting stock held by non-affiliates of the registrant as of June30, 2002:

None

 

The aggregate marketvalue of the voting stock held by non-affiliates of the registrant as ofFebruary 28, 2003:

None

 

The number of sharesoutstanding of the registrant’s classes of common stock as of February 28,2003:

 
| Common Stock, $100 par  value 3⁄4 145,000 shares |
|-----------------------------------------------------|
|                                                |

 

THE REGISTRANT IS AWHOLLY-OWNED INDIRECT SUBSIDIARY OF PACCAR INC AND MEETS THE CONDITIONS SETFORTH IN GENERAL INSTRUCTIONS (I) (1) (a) AND (b) OF FORM 10-K AND IS,THEREFORE, FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

 

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**PACCAR Financial Corp.**

(Millions of Dollars)

##### ** **

##### **PART I**

 

 

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

 

## GENERAL

 

PACCAR Financial Corp.

 

PACCAR Financial Corp.(the “Company”) is a Washington corporation organized in 1961 as a wholly-ownedsubsidiary of PACCAR Inc (“PACCAR”) to finance the sale of PACCAR products. 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 also finances dealer inventories of transportationequipment and franchises PACCAR dealerships to engage in full-service andfinance leasing.

 

In 2000, PACCAR Increorganized its U. S. finance and leasing operations to improve operatingefficiency and to minimize funding costs. Effective May 1, 2000, PACCARtransferred the stock of the Company to PACCAR Financial Services Corporation(“PFSC”), a wholly-owned subsidiary of PACCAR. In addition, effective May 1,2000, PACCAR Leasing Corporation (“PLC”), another wholly-owned subsidiary ofPACCAR, was merged into the Company. The merger was accounted for as acombination of entities under common control and treated for accountingpurposes in a manner similar to a “pooling of interests”. Since bothsubsidiaries are wholly-owned by PACCAR, no consideration was exchanged toeffect the merger.

 

### PACCAR

 

PACCAR has two principalindustry segments, (1) manufacture and distribution of light-, medium- andheavy- duty trucks and related aftermarket distribution of parts and (2)finance and leasing services provided to customers and dealers. PACCARdistributes trucks and parts primarily through its independent dealer network.PACCAR’s finance and leasing activities are principally related to PACCARproducts and associated equipment. Other manufactured products includeindustrial winches.

 

PACCAR and itssubsidiaries design and manufacture heavy-duty diesel trucks which are marketedunder the Peterbilt, Kenworth, DAF and Foden nameplates. These vehicles, whichare built in four plants in the United States, three in Europe and one each inAustralia, Canada and Mexico, are used worldwide for over-the-road and off-highwayhauling of freight, petroleum, wood products, construction and other materials.Commercial trucks and related replacement parts comprise the largest segment ofPACCAR’s business, accounting for 93% of total 2002 net sales and revenues.

 

PACCAR, through itsPeterbilt and Kenworth Divisions, competes in the North American medium duty(Class 6/7) markets primarily with conventional models. These medium-dutytrucks are assembled at PACCAR’s Ste. Therese, Quebec plant and at PACCAR’sfacility in Mexicali, Mexico. This line of business represents a small butincreasing percentage of PACCAR’s North American sales. PACCAR competes in theEuropean light/medium (6 to 15 metric ton) commercial vehicle market with DAFcab-over-engine trucks assembled in the United Kingdom by Leyland, one ofPACCAR’s wholly-owned subsidiaries.

 

Substantially all trucksand related parts are sold to dealers, which are independent except for a smallnumber of factory branches.  TheKenworth and Peterbilt nameplates are marketed and distributed by separatedivisions in the U.S. and a foreign subsidiary in Canada.  The Kenworth nameplate is also marketed anddistributed by foreign subsidiaries in Mexico and Australia.  The DAF and Foden nameplates are marketedand distributed by foreign subsidiaries headquartered in the Netherlands andUnited Kingdom, respectively.  A U.S.division, PACCAR International, also markets all four nameplates outside eachof their primary markets.  The decisionto operate as a subsidiary or as a division is incidental to Truck Segmentoperations and reflects legal, tax and regulatory requirements in the variouscountries where PACCAR operates.

 

2

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There were three otherprincipal competitors in the U.S. and Canada Class 8 truck market in 2002.PACCAR’s share of that market was 23.6% of retail sales in 2002. In Europethere were five other principal competitors in the commercial vehicle market in2002, including parent companies to two competitors of PACCAR in the UnitedStates. PACCAR’s subsidiary, DAF, had a 12.0% share of the Western Europeanheavy-duty market and a 8.6% share of the light/medium market. These marketsare highly competitive in price, quality and service, and PACCAR is notdependent on any single customer for its sales. There are no significantseasonal variations.

 

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

 

PACCAR’s common stock, $1par value, is traded on the NASDAQ National Market under the symbol “PCAR”.PACCAR and the Company are subject to the informational requirements of theSecurities Exchange Act of 1934 and in accordance therewith file reports andother information with the Securities and Exchange Commission (the“Commission”). All reports, proxy statements and other information filed byPACCAR and the Company with the Commission may be inspected and copied at thepublic reference facility maintained by the Commission at Room 1024, 450 FifthStreet, N.W., Washington, D.C. 20549 or through the Commission’s internet siteat www.sec.gov.

 

BUSINESS OF THECOMPANY

 

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 allied equipmentsuch as mixer and dump bodies attached to trucks. In addition, the Companyfranchises PACCAR dealerships to engage in full-service and finance leasing asmembers of the PacLease system. The Company also, in selected markets, engagesin full-service leasing directly with its customers through Company-ownedstores and on a limited basis through PACCAR dealerships.

 

The Company currentlyconducts business with most PACCAR dealers. The volume of the Company’sbusiness is significantly affected by PACCAR’s sales of trucks to its dealersand competition from other financing sources.

 

As of December 31, 2002,the Company employed 292 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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The Company’s Products

 

Retail Receivables

 

Retail Contracts  The Company purchases contracts from dealersand receives assignments of the contracts and a first lien security interest inthe vehicles financed (“Retail Contracts”). Certain retail contracts with thirdparty leasing companies may also include an assignment to the Company of therelated lease and rental payments due. Retail Contracts purchased by theCompany have fixed or floating interest rates.

 

Direct Loans  The Company also makes loans to the endusers of the vehicles financed that are secured by a first lien securityinterest in the vehicles (“Direct Loans”). Direct Loans have fixed or floatinginterest rates.

 

Master Note

 

Master Note contracts(“Master Note”) are an alternative form of retail financing offered to selectdealers for new and used trucks. Retail installment contracts originated by thedealer for new or used trucks and meeting the Company’s requirement as to form,terms and creditworthiness for Retail Contracts are pledged to the Company as collateralfor direct, full recourse loans by the Company to the dealer. Master Notecontracts have fixed or floating interest rates.

 

Wholesale Contracts

 

The Company provideswholesale financing for new and used truck and trailer inventories for dealers(“Wholesale Contracts”). Wholesale Contracts are secured by the inventoriesfinanced. The amount of credit extended by the Company for each truck isgenerally limited to the invoice price of new equipment and to the wholesalevalue of used equipment. Interest under Wholesale Contracts is based uponfloating interest rates.

 

Dealer Loans

 

The Company makes loansto selected Peterbilt and Kenworth dealers (“Dealer Loans”). The purposes ofthese loans include the financing of real estate, fixed assets, working capitaland dealership acquisitions. Dealer loans may have fixed or floating interestrates.

 

Direct Financing Leases

 

The Company offers directfinancing lease contracts where it is treated as the owner of the equipment fortax purposes 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.

 

Operating Leases

 

The Company offersoperating lease contracts (“Operating Leases”) where it is treated as the ownerof the equipment. The lessee is responsible for the payment of property andsales taxes, licenses, maintenance and other operating items. The lessee isobligated to maintain the equipment and to insure the equipment againstcasualty and liability losses.

 

At the end of theoperating lease term the lessee has the option to return the equipment to theCompany without penalty.

 

4

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Full-Service Leasing

 

The Company also conductsfull-service leasing operations under the PacLease trade name. Selected dealersare franchised to provide full-service leasing. The Company provides thefranchisees with equipment financing and managerial support. The Company alsooperates full-service lease outlets in selected markets on its own behalf.

 

Insurance

 

The Company sellsphysical damage insurance through PACCAR dealers who are licensed insuranceagents as well as through licensed agents of the Company. The Company retainsthe premium revenues and loss exposure for the policies, which are issuedthrough an unrelated insurance carrier.

 

The Company charges a feeto provide insurance coverage, through an unrelated regulated insurancecarrier, on new trucks, used trucks and trailer inventory to dealers havingWholesale Contracts with the Company.

 

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 unaffiliated insurance carrier. Tolimit its exposure the Company has acquired excess insurance coverage from athird party insurance carrier.

 

CUSTOMERCONCENTRATION, PAST DUE ACCOUNTS AND LOSS EXPERIENCE

 

Customer Concentration

 

At December 31, 2002 thelargest single customer for retail contracts, direct loans or leasesrepresented 1.7% of the Company’s gross receivables and the five largest suchcustomers collectively amounted to 4.0% of gross receivables.

 

At December 31, 2002, theCompany had Master Note contracts outstanding with six dealer groups. MasterNote borrowings totaled 4.5% of the Company’s gross receivables, while thelargest Master Note dealer’s borrowings amounted to 3.0% of the Company’s grossreceivables. Master Notes are secured by numerous retail installment contracts,which, in effect, reduces the amount of dealer concentration.

 

With respect to wholesalefinancing, at December 31, 2002, the largest single dealer group accounted for1.0% of the Company’s gross receivables, and the five largest dealer groupscollectively accounted for 3.3% of gross receivables.

 

At December 31, 2002, thelargest single full-service leasing franchise group accounted for 1.4% of theCompany’s gross receivables, and the five largest full-service leasingfranchise groups collectively accounted for 4.6% of gross receivables.

 

Past Due Receivables andAllowance 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 which it considers to beadequate to cover management’s estimates of losses.

 

5

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For discussion of theallowance for losses, see “Management’s Discussion and Analysis of FinancialCondition and Results of Operations, 2000-2002.”

 

COMPETITION ANDECONOMIC 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 which may be used for wholesale and customer financing of trucks.Retail purchasers also have a variety of sources available to finance truckpurchases.

 

The ability of the Companyto compete in its market is principally based on the rates and terms that theCompany offers dealers and retail purchasers, as well as the specializedservices it provides. Rates and terms are based on the Company’s desire toprovide flexible financing that meets dealer and customer financing needs, theability of the Company to borrow funds at competitive rates and the Company’sneed to earn an adequate return on its invested capital. The Company’s businessis also affected by changes in market interest rates, which in turn are relatedto general economic conditions, demand for credit, inflation and governmentalpolicies. Seasonality is not a significant factor in the Company’s business.

 

The volume of receivablesavailable to be acquired by the Company from dealers is largely dependent uponthe number of Kenworth and Peterbilt trucks sold. Domestic sales of medium- andheavy-duty trucks depend on the capital equipment requirements of thetransportation industry, which in turn are influenced by economic growth andcyclical variations in the economy. Medium- and heavy-duty truck sales are alsosensitive to economic factors such as fuel costs, interest rates, federalexcise and highway use taxes and taxation of the acquisition and use of capitalgoods.

 

REGULATION ANDSIMILAR 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 laws may require the Company to belicensed as a sales finance company and may regulate disclosure of financecharges and other terms of retail installment contracts.  The Company is subject to substantive statefranchise regulations and federal and state uniform franchise disclosure lawsin connection with the offering of PacLease full service truck leasing andrental franchises to PACCAR truck dealers. The Company also owns and operates several such truck leasing and rentalbusiness locations, which are subject to applicable state licensing laws.  The Company is subject to state insuranceregulations in connection with its licensed insurance salesmen.  The Company is also subject to some of theprovisions of federal law relating to non-discrimination in the granting ofcredit.

 

SOURCES OF FUNDS

 

The Company obtains fundsprimarily from borrowings in the capital markets and collections on loans andleases and to a lesser extent retained earnings and capital contributions fromPFSC. The Company’s profitable acquisition of additional receivables isdependent upon its ability to raise funds at competitive rates in the publicand private debt markets. The receivables and leases that are financed areeither fixed rate or floating rate with terms that range from 12 to 84 months.

 

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

 

6

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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 contracts as a tool to achieve its matched funding objectives andto reduce total borrowing costs relative to its primary borrowing sources -commercial paper and medium-term notes. Fixed rate swaps, matched to floatingrate borrowings, are used to lock in the funding cost of fixed rate assets. Asof December 31, 2002, the total notional principal amount of interest rate swapcontracts outstanding was $1,692.7, all of which result in a fixed rate paymentobligation. The notional amount is used to measure the volume of these contractsand does not represent exposure to credit loss. The Company’s risk in thesetransactions is the cost of replacing, at current market rates, these contractsin the event of default by the counterparty. Management believes the risk ofincurring such losses is remote, and any losses would be immaterial. Thepermitted types of interest rate contracts, their transaction limits andrelated approval authorizations have been established by the Company’s seniormanagement and Board of Directors. The interest rate contracts outstanding areregularly reported to, and reviewed by, the Company’s senior management.

 

Effective January 1,2001, the Company adopted Financial Accounting Standard (FAS) No. 133,“Accounting for Derivative Instruments and Hedging Activities,” which requiresthat all interest rate contracts (derivative instruments) be recorded on theBalance Sheet at fair value. The adoption of FAS 133 on January 1, 2001resulted in a cumulative increase to net income of $.4, net of related incometax effects of $.3, and a cumulative reduction to Other Comprehensive Income of$14.6, net of related income tax effects of $9.2. See “Note E -Derivative Financial Instruments” in the Notes to Financial Statements.

 

The Company participateswith PACCAR and other PACCAR affiliates in syndicated credit facilities of$1,275.0 at December 31, 2002 which is entirely available for use by theCompany.  The Company is liable only forits own borrowings under these credit facilities.  The credit facilities mature as follows, $500.0 and $775.0 in2003 and 2004, respectively.  There wereno borrowings under these credit facilities in the years ended December 31,2001 or 2002.

 

As of December 31, 2002,the Company had $1,484.0 of medium-term notes and other fixed rate borrowingsoutstanding, $634.0 of which are due within 12 months. See “Note F -Borrowings” in the Notes to Financial Statements for medium-term notematurities.

 

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.

 

7

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RELATIONSHIP WITHPACCAR AND AFFILIATES

 

General

 

The operations of theCompany are fundamentally affected by its relationship with PACCAR. Sales ofPACCAR products are the Company’s principal source of financing business. TheCompany receives administrative support from and pays dividends to PFSC and mayoccasionally borrow funds from or lend money to PACCAR and/or its affiliates.Since the directors of the Company are all executives of PACCAR or itsaffiliated companies and PACCAR is the sole owner of PFSC’s outstanding votingcommon stock, PACCAR can determine the course of the Company’s business. See“Note D - Transactions withPACCAR and Affiliates” in the Notes to Financial Statements.

 

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, 2002, PFSC employed154 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 not significantly different from the costs thatwould be incurred if the Company were on a stand-alone basis.

 

Support Agreement

 

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 year ended December31, 2002 and for the years ended December 31, 1998 - 2000 without assistance.In order to maintain the ratio of 1.25 to 1 in 2001, PACCAR provided earningssupport by assuming $17.0 of the Company’s interest expense. See “Note D -Transactions with PACCAR and Affiliates” in the Notes 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.

 

The Support Agreementexpressly states that PACCAR’s commitments to the Company thereunder do notconstitute a PACCAR guarantee of payment of any indebtedness or liability of theCompany to others and do not

 

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create rights against PACCAR in favor of persons otherthan the Company. There are no guarantees, direct or indirect, by PACCAR ofpayment of any indebtedness of the Company.

 

OTHER DISCLOSURES

 

The Company’s filings onForm 10-K, 10-Q and 8-K and any amendments to those reports can be reachedthrough a link on PACCAR Inc’s website www.paccar.com free of charge as soon asreasonably practicable after the report is electronically filed with, orfurnished to, the Securities and Exchange Commission.

 

**ITEM2.          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 of theCompany are located in leased premises. Annual lease rentals for offices in theaggregate are not material in relation to expenses as a whole.

 

**ITEM3.          LEGAL PROCEEDINGS**

 

The Company is a party tovarious routine legal proceedings incidental to its business involving thecollection of accounts and other matters. The Company does not consider such matters to be material with respect tothe business or financial condition of the Company as a whole.

 

**ITEM4.          SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

Not applicable.

 

**PART II**

 

**ITEM5.          MARKET FOR REGISTRANT’S COMMONEQUITY AND RELATED STOCKHOLDER MATTERS**

 

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

 

A cash dividend in theamount of $11.0 was declared and paid in the second quarter of 2002. There wereno cash dividends paid to PFSC or PACCAR during 2001 or 2000.

 

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**ITEM6.          SELECTED FINANCIAL 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, 2002 hasbeen derived from the Company’s audited financial statements.

 

**BalanceSheet Data**

 
|                                                                                |   | **As of  December 31**     |        |
|-------------------------------------------------------------------------------------|--------|----------------------------|-------------|
|                                                                                |   | **2002**                   |        | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                                |   |                       |        |   |   |   |   |   |   |   |   |
| Total Assets                                                                        |   | **$**                      | **3,511.5** |   | $ | 3,562.6 |   | $ | 4,119.4 |   | $ | 3,732.3 |   | $ | 3,027.5 |   |
| Total  Liabilities                                                                  |   | **2,955.6**                |        | 3,039.6 |   | 3,597.2 |   | 3,260.0 |   | 2,618.4 |   |
| Total  Stockholder’s Equity                                                    |   | **555.9**                  |        | 523.0 |   | 522.2 |   | 472.3 |   | 409.1 |   |
|                                                                                |   |                       |        |   |   |   |   |   |   |   |   |
| **Income Statement Data**                                                           |   |                       |        |   |   |   |   |   |   |   |   |
|                                                                                |   | **Year ended December 31** | ** **  |
|                                                                                |   | **2002**                   |        | **2001** |   | **2000** |   | **1999** |   | **1998** | ** ** |
| Interest and  other revenue                                                         |   | **$**                      | **283.1**   |   | $ | 335.6 |   | $ | 367.4 |   | $ | 298.3 |   | $ | 262.4 |   |
|                                                                                |   |                       |        |   |   |   |   |   |   |   |   |
| Total expenses  before assumption of interest expense by PACCAR                     |   | **238.1**                  |        | 327.7 |   | 313.4 |   | 236.7 |   | 215.1 |   |
| Assumption of  interest expense by PACCAR (1)                                       |   | **—**                 |        | (17.0 | ) | — |   | — |   | — |   |
| Total expenses                                                                      |   | **238.1**                  |        | 310.7 |   | 313.4 |   | 236.7 |   | 215.1 |   |
|                                                                                |   |                       |        |   |   |   |   |   |   |   |   |
| Income before  income taxes                                                         |   | **45.0**                   |        | 24.9 |   | 54.0 |   | 61.6 |   | 47.3 |   |
| Income taxes                                                                        |   | **17.7**                   |        | 9.7 |   | 21.0 |   | 23.8 |   | 18.7 |   |
|                                                                                |   |                       |        |   |   |   |   |   |   |   |   |
| Income before  cumulative effect of accounting change                               |   | **27.3**                   |        | 15.2 |   | 33.0 |   | 37.8 |   | 28.6 |   |
| Cumulative  effect of accounting change (net of tax)                                |   | **—**                 |        | .4 |   | — |   | — |   | — |   |
|                                                                                |   |                       |        |   |   |   |   |   |   |   |   |
| Net income                                                                          |   | **$**                      | **27.3**    |   | $ | 15.6 |   | $ | 33.0 |   | $ | 37.8 |   | $ | 28.6 |   |
|                                                                                |   |                       |        |   |   |   |   |   |   |   |   |
| Ratio of  Earnings to Fixed Charges Pursuant to SEC reporting Requirements (2) |   | **1.39x**                  |        | 1.16x |   | 1.26x |   | 1.40x |   | 1.37x |   |
|                                                                                |   |                       |        |   |   |   |   |   |   |   |   |
| Ratio of  Earnings to Fixed Charges Pursuant to the Support Agreement          |   | **1.53x**                  |        | 1.25x |   | 1.31x |   | 1.46x |   | 1.45x |   |

 

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(1)          In order to maintain theratio of earnings to fixed charges in 2001, PACCAR provided earnings support of$17.0 through the assumption of the Company’s interest expense. No earningssupport was provided in 2002 or for the years ending December 31, 1998 - 2000.

 

(2)          For the purposes of thisratio, earnings consist of income before income taxes plus fixed charges. Fixedcharges consist of interest expense plus a portion of rent expense (which isdeemed representative of an interest factor). The method of computing the ratioof earnings to fixed charges shown above complies with SEC reporting requirementsbut differs from the method called for in the Support Agreement between theCompany and PACCAR. See Exhibits 12.1 and 12.2.

 

10

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**ITEM7.          MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, 2000 –****2002**(Millions of Dollars)

 

**Results of Operations**

 
|                                                                                                                |   | **Year ended  December 31** |        |
|---------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                                |   | **2002**                    |        | **2001** |   | **2000** |   |
| Average earning  assets                                                                                             |   | **$**                       | **3,214.1** |   | $ | 3,629.3 |   | $ | 3,948.9 |   |
| Interest and  other revenue                                                                                         |   | **283.1**                   |        | 335.6 |   | 367.4 |   |
| Income before taxes                                                                                                 |   | **45.0**                    |        | 24.9 |   | 54.0 |   |
| Net income                                                                                                          |   | **$**                       | **27.3**    |   | $ | 15.6 |   | $ | 33.0 |   |
| Allowance for  Losses:                                                                                              |   |                        |        |   |   |   |   |
| Balance at  beginning of year                                                                                       |   | **$**                       | **66.2**    |   | $ | 65.4 |   | $ | 60.7 |   |
| Provision for  losses                                                                                               |   | **42.2**                    |        | 80.8 |   | 36.4 |   |
| Credit losses  net of recoveries                                                                                    |   | **(41.5**                   | **)**       | (80.0 | ) | (31.7 | ) |
| Balance at end  of year                                                                                             |   | **$**                       | **66.9**    |   | $ | 66.2 |   | $ | 65.4 |   |
|                                                                                                                |   |                        |        |   |   |   |   |
| Ratios:                                                                                                             |   |                        |        |   |   |   |   |
| Credit losses  net of recoveries to average net receivables and equipment on operating  leases                      |   | **1.29**                    | **%**       | 2.20 | % | .80 | % |
| Allowance for  losses to year-end net receivables and equipment on operating leases                                 |   | **2.04**                    | **%**       | 1.98 | % | 1.63 | % |
| Year-end retail  receivables and leases past due (over 60 days) to year-end retail contracts  and lease receivables |   | **1.91**                    | **%**       | 3.11 | % | 3.35 | % |

 

**2002 Compared to 2001:**

 

The Company’s net incomeincreased 75% to $27.3 in 2002 from $15.6 in 2001. Interest and other revenuedeclined 16% to $283.1 over the same period due to lower earning assets andlower interest rates. Although the Company’s 2002 market share and new loanvolume exceeded 2001 levels, new loan volume was surpassed by highercollections on accounts resulting in average earning assets decreasing 11% in2002 to $3,214.1 from $3,629.3 in 2001. Interest and other borrowing expense,before the Support Agreement interest expense assumption of $17.0 by PACCAR in2001, decreased 33% in 2002 to $118.9 due to lower debt balances and interestrates. Depreciation, related to operating leases, increased 26% in 2002 to$15.3 from $12.1 in 2001 due to higher operating lease assets. Equipment onoperating leases increased 135% from $52.0 to $122.3 at December 31, 2001 and2002, respectively, as a result of higher new operating lease volume in 2002compared with prior years. The provision for losses on receivables decreased48% to $42.2 in 2002 compared to $80.8 in 2001 as a result of lower creditlosses. In 2002 the Company experienced lower levels of past dues andrepossessions as well as a lower loss per repossession compared with 2001.

 

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. The requiredratio for the year ended December 31, 2000 was met without assistance.

 

11

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**2001 Compared to 2000:**

 

The Company’s net incomedeclined 53% to $15.6 in 2001 from $33.0 in 2000. Interest and other revenuedecreased 9% over the same period to $335.6 due to lower earning assets andlower interest rates. Average earning assets decreased 8% in 2001 to $3,629.3from $3,948.9 in 2000 due to lower new loan volume, which was less than collectionson accounts. The provision for losses on receivables more than doubled to $80.8in 2001 compared to $36.4 in 2000 due to credit losses. The Company experiencedhigh levels of past dues and repossessions as well as a higher loss perrepossession due to lower used truck prices.

 

**Company Outlook**

 

The outlook for theCompany is dependent on the level of credit losses experienced, as well as thegeneration of new business.  An extendedperiod of general 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 repossessions and higher credit losses.  In the U.S., fleet bankruptcy filingscontinue at a high level and many trucking companies are financially weak.  In early 2000, the Company adjusted creditgranting policies to reflect the more difficult market.  These conservative credit policies as wellas continued strength in used truck prices contributed to the reduction incredit losses in the second half of 2002. Truck production in 2003 could continue at levels similar to 2002, whichif achieved, would likely result in an average earning asset level comparableto 2002.

 

**Funding and Liquidity**

 

The Company manages itscapital structure consistent with industry standards. Since 1983, the Companyhas registered debt securities under the Securities Act of 1933 for offering tothe public. In 2000, the Company filed a shelf registration statement underwhich $2,500.0 of medium-term notes could be issued as needed. As of December31, 2002, $630.0 of such securities were available for issuance.

 

The Company believes thatit has sufficient financial capabilities to continue funding receivables andservicing debt through internally generated funds, lines of credit, access topublic and private debt markets, and other financial resources. The decrease inborrowings to $2,604.6 at December 31, 2002 from $2,740.1 at December 31, 2001was due to collections exceeding the origination of finance and otherreceivables.

 

The following summarizesthe Company’s contractual cash commitments at December 31, 2002:

 
|             |   | **Maturity**            |    |                    |   |
|------------------|--------|-------------------------|---------|-------------------------|--------|
|             |   | **Less than  One Year** |    | **More than  One Year** |   | **Total** |   |
| Borrowings       |   | $                       | 1,754.6 |                    | $      | 850.0 |   | $ | 2,604.6 |   |
| Operating Leases |   | .8                      |    | 1.5                     |   | 2.3 |   |
| Total            |   | $                       | 1,755.4 |                    | $      | 851.5 |   | $ | 2,606.9 |   |

 

As described in Note F tothe financial statements, Borrowings consist primarily of term debt andcommercial paper. Operating leases consist of offices of the Company located onleased premises and office equipment. In addition, the Company had loan andlease commitments of $117.4 expiring within one year. These commitmentsrepresent commitments to fund new retail and lease contracts.

 

**Critical Accounting Policies**

 

In the preparation of theCompany’s financial statements, in accordance with Generally AcceptedAccounting Principles, management uses estimates and makes judgments andassumptions that affect asset and liability values and the amounts reported asincome and expense during the periods presented.  The following are

 

12

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accounting policies which, in the opinion ofmanagement, are particularly sensitive and which, if actual results aredifferent, may have a material impact on the financial statements.

 

In deter­mining the estimatedresidual value for equipment accounted as operating leases and certain directfinancing leases, the Company considers the length of the lease term, the truckmodel and anticipated market demand and the ex­pected usage of the truck. Ifthe sales price of a truck at the end of the lease term differs significantlyfrom the Company’s estimate, a gain or loss will result. The Company believesits residual setting policies are reasonable and appropriate, however futuremarket conditions, changes in government regulations and other factors outsidethe Company’s control can impact the ultimate sales price of trucks returnedunder these contracts. Residual values are reviewed regularly and adjusteddownward if market conditions warrant.

 

The establishment of creditloss reserves on financial services receivables are dependent on estimatesincluding assumptions regarding past dues, repossession rates and the recoveryrate on 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 -Summary of Accounting Policies” 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. These statements are subject to risks and uncertaintiesthat may affect actual results. The risks and uncertainties include, but arenot limited to national and local economic, political and industry conditions;changes in the levels of new business volume due to unit fluctuations in newPACCAR truck sales; changes in competitive factors; changes affecting theprofitability of truck owners and operators; price changes impacting equipmentcosts and residual values; changes in costs and availability of externalfunding sources; and legislation and governmental regulation.

 

13

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

 

Market Risk andDerivative Financial Instruments

 

In the normal course ofbusiness, the Company issues various financial instruments that expose theCompany to market risk associated with market interest rates. Policies andprocedures have been established by the Company to manage these market risksthrough the use of various derivative financial instruments. The Company doesnot engage in derivatives trading, market-making or other speculativeactivities.

 

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, 2002 and 2001.

 

 
| **Fair Value Gains (Losses)**                                                                          |   |                       |      |     |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------|-----------|----------|--------|
| (Millions of Dollars)                                                                                  |   |                       |      |     |   |
|                                                                                                   |   | **Year ended December 31** |      |
|                                                                                                   |   | **2002**                   |      | **2001** |   |
|                                                                                                   |   |                       |      |     |   |
| Assets                                                                                                 |   |                       |      |     |   |
| Retail notes,  contracts and wholesale financing, net of unearned interest, less allowance  for losses |   | **$**                      | **(23.9** | **)**    | $      | (27.6 | ) |
|                                                                                                   |   |                       |      |     |   |
| Liabilities                                                                                            |   |                       |      |     |   |
| Long-term debt                                                                                         |   | **.5**                     |      | 3.3      |   |
| Interest rate  swaps related to financial services debt                                                |   | **20.1**                   |      | 18.4     |   |
|                                                                                                   |   |                       |      |     |   |
| Total                                                                                                  |   | **$**                      | **(3.3**  | **)**    | $      | (5.9 | ) |

 

**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

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Report of Ernst& Young LLP, Independent Auditors

 

 

Board of Directors

PACCAR Financial ServicesCorporation and PACCAR Financial Corp.

 

 

We have audited theaccompanying balance sheets of PACCAR Financial Corp. (a wholly-ownedsubsidiary of PACCAR Financial Services Corporation) as of December 31, 2002and 2001, and the related statements of income and retained earnings and cashflows for each of the three years in the period ended December 31, 2002. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of PACCAR Financial Corp. at December 31, 2002and 2001, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2002 in conformity with accountingprinciples generally accepted in the United States.

 

As discussed in Note A tothe financial statements, the Company adopted Financial Accounting StandardsNo. 133, “Accounting for Derivative Instruments and Hedging Activities”effective January 1, 2001.

 

 
|                |   |   |   | /s/  Ernst & Young LLP |   |
|---------------------|--------|--------|--------|---------------------------------|--------|
|                |   |   |   |                            |   |
|                |   |   |   |                            |   |
|                |   |   |   |                            |   |
| Seattle, Washington |   |   |   |                            |   |
| February 18, 2003   |   |   |   |                            |   |

 

15

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**PACCARFinancial Corp.**

 

**STATEMENTSOF INCOME AND RETAINED EARNINGS**

(Millions of Dollars)

 
|                                                    |   | **Year ended  December 31** |      |
|---------------------------------------------------------|--------|-----------------------------|-----------|
|                                                    |   | **2002**                    |      | **2001** |   | **2000** |   |
|                                                    |   |                        |      |   |   |   |   |
| **INTEREST AND OTHER REVENUE**                          |   | **$**                       | **283.1** |   | $ | 335.6 |   | $ | 367.4 |   |
|                                                    |   |                        |      |   |   |   |   |
| Interest and  other borrowing expenses (1)              |   | **118.9**                   |      | 159.5 |   | 210.1 |   |
| Depreciation  related to operating leases               |   | **15.3**                    |      | 12.1 |   | 9.1 |   |
| Insurance claims  and underwriting expenses             |   | **11.7**                    |      | 10.3 |   | 8.4 |   |
| Operating  expenses at company owned leasing facilities |   | **7.1**                     |      | 5.8 |   | 5.8 |   |
| Selling, general  and administrative expenses           |   | **42.9**                    |      | 42.2 |   | 43.6 |   |
| Provision for  losses on receivables                    |   | **42.2**                    |      | 80.8 |   | 36.4 |   |
|                                                    |   |                        |      |   |   |   |   |
| **TOTAL EXPENSES**                                      |   | **238.1**                   |      | 310.7 |   | 313.4 |   |
|                                                    |   |                        |      |   |   |   |   |
| **INCOME BEFORE INCOME TAXES AND  ACCOUNTING CHANGE**   |   | **45.0**                    |      | 24.9 |   | 54.0 |   |
|                                                    |   |                        |      |   |   |   |   |
| Income taxes                                            |   | **17.7**                    |      | 9.7 |   | 21.0 |   |
|                                                    |   |                        |      |   |   |   |   |
| **NET INCOME BEFORE ACCOUNTING CHANGE**                 |   | **27.3**                    |      | 15.2 |   | 33.0 |   |
|                                                    |   |                        |      |   |   |   |   |
| Cumulative  effect of accounting change (net of tax)    |   | **—**                  |      | .4 |   | — |   |
|                                                    |   |                        |      |   |   |   |   |
| **NET INCOME**                                          |   | **27.3**                    |      | 15.6 |   | 33.0 |   |
|                                                    |   |                        |      |   |   |   |   |
| **RETAINED EARNINGS AT BEGINNING OF  YEAR**             |   | **409.7**                   |      | 394.1 |   | 361.1 |   |
| Cash dividends  paid                                    |   | **11.0**                    |      | — |   | — |   |
|                                                    |   |                        |      |   |   |   |   |
| **RETAINED EARNINGS AT END OF YEAR**                    |   | **$**                       | **426.0** |   | $ | 409.7 |   | $ | 394.1 |   |

 

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

 

See Notes to FinancialStatements

 

----

(1)                                  Interestand other borrowing expense for the year ended December 31, 2001 after theassumption of interest expense of $17.0 by PACCAR. See “Note D -Transactions with PACCAR and Affiliates.”

 

16

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**PACCARFinancial Corp.**

 
| **BALANCE SHEETS**                                                                                                                            |   |                   |        |     |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|-------------|----------|--------|
| (Millions of Dollars)                                                                                                                         |   |                   |        |     |   |
|                                                                                                                                          |   | **As of  December 31** |        |
|                                                                                                                                          |   | **2002**               |        | **2001** |   |
|                                                                                                                                          |   |                   |        |     |   |
| **ASSETS**                                                                                                                                    |   |                   |        |     |   |
|                                                                                                                                          |   |                   |        |     |   |
| Cash                                                                                                                                          |   | **$**                  | **9.9**     |     | $      | 18.5 |   |
| Finance and  other receivables, net of allowance for losses of $66.9 ($66.2 in 2001)                                                          |   | **3,156.2**            |        | 3,289.1  |   |
| Loans to PACCAR  Inc and affiliates                                                                                                           |   | **192.0**              |        | 163.2    |   |
| Equipment on  operating leases, net of depreciation of $26.8 ($21.9 in 2001)                                                                  |   | **122.3**              |        | 52.0     |   |
| Equipment held  for sale                                                                                                                      |   | **10.6**               |        | 17.1     |   |
| Other assets                                                                                                                                  |   | **20.5**               |        | 22.7     |   |
|                                                                                                                                          |   |                   |        |     |   |
| **TOTAL ASSETS**                                                                                                                              |   | **$**                  | **3,511.5** |     | $      | 3,562.6 |   |
|                                                                                                                                          |   |                   |        |     |   |
| **LIABILITIES**                                                                                                                               |   |                   |        |     |   |
|                                                                                                                                          |   |                   |        |     |   |
| Accounts payable  and accrued expenses                                                                                                        |   | **$**                  | **63.7**    |     | $      | 55.8 |   |
| Payable for  finance receivables acquired                                                                                                     |   | **50.5**               |        | 30.5     |   |
| Derivative  liability                                                                                                                         |   | **52.2**               |        | 52.0     |   |
| Commercial paper                                                                                                                              |   | **1,120.6**            |        | 1,274.5  |   |
| Medium-term  notes and other borrowings                                                                                                       |   | **1,484.0**            |        | 1,465.6  |   |
| Income taxes -  current and deferred                                                                                                          |   | **184.6**              |        | 161.2    |   |
|                                                                                                                                          |   |                   |        |     |   |
| **TOTAL LIABILITIES**                                                                                                                         |   | **$**                  | **2,955.6** |     | $      | 3,039.6 |   |
|                                                                                                                                          |   |                   |        |     |   |
| **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 $100 per share, 200,000 shares authorized, 145,000 shares issued  and outstanding                                    |   | **14.5**               |        | 14.5     |   |
| Paid-in capital                                                                                                                               |   | **116.0**              |        | 99.5     |   |
| Retained  earnings                                                                                                                            |   | **426.0**              |        | 409.7    |   |
| Accumulated  other comprehensive loss                                                                                                         |   | **(31.6**              | **)**       | (31.7    | )      |
|                                                                                                                                          |   |                   |        |     |   |
| **TOTAL STOCKHOLDER’S EQUITY**                                                                                                           |   | **555.9**              |        | 523.0    |   |
|                                                                                                                                          |   |                   |        |     |   |
| **TOTAL LIABILITIES AND STOCKHOLDER’S  EQUITY**                                                                                          |   | **$**                  | **3,511.5** |     | $      | 3,562.6 |   |

 

See Notes to FinancialStatements

 

17

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**PACCARFinancial Corp.**

 
| **STATEMENTS OF CASH FLOWS**                                                 |   |                        |     |     |   |     |   |
|------------------------------------------------------------------------------|--------|-----------------------------|----------|----------|--------|----------|--------|
| (Millions of  Dollars)                                                       |   |                        |     |     |   |     |   |
|                                                                         |   | **Year ended  December 31** |     |
|                                                                         |   | **2002**                    |     | **2001** |   | **2000** |   |
|                                                                         |   |                        |     |     |   |     |   |
| **OPERATING ACTIVITIES**                                                     |   |                        |     |     |   |     |   |
|                                                                         |   |                        |     |     |   |     |   |
| Net income                                                                   |   | **$**                       | **27.3** |     | $      | 15.6     |   | $ | 33.0 |   |
| Items included  in net income not affecting cash:                            |   |                        |     |     |   |     |   |
| Provision for  losses on receivables                                         |   | **42.2**                    |     | 80.8     |   | 36.4     |   |
| Deferred taxes  provision                                                    |   | **25.2**                    |     | 7.6      |   | 28.7     |   |
| Depreciation and  amortization                                               |   | **21.9**                    |     | 17.6     |   | 15.2     |   |
| Increase  (decrease) in payables and other                                   |   | **3.1**                     |     | (25.5    | )      | 1.2      |   |
|                                                                         |   |                        |     |     |   |     |   |
| **NET CASH PROVIDED BY OPERATING  ACTIVITIES**                               |   | **119.7**                   |     | 96.1     |   | 114.5    |   |
|                                                                         |   |                        |     |     |   |     |   |
| **INVESTING ACTIVITIES**                                                     |   |                        |     |     |   |     |   |
|                                                                         |   |                        |     |     |   |     |   |
| Finance and  other receivables originated                                    |   | **(1,185.3**                | )        | (1,067.5 | )      | (1,796.5 | )      |
| Collections on  finance and other receivables                                |   | **1,422.1**                 |     | 1,507.6  |   | 1,338.6  |   |
| Net (increase)  decrease in wholesale receivables                            |   | **(121.4**                  | )        | 139.6    |   | 26.9     |   |
| Net increase in  loans to PACCAR Inc and affiliates                          |   | **(28.8**                   | )        | (100.3   | )      | (20.8    | )      |
| Acquisition of  equipment                                                    |   | **(96.2**                   | )        | (18.8    | )      | (28.1    | )      |
| Proceeds from  disposal of equipment                                         |   | **8.4**                     |     | 9.0      |   | 9.2      |   |
|                                                                         |   |                        |     |     |   |     |   |
| **NET CASH (USED IN) PROVIDED BY  INVESTING ACTIVITIES**                     |   | **(1.2**                    | )        | 469.6    |   | (470.7   | )      |
|                                                                         |   |                        |     |     |   |     |   |
| **FINANCING ACTIVITIES**                                                     |   |                        |     |     |   |     |   |
|                                                                         |   |                        |     |     |   |     |   |
| Net (decrease)  increase in commercial paper and other short-term borrowings |   | **(153.9**                  | )        | (535.0   | )      | 105.1    |   |
| Proceeds from  medium-term notes and other borrowings                        |   | **845.0**                   |     | 425.0    |   | 795.0    |   |
| Payments of  medium-term notes and other borrowings                          |   | **(826.6**                  | )        | (461.7   | )      | (549.9   | )      |
| Dividends paid                                                               |   | **(11.0**                   | )        | —   |   | —   |   |
| Payment of  advances from (to) PACCAR Inc                                    |   | **2.9**                     |     | (5.0     | )      | (4.8     | )      |
| Capital  contributions                                                       |   | **16.5**                    |     | 16.9     |   | 16.9     |   |
|                                                                         |   |                        |     |     |   |     |   |
| **NET CASH (USED IN) PROVIDED BY  FINANCING ACTIVITIES**                     |   | **(127.1**                  | )        | (559.8   | )      | 362.3    |   |
|                                                                         |   |                        |     |     |   |     |   |
| **NET (DECREASE) INCREASE IN CASH**                                          |   | **(8.6**                    | )        | 5.9      |   | 6.1      |   |
|                                                                         |   |                        |     |     |   |     |   |
| **CASH AT BEGINNING OF YEAR**                                                |   | **18.5**                    |     | 12.6     |   | 6.5      |   |
|                                                                         |   |                        |     |     |   |     |   |
| **CASH AT END OF YEAR**                                                      |   | **$**                       | **9.9**  |     | $      | 18.5     |   | $ | 12.6 |   |

 

See Notes to FinancialStatements

 

18

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**PACCARFinancial Corp.**

 

**NOTES TOFINANCIAL STATEMENTS**

(Millions of Dollars)

** **

**NOTE A—SUMMARY OF ACCOUNTING POLICIES**

 

Industry:  PACCAR Financial Corp. (the “Company”), awholly-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.

 

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

 

Use of Estimates:  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect amounts reportedand disclosed in the financial statements. Actual results could differ from theamounts estimated by management.

 

Estimated Losseson Receivables: Theprovision for losses on finance and other receivables is charged to income inan amount sufficient to maintain the allowance for losses at a level consideredadequate to cover estimated losses. Receivables are charged to this allowancewhen, in the judgment of management, they are deemed uncollectible. Withrespect to certain retail contracts acquired from dealers, the dealer retainsliability, up to specified limits, for the credit loss on the sale of arepossessed vehicle. The amount and collectibility of dealer recourseprovisions have been considered in establishing the allowance for losses on receivables.

 

Revenue Recognition:  Revenue from finance receivables and otherreceivables is recognized using the interest method. Certain loan originationcosts are deferred and amortized to interest and other income. For operatingleases, income is recognized on a straight-line basis over the lease term.

 

Finance receivables areconsidered impaired and recognition of income is suspended when managementdetermines that collection of future income is not probable (generally after 90days past due). Recognition is resumed if the receivable becomes contractuallycurrent and collection doubts are removed.

 

Equipment:  Equipment on operating leases is recorded atcost and depreciated on a straight-line basis to its estimated residual value.Residual values are reviewed regularly and are reduced if market conditionswarrant.

 

Income Taxes:  The Company is included in the consolidatedfederal income tax return of PACCAR. Income taxes for the Company aredetermined on a separate return basis, and any related tax liability is paid bythe Company to PACCAR and any related tax benefit is paid by PACCAR to theCompany.

 

Derivative FinancialInstruments: Effective January 1, 2001, the Company adopted Financial AccountingStandard (FAS) No. 133, “Accounting for Derivative Instruments and HedgingActivities*.*”The adoption of FAS 133 on January 1, 2001 resulted in a cumulative increase tonet income of $.4, net of related income tax effects of $.3, and a cumulativereduction to Other Comprehensive Income (“OCI”) of $14.6, net of related incometax effects of $9.2.

 

Reclassifications:  Certain prior year amounts have beenreclassified to conform to the 2002 presentation.

 

19

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**NOTE B—FINANCE AND OTHER RECEIVABLES**

 

Terms for finance andother receivables range from 12 to 84 months. Company experience has shown thatsome receivables will be paid prior to contractual maturity and others will beextended or renewed. Accordingly, the maturities of receivables presented hereshould not be regarded as a forecast of future collections.

 

The Company’s finance andother receivables are as follows:

 
|                                                                                    |   | **Year ended  December 31** |        |
|-----------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                    |   | **2002**                    |        | **2001** |   |
| Retail notes and  contracts due within:                                                 |   |                        |        |   |   |
| One year                                                                                |   | **$**                       | **885.5**   |   | $ | 1,000.5 |   |
| Two years                                                                               |   | **588.4**                   |        | 634.5 |   |
| Three years                                                                             |   | **389.7**                   |        | 450.5 |   |
| Four years                                                                              |   | **193.8**                   |        | 227.4 |   |
| Five years and  beyond                                                                  |   | **89.8**                    |        | 74.9 |   |
|                                                                                    |   | **2,147.2**                 |        | 2,387.8 |   |
| Wholesale  financing                                                                    |   | **308.5**                   |        | 187.1 |   |
| Direct financing  leases (including residual values of $51.5 in 2002 and $59.5 in 2001) |   | **880.6**                   |        | 950.7 |   |
| Interest and  other receivables                                                         |   | **30.4**                    |        | 35.3 |   |
|                                                                                    |   |                        |        |   |   |
|                                                                                    |   | **3,366.7**                 |        | 3,560.9 |   |
|                                                                                    |   |                        |        |   |   |
| Less allowance  for losses                                                              |   | **(66.9**                   | **)**       | (66.2 | ) |
|                                                                                    |   |                        |        |   |   |
|                                                                                    |   | **3,299.8**                 |        | 3,494.7 |   |
|                                                                                    |   |                        |        |   |   |
| Unearned  interest:                                                                     |   |                        |        |   |   |
| Retail notes and  contracts                                                             |   | **(38.4**                   | **)**       | (79.8 | ) |
| Direct financing  leases                                                                |   | **(105.2**                  | **)**       | (125.8 | ) |
|                                                                                    |   |                        |        |   |   |
|                                                                                    |   | **(143.6**                  | **)**       | (205.6 | ) |
|                                                                                    |   |                        |        |   |   |
| Finance and  other receivables                                                          |   | **$**                       | **3,156.2** |   | $ | 3,289.1 |   |

 

Future minimum leasepayments on direct financing leases totaled $829.1 at December 31, 2002 and aredue as follows: $271.7 in 2003; $208.0 in 2004; $164.9 in 2005; $99.3 in 2006and $85.2 in 2007 and beyond.

 

20

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The allowance for losses on receivables is summarized as follows:

 
|                              |   | **Year ended  December 31** |     |
|-----------------------------------|--------|-----------------------------|----------|
|                              |   | **2002**                    |     | **2001** |   |
|                              |   |                        |     |   |   |
| Balance at  beginning of year     |   | **$**                       | **66.2** |   | $ | 65.4 |   |
| Provision for  losses             |   | **42.2**                    |     | 80.8 |   |
| Credit losses,  net of recoveries |   | **(41.5**                   | )        | (80.0 | ) |
|                              |   |                        |     |   |   |
| Balance at end  of year           |   | **$**                       | **66.9** |   | $ | 66.2 |   |

 

At December 31, 2002 and2001, the recorded investments in retail notes and contracts that wereconsidered to be impaired were $49.4 and $85.9, respectively. Included in theallowance for losses were specific reserves of $12.1 and $32.4 on theseimpaired notes and contracts. The average recorded investment in impaired notesand contracts during the years ended December 31, 2002 and 2001, was $63.2 and$102.7, respectively. The Company recognized interest income of $1.2, $2.4 and$1.4 for the years ended December 31, 2002, 2001 and 2000, respectively, onthose impaired loans, all of which was recognized using the cash basis methodof income recognition.

 

**NOTE C—EQUIPMENT ON OPERATING LEASES**

 

Terms of operating leasesrange up to 60 months. Future annual minimum rental payments to be received fortransportation equipment on non-cancelable operating leases beginning January1, 2003 were: $17.3 in 2003; $13.4 in 2004; $10.3 in 2005; $3.8 in 2006 and $.2in 2007. Interest and other revenue includes contingent rentals of $7.2, $6.3and $6.4 in 2002, 2001 and 2000, respectively.

 

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

 

The Company and PACCARare parties to a Support Agreement that obligates PACCAR to provide, whenrequired, financial assistance to the Company to ensure 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 for the years ended December 31, 2002and 2000 was met without assistance. In order to maintain the ratio of earningsto fixed charges in 2001, PACCAR provided earnings support by assuming $17.0 ofthe Company’s interest expense. Without earnings support the Company would haveearned net income of $5.1.

 

PFSC charges the Company for certain administrative services itprovides and certain services the Company receives indirectly from PACCAR. Thecosts are charged to the Company based upon the Company’s specific use of theservices at PFSC’s or PACCAR’s cost. Management considers these chargesreasonable and not significantly different from the costs that would beincurred if the Company were on a stand-alone basis. Fees for services of$16.5, $16.4 and $16.5 in 2002, 2001 and 2000, respectively, were charged tothe Company. PFSC recognizes certain of these administrative services as anadditional investment in the Company. The Company records the investment aspaid-in capital. A cash dividend in the amount of $11.0 was declared and paidin the second quarter of 2002. There were no cash dividends paid during 2001 or2000.

 

The Company’s employeesare covered by a defined benefit pension plan, an unfunded post-retirementmedical and life insurance plan, and a defined contribution plan sponsored byPACCAR. Separate allocations of plan assets, defined benefit accumulated planbenefits and defined contribution plan benefits relating to the Company

 

21

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have not been made.Expenses charged to the Company by PACCAR for these plans were $1.8, $1.8, and$1.6 for years 2002, 2001 and 2000, respectively.

 

Financing and cashmanagement is partly provided through unsecured short-term advances to and fromPACCAR. Net interest paid to PACCAR was $.1, $.1 and $.6 in 2002, 2001 and2000, respectively.

 

Periodically, the Companyborrows funds from PACCAR and makes loans to PACCAR. Loans outstanding toPACCAR were $38.7 and $20.3 at December 31, 2002 and 2001, respectively. Loansoutstanding from PACCAR were $2.9 at December 31, 2002. There were no loansoutstanding from PACCAR at December 31, 2001.

 

PACCAR has issued lettersof credit in the amount of $6.1 on behalf of the Company to guarantee funds forpayment to insured franchises and their customers for any future insurancelosses.

 

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 and soldthrough 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. There was a total of $153.3 and $142.9 in loans outstanding toforeign affiliates operating in the United Kingdom, the Netherlands and Mexicoat December 31, 2002 and 2001, respectively. There were no loans outstanding toother foreign affiliates for those periods. Interest income earned on affiliateloans was $3.3, $3.0 and $2.5 in 2002, 2001 and 2000, respectively.

 

Included within accountspayable and accrued expenses is $2.0 and $6.7 payable to PACCAR’s truckdivisions at December 31, 2002 and 2001, respectively.

 

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

 

**NOTE E—DERIVATIVE FINANCIAL INSTRUMENTS**

 

The Company does notengage in derivatives trading, market-making or other speculative activities.The Company enters into derivative financial agreements as hedgingtransactions to manage certain exposures to fluctuations in interest ratesand foreign currency exchange rates. The Company documents its risk managementstrategy and hedge effectiveness at the inception of and during the term ofeach hedge. The Company in the normal course of business enters into variousinterest-rate contracts, including interest-rate and currency swaps.Interest-rate contracts generally involve the exchange of fixed and floatingrate interest payments without the exchange of the underlying principal. Thesecontracts are used to manage exposures to fluctuations in interest rates. Netamounts paid or received are reflected as adjustments to interest expense. AtDecember 31, 2002 the Company had 93 interest rate swaps outstanding withvarious financial institutions. The notional amount of these contracts totaled$1,692.7 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 established minimum credit ratings of thecounterparties and limits its exposure to any one counterparty. Managementbelieves that the risk of nonperformance by the counterparties is very low.

 

Floating to fixed rateswaps effectively convert an equivalent amount of commercial paper and othervariable rate debt to fixed rate debt. Notional maturities for the five yearsbeginning January 1, 2003 are $723.4, $554.3,

 

22

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$286.0,  $84.5 and $44.5. The weighted average payrate of 4.63% approximates the Company’s net cost of funds. The weightedaverage receive rate of 1.55% offsets rates on associated debt obligations.

 

All derivatives are reported at fair value as “Otherassets” or “Derivative liability” in the accompanying balance sheets. The gainor loss on the effective portion of derivatives that have been designated ascash flow hedging instruments arising from the change in fair value isinitially reported in OCI. The remaining gain or loss, if any, is recognizedcurrently in earnings. Hedge ineffectiveness was immaterial. Amounts inaccumulated OCI are reclassified into net income in the same periodin which the hedged forecasted transaction affects earnings. Netgains and losses from interest-rate contracts are recognized as an adjustmentto interest expense. Of the accumulated net loss included in OCI as of December31, 2002, $26.0 is expect­ed to be reclassified to net income in 2003. Thefixed interest earned on finance receivables will offset the amount recognizedin interest expense resulting in a stable interest margin consistent with theCompany’s interest rate risk management strategy.

 

23

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**NOTE F—BORROWINGS**

 

Borrowings are summarizedas follows:

 
|                             |   | **Effective  Rate*** |     | **As of  December 31,** |        |
|----------------------------------|--------|----------------------|----------|-------------------------|-------------|
|                             |   |                 | **2002** |                    | **2001**    |   |
|                             |   |                 |     |                    |        |   |   |
| Commercial paper                 |   | **3.71**             | **%**    | **$**                   | **1,120.6** |   | $ | 1,274.5 |   |
| Fixed rate  medium-term notes    |   | **6.43**             | **%**    | **105.0**               |        | 300.0 |   |
| Floating rate  medium-term notes |   | **3.57**             | **%**    | **1,375.0**             |        | 1,150.0 |   |
| Other fixed rate  borrowings     |   | **5.64**             | **%**    | **4.0**                 |        | 15.6 |   |
|                             |   |                 |     |                    |        |   |   |
| Total                            |   | **3.75**             | **%**    | **$**                   | **2,604.6** |   | $ | 2,740.1 |   |

 

----

*The effective rate isthe weighted average rate as of December 31, 2002 and includes the effects ofinterest rate swap agreements.

 

Interest expense onborrowings, before the interest expense assumption of $17.0 in 2001 by PACCAR,amounted to $114.7, $171.5, and $205.5 for 2002, 2001 and 2000, respectively.

 

Principal amounts ofmedium-term notes and other fixed rate borrowings due over the next five yearsbeginning January 1, 2003 are $634.0 in 2003, $800.0 in 2004, and $50.0 in2005.

 

At December 31, 2002,there was $630.0 of medium-term debt available for issuance under a currentlyoutstanding shelf registration statement.

 

Cash paid for interest(net of swap interest received) was $120.9 in 2002, $165.0 in 2001 and $208.1in 2000.

 

**NOTE G—CREDIT ARRANGEMENTS**

 

The Company participateswith PACCAR and other PACCAR affiliates in syndicated bank line of creditfacilities of $1,275.0 at December 31, 2002 which are entirely available foruse by the Company. These credit facilities are used to provide backupliquidity for the Company’s short-term borrowings. The Company is liable onlyfor its own borrowings under this credit facility.  There were no borrowings outstanding under these facilities atDecember 31, 2002 and 2001.

 

24

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**NOTE H—INCOME TAXES**

 

The provision for incometaxes consists of the following:

 
|                         |   | **Year ended  December 31** |     |
|------------------------------|--------|-----------------------------|----------|
|                         |   | **2002**                    |     | **2001** |   | **2000** |   |
|                         |   |                        |     |   |   |   |   |
| Current  provision (benefit) |   |                        |     |   |   |   |   |
| Federal                      |   | **$**                       | **(9.0** | ) | $ | .6 |   | $ | (7.3 | ) |
| State                        |   | **1.6**                     |     | 1.9 |   | (.4 | ) |
|                         |   | **(7.4**                    | **)**    | 2.5 |   | (7.7 | ) |
|                         |   |                        |     |   |   |   |   |
| Deferred  provision          |   | **25.1**                    |     | 7.2 |   | 28.7 |   |
|                         |   |                        |     |   |   |   |   |
|                         |   | **$**                       | **17.7** |   | $ | 9.7 |   | $ | 21.0 |   |

 

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

 
|                              |   | **Year ended  December 31** |     |
|-----------------------------------|--------|-----------------------------|----------|
|                              |   | **2002**                    |     | **2001** |   | **2000** |   |
|                              |   |                        |     |   |   |   |   |
| Tax at the  statutory rate of 35% |   | **$**                       | **15.8** |   | $ | 8.7 |   | $ | 18.9 |   |
| Effect of state  income taxes     |   | **1.8**                     |     | .9 |   | 2.0 |   |
| Other                             |   | **.1**                      |     | .1 |   | .1 |   |
|                              |   | **$**                       | **17.7** |   | $ | 9.7 |   | $ | 21.0 |   |

 

Cash received for incometaxes was $.2 in 2002, $4.4 in 2001 and $7.1 in 2000.

 

Deferred income taxassets and liabilities consisted of the following:

 
|                                   |   | **As of  December 31** |      |
|----------------------------------------|--------|------------------------|-----------|
|                                   |   | **2002**               |      | **2001** |   |
| Deferred tax  liabilities:             |   |                   |      |   |   |
| Asset  capitalization and depreciation |   | **$**                  | **219.9** |   | $ | 202.8 |   |
| State income tax                       |   | **16.7**               |      | 8.6 |   |
|                                   |   | **236.6**              |      | 211.4 |   |
|                                   |   |                   |      |   |   |
| Deferred tax  assets:                  |   |                   |      |   |   |
| Allowance for  losses on receivables   |   | **(26.3**              | )         | (24.1 | ) |
| Derivative  liability                  |   | **(19.6**              | )         | (19.7 | ) |
| Other                                  |   | **(5.3**               | )         | (7.4 | ) |
|                                   |   | **(51.2**              | **)**     | (51.2 | ) |
|                                   |   |                   |      |   |   |
| Net deferred tax  liability            |   | **$**                  | **185.4** |   | $ | 160.2 |   |

 

25

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

 

The following methods andassumptions were used by the Company in estimating its fair value disclosuresfor financial instruments:

 

Cash:  The carrying amount reported in the balancesheets is stated at fair value.

 

Net Receivables:  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 allowance for losses have been excluded from the accompanyingtable.

 

Commercial Paper,Medium-Term Notes and Other Fixed Rate Borrowings:  The carrying amounts of the Company’scommercial paper and floating rate medium-term notes approximates fair value.The fair value of the Company’s fixed rate medium-term notes and other fixedrate borrowings is estimated using discounted cash flow analysis, based on theCompany’s current incremental borrowing rates for similar types of borrowingarrangements.

 

Derivative Instruments*:*Fair values for the Company’s interest-rate contracts are based on costs thatwould be incurred to terminate existing agreements and enter into newagreements with similar notional amounts, maturity dates and counterparties’credit standing at current market interest rates.

 

Payables and Accrued Expenses:**Carryingamounts approximate fair value and have been excluded from the accompanyingtable.

 

Financial instruments ofthe Company, where the recorded carrying amount is not at fair value, are asfollows:

 
|                                                          |   | **As of  December 31** |        |
|---------------------------------------------------------------|--------|------------------------|-------------|
|                                                          |   | **2002**               |        | **2001** |   |
|                                                          |   | **Carrying  Amount**   |        | **Fair Value** |   | **Carrying   Amount** |   | **Fair Value** |   |
|                                                          |   |                   |        |   |   |   |   |   |   |
| Net receivables                                               |   | **$**                  | **2,367.8** | ** ** | **$** | **2,424.9** |   | $ | 2,443.3 |   | $ | 2,491.7 |   |
| Fixed rate  medium-term notes and other fixed rate borrowings |   | **109.0**              | ** **  | **111.6** |   | 315.6 |   | 324.0 |   |
|                                                               |        |                        |             |  |  |  |  |  |  |  |  |  |  |

 

26

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**NOTEJ—STOCKHOLDER’S EQUITY**

 

**Other Comprehensive Income**

 

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

 
|                                                             |   | **Pretax  Amount** |       | **Tax Effect** |       | **Net Amount** |       |
|------------------------------------------------------------------|--------|--------------------|------------|----------------|------------|----------------|------------|
|                                                             |   |               |       |           |       |           |       |
| **2002**                                                         |   |               |       |           |       |           |       |
| Net income                                                       |   | **$**              | **45.0**   | ** **     | **$**      | **(17.7**      | **)**      | **$** | **27.3** | ** ** |
| Other  comprehensive income (loss):                              |   |               | ** ** |           | ** ** |           | ** ** |
| Loss on  derivative contracts                                    |   | **(48.3**          | **)**      | **18.5**       | ** ** | **(29.8**      | **)**      |
| Reclassification  adjustment                                     |   | **48.5**           | ** ** | **(18.6**      | **)**      | **29.9**       | ** ** |
| Net other  comprehensive income (loss)                           |   | **.2**             | ** ** | **(.1**        | **)**      | **.1**         | ** ** |
| Total  comprehensive income (loss)                               |   | **$**              | **45.2**   | ** **     | **$**      | **(17.8**      | **)**      | **$** | **27.4** | ** ** |
|                                                             |   |               |       |           |       |           |       |
| **2001**                                                         |   |               |       |           |       |           |       |
| Net income                                                       |   | $                  | 25.3       |           | $          | (9.7           | )          | $ | 15.6 |   |
| Other  comprehensive income (loss):                              |   |               |       |           |       |           |       |
| Cumulative  effect of accounting change for derivative contracts |   | (23.8              | )          | 9.2            |       | (14.6          | )          |
| 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          | )          |
| Total  comprehensive income (loss)                               |   | $                  | (26.1      | )              | $          | 10.0           |       | $ | (16.1 | ) |

 

Accumulated other comprehensive loss of $31.6 and $31.7 at December 31,2002 and 2001, respectively, is comprised of the unrealized net loss onderivative contracts.

 

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

 
|                        |   | **QUARTER** |       |
|-----------------------------|--------|-------------|------------|
|                        |   | **First**   |       | **Second** |   | **Third** |   | **Fourth** |   |
|                        |   |        |       |   |   |   |   |   |   |
| **2002**                    |   |        |       |   |   |   |   |   |   |
|                        |   |        |       |   |   |   |   |   |   |
| Interest and  other revenue |   | **$**       | **70.3**   | ** ** | **$** | **70.0** | ** ** | **$** | **71.0** | ** ** | **$** | **71.8** | ** ** |
| Income before  income taxes |   | **3.6**     | ** ** | **8.8** | ** ** | **14.7** | ** ** | **17.9** | ** ** |
| Net income                  |   | **2.1**     | ** ** | **5.4** | ** ** | **8.9** | ** ** | **10.9** | ** ** |
|                        |   |        |       |   |   |   |   |   |   |
| **2001**                    |   |        |       |   |   |   |   |   |   |
|                        |   |        |       |   |   |   |   |   |   |
| Interest and  other revenue |   | $           | 90.3       |   | $ | 85.7 |   | $ | 82.4 |   | $ | 77.2 |   |
| Income before  income taxes |   | 4.7         |       | 1.8 |   | .9 |   | 17.5 |   |
| Net income                  |   | 3.2         |       | 1.0 |   | .5 |   | 10.9 |   |

 

In order to maintain theratio of earnings to fixed charges in 2001, PACCAR provided earnings support inthe fourth quarter 2001 by assuming $17.0 of the Company’s interest expense.Without earnings support fourth quarter 2001 net income would have been $.4.

 

27

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**NOTE L—COMMITMENTS AND CONTINGENCIES**

 

The Company is a party tovarious 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.

 

28

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**ITEM 9.          CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

The registrant hasnot had any disagreements with its independent auditors on accounting orfinancial disclosure matters.

 

**PART III**

 

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

 

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

 

 

**ITEM 14.       CONTROLSAND PROCEDURES**

 

TheCompany’s principal executive officer and principal financial officer evaluatedthe Company’s disclosure controls and procedures (as defined in rule 13a-14(c)and 15d-14(c) under the Securities Exchange Act of 1934, as amended) as of adate within 90 days before the filing of this annual report (the EvaluationDate). Based on that evaluation, the principal executive officer and principalfinancial officer of the Company concluded that, as of the Evaluation Date, thedisclosure controls and procedures in place at the Company were adequate toensure that information required to be disclosed by the Company, including itsconsolidated subsidiaries, in reports that the Company files or submits underthe Exchange Act, is recorded, processed, summarized and reported on a timelybasis in accordance with applicable rules and regulations. There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls subsequent to the Evaluation Date.

 

**PART IV**

 

**ITEM 15.       EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

(a) LIST OF FINANCIALSTATEMENTS AND FINANCIAL STATEMENT SCHEDULES

 

The followingfinancial statements of the Company are included in Item 8:

 

At December 31,2002 and 2001 and for the Years Ended December 31, 2002, 2001 and 2000

 

                Statements of Income andRetained Earnings — Years Ended December 31, 2002, 2001 and 2000

 

                Balance Sheets —December 31,2002 and 2001

 

                Statements of Cash Flows — YearsEnded December 31, 2002, 2001 and 2000

 

                        Notes to Financial Statements — December 31,2002

 

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 beenomitted.

 

                        Listing of Exhibits

 

The exhibits required byItem 601 of Regulation S-K are listed in the accompanying Exhibit Index.

 

29

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(b) REPORTS ON FORM8-K FILED IN THE FOURTH QUARTER OF 2002

 

There were no reports onForm 8-K for the quarter ended December 31, 2002.

 

30

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                        | PACCAR Financial Corp. |                   |
|-----------------------------|------------------------|------------------------|
|                        |                   |                   |   |
|                        | By                     | /s/ Timothy M. Henebry |   |
|                        |                   | Timothy M. Henebry     |   |
|                        |                   | President              |   |
|                        |                   |                   |   |
| Date:  March  10, 2003 |                   |                   |   |

 

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

 
| (1)    | Principal Executive Officer          |                     |
|--------|--------------------------------------|--------------------------|
|   |                                 |                     |   |
|   |                                 | /s/ Mark C. Pigott       |   | Chairman |
|   |                                 | Mark C. Pigott           |   |
|   |                                 |                     |   |
| (2)    | Principal Financial Officer          |                     |
|   |                                 |                     |   |
|   |                                 | /s/ Michael A. Tembreull |   | Vice Chairman |
|   |                                 | Michael A. Tembreull     |   |
|   |                                 |                     |   |
| (3)    | Principal Accounting Officer         |                     |
|   |                                 |                     |   |
|   |                                 | /s/ Barry E. Prather     |   | Controller |
|   |                                 | Barry E. Prather         |   |
|   |                                 |                     |   |
| (4)    | A Majority of the Board of Directors |                     |
|   |                                 |                     |   |
|   |                                 | /s/ Timothy M. Henebry   |   |   |
|   |                                 | Timothy M. Henebry       |   |
|   |                                 |                     |   |
|   | Kenneth R. Gangl*                    |                     |
|   | David J. Hovind*                     |                     |
|   |                                 |                     |   |
|   |                                 |
| *By    | /s/ Timothy M. Henebry               |                     | . |
|   | Timothy M. Henebry                   |                     |
|   | Attorney-in-fact                     |                     |
|        |                                      |                          |  |  |  |

 

31

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**PACCARFinancial Corp.**

**CERTIFICATIONS**

 

I, Mark C. Pigott,Chairman, certify that:

 

1.                           Ihave reviewed this annual report on Form 10-K of PACCAR Financial Corp.;

 

2.                           Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                           Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                           Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                    designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)                   evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)                    presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                           Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                    allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                   anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                           Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date   | March 10, 2003                |   |   |
|--------|-------------------------------|--------|--------|
|   | /s/ Mark C. Pigott            |
|   | Mark C. Pigott                |
|   | Chairman                      |
|   | (Principal Executive Officer) |

 

32

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**PACCARFinancial Corp.**

**CERTIFICATIONS**

 

I, Michael A.Tembreull, Vice Chairman, certify that:

 

1.                           Ihave reviewed this annual report on Form 10-K of PACCAR Financial Corp.;

 

2.                           Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                           Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                           Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                           Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                           Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date   | March 10, 2003                |   |   |
|--------|-------------------------------|--------|--------|
|   | /s/ Michael A. Tembreull      |
|   | Michael A. Tembreull          |
|   | Vice Chairman                 |
|   | (Principal Financial Officer) |

 

33

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**PACCARFinancial Corp.**

**EXHIBITINDEX**

 

 
| 2      |   | Plan of Merger of PACCAR Leasing Corporation, a Delaware  Corporation, and PACCAR Financial Corp., a Washington Corporation effective  May 1, 2000 (incorporated by reference to Exhibit 2 to the Company’s  Quarterly Report on Form 10-Q dated August 11, 2000, File Number 0-12553).                                                                                                                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1    |   | Restated Articles of Incorporation of the Company,  as amended (incorporated by reference to Exhibit 3.1 to the Company’s Annual  Report on Form 10-K dated March 26, 1985. Amendment incorporated by reference  to Exhibit 19.1 to the Company’s Quarterly Report on Form 10-Q dated August  13, 1985, File Number 0-12553).                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2    |   | By-laws of the Company, as amended (incorporated by  reference to Exhibit 3.2 to the Company’s Registration Statement on Form 10  dated October 20, 1983, File Number 0-12553).                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.1    |   | Indenture for Senior Debt Securities dated as of  December 1, 1983 and first Supplemental Indenture dated as of June 19, 1989  between the Company and Citibank, N.A. (incorporated by reference to Exhibit  4.1 to the Company’s Annual Report on Form 10-K dated March 26, 1984, File Number  0-12553 and Exhibit 4.2 to the Company’s Registration Statement on Form S-3  dated June 23, 1989, Registration Number 33-29434). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3    |   | Forms of Medium-Term Note, Series H (incorporated by  reference to Exhibits 4.3A and 4.3B to the Company’s Registration Statement  on Form S-3 dated March 11, 1996, Registration Number 333-01623).                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | Form of Letter of Representation among the Company,  Citibank, N.A. and the Depository Trust Company, Series H (incorporated by  reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-3  dated March 11, 1996, Registration Number 333-01623).                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.4    |   | Forms of Medium-Term Note, Series I (incorporated by  reference to Exhibits 4.2A and 4.2B to the Company’s Registration Statement  on Form S-3 dated September 10, 1998, Registration Number 333-63153).                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | Form of Letter of Representation among the Company,  Citibank, N.A. and The Depository Trust Company, Series I (incorporated by  reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3  dated September 10, 1998, Registration Number 333-63153).                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.5    |   | Forms of Medium-Term Note, Series J (incorporated by  reference to Exhibits 4.2A and 4.2B to the Company’s Registration Statement  on Form S-3 dated March 2, 2000, Registration Number 333-31502).                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | Form of Letter of Representation among the Company,  Citibank, N.A. and The Depository Trust Company, Series J (incorporated by  reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3  dated March 2, 2000, Registration Number 333-31502).                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1   |   | Support Agreement between the Company and PACCAR  dated as of June 19, 1989 (incorporated by reference to Exhibit 28.1 to the  Company’s Registration Statement on Form S-3 dated June 23, 1989,  Registration Number 33-29434).                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 12.1   |   | Statement re: computation of ratio of earnings to  fixed charges of the Company pursuant to SEC reporting requirements for each  of the five years ended December 31, 1998 - 2002.                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 12.2   |   | Statement re: computation of ratio of earnings to  fixed charges of the Company pursuant to the Support Agreement with PACCAR  for each of the five years ended December 31, 1998 - 2002.                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 12.3   |   | Statement re: computation of ratio of earnings to  fixed charges of PACCAR and subsidiaries pursuant to SEC reporting requirements  for each of the five years ended December 31, 1998 - 2002.                                                                                                                                                                                                                                             |

 

34

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| 23     |   | Consent of Independent Auditors                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------|
|   |   |                                                                                               |
| 25.1   |   | Power of attorney of certain officers and directors                                                |
|   |   |                                                                                               |
| 99.1   |   | Certification pursuant to section 906 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350). |
|   |   |                                                                                               |
| 99.2   |   | Certification pursuant to section 906 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350). |

 

Other exhibitslisted in Item 601 of Regulation S-K are not applicable.

 

 

35

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