**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

# **FORM10-K**

 

**FOR ANNUAL AND TRANSITION REPORTS**

**PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**(MarkOne)**

**ý****       ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  (NO FEE REQUIRED)**

 

# **For the fiscal yearended December 31, 2001**

**OR**

** **

**o****      TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  (NO FEEREQUIRED)**

 

**Fortransition periodfrom            to           **

** **

**CommissionFile No. 0-12553**

 

**PACCARFINANCIAL CORP.**

(Exact name ofRegistrant 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   ý No  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

 

The aggregate marketvalue of the voting stock held by non-affiliates of the registrant as ofFebruary 28, 2002:

None

 

The number of sharesoutstanding of the registrant’s classes of common stock as of February 28,2002:

 

Common Stock, $100 parvalue - - 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.

 

 

 

**PACCARFinancial Corp.**(Millions ofDollars)

 

 

##### **PART I**

 

 

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

 

## GENERAL

 

 

PACCAR Financial Corp.

 

PACCARFinancial Corp. (the “Company”) is a Washington corporation organized in 1961as a wholly owned subsidiary of PACCAR Inc (“PACCAR”) to finance the sale ofPACCAR products. The Company provides financing and leasing of trucks andrelated equipment manufactured primarily by PACCAR and sold through PACCAR’sindependent dealer network in the United States. The Company also financesdealer inventories of transportation equipment and franchises PACCARdealerships to engage in full-service and finance leasing.

 

In 2000, PACCARInc reorganized 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. PFSC was formed in January 2000to support the expanding financial services activities of PACCAR. In addition,effective May 1, 2000, PACCAR Leasing Corporation (“PLC”), another wholly ownedsubsidiary of PACCAR, was merged into the Company. The merger was accounted foras a combination 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 principal industry segments, (1) manufactureand distribution of light-, medium- and heavy- duty trucks and relatedaftermarket distribution of parts and (2) finance and leasing services providedto customers and dealers. PACCAR distributes trucks and parts primarily throughits independent dealer network. PACCAR’s finance and leasing activities areprincipally related to PACCAR products and associated equipment. Othermanufactured products include industrial winches.

 

        PACCAR and its subsidiaries design and manufacture truckswhich are marketed under the Peterbilt, Kenworth, DAF and Foden nameplates inthe heavy-duty diesel category. These vehicles, which are built in four plantsin the United States, three in Europe and one each in Australia and Mexico, areused worldwide for over-the-road and off-highway hauling of freight, petroleum,wood products, construction and other materials. Commercial trucks and relatedservice parts comprise the largest segment of PACCAR’s business, accounting for92% of total 2001 net sales and revenues.

 

        PACCAR, through its Peterbilt and Kenworth nameplates,competes in the North American Class 6/7 markets primarily with conventionalmodels. These medium-duty trucks are assembled at PACCAR’s Ste. Therese, Quebecplant and at PACCAR’s Mexican subsidiary in Mexicali, Mexico. This line ofbusiness represents a small but increasing percentage of PACCAR’s NorthAmerican sales. PACCAR competes in the European light/medium (6 to 15 metricton) commercial vehicle market with DAF cab-over-engine trucks assembled in theUnited Kingdom by Leyland, one of PACCAR’s wholly-owned subsidiaries. During2001, DAF completed its development of an updated light-line product. The newproduct, which began full-scale production in April 2001, was recently named2002 International Truck of the Year in Europe.

 

        Trucks and related parts are sold to independent dealers forresale. Trucks manufactured in the U.S. and Canada for sale outside NorthAmerica are marketed by PACCAR International, a U.S. division. Those sales aremade through a worldwide dealer network. Trucks manufactured in Australia,Mexico, the Netherlands and the United Kingdom are marketed in their primarymarkets through independent dealers and a small number of factory branches.Trucks manufactured in these countries for export to South America, Africa andAsia are marketed by DAF or PACCAR International.

 

2

----

**PACCARFinancial Corp.**(Millions ofDollars)

 

 

 

      There were three other principal competitors in the U.S. Class8 truck market in 2001. PACCAR’s share of that market was 19.5% ofregistrations in 2001. In Europe there were five other principal competitors inthe commercial vehicle market in 2001, including parent companies to twocompetitors of PACCAR in the United States. PACCAR’s subsidiary, DAF, had an11.4% share of the western European heavy-duty market and a 7.7% share of thelight/medium market. These markets are highly competitive in price, quality andservice, and PACCAR is not dependent on any single customer for its sales.There are no significant seasonal variations.

 

      In addition to the Company, which provides financing, leasingand full-service truck leasing in the United States, PACCAR offers similarfinancing programs for PACCAR products in Mexico, Canada, Australia, UnitedKingdom, Netherlands, Belgium, Germany, France, Italy and Spain through otherwholly-owned finance companies. PACCAR also conducts full-service leasingoperations through wholly-owned subsidiaries in Canada and Mexico. PACCAR has a49% equity ownership in DAF Financial Services (DFS) in Europe. Effective July1, 2001, concurrent with the start-up of wholly-owned finance operations inseven western European markets, DFS ceased writing new business. DFS willcontinue to service existing assets until they are liquidated in the ordinarycourse of business.

 

      PACCAR’s common stock, $1 par value, is traded on the NASDAQNational Market under the symbol “PCAR”. PACCAR and the Company are subject tothe informational requirements of the Securities Exchange Act of 1934 and inaccordance therewith file reports and other information with the Securities andExchange Commission (the “Commission”). All reports, proxy statements and otherinformation filed by PACCAR and the Company with the Commission may beinspected and copied at the public reference facility maintained by theCommission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 orthrough the Commission’s internet site at www.sec.gov.

 

 

BUSINESS OF THECOMPANY

 

      The Company operates primarily in one industry segment, truckand related equipment financing in the United States. The Company providesfinancing to customers and dealers for new Kenworth and Peterbilt trucks, usedtrucks, and for truck trailers and allied equipment such as mixer and dumpbodies attached to trucks. In addition, the Company franchises PACCARdealerships to engage in full-service and finance leasing as members of thePacLease system. The Company also in selected markets engages in full-serviceleasing directly with its customers through Company owned stores.

 

      The Company currently conducts business with most PACCARdealers. The volume of the Company’s business is significantly affected byPACCAR’s sales and competition from other financing sources.

 

      As of December 31, 2001, the Company employed 299 full-timeemployees, none of whom are represented by a collective bargaining agent. TheCompany considers relations with its employees to be good.

 

3

----

**PACCARFinancial Corp.**(Millions ofDollars)

 

 

The Company’s Products

 

Retail Receivables

 

Retail Contracts The Company purchases contracts from dealers and receives assignments ofthe contracts and a first lien security interest in the vehicles financed(“Retail Contracts”). Collateral for vehicles sold to leasing companies mayalso include an assignment of leases and rentals due. Retail Contractspurchased by the Company have fixed or floating interest rates.

 

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

 

Master Note

 

      Master Note contracts (“Master Note”) are an alternative formof retail financing offered to select dealers for new and used trucks. Retailinstallment contracts originated by the dealer for new or used trucks andmeeting the Company’s requirement as to form, terms and creditworthiness forRetail Contracts are pledged to the Company as collateral for direct, fullrecourse loans by the Company to the dealer. Master Note contracts have fixedor floating interest rates.

 

Wholesale Contracts

 

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

 

Dealer Loans

 

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

 

Direct Financing Leases

 

      The Company offers direct financing lease contracts where it istreated as the owner of the equipment for tax purposes and generally retainsthe tax depreciation (“Direct Financing Leases”). The lessee is responsible forthe payment of property and sales taxes, licenses, maintenance and otheroperating items. The lessee is obligated to maintain the equipment and toinsure the equipment against casualty and liability losses.

 

      Most of the Company’s Direct Financing Leases contain aTerminal Rental Adjustment Clause, which requires the lessee to guarantee tothe Company a stated residual value upon disposition of the equipment at theend of the direct financing lease term.

 

Operating Leases

 

      The Company offers operating lease contracts (“OperatingLeases”) where it is treated as the owner of the equipment. The lessee isresponsible for the payment of property and sales taxes, licenses, maintenanceand other operating items. The lessee is obligated to maintain the equipmentand to insure the equipment against casualty and liability losses.

 

      At the end of the operating lease term the lessee has theoption to return the equipment to the Company without penalty.

 

4

----

**PACCARFinancial Corp.**(Millions ofDollars)

 

 

Full-Service Leasing

 

      The Company also conducts full-service leasing operations underthe PacLease trade name. Selected dealers are franchised to providefull-service leasing. The Company provides the franchisees with equipmentfinancing and managerial support. The Company also operates full-service leaseoutlets in selected markets on its own behalf.

 

Insurance

 

      The Company sells physical damage insurance through PACCARdealers who are licensed insurance agents as well as through licensed agents ofthe Company. The Company retains the premium revenues and loss exposure for thepolicies, which are issued through an unrelated insurance carrier.

 

      The Company charges a fee to provide insurance coverage,through an unrelated regulated insurance carrier, on new trucks, used trucksand trailer inventory to dealers having Wholesale Contracts with the Company.

 

      The Company offers physical damage and liability insurance onnew and used trucks and trailers to its full-service lease customers. TheCompany retains premium and loss exposure for the policies that are issuedthrough an unaffiliated insurance carrier. To limit its exposure the Companyhas acquired excess insurance coverage from a third party insurance carrier.

 

 

CUSTOMERCONCENTRATION, PAST DUE ACCOUNT AND LOSS EXPERIENCE

 

Customer Concentration

 

      At December 31, 2001, the largest single customer for retailcontracts, direct loans or leases represented 1.4% of the Company’s grossreceivables and the five largest such customers collectively amounted to 3.4%of gross receivables.

 

      At December 31, 2001, the Company had Master Note contractsoutstanding with six dealers. Master Note borrowings totaled 5.4% of theCompany’s gross receivables, while the largest Master Note dealer’s borrowingsamounted to 3.7% of the Company’s gross receivables. Master Notes are securedby numerous retail installment contracts, which, in effect, reduces the amountof dealer concentration.

 

      With respect to wholesale financing, at December 31, 2001, thelargest single dealer group accounted for .7% of the Company’s grossreceivables, and the five largest dealer groups collectively accounted for 1.9%of gross receivables.

 

      At December 31, 2001, the largest single full-service leasingfranchise group accounted for 1.5% of the Company’s gross receivables, and thefive largest full-service leasing franchise groups collectively accounted for4.6% of gross receivables.

 

Past Due Receivables andAllowance for Losses

 

      An account is considered past due by the Company if any portionof an installment is due and unpaid for more than 30 days. In periods ofadverse economic conditions, past due levels, repossessions and credit lossesgenerally increase.

 

      The Company maintains an allowance for losses on receivables ata level which it considers to be adequate to cover management’s estimates oflosses.

 

 

5

----

**PACCARFinancial Corp.**(Millions ofDollars)

 

 

      For discussion of the allowance for losses, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,1999-2001.”

 

 

COMPETITION ANDECONOMIC FACTORS

 

      The commercial truck and trailer finance and leasing businessis highly competitive among banks, commercial finance companies, captivefinance companies and leasing companies. Many of these institutions havesubstantially greater financial resources than the Company and may borrow fundsat lower rates.

 

      The dealers are the primary source of contracts acquired by theCompany. However, dealers are not required to obtain financing from theCompany, and they have a variety of other sources, which may be used forwholesale and customer financing of trucks. Retail purchasers also have avariety of sources available to finance truck purchases.

 

      The ability of the Company to compete in its market isprincipally based on the rates and terms that the Company offers dealer andretail purchasers, as well as the specialized services it provides. Rates andterms are based on the Company’s desire to provide flexible financing thatmeets dealer and customer financing needs, the ability of the Company to borrowfunds at competitive rates and the Company’s need to earn an adequate return onits invested capital. The Company’s business is also affected by changes inmarket interest rates, which in turn are related to general economicconditions, demand for credit, inflation and governmental policies. Seasonalityis not a significant factor in the Company’s business.

 

      The volume of receivables available to be acquired by theCompany from dealers is largely dependent upon the number of Kenworth andPeterbilt trucks sold. Domestic sales of heavy-duty trucks depend on thecapital equipment requirements of the transportation industry, which in turnare influenced by economic growth and cyclical variations in the economy.Heavy-duty truck sales are also sensitive to economic factors such as fuelcosts, interest rates, federal excise and highway use taxes and taxation of theacquisition and use of capital goods.

 

 

REGULATION ANDSIMILAR MATTERS

 

      In certain states, the Company is subject to retail installmentsales or installment loan statutes and related regulations, the terms of whichvary from state to state. These laws may require the Company to be licensed asa sales finance company and may regulate disclosure of finance charges andother terms of retail installment contracts. The Company is also subject tosome of the provisions of federal law relating to discrimination in thegranting of credit.

 

 

SOURCES OF FUNDS

 

      The Company obtains funds primarily from borrowings in thecapital markets and collections on loans and leases and to a lesser extentretained earnings and PFSC equity investments. The Company’s profitableacquisition of additional receivables is dependent upon its ability to raisefunds at competitive rates in the public and private debt markets. Thereceivables and leases that are financed are either fixed rate or floating ratewith terms that range from 12 to 84 months.

 

      To reduce the risk of changes in interest rates that couldaffect interest margins, the Company obtains funds with interest ratecharacteristics similar to the corresponding assets. Fixed rate assets arefunded primarily with publicly offered medium-term notes and commercialpaper.  Interest rate swaps are combinedwith commercial paper or floating rate medium-term notes to convert floatingrate debt to fixed rate debt.  Floatingrate assets are funded primarily with commercial paper with maturities of threemonths or less and medium-term notes. As a result, the Company’s interestmargin on existing business does not change significantly as interest rateschange.

 

6

----

**PACCARFinancial Corp.**(Millions ofDollars)

** **

 

 

      The Company enters into interest rate contracts as a tool toachieve its matched funding objectives and to reduce total borrowing costs relativeto its primary borrowing sources — commercial paper and medium-term notes.Fixed rate swaps, matched to floating rate borrowings, are used to lock in thefunding cost of fixed rate assets. As of December 31, 2001, the total notionalprincipal amount of interest rate swap contracts outstanding was $1,722.5, allof which result in a fixed rate payment obligation. The notional amount is usedto measure the volume of these contracts and does not represent exposure tocredit loss. The Company’s risk in these transactions is the cost of replacing,at current market rates, these contracts in the event of default by thecounterparty. Management believes the risk of incurring such losses is remote,and any losses would be immaterial. The permitted types of interest ratecontracts, their transaction limits and related approval authorizations havebeen established by the Company’s senior management and Board of Directors. Theinterest rate contracts outstanding are regularly reported to, and reviewed by,the Company’s senior management.

 

      EffectiveJanuary 1, 2001 the Company adopted Financial Accounting Standard (FAS) No.133, “Accounting for Derivative Instruments and Hedging Activities,” whichrequires that all interest rate contracts (derivative instruments) be recordedon the Balance 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. During 2001, the Companyrecognized a net gain of $.2 from derivative instruments designated andqualifying as fair value hedges. Ineffectiveness was immaterial for both fair value and cash flow hedgesand there were no fair value or cash flow hedges de-recognized or terminatedduring the year. The fair value of interest rate contracts is recorded as“Other assets” or “Derivative liability” in the accompanying balance sheet. See“Note E — Derivative Financial Instruments” in the Notes to FinancialStatements.

 

      The Company participates with PACCAR and other PACCARaffiliates in a $1,825.0 syndicated bank line of credit facility, a portion ofwhich matures in three years. Under this facility $1,525.0 is available to theCompany and was unused at December 31, 2001. These credit facilities are usedto provide backup liquidity for the Company’s commercial paper program. TheCompany is liable only for its own borrowings under this credit facility.

 

      As of December 31, 2001, the Company had $1,465.6 medium-termnotes and other fixed rate borrowings outstanding, $826.6 of which are duewithin 12 months. See “Note F — Borrowings” in the Notes to FinancialStatements for medium-term note maturities.

 

      An indenture of the Company dated as of December 1, 1983, asamended by a first supplemental indenture dated June 19, 1989 (Exhibit 4.1),with respect to the Company’s medium-term notes which are publicly issued fromtime to time, contains restrictions limiting secured debt which may be incurredby the Company and any subsidiary.

 

7

----

**PACCARFinancial Corp.**(Millions ofDollars)

** **

 

RELATIONSHIP WITHPACCAR

 

General

 

      The operations of the Company are fundamentally affected by itsrelationship with PACCAR. Sales of PACCAR products are the Company’s principalsource of financing business. The Company receives administrative support fromand pays dividends to PFSC and may occasionally borrow funds from or lend moneyto PACCAR or its affiliates. Since the directors of the Company are allexecutives of PACCAR or its affiliated companies and PACCAR is the sole ownerof PFSC’s outstanding voting common stock, PACCAR can determine the course ofthe Company’s business. See “Note D — Transactions with PACCAR and Affiliates”in the Notes to Financial Statements.

 

      The Company periodically loans funds to certain foreign financeand leasing affiliates of PACCAR. These various affiliates have SupportAgreements with PACCAR, similar to the Company’s Support Agreement. The foreignaffiliates operate in the United Kingdom, Netherlands, Mexico, Canada andAustralia, and any resulting currency exposure is fully hedged. The foreignaffiliates provide financing and leasing of trucks and related equipment manufacturedprimarily by PACCAR and sold through PACCAR’s independent dealer networks inEurope, Mexico, Canada and Australia. The Company will not make loans to theforeign affiliates in excess of the equivalent of $300.0 United States dollars,unless the amount in excess of such limits is guaranteed by PACCAR. The Companyperiodically reviews the funding alternatives for these affiliates, and theselimits may be revised in the future.

 

Support Agreement

 

      The Company and PACCAR are parties to a Support Agreement thatobligates PACCAR to provide, when required, financial assistance to the Companyto assure that the Company maintains a ratio of net earnings available forfixed charges to fixed charges (as defined) of at least 1.25 to 1 for anyfiscal year. The Support Agreement also requires PACCAR to own, directly orindirectly, all outstanding voting stock of the Company. In order to maintainthe ratio of 1.25 to 1 in 2001, PACCAR provided earnings support by assuming$17.0 of the Company’s interest expense. See “Note D — Transactions with PACCARand Affiliates” in the Notes to Financial Statements. The required ratio foreach of the years ended December 31, 1997 — 2000 was met without assistance.

 

      The Company and PACCAR may amend or terminate any or all of theprovisions of the Support Agreement upon 30 days notice, with copies of thenotice being sent to all nationally recognized statistical rating organizations(“NRSROs”) which have issued ratings with respect to debt of the Company(“Rated Debt”). Such amendment or termination will be effective only if (i) twoNRSROs confirm in writing that their ratings with respect to any Rated Debtwould remain the same after such amendment or termination, or (ii) the noticeof amendment or termination provides that the Support Agreement will continuein effect with respect to Rated Debt outstanding on the effective date of suchamendment or termination unless such debt has been paid or defeased pursuant tothe indenture or other agreement applicable to such debt, or (iii) the holdersof at least two-thirds of the aggregate principal amount of all outstandingRated Debt with original maturity in excess of 270 days consent in writing tosuch amendment or termination, provided that the holders of Rated Debt havingan original maturity of 270 days or less shall continue to have the benefits ofthe Support Agreement until the maturity of such debt.

 

      The Support Agreement expressly states that PACCAR’scommitments to the Company thereunder do not constitute a PACCAR guarantee ofpayment of any indebtedness or liability of the Company to others and do notcreate rights against PACCAR in favor of persons other than the Company. Thereare no guarantees, direct or indirect, by PACCAR of payment of any indebtednessof the Company.

 

8

----

**PACCARFinancial Corp.**(Millions ofDollars)

** **

 

**ITEM 2.          PROPERTIES**

 

      The Company’s principal office is located in the corporateheadquarters building of PACCAR (owned by PACCAR) at 777 — 106th AvenueN.E., Bellevue, Washington 98004. The Company owns two full-service leasingfacilities in Texas.

 

      Other offices of the Company are located in leased premises.Annual lease rentals for offices in the aggregate are not material in relationto expenses as a whole.

 

**ITEM 3.          LEGALPROCEEDINGS**

 

      The Company is a party to various routine legal proceedingsincidental to its business involving the collection of accounts and othermatters. The Company does not consider such matters to be material with respectto the business or financial condition of the Company as a whole.

 

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

 

      Not applicable.

 

 

 

**PART II**

 

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

 

      All outstanding common stock is owned by PFSC; therefore, thereis no trading market in the Company’s common stock.

 

      There were no cash dividends paid to PFSC or PACCAR during 2001or 2000. Cash dividends of $3.2 were paid in 1999.

 

9

----

**PACCARFinancial Corp.**(Millions ofDollars)

** **

 

 

**ITEM 6.          SELECTEDFINANCIAL DATA**

 

      The following table summarizes selected financial data for theCompany. The information with respect to each of the five years in the periodended December 31, 2001 has been derived from the Company’s audited financialstatements.

 

** **

**Balance Sheet Data**

 
|                             |   | As of December 31 |        |
|----------------------------------|--------|-------------------|-------------|
|                             |   | **2001**          | ** **  | 2000 |   | 1999 |   | 1998 |   | 1997 | ** ** |
| Total Assets                     |   | **$**             | **3,562.6** |   | $ | 4,119.4 |   | $ | 3,732.3 |   | $ | 3,027.5 |   | $ | 2,509.7 |   |
| Total  Liabilities               |   | **3,039.6**       |        | 3,597.2 |   | 3,260.0 |   | 2,618.4 |   | 2,128.6 |   |
| Total  Stockholder’s Equity |   | **523.0**         |        | 522.2 |   | 472.3 |   | 409.1 |   | 381.1 |   |
|                                  |        |                   |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

**Income Statement Data**

 
|                                                                          |   | Year ended December 31 |      |
|-------------------------------------------------------------------------------|--------|------------------------|-----------|
|                                                                          |   | **2001**               |      | 2000 |   | 1999 |   | 1998 |   | 1997 |   |
| Interest and  other revenue                                                   |   | **$**                  | **335.6** |   | $ | 367.4 |   | $ | 298.3 |   | $ | 262.4 |   | $ | 241.8 |   |
|                                                                          |   |                   |      |   |   |   |   |   |   |   |   |
| Total expenses  before assumption by PACCAR of interest expense               |   | **327.7**              |      | 313.4 |   | 236.7 |   | 215.1 |   | 184.8 |   |
| Assumption by  PACCAR of interest expense(1)                                  |   | **(17.0**              | )         | — |   | — |   | — |   | — |   |
| Total expenses                                                                |   | **310.7**              |      | 313.4 |   | 236.7 |   | 215.1 |   | 184.8 |   |
|                                                                          |   |                   |      |   |   |   |   |   |   |   |   |
| Income before  income taxes                                                   |   | **24.9**               |      | 54.0 |   | 61.6 |   | 47.3 |   | 57.0 |   |
| Income taxes                                                                  |   | **9.7**                |      | 21.0 |   | 23.8 |   | 18.7 |   | 22.4 |   |
|                                                                          |   |                   |      |   |   |   |   |   |   |   |   |
| Income before  cumulative effect of accounting change                         |   | **15.2**               |      | 33.0 |   | 37.8 |   | 28.6 |   | 34.6 |   |
| Cumulative  effect of accounting change (net of tax)                          |   | **.4**                 |      | — |   | — |   | — |   | — |   |
|                                                                          |   |                   |      |   |   |   |   |   |   |   |   |
| Net income                                                                    |   | **$**                  | **15.6**  |   | $ | 33.0 |   | $ | 37.8 |   | $ | 28.6 |   | $ | 34.6 |   |
|                                                                          |   |                   |      |   |   |   |   |   |   |   |   |
| Ratio of  Earnings to Fixed Charges Pursuant to SEC reporting requirements(2) |   | **1.16x**              |      | 1.26x |   | 1.40x |   | 1.37x |   | 1.50x |   |
|                                                                          |   |                   |      |   |   |   |   |   |   |   |   |
| Ratio of  Earnings to Fixed Charges Pursuant to the Support Agreement(2)      |   | **1.25x**              |      | 1.31x |   | 1.46x |   | 1.45x |   | 1.59x |   |

----

(1)          In order to maintain the ratio of earnings to fixedcharges in 2001, PACCAR provided earnings support of $17.0 through theassumption of the Company’s interest expense.

 

(2)          For the purposes of this ratio, earnings consist ofincome before income taxes plus fixed charges. Fixed charges consist ofinterest expense plus a portion of rent expense (which is deemed representativeof an interest factor). The method of computing the ratio of earnings to fixedcharges shown above complies with SEC reporting requirements but differs fromthe method called for in the Support Agreement between the Company and PACCAR.See Exhibits 12.1 and 12.2.

 

10

----

**PACCARFinancial Corp.**(Millions ofDollars)

** **

 

**ITEM7.          MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, 1999 —****2001** (Millions of Dollars)

 

**Results of Operations**

 
|                                                                                                              |   | Year ended December 31 |           |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------|----------------|
|                                                                                                              |   | **2001**               |           | 2000 |   | 1999 |   |
|                                                                                                              |   | (Millions of Dollars)  |           |
| Average earning  assets                                                                                           |   | **$**                  | **3,629.3**    |   | $ | 3,948.9 |   | $ | 3,286.3 |   |
| Revenue                                                                                                           |   | **335.6**              |           | 367.4 |   | 298.3 |   |
| Income before  taxes                                                                                              |   | **24.9**               |           | 54.0 |   | 61.6 |   |
| Net income                                                                                                        |   |                   | ** 15.6** |   |   |  33.0 |   |   |  37.8 |   |
|                                                                                                              |   |                   |           |   |   |   |   |   |   |   |
| Allowance for  Losses:                                                                                            |   |                   |           |   |   |   |   |
| Balance at  beginning of year                                                                                     |   | **$**                  | **65.4**       |   | $ | 60.7 |   | $ | 51.5 |   |
| Provision for  losses                                                                                             |   | **80.8**               |           | 36.4 |   | 16.0 |   |
| Credit losses  net of recoveries                                                                                  |   | **(80.0**              | )              | (31.7 | ) | (6.8 | ) |
| Balance at end  of year                                                                                           |   | **$**                  | ** 66.2** |   | $ |  65.4 |   | $ |  60.7 |   |
| Ratios:                                                                                                           |   |                   |           |   |   |   |   |
| Credit losses  net of recoveries to average net receivables and equipment on operating  leases                    |   | **2.20**               | **%**          | .80 | % | .21 | % |
| Allowance for  losses to year-end net contracts and equipment on operating leases                                 |   | **1.98**               | **%**          | 1.63 | % | 1.66 | % |
| Year-end retail  contracts and leases past due (over 60 days) to year-end retail contracts and  lease receivables |   | **3.11**               | **%**          | 3.35 | % | .77 | % |

 

**2001 Compared to 2000:**

 

      The Company’s net income declined 53% to $15.6 in 2001 from$33.0 in 2000. Interest and other revenue declined 9% to $335.6 over the sameperiod due to lower earning assets and lower interest rates. Average earningassets decreased 8% in 2001 to $3,629.3 from $3,948.9 in 2000 due to lower newloan volume. Interest and other borrowing expense, before the Support Agreementinterest expense assumption of $17.0 by PACCAR, decreased 16% in 2001 to $176.5due to lower debt balances and interest rates. Depreciation, related tooperating leases, increased 33% in 2001 to $12.1 from $9.1 in 2000 due tohigher average earning operating lease assets and higher depreciation as aresult of reductions in residual values. The provision for losses onreceivables increased 122% to $80.8 in 2001 compared to $36.4 in 2000 due tocredit losses. The Company experienced high levels of past dues andrepossessions as well as a higher loss per repossession due to lower used truckprices.

 

      The Company and PACCAR are parties to aSupport Agreement which obligates PACCAR to provide, when required, financialassistance to the Company to assure that the Company maintains a ratio of netearnings available for fixed charges to fixed charges (as defined) of at least1.25 to 1 for any fiscal year. In order to maintain the ratio of earnings tofixed charges in 2001, PACCAR provided earnings support by assuming $17.0 ofthe Company’s interest expense. Without earnings support the Company’s netincome would have been $5.1. The required ratio for the years ended December31, 2000 and 1999, was met without assistance.

 

      During 2001, when determining the adequacyof the allowance for losses, based on historical analysis of past creditlosses, the Company revised its estimate of the collectibility of any amountsowed after applying any applicable proceeds of the sales of collateral. Theimpact of this change in estimate was to reduce the amount charged off during2001 by $3.3. The Company also revised its estimates of the collectibility oflate charges assessed on customers’ accounts during 2001. The effect of thischange was to increase Interest and other revenue for 2001 by $3.1.

 

11

----

**PACCARFinancial Corp.**(Millions ofDollars)

** **

 

**2000 Compared to 1999:**

 

      The Company’s net income decreased 13% to $33.0 in 2000 from$37.8 in 1999. Interest and other revenue increased 23% during the same periodto $367.4 due to higher interest rates and portfolio growth. The increase ininterest and other revenue was offset by higher interest costs, provision forlosses and selling, general and administrative expenses to support portfoliogrowth. The provision for losses increased 127% to $36.4 in 2000 primarily dueto credit losses. Credit losses net of recoveries in 2000 increased to $31.7from $6.8 in 1999.

 

**Company Outlook:**

 

      The Company is expected to continue toexperience high levels of credit losses. Even though fuel costs have declinedrecently, weakness in truck freight volume and higher insurance costs have con­tinuedto put pressure on the profit margins of truck operators. In the U.S., a recordnumber of trucking companies have filed for bankruptcy protection and manyothers are financially weak. In view of these conditions,the Company’s management has adjusted credit-granting policies, whereappropriate, to reflect the more difficult market. As 2002 truck production isexpected to con­tinue at levels similar to 2001, earning assets will likelycontinue to decline.

 

**Funding and Liquidity**

 

      The Company manages its capital structure consistent withindustry standards. Since 1983, the Company has registered debt securitiesunder the Securities Act of 1933 for offering to the public. In 2000, theCompany filed a shelf registration statement under which $2,500.0 ofmedium-term notes could be issued as needed. As of December 31, 2001, $1,475.0of such securities were available for issuance.

 

      The Company believes that it has sufficient financialcapabilities to continue funding receivables and servicing debt throughinternally generated funds, lines of credit, access to public and private debtmarkets, and other financial resources. The decrease in borrowings to $2,740.1at December 31, 2001 from $3,311.8 at December 31, 2000 is due to lower newlending volume and a decrease in wholesale receivables. New lending volumedecreased 40% to $1,067.5 in 2001 from $1,767.3 in 2000 due to lower PACCARtruck sales.

 

The following summarizesthe Company’s contractual cash commitments at December 31, 2001:

 
|             |   | Maturity           |    |               |
|------------------|--------|--------------------|---------|--------------------|
|             |   | Less than One Year |    | More than One Year |   | Total |   |
| Borrowings       |   | $                  | 2,101.1 |               | $ | 639.0 |   | $ | 2,740.1 |   |
| Operating Leases |   | 1.2                |    | .3                 |   | 1.5 |   |
| Total            |   | $                  | 2,102.3 |               | $ | 639.3 |   | $ | 2,741.6 |   |

 

      As described in Note F, Borrowings consist primarily of termdebt and commercial paper. Operating leases consist of offices of the Companylocated on leased premises and office equipment. In addition, the Company hadloan and lease commitments of $116.8 expiring within one year. Thesecommitments represent commitments to fund new retail and lease contracts.

 

**Critical Accounting Policies**

 

      The Securities Exchange Commission of the United States hasrecently issued Financial Reporting Release No. 60 (“FR60”).  FR60 requires registrants to provideadditional disclosure in the Management’s Discussion and 

 

12

----

**PACCARFinancial Corp.**(Millions ofDollars)

** **

 

Analysis, whereappropriate, of accounting policies in which estimates are particularlysensitive and which, if actual results are different, may have a materialimpact to the financial statements. Accounting policies deemed to meet thesecriteria are discussed as follows:

 

      In deter­miningthe estimated residual value for equipment accounted as operating leases andcertain direct financing leases, the Company considers the length of the leaseterm, the truck model and anticipated market demand and the ex­pected usage ofthe truck. If the sales price of a truck at the end of the lease term differssignificantly from the Company’s estimate, a gain or loss will result. TheCompany believes its residual setting policies are reasonable and appropriate,however future market conditions, changes in government regulations and otherfactors outside the Company’s control can impact the ultimate sales price oftrucks returned under these contracts. Residual values are reviewed regularlyand adjusted downward if market conditions warrant.

 

      Theestablishment of credit loss reserves on financial services receivables aredependent on estimates including assumptions regarding past dues, repossessionrates and the recovery rate on the underlying collateral. The Com­pany believesits reserve setting policies are conservative and adequately take into accountthe known risks in­herent in the financial services portfolio. If there aresignificant variations in the actual results from those estimates, theprovision for credit losses and operating earnings may be adversely impacted.See “Note A — Summary of Accounting Policies” in the Notes to FinancialStatements.

 

**Forward Looking Statements**

 

      Certain information presented in this Form 10-K containsforward-looking statements made pursuant to the Private Securities LitigationReform Act of 1995, which are subject to risks and uncertainties that mayaffect actual results. Risks and uncertainties include, but are not limited toglobal and local economic, political and industry conditions; competitivepressures; price changes impacting manufacturing and operating costs;insufficient or under-utilization of manufacturing capacity; and legislationand governmental regulation.

 

13

----

**PACCARFinancial Corp.**(Millions ofDollars)

** **

 

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

 

Market Risk andDerivative Financial Instruments

      In the normal course of business, the Company issues variousfinancial instruments that expose the Company to market risk associated withmarket interest rates. Policies and procedures have been established by theCompany to manage these market risks through the use of various derivativefinancial instruments. The Company does not engage in derivatives trading,market-making or other speculative activities.

 

      The following is a sensitivity analysis for the Company’sderivatives that have interest rate risk. These instruments are held for otherthan trading purposes. The gains or losses in the following table represent thechanges in the financial instruments’ fair values that would result from a 100basis point increase of the current market rate at December 31, 2001 and 2000.

 

 
| **Fair  Value Gains (Losses)**                                                                         |   |                   |      |   |   |
|--------------------------------------------------------------------------------------------------------|--------|------------------------|-----------|--------|--------|
|                                                                                                   |   | Year ended December 31 |      |
|                                                                                                   |   | **2001**               |      | 2000   |   |
|                                                                                                   |   | (Millions of Dollars)  |      |
| Assets                                                                                                 |   |                   |      |   |   |   |   |
| Retail notes,  contracts and wholesale financing, net of unearned interest, less allowance  for losses |   | **$**                  | **(27.6** | )      | $      | (32.1 | ) |
|                                                                                                   |   |                   |      |   |   |
| Liabilities   Long-term debt                                                                           |   | **3.3**                |      | 6.5    |   |
| Interest rate  swaps related to financial services debt                                                |   | **18.4**               |      | 23.4   |   |
|                                                                                                   |   |                   |      |   |   |
| Total                                                                                                  |   | **$**                  | **(5.9**  | )      | $      | (2.2 | ) |

 

 

 

 

**ITEM 8.          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

      The financial statements of the Company and related schedulesdescribed under Item 14, “Exhibits, Financial Statement Schedules, and Reportson Form 8-K,” are included following this page.

 

14

----

 

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, 2001and 2000, and the related statements of income and retained earnings and cashflows for each of the three years in the period ended December 31, 2001. 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, 2001and 2000, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2001 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 21, 2002

 

15

----

**PACCARFinancial Corp.**

** **

**STATEMENTS OF INCOME AND RETAINED EARNINGS**

(Millions of Dollars)

 
|                                                 |   | Year ended December 31 |      |
|------------------------------------------------------|--------|------------------------|-----------|
|                                                 |   | **2001**               |      | 2000 |   | 1999 |   |
| **INTEREST AND OTHER REVENUE**                       |   | **$**                  | **335.6** |   | $ | 367.4 |   | $ | 298.3 |   |
|                                                 |   |                   |      |   |   |   |   |
| Interest and  other borrowing expense(1)             |   | **159.5**              |      | 210.1 |   | 154.7 |   |
| Depreciation  related to operating leases            |   | **12.1**               |      | 9.1 |   | 8.0 |   |
| Insurance claims  and underwriting expenses          |   | **10.3**               |      | 8.4 |   | 9.9 |   |
| Vehicle  operating expense                           |   | **5.8**                |      | 5.8 |   | 6.8 |   |
| Selling, general  and administrative expenses        |   | **42.2**               |      | 43.6 |   | 41.3 |   |
| Provision for  losses on receivables                 |   | **80.8**               |      | 36.4 |   | 16.0 |   |
|                                                 |   |                   |      |   |   |   |   |
| **TOTAL EXPENSES**                                   |   | **310.7**              |      | 313.4 |   | 236.7 |   |
|                                                 |   |                   |      |   |   |   |   |
| **INCOME BEFORE INCOME TAXES**                       |   | **24.9**               |      | 54.0 |   | 61.6 |   |
|                                                 |   |                   |      |   |   |   |   |
| Income taxes                                         |   | **9.7**                |      | 21.0 |   | 23.8 |   |
|                                                 |   |                   |      |   |   |   |   |
| **NET INCOME BEFORE ACCOUNTING CHANGE**              |   | **15.2**               |      | 33.0 |   | 37.8 |   |
|                                                 |   |                   |      |   |   |   |   |
| Cumulative  effect of accounting change (net of tax) |   | **.4**                 |      | — |   | — |   |
|                                                 |   |                   |      |   |   |   |   |
| **NET INCOME**                                       |   | **15.6**               |      | 33.0 |   | 37.8 |   |
|                                                 |   |                   |      |   |   |   |   |
| Retained  earnings at beginning of year              |   | **394.1**              |      | 361.1 |   | 326.5 |   |
| Cash dividends  paid                                 |   | **—**             |      | — |   | (3.2 | ) |
|                                                 |   |                   |      |   |   |   |   |
| **RETAINED EARNINGS AT END OF YEAR**                 |   | **$**                  | **409.7** |   | $ | 394.1 |   | $ | 361.1 |   |

 

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

 

See Notes to FinancialStatements

 

 (1)                               Interest and other borrowing expense for the yearended December 31, 2001 after the assumption of interest expense of $17.0 byPACCAR. See “Note D — Transactions with PACCAR and Affiliates.”

 

 

16

----

**PACCARFinancial Corp.**

** **

**BALANCE SHEETS**

(Millions of Dollars)

 
|                                                                                                                                          |   | As of December 31 |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|
|                                                                                                                                          |   | **2001**          |        | 2000 |   |
| **ASSETS**                                                                                                                                    |   |              |        |   |   |
|                                                                                                                                          |   |              |        |   |   |
| Cash                                                                                                                                          |   | **$**             | **18.5**    |   | $ | 12.6 |   |
| Finance and  other receivables net of allowance for losses of $66.2 in 2001 ($65.4 in  2000)                                                  |   | **3,289.1**       |        | 3,950.9 |   |
| Loans to PACCAR  Inc and affiliates                                                                                                           |   | **163.2**         |        | 62.9 |   |
| Equipment on  operating leases net of depreciation of $21.9 in 2001 ($19.7 in 2000)                                                           |   | **52.0**          |        | 56.5 |   |
| Equipment held  for sale                                                                                                                      |   | **17.1**          |        | 16.7 |   |
| Other assets                                                                                                                                  |   | **22.7**          |        | 19.8 |   |
|                                                                                                                                          |   |              |        |   |   |
| **TOTAL ASSETS**                                                                                                                              |   | **$**             | **3,562.6** |   | $ | 4,119.4 |   |
|                                                                                                                                          |   |              |        |   |   |
| **LIABILITIES**                                                                                                                               |   |              |        |   |   |
|                                                                                                                                          |   |              |        |   |   |
| Accounts payable  and accrued expenses                                                                                                        |   | **$**             | **55.8**    |   | $ | 80.0 |   |
| Payable for  finance receivables acquired                                                                                                     |   | **30.5**          |        | 34.6 |   |
| Derivative liability                                                                                                                          |   | **52.0**          |        | — |   |
| Advances from  PACCAR Inc                                                                                                                     |   | **—**        |        | 5.0 |   |
| Borrowings                                                                                                                                    |   | **2,740.1**       |        | 3,311.8 |   |
| Income taxes —  current and deferred                                                                                                     |   | **161.2**         |        | 165.8 |   |
|                                                                                                                                          |   |              |        |   |   |
| **TOTAL LIABILITIES**                                                                                                                         |   | **$**             | **3,039.6** |   | $ | 3,597.2 |   |
|                                                                                                                                          |   |              |        |   |   |
| **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 $100 per share, 200,000 shares authorized, 145,000 shares issued  and outstanding                                    |   | **14.5**          |        | 14.5 |   |
| Paid-in capital                                                                                                                               |   | **99.5**          |        | 82.6 |   |
| Retained  earnings                                                                                                                            |   | **409.7**         |        | 394.1 |   |
| Accumulated  other comprehensive loss                                                                                                         |   | **(31.7**         | )           | — |   |
|                                                                                                                                          |   |              |        |   |   |
| **TOTAL STOCKHOLDER’S EQUITY**                                                                                                           |   | **523.0**         |        | 522.2 |   |
|                                                                                                                                          |   |              |        |   |   |
| **TOTAL LIABILITIES AND STOCKHOLDER’S  EQUITY**                                                                                          |   | **$**             | **3,562.6** |   | $ | 4,119.4 |   |

 

See Notes to FinancialStatements

 

17

----

**PACCARFinancial Corp.**

 

**STATEMENTS OF CASH FLOWS**

(Millions of Dollars)

 
|                                                                         |   | Year ended December 31 |     |
|------------------------------------------------------------------------------|--------|------------------------|----------|
|                                                                         |   | **2001**               |     | 2000 |   | 1999 |   |
| **OPERATING ACTIVITIES**                                                     |   |                   |     |   |   |   |   |
|                                                                         |   |                   |     |   |   |   |   |
| Net income                                                                   |   | **$**                  | **15.6** |   | $ | 33.0 |   | $ | 37.8 |   |
| Items included  in net income not affecting cash:                            |   |                   |     |   |   |   |   |
| Provision for  losses on receivables                                         |   | **80.8**               |     | 36.4 |   | 16.0 |   |
| Increase in  deferred taxes payable                                          |   | **7.6**                |     | 28.7 |   | 18.9 |   |
| Depreciation and  amortization                                               |   | **17.6**               |     | 15.2 |   | 12.9 |   |
| Decrease in  payables and other                                              |   | **(25.5**              | )        | (28.0 | ) | (21.6 | ) |
|                                                                         |   |                   |     |   |   |   |   |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                   |   | **96.1**               |     | 85.3 |   | 64.0 |   |
|                                                                         |   |                   |     |   |   |   |   |
| **INVESTING ACTIVITIES**                                                     |   |                   |     |   |   |   |   |
|                                                                         |   |                   |     |   |   |   |   |
| Finance and  other receivables acquired                                      |   | **(1,067.5**           | )        | (1,767.3 | ) | (1,898.6 | ) |
| Collections on  finance and other receivables                                |   | **1,506.8**            |     | 1,338.6 |   | 1,403.9 |   |
| Net decrease  (increase) in wholesale receivables                            |   | **139.6**              |     | 26.9 |   | (176.2 | ) |
| Net increase in  loans to PACCAR Inc and affiliates                          |   | **(100.3**             | )        | (20.8 | ) | (10.6 | ) |
| Acquisition of  equipment                                                    |   | **(18.8**              | )        | (28.1 | ) | (16.6 | ) |
| Proceeds from  disposal of equipment                                         |   | **9.8**                |     | 9.2 |   | 9.1 |   |
|                                                                         |   |                   |     |   |   |   |   |
| NET CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES                         |   | **469.6**              |     | (441.5 | ) | (689.0 | ) |
|                                                                         |   |                   |     |   |   |   |   |
| **FINANCING ACTIVITIES**                                                     |   |                   |     |   |   |   |   |
|                                                                         |   |                   |     |   |   |   |   |
| Net (decrease)  increase in commercial paper and other short-term borrowings |   | **(535.0**             | )        | 105.1 |   | 297.8 |   |
| Proceeds from  medium-term notes and other borrowings                        |   | **425.0**              |     | 795.0 |   | 705.0 |   |
| Payments of  medium-term notes and other borrowings                          |   | **(461.7**             | )        | (549.9 | ) | (402.1 | ) |
| Net advances to  PACCAR Inc                                                  |   | **(5.0**               | )        | (4.8 | ) | (9.4 | ) |
| Capital  contributions                                                       |   | **16.9**               |     | 16.9 |   | 28.6 |   |
| Cash dividend  paid                                                          |   | **—**             |     | — |   | (3.2 | ) |
|                                                                         |   |                   |     |   |   |   |   |
| NET CASH (USED  IN) PROVIDED BY FINANCING ACTIVITIES                         |   | **(559.8**             | )        | 362.3 |   | 616.7 |   |
|                                                                         |   |                   |     |   |   |   |   |
| **NET INCREASE (DECREASE) IN CASH**                                          |   | **5.9**                |     | 6.1 |   | (8.3 | ) |
|                                                                         |   |                   |     |   |   |   |   |
| **CASH AT BEGINNING OF YEAR**                                                |   | **12.6**               |     | 6.5 |   | 14.8 |   |
|                                                                         |   |                   |     |   |   |   |   |
| **CASH AT END OF YEAR**                                                      |   | **$**                  | **18.5** |   | $ | 12.6 |   | $ | 6.5 |   |

 

See Notes to FinancialStatements

 

18

----

**PACCARFinancial Corp.**

** **

| **NOTES TO FINANCIAL STATEMENTS** |
|-----------------------------------|
| (Millions of Dollars)             |

 

 

**NOTE A—SUMMARY OF ACCOUNTING POLICIES**

 

Industry: PACCAR Financial Corp. (the “Company”), a wholly-owned subsidiary ofPACCAR Financial Services Corporation (“PFSC”), provides financing of trucksand related equipment manufactured primarily by PACCAR Inc (“PACCAR”) and soldby authorized dealers. The Company also finances dealer inventories oftransportation equipment and franchises PACCAR dealerships to engage infull-service and finance leasing. The operations of the Company arefundamentally affected by its relationship with PACCAR. PFSC is a wholly-ownedsubsidiary of PACCAR. Sales of PACCAR products are the Company’s principalsource 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 in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect amounts reported and disclosed in the financialstatements. Actual results could differ from the amounts estimated bymanagement.

 

Estimated Losseson Receivables: The provision for losses on finance and otherreceivables is charged to income in an amount sufficient to maintain theallowance for losses at a level considered adequate to cover estimated losses.Receivables are charged to this allowance when, in the judgment of management,they are deemed uncollectible. With respect to certain retail contractsacquired from dealers, the dealer retains liability, up to specified limits,for the credit loss on the sale of a repossessed vehicle. The amount andcollectibility of dealer recourse provisions have been considered inestablishing the allowance for losses on receivables.

 

Beginning with the second quarter 2001, when determining the adequacy ofthe allowance, based on historical analysis of past credit losses, the Companyrevised its estimate of the collectibility of any amounts owed after applyingany applicable proceeds of the sales of collateral. The impact of this changein estimate was to reduce the amount charged off during the year ended December31, 2001 by $3.3.

 

Revenue Recognition: Revenue from finance receivables and other receivables is recognizedusing the interest method. Certain loan origination costs are deferred andamortized to interest and other income. For operating leases, income isrecognized on a straight-line basis over the lease term.

 

Recognition of income issuspended when management determines that collection of future income is notprobable (generally after 90 days past due). Recognition is resumed if thereceivable becomes contractually current and collection doubts are removed.Finance receivables with income suspended are considered impaired until thereceivable becomes contractually current and collection doubts are removed.

 

Duringthe second quarter 2001, based on historical analysis, the Company revised itsestimates of the collectibility of late charges assessed on customers’accounts. The effect of this change was to increase Interest and Other Revenuefor the year ended December 31, 2001 by $3.1.

 

Equipment: Equipment on operating leases is recorded at cost and depreciated on astraight-line basis to its estimated residual value. Residual values arereviewed regularly and are reduced if market conditions warrant.

 

Income Taxes: The Company is included in the consolidated federal income tax return ofPACCAR. Income taxes for the Company are determined on a separate return basis,and any related tax liability is paid by the Company to PACCAR and any relatedtax benefit is paid by PACCAR to the Company.

 

 

 

 

19

----

**PACCARFinancial Corp.**

** **

| **NOTES TO FINANCIAL STATEMENTS** |
|-----------------------------------|
| (Millions of Dollars)             |

 

Derivative Financial Instruments: Effective January 1, 2001, the Company adopted Financial AccountingStandard (FAS) No. 133, “Accounting for Derivative Instruments and HedgingActivities*,*”which requires all derivative instruments be recorded on the balance sheetat fair value. As of the derivative con­tract’s inception date, the Companydesignates the deri­vative as either a fair value or as a cash flow hedge. Afair value hedge mitigates the Company’s exposure to the change in the fairvalue of the hedged asset or lia­bility. A cash flow hedge reduces theCompany’s expo­sure to a forecasted transaction or the variable cash flowsrelated to an asset or liability.

 

Changesin the fair value of derivatives designated as part of a hedge transactionare recorded each period in current earnings or other comprehensive income de­pendingon the type of the hedged transaction. For fair value hedge transactions,changes in fair value of the derivative instrument are generally offset in theincome statement by changes in the fair value of the item being hedged. Forcash-flow hedge transactions, changes in the fair value of the derivativeinstrument are reported in other comprehensive income. The gains andlosses on cash flow hedge transactions reported in other com­prehensiveincome are reclassified to earnings in the same period that the related cashflows of the hedge transaction affect earnings. The ineffective portionsof all hedges are recognized in current period earnings.

 

Theadoption of FAS 133 on January 1, 2001 resulted in a cumulative increase to netincome 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 been reclassified to conform to the 2001presentation.

 

20

----

**PACCARFinancial Corp.**

** **

| **NOTES TO FINANCIAL STATEMENTS** |
|-----------------------------------|
| (Millions of Dollars)             |

 

**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 |        |
|-----------------------------------------------------------------------------------------|--------|------------------------|-------------|
|                                                                                    |   | **2001**               |        | 2000 |   |
| Retail notes and  contracts due within:                                                 |   |                   |        |   |   |
| One year                                                                                |   | **$**                  | **1,000.5** |   | $ | 1,167.7 |   |
| Two years                                                                               |   | **634.5**              |        | 771.1 |   |
| Three years                                                                             |   | **450.5**              |        | 562.3 |   |
| Four years                                                                              |   | **227.4**              |        | 334.6 |   |
| Five years and  beyond                                                                  |   | **74.9**               |        | 139.1 |   |
|                                                                                    |   | **2,387.8**            |        | 2,974.8 |   |
| Wholesale  financing                                                                    |   | **187.1**              |        | 326.7 |   |
| Direct financing  leases (including residual values of $59.5 in 2001 and $37.5 in 2000) |   | **950.7**              |        | 945.7 |   |
| Interest and  other receivables                                                         |   | **35.3**               |        | 31.0 |   |
|                                                                                    |   |                   |        |   |   |
|                                                                                    |   | **3,560.9**            |        | 4,278.2 |   |
|                                                                                    |   |                   |        |   |   |
| Less allowance  for losses                                                              |   | **(66.2**              | )           | (65.4 | ) |
|                                                                                    |   |                   |        |   |   |
|                                                                                    |   | **3,494.7**            |        | 4,212.8 |   |
|                                                                                    |   |                   |        |   |   |
| Unearned  interest:                                                                     |   |                   |        |   |   |
| Retail notes and  contracts                                                             |   | **(79.8**              | )           | (126.0 | ) |
| Direct financing  leases                                                                |   | **(125.8**             | )           | (135.9 | ) |
|                                                                                    |   |                   |        |   |   |
|                                                                                    |   | **(205.6**             | **)**       | (261.9 | ) |
|                                                                                    |   |                   |        |   |   |
| Finance and  other receivables                                                          |   | **$**                  | **3,289.1** |   | $ | 3,950.9 |   |

 

Future minimum leasepayments on direct financing leases totaled $891.2 at December 31, 2001 and aredue as follows: $263.3 in 2002; $243.5 in 2003; $176.0 in 2004; $120.0 in 2005and $88.4 in 2006 and beyond.

 

21

----

**PACCARFinancial Corp.**

** **

| **NOTES TO FINANCIAL STATEMENTS** |
|-----------------------------------|
| (Millions of Dollars)             |

 

The allowance for losseson receivables is summarized as follows:

 

 
|                             |   | Year ended December 31 |     |
|----------------------------------|--------|------------------------|----------|
|                             |   | **2001**               |     | 2000 |   |
| Balance at  beginning of year    |   | **$**                  | **65.4** |   | $ | 60.7 |   |
| Provision for  losses            |   | **80.8**               |     | 36.4 |   |
| Credit losses  net of recoveries |   | **(80.0**              | )        | (31.7 | ) |
|                             |   |                   |     |   |   |
| Balance at end  of year          |   | **$**                  | **66.2** |   | $ | 65.4 |   |

 

At December 31, 2001 and2000, the recorded investments in retail notes and contracts that wereconsidered to be impaired were $85.9 and $90.8, respectively. Included in theallowance for losses were specific reserves of $32.4 and $26.3 on theseimpaired notes and contracts. The average recorded investment in impaired notesand contracts during the years ended December 31, 2001 and 2000, was $102.7 and$64.8 respectively. The Company recognized interest income of $2.4, $1.4 and$1.5 for the years ended December 31, 2001, 2000 and 1999, 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 44 months. Future annual minimum rental payments to be received fortransportation equipment on non-cancelable operating leases beginning January1, 2002 were: $9.2 in 2002; $6.2 in 2003; $2.2 in 2004 and $.4 in 2005.Interest and other revenue includes contingent rentals of $6.3, $6.4 and $5.7in 2001, 2000 and 1999, 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. In order to maintain the ratio of earnings to fixedcharges in 2001, PACCAR provided earnings support by assuming $17.0 of theCompany’s interest expense. Without earnings support the Company would haveearned after tax net income of $5.1. The required ratio for the years endedDecember 31, 2000 and 1999, was met without assistance.

 

PFSC charges the Companyfor certain administrative services it provides and certain services theCompany receives indirectly from PACCAR. As of December 31, 2001, PFSC employed153 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. Fees for servicesof $16.4, $16.5 and $2.2 in 2001, 2000 and 1999, respectively, were charged tothe Company. The increase in fees for services in 2001 and 2000 was due to PFSCcharging the Company for certain expenses which had previously been paiddirectly by the Company. PFSC recognizes certain of these administrativeservices as an additional investment in the Company. The Company records theinvestment as paid-in capital. The Company may elect to pay a dividend to PFSCfor the paid-in capital invested in prior years. There were no cash dividendsdeclared or paid during 2001 or 2000. Cash dividends of $3.2 were paid in 1999.

 

 

22

----

**PACCARFinancial Corp.**

** **

| **NOTES TO FINANCIAL STATEMENTS** |
|-----------------------------------|
| (Millions of Dollars)             |

 

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 havenot been made. Expenses charged to the Company by PACCAR for these plans were$1.8, $1.6, and $1.8 for years 2001, 2000 and 1999, respectively.

 

Financing and cashmanagement is partly provided through unsecured short-term advances to and fromPACCAR. Net interest paid to PACCAR was $.1, $.6 and $1.4 in 2001, 2000 and1999, respectively.

 

Periodically, the Companyborrows funds from PACCAR and makes loans to PACCAR. Loans outstanding toPACCAR were $20.3 and $9.6 at December 31, 2001 and 2000, respectively. Therewere no loans outstanding from PACCAR at December 31, 2001. Loans outstandingfrom PACCAR were $5.0 at December 31, 2000.

 

PACCAR has issued lettersof credit in the amount of $4.9 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, Netherlands, Mexico, Canada and Australia, and any resulting currencyexposure is fully hedged. The foreign affiliates provide financing and leasingof 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 $142.9 in loans outstanding to foreignaffiliates operating in the United Kingdom, Netherlands and Mexico at December31, 2001. There was a total of $53.3 in loans outstanding to a foreignaffiliate operating in the United Kingdom at December 31, 2000. There were noloans outstanding to other foreign affiliates for those periods. Interestincome earned on affiliate loans was $3.0, $2.5 and $1.1 in 2001, 2000 and 1999respectively.

 

Included within accountspayable and accrued expenses is $6.7 and $9.0 payable to PACCAR’s truckdivisions at December 31, 2001 and 2000, respectively.

 

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

 

23

----

**PACCARFinancial Corp.**

** **

| **NOTES TO FINANCIAL STATEMENTS** |
|-----------------------------------|
| (Millions of Dollars)             |

 

**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 various interest-ratecontracts, including interest-rate and currency swaps. Interest-ratecontracts generally involve the exchange of fixed and floating rate interestpayments without the exchange of the underlying principal. These contracts areused to manage exposures to fluctuations in interest rates. Net amounts paid orreceived are reflected as adjustments to interest expense. At December 31, 2001the Company had 80 interest rate swaps outstanding with various financialinstitutions. The notional amount of these contracts totaled $1,722.5 withamounts expiring annually over the next five years. The notional amount is usedto measure the volume of these contracts and does not represent exposure tocredit loss. In the event of default by a counterparty, the risk in thesetransactions is the cost of replacing the interest-rate contract at currentmarket 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 rates. Notional maturities for the five yearsbeginning January 1, 2002 are $861.3, $499.0, $283.7, $73.5 and $5.0. Theweighted average pay rate of 6.01% approximates the Company’s net cost offunds. The weighted average receive rate of 2.09% offsets rates on associateddebt obligations.

 

Derivatives that have been designated and qualify ascash flow hedging instruments are reported at fair value on the balance sheet.The gain or loss on the effective portion of the hedge arising from the changein fair value is initially reported in OCI. The remaining gain or loss, if any,is recognized currently in earnings. Amounts in accumulated OCI arereclassified into net income in the same period in which the hedgedforecasted transaction affects earnings. Net gains and losses frominterest-rate contracts are recognized as an adjustment to interest expense. Ofthe accumulated net loss included in OCI as of December 31, 2001, $29.8 isexpect­ed to be reclassified to net income in 2002.

 

During 2001, the Company recognized a net gain of $.2from derivative instruments designated and qualifying as fair value hedges.Ineffectiveness was immaterial for both fair value and cash flow hedges andthere were no fair value or cash flow hedges de-recognized or terminated duringthe year. The fair value of interest rate contracts is recorded as “Other assets”or “Derivative liability” in the accompanying balance sheet.

 

 

24

----

**PACCARFinancial Corp.**

** **

| **NOTES TO FINANCIAL STATEMENTS** |
|-----------------------------------|
| (Millions of Dollars)             |

 

**NOTE F—BORROWINGS**

 

Borrowings are summarizedas follows:

 
|                             |   | **Effective** |       | As of December 31, |        |
|----------------------------------|--------|---------------|------------|--------------------|-------------|
|                             |   | **Rate***     |       | **2001**           |        | 2000 |   |
| Commercial paper                 |   | **4.95%**     |       | **$**              | **1,274.5** |   | $ | 1,734.5 |   |
| Other floating  rate borrowings  |   | **—**    | ** ** | **—**         |        | 75.0 |   |
| Fixed rate  medium-term notes    |   | **6.17%**     |       | **300.0**          |        | 670.0 |   |
| Floating rate  medium-term notes |   | **4.90%**     |       | **1,150.0**        |        | 800.0 |   |
| Other fixed rate  borrowings     |   | **5.91%**     |       | **15.6**           |        | 32.3 |   |
|                             |   |          |       |               |        |   |   |
| Total                            |   | **5.07%**     |       | **$**              | **2,740.1** |   | $ | 3,311.8 |   |

 

*The effective rate isthe weighted average rate as of December 31, 2001 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 $171.5, $205.5, and $151.1 for 2001, 2000 and 1999, respectively.

 

Principal amounts ofmedium-term notes and other fixed rate borrowings due over the next five yearsbeginning January 1, 2002 are $826.6 in 2002, $634.0 in 2003, and $5.0 in 2004.

 

At December 31, 2001,there was $1,475.0 of medium-term debt available for issuance under a currentlyoutstanding shelf registration statement.

 

Cash paid for interest(net of swap interest received) was $165.0 in 2001, $208.1 in 2000 and $149.5in 1999.

 

**NOTE G—CREDIT ARRANGEMENTS**

 

The Company participateswith PACCAR and other PACCAR affiliates in a $1,825.0 syndicated bank line ofcredit facility, a portion of which matures in three years. Under this facility$1,525.0 is available to the Company and was unused at December 31, 2001. Thesecredit facilities are used to provide backup liquidity for the Company’sshort-term borrowings. The Company is liable only for its own borrowings underthis credit facility.

 

25

----

**PACCARFinancial Corp.**

** **

| **NOTES TO FINANCIAL STATEMENTS** |
|-----------------------------------|
| (Millions of Dollars)             |

 

**NOTE H—INCOME TAXES**

 

The provision for incometaxes consists of the following:

 
|                         |   | Year ended December 31 |    |
|------------------------------|--------|------------------------|---------|
|                         |   | **2001**               |    | 2000 |   | 1999 |   |
| Current  provision (benefit) |   |                   |    |   |   |   |   |
| Federal                      |   | **$**                  | **.6**  |   | $ | (7.3 | ) | $ | 3.7 |   |
| State                        |   | **1.9**                |    | (.4 | ) | 1.2 |   |
|                         |   | **2.5**                |    | (7.7 | ) | 4.9 |   |
|                         |   |                   |    |   |   |   |   |
| Deferred  provision          |   | **7.2**                |    | 28.7 |   | 18.9 |   |
|                         |   |                   |    |   |   |   |   |
|                         |   | **$**                  | **9.7** |   | $ | 21.0 |   | $ | 23.8 |   |

 

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

 
|                              |   | Year ended December 31 |          |
|-----------------------------------|--------|------------------------|---------------|
|                              |   | **2001**               |          | 2000 |   | 1999 |   |
| Tax at the  statutory rate of 35% |   | **$**                  | **8.7**       |   | $ | 18.9 |   | $ | 21.6 |   |
| Effect of state  income taxes     |   | **.9**                 |          | 2.0 |   | 2.2 |   |
| Effect of other  income taxes     |   | **.1**                 |          | .1 |   | — |   |
|                              |   | **$**                  | ** 9.7** |   | $ |  21.0 |   | $ |  23.8 |   |

 

Cash (received)/paid forincome taxes was $(4.4) in 2001, $(7.1) in 2000 and $10.0 in 1999.

 

Deferred income taxassets and liabilities consisted of the following:

 
|                                   |   | As of December 31 |      |
|----------------------------------------|--------|-------------------|-----------|
|                                   |   | **2001**          |      | 2000 |   |
| Deferred tax  liabilities:             |   |              |      |   |   |
| Asset  capitalization and depreciation |   | **$**             | **202.8** |   | $ | 194.1 |   |
| State income tax                       |   | **8.6**           |      | 8.3 |   |
|                                   |   | **211.4**         |      | 202.4 |   |
|                                   |   |              |      |   |   |
| Deferred tax  assets:                  |   |              |      |   |   |
| Allowance for  losses on receivables   |   | **(24.1**         | **)**     | (23.7 | ) |
| Derivative  liability                  |   | **(19.7**         | **)**     | — |   |
| Other                                  |   | **(7.4**          | **)**     | (6.4 | ) |
|                                   |   | **(51.2**         | **)**     | (30.1 | ) |
|                                   |   |              |      |   |   |
| Net deferred tax  liability            |   | **$**             | **160.2** |   | $ | 172.3 |   |

 

 

26

----

**PACCARFinancial Corp.**

** **

| **NOTES TO FINANCIAL STATEMENTS** |
|-----------------------------------|
| (Millions of Dollars)             |

 

**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 balance sheets is stated at fairvalue.

 

Net Receivables: For floating rate loans and wholesale financings, fair values are basedon carrying values. For fixed rate loans, fair values are estimated usingdiscounted cash flow analysis based on interest rates currently being offeredfor loans with similar terms to borrowers of similar credit quality. Thecarrying amount of accrued interest and other receivables approximates its fairvalue. Direct financing lease receivables and the related allowance for losses havebeen excluded from the accompanying table.

 

Commercial Paper, OtherFloating Rate Borrowings, Medium-Term Notes and Other Fixed Rate Borrowings: The carrying amounts of the Company’s commercial paper, other floatingrate borrowings and floating rate medium-term notes approximate its 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.

 

Trade Receivables and Payables:**Carrying amounts approximate fair valueand have been excluded from the accompanying table.

 

The carrying amounts andfair values of the Company’s financial instruments are as follows:

 
|                                                 |   | As of December 31    |       |
|------------------------------------------------------|--------|----------------------|------------|
|                                                 |   | **2001**             |       | 2000 |   |
|                                                 |   | **Carrying  Amount** |       | **Fair Value** |   | Carrying Amount |   | Fair Value |   |
| Cash                                                 |   | **$**                | **18.5**   | ** ** | **$** | **18.5** |   | $ | 12.6 |   | $ | 12.6 |   |
| Net receivables                                      |   | **2,443.3**          | ** ** | **2,491.7** |   | 3,111.6 |   | 3,066.4 |   |
| Derivative asset                                     |   | **2.6**              | ** ** | **2.6** |   | — |   | 5.4 |   |
| Derivative  liability                                |   | **52.0**             | ** ** | **52.0** |   | — |   | 25.7 |   |
| Commercial paper  and other floating rate borrowings |   | **1,274.5**          | ** ** | **1,274.5** |   | 1,809.4 |   | 1,809.4 |   |
| Medium-term  notes and other fixed rate borrowings   |   | **1,465.6**          | ** ** | **1,474.0** |   | 1,502.3 |   | 1,514.3 |   |
|                                                      |        |                      |            |  |  |  |  |  |  |  |  |  |  |

 

27

----

**PACCARFinancial Corp.**

** **

| **NOTES TO FINANCIAL STATEMENTS** |
|-----------------------------------|
| (Millions of Dollars)             |

 

**NOTE J—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** |       |
|------------------------------------------------------------------|--------|--------------------|------------|----------------|------------|----------------|------------|
| **2001**                                                         |   |               |       |           |       |           |       |
| Cumulative  effect of accounting change for derivative contracts |   | **$**              | **(23.8**  | **)**          | **$**      | **9.2**        | ** ** | **$** | **(14.6** | **)** |
| Net holding loss                                                 |   | **(35.7**          | **)**      | **13.6**       | ** ** | **(22.1**      | **)**      |
| Reclassification  adjustment                                     |   | **8.1**            | ** ** | **(3.1**       | **)**      | **5.0**        | ** ** |
| Net other  comprehensive income (loss)                           |   | **$**              | **(51.4**  | **)**          | **$**      | **19.7**       | ** ** | **$** | **(31.7** | **)** |

 

The Company did notrecognize other comprehensive income (loss) prior to 2001.

 

 

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

 
|                        |   | QUARTER |       |
|-----------------------------|--------|---------|------------|
|                        |   | First   |       | Second |   | Third |   | Fourth |   |
| **2001**                    |   |    |       |   |   |   |   |   |   |
|                        |   |    |       |   |   |   |   |   |   |
| Interest and  other revenue |   | **$**   | **89.9**   | ** ** | **$** | **85.4** | ** ** | **$** | **82.3** | ** ** | **$** | **78.0** | ** ** |
| Income before  income taxes |   | **4.7** | ** ** | **1.8** | ** ** | **.9** | ** ** | **17.5** | ** ** |
| Net income                  |   | **3.2** | ** ** | **1.0** | ** ** | **.5** | ** ** | **10.9** | ** ** |
|                        |   |    |       |   |   |   |   |   |   |
| **2000**                    |   |    |       |   |   |   |   |   |   |
|                        |   |    |       |   |   |   |   |   |   |
| Interest and  other revenue |   | $       | 83.8       |   | $ | 91.1 |   | $ | 97.0 |   | $ | 95.5 |   |
| Income before  income taxes |   | 14.8    |       | 14.8 |   | 13.5 |   | 10.9 |   |
| Net income                  |   | 9.1     |       | 9.0 |   | 8.3 |   | 6.6 |   |

 

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 net income would have been $.4.

 

 

**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

----

 

**ITEM 9.          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE**

 

        The registrant has not had any disagreements with itsindependent auditors on accounting or financial disclosure matters.

 

 

**PART III**

 

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

 

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

 

 

**PART IV**

 

**ITEM 14.       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 31,2001 and 2000 and for the Years Ended December 31, 2001, 2000 and 1999

 

                Statements of Income andRetained Earnings — Years Ended December 31, 2001, 2000 and 1999

 

                Balance Sheets —December 31, 2001and 2000

 

                Statements of Cash Flows — YearsEnded December 31, 2001, 2000 and 1999

 

                        Notes to Financial Statements — December 31,2001

 

        All schedules for which provision is made in the applicableaccounting regulation of the Securities and Exchange Commission are notrequired under the related instructions, are inapplicable or have beenotherwise disclosed and, therefore, have been omitted.

 

                        Listing of Exhibits

 

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

 

(b) REPORTS ON FORM8-K FILED IN THE FOURTH QUARTER OF 2001

 

There were noreports on Form 8-K for the quarter ended December 31, 2001.

 

29

----

** **

 

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 22, 2002

 

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/ Timothy M. Henebry |   | President |
|--------|--------|------------------------|--------|-----------|
|   |   | Timothy M. Henebry     |   |      |

 

(2)                                  Principal Financial Officer

 

 
|   |   | /s/ Patricia A. Donohoe |   | Treasurer |
|--------|--------|-------------------------|--------|-----------|
|   |   | Patricia A. Donohoe     |   |      |

 

(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*

                Mark C. Pigott*

                Michael A. Tembreull*

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

 

30

----

**PACCARFinancial Corp.**

**EXHIBITINDEX**

 

2                                          Plan of Merger of PACCAR LeasingCorporation, a Delaware Corporation, and PACCAR Financial Corp., a WashingtonCorporation effective May 1, 2000 (incorporated by reference to Exhibit 2 tothe Company’s Quarterly Report on Form 10-Q dated August 11, 2000, File Number0-12553).

 

3.1                                 Restated Articles of Incorporation of theCompany, as amended (incorporated by reference to Exhibit 3.1 to the Company’sAnnual Report on Form 10-K dated March 26, 1985. Amendment incorporated byreference to Exhibit 19.1 to the Company’s Quarterly Report on Form 10-Q datedAugust 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 RegistrationStatement on Form 10 dated October 20, 1983, File Number 0-12553).

 

4.1                                 Indenture for Senior Debt Securitiesdated as of December 1, 1983 and first Supplemental Indenture dated as of June19, 1989 between the Company and Citibank, N.A. (incorporated by reference toExhibit 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 onForm 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’sRegistration Statement on Form S-3 dated March 11, 1996, Registration Number333-01623).

 

Form of Letter ofRepresentation among the Company, Citibank, N.A. and the Depository TrustCompany, Series H (incorporated by reference to Exhibit 4.4 to the Company’sRegistration Statement on Form S-3 dated March 11, 1996, Registration Number333-01623).

 

4.4                                 Forms of Medium-Term Note, Series I(incorporated by reference to Exhibits 4.2A and 4.2B to the Company’sRegistration Statement on Form S-3 dated September 10, 1998, RegistrationNumber 333-63153).

 

Form of Letter ofRepresentation among the Company, Citibank, N.A. and The Depository TrustCompany, Series I (incorporated by reference to Exhibit 4.3 to the Company’sRegistration Statement on Form S-3 dated September 10, 1998, RegistrationNumber 333-63153).

 

4.5                                 Forms of Medium-Term Note, Series J(incorporated by reference to Exhibits 4.2A and 4.2B to the Company’sRegistration Statement on Form S-3 dated March 2, 2000, Registration Number333-31502).

 

Form of Letter ofRepresentation among the Company, Citibank, N.A. and The Depository TrustCompany, Series J (incorporated by reference to Exhibit 4.3 to the Company’sRegistration Statement on Form S-3 dated March 2, 2000, Registration Number333-31502).

 

10.1                           Support Agreement between the Company andPACCAR dated as of June 19, 1989 (incorporated by reference to Exhibit 28.1 tothe Company’s Registration Statement on Form S-3 dated June 23, 1989,Registration Number 33-29434).

 

12.1                           Statement re: computation of ratio ofearnings to fixed charges of the Company pursuant to SEC reporting requirementsfor each of the five years in the period ended December 31, 2001.

 

12.2                           Statement re: computation of ratio ofearnings to fixed charges of the Company pursuant to the Support Agreement withPACCAR for each of the five years in the period ended December 31, 2001.

 

12.3                           Statement re: computation of ratio ofearnings to fixed charges of PACCAR and subsidiaries pursuant to SEC reportingrequirements for each of the five years in the period ended December 31, 2001.

 

31

----

**PACCARFinancial Corp.**

**EXHIBITINDEX**

 

23                                    Consent of Independent Auditors

 

25.1                           Power of attorney of certain officers anddirectors

 

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

 

 

32

----