<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For transition period from __________ to __________
Commission File No. 0-12553
PACCAR FINANCIAL CORP.
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(Exact name of Registrant as specified in its charter)
Washington 91-6029712
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(State of Incorporation) (I.R.S. Employer Identification No.)
777 - 106th Avenue N.E., Bellevue, Washington 98004
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (425) 468-7100
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Series H Medium-Term Notes
$5 Million Due December 15, 2000 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1999:
None
The number of shares outstanding of the registrant's classes of common stock
as of March 1, 1999:
Common Stock, $100 par value -- 145,000 shares
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THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF PACCAR INC AND MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I)(1)(a) AND (b) OF FORM 10-K
AND IS, THEREFORE, FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
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PART I
ITEM 1. BUSINESS
GENERAL
PACCAR Financial Corp.
PACCAR Financial Corp. (the "Company"), a wholly-owned subsidiary of
PACCAR Inc ("PACCAR"), is a Washington corporation organized in 1961 to
finance the sale of PACCAR products. The Company provides financing and
leasing of trucks and related equipment manufactured primarily by PACCAR and
sold through PACCAR's independent dealers in the United States. The Company
also finances dealer inventories of transportation equipment.
PACCAR
PACCAR is a multi-national company whose principal products are
commercial trucks and related service parts. This business accounted for 92%
of PACCAR's total revenues in 1998. PACCAR markets trucks in the heavy-duty
diesel category under the Kenworth, Peterbilt, DAF, and Foden nameplates
primarily through its dealers. These vehicles are manufactured in four plants
in the U.S., three in Europe and one each in Australia and Mexico. PACCAR
also competes in the North American Class 6/7 markets. These medium-duty
trucks are assembled at a PACCAR factory in Mexico and in the Seattle,
Washington plant. PACCAR competes in the European medium commercial vehicle
market with a cab-over-engine truck manufactured in the Netherlands. During
the second quarter of 1998, PACCAR acquired Leyland Trucks Limited. Leyland
manufactures light commercial vehicles in the United Kingdom for sale
throughout Europe under the DAF and Leyland DAF nameplates. PACCAR competes
in the truck parts aftermarket primarily through its independent dealer
networks. Other PACCAR businesses include industrial winches and retail auto
parts.
In the United States, Kenworth and Peterbilt trucks are sold to an
independent dealer network for resale to retail purchasers. Trucks
manufactured in the United States for export are marketed by a division of
PACCAR through an independent international dealer network.
In addition to the Company, which provides financing and leasing in the
United States, PACCAR offers similar financing programs for PACCAR products
in Mexico, Canada, Australia and the United Kingdom through five other
wholly-owned finance companies. PACCAR also provides full service truck
leasing through a wholly-owned subsidiary.
As of December 31, 1998, PACCAR and its subsidiaries had total assets of
$6.8 billion and stockholders' equity of $1.8 billion. For the year ended
December 31, 1998, PACCAR's consolidated revenues and net income were $7.9
billion and $416.8 million, respectively.
There were four other principal competitors besides PACCAR in the U.S.
Class 8 truck market in 1998. Based on 1998 industry registration statistics,
PACCAR's Kenworth and Peterbilt combined truck sales accounted for
approximately 21% of domestic Class 8 new truck registrations. There were
seven other principal competitors in the European medium and heavy commercial
vehicle market in 1998 including parent companies of three competitors of
PACCAR in the United States. PACCAR's subsidiary, DAF, had a 10.5% share of
the western European heavy-duty market. These markets are highly competitive
in price, quality and service. PACCAR is not dependent on any single customer
for a significant amount of its sales.
PACCAR's common stock, $1 par value, is traded on the Nasdaq National
Market under the symbol "PCAR". PACCAR and the Company are subject to the
informational requirements of the Securities
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Exchange Act of 1934 and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the "Commission").
All reports, proxy statements and other information filed by PACCAR and the
Company with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549; Suite 1400, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661; at 7 World Trade Center, 13th Floor,
New York, New York 10048, or through the Commission's internet site at
www.sec.gov.
BUSINESS OF THE COMPANY
The Company operates primarily in one industry segment, truck and
related equipment financing. The Company provides financing for dealers'
sales of Kenworth and Peterbilt trucks in the United States. In addition, the
Company provides financing for dealers' purchases of new Class 6, 7 and 8
trucks and used trucks, regardless of make or model. Financing is also
provided for truck trailers and allied equipment such as mixer and dump
bodies attached to the truck.
The Company currently conducts business with most PACCAR dealers. The
volume of the Company's business is significantly affected by PACCAR's sales
and competition from other financing sources.
As of December 31, 1998, the Company employed 290 full-time employees,
none of whom are represented by a collective bargaining agent. The Company
considers relations with its employees to be good.
THE COMPANY'S PRODUCTS
RETAIL RECEIVABLES
RETAIL CONTRACTS
The Company purchases contracts from dealers and receives assignments of
the contracts and a first lien security interest in the vehicles financed
("Retail Contracts"). Collateral for vehicles sold to leasing companies may
also include an assignment of leases and rentals due. Retail Contracts
purchased by the Company have fixed or floating interest rates.
DIRECT LOANS
The Company also makes loans to the end users of the vehicles financed that
are secured by a first lien security interest in the vehicles ("Direct
Loans"). Direct Loans have fixed or floating interest rates.
MASTER NOTE
These contracts are an alternative form of retail financing offered to
selected dealers for new and used trucks. Retail installment contracts
originated by the dealer for new or used trucks and meeting the Company's
requirements as to form, terms and creditworthiness for Retail Contracts are
pledged to the Company as collateral for direct, full recourse loans by the
Company to the dealer ("Master Note"). Master Note contracts have fixed or
floating interest rates.
WHOLESALE CONTRACTS
The Company provides wholesale financing for new and used truck and
trailer inventories for dealers ("Wholesale Contracts"). Wholesale Contracts
are secured by the inventories financed. The amount of credit extended by the
Company for each truck is generally limited to the invoice price of new
equipment and to the wholesale value of used equipment. Interest under
Wholesale Contracts is based upon floating rates.
DEALER LOANS
The Company makes loans to selected Peterbilt and Kenworth dealers
("Dealer Loans"). The purposes of these loans include the financing of real
estate, fixed asset, working capital and dealership acquisitions. Dealer
loans may have fixed or floating interest rates.
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LEASES
The Company offers lease contracts where it is treated as the owner of
the equipment for tax purposes and generally retains the tax depreciation
("Leases"). The lessee is responsible for the payment of property and sales
taxes, licenses, maintenance and other operating items. The lessee is
obligated to maintain the equipment and to insure the equipment against
casualty and liability losses.
Most of the Company's Leases contain a Terminal Rental Adjustment Clause
which requires the lessee to guarantee to the Company a stated residual value
upon disposition of the equipment at the end of the lease term.
INSURANCE
The Company sells physical damage insurance through PACCAR dealers who
are licensed insurance agents as well as through licensed agents of the
Company. The Company retains the premium revenues and loss exposure for the
policies which are issued through an unrelated insurance carrier.
The Company also charges a fee to provide insurance coverage, through an
unrelated regulated insurance carrier, on new trucks, used trucks and trailer
inventory to dealers having Wholesale Contracts with the Company. The Company
retains annual loss exposure up to that year's fee revenues.
CUSTOMER CONCENTRATION, PAST DUE ACCOUNTS AND LOSS EXPERIENCE
CUSTOMER CONCENTRATION
At December 31, 1998, the largest single customer for Retail Contracts,
Direct Loans or Leases represented 1.2% of the Company's net receivables, and
the five largest such accounts amounted to 4.4% of net receivables.
At December 31, 1998, the Company had four Master Note dealers. Master
Note borrowings totaled 12.1% of the Company's net receivables, while the
largest Master Note dealer's borrowing amounted to 8.4% of the Company's net
receivables. Master Note receivables are secured by numerous retail
installment contracts which, in effect, reduce the amount of dealer
concentration.
With respect to wholesale financing, at December 31, 1998, the largest
single dealer group accounted for 1.4% of the Company's net receivables, and
the five largest dealer groups collectively accounted for 3.5% of net
receivables.
PAST DUE RECEIVABLES AND ALLOWANCE FOR LOSSES
An account is considered past due by the Company if any portion of an
installment is due and unpaid for more than 30 days. In periods of adverse
economic conditions, past due levels, repossessions and credit losses
generally increase.
The Company maintains an allowance for losses on receivables at a level
which it considers to be adequate to cover management's estimates of losses.
The following table summarizes the activity in the Company's allowance for
losses on receivables and presents related ratios:
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Allowance for Losses
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(Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31
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1998 1997 1996
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<S> <C> <C> <C>
Balance at beginning of period $37,350 $ 36,000 $ 35,790
Provision for losses 11,485 6,245 3,279
Net losses (4,035) (4,895) (3,069)
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Balance at end of period $44,800 $ 37,350 $ 36,000
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Ratios:
Net losses to average net .16% .23% .15%
receivables and equipment on operating leases
Allowance for losses to period end net 1.68% 1.70% 1.70%
receivables and equipment on operating leases
Period end gross contracts and leases past .65% 1.05% .93%
due (over 60 days) to period end gross
contracts and lease receivables
</TABLE>
For discussion of the allowance for losses, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations, 1996-1998."
COMPETITION AND ECONOMIC FACTORS
The truck financing business is highly competitive among banks,
commercial finance companies, captive finance companies and leasing
companies. Many of these institutions have substantially greater financial
resources than the Company and may borrow funds at lower rates.
The dealers are the primary source of contracts acquired by the Company.
However, dealers are not required to obtain financing from the Company, and
they have a variety of other sources which may be used for wholesale and
customer financing of trucks. Retail purchasers also have a variety of
sources available to finance truck purchases.
The ability of the Company to compete in its market is principally based
on the rates and terms which the Company offers dealers and retail
purchasers, as well as the specialized services it provides. Rates and terms
are based on the Company's desire to provide flexible financing which meets
dealer and customer financing needs, the ability of the Company to borrow
funds at competitive rates and the Company's need to earn an adequate return
on its invested capital. The Company's business is also affected by changes
in market interest rates, which in turn are related to general economic
conditions, demand for credit, inflation and governmental policies.
Seasonality is not a significant factor in the Company's business.
The volume of receivables available to be acquired by the Company from
dealers is largely dependent upon the number of Kenworth and Peterbilt trucks
sold. Domestic sales of heavy-duty trucks depend on the capital equipment
requirements of the transportation industry, which in turn are influenced by
economic growth and cyclical variations in the economy. Heavy-duty truck
sales are also sensitive to economic factors such as fuel costs, interest
rates, federal excise and highway use taxes and taxation of the acquisition
and use of capital goods.
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REGULATIONS AND SIMILAR MATTERS
In certain states, the Company is subject to retail installment sales or
installment loan statutes and related regulations, the terms of which vary
from state to state. These laws may require the Company to be licensed as a
sales finance company and may regulate disclosure of finance charges and
other terms of retail installment contracts. The Company is also subject to
some of the provisions of federal law relating to discrimination in the
granting of credit.
SOURCES OF FUNDS
The operations of the Company are financed by borrowings, retained
earnings, and PACCAR equity investments. The Company's profitable acquisition
of additional receivables is dependent upon its ability to raise funds at
competitive rates in the public and private debt markets. The receivables and
leases that are financed are either fixed rate or floating rate, with a term
of generally five years or less.
To reduce the risk of changes in interest rates that could affect
interest margins, the Company obtains funds with interest rate
characteristics similar to the corresponding assets. Fixed rate assets are
funded primarily with publicly offered fixed rate medium-term notes and
commercial paper combined with interest rate swaps. Floating rate assets are
funded primarily with commercial paper with maturities of three months or
less. As a result, the Company's interest margin on existing business does
not change significantly as interest rates change.
The Company enters into over-the-counter interest rate contracts as a
tool to achieve its matched funding objectives and to reduce total borrowing
costs relative to its primary borrowing sources--commercial paper and fixed
rate medium-term notes. Fixed interest rate swaps, matched to floating rate
borrowings, are used to lock in the funding cost of fixed rate assets.
Floating interest rate swaps, matched to either fixed or floating rate debt,
are used to convert to a floating rate index more appropriate to the
Company's floating rate assets. Interest rate caps are occasionally purchased
to hedge the floating rate funding cost of floating rate assets that have a
maximum yield. As of December 31, 1998, the total notional principal amount
of interest rate swap contracts outstanding was $969 million, all of which
result in a fixed rate payment obligation. The notional amount is used to
measure the volume of these contracts and does not represent exposure to
credit 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 the counterparty. Management believes the risk of incurring such losses is
remote, and any losses would be immaterial. The permitted types of interest
rate contracts, their transaction limits and related approval authorizations
have been established by the Company's senior management and Board of
Directors. The interest rate contracts outstanding are regularly reported to,
and reviewed by, the Company's senior management.
As of December 31, 1998, the Company had $755 million of unused,
confirmed bank lines of credit, $635 million of which are shared with PACCAR,
that are reviewed annually for renewal. These lines are maintained primarily
to support the Company's short-term borrowings. Neither PACCAR nor the
Company is liable for any borrowings of the other under these lines of credit.
As of December 31, 1998, the Company had $956 million of medium-term
notes outstanding, $368 million of which was due within 12 months. See "Note
E--Borrowings" in the Notes to Financial Statements for medium-term note
maturities.
An indenture of the Company dated as of December 1, 1983, as amended 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 from
time to time, contains restrictions limiting secured debt which may be
incurred by the Company and any subsidiary.
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RELATIONSHIP WITH PACCAR
GENERAL
The operations of the Company are fundamentally affected by its
relationship with PACCAR. Sales of PACCAR products are the Company's
principal source of financing business. The Company receives administrative
support from and pays dividends to PACCAR, and may occasionally borrow funds
from or lend money to PACCAR or its affiliates. Since the directors of the
Company are all executives of PACCAR or its affiliated companies and PACCAR
is the sole owner of the Company's outstanding voting common stock, PACCAR
can determine the course of the Company's business. See "Note D--Transactions
with PACCAR and Affiliates" in the Notes to Financial Statements.
SUPPORT AGREEMENT
The Company and PACCAR are parties to a Support Agreement which
obligates PACCAR to provide, when required, financial assistance to the
Company to assure that the Company maintains 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 Agreement also requires PACCAR to own,
directly or indirectly, all outstanding voting stock of the Company. The
required ratio for each of the years ended December 31, 1994 - 1998 was met
without assistance.
The Company and PACCAR may amend or terminate any or all of the
provisions of the Support Agreement upon 30 days notice, with copies of the
notice 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) two NRSROs confirm in writing that their ratings with respect to
any Rated Debt would remain the same after such amendment or termination, or
(ii) the notice of amendment or termination provides that the Support
Agreement will continue in effect with respect to Rated Debt outstanding on
the effective date of such amendment or termination unless such debt has been
paid or defeased pursuant to the indenture or other agreement applicable to
such debt, or (iii) the holders of at least two-thirds of the aggregate
principal amount of all outstanding Rated Debt with an original maturity in
excess of 270 days consent in writing to such amendment or termination,
provided that the holders of Rated Debt having an original maturity of 270
days or less shall continue to have the benefit of the Support Agreement
until the maturity of such debt.
The Support Agreement expressly states that PACCAR's commitments to the
Company thereunder do not constitute a PACCAR guarantee of payment of any
indebtedness or liability of the Company to others and do not create rights
against PACCAR in favor of persons other than the Company. There are no
guarantees, direct or indirect, by PACCAR of payment of any indebtedness of
the Company.
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ITEM 2. PROPERTIES
The Company's principal office is located in the corporate headquarters
building of PACCAR (owned by PACCAR) at 777 - 106th Avenue N.E., Bellevue,
Washington 98004.
Other offices of the Company are located in leased premises. Annual
lease rentals for offices in the aggregate are not material in relation to
expenses as a whole.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various routine legal proceedings incidental
to its business involving the collection of accounts and other matters. The
Company does not consider such matters to be material with respect to the
business or financial condition of the Company as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All outstanding common stock is owned by PACCAR; therefore, there is no
trading market in the Company's common stock.
The Company began in 1994 to pay a dividend to PACCAR for the additional
paid-in capital invested in the prior year. Cash dividends of $2.1 million,
$2.7 million and $2.9 million were paid in 1998, 1997 and 1996, respectively.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data for the Company
and should be read in conjunction with the more detailed financial statements
included under "Financial Statements and Supplementary Data." The information
with respect to each of the five years in the period ended December 31, 1998
has been derived from the Company's audited financial statements.
Balance Sheet Data and Income Statement Data
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(Thousands of Dollars)
<TABLE>
<CAPTION>
Balance Sheet Data As of December 31
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Total Assets $ 2,679,820 $ 2,201,064 $ 2,120,612 $ 2,074,405 $ 1,770,769
Total Liabilities 2,311,591 1,857,660 1,807,559 1,792,934 1,517,436
Total Stockholder's Equity 368,229 343,404 313,053 281,471 253,333
<CAPTION>
Income Statement Data Year Ended December 31
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Finance and Insurance Margin $ 86,930 $ 82,214 $ 79,543 $ 74,975 $ 67,435
Selling, General and
Administrative Expenses 35,067 25,272 24,084 23,429 22,815
Provision for Losses
on Receivables 11,485 6,245 3,279 4,816 2,473
------------ ------------ ------------ ----------- -----------
Income Before Income Taxes 40,378 50,697 52,180 46,730 42,147
Income Taxes 15,744 19,785 20,321 18,809 16,968
------------ ------------ ------------ ----------- -----------
Net Income $ 24,634 $ 30,912 $ 31,859 $ 27,921 $ 25,179
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Ratio of Earnings to Fixed 1.36x 1.50x 1.53x 1.52x 1.67x
Charges (1)
</TABLE>
(1) For purposes of this ratio, earnings consist of income before income
taxes plus fixed charges. Fixed charges consist of interest expense plus
a portion of rent expense (which is deemed representative of an interest
factor). The method of computing the ratio of earnings to fixed charges
shown above complies with SEC reporting requirements but differs from
the method called for in the Support Agreement between the Company and
PACCAR. The ratios computed pursuant to the Support Agreement were
1.41x, 1.57x, 1.62x, 1.63x and 1.82x for the years 1998 - 1994,
respectively. See Exhibits 12.1 and 12.2.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, 1996 - 1998
RESULTS OF OPERATIONS
1998 Compared to 1997:
New business volume was $1.5 billion, increasing 31% over $1.2 billion
in 1997. Average receivables grew 13% to $2.4 billion in 1998 from $2.1
billion in 1997. As a result of asset growth, the finance margin of $85.0 for
1998 increased 6% from $80.4 million in 1997. However, the average margin
rate on receivables declined for the fourth consecutive year from 3.80% for
1997 to 3.57% for 1998 due to intense rate competition in the truck lending
market.
Selling, general and administrative expenses were 39% higher in 1998
than 1997 as a result of higher staffing costs and the one-time charge-off of
an investment in a new loan system that was terminated due to unresolved cost
and scheduling issues. Operating expenses, excluding the impact of the
charge-off, would have been 9% higher than the prior year. The provision for
losses increased 84% to $11.5 million in 1998 from $6.2 million in 1997,
despite lower net credit losses and a decline in the reserve ratio to 1.68%
versus 1.70% in 1997, due to asset growth. The level of the allowance
reflects the risks inherent in the financing of commercial highway
transportation equipment.
As a result of the foregoing factors, net income for 1998 decreased 20%
to $24.6 million from $30.9 million in 1997. Net income for 1998, excluding
the charge-off, would have been $29.2 million representing a 5% reduction
from 1997.
1997 Compared to 1996:
Net income decreased 3% to $30.9 million in 1997 from $31.9 million in
1996. While the 3% increase in the finance margin to $80.4 million for 1997
from $77.9 million was attributable to growth in receivables, the higher
margin was more than offset by increases in the loss provision and selling,
general and administrative expenses. The provision for losses of $6.2 million
in 1997 increased 91% compared to 1996 due to asset growth and higher credit
losses. Selling, general and administrative expenses were 5% higher in 1997
than 1996 due to increased staffing costs.
FUNDING AND LIQUIDITY
The Company manages its capital structure consistent with industry
standards. Since 1983, the Company has registered senior debt securities
under the Securities Act of 1933 for offering to the public. In 1998, the
Company registered $1 billion of senior debt securities for offering to the
public. At the end of 1998, there were $805 million of such securities
available for issuance.
The Company believes that it has sufficient financial capabilities,
including internally generated funds, access to public and private debt
markets, lines of credit and other financial resources, to fund current
business needs and service debt maturities.
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YEAR 2000 ISSUE
As a finance company, the Company relies upon computer processing to
originate and service loans and leases. The Company has identified and
evaluated its major internal systems for Year 2000 compliance. Internal
systems have already been modified to enable the Company to process loans and
leases with a termination date after the Year 2000. Some additional software
related changes for the systems to operate properly after the Year 2000 have
been identified by the Company. The Company has developed a detailed plan,
including anticipated completion dates for each significant system and
anticipates overall completion by the end of September 1999. Management
regularly reviews the progress under this plan. A team consisting of
full-time employees supplemented with contract staff is working to make the
necessary changes. Total cost to the Company is expected to approximate $2.0
million, of which $1.0 million has been incurred through December 31, 1998.
Operating funds will fund the cost of the project.
In the unlikely event that management concludes that there is a material risk
that a significant computer system will not be Year 2000 compliant by the end
of 1999, a contingency plan utilizing manual processes and alternate systems
will be developed.
Since the Company is not a manufacturer, the Company's reliance on embedded
computer systems is limited to facilities related matters, such as office
security systems and telecommunications equipment. The Company is in the
process of confirming with its vendors that such systems will be, or are,
Year 2000 compliant.
The Company also relies on the ability of banks and other financial
institutions participating in the public debt markets to fund its lending
activity. If there is a significant failure of banking systems or systems of
other entities within the public market structure due to the Year 2000 issue,
the Company's ability to access the credit markets and process payments could
be adversely affected. The Company has sent letters and has received
responses indicating that banks and other financial institutions with which
it has relationships already are, or will be, compliant by the Year 2000.
If the United States economy enters into a recession due to widespread
interruption in commercial activity or the effect of diverting substantial
resources to achieve Year 2000 compliance, the Company would likely
experience an increase in credit losses, a reduction in interest income and a
drop in new lending volume. Due to the cyclical nature of the trucking
business, however, the possibility of a general economic or a trucking
industry downturn has long been a factor in the Company's credit granting
decisions.
Since the Company is a collateral based lender with hard copy documents to
enforce its loans and leases, the most reasonably likely worst case scenario
if all its systems are not Year 2000 compliant is that information and
reports would contain inaccuracies that would slow the efficient processing
of payments, result in increased administrative costs to the Company and
generally reduce customer service. The cumulative effect of these potential
outcomes is unknown, but could have a material effect on the Company's
financial condition, the results of operations and liquidity.
The Company has no single customer concentration greater than 2% of assets
and the impact on the Company from a single customer's non-compliance is not
expected to be material. However, if a large number of its major customers
encounter operating problems due to Year 2000 that cause them to default on
their obligations, there could be a material impact on the Company due to
higher credit losses and lower interest income.
Management believes it is taking the necessary steps regarding Year 2000
compliance with respect to matters within its control to ensure that the Year
2000 issue will not materially impact the Company.
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ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company's primary market risk exposure is from fluctuations in interest
rates. To manage the risks the Company uses derivative financial instruments,
primarily interest rate swaps, in accordance with established policies and
procedures. The objectives are to reduce existing interest rate risk arising
from the financing of receivables, change interest rate characteristics of
debt to more closely reflect the interest rate characteristics of the
receivables being funded, and to reduce funding costs. Derivative usage is
limited to hedging strategies which match the interest rate characteristics
of debt to those of the receivables being funded. The Company does not use
derivatives for trading purposes. Following is a tabular presentation of
items which are subject to market risk exposure and the derivatives which are
used to manage the exposure risk.
Principal (Notional) Amount by Expected Maturity
Average Interest Rate (Swap) Strike Price
<TABLE>
<CAPTION>
FAIR
THERE- VALUE
(DOLLARS IN MILLIONS) 1999 2000 2001 2002 2003 AFTER TOTAL 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Retail Notes, Contracts and
Wholesale
Financing, net of Unearned
Interest and Allowance for
Losses:
Fixed Rate 679.3 570.0 411.2 234.1 72.9 2.2 1,969.7 1,971.9
------ ------ ------ ------ ------ ------ ------- -------
Average Interest Rate 8.58% 8.44% 8.32% 8.09% 8.09% 8.09% 8.41%
------ ------ ------ ------ ------ ------ -------
Variable Rate 226.0 27.8 24.2 16.4 4.2 .9 299.5 299.5
------ ------ ------ ------ ------ ------ ------- -------
Average Interest Rate 6.81% 6.81% 6.81% 6.81% 6.81% 6.81% 6.81%
------ ------ ------ ------ ------ ------ -------
LIABILITIES
Commercial Paper 1,212.7 - - - - - 1,212.7 1,212.7
------- ------- ------- ------- ------- ------- --------- -------
Average Interest Rate 5.10% - - - - - 5.10%
------- ------- ------- ------- ------- ------- ---------
Medium-term Notes
Fixed Rate 233.0 253.0 235.0 100.0 - - 821.0 832.6
------- ------- ------- ------- ------- ------- --------- -------
Average Interest Rate 6.06% 6.11% 6.08% 5.89% - - 6.06%
------- ------- ------- ------- ------- ------- ---------
Variable Rate 135.0 - - - - - 135.0 135.0
------- ------- ------- ------- ------- ------- --------- -------
Average Interest Rate 5.21% - - - - - 5.21%
------- ------- ------- ------- ------- ------- ---------
INTEREST RATE DERIVATIVE
FINANCIAL INSTRUMENTS RELATED TO
DEBT
Interest Rate Swaps
Pay Fixed/Receive Variable 530.1 327.1 76.9 21.8 9.2 4.0 969.1 (4.6)
------- ------- ------- ------- ------- ------- --------- -------
Average Interest Pay Rate 5.82% 5.59% 5.03% 5.42% 5.97% 5.37% 5.67%
------- ------- ------- ------- ------- ------- ---------
Average Interest Receive Rate 5.48% 5.40% 5.26% 5.26% 5.28% 5.0% 5.43%
------- ------- ------- ------- ------- ------- ---------
</TABLE>
-12-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and related schedules described
under Item 14, "Exhibits, Financial Statement Schedules, and Reports on Form
8-K," are included following this page.
-13-
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
PACCAR Inc and PACCAR Financial Corp.
We have audited the accompanying balance sheets of PACCAR Financial Corp. (a
wholly-owned subsidiary of PACCAR Inc) as of December 31, 1998 and 1997, and
the related statements of income and retained earnings and cash flows for
each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PACCAR Financial Corp. at
December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/S/ Ernst & Young LLP
Seattle, Washington
February 16, 1999
-14-
<PAGE>
BALANCE SHEETS
PACCAR Financial Corp.
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------- --------------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Cash $ 14,641 $ 13,370
Finance and other receivables net of
allowance for losses of $44,800 in 1998 ($37,350 in 1997) 2,606,540 2,136,315
Loans to affiliate 13,493 -
Equipment on operating leases net of
depreciation of $10,894 in 1998 ($16,332 in 1997) 30,076 34,593
Other assets 15,070 16,786
-------------------- --------------------
TOTAL ASSETS $ 2,679,820 $ 2,201,064
-------------------- --------------------
-------------------- --------------------
LIABILITIES
Accounts payable and accrued expenses $ 38,590 $ 36,580
Payable for finance receivables acquired 41,526 35,799
Commercial paper and other short-term borrowings 1,212,743 759,016
Medium-term notes 956,000 964,000
Income taxes - current and deferred 62,732 62,265
-------------------- --------------------
TOTAL LIABILITIES 2,311,591 1,857,660
-------------------- --------------------
STOCKHOLDER'S EQUITY
Preferred stock, par value $100 per share,
6% noncumulative and nonvoting,
450,000 shares authorized,
310,000 shares issued and outstanding 31,000 31,000
Common stock, par value $100 per share,
200,000 shares authorized,
145,000 shares issued and outstanding 14,500 14,500
Paid-in capital 13,990 11,706
Retained earnings 308,739 286,198
-------------------- --------------------
TOTAL STOCKHOLDER'S EQUITY 368,229 343,404
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 2,679,820 $ 2,201,064
-------------------- --------------------
-------------------- --------------------
</TABLE>
See accompanying notes.
-15-
<PAGE>
STATEMENTS OF INCOME AND RETAINED EARNINGS
PACCAR Financial Corp.
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
------------------ ----------------- -----------------
(Thousands of Dollars)
<S> <C> <C> <C>
Interest and other income $ 197,819 $ 181,152 $ 175,836
Rentals on operating leases 8,525 9,801 11,767
------------------ ----------------- -----------------
TOTAL FINANCE INCOME 206,344 190,953 187,603
Interest expense 112,958 101,440 98,536
Other borrowing expense 2,051 1,810 1,803
Depreciation expense related
to operating leases 6,310 7,319 9,358
------------------ ----------------- -----------------
TOTAL FINANCE EXPENSES 121,319 110,569 109,697
------------------ ----------------- -----------------
FINANCE MARGIN 85,025 80,384 77,906
Insurance premiums earned 6,694 5,726 5,528
Insurance claims and underwriting expenses 4,789 3,896 3,891
------------------ ----------------- -----------------
INSURANCE MARGIN 1,905 1,830 1,637
Selling, general and
administrative expenses 35,067 25,272 24,084
Provision for losses on receivables 11,485 6,245 3,279
------------------ ----------------- -----------------
INCOME BEFORE INCOME TAXES 40,378 50,697 52,180
Federal and state income taxes 15,744 19,785 20,321
------------------ ----------------- -----------------
NET INCOME 24,634 30,912 31,859
Retained earnings at beginning of year 286,198 257,941 229,015
Cash dividends paid (2,093) (2,655) (2,933)
------------------ ----------------- -----------------
RETAINED EARNINGS AT END OF YEAR $ 308,739 $ 286,198 $ 257,941
------------------ ----------------- -----------------
------------------ ----------------- -----------------
</TABLE>
See accompanying notes.
-16-
<PAGE>
STATEMENTS OF CASH FLOWS
PACCAR Financial Corp.
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
-------------------- -------------------- -------------------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 24,634 $ 30,912 $ 31,859
Items included in net income not
affecting cash:
Provision for losses on receivables 11,485 6,245 3,279
Charge-off of loan system investment 7,453 - -
Increase (decrease) in deferred taxes payable 1,446 1,573 (3,640)
Depreciation and amortization 10,187 11,294 13,236
(Increase) decrease in payables and other (5,139) (4,429) 13,223
-------------------- -------------------- -------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 50,066 45,595 57,957
INVESTING ACTIVITIES:
Finance and other receivables acquired (1,507,276) (1,155,213) (1,053,350)
Collections on finance and other receivables 1,063,047 1,017,968 942,736
Net (increase) decrease in wholesale
receivables (45,908) 40,857 53,404
Acquisition of equipment (13,609) (17,132) (11,421)
Proceeds from disposal of equipment 9,033 9,303 11,880
-------------------- -------------------- -------------------
NET CASH USED IN
INVESTING ACTIVITIES (494,713) (104,217) (56,751)
FINANCING ACTIVITIES:
Net increase in commercial paper
and other short-term borrowings 453,727 59,400 41,759
Proceeds from medium-term notes 460,000 415,000 375,000
Payments of medium-term notes (468,000) (415,000) (410,500)
Additions to paid-in capital 2,284 2,093 2,655
Payment of cash dividend (2,093) (2,655) (2,933)
-------------------- -------------------- -------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 445,918 58,838 5,981
-------------------- -------------------- -------------------
NET INCREASE IN CASH 1,271 216 7,187
CASH AT BEGINNING OF YEAR 13,370 13,154 5,967
-------------------- -------------------- -------------------
CASH AT END OF YEAR $ 14,641 $ 13,370 $ 13,154
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
</TABLE>
See accompanying notes.
-17-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PACCAR Financial Corp.
December 31, 1998
(Thousands of Dollars)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
INDUSTRY: PACCAR Financial Corp. (the "Company"), a wholly-owned subsidiary
of PACCAR Inc ("PACCAR"), provides financing of trucks and related equipment
manufactured primarily by PACCAR and sold by authorized dealers. The Company
also finances dealer inventories of transportation equipment. The operations
of the Company are fundamentally affected by its relationship with PACCAR.
Sales of PACCAR products are the Company's principal source of financing
business.
Due to the nature of the Company's business, customers are concentrated in
the transportation industry throughout the United States. The Company's
receivables and direct financing lease portfolio are not concentrated in any
geographic region. Generally, all receivables are collateralized by the
equipment being financed. The risk of credit losses related to this
concentration has been considered in establishing the allowance for losses.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported and disclosed in the
financial statements. Actual results could differ from the amounts estimated
by management.
ESTIMATED LOSSES ON RECEIVABLES: The provision for losses on finance and
other receivables is charged to income in an amount sufficient to maintain
the allowance 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 (usually upon repossession of the
collateral). On certain retail contracts acquired from the dealers, the
dealer retains liability, up to specified limits, for the credit loss on the
sale of a repossessed vehicle. The amount and collectibility of dealer
recourse provisions have been considered in establishing the allowance for
credit losses on receivables.
REVENUE RECOGNITION: Revenue from net finance receivables and other
receivables is recognized using the interest method. Certain loan origination
costs are deferred and amortized to interest and other income. For operating
leases, income is recognized on a straight line basis over the lease term.
Recognition of income is suspended when management determines that collection
of future income is not probable (generally after 90 days past due).
Recognition is resumed if the receivable becomes contractually current and
collection doubts are removed.
EQUIPMENT: Equipment on operating leases is recorded at cost and depreciated
on a straight-line basis over the contract term of each operating lease to an
estimated residual value.
INCOME TAXES: The Company is included in the consolidated federal income tax
return of PACCAR. 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 related tax benefit is paid by PACCAR to the Company.
-18-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PACCAR Financial Corp.
December 31, 1998
(Thousands of Dollars)
DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters into interest rate
contracts and cap agreements to manage certain exposures to fluctuations in
interest rates. The Company uses interest rate swap contracts to match the
interest rate characteristics of the Company's finance receivables with the
borrowings used to fund those receivables and to limit the Company's exposure
to rising interest rates. Interest rate swap contracts involve the exchange
of fixed and floating rate interest payments without the exchange of the
underlying principal. Net amounts paid or received are reflected as
adjustments to interest expense. Interest rate cap premiums paid are
amortized to interest expense ratably during the life of the agreement. The
fair values of interest rate swap and cap agreements are not recognized in
the financial statements. Realized gains or losses at the time of maturity,
termination or repayment of an interest rate contract or cap agreement are
recorded in a manner consistent with the original designation of the interest
rate contract or cap agreement. The Company does not engage in derivatives
trading, market-making or other speculative activities.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in the
first quarter of 2000. Based on review of the pronouncement, management
believes its current use of derivatives for hedging purposes will be
considered cash flow hedges under the new pronouncement. Management does not
anticipate that the adoption of the new Statement will have a significant
effect on earnings or the financial position of the Company. However, given
the complex nature of the new Standard and the dependence on market values,
the impact will not be known until adoption.
-19-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PACCAR Financial Corp.
December 31, 1998
(Thousands of Dollars)
NOTE B--RECEIVABLES
Terms for substantially all finance and other receivables range up to 60
months. Experience of the Company has shown that some receivables will be
paid prior to contractual maturity and others will be extended or renewed.
Accordingly, the maturities of receivables presented here should not be
regarded as a forecast of future collections.
The Company's finance and other receivables are as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
------------------- -------------------
<S> <C> <C>
Notes and contracts due within:
One year $ 794,837 $ 755,461
Two years 634,223 513,867
Three years 458,233 346,027
Four years 262,634 176,638
Five years and beyond 87,410 61,872
------------------- -------------------
2,237,337 1,853,865
Wholesale financing 161,051 115,143
Direct financing leases (including estimated residual
values of $11,652) 385,484 328,037
Interest and other receivables 22,047 8,306
------------------- -------------------
2,805,919 2,305,351
Unearned interest:
Notes and contracts (94,515) (93,247)
Direct financing leases (46,571) (38,439)
------------------- -------------------
(141,086) (131,686)
------------------- -------------------
Net finance and other receivables $ 2,664,833 $ 2,173,665
------------------- -------------------
------------------- -------------------
</TABLE>
Future minimum lease payments on direct financing leases totaled $373,832 at
December 31, 1998 and are due as follows: $117,560 in 1999; $97,092 in 2000;
$81,324 in 2001; $52,687 in 2002; and $25,169 in 2003 and beyond.
The allowance for losses on receivables is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Balance at beginning of year $ 37,350 $ 36,000 $ 35,790
Provision for losses 11,485 6,245 3,279
Net losses (4,035) (4,895) (3,069)
------------------ ------------------ -----------------
Balance at end of year $ 44,800 $ 37,350 $ 36,000
------------------ ------------------ -----------------
------------------ ------------------ -----------------
</TABLE>
-20-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PACCAR Financial Corp.
December 31, 1998
(Thousands of Dollars)
At December 31, 1998 and 1997, the recorded investments in notes and
contracts that were considered to be impaired were $16,146 and $20,353,
respectively. Included in the allowance for losses were specific reserves of
$5,073 and $5,172 on these impaired notes and contracts. The average recorded
investment in impaired notes and contracts during the years ended December
31, 1998 and 1997, was $18,659 and $27,021, respectively. For the years ended
December 31, 1998 and 1997, the Company recognized interest income of $888
and $963 respectively, on those impaired loans, all of which was recognized
using the cash basis method of income recognition.
NOTE C--OPERATING LEASES
Terms of operating leases range up to 60 months. Future annual minimum rental
payments to be received for transportation equipment on operating leases
beginning January 1, 1999 were: $7,295 in 1999; $4,674 in 2000; $2,007 in
2001 and $454 in 2002.
NOTE D--TRANSACTIONS WITH PACCAR AND AFFILIATES
The Company and PACCAR are parties to a Support Agreement which obligates
PACCAR to provide, when required, financial assistance to the Company to
assure that the Company maintains 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 Agreement also requires PACCAR to own, directly or
indirectly, all outstanding voting stock of the Company. The required ratio
for the years ended December 31, 1998, 1997 and 1996, was met without
assistance.
PACCAR charges the Company for certain administrative services it provides.
These costs are charged to the Company based upon the Company's specific use
of the services and PACCAR's cost. Management considers these charges
reasonable and not significantly different from the costs that would be
incurred if the Company were on a stand-alone basis. Fees for services of
$2,451, $1,976 and $2,676 in 1998, 1997 and 1996, respectively, were charged
to the Company. In lieu of current year payment, PACCAR recognizes certain of
these administrative services as an additional investment in the Company. The
Company records the investment as paid-in capital. The Company pays a
dividend to PACCAR for the paid-in capital invested in the prior year. Cash
dividends of $2,093, $2,655, and $2,933 were paid in 1998, 1997 and 1996,
respectively.
The Company's employees are covered by a defined benefit pension plan, an
unfunded postretirement medical and life insurance plan and a defined
contribution plan sponsored by PACCAR. Separate allocations of plan assets,
defined benefit accumulated plan benefits and defined contribution plan
benefits relating to the Company have not been made. Expenses charged to the
Company by PACCAR for these plans were $1,039, $820, and $791 for years 1998,
1997 and 1996, respectively.
Periodically, the Company borrows funds from PACCAR and makes loans to
PACCAR. At December 31, 1998, 1997 and 1996, there were no outstanding loans
for the Company from or to PACCAR.
The Company periodically loans funds to certain foreign and domestic finance
and leasing affiliates of PACCAR. These various affiliates have Support
Agreements with PACCAR, similar to the Company's Support Agreement. The
foreign affiliates operate in the United Kingdom, Canada and Australia, and
any resulting currency exposure is fully hedged. The aggregate of any such
loans not guaranteed by PACCAR will not exceed the equivalent of 50 million
United States dollars. At December 31, 1998, there was $13 million in loans
outstanding to a finance affiliate operating in the United Kingdom. There
were no loans at December 31, 1997 or December 31, 1996.
The Company's Articles of Incorporation provide that the 6% noncumulative,
nonvoting preferred stock (100% owned by PACCAR) is redeemable only at the
option of the Company's Board of Directors.
-21-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PACCAR Financial Corp.
December 31, 1998
(Thousands of Dollars)
NOTE E--BORROWINGS
Borrowings are summarized as follows:
<TABLE>
<CAPTION>
Effective
Rate* 1998 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Commercial paper 5.27% $ 1,212,743 $ 715,016
Other short-term borrowings - - 44,000
Fixed rate medium-term notes 6.10% 821,000 789,000
Floating rate medium-term notes 5.40% 135,000 175,000
-------------------- -------------------- --------------------
Total 5.59% $ 2,168,743 $ 1,723,016
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
</TABLE>
*The effective rate is the weighted average rate as of December 31, 1998 and
includes the effects of interest rate agreements.
Principal amounts of medium-term notes due over the next five years beginning
January 1, 1999 are $368,000 in 1999, $253,000 in 2000, $235,000 in 2001,
$100,000 in 2002, and $0 in 2003.
At December 31, 1998, there was $805 million of medium-term debt available
for issuance under a currently outstanding shelf registration.
Cash paid for interest (net of swap interest received) was $118,032 in 1998,
$101,845 in 1997, and $102,414 in 1996.
At December 31, 1998, the Company had outstanding 56 interest rate swaps with
various financial institutions with a total notional balance of $969 million.
The notional principal of these contracts matures as follows: $530 million in
1999, $327 million in 2000, $77 million in 2001, $22 million in 2002, and $13
million thereafter. The notional amount is used to measure the volume of
these contracts and does not represent exposure to credit 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 the counterparty. Management
believes the risk of incurring such losses is remote and any losses would be
immaterial.
At December 31, 1998, the interest rate swap weighted average pay rate was
5.67%. The weighted average interest rate swap receive rate of 5.43% offsets
the pay rate on associated debt obligations.
NOTE F-- CREDIT ARRANGEMENTS
The Company and PACCAR have lines of credit arrangements with various
commercial banks that are reviewed annually for renewal. These lines are
maintained primarily to support the Company's short-term borrowings. At
December 31, 1998, the unused portion of these credit lines was $755 million
of which $635 are shared with PACCAR. The Company compensates the banks for
providing lines of credit with fees that are immaterial.
The Company has entered into facility agreements with various lending
institutions, under which the lending institutions may sell a participation
or assign all or a portion of the note to other institutions. These notes
generally mature within 90 days. At December 31, 1998, there were no notes
outstanding, compared with $19 million at December 31, 1997.
-22-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PACCAR Financial Corp.
December 31, 1998
(Thousands of Dollars)
NOTE G--INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
-------------------- ------------------- ---------------
<S> <C> <C> <C>
Current provision
Federal $ 12,809 $ 15,278 $ 20,531
State 1,489 2,934 3,430
-------------------- ------------------- ---------------
14,298 18,212 23,961
Deferred expense (benefit) 1,446 1,573 (3,640)
-------------------- ------------------- ---------------
$ 15,744 $ 19,785 $ 20,321
-------------------- ------------------- ---------------
-------------------- ------------------- ---------------
</TABLE>
A reconciliation between the statutory federal income tax rate and the actual
provision for income taxes is shown below:
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
-------------------- ------------------- ---------------
<S> <C> <C> <C>
Tax at the statutory rate of 35% $ 14,132 $ 17,743 $ 18,263
Effect of state income taxes 1,612 2,042 2,058
-------------------- ------------------- ---------------
$ 15,744 $ 19,785 $ 20,321
-------------------- ------------------- ---------------
-------------------- ------------------- ---------------
</TABLE>
Cash paid for income taxes was $15,885 in 1998, $17,386 in 1997, and $23,802
in 1996.
Deferred income tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
As of December 31
1998 1997
------------------- -------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 75,509 $ 71,748
State income tax 9,514 8,621
------------------- -------------------
85,023 80,369
Deferred tax assets:
Allowance for doubtful accounts (15,721) (13,073)
Other (5,343) (4,783)
------------------- -------------------
(21,064) (17,856)
------------------- -------------------
Net deferred tax liability $ 63,959 $ 62,513
------------------- -------------------
------------------- -------------------
</TABLE>
-23-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PACCAR Financial Corp.
December 31, 1998
(Thousands of Dollars)
NOTE H--FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH: The carrying amount reported in the balance sheets is stated at fair
value.
NET RECEIVABLES: For floating rate loans and wholesale financings, fair
values are stated at carrying values. For fixed rate loans, fair values are
estimated using discounted cash flow analyses applying interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. The carrying amount of accrued interest and other receivables
approximates their fair value. Direct financing leases and the related
allowance for losses are not included in net receivables for purposes of this
note.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Company's interest rate
contracts are based on costs which would be incurred to terminate existing
agreements and enter into new agreements with similar notional amounts,
maturity dates and counterparties' credit standings at current market
interest rates or currency exchange rates.
COMMERCIAL PAPER, SHORT-TERM BANK LOANS AND MEDIUM-TERM NOTES: The carrying
amount of the Company's commercial paper, bank loans and floating rate
medium-term notes approximates their fair value. The fair value of the
Company's fixed rate medium-term notes is estimated using discounted cash
flow analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
The carrying amount of trade payables and receivables approximate their fair
value and have been excluded from the accompanying table.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash $ 14,641 $ 14,641 $ 13,370 $ 13,370
Net receivables 2,291,403 2,293,528 1,852,525 1,858,117
Commercial paper and short-term bank loans 1,212,743 1,212,743 759,016 759,016
Medium-term notes 956,000 967,568 964,000 964,709
</TABLE>
The Company's intent is to hold interest rate contracts until maturity. If
recorded at fair value at December 31, 1998, the Company's off-balance-sheet
financial instruments (interest rate contracts) would represent gross assets
of $751 and offsetting gross liabilities of $5,313, resulting in a net
liability of $4,562. If recorded at fair value at December 31, 1997, the
Company's off-balance-sheet financial instruments would have reflected a net
liability balance of $743.
-24-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PACCAR Financial Corp.
December 31, 1998
(Thousands of Dollars)
NOTE I--QUARTERLY RESULTS (Unaudited)
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------------------------------------------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
1998
- ----
Gross income $ 49,755 $ 52,661 $ 54,465 $ 56,157
Income before income taxes 11,791 11,958 12,195 4,434*
Net income 7,067 7,393 7,487 2,687
1997
- ----
Gross income $ 48,317 $ 48,322 $ 49,320 $ 50,720
Income before income taxes 12,744 12,791 12,916 12,246
Net income 7,782 7,805 7,882 7,443
</TABLE>
* As disclosed in the Company's 8-K filed December 10, 1998, the Company
recorded a one-time charge-off of an investment in a new loan system in the
amount of $7,453 during fourth quarter 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The registrant has not had any disagreements with its independent
auditors on accounting or financial disclosure matters.
-25-
<PAGE>
PART III
ITEMS 10, 11, 12 AND 13
These items omitted pursuant to Form 10-K General Instruction (I)(1)(a)
and (b).
-26-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of the Company are included in Item 8:
AT DECEMBER 31, 1998 AND 1997 AND FOR THE YEARS ENDED DECEMBER 31,
1998, 1997, AND 1996
Balance Sheets -- December 31, 1998 and 1997
Statements of Income and Retained Earnings -- Years Ended
December 31, 1998, 1997 and 1996
Statements of Cash Flows -- Years Ended December 31, 1998, 1997
and 1996
Notes to Financial Statements -- December 31, 1998
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions, are inapplicable or have been otherwise disclosed
and, therefore, have been omitted.
Listing of Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in the
accompanying Exhibit Index.
(b) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1998
On December 10, 1998 the Company filed a Form 8-K under Item 5 disclosing the
write-off of its investment in the development of a new loan system.
-27-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PACCAR Financial Corp.
By
--------------------
Andrew J. Wold
President
Date: March 23, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant as of the above date and in the capacities indicated.
(1) Principal Executive Officer
President
--------------------------------------
Andrew J. Wold
(2) Principal Financial Officer
Treasurer
--------------------------------------
Patricia A. Donohoe
(3) Principal Accounting Officer
Controller
--------------------------------------
Michael T. Barkley
(4) A Majority of the Board of Directors:
--------------------------------------
Andrew J. Wold
David J. Hovind*
Mark C. Pigott*
Michael A. Tembreull*
*By
---------------------------------------
Andrew J. Wold
Attorney-in-Fact
-28-
<PAGE>
PACCAR Financial Corp.
EXHIBIT INDEX
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's Form
10-K dated March 26, 1985. Amendment incorporated by reference to
Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q dated
August 13, 1985, File Number 0-12553).
3.2 By-Laws of the Company, as amended (incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
10 dated October 20, 1983, File Number 0-12553).
4.1 Indenture for Senior Debt Securities dated as of December 1, 1983
and first Supplemental Indenture dated as of June 19, 1989 between
the Company and Citibank, N.A. (incorporated by reference to
Exhibit 4.1 to the Company's Annual Report on Form 10-K dated
March 26, 1984, File Number 0-12553 and Exhibit 4.2 to the
Company's Registration Statement on Form S-3 dated June 23, 1989,
Registration Number 33-29434).
4.2 Forms of Medium-Term Note, Series G (incorporated by reference to
Exhibits 4.3A and 4.3B to the Company's Registration Statement on
Form S-3 dated December 8, 1993, Registration Number 33-51335).
Form of Letter of Representation among the Company, Citibank, N.A.
and the Depository Trust Company, Series G (incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement
on Form S-3 dated December 8, 1993, Registration Number 33-51335).
4.3 Forms of Medium-Term Note, Series H (incorporated by reference to
Exhibits 4.3A and 4.3B to the Company's Registration Statement on
Form S-3 dated March 11, 1996, Registration Number 333-01623).
Form of Letter of Representation among the Company, Citibank, N.A.
and the Depository Trust Company, Series H (incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement
on Form S-3 dated March 11, 1996, Registration Number 333-01623).
4.4 Forms of Medium-Term Note, Series I (incorporated by reference to
Exhibits 4.2A and 4.2B to the Company's Registration Statement on
Form S-3 dated September 10, 1998, Registration Number 333-63153).
Form of Letter of Representation among the Company, Citibank, N.A.
and the Depository Trust Company, Series I (incorporated by
reference to Exhibit 4.3 to the Company's Registration Statement
on Form S-3 dated September 10, 1998, Registration Number
333-63153).
10.1 Support Agreement between the Company and PACCAR dated as of June
19, 1989 (incorporated by reference to Exhibit 28.1 to the
Company's Registration Statement on Form S-3 dated June 23, 1989,
Registration Number 33-29434).
12.1 Statement re computation of ratio of earnings to fixed charges of
the Company pursuant to SEC reporting requirements for each of the
five years in the period ended December 31, 1998.
12.2 Statement re computation of ratio of earnings to fixed charges of
the Company pursuant to the Support Agreement with PACCAR for each
of the five years in the period ended December 31, 1998.
12.3 Statement re computation of ratio of earnings to fixed charges of
PACCAR and subsidiaries pursuant to
-29-
<PAGE>
SEC reporting requirements for each of the five years in the
period ended December 31, 1998.
23 Consent of Independent Auditors.
25.1 Power of attorney of certain officers and directors.
27 Financial Data Schedule for Article 5 of Regulation S-X, Item
601(c) for the year ended December 31, 1998.
Other exhibits listed in Item 601 of Regulation S-K are not applicable.
-30-
<PAGE>
EXHIBIT 12.1
PACCAR Financial Corp.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
PURSUANT TO SEC REPORTING REQUIREMENTS
(Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FIXED CHARGES
Interest expense $ 112,958 $ 101,440 $ 98,536 $ 89,796 $ 62,851
Portion of rentals
deemed interest 704 257 244 238 226
----------- ----------- ----------- ----------- -----------
TOTAL FIXED CHARGES $ 113,662 $ 101,697 $ 98,780 $ 90,034 $ 63,077
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
EARNINGS
Income before taxes $ 40,378 $ 50,697 52,180 $ 46,730 $ 42,147
FIXED CHARGES 113,662 101,697 98,780 90,034 63,077
----------- ----------- ----------- ----------- -----------
EARNINGS AS DEFINED $ 154,040 $ 152,394 $ 150,960 $ 136,764 $ 105,224
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
RATIO OF EARNINGS
TO FIXED CHARGES (1) 1.36x 1.50x 1.53x 1.52x 1.67x
</TABLE>
(1) The method of computing the ratio of earnings to fixed charges shown
above complies with SEC reporting requirements but differs from the
method called for in the Support Agreement between the Company and
PACCAR. See Exhibit 12.2.
-32-
<PAGE>
EXHIBIT 12.2
PACCAR Financial Corp.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
PURSUANT TO THE SUPPORT AGREEMENT
BETWEEN THE COMPANY AND PACCAR
(Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FIXED CHARGES
Interest expense $ 112,958 $ 101,440 $ 98,536 $ 89,796 $ 62,851
Facility and equipment
rental 930 772 730 714 678
----------- ----------- ----------- ----------- -----------
TOTAL FIXED CHARGES $113,888 $ 102,212 $ 99,266 $ 90,510 $ 63,529
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
EARNINGS
Income before taxes $ 40,378 $ 50,697 52,180 $ 46,730 $ 42,147
Depreciation 6,631 7,618 9,579 10,605 10,168
----------- ----------- ----------- ----------- -----------
47,009 58,315 61,759 57,335 52,315
FIXED CHARGES 113,888 102,212 99,266 90,510 63,529
----------- ----------- ----------- ----------- -----------
EARNINGS AS DEFINED $ 160,897 $ 160,527 $ 161,025 $ 147,845 $ 115,844
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
RATIO OF EARNINGS
TO FIXED CHARGES 1.41x 1.57x 1.62x 1.63x 1.82x
</TABLE>
-33-
<PAGE>
EXHIBIT 12.3
PACCAR AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FIXED CHARGES
Interest expense
PACCAR and
Subsidiaries (1) $ 165,047 $ 146,913 $ 131,807 $ 123,480 $ 87,465
Portion of rentals
deemed interest 14,554 7,138 5,928 5,727 5,494
----------- ----------- ----------- ---------- -----------
TOTAL FIXED CHARGES $ 179,601 $ 154,051 $ 137,735 $ 129,207 $ 92,959
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
EARNINGS
Income before taxes - PACCAR
and Subsidiaries (2) $ 653,037 $ 534,723 $ 312,925 $ 399,562 $ 320,098
FIXED CHARGES 179,601 154,051 137,735 129,207 92,959
----------- ----------- ----------- ---------- -----------
EARNINGS AS DEFINED $ 832,638 $ 688,774 $ 450,660 $ 528,769 $ 413,057
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
RATIO OF EARNINGS
TO FIXED CHARGES 4.64x 4.47x 3.27x 4.09x 4.44x
</TABLE>
(1) Exclusive of interest paid to PACCAR.
(2) Includes before-tax earnings of wholly-owned subsidiaries.
-34-
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-51335) of PACCAR Financial Corp. and in the related
Prospectus of our report dated February 16, 1999 with respect to the
financial statements of PACCAR Financial Corp. included in this Annual Report
(Form 10-K) for the year ended December 31, 1998.
/S/ Ernst & Young LLP
Seattle, Washington
March 23, 1999
-35-
<PAGE>
EXHIBIT 25.1
POWER OF ATTORNEY
We, the undersigned directors and officers of PACCAR Financial Corp., a
Washington corporation, hereby severally constitute and appoint A. J. Wold
our true and lawful attorney-in-fact, with full power to him to sign for us,
and in our names in the capacities indicated below, a Form 10-K of this
corporation for fiscal year 1998 to be filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, together
with any and all amendments to said Form 10-K, hereby ratifying and
confirming our signatures as they may be signed by our said attorney-in-fact
to said Form 10-K and any and all amendments thereto.
IN WITNESS WHEREOF each of the undersigned has executed this power of
attorney as of the 5th of March 1999.
President Chairman of
- ------------------- ----------------------- the Board
A. J. Wold M. C. Pigott and Director
Treasurer Director
- ------------------- -----------------------
P. A. Donohoe D. J. Hovind
Controller Director
- ------------------- -----------------------
M. T. Barkley M. A. Tembreull
-36-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1998
AND 1997 AND FROM THE BALANCE SHEETS AT DECEMBER 31, 1998 AND DECEMBER 31, 1998
OF PACCAR FINANCIAL CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,641
<SECURITIES> 0
<RECEIVABLES> 2,664,833
<ALLOWANCES> 44,800
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 40,970
<DEPRECIATION> 10,894
<TOTAL-ASSETS> 2,679,820
<CURRENT-LIABILITIES> 0
<BONDS> 956,000
0
31,000
<COMMON> 14,500
<OTHER-SE> 322,729
<TOTAL-LIABILITY-AND-EQUITY> 2,679,820
<SALES> 0
<TOTAL-REVENUES> 213,038
<CGS> 0
<TOTAL-COSTS> 126,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11,485
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 40,378
<INCOME-TAX> 15,744
<INCOME-CONTINUING> 24,634
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,634
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
