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 93% of PACCAR's total revenues in 1999. 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 five plants in the U.S., three in Europe and one each in Canada, Australia and Mexico. PACCAR also competes in the North American Class 6/7 markets. These medium-duty trucks are assembled at PACCAR's recently renovated Quebec plant and at a PACCAR factory in Mexico. This line of business represents a small, but growing, percentage of PACCAR's North American sales. PACCAR competes in the European medium commercial vehicle market with a cab-over-engine truck manufactured in the Netherlands. 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. PACCAR sold its automotive parts retail subsidiary during the fourth quarter of 1999.
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, 1999, PACCAR and its subsidiaries had total assets of $7.9 billion and stockholders' equity of $2.1 billion. For the year ended December 31, 1999, PACCAR's consolidated revenues and net income were $9.0 billion and $583.6 million respectively.
There were four other principal competitors besides PACCAR in the U.S. Class 8 truck market in 1999. Based on 1999 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 1999 including parent companies of three competitors of PACCAR in the United States. PACCAR's subsidiary, DAF, had a 10% 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 Exchange Act of 1934 and in accordance therewith file 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 trucks.
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, 1999, the Company employed 280 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 select 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.
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, 1999, the largest single customer for Retail Contracts, Direct Loans or Leases represented 1.1% of the Company's receivables, and the five largest such accounts amounted to 4.2% of receivables.
At December 31, 1999, the Company had four Master Note dealers. Master Note borrowings totaled 10.7% of the Company's receivables, while the largest Master Note dealer's borrowing amounted to 8.6% of the Company's receivables. Master Note receivables are secured by numerous retail installment contracts, which, in effect, reduces the amount of dealer concentration.
With respect to wholesale financing, at December 31, 1999, the largest single dealer group accounted for 2.3% of the Company's receivables, and the five largest dealer groups collectively accounted for 5.6% of 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:
ALLOWANCE FOR LOSSES (Thousands of Dollars)
For discussion of the allowance for losses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations, 1997-1999."
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.
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, terms 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 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, 1999, the total notional principal amount of interest rate swap contracts outstanding was $1,058 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, 1999, the Company had $815 million of unused, confirmed bank lines of credit, $760 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, 1999, the Company had $1,198 million of medium-term notes outstanding, $523 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.
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 it's 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, 1995 - 1999 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.
ITEM 2.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
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 $2.3 million, $2.1 million and $2.7 million were paid in 1999, 1998 and 1997, respectively.
ITEM 6.
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, 1999 has been derived from the Company's audited financial statements.
BALANCE SHEET DATA AND INCOME STATEMENT DATA (Thousands of Dollars)
(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 1.44x, 1.41x, 1.57x, 1.62x and 1.63x for the years 1999 - 1995, respectively. See Exhibits 12.1 and 12.2.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, 1997 - 1999
RESULTS OF OPERATIONS 1999 Compared to 1998: 1999 new business volume was $1.8 billion, increasing 20% over 1998's record volume of $1.5 billion. As a result, average receivables grew 21% to $2.9 billion from $2.4 billion in 1998. The finance margin of $94.5 million for 1999 increased 11% from $85.0 million in 1998. However, the average margin rate on receivables declined for the fifth consecutive year from 3.57% for 1998 to 3.23% for 1999 due to higher leverage and intense rate competition in the truck lending market. The insurance margin improved $.6 million due to higher premiums and improved loss experience.
Selling, general and administrative expenses of $27.4 million were 22% lower in 1999 primarily because 1998's expenses included a $7.5 million one-time charge-off of an investment in a new loan system. 1999 operating expenses were favorably impacted in the amount of $1.4 million by a settlement with a vendor related to the same project. Excluding the impact of these items, 1999 operating expenses were 4% higher than in 1998 due primarily to higher salaries and related costs and Year 2000 compliance efforts. The provision for losses increased 36% to $15.6 million in 1999 from $11.5 million in 1998. This increase is consistent with the Company's rapid asset growth. Credit losses increased to $6.8 million in 1999 from $4.0 million in 1998 due partly to higher fuel prices that have reduced operating margins for many truck operators. Management expects this near-term trend to continue until fuel prices decline or operators successfully pass those costs on to their customers. Despite recent trends, the overall portfolio quality remains good. The level of the allowance for credit losses reflects the risks inherent in the financing of commercial highway transportation equipment.
As a result of the foregoing factors, 1999 net income increased 35% to $33.3 million from $24.6 million in 1998. Excluding the impact of the 1999 vendor settlement and the 1998 charge-off, net income for 1999 would have been $32.4 million, representing an 11% increase from 1998 net income.
1998 Compared to 1997: Net income decreased 20% to $24.6 million in 1998 from $30.9 million in 1997. New business volume increased 31% to $1.5 billion from $1.2 billion in 1997. The provision for losses of $11.5 million in 1998 increased 84% compared to 1997, despite lower credit losses, due to asset growth. Selling, general and administrative expenses were 39% higher in 1998 than 1997 as a result of higher staffing costs and the $7.5 million loan system investment charge-off.
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. At the end of 1999, there were $195 million of such securities available for issuance. The Company is in the process of filing a new shelf registration statement, which is expected to be completed by the end of the first quarter of 2000.
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.
PACCAR made an additional $25 million investment in the Company through paid-in capital in the third quarter of 1999.
YEAR 2000 ISSUE The Company's total cost of identifying, evaluating, converting and testing its major internal systems for Year 2000 compliance was $2.0 million and was funded with operating funds. Management believes the Company's systems to be Year 2000 compliant and is not aware of the existence of any Year 2000 issues related to its systems or the systems of its major vendors or the banks and financial institutions with which it has relationships.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK AND DERIVATIVE FINANCIAL INSTRUMENTS The Company's primary market risk exposure is to 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
Principal (Notional) Amount by Expected Maturity Average Interest Rate (Swap) Strike Price
ITEM 8.
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.
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, 1999 and 1998, and the related statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States.
/S/ Ernst & Young LLP
Seattle, Washington February 16, 2000
BALANCE SHEETS PACCAR Financial Corp.
See accompanying notes.
STATEMENTS OF INCOME AND RETAINED EARNINGS PACCAR Financial Corp.
See accompanying notes.
STATEMENTS OF CASH FLOWS PACCAR Financial Corp.
See accompanying notes.
NOTES TO FINANCIAL STATEMENTS PACCAR Financial Corp.
December 31, 1999 (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 accounting principles generally accepted in the United States 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 losses on receivables.
REVENUE RECOGNITION: Revenue from 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.
NOTES TO FINANCIAL STATEMENTS PACCAR Financial Corp. December 31, 1999 (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 1999 presentation.
NEW ACCOUNTING PRONOUNCEMENTS: In June 1999, the Financial Accounting Standards Board issued Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133--AN AMENDMENT OF FASB STATEMENT NO. 133. This pronouncement postponed the required adoption of FASB statement No. 133 from first quarter 2000 to first quarter 2001. Based on review of FASB Statement No. 133, management believes its current use of derivatives for hedging purposes will be considered cash flow hedges under the pronouncement. Management does not anticipate that the adoption 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.
NOTES TO FINANCIAL STATEMENTS PACCAR Financial Corp. December 31, 1999 (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:
Future minimum lease payments on direct financing leases totaled $486,101 at December 31, 1999 and are due as follows: $143,255 in 2000; $126,963 in 2001; $105,233 in 2002; $74,933 in 2003; and $35,717 in 2004 and beyond.
The allowance for losses on receivables is summarized as follows:
NOTES TO FINANCIAL STATEMENTS PACCAR Financial Corp. December 31, 1999 (Thousands of Dollars)
At December 31, 1999 and 1998, the recorded investments in notes and contracts that were considered to be impaired were $22,101 and $16,146, respectively. Included in the allowance for losses were specific reserves of $7,978 and $5,073 on these impaired notes and contracts. The average recorded investment in impaired notes and contracts during the years ended December 31, 1999 and 1998, was $27,466 and $18,659, respectively. For the years ended December 31, 1999 and 1998, the Company recognized interest income of $1,466 and $888 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 44 months. Future annual minimum rental payments to be received for transportation equipment on operating leases beginning January 1, 2000 were: $5,864 in 2000; $3,464 in 2001; $1,906 in 2002 and $218 in 2003.
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, 1999, 1998 and 1997, 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 $1,772, $2,451 and $1,976 in 1999, 1998 and 1997, 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 $2,284, $2,093, and $2,655 were paid in 1999, 1998 and 1997, respectively. PACCAR made an additional $25 million investment in the Company through paid-in capital in 1999.
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 $1,238, $1,039, and $820 for years 1999, 1998 and 1997, respectively.
Periodically, the Company borrows funds from PACCAR and makes loans to PACCAR. At December 31, 1999, 1998 and 1997, there were no outstanding loans for the Company from or to PACCAR.
NOTES TO FINANCIAL STATEMENTS PACCAR Financial Corp. December 31, 1999 (Thousands of Dollars)
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 foreign finance affiliates provide financing and leasing of trucks and related equipment manufactured primarily by PACCAR and sold through PACCAR's independent dealer networks in the United Kingdom, Canada and Australia. The domestic leasing affiliate finances trucks and trailers under direct finance leases, operating leases and other financing agreements for terms of one to ten years. The Company will not make loans to the foreign affiliates in excess of the equivalent of $50 million United States dollars, or loans to its domestic leasing affiliate in excess of $200 million, unless the amount in excess of such limits is guaranteed by PACCAR. The Company periodically reviews the funding alternatives for these affiliates, and these limits may be revised in the future. There was a total of $24 million and $13 million in loans outstanding to a foreign affiliate operating in the United Kingdom at December 31, 1999 and 1998, respectively, and no loans outstanding to other foreign or the domestic affiliates for either period. There were no loans at December 31, 1997.
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.
NOTE E--BORROWINGS
Borrowings are summarized as follows:
*The effective rate is the weighted average rate as of December 31, 1999 and includes the effects of interest rate agreements.
Principal amounts of medium-term notes due over the next five years beginning January 1, 2000 are $523,000 in 2000, $400,000 in 2001, $195,000 in 2002, $75,000 in 2003 and $5,000 in 2004.
At December 31, 1999, there was $195 million of medium-term debt available for issuance under a currently outstanding shelf registration statement.
Cash paid for interest (net of swap interest received) was $136,037 in 1999, $118,032 in 1998, and $101,845 in 1997.
NOTES TO FINANCIAL STATEMENTS PACCAR Financial Corp. December 31, 1999 (Thousands of Dollars)
At December 31, 1999, the Company had outstanding 59 interest rate swaps with various financial institutions with a total notional balance of $1,058 million. The notional principal of these contracts matures as follows: $549 million in 2000, $307 million in 2001, $150 million in 2002, $44 million in 2003, and $8 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, 1999, the interest rate swap weighted average pay rate was 5.72%. The weighted average interest rate swap receive rate of 6.19% 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, 1999, the unused portion of these credit lines was $815 million of which $760 million 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. There were no notes outstanding at December 31, 1999 or December 31, 1998.
NOTES TO FINANCIAL STATEMENTS PACCAR Financial Corp. December 31, 1999 (Thousands of Dollars)
NOTE G--INCOME TAXES
The provision for income taxes consists of the following:
A reconciliation between the statutory federal income tax rate and the actual provision for income taxes is shown below:
Cash paid for income taxes was $14,125 in 1999, $15,885 in 1998, and $17,386 in 1997.
Deferred income tax assets and liabilities consisted of the following:
NOTES TO FINANCIAL STATEMENTS PACCAR Financial Corp. December 31, 1999 (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 fair value disclosures herein.
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 amounts of the Company's commercial paper, bank loans and floating rate medium-term notes approximate 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 amounts 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 are as follows:
The Company's intent is to hold interest rate contracts until maturity. If recorded at fair value at December 31, 1999, the Company's off-balance-sheet financial instruments (interest rate contracts) would represent gross assets of $11,341 and offsetting gross liabilities of $0, resulting in a net asset of $11,341. If recorded at fair value at December 31, 1998, the Company's off-balance-sheet financial instruments would have reflected a net liability of $4,562.
NOTES TO FINANCIAL STATEMENTS PACCAR Financial Corp. December 31, 1999 (Thousands of Dollars)
NOTE I--QUARTERLY RESULTS (Unaudited)
*Third quarter 1999 pre-tax income was favorably impacted in the amount of $1.4 million by a settlement with a vendor related to the above project.
** The Company recorded a one-time pre-tax charge-off of an investment in a new loan system in the amount of $7.5 million during fourth quarter 1998.
ITEM 9.
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.
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.
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, 1999 AND 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Balance Sheets -- December 31, 1999 and 1998
Statements of Income and Retained Earnings -- Years Ended December 31, 1999, 1998 and 1997
Statements of Cash Flows -- Years Ended December 31, 1999, 1998 and
Notes to Financial Statements -- December 31, 1999
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 1999
There were no reports on Form 8-K for the quarter ended December 31, 1999.
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/s/ Andrew J. Wold ----------------------- Andrew J. Wold President
Date: March 17, 2000
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
/s/ Andrew J. Wold President ----------------------- Andrew J. Wold
(2) Principal Financial Officer
/s/ Patricia A. Donohoe Treasurer ----------------------- Patricia A. Donohoe
(3) Principal Accounting Officer
/s/ Michael T. Barkley Controller ----------------------- Michael T. Barkley
(4) A Majority of the Board of Directors: /s/ Andrew J. Wold ----------------------- Andrew J. Wold
Kenneth R. Gangl* David J. Hovind* Mark C. Pigott* Michael A. Tembreull*
*By /s/ Andrew J. Wold --------------------------------- Andrew J. Wold Attorney-in-Fact
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, 1999.
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, 1999.
12.3 Statement re computation of ratio of earnings to fixed charges of PACCAR and subsidiaries pursuant to SEC reporting requirements for each of the five years in the period ended December 31, 1999.
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, 1999.
Other exhibits listed in Item 601 of Regulation S-K are not applicable.