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TABLE OF CONTENTS
Index to Financial Statements American Truck Source, Inc. and Subsidiaries

Filed Pursuant to Rule 424(b)(4)
Registration No.: 333-119131

10,000,000 Shares

LOGO

Class A Common Stock


        We are selling 7,250,000 shares of class A common stock and the selling shareholders are selling 2,750,000 shares of class A common stock. We will not receive any of the proceeds from the sale of the shares of class A common stock sold by the selling shareholders.

        Our class A common stock is listed on the NASDAQ National Market under the symbol "RUSHA." The last reported sale price on the NASDAQ National Market on November 18, 2004 was $13.56 per share.

        On September 15, 2004, we agreed to acquire substantially all of the assets of American Truck Source, Inc., or ATS. Completion of this offering is a condition precedent to our closing of the acquisition of ATS. The acquisition of ATS is subject to certain conditions as described in this prospectus. If the acquisition of ATS is not consummated, we will use the offering proceeds to repurchase shares of our class A common stock and/or pay off some of our debt. See "Risk Factors—Risks Related to Our Planned Acquisition of ATS" and "Use of Proceeds."

        The underwriters have an option to purchase a maximum of 1,500,000 additional shares of class A common stock from us to cover over-allotments of shares.

        Investing in our common stock involves risks. See "Risk Factors" on page 8.

 
  Price to
Public

  Underwriting
Discounts and
Commissions

  Proceeds to
Rush Enterprises

  Proceeds to
Selling Shareholders

Per Share   $13.25   $0.6625   $12.5875   $12.5875
Total   $132,500,000   $6,625,000   $91,259,375   $34,615,625

        Delivery of the shares of class A common stock will be made on or about November 24, 2004.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

  Credit Suisse First Boston  

 

Morgan Keegan & Company, Inc.

 

 

BB&T Capital Markets

 

The date of this prospectus is November 18, 2004.


logo




TABLE OF CONTENTS

        

 
PROSPECTUS SUMMARY
RISK FACTORS
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
CAPITALIZATION
PLANNED ACQUISITION OF ATS
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INDUSTRY
BUSINESS
MANAGEMENT
PRINCIPAL SHAREHOLDERS
SELLING SHAREHOLDERS
UNDERWRITING
NOTICE TO CANADIAN RESIDENTS
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INCORPORATION BY REFERENCE
INDEX TO FINANCIAL STATEMENTS

        You should rely only on the information contained or incorporated by reference in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.



PROSPECTUS SUMMARY

        This summary highlights information contained elsewhere in this prospectus. Before investing in our common stock, you should read the entire prospectus carefully, including the "Risk Factors" section, the consolidated financial statements and the notes thereto included elsewhere in this prospectus and the documents incorporated herein by reference.

        We conduct our business through our operating subsidiaries, each of which is a direct or indirect wholly owned subsidiary of Rush Enterprises, Inc. For purposes of this prospectus, unless the context otherwise requires, all references herein to "the Company," "our company," "Rush Enterprises," "Rush," "we," "us," and "our" refer to Rush Enterprises, Inc. and its consolidated subsidiaries and their predecessors. Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters' over-allotment option is not exercised. Unless the context requires otherwise, references to our common stock are to both our class A common stock and class B common stock.


Our Company

        We are a full-service, integrated retailer of premium transportation and construction equipment and related services. Our Rush Truck Centers primarily sell heavy-duty trucks manufactured by Peterbilt Motors Company, a division of PACCAR, Inc. We sold approximately 20.3% of all the new Peterbilt Class 8 trucks sold in the United States in 2003. Some of our Rush Truck Centers sell medium-duty trucks manufactured by Peterbilt, GMC, Hino, UD (Nissan) and Isuzu. We are also a supplier of John Deere construction equipment through our Rush Equipment Center in Houston, Texas. Through our strategically located network of Rush Truck Centers and our Rush Equipment Center, we provide one-stop service for the needs of our customers, including retail sales of new and used transportation and construction equipment, aftermarket parts sales, service and repair facilities and financing, leasing and rental, and insurance services.

        Our Rush Truck Centers are principally located in high traffic areas throughout the southern United States. Since commencing operations as a Peterbilt heavy-duty truck dealer over 38 years ago, we have grown to operate Rush Truck Centers at 37 locations in Texas, Colorado, Oklahoma, California, Florida, Arizona, New Mexico and Alabama.

        Our Rush Equipment Center in Houston, Texas sells, leases and rents a full line of construction equipment for light to medium sized applications, including a variety of construction equipment trailers and heavy-duty cranes.

        Additionally, we sell a complete line of property and casualty insurance, including collision and liability insurance on trucks, cargo insurance, and credit life insurance.

Planned Acquisition of ATS

        On September 15, 2004, we entered into an asset purchase agreement with American Truck Source, Inc., or ATS, its subsidiaries and stockholders to acquire substantially all of the assets of ATS. ATS operates Peterbilt dealerships, which offer substantially the same products and services as our Rush Truck Centers, serving the markets in Dallas, Fort Worth, Abilene, and Tyler, Texas; Nashville, Tennessee; Birmingham, Alabama; and Louisville, Kentucky. A copy of the asset purchase agreement and the first amendment thereto are available in our Current Reports on Forms 8-K filed on September 16, 2004 and November 9, 2004, respectively. Peterbilt has provided ATS with notice that it intends to exercise its right of first refusal with regards to ATS's dealerships serving the Louisville and Birmingham markets. Peterbilt has provided the Company with the documents required from the manufacturer to obtain dealer licenses for ATS's Texas and Nashville dealerships indicating their intention to grant the Company these dealerships. The purchase price for ATS's assets that we expect to acquire is $105.0 million, subject to further purchase price adjustments.

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        Revenues for the ATS dealerships we expect to acquire were $199.8 million for the year ended December 31, 2003 and $247.6 million for the nine month period ended September 30, 2004. Pretax income for the ATS dealerships we expect to acquire was $2.9 million for the year ended December 31, 2003 and $7.9 million for the nine months ended September 30, 2004. Unless otherwise specified, whenever we refer to the "ATS acquisition" or the "acquisition of ATS" we mean the acquisition of ATS's Texas and Nashville dealerships. The dealerships we expect to acquire generated 82% of ATS's revenue and 82% of ATS's pre-tax income in the nine months ended September 30, 2004. We expect to complete the ATS acquisition approximately six weeks after the completion of this offering.

        Anticipated Benefits of ATS Acquisition.    We believe that the acquisition of ATS will provide us with several strategic benefits including: the expansion of our dealership network into the Dallas/Forth Worth and Nashville markets; expansion of our customer base of independent owner-operator customers; and the addition of experienced employees.

        Transaction Structure.    We have agreed to pay a total of approximately $105.0 million to purchase the ATS dealerships we expect to acquire. Approximately $90.3 million of the purchase price for ATS will be funded from the net proceeds of this offering and $12.3 million of the purchase price will be funded through our floor plan financing agreement. In addition, we will assume $2.4 million of ATS's liabilities in the acquisition.

        The completion of the ATS acquisition is subject to closing conditions, including our ability to obtain motor vehicle dealer licenses for the dealerships we are acquiring. The parties have the right to terminate the ATS acquisition if it is not completed by June 30, 2005.

        Credit Suisse First Boston LLC, one of the underwriters in this offering, has acted as financial advisor to us in connection with the ATS acquisition and will receive customary compensation in connection therewith upon the closing of the acquisition.

        If the ATS acquisition is not consummated, the Company intends to use its net proceeds from this offering to repurchase shares of its class A common stock to the extent circumstances warrant such use. However, the Company may use some of its net proceeds to repay some of its existing floor plan debt and the remainder to repurchase shares of its class A common stock. Any share repurchase would be on terms determined at the time of such repurchase.

Our Business Strategy

        Operating Strategy.    Our strategy is to operate an integrated dealer network that primarily markets Peterbilt heavy-duty trucks, medium-duty trucks and John Deere construction equipment and provides complementary products and services. Our strategy includes the following key elements:

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        Growth Strategy.    Through expansion and acquisition initiatives, we have grown to operate a large, multistate, full-service network of heavy-duty truck dealerships. We intend to continue to grow our business internally and through acquisitions by:

        Our principal executive offices are located at 555 IH-35 South, New Braunfels, Texas 78130, and our telephone number is (877) 879-7266. Our web site is located at rushenterprises.com. The information contained on our web site is not part of this prospectus.

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THE OFFERING

Class A common stock offered to the public by Rush Enterprises, Inc.   7,250,000 shares

Class A common stock offered to the public by the selling shareholders

 

2,750,000 shares

Class A common stock to be outstanding after this offering

 

14,835,274 shares

Underwriters' over-allotment option

 

1,500,000 shares

Class A common stock to be outstanding after this offering, assuming exercise of the underwriters' over-allotment option in full

 

16,335,274 shares

Class B common stock to be outstanding after this offering

 

7,545,760 shares

Voting rights

 

Our class A common stock and class B common stock are identical, except that our class A common stock has 1/20th of one vote per share on all matters requiring the vote of the shareholders while our class B common stock has one vote per share.

Use of Proceeds

 

We intend to use the net proceeds from the sale of shares by us to pay a portion of the purchase price for the ATS acquisition. See "Use of Proceeds." If the ATS acquisition is not consummated, the Company intends to use its net proceeds from this offering to repurchase shares of its class A common stock to the extent circumstances warrant such use. However, the Company may use some of its net proceeds to repay some of its existing floor plan debt and the remainder to repurchase shares of its class A common stock. Any share repurchase would be on terms determined at the time of such repurchase.

Nasdaq National Market symbol

 

 
 
Class A common stock

 

"RUSHA"
 
Class B common stock

 

"RUSHB"

Risk Factors

 

You should carefully read and consider the information set forth under "Risk Factors" and all other information set forth or incorporated by reference in this prospectus before investing in our common stock.

        The number of shares that will be outstanding after this offering excludes 2,096,048 shares of common stock reserved for issuance under outstanding options.

4


Summary Financial and Other Data

        The following selected financial data for the three years ended December 31, 2003 are derived from our audited consolidated financial statements. The financial data for the nine month periods ended September 30, 2004 and 2003 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of the financial position and the results of operations for these periods.

        Operating results for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2004. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included or incorporated by reference herein.

        Our historical results do not include results from ATS, which we intend to acquire with the net proceeds from this offering. These results may not be indicative of our future performance.

        Our summary pro forma consolidated financial data are derived from "Unaudited Pro Forma Consolidated Financial Data" and the historical financial statements of Rush and ATS, which are incorporated by reference herein or included elsewhere in this prospectus.

        The unaudited pro forma consolidated balance sheet as of September 30, 2004 gives effect to the following events as if they were consummated on September 30, 2004:

        The unaudited pro forma consolidated statements of operations for the year ended December 31, 2003 and for the nine month period ended September 30, 2004 give pro forma effect to these events as if they were consummated on January 1, 2003.

        The pro forma consolidated financial data has been prepared for illustrative purposes only and does not purport to represent what our results of operations or financial condition would actually have been had the transactions described in "Unaudited Pro Forma Consolidated Financial Data" in fact occurred as of the dates specified. The information provided below should be read in conjunction with the following, each of which is included elsewhere or incorporated by reference in this prospectus: (1) our historical consolidated financial statements and accompanying notes, (2) "Management's Discussion and Analysis of Financial Condition and Results of Operations," (3) "Unaudited Pro Forma Consolidated Financial Data," and (4) the separate historical financial statements and accompanying notes of ATS.

        The pro forma consolidated financial data does not represent what our results of operations or financial conditions will be if we do not acquire ATS and instead use the proceeds to repurchase shares of our class A common stock and/or pay off existing floor plan debt.

5


 
  Year Ended December 31,
  Pro Forma
Year Ended
December 31,

  Nine Months Ended September 30,
  Pro Forma Nine Months Ended September 30,
 
 
  2001
  2002
  2003
  2003
  2003
  2004
  2004
 
 
   
   
   
   
  (unaudited)

   
 
 
  (in thousands, except per share amounts)

 
SUMMARY OF INCOME STATEMENT DATA                                            
Revenues                                            
  New and used truck sales   $ 438,143   $ 488,456   $ 501,757   $ 657,948   $ 343,487   $ 527,167   $ 736,621  
  Parts and service     188,566     211,478     249,818     289,460     186,135     214,563     247,800  
  Construction equipment sales     31,666     24,324     28,263     28,263     20,278     23,711     23,711  
  Lease and rental     25,040     25,277     25,847     26,344     18,992     20,278     23,400  
  Finance and insurance     5,251     5,448     6,286     9,743     4,550     5,619     7,400  
  Other     2,847     2,164     3,361     3,361     2,228     2,629     2,629  
   
 
 
 
 
 
 
 
    Total revenues     691,513     757,147     815,332     1,015,119     575,670     793,967     1,041,561  
Cost of products sold     562,316     615,942     662,082     832,078     461,931     657,358     873,733  
   
 
 
 
 
 
 
 
Gross profit     129,197     141,205     153,250     183,041     113,739     136,609     167,828  
Selling, general and administrative     101,832     111,721     124,207     145,892     92,249     106,060     124,213  
Depreciation and amortization     9,176     8,594     8,929     11,642     6,705     6,834     9,406  
   
 
 
 
 
 
 
 
Operating income from continuing operations     18,189     20,890     20,114     25,507     14,785     23,715     34,209  
Interest expense, net     9,267     6,499     6,348     5,127     4,465     4,360     4,352  
Gain (loss) on sale of assets     1,067     155     1,984     1,984     342     504     504  
Other gain (loss)                 (8 )           48  
   
 
 
 
 
 
 
 
Income from continuing operations before income taxes     9,989     14,546     15,750     22,356     10,662     19,859     30,409  
Provision for income taxes     3,996     5,818     6,300     8,942     4,265     7,944     12,164  
   
 
 
 
 
 
 
 
Income from continuing operations     5,993     8,728     9,450     13,414     6,397     11,915     18,245  
Income (loss) from discontinued operations (including loss on disposal of $7.9 million in 2002, net of taxes)     (2,731 )   (10,472 )   (621 )   (621 )   (683 )   (143 )   (143 )
   
 
 
 
 
 
 
 
Net income   $ 3,262   $ (1,744 ) $ 8,829   $ 12,793   $ 5,714   $ 11,772   $ 18,102  
   
 
 
 
 
 
 
 

6


 
  Year Ended December 31,
  Pro Forma
Year Ended
December 31,

  Nine Months Ended September 30,
  Pro Forma Nine Months Ended September 30,
 
  2001
  2002
  2003
  2003
  2003
  2004
  2004
 
   
   
   
   
  (unaudited)

   
 
  (in thousands, except per share amounts)

Earnings Per Share:                                          
Earnings (loss) per Common Share—Basic                                          
Income from continuing operations   $ 0.43   $ 0.62   $ 0.67   $ 0.63   $ 0.46   $ 0.81   $ 0.83
Net income (loss)   $ 0.23   $ (0.12 ) $ 0.63   $ 0.60   $ 0.41   $ 0.80   $ 0.83
Earnings (loss) per Common Share—Diluted                                          
Income from continuing operations   $ 0.42   $ 0.60   $ 0.63   $ 0.60   $ 0.43   $ 0.75   $ 0.79
Net income (loss)   $ 0.23   $ (0.12 ) $ 0.59   $ 0.57   $ 0.39   $ 0.74   $ 0.78
Basic weighted average shares     14,004     14,004     14,042     21,292     14,007     14,647     21,897
Diluted weighted average shares and assumed conversions     14,166     14,461     15,024     22,274     14,720     15,898     23,148

 


 

Year Ended December 31,


 

Pro Forma
Year Ended
December 31,


 

Nine Months Ended September 30,


 

Pro Forma Nine Months Ended September 30,

 
  2001
  2002
  2003
  2003
  2003
  2004
  2004
 
   
   
   
   
  (unaudited)

   
 
  (in thousands, except per share amounts)

OPERATING DATA                                          
Number of locations     44     41     38     43     39     38     43
Unit truck sales                                          
  New trucks     4,245     4,717     4,535     5,895     3,040     5,046     6,828
  Used trucks     1,907     2,111     2,421     3,028     1,791     2,095     2,744
   
 
 
 
 
 
 
    Total unit trucks sales     6,152     6,828     6,956     8,923     4,831     7,141     9,572
Truck lease and rental units     1,403     1,363     1,397     1,607     1,391     1,378     1,548
 
  Year Ended December 31,
  Nine Months Ended September 30,
  Pro Forma Nine Months Ended September 30,
 
  2001
  2002
  2003
  2003
  2004
  2004
 
   
   
   
  (unaudited)

 
  (in thousands)

BALANCE SHEET DATA                                    
Total assets   $ 338,811   $ 345,110   $ 366,878   $ 357,249   $ 421,825   $ 527,804
Floor plan financing     85,300     89,288     108,235     107,904     136,577     148,890
Line-of-credit borrowings     22,459     22,395     17,732     17,413     17,669     17,669
Long-term debt, including current portion     98,170     94,916     90,028     89,885     89,242     89,242
Shareholders' equity     81,439     79,695     88,706     85,409     108,430     198,689

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RISK FACTORS

        You should carefully consider the risks described below, together with all of the other information in this prospectus, before making a decision to invest in our common stock. If any of the following risks actually occur, our business, financial condition and results of operations could suffer. In this case, the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock. The following risk factors relate to our current and anticipated business, and would also apply to our company after giving effect to the ATS acquisition.

Risks Related to Our Planned Acquisition of ATS

We may not realize the anticipated benefits of the ATS acquisition or be successful in integrating the operations, personnel or technology of ATS.

        The anticipated benefits of the ATS acquisition may not be realized and the integration of the operations, personnel and technology of ATS may not be successful. Integrating ATS into our organization will be a complex, time-consuming and expensive process.

        The acquisition of ATS is the largest acquisition in our history and we may face substantial difficulties, costs and delays in integrating the various operations of ATS that we have not faced in prior acquisitions, including:

        Integration may cause increased operating costs, lower than anticipated financial performance and the loss of employees. Many of these factors are outside of our control. The failure to timely and efficiently integrate ATS into our organization could have an adverse effect on our business, financial condition and operating results.

In the event that the ATS acquisition is not consummated, the proceeds of this offering may be used to repurchase shares of our class A common stock and/or to pay off existing floor plan debt, which could result in lower earnings per share.

        If we do not consummate the planned acquisition of ATS because we are unable to obtain motor vehicle dealer licenses, or for any other reason, and any of the funds raised in this offering are used to pay off some of our existing floor plan debt, there would be a substantial reduction to the Company's earnings per share. This reduction in earnings per share could have a substantial adverse effect on the market price of our common stock. Likewise, any delay in the closing will result in a substantial reduction in the Company's earnings per share for any period prior to the closing, which could also have a substantial adverse effect on the market price of our common stock.

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Risks Related to Our Business

We are substantially dependent upon PACCAR for the supply of Peterbilt trucks and parts, the sale of which generate substantially all of our revenues.

        We currently operate as a dealer of Peterbilt trucks and parts pursuant to dealership agreements with PACCAR. During 2003, substantially all of our revenues resulted from sales of equipment and parts purchased from PACCAR. Due to our dependence on PACCAR, we believe that the long-term success of our Rush Truck Centers depends, in large part, on the following:

        We have no control over the management or operation of PACCAR or Peterbilt dealerships that we do not own.

Our dealership agreements may be terminable upon a change of control and we cannot control whether or not our largest shareholder and management maintain their current positions.

        We have entered into nonexclusive dealership agreements with Peterbilt that authorize us to act as a dealer of Peterbilt heavy-duty trucks. Peterbilt can terminate our dealership agreements in the event of a change of control of the Company or if we violate any number of provisions in the dealership agreements. Under our Peterbilt dealership agreements, a change of control occurs if (i) with respect to the election of directors, the aggregate voting power held by W. Marvin Rush, W. M. "Rusty" Rush and other Rush executives decreases below 30% (such persons currently control 38.3% of the voting power with respect to the election of directors and will control 35.0% of the voting power with respect to the election of directors after this offering); or (ii) any person or entity other than W. Marvin Rush, W. M. "Rusty" Rush and other Rush executives or any person or entity who has been approved in writing by PACCAR, either (x) owns common stock with a greater percentage of the voting power with respect to the election of our directors than W. Marvin Rush and W. M. "Rusty" Rush and other Rush executives, in the aggregate, or (y) holds the office of Chairman of the Board, President or Chief Executive Officer of the Company. We have no control over the transfer or disposition by W. Marvin Rush or by his estate of his common stock. If W. Marvin Rush were to sell his class B common stock or bequest his class B common stock to nonfamily members or if his estate is required to liquidate his class B common stock to pay estate taxes or otherwise, the change of control provisions of the Peterbilt dealership agreements could be triggered and cause us to lose our critical right to sell Peterbilt products. Our John Deere dealership agreement and some of our medium-duty truck dealership agreements are also terminable in the event of a change of control. If our dealership agreements are terminated, we will lose the right to purchase Peterbilt or John Deere products and the right to use certain trademarks, which would have a material adverse effect on our operations, revenues and profitability.

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If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, nonrenewal or renegotiation of their dealership agreements.

        Our dealership agreements impose certain operational obligations and financial requirements on us. State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a dealership agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or nonrenewal. Manufacturers' lobbying efforts may lead to the repeal or revision of state dealer laws. If dealer laws are repealed in the states in which we operate dealerships, our manufacturers may be able to terminate our dealership agreements without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of state dealer laws, or if such laws are weakened, we will be subject to higher risk of termination or non-renewal of our dealership agreements. Termination or non-renewal of any of our dealership agreements could have a material adverse effect on our operations, revenues and profitability.

Our dealership agreements have relatively short terms which could result in non-renewal or imposition of less favorable terms upon renewal.

        Our Peterbilt franchise agreements have current terms expiring between December 2005 and October 2006. Our dealership agreements with GMC, Hino, UD (Nissan) and Isuzu for the sale of medium-duty trucks have current terms expiring between March 2005 and June 2006. Upon each expiration, we must request and negotiate a renewal. In many states state dealer franchise laws restrict the manufacturer's ability to refuse to renew dealership agreements or to impose new terms upon renewal. To the extent such laws do permit non-renewal or imposition of new terms, the relatively short terms will give the manufacturers the opportunity to exercise such rights. Any non-renewal or imposition of less favorable terms upon renewal would have an adverse impact on our business.

We depend on our relationships with component suppliers for sales incentives, discounts and similar programs which are material to our operations.

        Unlike cars sold by automobile dealerships, each truck we sell is custom-built and each of our customers can choose components from any one of several component suppliers to construct their truck. Therefore, our dealerships depend on the component suppliers for sales incentives, discounts, warranties and other programs that are intended to promote our use of their components. Most of the incentives and discounts are individually negotiated and not always the same as those made available to our competitors. These incentives and discounts are material to our operations. A reduction or discontinuation of a component supplier's incentive program could materially adversely affect our profitability.

Substantial competition may affect our profitability.

        We face vigorous competition for customers and for suitable dealership locations. We compete with a large number of independent and factory-owned dealers, some of which operate in more than one location, but most of which operate in a single location. There is significant competition both within the markets currently being served by us and in markets that we may enter. Moreover, our Peterbilt dealership arrangements with PACCAR do not contractually provide us with exclusive dealerships in any territory. PACCAR could elect to create additional Peterbilt dealers in our market areas in the future. While Peterbilt dealership agreements, including ours, restrict dealers from operating sales or service facilities outside their assigned territory, such agreements do not restrict fleet or other sales or marketing activity outside the assigned territory. Accordingly, we may and do engage in fleet sales and other marketing activities outside our assigned territories and other Peterbilt dealers may engage in similar activities within our territories. Dealer competition continues to increase and is affected by a number of factors including the accessibility of dealership locations, the number of dealership locations,

10



product pricing, product value, product quality, product design and customer service (including technical service). We anticipate that we will continue to face strong competition in the future.

We may be required to obtain additional financing to maintain adequate inventory levels.

        The heavy-duty truck business requires inventories of trucks held for sale to be maintained at dealer locations in order to facilitate immediate sales to customers on demand. We generally purchase our truck inventories with the assistance of a floor plan financing program through General Motors Acceptance Corporation that provides for payment at the earlier of the time of sale for each truck financed or at a fixed date following delivery. In the event that our financing becomes insufficient to satisfy our future requirements, we would need to obtain similar financing from other sources. There is no assurance that such additional floor plan financing or alternate financing could be obtained or, if obtained, that it will be on commercially reasonable terms.

If we lose key personnel or are unable to attract additional qualified personnel, our business could be adversely affected because we rely on the industry knowledge and relationships of our key personnel.

        We believe that our success depends significantly upon the efforts and abilities of our executive management and key employees, including, in particular, W. Marvin Rush and W. M. "Rusty" Rush. Additionally, our business is dependent upon our ability to continue to attract and retain qualified personnel, such as executive officers, managers and sales personnel. We generally have entered into employment agreements with certain executive officers. The loss of the services of one or more members of our senior management team, including, in particular, W. Marvin Rush or W. M. "Rusty" Rush, could have a material adverse effect on us and materially impair the efficiency and productivity of our operations. In addition, the loss of any of our key employees or the failure to attract additional qualified managers and sales personnel could have a material adverse effect on our business and may materially impact the ability of our dealerships to conduct their operations in accordance with our business strategy.

The dollar amount of our backlog, as stated at any given time, is not necessarily indicative of our future earnings.

        As of September 30, 2004, our backlog of new truck orders was approximately $330.0 million. Our backlog is determined quarterly by multiplying the number of new trucks for each particular type of truck on order at our Rush Truck Centers by the recent average selling price for that type of truck.

        We only include confirmed orders in our backlog. However, such orders are subject to cancellation. In the event of order cancellation, we have no contractual right to the total revenues reflected in our backlog. It currently takes between 60 days and six months for us to receive delivery from Peterbilt once an order is placed. We sell the majority of our new heavy-duty trucks by customer special order, with the remainder sold out of inventory. Orders from a number of our major fleet customers are included in our backlog as of September 30, 2004. There can be no assurance that our major fleet customers will not cancel these orders.

        Reductions in backlog due to cancellation by a customer or for other reasons adversely affect, potentially to a material extent, the revenue and profit we actually receive from orders projected in our backlog. If we were to experience significant cancellations of orders in our backlog, our financial condition could be significantly adversely affected.

Our Texas franchise motor vehicle licenses may not be renewed.

        The Texas Department of Transportation ("TDOT") has issued letters regarding some of our Texas franchise motor vehicle dealer licenses subjecting them to termination due to concerns regarding PACCAR's ownership of our common stock. PACCAR has sold all of its shares of our common stock

11



in order to alleviate TDOT's concerns, and we believe that all of our Texas franchise motor vehicle dealer licenses will be renewed once TDOT makes a final decision with regard to this matter. If for any reason TDOT determines not to renew the franchise motor vehicle license for any of our dealerships we would be unable to operate such dealerships, and our business and financial results would be adversely affected.

Our dealerships are subject to federal, state and local environmental regulations that may result in claims and liabilities, which could be material.

        We are subject to a wide range of federal, state and local environmental laws and regulations, including those governing discharges into the air and water; the operation and removal of underground and aboveground storage tanks; the use, handling, storage and disposal of hazardous substances and other materials; and the investigation and remediation of contamination. As with truck or construction equipment dealerships generally, and service, parts and body shop operations in particular, our business involves the use, storage, handling and contracting for recycling or disposal of hazardous materials or wastes and other environmentally sensitive materials. Operations involving the management of hazardous and nonhazardous materials are subject to requirements of the Resource Conservation and Recovery Act, or RCRA, and comparable state statutes. Our business also involves the operation of storage tanks containing such materials. Storage tanks are subject to periodic testing, containment, upgrading and removal under RCRA and comparable statutes. Furthermore, investigation or remediation may be necessary in the event of leaks or other discharges from current or former underground or aboveground storage tanks. We may also have liability in connection with materials that were sent to third-party recycling, treatment, and or disposal facilities under the Comprehensive Environmental Response, Compensation and Liability Act, and comparable state statutes, which impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. Similar to many of our competitors, we have incurred and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations.

        Soil and groundwater contamination is known to exist at some of our current properties. Further, environmental laws and regulations are complex and subject to change. In addition, in connection with the acquisition of ATS and other acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. In connection with our dispositions, or prior dispositions made by companies we acquire, we may retain exposure for environmental costs and liabilities, some of which may be material. Compliance with current or amended, or new or more stringent, laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions could require additional expenditures by us, and those expenditures could be material.

Risks Related to Our Common Stock

We are controlled by a single shareholder and his affiliates.

        Upon completion of this offering, W. Marvin Rush will own approximately 0.1% of our issued and outstanding shares of class A common stock and 36.5% of our issued and outstanding class B common stock. As a result of such ownership, Mr. Rush will have the power to effectively control the Company, including the election of directors, the determination of matters requiring shareholder approval and other matters pertaining to corporate governance. See "Principal Shareholders."

The class A common stock has limited voting power.

        Each share of class A common stock ranks substantially equal to each share of class B common stock with respect to receipt of any dividends or distributions declared on shares of common stock and

12



the right to receive proceeds on liquidation or dissolution of the Company after payment of the Company's indebtedness and liquidation preference payments to holders of preferred shares. However, holders of class A common stock have 1/20th of one vote per share on all matters requiring a shareholder vote, while holders of class B common stock have one full vote per share.

Our agreements with PACCAR and our shareholder rights plan could discourage another company from acquiring us and impede our ability to issue additional stock to raise capital or as consideration for future acquisitions.

        A number of our dealership agreements impose restrictions on the sale and transfer of our common stock. These restrictions also may prevent or deter prospective acquirers from acquiring control of us and, therefore, may adversely impact the value of our common stock. For example, under the PACCAR dealership agreements, except as may be otherwise approved from time to time by PACCAR, W. Marvin Rush and W. M. "Rusty" Rush and other of our executives, in the aggregate, are required to retain a control of at least 30% of the voting power of our outstanding shares and voting power equal or superior to that of any other person or group. To reduce the risk of a change of control that might materially adversely affect our business or our rights under our PACCAR dealership agreements, we have adopted a shareholder rights plan, commonly referred to as a "poison pill."

        In addition, W. Marvin Rush and members of his immediate family have granted PACCAR a right of first refusal to purchase their respective shares of common stock in the event that any of such individuals desire to transfer in excess of 100,000 shares in any 12-month period to any person other than an immediate family member, an associate or a Dealer Principal (as defined in the PACCAR dealership agreements). This right of first refusal, the number of shares owned by W. Marvin Rush, our adoption of the rights plan and the requirement in our dealership agreements that certain dealer principals retain a controlling interest in us, combined with the ability of the Board of Directors to issue shares of preferred stock without further vote or action by the shareholders, may discourage, delay or prevent a change in control of the Company without further action by the shareholders, which could adversely affect the market price of our common stock or prevent or delay a merger or acquisition that our shareholders may consider favorable. We do not have the right to waive the right of first refusal or the terms of our dealership agreements in order to accept a favorable offer, but our Board of Directors may redeem the rights under the rights plan to accept a favorable offer.

        Actions by our shareholders or prospective shareholders that would violate any of the above restrictions on our dealership agreements are generally outside our control. If we are unable to renegotiate these restrictions, we may be forced to terminate or sell one or more of our dealerships, which could have a material adverse effect on us. This may also inhibit our ability to acquire additional dealerships. These restrictions also may impede our ability to raise required capital or to issue our stock as consideration for future acquisitions.

13



CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus and the documents incorporated by reference herein contain statements concerning our future results and performance and other matters that are "forward-looking" statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties, and other factors that may cause our results or our industry's results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "intend," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," or "continue" or the negative of such terms or other comparable terminology.

        Examples of other forward-looking statements contained or incorporated by reference in this prospectus include statements regarding:

        These forward-looking statements reflect our best judgment about future events and trends based on the information currently available to us. Our results of operations can be affected by inaccurate assumptions we make, or by risks and uncertainties known or unknown to us. Therefore, we cannot guarantee the accuracy of the forward-looking statements. Actual events and results of operations may vary materially from our current expectations and assumptions.

        Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. We do not assume responsibility for the accuracy and completeness of the forward-looking statements. We do not intend to update any of the forward-looking statements after the date of this prospectus to conform them to actual results.

14



USE OF PROCEEDS

        We estimate that the net proceeds from the sale of the 7,250,000 shares of class A common stock by us will be approximately $90.3 million, or approximately $109.1 million if the underwriters exercise their over-allotment option in full, after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of class A common stock by the selling shareholders.

        We expect to use the net proceeds we receive from this offering to pay all or a portion of the purchase price for the ATS acquisition. Completion of this offering is a condition precedent to our closing of the acquisition of ATS. The remaining portion, if any, of the purchase price of our ATS acquisition will be paid with $12.3 million from our new floor plan financing agreements. In addition, we will assume $2.4 million of ATS's liabilities in the acquisition. If, as a result of the exercise of the over-allotment option, we have proceeds in excess of the ATS acquisition purchase price, we will use the excess proceeds to pay off existing floor plan debt or for general corporate purposes. See "Planned Acquisition of ATS" for a description of the transaction.

        If the ATS acquisition is not consummated, the Company intends to use its net proceeds from this offering to repurchase shares of its class A common stock to the extent circumstances warrant such use. However, the Company may use some of its net proceeds to repay some of its existing floor plan debt and the remainder to repurchase shares of its class A common stock. Any share repurchase would be on terms determined at the time of such repurchase.

15



CAPITALIZATION

        The following table shows our capitalization as of September 30, 2004:

        You should read this table in conjunction with our financial statements and the notes to those financial statements included in or incorporated by reference into this prospectus, the Unaudited Pro Forma Financial Statements beginning on page 19, and the historical consolidated financial statements and the related notes of ATS beginning on page F-2.

 
  September 30, 2004
 
  Actual
  Pro Forma
 
  (unaudited, in thousands)

Cash and cash equivalents   $ 45,745   $ 45,745
   
 
Current portion long-term debt   $ 21,695   $ 21,695
Advances outstanding under lines of credit   $ 17,669   $ 17,669

Long-term debt, net of current maturities

 

$

67,547

 

$

67,547
   
 
   
Total debt

 

$

106,911

 

$

106,911
   
 

Shareholders' equity:

 

 

 

 

 

 
 
Class A common stock, $0.01 par value; 40,000,000 shares authorized; 7,584,024 shares issued and outstanding; and 14,834,024 shares pro forma and as adjusted(1)

 

$

76

 

$

149
 
Class B common stock, $0.01 par value; 10,000,000 shares authorized; 7,543,944 shares issued and outstanding(2)

 

$

75

 

$

75
 
Additional paid-in capital

 

$

47,278

 

$

137,464
  Retained earnings   $ 61,001   $ 61,001
   
 
    Total shareholders' equity   $ 108,430   $ 198,689
   
 
     
Total capitalization

 

$

215,341

 

$

305,600
   
 

(1)
Excludes (a) 2,735,231 shares of class A common stock reserved for issuance under our stock option and incentive plans and agreements, of which options to purchase 1,310,524 shares at an average exercise price of $5.32 were outstanding as of September 30, 2004; and (b) 1,500,000 shares of class A common stock that the underwriters have an option to purchase solely to cover over-allotments.

(2)
Excludes 1,155,397 shares of class B common stock reserved for issuance under our stock option and incentive plans and agreements, of which options to purchase 788,590 shares of class B common stock at an average exercise price of $3.95 were outstanding as of September 30, 2004.

16



PLANNED ACQUISITION OF ATS

        On September 15, 2004, we entered into an asset purchase agreement with ATS, its subsidiaries and its stockholders to acquire substantially all of the assets of ATS. ATS operates Peterbilt dealerships, which offer substantially the same services as our Rush Truck Centers, serving the Dallas, Fort Worth, Abilene, and Tyler, Texas; Nashville, Tennessee; Birmingham, Alabama; and Louisville, Kentucky markets. A copy of the asset purchase agreement is available in our Current Report on Form 8-K filed on September 16, 2004. Peterbilt has provided ATS with notice that it intends to exercise its right of first refusal with regards to ATS's dealerships serving the Louisville and Birmingham markets. Peterbilt has provided the Company with the documents required from the manufacturer to obtain dealer licenses for ATS's Texas and Nashville dealerships indicating their intention to grant the Company these dealerships. On November 8, 2004, we entered into an amendment to the asset purchase agreement with ATS to acknowledge PACCAR's decision to exercise its right of first refusal with regard to ATS's dealerships serving the Louisville and Birmingham markets and to waive some of the closing conditions. A copy of this amendment is included in our Current Report on Form 8-K filed on November 9, 2004.

Transaction Structure

        We have agreed to pay a total of approximately $105.0 million for ATS's assets that we expect to acquire, subject to further purchase price adjustments. Approximately $90.3 million of the purchase price for ATS will be funded from the net proceeds of this offering and $12.3 million of the purchase price will be funded through our floor plan financing agreement. In addition, we will assume $2.4 million of ATS's liabilities in the acquisition.

        The completion of the ATS acquisition remains subject to the following closing conditions: our ability to secure financing sufficient to fund the ATS acquisition and our ability to obtain motor vehicle dealer licenses for the dealerships we are acquiring. The parties have the right to terminate the ATS acquisition if it is not completed by June 30, 2005. If PACCAR does not purchase ATS's dealerships serving the Louisville and Birmingham markets, the Company will be required to purchase those dealerships from ATS.

        If the ATS acquisition is not consummated, the Company intends to use its net proceeds from this offering to repurchase shares of its class A common stock to the extent circumstances warrant such use. However, the Company may use some of its net proceeds to repay some of its existing floor plan debt and the remainder to repurchase shares of its class A common stock. Any share repurchase would be on terms determined at the time of such repurchase.

Anticipated Benefits of ATS Acquisition

        We believe that the acquisition of ATS will provide us with several strategic benefits:

17


ATS Business Overview

        The ATS Peterbilt dealerships that we expect to acquire serve Dallas, Fort Worth, Abilene and Tyler, Texas and Nashville, Tennessee. The dealerships sell new and used heavy-duty trucks and offer substantially the same products and services as our Rush Truck Centers. Revenues for the ATS dealerships we expect to acquire were $199.8 million for the year ended December 31, 2003 and $247.6 million for the nine month period ended September 30, 2004. Pretax income for the ATS dealerships we expect to acquire was $2.9 million for the year ended December 31, 2003 and $7.9 million for the nine month period ended September 30, 2004. The dealerships we expect to acquire generated 82% of ATS's revenue and 82% of ATS's pre-tax income in the nine months ended September 30, 2004.

        New and Used Truck Sales.    ATS sells new Peterbilt heavy-duty trucks, new Peterbilt medium-duty trucks and used heavy-duty trucks manufactured by Peterbilt and other major truck suppliers. In 2003, new and used truck revenues at the ATS dealerships we expect to acquire accounted for $156.2 million, or 78.2%, of ATS's total revenues of the dealerships we expect to acquire.

        Parts and Service.    ATS is the sole authorized Peterbilt parts and accessories supplier in each of the geographic territories that it serves. It carries a full line of Peterbilt and other truck parts and accessories in inventory. ATS operates fully equipped service and body shop facilities at three of its dealerships we expect to acquire. In 2003, parts and service revenues at the dealerships we expect to acquire accounted for $39.6 million, or 19.8%, of ATS's total revenues of the dealerships we expect to acquire.

        Finance and Leasing.    ATS offers its clients third party financing through PACCAR Financial. It also leases Peterbilt trucks to third-party freight carriers at its Nashville dealership under the PacLease trade name. In 2003, revenue from finance and leasing, net at the dealerships we expect to acquire accounted for $4.0 million, or 2.0%, of ATS's total revenues of the dealerships we expect to acquire.

18



UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

        The following tables present our unaudited pro forma consolidated balance sheet as of September 30, 2004 and unaudited pro forma consolidated statement of operations for the year ended December 31, 2003 and the nine month period ended September 30, 2004. The unaudited pro forma consolidated financial data presented below has been derived from the following, which are included elsewhere in this prospectus or incorporated by reference: (1) our audited consolidated financial statements and accompanying notes; (2) the separate audited financial statements and accompanying notes of ATS for the year ended December 31, 2003; and (3) Rush's and ATS's unaudited consolidated financial statements for the nine month period ended September 30, 2004. The unaudited pro forma consolidated financial data has been prepared for illustrative purposes only and does not purport to represent what our results of operations or financial condition would actually have been had the transactions described below in fact occurred as of the dates specified. In addition, the unaudited pro forma consolidated financial data does not purport to project our results of operations or financial condition as of any date or for any future period.

        The unaudited pro forma consolidated balance sheet as of September 30, 2004 gives effect to the following events as if they were consummated on September 30, 2004:

        The unaudited pro forma consolidated statements of operations for the year ended December 31, 2003 and for the nine month period ended September 30, 2004 give pro forma effect to these events as if they were consummated on January 1, 2003.

        The ATS acquisition will be accounted for using the purchase method of accounting. Under the purchase method of accounting, the cash payment of the estimated aggregate purchase price for ATS (including transaction fees and expenses) will be allocated to the tangible assets, identifiable intangible assets and liabilities of ATS, based upon their respective fair values. The allocation of the purchase price, useful lives assigned to assets and other adjustments made to the unaudited pro forma consolidated financial data are based upon available information and certain preliminary assumptions that we believe are reasonable under the circumstances. We have completed our preliminary fair market value allocation to the specific assets and liabilities of ATS and do not expect the final amounts allocated and the related useful lives to differ materially from those reflected in the unaudited pro forma consolidated financial data. The acquisition of ATS is subject to certain conditions, including the successful completion of this offering.

        The unaudited pro forma consolidated financial data should be read in conjunction with the following, which are included elsewhere in this prospectus or incorporated by reference herein: (1) our historical consolidated financial statements and accompanying notes, (2) "Management's Discussion and Analysis of Financial Condition and Results of Operations," and (3) the separate historical financial statements and accompanying notes of ATS.

        The pro forma consolidated financial data does not represent what our results of operations or financial conditions will be if we do not acquire ATS and instead use the proceeds to repurchase shares of our class A common stock and/or pay off existing floor plan debt.

19


Unaudited Pro Forma Consolidated Balance Sheet
As of September 30, 2004
(In Thousands)

 
  Rush
  ATS
  Pro Forma
Adjustments

  Pro Forma
Consolidated
Balance Sheet

ASSETS                        
CURRENT ASSETS:                        
  Cash and cash equivalents   $ 45,745   $ 15,406   $ (15,406 )(1) $ 45,745
                  90,259   (2)    
                  12,313   (3)    
                  (102,572 )(3)    
  Accounts receivable, net     32,878     15,875     (13,063 )(1)   32,878
                  (2,812 )(6)    
  Inventories     161,686     39,055     (8,844 )(6)   191,897
  Prepaid expenses and other     1,234     805     (194 )(6)   1,845
  Assets held for sale     8,851     0           8,851
  Notes receivable           21           21
  Deferred income taxes     2,838     0     960   (4)   3,798
   
 
 
 
    Total current assets     253,232     71,162     (39,359 )   285,035
PROPERTY AND EQUIPMENT, net     124,231     28,032     (3,679 )(1)   150,319
                  4,290   (3)    
                  (2,555 )(6)    
OTHER ASSETS:                        
  Receivables from affiliates, net           17,638     (17,638 )(5)   0
  Notes receivable, net of current portion           740           740
  Other, net     44,410     5,075     (3,785 )(1)   91,710
                  46,609   (3)    
                  (599 )(6)    
   
 
 
 
    Total other assets     44,410     23,453     24,587     92,450
   
 
 
 
Total assets   $ 421,873   $ 122,647   $ (16,716 ) $ 527,804
   
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY                        
CURRENT LIABILITIES:                        
  Floor plan notes payable   $ 136,577   $ 48,716   $ (39,982 )(1) $ 148,890
                  12,313   (3)    
                  (8,734 )(6)    
  Current maturities of long-term debt     21,695     3,439     (3,316 )(1)   21,695
                  (123 )(6)    
  Advances outstanding under lines of credit     17,669     0           17,669
  Trade accounts payable     17,182     3,058     (2,125 )(1)   17,182
                  (933 )(6)    
  Accrued expenses     34,339     6,160     (2,379 )(1)   36,738
                  (1,382 )(6)    
  Income taxes payable (refundable)           (30 )   22   (1)   0
                  8   (6)    
   
 
 
 
    Total current liabilities     227,462     61,343     (46,631 )   242,174
LONG-TERM DEBT, net of current maturities     67,547     20,955     (19,594 )(1)   67,547
                  (1,361 )(6)    
DEFERRED INCOME TAXES, net     18,434     0     960   (4)   19,394
OTHER LIABILITIES     0     1,247     (1,205 )(1)   0
                  (42 )(6)    
SHAREHOLDERS' EQUITY                        
  Common Stock     151     103     (103 )(1)   224
                  73   (2)    
  Additional paid-in-capital     47,278     4,578     (2,378 )(1)   137,464
                  90,186   (2)    
                  (2,200 )(6)    
  Treasury stock     0     (1,074 )   1,074   (1)   0
  Retained earnings     61,001     35,495     (35,260 )(1)   61,001
                  (235 )(6)    
   
 
 
 
    Total shareholders' equity     108,430     39,102     51,157     198,689
   
 
 
 
    Total liabilities and shareholders' equity   $ 421,873   $ 122,647   $ (16,716 ) $ 527,804
   
 
 
 

20


Notes to the Unaudited Pro Forma Consolidated Balance Sheet:

(1)
In accordance with the terms of the asset purchase agreement between Rush and ATS, Rush is not acquiring all or a portion of the asset, assuming the liability or retaining the equity represented in the applicable line items from ATS.

(2)
Records the proceeds, and additions to common stock and additional paid in capital, net of financing costs of $5.8 million, from our issuance and sale of approximately $96.1 million in class A common stock in this offering.

(3)
Reflects the cash payment and the allocation of the estimated aggregate purchase price of ATS.

Cash paid from proceeds of this offering and existing cash of Rush   $ 107,897  
Cash proceeds received from ATS from the repayment of receivable from affiliate (see note 5 below)     (17,638 )
Cash paid from proceeds of floor plan notes payable     12,313  
   
 

Total cash consideration paid to ATS

 

 

102,572

 
Reserve for repossession losses, interest chargebacks and accrued vacation that are included in ATS's Accrued expenses and are being assumed from ATS by Rush     2,399  
   
 
Total purchase price   $ 104,971  
   
 

Preliminary Allocation of Purchase Price:

 

 

 

 
Inventories   $ 30,211  
Prepaid expenses and other     611  
Notes receivable     21  
Property and equipment, net—at ATS basis(a)     21,798  
Step up in basis of ATS property and equipment, net     4,290  
Notes receivable, net of current portion     740  
Other assets, net     691  
Goodwill     46,609  
   
 
    $ 104,971  
   
 

 
  Estimated Useful
Life in Years

Land  
Buildings and improvements   39
Equipment   5
Furniture and fixtures   5
Leased vehicles   3-5
Company vehicles   5
(4)
Records a deferred tax asset and deferred tax liability related to different accounting treatments for book and tax purposes of the liabilities assumed from ATS. The amount is calculated as follows:

Reserve for repossession losses, interest chargebacks and accrued vacation that are included in ATS's accrued expenses and are being assumed from ATS by Rush   $ 2,399
Company's effective tax rate     40%
   
    $ 960
   
(5)
Records proceeds paid by ATS to Rush for repayment of the receivable from affiliate, net. This receivable is being purchased by Rush and then immediately repaid by ATS in accordance with the asset purchase agreement.

(6)
Represents assets and liabilities of ATS's Birmingham and Louisville Peterbilt that are not being acquired by Rush.

21


Unaudited Pro Forma Consolidated Statement of Operations
Nine Months Ended September 30, 2004
(In Thousands, Except per Share Amounts)

 
  Rush
  ATS
  Pro Forma
Adjustments

  Pro Forma
Statement
of Operations

 
REVENUES:                          
  New and used truck sales   $ 527,167   $ 250,672   $ (41,218 )(8) $ 736,621  
  Parts and service sales     214,563     44,642     (11,405 )(8)   247,800  
  Construction equipment sales     23,711     0           23,711  
  Lease and rental     20,278     3,122           23,400  
  Finance and Insurance     5,619     2,082     (301 )(8)   7,400  
  Other     2,629     0           2,629  
   
 
 
 
 
    Total revenues     793,967     300,518     (52,924 )   1,041,561  
COST OF PRODUCTS SOLD:                          
  New and used truck sales     488,839     234,025     (38,833 )(8)   684,031  
  Parts and service sales     132,985     27,798     (7,476 )(8)   153,307  
  Construction equipment sales     20,861     0           20,861  
  Lease and rental     14,673     861           15,534  
   
 
 
 
 
    Total cost of products sold     657,358     262,684     (46,309 )   873,733  
GROSS PROFIT     136,609     37,834     (6,615 )(8)   167,828  
SELLING, GENERAL AND ADMINISTRATIVE     106,060     24,523     (1,965 )(1)   124,213  
                  (4,405 )(8)      
DEPRECIATION AND AMORTIZATION     6,834     2,747     60   (2)   9,406  
                  (33 )(3)      
                  (202 )(8)      
   
 
 
 
 
OPERATING INCOME     23,715     10,564     (70 )   34,209  
INTEREST EXPENSE, NET     4,360     975     (1,365 )(4)   4,352  
                  686   (5)      
                  (304 )(8)      
GAIN ON SALE OF ASSETS     504     0           504  
OTHER INCOME (EXPENSE)     0     53     (5 )(8)   48  
   
 
 
 
 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES     19,859     9,642     908     30,409  
INCOME TAX PROVISION (BENEFIT)     7,944     144     4,076   (6)   12,164  
                  0        
   
 
 
 
 
INCOME FROM CONTINUING OPERATIONS     11,915     9,498     (3,168 )   18,245  
LOSS FROM DISCONTINUED OPERATIONS, NET     (143 )   0           (143 )
   
 
 
 
 
NET INCOME   $ 11,772   $ 9,498   $ (3,168 ) $ 18,102  
   
 
 
 
 
EARNINGS PER COMMON SHARE—BASIC                          
  Income from continuing operations   $ 0.81               $ 0.83  
  Net income   $ 0.80               $ 0.83  
EARNINGS PER COMMON SHARE—DILUTED                          
  Income from continuing operations   $ 0.75               $ 0.79  
  Net income   $ 0.74               $ 0.78  
SHARES OUTSTANDING                          
  Basic     14,647           7,250   (7)   21,897  
  Diluted     15,898           7,250   (7)   23,148  

22


Notes to September 30, 2004 Unaudited Pro Forma Consolidated Statement of Operations:

(1)
Represents salaries and personal expenses of the owners of ATS currently paid by ATS. As a result of this transaction, the positions of the owners of ATS will be eliminated and the owners of ATS will not be employed by Rush.

(2)
Represents $3.1 million step-up in buildings and improvements divided by 39 year useful life. The remaining step-up of $1.2 million in Property and Equipment, net on the Unaudited Pro Forma Consolidated Balance Sheet, is related to non-depreciable land.

(3)
Represents add back of depreciation expense on vehicles retained by ATS.

(4)
Represents interest savings calculated as follows:

Elimination of interest expense of acquired ATS dealerships as a result of the reduction of debt       $ 1,659  
Floor plan note payable incurred to fund purchase price   12,313        
ATS's floor plan rate   3.185 %      
   
       
Annual interest expense related to floor plan   (392 )      
    75 %      
   
       
Floor plan interest expense for the nine months ended September 30, 2004         (294 )
       
 
Total interest savings for the nine month period ended September 30, 2004       $ 1,365  
       
 
(5)
Represents interest income, that has been netted against interest expense in the financial statements of ATS, related to the receivable from affiliate that is being paid off on the day of the transaction.

(6)
Reflects an adjustment to record income tax expense on ATS's pretax income from continuing operations and for the effects of the pro forma adjustments using Rush's effective tax rate of 40%. Calculated as follows:

ATS 9/30/04 income from continuing operations before income taxes   $ 9,642  
Net effect of pro forma adjustments on income from continuing operations before income taxes     908  
   
 
Pro forma income from continuing operations before income taxes     10,550  
Rush effective tax rate     40%  
   
 
ATS's provision for income taxes at Rush's effective tax rate     4,220  
Subtract ATS's 9/30/04 income tax expense     (144 )
   
 
Pro forma adjustment to increase provision for income taxes   $ 4,076  
   
 
(7)
Records the additional shares outstanding from our issuance and sale of 7,250,000 shares of our class A common stock in this offering at a price of $13.25 per share.

(8)
Represents revenue and expenses directly related to ATS's Birmingham and Louisville Peterbilt operations that are not being acquired by Rush. These amounts include certain expenses recorded at the corporate level that are directly attributable to the Birmingham or Louisville dealerships.

23



Unaudited Pro Forma Consolidated Statement of Operations

Year Ended December 31, 2003

(In Thousands Except per Share Amounts)

 
  Rush
  ATS(1)
  Pro Forma
Adjustments

  Pro Forma
Statement
of Operations

 
REVENUES:                          
  New and used truck sales   $ 501,757   $ 205,424   $ (49,233 )(9) $ 657,948  
  Parts and service sales     249,818     54,439     (14,797 )(9)   289,460  
  Construction equipment sales     28,263     0           28,263  
  Lease and rental     25,847     497           26,344  
  Finance and Insurance     6,286     3,936     (479 )(9)   9,743  
  Other     3,361     0           3,361  
   
 
 
 
 
    Total revenues     815,332     264,296     (64,509 )   1,015,119  
COST OF PRODUCTS SOLD:                          
  New and used truck sales     466,396     191,187     (46,978 )(9)   610,605  
  Parts and service sales     151,373     34,300     (9,911 )(9)   175,762  
  Construction equipment sales     25,158                 25,158  
  Lease and rental     19,155     1,398           20,553  
   
 
 
 
 
    Total cost of products sold     662,082     226,885     (56,889 )   832,078  
GROSS PROFIT     153,250     37,411     (7,620 )(9)   183,041  
SELLING, GENERAL AND ADMINISTRATIVE     124,207     30,172     (2,798 )(2)   145,892  
                  (5,689 )(9)      
DEPRECIATION AND AMORTIZATION     8,929     3,006     80   (3)   11,642  
                  (84 )(4)      
                  (289 )(9)      
   
 
 
 
 
OPERATING INCOME     20,114     4,233     1,160     25,507  
INTEREST EXPENSE, NET     6,348     125     (1,767 )(5)   5,127  
                  814   (6)      
                  (393 )(9)      
GAIN ON SALE OF ASSETS     1,984     0           1,984  
OTHER INCOME (EXPENSE)     0     (17 )   9   (9)   (8 )
   
 
 
 
 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES     15,750     4,091     2,515     22,356  
INCOME TAX PROVISION (BENEFIT)     6,300     (239 )   2,881   (7)   8,942  
                  0        
   
 
 
 
 
INCOME FROM CONTINUING OPERATIONS     9,450     4,330     (366 )   13,414  
LOSS FROM DISCONTINUED OPERATIONS, NET     (621 )               (621 )
   
 
 
 
 
NET INCOME   $ 8,829   $ 4,330   $ (366 ) $ 12,793  
   
 
 
 
 
EARNINGS PER COMMON SHARE—BASIC                          
  Income from continuing operations   $ 0.67               $ 0.63  
  Net income   $ 0.63               $ 0.60  
EARNINGS PER COMMON SHARE—DILUTED                          
  Income from continuing operations   $ 0.63               $ 0.60  
  Net income   $ 0.59               $ 0.57  
SHARES OUTSTANDING                          
  Basic     14,042           7,250   (8)   21,292  
  Diluted     15,024           7,250   (8)   22,274  

24


Notes to December 31, 2003 Unaudited Pro Forma Consolidated Statement of Operations:

(1)
Certain revenue and cost of sale line items of ATS have been reclassified to conform with Rush's presentation.

(2)
Represents salaries and personal expenses of the owners of ATS currently paid by ATS. As a result of this transaction, the positions of the owners of ATS will be eliminated and the owners of ATS will not be employed by Rush.

(3)
Represents $3.1 million step-up in buildings and improvements divided by 39 year useful life. The remaining step-up of $1.2 million in Property and Equipment, net on the Unaudited Pro Forma Consolidated Balance Sheet, is related to non-depreciable land.

(4)
Represents add back of depreciation expense on vehicles retained by ATS.

(5)
Represents interest savings calculated as follows:

Elimination of interest expense of acquired ATS dealerships as a result of the reduction of debt       $ 2,159  
Floor plan note payable incurred to fund purchase price   12,313        
ATS's floor plan rate   3.185 %      
   
       
Annual interest expense related to floor plan         (392 )
       
 
Total annual interest expense savings       $ 1,767  
       
 
(6)
Represents interest income, that has been netted against interest expense in the financial statements of ATS, related to the receivable from affiliate that is being paid off on the day of the transaction.

(7)
Reflects an adjustment to record income tax expense on ATS's pretax income from continuing operations and for the effects of the pro forma adjustments using Rush's effective tax rate of 40%. Calculated as follows:

ATS 12/31/03 income from continuing operations before income taxes   $ 4,091
Net effect of pro forma adjustments on income from continuing operations before income taxes     2,515
   
Pro forma income from continuing operations before income taxes     6,606
Rush effective tax rate     40%
   
ATS's provision for income taxes at Rush's effective tax rate     2,642
Add ATS's 12/31/03 income tax benefit     239
   
Pro forma adjustment to increase provision for income taxes   $ 2,881
   
(8)
Records the additional shares outstanding from our issuance and sale of 7,250,000 shares of our class A common stock in this offering at a price of $13.25 per share.

(9)
Represents revenue and expenses directly related to ATS's Birmingham and Louisville Peterbilt operations that are not being acquired by Rush. These amounts include certain expenses recorded at the corporate level that are directly attributable to the Birmingham or Louisville dealerships.

25



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        You should read the following discussion and analysis in conjunction with the information set forth under "Selected Historical Financial Data" and our consolidated financial statements and the notes to those statements included elsewhere in this prospectus. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other nonhistorical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under "Risk Factors" and "Cautionary Notice Regarding Forward-Looking Statements." Our actual results may differ materially from those contained in or implied by any forward-looking statements. The following discussion reflects our historical results of operations and does not reflect our proposed acquisition of ATS.

Company Overview

General

        We are a full-service, integrated retailer of premium transportation and construction equipment and related services. As the leading supplier of Peterbilt trucks, we sold approximately 20.3% of all the new Class 8 Peterbilt trucks sold in the United States in 2003. Some of our Rush Truck Centers sell medium-duty trucks manufactured by Peterbilt, GMC, Hino, UD (Nissan) and Isuzu. In 1997, we acquired our first John Deere construction equipment dealership in Houston, Texas and are the only authorized supplier of John Deere construction equipment in that market. Through our strategically located network of Rush Truck Centers and our Rush Equipment Center, we provide one-stop service for the needs of our customers, including retail sales of new and used transportation and construction equipment, as well as aftermarket parts sales, service and repair facilities and financing, leasing and rental, and insurance services.

        Our Rush Truck Centers are principally located in high traffic areas throughout the southern United States. We provide leasing and rental services at our one-stop Rush Truck Centers and our Rush Equipment Center. Retail financing of trucks and construction equipment, as well as a line of insurance products, can also be arranged at our Rush Truck Centers and Rush Equipment Center.

        Our business strategy consists of providing our customers with competitively priced products supported with timely and reliable service through our integrated dealer network. We intend to continue to implement our business strategy, reinforce customer loyalty and remain a market leader by continuing to develop our Rush Truck Centers and Rush Equipment Center as we extend our geographic focus through strategic acquisitions of new locations and expansions of our existing facilities.

        Rush Truck Centers.    Since commencing operations as a Peterbilt heavy-duty truck dealer over 38 years ago, we have grown to operate Rush Truck Centers, which primarily sell new Class 8 Peterbilt trucks, at 37 locations in the states of Texas, Colorado, Oklahoma, California, Arizona, Florida, Alabama and New Mexico. Class 8 trucks are defined by the American Automobile Association as trucks with a minimum gross vehicle weight rating above 33,000 pounds. Our Rush Truck Centers are strategically located to take advantage of increased cross-border traffic between the United States and Mexico resulting from implementation of NAFTA in 1994.

        Rush Equipment Center.    Since commencing operations as a John Deere dealer in 1997, we had grown to operate six Rush Equipment Centers in Texas and Michigan. We sold our five Michigan construction equipment dealerships in 2002, recording a net loss from discontinued operations of $3.3 million. Our Rush Equipment Center in Houston, Texas, provides a full line of construction equipment for light to medium sized applications, including John Deere backhoe loaders, hydraulic excavators, crawler-dozers and four-wheel drive loaders.

26



        Leasing and Rental Services.    Through our dealerships we provide a broad line of product selections for lease or rent, including Class 8, Class 7 and Class 6 Peterbilt trucks, and a full array of John Deere construction equipment products, including a variety of construction equipment trailers and heavy-duty cranes. Our lease and rental fleets are offered primarily through our Rush Truck Centers and Rush Equipment Center on a daily, monthly or long-term basis.

        Financial and Insurance Services.    Through our dealerships we offer third-party financing to assist customers in purchasing new and used trucks and construction equipment. Additionally, we sell a complete line of property and casualty insurance, including collision and liability insurance on trucks, cargo insurance and credit life insurance.

Critical Accounting Policies

        The Company's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The Company believes the following accounting policies, which are described in Note 2 of Notes to Consolidated Financial Statements, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

        Inventories.    Inventories are stated at the lower of cost or market value. Cost is determined by specific identification for new and used truck and construction equipment inventory and by the first-in, first-out method for tires, parts and accessories. An allowance is provided when it is anticipated that cost will exceed net realizable value.

        Other Assets.    Other assets consist primarily of goodwill related to acquisitions and other intangible assets. As stated in Note 2, Financial Accounting Standards Board Statement No. 142 ("SFAS 142") provides that goodwill and other intangible assets that have indefinite useful lives will not be amortized, but instead must be tested at least annually for impairment, and intangible assets that have finite useful lives should continue to be amortized over their useful lives. SFAS 142 also provides specific guidance for testing goodwill and other nonamortized intangible assets for impairment. SFAS 142 requires management to make certain estimates and assumptions in order to allocate goodwill to reporting units and to determine the fair value of a reporting unit's net assets and liabilities, including, among other things, an assessment of market condition, projected cash flows, interest rates and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. SFAS 142 requires, in lieu of amortization, an annual impairment review of goodwill. The impact of adopting SFAS 142, effective January 1, 2002, resulted in the cessation of goodwill amortization, which would have approximated $1.2 million of pretax amortization expense from continuing operations during 2002 and $1.4 million of pretax amortization expense from continuing operations during 2003. The Company did not record an impairment charge related to the goodwill for its continuing operations as a result of its December 31, 2003 impairment review. The Company did, however, record an impairment of goodwill related to its discontinued operations at December 31, 2002 (see Note 3). Furthermore, SFAS 142 exposes the Company to the possibility that changes in market conditions could result in significant impairment charges in the future, thus resulting in a potential increase in earnings volatility.

        Revenue Recognition Policies.    Income on the sale of a vehicle or a piece of construction equipment (a "unit") is recognized when the customer executes a purchase contract with us, a unit has been delivered to the customer and there are no significant uncertainties related to financing or collectibility. Lease and rental income is recognized over the period of the related lease or rental

27



agreement. Parts and service revenue is earned at the time the Company sells the parts to its customers or at the time the Company completes the service work order related to service provided to the customer's unit. Payments received on prepaid maintenance plans are deferred as a component of accrued expenses and recognized as income when the maintenance is performed.

        Finance and Insurance Revenue Recognition.    Finance income related to the sale of a unit is recognized over the period of the respective finance contract, based on the effective interest rate method, if the finance contract is retained by the Company. During 2001, 2002 and 2003, no finance contracts were retained for any significant length of time by the Company but were generally sold to certain finance companies concurrent with the sale of the related unit. The majority of finance contracts are sold without recourse. The Company's liability related to finance contracts sold with recourse is generally limited to 5% to 20% of the outstanding amount of each note initiated on behalf of the finance company. However, the Company recently instituted a full recourse finance program that accepts 100% liability, with some restrictions, of the outstanding amount of each note initiated on behalf of the finance company. In order for a contract to be accepted into this full recourse finance program, a customer must meet strict credit requirements or maintain a significant equity position in the truck being financed, therefore, the Company does not expect to finance a significant percentage of its truck sales under this full recourse finance program.

        The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. The Company also receives commissions from the sale of various insurance products to customers and extended service contracts. Revenue is recognized by the Company upon the sale of such finance and insurance contracts to the finance and insurance companies, net of a provision for estimated repossession losses and interest charge backs. The Company is not the obligor under any of these contracts. In the case of finance contracts, a customer may prepay, or fail to pay, thereby terminating the contract. If the customer terminates a retail finance contract or other insurance product prior to scheduled maturity, a portion of these fees may be charged back to the Company based on the relevant terms of the contracts. The estimate of ultimate charge back exposure is based on the Company's historical charge back expense arising from similar contracts, including the impact of refinance and default rates on retail finance contracts and cancellation rates on other insurance products. The actual amount of historical charge backs has not been significantly different than the Company's estimates.

28


Results of Operations

        The following discussion and analysis includes the Company's historical results of operations for the years ended December 31, 2001, 2002 and 2003 and for the nine months ended September 30, 2003 and 2004.

        The following table sets forth for the periods indicated certain financial data as a percentage of total revenues:

 
  Year Ended December 31,
  Nine Months Ended September 30,
 
 
  2001
  2002
  2003
  2003
  2004
 
New and used truck sales   63.4 % 64.5 % 61.5 % 59.7 % 66.4 %
Parts and service   27.3   28.0   30.6   32.3   27.0  
Construction equipment sales   4.6   3.2   3.5   3.5   3.0  
Lease and rental   3.6   3.3   3.2   3.3   2.6  
Finance and insurance   0.7   0.7   0.8   0.8   0.7  
Other   0.4   0.3   0.4   0.4   0.3  
   
 
 
 
 
 
Total revenues   100.0   100.0   100.0   100.0   100.0  
Cost of products sold   81.3   81.3   81.2   80.2   82.8  
   
 
 
 
 
 
Gross profit   18.7   18.7   18.8   19.8   17.2  
Selling, general and administrative   14.7   14.8   15.2   16.0   13.4  
Depreciation and amortization   1.3   1.1   1.1   1.2   0.9  
   
 
 
 
 
 
Operating income from continuing operations   2.7   2.8   2.5   2.6   2.9  
Interest expense, net   1.3   0.9   0.8   0.8   0.5  
Gain on sale of assets   0.1     0.2   0.1   0.1  
   
 
 
 
 
 
Income before income taxes from continuing operations   1.5   1.9   1.9   1.9   2.5  
Income taxes   0.6   0.8   0.8   0.7   1.0  
   
 
 
 
 
 
Income from continuing operations   0.9   1.1   1.1   1.2   1.5  
(Loss) from discontinued operations, net of taxes   (0.4 ) (1.3 ) (0.1 ) (0.1 ) 0.0  
   
 
 
 
 
 
Net income (loss)   0.5 % (0.2 )% 1.0 % 1.1   1.5  
   
 
 
 
 
 

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Revenues

        Revenues increased $218.3 million, or 37.9%, from $575.7 million in the first nine months of 2003 to $794.0 million in the first nine months of 2004. Sales of new and used trucks increased $183.7 million, or 53.5%, from $343.5 million in the first nine months of 2003 to $527.2 million in the first nine months of 2004.

        Unit sales of new Class 8 trucks increased 58.7%, from 2,412 units in the first nine months of 2003 to 3,828 units in the first nine months of 2004. The increase in Class 8 unit sales is being driven by the industry's need to replace aging equipment after three consecutive years of U.S. truck sales lagging behind the normal replacement cycle. A.C.T. Research Co., LLC ("A.C.T. Research"), a heavy-duty truck industry data and forecasting services provider estimates that deliveries of Class 8 trucks in the U.S. will increase from 145,000 in 2003 to approximately 200,600 in 2004. In 2003, the Company retained a 2.5% share of the Class 8 truck sales market in the U.S. The Company expects to maintain this share in 2004, which would result in the sale of approximately 5,000 Class 8 trucks based on the number of U.S. deliveries estimated by truck and original equipment manufacturers.

29



        The Environmental Protection Agency ("EPA") has mandated that heavy-duty engine manufacturers meet new, stricter emissions guidelines for all engines built after January 1, 2007. Historically, the industry has experienced an accelerated demand for trucks in the months preceding the effective date of the change in EPA guidelines followed by a short-term decrease in demand in the months subsequent to the change. The Company does not expect the change in emission guidelines to have an effect on its 2004 results from operations. Industry expectations are for Class 8 unit deliveries to remain above 200,000 units through 2006 and then soften in 2007 to below 200,000 units due to future engine emission laws. These engine emission laws are expected to increase the cost and reduce the efficiency of engines beginning in 2007.

        Unit sales of new medium-duty trucks increased 93.9%, from 628 units in the first nine months of 2003 to 1,218 units in the first nine months of 2004. The Company has made a concerted effort to improve its medium-duty truck sales by adding experienced medium-duty sales personnel and introducing new medium-duty franchises in the Class 4 through 6 truck markets to complement its existing Peterbilt medium-duty line, which consists primarily of Class 7 trucks. Class 4 through 6 unit truck sales accounted for 57% of our total medium-duty truck sales in the first nine months of 2004 compared to 28% in the first nine months of 2003. The average sales price for Class 4 through 6 trucks during the first nine months of 2004 was $39,900 compared to an average sales price of $67,800 for the Peterbilt medium-duty model. The increase in sales of lower priced medium-duty trucks resulted in an 8.0% decrease in the average sales price for all medium-duty trucks in the first nine months of 2004 compared to the first nine months of 2003. However, new medium-duty truck sales revenue increased approximately $27.8 million in the first nine months of 2004 compared to the first nine months of 2003. In 2004, the Company expects to continue to add medium-duty franchises to certain dealerships and increase its medium-duty sales and market share compared to 2003.

        Unit sales of used trucks increased 17.0%, from 1,791 units in the first nine months of 2003 to 2,095 units in the first nine months of 2004. Used truck average revenue per unit increased by approximately 5.1%. Historically, used truck demand is consistent with new truck demand. The Company expects used truck demand to remain high, however, our sales will depend on the availability of used trucks.

        Parts and service sales increased $28.5 million, or 15.3%, from $186.1 million in the first nine months of 2003 to $214.6 million in the first nine months of 2004. Same store parts and service sales, which exclude the first nine months of 2003 sales for Bossier City, Louisiana, January 2004 for the Florida stores and January through March 2004 for the Mobile store, increased approximately $30.5 million, or 16.8%, in the first nine months of 2004 compared to the first nine months of 2003. The increase in parts and service sales is due to a combination of business development, price increases for parts and labor, extension of our business hours and expansion of capacity by adding service bays and technicians to certain locations. This growth rate over the prior year's period is consistent with the Company's expectations for parts and service revenue growth for the remainder of 2004.

        Sales of new and used construction equipment increased $3.4 million, or 16.7%, from $20.3 million in the first nine months of 2003 to $23.7 million in the first nine months of 2004. Revenue generated from the sale of new construction equipment units increased 20.0% in the first nine months of 2004 compared to the first nine months of 2003. Revenue generated from the sale of used construction equipment units decreased approximately 5.2% in the first nine months of 2004 compared to the first nine months of 2003. John Deere's market share in the Houston area has decreased slightly from 17.3% in the first nine months of 2003 to 17.1% in the first nine months of 2004.

        Lease and rental revenues increased $1.2 million, or 6.3%, from $19.0 million in the first nine months of 2003 to $20.3 million in the first nine months of 2004. This increase is due to additional lease and rental units being placed in service and is consistent with the Company's expectations for lease and rental revenue for 2004.

30



        Finance and insurance revenues increased $1.0 million, or 21.7%, from $4.6 million in the first nine months of 2003 to $5.6 million in the first nine months of 2004. The Company expects finance and insurance revenues to continue to increase as demand for new and used trucks increases. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of operating profits.

Gross Profit

        Gross profit increased $22.9 million, or 20.1%, from $113.7 million in the first nine months of 2003 to $136.6 million in the first nine months of 2004. Gross profit as a percentage of sales decreased from 19.8% in the first nine months of 2003 to 17.2% in the first nine months of 2004. This decrease is primarily a result of a change in our product mix. Truck sales, a lower margin revenue item, increased as a percentage of total revenue from 59.7% in the first nine months of 2003 to 66.4% in the first nine months of 2004. Parts and service revenue, a higher margin revenue item, decreased as a percentage of total revenue from 32.3% in the first nine months of 2003 to 27.0% in the first nine months of 2004.

        Gross margins on Class 8 truck sales were down slightly from 6.4% in the first nine months of 2003 to 6.2% in the first nine months of 2004. Manufacturers' incentives for Class 8 trucks accounted for 29.0% of the gross margin for the nine months ended September 30, 2004 and 28.1% for the nine months ended September 30, 2003. Given the increasing demand for Class 8 trucks coupled with the expected increase in purchases from owner operators that historically have rendered higher gross margins than fleet sales, the Company expects gross margins from Class 8 truck sales to strengthen in the remainder of 2004 and to exceed those achieved in 2003.

        Gross margins on medium-duty truck sales slightly increased from 5.0% in the first nine months of 2003 to 5.2% in the first nine months of 2004. Manufacturers' incentives for medium-duty trucks accounted for 3.8% of the gross margin for the nine months ended September 30, 2004 and 2.0% for the nine months ended September 30, 2003. Gross margins on non-Peterbilt medium-duty truck models were approximately 3.4% in the first nine months of 2004 compared to a gross margin of approximately 6.2% for the Peterbilt medium-duty model. Non-Peterbilt medium-duty models accounted for 693 units in the first nine months of 2004 compared to 244 units in the first nine months of 2003. Peterbilt medium-duty sales accounted for 525 units in the first nine months of 2004 compared to 384 units in the first nine months of 2003. Sales of non-Peterbilt medium-duty models will continue to grow significantly as a percentage of total medium-duty sales.

        Gross margins on used truck sales increased from 6.7% in the first nine months of 2003 to 8.1% in the first nine months of 2004. The challenge for the remainder of 2004 is procuring quality used trucks at an acceptable price in a market where demand is exceeding supply. The Company believes it will be able to continue to achieve 7% to 9% margins in the used truck sales market for the remainder of 2004.

        Gross margins from the Company's parts, service and body shop operations decreased from 37.6% in the first nine months of 2003 to 36.4% in the first nine months of 2004. There are various reasons for this decrease, including nonproprietary parts sales becoming a larger percentage of the Company's overall parts sales and competitive pricing pressures from providers of nonproprietary parts. Historically, gross margins on nonproprietary parts are approximately 40 to 50% lower than gross margins on proprietary parts. Additionally, the Company has increased preventative maintenance services that are provided at lower margins than traditional repair work, and has selectively provided discounted labor rates to garner additional sales both at our dealership locations and at off-site locations. Gross profit dollars for the parts, service and body shop departments increased from $69.9 million in the first nine months of 2003 to $78.2 million in the first nine months of 2004.

        Gross margins on new and used construction equipment sales increased from 9.9% in the first nine months of 2003 to 12.0% in the first nine months of 2004. The Company expects 2004 gross margins to

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remain in a range of 9.5% to 13.0%, depending on the product mix, and for overall gross profit growth to be directly correlated to sales growth.

        Gross profit generated from lease and rental sales increased from approximately 24.5% in the first nine months of 2003 to 26.0% in the first nine months of 2004. The Company's policy is to aggressively depreciate its lease and rental fleet. This policy results in the Company realizing small operating profits while the unit is in service and a corresponding larger gain on sale when the unit is sold at the end of the lease term. The Company expects to maintain gross margins of approximately 26.0% to 28.0% through the remainder of 2004 and for overall gross profit growth to be directly correlated to increases in lease and rental sales.

        The increase in finance and insurance revenues and other income, as described above, has limited direct costs and, therefore, contributes a disproportionate share of gross profit.

SG&A Expenses

        Selling, general and administrative ("SG&A") expenses increased $13.9 million, or 15.1%, from $92.2 million in the first nine months of 2003 to $106.1 million in the first nine months of 2004. The majority of the increase is related to increased expense related to facility expansion and increased commissions corresponding to the increase in sales and gross profit. SG&A expenses as a percentage of sales decreased from 16.0% in the first nine months of 2003 to 13.4% in the first nine months of 2004. From 1999 to 2003, SG&A expenses as a percentage of sales have ranged from 11.2% to 16.0%. The Company expects SG&A expenses as a percentage of sales to remain at the lower end of this range while the demand for trucks remains high. The Company's management continually monitors SG&A expenses.

Interest Expense

        Net interest expense decreased $0.1 million from $4.5 million in the first nine months of 2003 to $4.4 million in the first nine months of 2004.

Gain on Sale of Assets

        Gain on sale of assets increased $0.2 million, from $0.3 million in the first nine months of 2003 to $0.5 million in the first nine months of 2004. The gain in 2004 is primarily related to the replacement of fixed assets used in the operation of the business and the sale of real estate holdings.

Income from Continuing Operations Before Income Taxes

        Income from continuing operations before income taxes increased $9.2 million, or 86.0%, from $10.7 million in the first nine months of 2003 to $19.9 million in the first nine months of 2004.

Income Taxes from Continuing Operations

        Income taxes from continuing operations increased $3.6 million, or 83.7%, from $4.3 million in the first nine months of 2003 to $7.9 million in the first nine months of 2004. The Company has provided for taxes at a 40% effective rate.

Gain (loss) from Discontinued Operations, net of Income Taxes

        Loss from discontinued operations net of income taxes decreased from a loss of approximately $683,000 in the first nine months of 2003 to a loss of approximately $143,000 in the first nine months of 2004. The loss recorded during 2003 is equal to net operating results of The D&D Farm and Ranch Supermarket ("D&D"), in Seguin, Texas, and included costs of $983,000 related to the liquidation of the Hockley store. The gain recorded during 2004 includes net operating results of D&D of approximately $97,000 and a charge of $240,000 related to the valuation of the Hockley, Texas real estate. The Company expects to sell D&D by December 31, 2004.

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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues

        Revenues increased $58.2 million, or 7.7%, from $757.1 million in 2002 to $815.3 million in 2003. Sales of new and used trucks increased $13.3 million, or 2.7%, from $488.5 million in 2002 to $501.8 million in 2003.

        Unit sales of new Class 8 trucks decreased 9.6%, from 4,022 units in 2002 to 3,636 units in 2003. The decline in new Class 8 truck sales was primarily due to the pre-buy experienced during the last half of 2002 caused by emission law changes that became effective October 1, 2002 and the buying cycle of one of the Company's major fleet customers, who made a significantly larger purchase in 2002 than in 2003. The Company's average sales price per Class 8 truck increased by 7.5% in 2003 compared to 2002. This increase is directly related to the increased engine costs that resulted from the new emission laws. Based on estimates from A.C.T. Research, the Company believes that the deliveries of Class 8 trucks will increase in 2004 to approximately 200,600 units. In 2003, the Company retained a 2.5% share of the Class 8 truck sales market in the United States. The Company expects to maintain this share in 2004, which would result in the sale of approximately 5,000 Class 8 trucks based on the number of U.S. deliveries estimated by A.C.T. Research.

        Unit sales of new medium-duty trucks increased 29.4%, from 695 units in 2002 to 899 units in 2003. In 2003, the Company made a concerted effort to improve its medium-duty truck sales by adding experienced medium-duty sales personnel, and introducing new medium-duty franchises to complement our existing Peterbilt medium-duty line. As a result of these actions, 44% of the Company's medium-duty unit sales in 2003 were GMC, Hino and UD (Nissan) models, compared to only 21% in 2002. The average sales price for these models was $38,700 compared to $66,500 for the Peterbilt medium-duty model, resulting in a decrease of the average sales price for all medium-duty trucks by 8.3% in 2003 compared to 2002. Overall, new medium-duty truck sales revenue increased $7.6 million in 2003 compared to 2002. In 2004, the Company expects to continue to add medium-duty franchises to certain of its dealerships and to increase its medium-duty sales and market share compared to 2003.

        Unit sales of used trucks increased 14.7%, from 2,111 units in 2002 to 2,421 units in 2003. Used truck average revenue per unit increased by 3.8%. During 2003, the increased demand for used trucks was partially due to the new emission laws that became effective October 1, 2002. The Company believes some customers were skeptical of the new engines and opted to purchase used trucks. The increase in the average used truck price is also a sign that the industry has been able to work through the excess supply of used trucks in the market caused by the high volume of new truck unit sales during 1998 through 2000.

        Parts and service sales increased $38.3 million, or 18.1%, from $211.5 million in 2002 to $249.8 million in 2003. Same store parts and service sales increased $19.7 million, or 9.3%, in 2003 compared to 2002. This increase was in line with management's expectations that consider business development coupled with price increases for parts and labor. The remaining increase was attributable to new store additions. The Company expects same store sales to increase approximately 10.0% in 2004 compared to 2003.

        Sales of new and used construction equipment increased $4.0 million, or 16.5%, from $24.3 million in 2002 to $28.3 million in 2003. This increase is consistent with the overall increase in unit sales for the Houston, Texas construction equipment market during 2003. According to John Deere, the Company's market share in the Houston area construction equipment market was 17.5% in 2003 compared to 14.6% in 2002. According to data compiled by John Deere, approximately 1,656 units of construction equipment were put into use in our area of responsibility in 2003 compared to 1,387 in 2002. The construction equipment industry expects to sell approximately 1,700 to 1,800 new

33



construction equipment units in the Houston area during 2004. The Company expects to increase its market share slightly in 2004 compared to 2003.

        Lease and rental revenues increased by 2.0%, from $25.3 million in 2002 to $25.8 million in 2003. As part of a planned reduction in our construction equipment rental business, construction equipment lease and rental revenues decreased $0.6 million, or 50.0%, from 2002 to 2003. Truck lease and rental revenue increased $1.2 million, or 5.0%, from 2002 to 2003. The increase in truck lease and rental revenue is due to the increase in our customer base during 2003. The Company expects lease and rental revenue to remain relatively flat in 2004 compared to 2003.

        Finance and insurance revenues increased 16.7%, from $5.4 million in 2002 to $6.3 million in 2003. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of operating profits. Approximately 88.9% of this increase is related to the addition of the new dealerships in Florida and Alabama. The remaining increase is related to additional customers qualifying for financing due to a change in the credit practices of the Company's finance providers.

        Other income increased $1.2 million, or 54.5%, from $2.2 million in 2002 to $3.4 million in 2003. Other income revenue is primarily related to the gain on sale realized on trucks from the lease and rental fleet, commissions earned from John Deere for direct manufacturer sales into our area of responsibility, document fees related to truck sales and purchase discounts. The primary reason for the increase during 2003 is related to gains resulting from the sales of trucks that had been leased by the Company.

Gross Profit

        Gross profit increased $12.1 million, or 8.6%, from $141.2 million in 2002 to $153.3 million in 2003. Approximately $10.6 million of the increase in gross profit is related to the acquisition of the Florida and Alabama dealerships. Gross profit as a percentage of sales remained relatively flat at 18.7% in 2002 and 18.8% in 2003.

        Gross margins on Class 8 truck sales were down from 6.5% in 2002 to 5.8% in 2003. Manufacturers' incentives for Class 8 trucks accounted for 24.6% of the gross margin in 2002 and 25.9% in 2003. The decrease is a result of the Company accepting smaller margins on several first time purchases by fleet customers. Given the increasing demand for Class 8 trucks coupled with the expected increase in purchases from owner operators that historically have rendered higher gross margins than fleet sales, the Company expects gross margins from Class 8 truck sales in 2004 to exceed those achieved in 2003. Additionally, each year the Company evaluates its reserve for new truck valuation losses. The Company recorded a $0.3 million loss provision to increase the Company's reserve for new truck inventory valuation in 2003 compared to $0 in 2002.

        Gross margins on medium-duty truck sales decreased from 5.6% in 2002 to 5.1% in 2003, primarily due to the previously discussed change in product mix. Manufacturers' incentives for medium-duty trucks did not contribute to gross margins in 2002 and accounted for 3.9% of the gross margin in 2003. Gross margins on GMC, Hino and UD (Nissan) models were approximately 3.4% in 2003 compared to a gross margin of 5.4% of the Peterbilt medium-duty model. Although sales of GMC, Hino and UD (Nissan) models will grow significantly as a percentage of total medium-duty sales in 2004, the Company expects the 2004 gross margin to approximate the 4.9% achieved during 2003.

        Gross margins on used truck sales decreased from 9.0% in 2002 to 6.7% in 2003, primarily due to the mix of wholesale versus retail used truck sales. The Company experienced higher than normal used truck wholesale transactions related to the trade-in units from first time new truck fleet customers. The Company does not expect to purchase as many used trucks from first time new truck fleet customers in 2004, which should result in increased gross margins on used truck sales compared to 2003. Additionally, each year the Company evaluates its reserve for used truck valuation losses. The

34



Company recorded a $1.0 million loss provision, primarily related to trade-in units from first time new truck fleet customers, to increase the Company's reserve for used truck valuation losses in 2003 compared to a $0.5 million loss provision recognized during 2002.

        Gross margins from the Company's parts, service and body shop operations decreased from 39.3% in 2002 to 37.5% in 2003. There are various reasons for this decrease, including nonproprietary parts sales becoming a larger percentage of the Company's overall parts sales and competitive pricing pressures from providers of nonproprietary parts. Historically, gross margins on nonproprietary parts are approximately 40% to 50% lower than gross margins on proprietary parts. Additionally, the Company has increased preventative maintenance services that are provided at lower margins than traditional repair work, and has selectively provided discounted labor rates to garner additional sales both at our dealership locations and at off-site customer locations. Gross profit dollars for the parts, service and body shop departments increased from $83.0 million in 2002 to $93.7 million in 2003. The Company expects the increase in same store gross profit to approximate the expected increase in parts, service and body shop sales of 10.0% in 2004 compared to 2003.

        Gross margins on new and used construction equipment sales remained relatively flat at approximately 10.0% in 2002 and 2003. The Company expects 2004 gross margins to be consistent with those achieved in 2003 and overall gross profit growth to be directly correlated to sales growth.

        Gross profit generated from lease and rental sales remained relatively flat. The Company's policy is to aggressively depreciate its lease and rental fleet. This policy results in the Company realizing small gross margins while the unit is in service and a corresponding larger gain on sale when the unit is sold at the end of the lease term. The Company expects 2004 gross margins to be consistent with those achieved in 2003 and overall gross profit growth to be directly correlated to increases in lease and rental sales.

        The increase in finance and insurance revenues and other income, as described above, has limited direct costs and, therefore, contributes a disproportionate share of gross profit. The Company expects gross profit from finance and insurance sales and other income to increase in 2004 based on projected increases in truck sales.

Selling, General and Administrative Expenses

        SG&A expenses increased $12.5 million, or 11.2%, from $111.7 million in 2002 to $124.2 million in 2003. Approximately $7.6 million of SG&A expense is related to the acquisitions of the Florida and Alabama dealerships. Same store SG&A expense increased $4.9 million, or 4.4%, from 2002 to 2003. The remaining increase is partially due to increased salary expense and increased commissions corresponding to the increase in gross profit. SG&A expenses as a percentage of sales increased from 14.8% to 15.2% from 2002 to 2003. The Company's management continually monitors SG&A expenses. The Company expects SG&A expenses as a percentage of sales to decrease in 2004 compared to 2003.

Interest Expense, Net

        Net interest expense decreased $0.2 million, or 3.1%, from $6.5 million in 2002 to $6.3 million in 2003. Interest expense decreased primarily as the result of declining interest rates. During 2004, the Company foresees increased truck inventory, which will be financed through our floor plan arrangements. This increase in floor plan financing is expected to increase interest expense during 2004.

Gain on Sale of Assets

        Gain on sale of assets increased $1.8 million, from $0.2 million in 2002 to $2.0 million in 2003. The gain in 2002 is primarily related to the replacement of fixed assets used in the operation of the business. The gain recognized in 2003 is primarily related to the sale of the assets of Rush Truck

35



Centers of Louisiana, Inc. The Company expects gains on sale of assets in 2004 to be limited to replacement of fixed assets used in the operation of the business and sales of certain real estate properties.

Income from Continuing Operations Before Income Taxes

        Income from continuing operations before income taxes increased by $1.2 million, or 8.3%, from $14.5 million in 2002 to $15.7 million in 2003, as a result of the factors described above. Industry experts predict an increase in Class 8 truck sales for 2004. Based on the predicted increase in industry truck sales, the Company believes that income from continuing operations in 2004 will exceed that of 2003.

Income Taxes from Continuing Operations

        Income taxes from continuing operations increased $0.5 million, or 8.6%, from $5.8 million in 2002 to $6.3 million in 2003. The Company has provided for taxes at a 40% effective rate.

Loss from Discontinued Operations, Net of Income Taxes

        Loss from discontinued operations net of income taxes decreased from $10.5 million in 2002 to $0.6 million in 2003. The loss recorded during 2002 includes net operating losses of the Michigan construction equipment dealerships of $0.9 million and net operating losses of D&D of $1.3 million, as well as disposal costs of $2.5 million for the Michigan construction equipment dealerships and $5.8 million for D&D. The loss recorded during 2003 includes net operating results of D&D of approximately $0.6 million. The Company expects to sell all discontinued operations by December 31, 2004.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues

        Revenues increased $65.6 million, or 9.5%, from $691.5 million in 2001 to $757.1 million in 2002. Sales of new and used trucks increased $50.4 million, or 11.5%, from $438.1 million in 2001 to $488.5 million in 2002.

        Unit sales of new Class 8 trucks increased 11.8%, from 3,597 units in 2001 to 4,022 units in 2002. New heavy-duty truck average sales price per Class 8 truck increased by 0.4% from 2001 to 2002. As a result of the emission law requirements for heavy-duty trucks, the Company experienced stronger than usual new truck sales during the second half of 2002 as customers made purchases of trucks manufactured before new emission laws took effect. These new guidelines increased the price of a new heavy-duty truck approximately $3,000 to $8,000 per unit.

        Unit sales of new medium-duty trucks increased 7.3%, from 648 units in 2001 to 695 units in 2002. The average sales price of a new medium-duty truck remained relatively flat from 2001 to 2002. The Company plans to penetrate the medium-duty truck market by adding new franchises, complementing our existing Peterbilt medium-duty line.

        Used truck average revenue per unit increased by 0.6%. Unit sales of used trucks increased 10.7%, from 1,907 units in 2001 to 2,111 units in 2002. The slight increase in the average used truck prices indicated that the market was absorbing the excess used trucks in the market caused by high new truck sales during 1998 through 2000.

        Parts and service sales increased $22.9 million, or 12.2%, from $188.6 million in 2001 to $211.5 million in 2002. The increase was due to same store growth of $6.5 million, or 3.4%, with the

36



remaining increase attributable to new store additions. This increase is consistent with management's expectations and price increases for parts and labor.

        Sales of new and used construction equipment decreased $7.4 million, or 23.3%, from $31.7 million in 2001 to $24.3 million in 2002. This decrease is consistent with total construction equipment industry sales declines of 20.7% in the Houston, Texas market that our Rush Equipment Center serves.

        Lease and rental revenues increased by 1.2%, from $25.0 million in 2001 to $25.3 million in 2002. As part of a planned reduction in our construction equipment rental business, construction equipment lease and rental revenues decreased $0.3 million, or 17.4%, from 2001 to 2002. Truck lease and rental revenue increased $0.6 million, or 2.1%, from 2001 to 2002.

        Finance and insurance revenues increased 3.8%, from $5.2 million in 2001 to $5.4 million in 2002. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of operating profits.

        Other income decreased $0.7 million, or 24.2%, from $2.9 million in 2001 to $2.2 million in 2002, due primarily to a decrease in gains resulting from truck sales by the leasing operations and fewer direct sales by John Deere into the Houston, Texas market.

Gross Profit

        Gross profit increased $12.0 million, or 9.3%, from $129.2 million in 2001 to $141.2 million in 2002. $5.4 million of the increase in gross profit is related to the acquisition of El Paso Trucks and Perfection Equipment Company, Inc. with the remaining attributable to same store growth. Gross profit as a percentage of sales remained flat at 18.7% in 2001 and 2002.

        Gross margins on Class 8 truck sales increased from 6.1% in 2001 to 6.5% in 2002. Manufacturers' incentives for Class 8 trucks accounted for 21.3% of the gross margin in 2001 and 24.6% in 2002. Gross margins on medium-duty trucks increased from 5.2% in 2001 to 5.6% in 2002. The Company received no manufacturer incentives on medium-duty trucks in 2001 or 2002. Gross margins on used truck sales increased from 8.4% in 2001 to 9.0% in 2002. Each year the Company records a loss provision, which increases the Company's reserve for new and used truck valuation and repossession losses. As a result of the more stable used truck market in 2002 as compared to 2001, only a $0.5 million loss provision was recorded in 2002 compared to a $1.2 million loss provision recorded in 2001.

        Gross margins on new and used construction equipment sales declined from 11.5% in 2001 to 10.5% in 2002. The decrease in margin is primarily related to a large amount of used construction equipment that was sold at an auction, at very low margins, in 2002.

        Gross margins on parts, service and body shop operations decreased from 40.7% in 2001 to 39.3% in 2002. This decrease is due to a change in the product mix. Parts sales increased as a percentage of overall sales in 2002 versus 2001. Parts sales historically have a lower gross margin than service and body shop sales. Overall, the Company's parts, service and body shop operations gross profit dollars increased from $76.6 million in 2001 to $83.0 million in 2002.

        The increase in finance and insurance revenues and the decrease in other income, as described above, have limited direct costs and, therefore, contribute a disproportionate share of gross profit.

Selling, General and Administrative Expenses

        SG&A expenses increased $9.9 million, or 9.7%, from $101.8 million in 2001 to $111.7 million in 2002. Approximately $5.3 million of SG&A expense is related to the acquisitions of El Paso Trucks and Perfection Equipment Company, Inc. Same store SG&A expense increased $4.6 million, or 4.5%, from 2001 to 2002. SG&A expenses as a percentage of sales increased from 14.7% in 2001 to 14.8% in 2002.

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Interest Expense, Net

        Net interest expense decreased $2.8 million, or 30.1%, from $9.3 million in 2001 to $6.5 million in 2002. Interest expense decreased primarily as the result of decreased levels of indebtedness due to lower floor plan liability levels.

Gain on Sale of Assets

        Gain on sale of assets decreased $0.9 million, or 81.8%, from 2001 to 2002. The gain recognized in 2001 is primarily related to the sale of excess real estate not needed for the operation of the business. The gain in 2002 is primarily related to the replacement of fixed assets used in the operation of the business.

Income from Continuing Operations Before Income Taxes

        Income from continuing operations before income taxes increased by $4.5 million, or 45%, from $10.0 million in 2001 to $14.5 million in 2002 as a result of the factors described above.

Income Taxes from Continuing Operations

        Income taxes from continuing operations increased $1.8 million, or 45%, from 2001 to 2002. The Company has provided for taxes at a 40% effective rate.

Loss from Discontinued Operations, Net of Income Taxes

        Loss from discontinued operations net of income taxes increased from $2.7 million in 2001 to $10.5 million in 2002. The loss recorded during 2001 is equal to net losses incurred in operating the Michigan construction equipment stores of $0.3 million and net losses incurred in operating D&D of $2.4 million. The loss recorded during 2002 includes net operating results of the Michigan construction equipment dealerships of $0.9 million and net operating results of D&D of $1.3 million as well as disposal costs related to the Michigan construction equipment dealerships of $2.5 million and disposal costs related to D&D of $5.8 million.

Liquidity and Capital Resources

        The Company's short-term cash needs are primarily for working capital, including inventory requirements, expansion of existing facilities and acquisitions of new facilities. These short-term cash needs have historically been financed with retention of profits and borrowings under credit facilities available to the Company. If demand for heavy-duty trucks remains strong through 2006, as predicted by the industry, the Company expects to experience net increases in cash and cash equivalents.

        At September 30, 2004, the Company had working capital of approximately $25.8 million, including $45.7 million in cash, $32.9 million in accounts receivable, $161.7 million in inventories, $8.9 million in assets held for sale, $1.2 million in prepaid expenses and other, and $2.8 million in deferred income taxes, offset by $136.6 million outstanding under floor plan notes payable, $21.7 million in current maturities of long-term debt, $17.7 million in advances outstanding under lines of credit, $17.2 million of trade accounts payable and $34.3 million in accrued expenses. The aggregate maximum borrowing limits under working capital lines of credit with its primary truck lender are approximately $13.5 million. Advances outstanding under this line of credit at September 30, 2004 were $13.5 million, leaving no funds available for future borrowings. The Company has four separate secured lines of credit that provide for an aggregate maximum borrowing of $18.6 million. Advances outstanding under these secured lines of credit in aggregate were $7.1 million, leaving $11.5 million available for future borrowings as of September 30, 2004.

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        The Company has a commitment for construction of a new dealership for our Mobile, Alabama location. The total estimated cost of this dealership is $2.6 million. As of September 30, 2004, approximately $1.4 million has been paid for the construction of the dealership and purchase of the land. Construction is expected to be complete in the first quarter of 2005. The Company has no other material commitments for capital expenditures as of September 30, 2004. However, the Company will continue to purchase vehicles that are necessary to operate its lease and rental division. Furthermore, management will continue to authorize capital expenditures for new buildings and expansion of facilities based on market opportunities.

        For the first nine months of 2004, operating activities resulted in net cash used by operations of approximately $1.7 million. Cash provided by operations was primarily due to income from continuing operations of $11.9 million, coupled with the provision for depreciation and amortization of $11.9 million and an increase in accounts payable and accrued expenses of $6.3 million which was offset by increases in accounts receivable of $8.4 million and increases in inventories of $24.5 million. The increase in accounts receivable is directly related to the increase in and timing of truck sales.

        During the first nine months of 2004, the Company used $22.4 million in investing activities. This consisted primarily of purchases of property and equipment of $23.5 million and business acquisitions of $3.5 million offset by proceeds from the sale of property and equipment of $4.7 million. Approximately $6.2 million was used for the replacement of the corporate aircraft, $4.6 million was used for routine replacement of capital equipment, and $8.4 million was used for the purchase of leasing trucks. The remaining amount was used for purchasing dealership property and remodeling existing dealerships.

        Net cash provided by financing activities in the third quarter of 2004 amounted to $35.4 million. Net cash provided by financing activities was primarily due to proceeds from notes payable of $19.8 million, net draws of floor plan notes payable of $28.3 million and proceeds from the exercise of employee and director stock options of $8.0 million, offset by principal payments on notes payable of $20.6 million.

        Substantially all of the Company's truck purchases from PACCAR are made on terms requiring payment within 15 days or less from the date the trucks are shipped from the factory. The Company finances substantially all of the purchase price of its new truck inventory, and 75% of the loan value of its used truck inventory, under a floor plan arrangement with GMAC under which GMAC pays PACCAR directly with respect to new trucks. The Company makes monthly interest payments to GMAC on the amount financed, but is not required to commence loan principal repayments prior to the sale of new vehicles for a period of 12 months or for a period of three months for used vehicles. On September 30, 2004, the Company had approximately $127.8 million outstanding under its floor plan financing arrangement with GMAC. GMAC permits the Company to earn interest on overnight funds deposited by the Company with GMAC at the prime rate less 0.90%. The Company is permitted to earn interest on overnight funds of up to 10.0% of the amount borrowed under its floor plan financing arrangement with GMAC.

        Substantially all of the Company's new construction equipment purchases are financed by John Deere and Citicapital. The Company finances substantially all of the purchase price of its new equipment inventory under its floor plan facilities. The agreement with John Deere provides an interest free financing period after which time the amount financed is required to be paid in full. When construction equipment is sold prior to the expiration of the interest free period, the Company is required to repay the principal within approximately ten days of the sale. If the equipment financed by John Deere is not sold within the interest free period, it is transferred to the Citicapital floor plan arrangement. The Company makes principal payments for sold inventory to Citicapital on the 15th day of each month. Used and rental equipment is financed to a maximum book value under a floor plan arrangement with Citicapital. The Company makes monthly interest payments on the amount financed

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and is required to commence loan principal repayments on rental equipment as book value reduces. Principal payments for sold used equipment are made on the 15th day of each month following the sale. The loans are collateralized by a lien on the equipment. The Company's floor plan agreements limit the aggregate amount of borrowings based on the book value of new and used equipment units. As of September 30, 2004, the Company's floor plan arrangement with Citicapital permits the financing of up to $10.5 million in construction equipment. On September 30, 2004, the Company had $3.5 million outstanding under its floor plan financing arrangements with John Deere and $5.3 million outstanding under its floor plan financing arrangements with Citicapital.

Backlog

        On September 30, 2004, the Company's backlog of truck orders was approximately $330.0 million as compared to a backlog of truck orders of approximately $140.0 million on September 30, 2003. The Company includes confirmed orders in its backlog. It currently takes between 60 days and six months for the Company to receive delivery from PACCAR once an order is placed. The Company sells the majority of its new heavy-duty trucks by customer special order, with the remainder sold out of inventory. Orders from a number of the Company's major fleet customers are included in the Company's backlog as of September 30, 2004.

Seasonality

        The Company's heavy-duty truck business is moderately seasonal. Seasonal effects on new truck sales related to the seasonal purchasing patterns of any single customer type are mitigated by the Company's diverse customer base, including small and large fleets, governments, corporations and owner operators. However, truck parts and service operations historically have experienced higher volumes of sales in the second and third quarters.

        Seasonal effects in the construction equipment business are primarily driven by the weather. Seasonal effects on construction equipment sales related to the seasonal purchasing patterns of any single customer type are mitigated by the Company's diverse customer base that includes contractors for both residential and commercial construction, utility companies, federal, state and local government agencies, and various petrochemical, industrial and material supply type businesses that require construction equipment in their daily operations.

Cyclicality

        The Company's business, as well as the entire retail heavy-duty truck industry, is dependent on a number of factors relating to general economic conditions, including fuel prices, interest rate fluctuations, economic recessions, government regulation and customer business cycles. In addition, unit sales of new trucks have historically been subject to substantial cyclical variation based on such general economic conditions. According to R.L. Polk, industry-wide domestic retail sales of Class 8 trucks resulted in approximately 145,000 new Class 8 truck registrations in 2003. A.C.T. Research, Inc., a heavy-duty truck industry data forecasting services provider, forecasts heavy-duty new truck sales to increase to approximately 200,600 units during 2004. The Company believes that its geographic expansion, concentration on high margin parts and service operations, and diversity of its customer base will reduce the overall impact to the Company resulting from general economic conditions and cyclical trends affecting the heavy-duty truck industry. However, the Company's operations will be affected by any general economic conditions or cyclical trends, either positive or negative, affecting the heavy-duty truck industry.

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Effects of Inflation

        The Company believes that the relatively moderate rates of inflation over the last few years have not had a significant impact on revenues or profitability. The Company does not expect inflation to have any near-term material effects on the sale of our products and services. However, there can be no assurance that there will be no such effect in the future.

Off-Balance Sheet Arrangements

        The Company does not have any off-balance sheet arrangements as of September 30, 2004.

Contractual Obligations

        The Company has certain contractual obligations which will impact its short and long-term liquidity. At December 31, 2003, such obligations were as follows:

 
  Payments Due by Period
Contractual Obligations

  Total
  Less than 1
year

  1-3
years

  3-5
years

  More than 5
years

 
  (in thousands)

Long-Term Debt Obligations(1)   $ 90,028   $ 23,767   $ 24,830   $ 14,724   $ 26,707
Operating Lease Obligations(2)     36,447     8,235     12,070     7,538     8,604
Interest expense on fixed rate debt(3)     16,826     5,027     6,758     4,225     816
Interest expense on variable rate debt(3)     1,587     383     592     489     123
   
 
 
 
 
Total   $ 144,888   $ 37,412   $ 44,250   $ 26,976   $ 36,250
   
 
 
 
 

(1)
Refer to Note 9 of Notes to Consolidated Financial Statements.

(2)
Refer to Note 12 of Notes to Consolidated Financial Statements.

(3)
In computing interest expense, the Company used its weighted average interest rate outstanding on fixed rate debt to estimate its interest expense on fixed rate debt. The Company used its weighted average variable rate outstanding on variable rate debt and added 0.25 percent per year to estimate its interest expense on variable rate debt.

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INDUSTRY

        We currently operate in the heavy-duty truck, medium-duty truck and construction equipment markets. There has historically been a high correlation in both of these markets between new product sales and the rate of change in U.S. industrial production and the U.S. gross domestic product.

Heavy-Duty Truck Market

        The Company serves the entire U.S. retail heavy-duty truck market which is dependent on a number of factors relating to general economic conditions, including fuel prices, government regulation, interest rate fluctuations, economic recessions and customer business cycles. In addition, unit sales of new trucks have historically been subject to substantial cyclical variation based on such general economic conditions. According to data published by R.L. Polk, an industry research and publication firm, the overall domestic heavy-duty truck market decreased from approximately 253,000 new Class 8 unit sales in 1999 to approximately 145,000 new Class 8 unit sales in 2003 (a 13.0% compounded decrease). During 2003, domestic heavy-duty truck sales decreased approximately 2.8% from 2002 and are expected to increase to approximately 200,600 units during 2004 according to A.C.T. Research. Our primary product line is Peterbilt trucks, which, according to R.L. Polk, accounted for approximately 12.3% of all new heavy-duty truck registrations in 2003. Historically, Peterbilt's market share in areas served by our dealerships has been significantly higher than its national average.

        As a result of our aggressive sales approach, new store openings and acquisitions in new markets, our share of the heavy-duty truck market increased from approximately 2.0% of the overall heavy-duty market share in the United States to an overall heavy-duty market share in the United States of 2.5% in 2003.

        Typically, Class 8 trucks are assembled by the manufacturer utilizing certain components manufactured by other companies, including engines, transmissions, axles, wheels and other components. As trucks and truck components have become increasingly complex, including the use of computerized controls and diagnostic systems, the ability to provide state-of-the-art service for a wide variety of truck equipment has become a competitive factor in the industry. Such service requires a significant capital investment in advanced equipment, parts inventory and a high level of training of service personnel. Environmental Protection Agency ("EPA") and U.S. Department of Transportation ("DOT") regulatory guidelines for service processes, including body shop, paint work and waste disposal, require sophisticated operating and testing equipment to ensure compliance with environmental and safety standards. Additionally, we believe that the trend of leasing and renting Class 8 trucks will continue as fleets, particularly private fleets, seek to establish full-service leases or rental contracts which provide for turn-key service including equipment, maintenance, and potentially, fuel, fuel tax reporting and other services. As a result, differentiation between truck dealers has become less dependent on pure price competition and is increasingly based on their ability to offer a wide variety of services to their clients. Such services include easily accessible, efficient and sophisticated truck service and replacement parts, financing for truck purchases, leasing and rental programs and the ability to accept multiple unit trade-ins related to large fleet purchases. We believe our one-stop concept and the size and diversity of our dealer network gives us a competitive advantage in providing these services.

        The EPA mandated that heavy-duty engine manufacturers meet new, stricter emissions guidelines regarding nitrous oxides for all engines built subsequent to October 1, 2002. These new guidelines increased the price of new heavy-duty trucks approximately $3,000 to $8,000 per unit and possibly reduced the operating efficiency and life of heavy-duty trucks. As a result, the Company experienced stronger than usual truck sales during the second half of 2002 as customers made purchases of trucks manufactured under the "old" emission laws. This accelerated demand in the second half of 2002 was followed by a short-term decrease in demand during the first half of 2003.

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        Subsequent to the guidelines that were effective October 1, 2002, the EPA has placed additional guidelines, further restricting the emissions of nitrous oxides for all engines built subsequent to January 1, 2007. Historically, the industry has experienced an accelerated demand for trucks in the months preceding the effective date of the change in EPA guidelines, followed by a short-term decrease in demand in the months subsequent to the change. The Company does not expect the change in emission guidelines to have an effect on its 2004 results from operations. The Company believes it is too early to determine how the change in emission guidelines will affect its results from operations subsequent to 2004.

        Subsequent to this expected short-term decline in demand, industry sales improved during the second half of 2003. The heavy-duty truck industry as a whole is expected to deliver approximately 200,600 new trucks in the United States during 2004, compared to approximately 145,000 new trucks in 2003 and 150,000 new trucks in 2002. The 2002 and 2003 new heavy-duty truck sales totals were the lowest heavy-duty truck sales totals in the last nine years. We believe that the new heavy-duty truck sales industry will begin to improve in 2004 and that we will perform at a level above our competitors.

        Management believes the long-term growth prospects for the heavy-duty truck industry remain positive. Factors, which management believes favor the continued long-term growth in the heavy-duty truck industry, include the following:

Medium-Duty Truck Market

        Several of our Rush Truck Centers offer medium-duty trucks manufactured by Peterbilt, GMC, Hino, UD (Nissan) or Isuzu, as well as parts and service. Medium-duty trucks are principally used in short-haul, local markets as delivery vehicles. Medium-duty trucks typically operate locally and generally do not venture out of their service areas overnight. The nature of the medium-duty truck market promotes the use of our service facilities during our evening shift, which is traditionally a slow period for heavy-duty truck service.

        The average sales price of a medium-duty truck sold by our dealerships through September 30, 2004 was approximately $52,000. Gross profit margins for medium-duty trucks are typically the same as those for heavy-duty trucks. A.C.T. Research estimates that retail sales of Class 4 through 7 medium-duty trucks totaled 246,530 units in 2003. We plan to expand our share of this market by adding new product lines, dealership locations and sales personnel. For example, we recently initiated sales of Hino medium-duty trucks at our new Dallas, Texas full service dealership.

Construction Equipment Market

        Through our Rush Equipment Center, which is an authorized John Deere dealer, we serve the Houston, Texas and surrounding area for retail sales of construction equipment targeted towards light and medium applications. According to data compiled by John Deere, approximately 1,656 units of construction equipment were put into use in our area of responsibility in 2003 compared to 1,387 in

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2002. The construction equipment industry expects to sell approximately 1,700 to 1,800 new construction equipment units in the Houston area during 2004. The Company's market share in the Houston area was 17.5% in 2003 and 14.6% in 2002.

        Our Rush Equipment Center has the exclusive right to sell new John Deere equipment and parts within its assigned area of responsibility, which means competition within its market comes primarily from dealers of competing manufacturers and rental companies.

        The customer base of John Deere equipment users is diverse and includes residential and commercial construction businesses, independent rental companies, utility companies, government agencies, and various petrochemical, industrial and material supply businesses. Industry statistics suggest that a majority of all construction equipment is owned by a relatively small percentage of the customer base. Accordingly, John Deere and its dealer group, including the Rush Equipment Center, are aggressively developing more sophisticated ways to serve large fleet owners.

        Market factors affecting the construction equipment industry include the following:

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BUSINESS

        We are a full-service, integrated retailer of heavy-duty and medium-duty trucks and construction equipment and related services. As the leading dealer of trucks manufactured by Peterbilt Motors Company, a division of PACCAR, Inc., we sold approximately 20.3% of all the new Class 8 Peterbilt trucks sold in the United States in 2003. In 1997, we acquired our first John Deere construction equipment dealership in Houston, Texas and thereafter we acquired five John Deere construction equipment dealerships in Michigan. We sold our five Michigan construction equipment dealerships during 2002. Through our strategically located network of Rush Truck Centers and our Rush Equipment Center, we provide one-stop service for the needs of our customers, including retail sales of new and used transportation and construction equipment, aftermarket parts sales, service and repair facilities and financing, leasing and rental, and insurance services.

Business Strategy

        Operating Strategy.    Our strategy is to operate an integrated dealer network that primarily markets Peterbilt heavy-duty trucks, medium-duty trucks and John Deere construction equipment and provides complementary products and services. Our strategy includes the following key elements:

        Growth Strategy.    Through our expansion and acquisition initiatives, we have grown to operate a large, multistate, full-service network of heavy-duty truck dealerships. As described below, we intend to continue to grow our business internally and through acquisitions by: expanding into new geographic

45



areas, expanding our product offerings and capabilities and opening new truck and equipment centers in existing markets.


        In identifying new areas for expansion, we analyze the target market's level of new heavy-duty truck registrations and construction equipment purchases, customer buying and leasing trends and the existence of competing franchises. We also assess the potential performance of a parts and service center to determine whether a market is suitable for a Rush dealership. After a market has been strategically reviewed, we survey the region for a well-situated location. Whether we acquire existing dealerships or open new dealerships, we will introduce the Rush branding program and implement our integrated management system.

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Management of Our Dealerships

        We manage our dealerships as described below.

Rush Truck Centers

        Our Rush Truck Centers are responsible for sales of new and used heavy-duty and medium-duty trucks, as well as related parts and services.

        New Truck Sales.    New heavy-duty truck sales represent the largest portion of our business, accounting for approximately $368.1 million, or 45.1%, of our total revenues for 2003. Rush Truck Centers primarily sell new Class 8 heavy-duty Peterbilt trucks, which constitute more than 95% of all new trucks we sell. The average delivery times for custom-ordered new Peterbilt trucks can vary between 30 days to six months. We also sell Class 7 and Class 6 Peterbilt trucks, Peterbilt refuse chassis and cement mixer chassis, GMC, Hino, Isuzu and UD (Nissan) medium-duty trucks and, at our Tulsa Rush Truck Center, Class 8 heavy-duty trucks manufactured by Volvo Trucks of North America, Inc. ("Volvo"). Medium-duty truck sales accounted for approximately $48.9 million, or 6.0%, of our total revenues for 2003. Our customers use heavy-duty and medium-duty trucks to haul a variety of materials, including general freight, petroleum, wood products, refuse and construction materials.

        A majority of our new truck sales are to fleet customers (customers who purchase more than five trucks in any 12-month period). Because of our large size, strong relationships with our fleet customers and ability to handle large quantities of used truck trade-ins, we are able to successfully market and sell to fleets nationwide. We believe that we have a competitive advantage over most other dealers in that we can absorb multiunit trade-ins often associated with fleet sales of new trucks and effectively disperse the used trucks for resale throughout our dealership network. We believe that our attention to customer service and our broad range of trucking services, including our ability to offer truck financing and insurance to our customers, has resulted in a high level of customer loyalty. We believe that approximately 70% of our truck sales in 2003 were to repeat customers.

        Used Truck Sales.    Used truck sales accounted for approximately $80.7 million, or approximately 9.9%, of our total revenues for 2003. We primarily sell used Class 8 heavy-duty trucks manufactured by the leading truck manufacturers in the industry, including, but not limited to, Peterbilt; Kenworth Truck Co., a division of PACCAR, Inc. ("Kenworth"); Volvo; Freightliner Corporation, a subsidiary of Daimler Chrysler AG ("Freightliner"); Mack Trucks, Inc. ("Mack") and Navistar International Corporation ("Navistar"). We believe that we are well positioned to market used heavy-duty trucks due to our ability to recondition used trucks for resale utilizing the parts and service departments at our Rush Truck Centers and to reallocate our used truck inventory from one Rush Truck Center to another in order to satisfy customer demand. The majority of our used truck fleet is comprised of trucks taken as trade-ins from new truck customers to be used as all or part of such customer's down payment; the remainder of our used truck fleet is purchased from third parties for resale.

        Truck Parts and Service.    Truck-related parts and service revenues accounted for approximately $233.0 million, or approximately 28.6%, of our total revenues for 2003. We are the sole authorized Peterbilt parts and accessories supplier in each of the geographic territories serviced by our Rush Truck Centers. The parts business augments our sales and service functions and is a source of recurring revenue. Each Rush Truck Center carries a wide variety of Peterbilt and other truck parts in its inventory, with an average of approximately 5,000 items from over 50 suppliers at each location. Rush Truck Centers offer "menu" pricing of service and body shop functions and expedited service at a premium price for certain routine repair and maintenance functions.

        Our Rush Truck Centers also feature various combinations of fully equipped service and body shop facilities, the combination and configuration of which varies by location, capable of handling a broad range of truck repairs on most makes and classes of trucks. Each Rush Truck Center is a Peterbilt

47



designated warranty service center and most are also authorized service centers for other manufacturers, including the following: Caterpillar, Inc. ("Caterpillar"); Cummins Engine, Inc. ("Cummins"); Detroit Diesel Corporation ("Detroit Diesel"); Eaton Corporation and Rockwell International Corporation. We have approximately 500 service bays, including 18 paint booths, throughout our Rush Truck Center network.

        We perform both warranty and nonwarranty service work. The cost of warranty work is reimbursed by the manufacturer at retail consumer rates. We estimate that approximately 18% of our truck service functions are performed under manufacturers' warranties. All service performed at our Rush Truck Centers is done by technicians who have been certified by our truck or component suppliers.

        Truck Leasing and Rental.    Truck leasing and rental revenues accounted for approximately $33.1 million, or 4.1%, of our total revenues for 2003. We engage in full-service Peterbilt truck leasing under the PacLease trade name at eight of our Rush Truck Centers and are the largest PacLease dealer in the United States. Leasing and rental customers contribute to additional parts sales and service work at Rush Truck Centers because all of our leases require all service and maintenance for the leased trucks to be performed at our facilities (or at facilities outside our service area, as we direct). Rented trucks are also generally serviced at our facilities. We have increased our lease and rental fleet, including contract maintenance, from less than 100 trucks in 1993 to approximately 1,397 trucks as of December 31, 2003. As of December 31, 2003, we owned approximately 51% of our lease and rental fleet, and leased the remaining trucks in our fleet directly from PACCAR Financial. Currently, the average age of the trucks in our lease and rental fleet is approximately 33 months. Generally, we hold trucks in our lease and rental fleet for approximately five years and then sell them to the public through our used sales operations at our Rush Truck Centers. Historically, we have realized gains on the sale of those trucks in excess of the cost of the purchase option contained in our leases with Peterbilt or the book value of trucks owned by the Company.

        Insurance Agency Services.    We sell a complete line of property and casualty insurance to our customers as well as to the general trucking public. Our agency is licensed to sell truck liability, general liability, collision and comprehensive, workers' compensation, cargo, credit life and health and occupational accident insurance coverages throughout the Rush operating territory. We serve as sales representatives for a number of leading insurance companies including the Great American Insurance Companies, Hartford Insurance Group and American General Financial Group. Our average renewal rate during 2003 was 72%.

Rush Equipment Center

        Our Rush Equipment Center in Houston, Texas is responsible for sales of new and used construction equipment as well as related parts and services.

        New Construction Equipment Sales.    New construction equipment sales accounted for approximately $25.5 million, or 3.1%, of our total revenues for 2003. Our Rush Equipment Center carries a complete line of John Deere construction equipment. A new piece of John Deere construction equipment typically ranges in price from $20,000 for a skidsteer to $500,000 for an excavator. We carry a full line of complementary construction equipment manufactured by other suppliers to augment our John Deere product line. We sell construction equipment to a diverse customer base including residential and commercial construction businesses, utility companies, government agencies, and various petrochemical, industrial and material supply businesses.

        We believe that John Deere's reputation for manufacturing quality construction equipment attracts new and repeat customers who value lower maintenance and repair costs and a higher residual value at trade-in. We increase this product loyalty with an operating strategy similar to the operating strategy used by our Rush Truck Centers that focuses on providing fast, reliable service. We believe that our operating strategy will enable us to both increase our customer base and generate repeat business for all product offerings.

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        Used Construction Equipment Sales.    Used construction equipment sales accounted for approximately $2.8 million, or 0.3%, of our total revenues for 2003. We sell used construction equipment manufactured by several of the leading manufacturers, including John Deere, Case Corporation ("Case"), Caterpillar, and Komatsu, Ltd. ("Komatsu"). Our used construction equipment inventory is derived from trade-ins from our construction equipment customers and purchases from third parties.

        Construction Equipment Parts and Service.    Construction equipment-related parts and service revenues accounted for approximately $11.8 million, or 1.4%, of our total revenues for 2003. Our Rush Equipment Center carries in its inventory a wide variety of John Deere and other parts, with over 13,000 items from over 15 suppliers. We are the sole authorized John Deere parts and accessories supplier in the Rush Equipment Center geographic territory. We maintain a fully equipped John Deere designated warranty service operation capable of handling repairs on most types of construction equipment at our Rush Equipment Center. We enhance our service presence with field service trucks and technicians who are capable of making on-site repairs at our customers' locations.

        Construction Equipment Rental.    Construction equipment rental revenues accounted for approximately $0.6 million, or 0.07%, of our total revenues for 2003. Our rental contracts require that all parts sales, service and maintenance for our rental construction equipment be performed at our facilities or at other facilities as we direct. Thus, construction equipment rental customers create additional parts sales and service work at our Rush Equipment Center. Our construction equipment rental fleet consisted of approximately 12 pieces of equipment as of December 31, 2003. Currently, the average age of the construction equipment in our rental fleet is approximately 25 months.

        We offer our customers both long-term and short-term rentals, as well as rental purchase options. We believe that the availability of a well-maintained rental fleet allows our customers to more effectively manage their business operations and assets by obtaining construction equipment on an as-needed basis.

Financial and Insurance Services

        At our Rush Truck Centers and our Rush Equipment Center we have personnel responsible for arranging third-party financing and insurance for both our heavy-duty truck and construction equipment product offerings.

        We offer our customers packages that assist them in purchasing new or used trucks and construction equipment. The sale of financial and insurance products accounted for approximately $6.3 million, or 0.8%, of our total revenue for 2003. Finance and insurance revenues have limited direct costs and, therefore, contribute a disproportionate share of our operating profits.

        New and Used Truck and Construction Equipment Financing.    Primarily through Citicapital and PACCAR Financial, we arranged customer financing of approximately $147.4 million, an increase of 14.7% from approximately $128.5 million in 2002. Approximately 79% of these truck finance contracts related to new truck sales and the remainder related to used truck sales. Generally, truck finance contracts are memorialized through the use of installment contracts, which are secured by the trucks financed, and generally require a down payment of 10% to 30% of the value of the financed truck, with the remaining balance financed over a two to five-year period. The majority of finance contracts are sold without recourse to the Company. The Company's recourse liability related to finance contracts sold with recourse to the Company is generally limited to 5% to 20% of the outstanding amount of each note initiated on behalf of the finance company. However, the Company recently instituted a full recourse finance program that accepts 100% liability, with some restrictions of the outstanding amount of each note initiated on behalf of the finance company. In order for a contract to be accepted into this full recourse finance program, a customer must meet strict credit requirements or

49



maintain a significant equity position in the truck being financed, therefore, the Company does not expect to finance a significant percentage of its truck sales under this full recourse finance program. The Company provides for an allowance for repossession losses and early repayment penalties.

        In addition, through The CIT Group, Citicapital, John Deere Credit and others, we arranged customer financing for approximately $17.7 million, or 62.6%, of our total new and used construction equipment sales in 2003. Generally, construction equipment finance contracts are memorialized through the use of installment or lease contracts, which are secured by the construction equipment financed, and generally require a down payment of 0% to 10% of the value of the financed piece of construction equipment, with the remaining balance being financed over a three to five-year period. All finance contracts for construction equipment are assigned without recourse.

Sales and Marketing

        Our established expansion and acquisition strategy and long history of operations in the heavy-duty truck business have resulted in a strong customer base that is diverse in terms of geography, industry and scale of operations. Rush Truck Centers' customers include owner-operators, regional and national fleets, corporations and local governments. During 2003, no single customer of our Rush Truck Centers accounted for more than 10% of our total truck sales by dollar volume. Our Rush Equipment Centers' customer base is similarly diverse and, during 2003, no single Rush Equipment Center customer accounted for more than 10% of our total construction equipment sales by dollar volume. We generally promote our products and related services through our sales staff, trade magazine advertisements and attendance at industry shows.

        We believe that the consistently reliable service received by our customers, our longevity and our geographic diversity have resulted in increased market recognition of the "Rush" brand name and have served to reinforce customer loyalty. During 2003, the majority of our truck sales were to repeat customers. In an effort to enhance our name recognition and to communicate the standardized high level of quality products and services provided at our Rush Centers, we implement our "Rush" brand name concept at each of our dealerships. Each of our dealerships is identified as either a Rush Truck Center or Rush Equipment Center. In Houston, Texas, we are making a concerted effort to target our products and services to existing truck customers that are also involved in the construction business.

Facility Management

        Personnel.    Each Rush Truck Center and the Rush Equipment Center is managed by a general manager who oversees the operations, personnel and the financial performance of the location, subject to the direction of our corporate office. Additionally, each Rush Truck Center is typically staffed by a sales manager, parts manager, service manager, sales representatives, parts employees, and other service and makeready employees. The sales staff of each Rush Truck Center and the Rush Equipment Center is compensated on a salary plus commission basis, with a high percentage of compensation based on commission, while the general manager, parts manager and service manager receive a combination of salary and performance bonus, with a high percentage of compensation based on the performance bonus. We believe that our employees are among the highest paid in their respective industries.

        General managers annually prepare detailed monthly forecasts and monthly profit and loss statements based upon historical information and projected trends. An element of each general manager's compensation is determined by meeting or exceeding these operating plans. During the year, general managers regularly review their facility's progress with senior management and make appropriate adjustments as needed. Most of our employees receive annual performance evaluations.

        We have been successful in retaining our senior management, general managers and other employees. To promote communication and efficiency in operating standards, general managers and

50



members of senior management attend several company-wide strategy sessions per year. In addition, management personnel attend various industry-sponsored leadership and management seminars and receive continuing education on Peterbilt products, John Deere products, marketing strategies and management information systems.

        Members of senior management regularly travel to each location to provide on-site management and support. Each location is audited regularly for administrative record-keeping, human resources and environmental compliance matters. The Company has instituted succession planning pursuant to which employees in each Rush Truck Center and the Rush Equipment Center are groomed as assistant managers to assume management responsibilities in existing and future dealerships.

        Purchasing and Suppliers.    We believe that pricing is an important element of our marketing strategy. Because of our size, our Rush Truck Centers benefit from volume purchases at favorable prices that permit them to achieve a competitive pricing position in the industry. We purchase our Peterbilt heavy-duty truck inventory and Peterbilt parts and accessories directly from PACCAR. All other manufacturers' parts and accessories, including those of Cummins, Detroit Diesel, Caterpillar and others, are purchased through wholesale vendors or from PACCAR, who buys such products in bulk for resale to us and other Peterbilt dealers. All purchasing, volume and pricing levels and commitments are negotiated by personnel at our corporate headquarters. We have been able to negotiate favorable pricing levels and terms, which enables us to offer competitive prices for our products.

        We purchase all of our John Deere construction equipment inventory and John Deere parts directly from John Deere.

        Management Information Systems.    Each Rush Truck Center and the Rush Equipment Center maintains a centralized real-time inventory tracking system which is accessible simultaneously by all locations and by our corporate office. We utilize our management information systems to monitor the inventory level at each of our dealerships. From information assimilated from management information systems, management has developed a model reflecting historic sales levels of different product lines. This model enables management to identify the appropriate level and combination of inventory and forms the basis of our operating plan. Our management information systems and databases are also used to monitor market conditions and sales information and assess product and expansion strategies.

        Information received from state and regulatory agencies, manufacturers and industry contacts allows us to determine market share statistics and gross volume sales numbers for our products as well as those of competitors. This information impacts ongoing operations because management remains aware of changes within our market and is able to react accordingly by realigning product lines and by adding new product lines and models.

        Distribution and Inventory Management.    We utilize our real-time inventory management tracking system to maintain a close link between each Rush Truck Center. This link allows for a timely and cost-effective sharing of managerial and sales information as well as the prompt transfer of inventory among various locations. The transfer of inventory reduces delays in delivery, helps maximize inventory turns and assists in controlling problems created by overstock and understock situations. We are linked directly to our major suppliers, including PACCAR, GMC, and John Deere via real-time communication links for purposes of ordering and inventory management. These automated reordering and communication systems allow us to maintain proper inventory levels and permit us to have inventory delivered to our locations, or directly to customers, typically within 24 hours of an order being placed.

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Recent Acquisitions and Dispositions

        In November 2003, we sold certain assets of our wholly owned subsidiary, Rush Truck Centers of Louisiana, Inc. The transaction was valued at approximately $5.5 million and paid in cash. We recognized a gain on sale of assets of approximately $1.6 million in the fourth quarter of 2003.

        In April 2003, we purchased substantially all of the assets of Peterbilt of Mobile, Inc., which consisted of a Peterbilt dealership in Mobile, Alabama. Peterbilt of Mobile, Inc.'s primary line of business is the sale of new Peterbilt Class 8 trucks, used heavy-duty trucks, parts and service. The transaction was valued at approximately $1.4 million, with the purchase price paid in cash.

        In February 2003, we acquired the common stock of Orange County Truck and Trailers, Inc., a Peterbilt dealer in central Florida. The acquisition provided Rush with the right to sell Peterbilt trucks and parts in Central Florida from locations in Orlando, Haines City, and Tampa, Florida. The transaction was valued at approximately $5.4 million, with the purchase price paid in cash.

        In November 2002, we decided to sell our Michigan John Deere construction equipment stores as a result of continuing deterioration in the Michigan construction equipment market and the location of the stores in relation to our other operations and plans for future expansion. The sale of the Michigan construction equipment stores was substantially complete at December 31, 2002. Our Rush Equipment Center in Houston, Texas continues to provide a full line of construction equipment for light to medium sized applications.

        In November 2002, we also decided to discontinue our retail segment, which operated three D&D farm and ranch retail stores in Denton, Hockley and Seguin, Texas. We decided that the retail segment did not fit into our long-term plans of growing our core truck and construction equipment businesses. The Denton store was closed in December 2002; and the Hockley store began liquidating inventory during November 2002 and completed the liquidation in March 2003. The Company is actively marketing the Seguin store and expects to sell the store by the end of 2004.

        In November 2001, we acquired the assets of Perfection Equipment Company, Inc. Perfection's primary lines of business are light-duty and medium-duty truck accessory and up-fitting, oil and gas up-fitting, and parts distribution. The transaction was valued at approximately $4.2 million, with the purchase price paid in cash.

        In August 2001, the Company purchased substantially all of the assets of El Paso Great Basin Trucks, Inc., which consisted of dealerships located in El Paso, Texas and Las Cruces, New Mexico. El Paso Trucks' primary line of business is the sale of new Peterbilt and used heavy-duty trucks, parts and service. The transaction was valued at approximately $2.5 million, with the purchase price paid in cash.

Competition

        There is, and will continue to be, significant competition both within our current markets and in the new markets we may enter. We anticipate that competition between us and other dealers will continue to increase in our current markets and on a national level based on the following:

        Our new truck products compete with trucks made by other manufacturers and sold through competing independent and factory-owned truck dealerships, including trucks manufactured by Navistar, Mack, Freightliner, Kenworth, Volvo, Ford Motor Company, Western Star Truck

52



Holdings, Ltd., and other manufacturers. Kenworth heavy-duty trucks are also manufactured by PACCAR, Peterbilt's parent company, but are distributed through a different network of competing dealers. Our construction equipment products compete with construction equipment manufactured by Case, Caterpillar and Komatsu, as well as other manufacturers. We believe that we are competitive in all of the dealer categories identified above, and that we are able to compete with manufacturer-dealers, independent dealers and wholesalers, rental service companies and industrial auctioneers in distributing our products on the basis of: overall product quality and reputation; "Rush" brand name recognition and reputation for reliability; and our ability to provide comprehensive full parts and service support, as well as financing, insurance and other customer services.

Dealership Agreements

        Peterbilt.    We have entered into nonexclusive dealership agreements with Peterbilt which authorize us to act as a dealer of Peterbilt heavy-duty trucks. Our areas of responsibility currently encompass 37 locations in the states of California, Colorado, Texas, Oklahoma, Arizona, Florida, Alabama and New Mexico. These dealership agreements have current terms expiring between December 2005 and October 2006 and impose certain operational obligations and financial requirements upon us and our dealerships. These agreements are terminable by Peterbilt upon a change of control of the Company, as such term is described in each agreement, and grant Peterbilt rights of first refusal under certain circumstances relating to any sale or transfer of our dealership locations or if certain Rush family members desire to sell more than 100,000 shares of our voting common stock within a 12-month period to anyone other than family members or certain other specified persons (see "Risk Factors—Our dealership agreements impose a number of restrictions and obligations on us and may be terminable upon a change of control."). Any termination or nonrenewal of these dealership agreements by Peterbilt must follow certain guidelines established by both state and federal legislation designed to protect dealers such as Rush from arbitrary termination or nonrenewal of franchise agreements. The Automobile Dealers Day in Court Act and other similar state laws provide that the termination or nonrenewal of a dealership agreement must be done in "good faith" and upon a showing of "good cause" by the manufacturer for such termination or nonrenewal, as such terms have been defined by statute and case law.

        John Deere.    We have entered into a nonexclusive dealership agreement with John Deere which authorizes us to act as a dealer of John Deere construction, utility and forestry equipment. This John Deere dealership agreement has no specified term or duration. Our current area of responsibility for the sale of John Deere construction equipment is the greater Houston, Texas metropolitan area. The John Deere dealership agreement imposes operational obligations and financial requirements of the Company. Like the dealership agreements with Peterbilt, the dealership agreement with John Deere is terminable upon a change of control of the Company, grants limited rights of first refusal and imposes certain financial requirements.

        Other Truck Suppliers.    In addition to our truck dealership agreements with Peterbilt, we are also an authorized dealer of Volvo trucks at our Rush Truck Center in Tulsa, Oklahoma, and have nonexclusive dealership agreements with GMC for the sale of GMC medium-duty trucks at our Rush Truck Centers in San Antonio, Houston, Austin and El Paso, Texas; Oklahoma City and Tulsa, Oklahoma; San Diego, California; and Phoenix and Tucson, Arizona. The Company has dealership agreements with UD (Nissan) for the sale of medium-duty trucks at our Rush Truck Centers in Fontana and Sylmar, California; Austin, Texas; and Winter Garden, Florida. We have a dealership service agreement with UD (Nissan) for the service of medium-duty trucks at our Pico Rivera, California Rush Truck Center. We have a dealership agreement with Isuzu for the sale of medium-duty trucks at our Rush Truck Center in Austin, Texas. In addition, we have a dealership agreement with Hino for the sale of Hino medium-duty trucks at our Rush Truck Centers in San Antonio, Pharr, Houston, Austin and Dallas, Texas; Oklahoma City and Tulsa, Oklahoma; and San Diego, California.

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Sales of non-Peterbilt medium-duty trucks accounted for less than 2.0% of our total revenues for 2003. These dealership agreements have current terms expiring between March 2005 and June 2006. These dealership agreements impose operating requirements upon us and require consent from the affected supplier for sale or transfer of such dealership agreement.

        Other Construction Equipment Suppliers.    In addition to John Deere, we are an authorized dealer for suppliers of other construction equipment. The terms of such arrangements vary, but most of these dealership agreements contain termination provisions allowing the supplier to terminate the agreement after a specified notice period (usually 180 days).

Floor Plan Financing

        Trucks.    We finance substantially all of our new truck inventory and 75% of the loan value of our used truck inventory under a floor plan arrangement with GMAC. As of September 30, 2004, we had approximately $127.8 million outstanding under our GMAC floor plan arrangement. Our GMAC floor plan facility has no expiration date and generally is renegotiated annually. The current interest rate is the prime rate less 65 basis points.

        Construction Equipment.    We finance substantially all of our new construction equipment inventory under floor plan facilities with John Deere and with Citicapital, a division of Citigroup. Our John Deere facility has no set expiration date and its interest rate is the prime rate plus 1.5%. Our Citicapital facility expires November 30, 2004 and the current interest rate is the 30-day LIBOR rate plus 3.0%. As of September 30, 2004, we had $3.5 million outstanding under the floor plan arrangement with John Deere and $5.3 million outstanding under the floor plan arrangement with Citicapital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

Product Warranties

        Both Peterbilt and John Deere provide the retail purchasers of their products with a limited warranty against defects in materials and workmanship, excluding certain specified components which are separately warranted by the suppliers of such components. We do not undertake to provide any warranty to our customers.

        We generally sell our used trucks and construction equipment "as is" and without manufacturer's warranty, although manufacturers sometimes will provide a limited warranty on their used products if they have been properly reconditioned prior to resale or if the manufacturer's warranty on such product is transferable and has not yet expired. We do not undertake to provide any warranty to our used truck or used construction equipment customers.

Trademarks

        The Peterbilt, John Deere, Volvo, GMC, Hino, Isuzu and UD (Nissan) trademarks and trade names, which are used in connection with our marketing and sales efforts, are subject to limited licenses included in the dealership agreements that we have with each of the respective manufacturers. The licenses are for the same periods as our dealership agreements. These trademarks and trade names are recognized internationally and are important in the marketing of our products. Each licensor engages in a continuous program of trademark and trade name protection in its marketing areas. We hold a registered trademark from the U.S. Patent and Trademark Office for the name "Rush."

Employees

        At September 30, 2004, we employed approximately 1,960 people. We have no contracts or collective bargaining agreements with labor unions and have never experienced work stoppages. We consider our relations with our employees to be good.

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Properties

        A Rush Truck Center or Rush Equipment Center may be comprised of one or more locations, generally in close proximity, in the same metropolitan area. The following is a list of our Rush Truck Center and Rush Equipment Center locations as of September 30, 2004:

Property

  Location
  Owned or Leased
  Date Acquired or Occupied
  Description of Activity and Material Lease Expiration Dates
Rush Truck Centers                

Alabama:

 

 

 

 

 

 

 

 
Rush Truck Center of Mobile   Mobile, Alabama   Leased   2003   New, used, parts, service, body and financial

Arizona:

 

 

 

 

 

 

 

 
Rush Truck Center of Phoenix   Phoenix, Arizona   Owned   1999   New, used, parts, service, body, financial and leasing operations for truck center
Rush Truck Center of Tucson   Tucson, Arizona   Owned   1999   New, used, parts, service and financial
Rush Truck Center of Flagstaff   Flagstaff, Arizona   Leased   1999   Parts and service
Rush Truck Center of Chandler   Chandler, Arizona   Leased   1999   Parts

California:

 

 

 

 

 

 

 

 
Rush Truck Center of Pico Rivera   Pico Rivera, California   Leased   1994   New, used, parts, service, body and financial (lease term expires 11/30/2006)
    Pico Rivera, California   Leased   1999   Leasing
Rush Truck Center of Fontana   Fontana, California   Owned   1994   New, parts, service, financial and leasing operations for truck center
    Fontana, California   Leased   2003   Used and body (lease term expires 9/1/2023)
Rush Truck Center of Sylmar   Sylmar, California   Owned   1999   New, used, parts, service and financial
Rush Truck Center of San Diego   San Diego, California   Leased   1999   New, used, parts, service body and financial (lease term expires 5/31/2009)
    San Diego, California   Leased   1999   Leasing
Rush Truck Center of Escondido   Escondido, California   Leased   1999   New, used, parts, service and financial
Rush Truck Center of El Centro   El Centro, California   Leased   1999   New, used, parts, service and financial

Colorado:

 

 

 

 

 

 

 

 
Rush Truck Center of Denver   Denver, Colorado   Owned   2000   New, used, parts, service, body, financial and leasing operations for truck center
Rush Truck Center of Greeley   Greeley, Colorado   Leased   1997   New, used, parts, service and financial

Florida:

 

 

 

 

 

 

 

 
Rush Truck Center of Winter Garden   Winter Garden, Florida   Leased   2003   New, used, parts, service and financial (lease term expires 9/14/2009)
Rush Truck Center of Haines City   Haines City, Florida   Leased   2003   New, used, parts, service and financial (lease term expires 1/31/2013)
                 

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Rush Truck Center of Tampa   Tampa, Florida   Leased   2003   New, used, parts, service and financial (lease term expires 5/31/2009)

New Mexico:

 

 

 

 

 

 

 

 
Rush Truck Center of Albuquerque   Albuquerque, New Mexico   Owned   2003   New, used, parts, service, body and financial
Rush Truck Center of Las Cruces   Las Cruces, New Mexico   Leased   2001   Parts and service

Oklahoma:

 

 

 

 

 

 

 

 
Rush Truck Center of Tulsa   Tulsa, Oklahoma   Leased   1998   New, used, parts, service, body and financial (lease term expires 10/1/2023)
    Tulsa, Oklahoma   Owned   1995   Parts and service
    Tulsa, Oklahoma   Owned   1995   Body
Rush Truck Center of Oklahoma City   Oklahoma City, Oklahoma   Owned   1995   New, used, parts, service, body and financial
Rush Truck Center of Ardmore   Ardmore, Oklahoma   Leased   2000   New, used, parts and service
Perfection Equipment, Inc.   Oklahoma City, Oklahoma   Owned   2001   Parts and service

Texas:

 

 

 

 

 

 

 

 
Rush Truck Center of San Antonio   San Antonio, Texas   Owned   1973   New, used, parts, service, body, financial and leasing operations for truck center
Rush Truck Center of Houston   Houston, Texas   Owned   2000   New, used, parts, service and financial
    Houston, Texas   Owned   1988   Body
    Houston, Texas   Owned   1992   Leasing and tire store
Rush Truck Center of Sealy   Sealy, Texas   Owned   2000   New, used, parts, service and financial
Rush Truck Center of Laredo   Laredo, Texas   Owned   1999   New, used, parts, service, body and financial
Rush Truck Center of Lufkin   Lufkin, Texas   Leased   1992   New, used, parts, service, body, financial and leasing operations for truck center (lease term expires 9/30/2006)
Rush Truck Center of Pharr   Pharr, Texas   Owned   1997   New, used, parts, service, body and financial
Rush Truck Center of Austin   Austin, Texas   Leased   1999   New, used, parts, service and financial
Rush Truck Center of El Paso   El Paso, Texas   Owned   2001   New, used, parts, service, body and financial

Rush Equipment Center

 

 

 

 

 

 

 

 

Rush Equipment Center of Houston

 

Houston, Texas

 

Owned

 

1997

 

New, used, parts, service, leasing and rental, and financial

        Our administrative offices are currently situated in 28,804 square feet of leased space in New Braunfels, Texas. We also occupy 3,750 square feet of leased space in San Antonio, Texas as administrative offices for our insurance services. D&D occupies 26,900 square feet of building space. We also own and operate a hunting ranch of approximately 6,500 acres in Cotulla, Texas. The Company sells hunting trips on the ranch and uses the ranch for client development purposes.

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MANAGEMENT

Executive Officers and Directors

        The following table sets forth certain information with respect to our current directors, director designees and executive officers (ages as of March 15, 2004).

Name

  Age
  Position
W. Marvin Rush   65   Chairman of the Board, Chief Executive Officer and Director
W. M. "Rusty" Rush   45   President, Chief Operating Officer and Director
J. M. Lowe, Jr.   60   Senior Vice President—Corporate Development
David C. Orf   54   Senior Vice President—Marketing and Specialized Equipment Sales
Brent Hughes   61   Senior Vice President—Financial Services
Daryl J. Gorup   55   Senior Vice President—Dealership Operations
Martin A. Naegelin, Jr.   40   Senior Vice President—Chief Financial Officer
James E. Thor   46   Senior Vice President of Retail Sales
Ernest N. Bendele   60   Vice President—Used Trucks
Louis Liles   61   Vice President—Corporate Administration
Ralph West   57   Vice President—Leasing and Rental Operations
John Hiltabiddle   59   Controller
Richard Hall   65   Vice President—Insurance
Ronald J. Krause(1)   76   Director
John D. Rock(1)   68   Director
Harold D. Marshall(1)   68   Director
Thomas A. Akin(1)   49   Director

(1)
Determined by the Company's Board of Directors to be independent in accordance with the listing standards of the NASDAQ National Market and the applicable rules of the Securities and Exchange Commission. Member of the Audit Committee, the Compensation Committee and the Nominating and Governance Committee.

        The following biographies describe the business experience of our executive officers and directors.

        W. Marvin Rush founded the Company in 1965. He served as President from inception until November 1995 when he began his service as Chairman of the Board and Chief Executive Officer. He also served on the Peterbilt dealer council from 1984-1987 and was elected its Chairman in 1987. He was also active on the PacLease Executive Committee from 1989-1992 and was Chairman in 1992. Other honors include the regional Peterbilt Dealer of the Year in 1986, 1987 and 1988, as well as the Midranger Dealer of the Year in 1989. His highest Peterbilt honor was being named North American Peterbilt Dealer of the Year for the 1993-1994 and the 2000-2001 years.

        W. M. "Rusty" Rush served as Vice President and Executive Vice President of the Company from 1990 until November 1995 when he began his service as President of the Company. He was named the Company's Chief Operating Officer in December 2001 and President of Rush Equipment Centers in June 2003. For several years he has overseen the Company's heavy-duty truck segment. He is now responsible for all operations of the Company.

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        J. M. Lowe, Jr. has worked for the Company since 1968, holding the position of Vice President of the Company since 1994. He was promoted to Senior Vice President in 1999. Currently he is responsible for acquisitions and all open account and unsecured lending for the Company.

        David C. Orf has served as Vice President of Marketing and Specialized Equipment Sales of the Company since 1993 and in October 1996 Mr. Orf was promoted to Senior Vice President. Mr. Orf was the general manager of the Company's Houston, Texas facilities until January 1996. Prior to joining the Company, Mr. Orf served as the Southeast regional manager of Peterbilt Motors Company, a division of PACCAR.

        Brent Hughes has served as Vice President of Financial Services since 1993 and he became Senior Vice President in September 1997. He is in charge of all secured financing for the Company. Mr. Hughes worked for Associates Commercial Corporation for 22 years, was Branch Manager in New York City, and later in San Antonio, and was Senior Vice President of the Western Region when he left to join the Company in 1992.

        Daryl J. Gorup has served as Senior Vice President of Dealership Operations of the Company since January 1997. Prior to joining the Company, Mr. Gorup had served for 15 years in various executive positions with Peterbilt, including General Sales Manager.

        Martin A. Naegelin, Jr. has served as Vice President and Chief Financial Officer since January 1997. Mr. Naegelin was promoted to Senior Vice President in December 2001 and was named Secretary and Treasurer of the Company and Executive Vice President of Rush Equipment Centers in March 2003. His responsibilities include the Company's corporate administrative functions, its retail finance and insurance operations, its truck leasing operations and construction equipment operations. Prior to joining the Company, Mr. Naegelin served as Vice President of Investor Relations and Corporate Development of Norwood Promotional Products, Inc. Mr. Naegelin had seven years of public accounting experience prior to joining Norwood in 1993.

        James E. Thor has served as the Senior Vice President of Retail Sales since June 2004. Prior to joining the Company Mr. Thor served for 14 years in various executive positions with Peterbilt. In 1996, Mr. Thor was promoted to Director of U.S. Regional sales of Peterbilt, prior to which he served as Regional Sales Manager and District Sales Manager.

        Ernest N. Bendele has worked for the Company since 1984, serving as a Vice President of the Company since October 1996. Mr. Bendele is responsible for procurement, inventory control and marketing of used trucks nationwide.

        Louis Liles has worked for the Company since December 1995 and has served as Vice President of the Company since September 1997. Prior to joining the Company, Mr. Liles was employed for 17 years, most recently serving as the Senior Vice President of Operations of Kerr Consolidated, Inc., which operated two Peterbilt dealerships and was acquired by the Company in December 1995. In his current capacity, Mr. Liles is responsible for the corporate administration function, which includes human resources and legal oversight.

        Ralph West has worked for the Company since 1994 and has served as a Vice President of the Company responsible for all leasing and rental operations since that time. Prior to joining the Company, Mr. West had been with Ryder Truck Rentals for 28 years serving in various executive positions, including Vice President during his last 14 years with Ryder.

        John Hiltabiddle has served as the Controller of the Company since December 1993. Mr. Hiltabiddle served as the Controller of two large automobile dealerships from 1984 until 1989 and from 1989 until he joined the Company in December 1993. Mr. Hiltabiddle had 12 years of public accounting experience prior to 1984.

58


        Richard "Dick" Hall has worked for the Company since December 1992 and has served as Vice President of Associated Acceptance, Inc., the Company's insurance agency affiliate, since that time. Mr. Hall was elected a Vice President of the Company in 2003. During his working career his service has included 8 years as President and Director of Municipal Insurance Company of America in Elgin, Illinois, and 15 years as President and Director of Northland Insurance Agency, Inc., a bank holding company in Chicago, Illinois. Prior to joining the Company, he owned and operated a proprietary school teaching insurance in San Antonio for six years.

        Ronald J. Krause has served as a director of the Company since June 1996. Mr. Krause served as President of Associates First Capital Corp. from 1976 until 1981 and President and Chief Operating Officer of Associates from 1981 until 1989. Mr. Krause was Vice Chairman of the Board of Directors of Associates of North America from 1988 until his retirement in 1989.

        John D. Rock has served as a director of the Company since April 1997. Mr. Rock served as a Vice President of the Oldsmobile Division of General Motors Corporation from 1991 until his retirement from General Motors Corporation in February 1997 after over 36 years of service. While at General Motors Corporation, Mr. Rock held various executive positions in sales, service and marketing. Mr. Rock has also served as a member of the Board of Directors of Volvo-GM Heavy Truck Corporation. Since his retirement in 1997, Mr. Rock has devoted his time and attention to the management of his personal investments.

        Harold D. Marshall has served as a director of the Company since February 1999. Mr. Marshall served as President and Chief Operating Officer of Associates First Capital Corp. from May 1996 until his retirement in January 1999 and served as a director of Associates. Mr. Marshall joined Associates in 1961 and organized their Transportation Division in 1974. Mr. Marshall serves as Vice Chairman of the American Trucking Association Foundation Board of Directors, as a Member of the American Trucking Association Foundation Executive Committee, as Trustee Emeritus of the Hudson Institute, and as a Trustee on the Board of Trustees of the Dallas Museum of Art. Mr. Marshall also serves as a director and member of the audit and compensation committees of Overnite Transportation Company. Since his retirement in 1999, Mr. Marshall has devoted his time and attention to the management of his personal investments.

        Thomas A. Akin has served as a director of the Company since August 2004. Mr. Akin worked in the audit department of Ernst & Young for 13 years and has served as the director of the audit department for Akin, Doherty, Klein & Feuge, P.C., in San Antonio, Texas since 1991. Throughout his career, Mr. Akin has served as the client service executive responsible for the independent audit for companies registered with the SEC.

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PRINCIPAL SHAREHOLDERS

        The table below sets forth certain information with respect to the beneficial ownership of our common stock as of September 30, 2004 by:

        Unless otherwise stated, each of the persons named in the table has sole voting and investment power with respect to the securities beneficially owned by it, him or her as set forth opposite their name. Beneficial ownership of the common stock listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Securities Exchange Act of 1934. The percentage of total voting power is based on 1/20th of one vote for each share of class A common stock and one vote for each share of class B common stock owned by each person.


Beneficial Ownership

 
  Class A
Common Stock

  Class B
Common Stock

   
Name and Address(1)

  Shares
  % of Class
  Shares
  % of Class
  % Total
Voting Power(2)

W. Marvin Rush(3)   2,766,735   34.9   2,766,735   35.5   35.5
Rutabaga Capital Management LLC(4)   891,650   11.2   721,800   9.3   9.3
John D. Rock(5)   92,000   1.2   52,000   *   *
Ronald J. Krause(6)   50,000   *   50,000   *   *
Harold D. Marshall(7)   75,000   *   35,000   *   *
Thomas A. Akin(8)   20,000   *     *   *
W. M. "Rusty" Rush   2,041   *   2,041   *   *
David C. Orf     *     *   *
Daryl J. Gorup   1,272   *   1,272   *   *
Martin A. Naegelin, Jr.   2,000   *   2,000   *   *
All executive officers and directors as a group (fifteen persons, including the executive officers and directors listed above)   3,078,229   38.8   2,978,274   38.2   38.3

*
Represents less than 1% of the issued and outstanding shares of common stock.

(1)
Except as otherwise noted, the street address of the named beneficial owner is 555 IH-35 South, New Braunfels, Texas 78130.

(2)
Based on a total of 15,127,968 shares of common stock issued and outstanding on September 30, 2004, plus vested options issuable under the Company's 1997 Non-Employee Director Stock Option Plan, vested options and options that will vest within 60 days of August 31, 2004 issuable under the Company's Long-Term Incentive Plan and vested options that are issuable outside of a Company plan.

(3)
Includes 2,001,833 shares of class A common stock and 2,001,833 shares of class B common stock held by 3MR Partners, L.P., of which W. Marvin Rush is the general partner, and 14,902 shares of class A common stock and 14,902 shares of class B common stock issuable upon the exercise of options granted to W. Marvin Rush pursuant to the Company's Long-Term Incentive Plan. W. Marvin Rush is the beneficial owner of the shares held by 3MR Partners, L.P.

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(4)
Rutabaga Capital Management LLC has (i) sole voting power for 396,750 shares of class A common stock and 275,300 shares of class B common stock, (ii) shared voting power for 494,900 shares of class A common stock and 446,500 shares of class B comon stock, and (iii) sole dispositive power for all shares of class A common stock and class B common stock that it owns. The address for Rutabaga Capital Management LLC is 64 Broad Street, Third Floor, Boston, Massachusetts 02110. This information is based solely on information contained in Schedule 13Gs filed with the SEC on February 4, 2004. Rutabaga Capital Management LLC is not affiliated with the Company or any member of the Company's management. The Company does not know what natural person or public company has the ultimate voting or investment control over the shares held by Rutabaga Capital Management LLC.

(5)
Includes 90,000 shares of class A common stock and 50,000 shares of class B common stock to be issued upon the exercise of options granted pursuant to the Company's 1997 Non-Employee Director Stock Option Plan.

(6)
Includes 50,000 shares of class A common stock and 30,000 shares of class B common stock to be issued upon the exercise of options granted pursuant to the Company's 1997 Non-Employee Director Stock Option Plan and 20,000 shares of class B common stock to be issued upon the exercise of options granted outside of any Company plan.

(7)
Includes 70,000 shares of class A common stock and 30,000 shares of class B common stock to be issued upon the exercise of options granted pursuant to the Company's 1997 Non-Employee Director Stock Option Plan.

(8)
Includes 20,000 shares of class A common stock to be issued upon the exercise of options granted pursuant to the Company's 1997 Non-Employee Director Stock Option Plan.

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SELLING SHAREHOLDERS

        The following table presents certain information regarding the beneficial ownership of our class A common stock (but without giving effect to the underwriters' exercise of the over-allotment option) by the selling shareholders. Please see "Principal Shareholders" for a description of the material relationships between us and the selling shareholders.

 
  Shares Beneficially Owned Prior to the Offering
   
  Shares Beneficially Owned After the Offering
 
Beneficial Owner

  Number Class A
  Percentage Class A
  Shares Being Sold in the Offering
  Number Class A
  Percentage Class A
 
W. Marvin Rush(1)   2,766,735   34.9 % 2,750,000   16,735   0.1 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
                       

(1)
Includes shares of class A common stock held by 3MR Partners, L.P. W. Marvin Rush is selling 750,000 shares of class A common stock that he owns individually. 3MR Partners, L.P., of which W. Marvin Rush is the general partner, is selling 2,000,000 shares of class A common stock.

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UNDERWRITING

        Under the terms and subject to the conditions contained in an underwriting agreement dated November 18, 2004, we and the selling shareholders have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston LLC is acting as representative, the following respective numbers of shares of class A common stock:

                           Underwriter

  Number of Shares
Credit Suisse First Boston LLC   7,000,000
Morgan Keegan & Company, Inc.   1,500,000
BB&T Capital Markets, a division of Scott & Stringfellow, Inc.   1,500,000
   
  Total   10,000,000
   

        The underwriting agreement provides that the underwriters are obligated to purchase all the shares of class A common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.

        We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 1,500,000 additional shares from us at the public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of class A common stock.

        The underwriters propose to offer the shares of class A common stock at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $0.3975 per share. The underwriters and selling group members may allow a discount of $0.1000 per share on sales to other broker/dealers. After the public offering the representative may change the public offering price and concession and discount to broker/dealers.

        The following table summarizes the compensation and estimated expenses we and the selling shareholders will pay:

 
  Per Share
  Total
 
  Without
Over-allotment

  With
Over-allotment

  Without
Over-allotment

  With
Over-allotment

Underwriting Discounts and Commissions paid by us   $ 0.6625   $ 0.6625   $ 4,803,125   $ 5,796,875
Expenses payable by us   $ 0.1379   $ 0.1143   $ 1,000,000   $ 1,000,000
Underwriting Discounts and Commissions paid by selling shareholders   $ 0.6625   $ 0.6625   $ 1,821,875   $ 1,821,875

        We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 (the "Securities Act") relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston LLC for a period of 90 days after the date of this prospectus except issuances pursuant to the exercise of employee stock options outstanding on the date hereof. However, in the event that either (1) during the last 17 days of the "lock-up" period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the "lock-up" period, we announce that we will release earnings results during the 16-day period beginning on the last day of the "lock-up" period, then in either case the expiration of the "lock-up" will be

63


extended until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Credit Suisse First Boston LLC waives, in writing, such an extension.

        Our officers and directors have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston LLC for a period of 90 days after the date of this prospectus. However, in the event that either (1) during the last 17 days of the "lock-up" period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the "lock-up" period, we announce that we will release earnings results during the 16-day period beginning on the last day of the "lock-up" period, then in either case the expiration of the "lock-up" will be extended until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Credit Suisse First Boston LLC waives, in writing, such an extension.

        We and the selling shareholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect.

        The shares of class A common stock have been approved for listing on The NASDAQ National Market, subject to official notice of issuance, under the symbol "RUSHA."

        In connection with the offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Securities Exchange Act of 1934 (the "Exchange Act").

64


These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The NASDAQ National Market or otherwise and, if commenced, may be discontinued at any time.

        Credit Suisse First Boston LLC has acted as financial advisor to us in connection with the ATS acquisition and will receive customary compensation in connection therewith upon the closing of the acquisition.

        A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representative may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make Internet distributions on the same basis as other allocations.

65



NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

        The distribution of the shares of class A common stock in Canada is being made only on a private placement basis exempt from the requirement that we and the selling shareholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of the shares are made. Any resale of the shares in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the shares.

Representations of Purchasers

        By purchasing the shares in Canada and accepting a purchase confirmation a purchaser is representing to us, the selling shareholders and the dealer from whom the purchase confirmation is received that:

Rights of Action—Ontario Purchasers Only

        Under Ontario securities legislation, a purchaser who purchases a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the shares, for rescission against us and the selling shareholders in the event that this prospectus contains a misrepresentation. A purchaser will be deemed to have relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the shares. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the shares. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us or the selling shareholders. In no case will the amount recoverable in any action exceed the price at which the shares were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we and the selling shareholders will have no liability. In the case of an action for damages, we and the selling shareholders will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the shares as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.

Enforcement of Legal Rights

        All of our directors and officers as well as the experts named herein and the selling shareholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.

Taxation and Eligibility for Investment

        Canadian purchasers of the shares should consult their own legal and tax advisors with respect to the tax consequences of an investment in the shares in their particular circumstances and about the eligibility of the shares for investment by the purchaser under relevant Canadian legislation.

66



LEGAL MATTERS

        The validity of the shares of class A common stock offered hereby will be passed upon for us by Fulbright & Jaworski L.L.P., San Antonio, Texas. The underwriters are being represented in connection with this offering by Vinson & Elkins L.L.P., Houston, Texas.


EXPERTS

        The consolidated financial statements of Rush Enterprises, Inc. at December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

        The consolidated financial statements of ATS for the years ended December 31, 2003 and 2002, included in this prospectus and elsewhere in the registration statement have been audited by BDO Seidman, LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.


WHERE YOU CAN FIND MORE INFORMATION

        We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy materials that we have filed with the SEC at the SEC public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information about the public reference room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public on the SEC's Internet website at sec.gov.

67



INCORPORATION BY REFERENCE

        We incorporate by reference into this prospectus the documents listed below and any filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and prior to the termination of the offering of common stock under this prospectus. The information incorporated by reference into this prospectus is considered a part of this prospectus, and information that we file later with the SEC, prior to the termination of the offering of common stock under this prospectus, will automatically update and supersede the previously filed information.

        We are not incorporating by reference in this prospectus any portion of any report that we have filed or will file later with the SEC that is not deemed to be "filed" for purposes of Section 18 of the Exchange Act.

        You may request a copy of these filings at no cost by writing to (or telephoning us) at the following address:

Rush Enterprises, Inc.
555 IH-35 South, Suite 500
New Braunfels, Texas 78130
Telephone: (877) 879-7266
Attention: Corporate Secretary

68



Index to Financial Statements

American Truck Source, Inc. and Subsidiaries

Consolidated Balance Sheet as of September 30, 2004 and 2003

Consolidated Statement of Income for the nine months ended September 30, 2004 and 2003

Consolidated Statement of Cash Flows for the nine months ended September 30, 2004 and 2003

Notes to Consolidated Financial Statements


Report of Independent Auditors


Consolidated Balance Sheets as of December 31, 2003 and 2002

Consolidated Statements of Income for the years ended December 31, 2003 and 2002

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003 and 2002

Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002

Notes to Consolidated Financial Statements

Rush Enterprises, Inc.

Report of Independent Auditors

Consolidated Balance Sheets as of December 31, 2002 and 2003

Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003

Consolidated Statements of Shareholders' Equity for the Years ended December 31, 2001, 2002 and 2003

Consolidated Statements of Cash Flows for the Years ended December 31, 2001, 2002 and 2003

Notes to Consolidated Financial Statements

F-1



American TruckSource, Inc. and Subsidiaries

Consolidated Balance Sheets

 
  Unaudited
 
 
  September 30,

 
 
  2004
  2003
 
Assets              
 
Cash and cash equivalents

 

$

15,405,783

 

$

12,900,569

 
  Accounts receivable, net of allowance for doubtful accounts $140,601 and $179,177     15,875,479     11,019,158  
  Inventories     39,055,014     51,537,423  
  Notes receivable, current     21,234     4,622,438  
  Prepaid expenses and other     804,781     949,792  
   
 
 
    Total current assets     71,162,291     81,029,380  
   
 
 
Property and equipment, net     28,031,901     24,277,863  

Other assets

 

 

 

 

 

 

 
  Receivables from affiliates, net     17,638,122     12,547,690  
  Notes Receivable, net of current portion     739,857     1,247,511  
  Other, net of accumulated amortization of $529,593 for both years     5,075,445     4,515,664  
   
 
 
    Total other assets     23,453,424     18,310,865  
   
 
 
    $ 122,647,616   $ 123,618,108  
   
 
 

Liabilities and Stockholder's Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 
  Floor plan lines of credit   $ 48,716,324   $ 51,641,661  
  Current portion of long-term debt     3,438,806     10,443,000  
  Accounts payable     3,057,417     5,427,349  
  Accrued liabilities     6,160,230     5,816,476  
  Income taxes payable (refundable)     (29,385 )   (59,999 )
   
 
 
    Total current liabilities     61,343,392     73,268,487  
   
 
 

Long term debt, net of current portion

 

 

20,954,983

 

 

17,273,349

 

Other liabilities

 

 

1,247,289

 

 

1,821,458

 
   
 
 

Total liabilities

 

 

83,545,664

 

 

92,363,294

 
   
 
 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholder's equity

 

 

 

 

 

 

 
  Class A common stock, $.01 par value, 20,000,000 shares authorized, 10,300,000 shares issued and 9,977,859 shares outstanding     103,000     103,000  
  Additional paid-in capital     4,578,083     4,578,083  
  Treasury stock at cost, 322,141 Class A shares     (1,074,000 )   (1,074,000 )
  Retained earnings     35,494,869     27,647,731  
   
 
 

Total stockholders' equity

 

 

39,101,952

 

 

31,254,814

 
   
 
 

 

 

$

122,647,616

 

$

123,618,108

 
   
 
 

See accompanying notes to consolidated financial statements.

F-2



American TruckSource, Inc. and Subsidiaries

Consolidated Statements of Income

 
  Unaudited
 
 
  Nine Months Ended
September 30,
2004

  Nine Months Ended
September 30,
2003

 
Revenues              
  New and used trucks   $ 250,671,844   $ 148,227,938  
  Parts and service     44,641,726     40,593,689  
  Finance and insurance income, net     2,081,892     2,092,665  
  Lease and rental income     3,122,491     2,996,392  
   
 
 

 

 

 

300,517,953

 

 

193,910,684

 
   
 
 

Cost of products sold

 

 

 

 

 

 

 
  New and used trucks     234,025,350     138,130,074  
  Parts and service     27,797,960     25,486,264  
  Lease fixed and variable expense     860,349     1,085,564  
   
 
 

 

 

 

262,683,659

 

 

164,701,902

 
   
 
 

Gross profit

 

 

37,834,294

 

 

29,208,782

 
   
 
 

Operating expenses

 

 

 

 

 

 

 
  Selling, general and administrative     24,523,420     22,231,905  
  Depreciation and amortization     2,746,852     2,261,555  
   
 
 

 

 

 

27,270,272

 

 

24,493,460

 
   
 
 

Operating income

 

 

10,564,022

 

 

4,715,322

 
   
 
 

Other expense (income)

 

 

 

 

 

 

 
  Interest expense     1,963,950     1,868,879  
  Interest and investment income     (989,495 )   (1,922,537 )
  Other, net     (53,354 )   (32,010 )
   
 
 

 

 

 

921,101

 

 

(85,668

)
   
 
 

Income (loss) before income taxes

 

 

9,642,921

 

 

4,800,990

 

Income tax provision (benefit)

 

 

144,162

 

 

65,893

 
   
 
 

Net income (loss)

 

$

9,498,759

 

$

4,735,097

 
   
 
 

See accompanying notes to consolidated financial statements.

F-3



American TruckSource, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 
  Unaudited
 
 
  Nine Months Ended
September 30,

 
 
  2004
  2003
 
Cash flows from operating activities              
  Net income   $ 9,498,759   $ 4,735,097  
  Adjustments to reconcile net income to net cash provided by operating activities:              
    Depreciation and amortization     2,746,852     2,261,555  
    Gain on sales of assets     (8,088 )   69,448  
    Imputed Interest     (508,574 )   (414,710 )
    Provision for doubtful accounts     91,015     74,400  
  Changes in operating assets and liabilities:              
    Accounts receivable     (6,942,972 )   (1,048,092 )
    Inventories     12,994,631     (7,348,983 )
    Prepaid expenses and other     69,795     (235,915 )
    Receivables from affiliates, net     (3,212,408 )   (1,918,619 )
    Floor plan lines of credit     (14,524,573 )   9,576,646  
    Accounts payable and accrued liabilities     (536,665 )   490,987  
    Income taxes payable     11,225     (141,277 )
    Other     (512,756 )   293,102  
   
 
 
     
Net cash provided by operating activities

 

 

(833,759

)

 

6,393,639

 

Cash flows from investing activities

 

 

 

 

 

 

 
  Capital expenditures     (944,608 )   (3,588,567 )
  Net proceeds from sales of assets     8,088     71,817  
  Receipts on notes receivable, net     1,179,161     (2,255,687 )
   
 
 
     
Net cash used in investing activities

 

 

242,641

 

 

(5,772,437

)

Cash flows from financing activities

 

 

 

 

 

 

 
  Borrowings under long-term debt agreements     643,702     2,200,000  
  Repayments of long-term debt     (7,961,596 )   (6,649,775 )
  Dividends paid to Shareholders     (1,247,232 )   (2,245,699 )
   
 
 
     
Net cash provided by (used in) financing activities

 

 

(8,565,126

)

 

(6,695,474

)

Increase in cash and cash equivalents

 

 

(9,156,244

)

 

(6,074,272

)

Cash and cash equivalents at beginning of year

 

 

24,562,027

 

 

18,974,841

 
   
 
 

Cash and cash equivalents at September 30,

 

$

15,405,783

 

$

12,900,569

 
   
 
 

See accompanying notes to consolidated financial statements.

F-4



American TruckSource, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Organization and Summary of Significant Accounting Policies

        Business—American TruckSource, Inc. and Subsidiaries (the Company), is a holding company formed in February 1997 to own and manage certain heavy-duty truck dealers franchised to sell new Peterbilt trucks and PACCAR Inc. (PACCAR) parts. Peterbilt trucks are manufactured by Peterbilt Motors Company (Peterbilt), a wholly owned subsidiary of PACCAR. In addition to new trucks and parts, the Company also sells used heavy-duty trucks, provides financing and insurance for new and used trucks and provides maintenance and body shop services through its service and body shop facilities.

        The Company's direct and indirect wholly owned operating subsidiaries are Dallas Peterbilt, Ltd., L.L.P. (DPL), Nashville Peterbilt, Inc. (NPI), Louisville Peterbilt, Inc. (LPI), Birmingham Peterbilt, Inc. (BPI), American TruckSource Financial Corporation (ATS Financial), American TruckSource Leasing, Inc. (ATS Leasing), and Highland Park Land Company (HPLC). DPL, NPI, LPI, and BPI are heavy-duty truck dealerships located in Dallas, Texas; Nashville, Tennessee; Jeffersonville, Indiana, and Birmingham, Alabama, respectively. DPL also has locations in Tyler, Fort Worth and Abilene, Texas. ATS Financial is a finance company in the business of retail and lease financing for new and used trucks and trailers. ATS Leasing is a franchise of PACLease (a division of PACCAR) and leases Peterbilt trucks to third-party freight carriers. HPLC owns the land and buildings at DPL's, NPI's, and LPI's primary locations, as well as other real estate properties.

        On September 15, 2004, the Company entered into an agreement to sell substantially all of its assets to Rush Enterprises, Inc. (Rush). PACCAR has indicated that it will exercise its right of first refusal with respect to LPI and BPI, allowing Rush to purchase substantially all of the assets of DPL, NPI, ATS Financial, ATS Leasing, and HPLC.

        Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.

        Consolidation—The accompanying consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated.

        Management Estimates—The preparation of the consolidated financial statements of the Company in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

        Consolidated Statements of Cash Flows—For purposes of the consolidated statements of cash flows, cash and cash equivalents include all deposits with original maturities of three months or less as well as all contracts in transit, which will be converted to cash within several days of their origination. Contracts in transit represent financing contracts on vehicles sold for which the proceeds are in transit from financing institutions.

        During the nine month periods ended September 30, 2004 and 2003 interest paid totaled approximately $1,937,328 and $1,825,498 and income taxes paid totaled approximately $132,937 and $44,616, respectively.

        Trade Receivables and Allowance for Doubtful Accounts—Trade receivables are customer obligations due under normal trade terms and are accounted for on a cost basis. Management performs continuing

F-5



credit evaluations of customers' financial condition and generally does not require collateral from customers. The Company provides an allowance for doubtful accounts based on its historic collection experience. Receivables are written off when management deems them uncollectible, based on historical experience with the individual account.

        Note Receivables and Loan Loss Reserve—Note receivables are carried on a cost basis, with interest income recognized as received. During the nine month period ended September 30, 2004, the notes earned interest at rates ranging from 5.50% to 19.9%. The Company records an allowance for these receivables based on historical experience with the account. The allowances at September 30, 2004 and 2003 were $121,944 and $365,453 and were included in the accrued liabilities $6,160,230 and $5,816,476, respectively in the accompanying consolidated balance sheets.

        Inventories—Inventories are stated at the lower of cost or market value. New and used truck inventories are carried at actual cost determined by specific identification. Parts and accessories inventories are carried at average cost.

        Property and Equipment—Property and equipment are carried at cost and depreciated on the straight-line method over their estimated useful lives. When assets are retired, sold or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected as other income during that accounting period. The costs of repairs and maintenance are expensed as incurred, and significant renewals or improvements are capitalized.

        The Company reviews for impairment whenever circumstances indicate that the carrying value of an asset may not be recoverable based on the estimated future cash flows (undiscounted and without interest charges) expected to result from use of that asset and its eventual disposition. Impairment is recognized only if the carrying amount of an asset is greater than the expected future cash flows and the impairment is based on the fair value of the asset.

        Other Assets—Other assets primarily consist of goodwill related to acquisitions of approximately $4,020,000. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Under SFAS 142, effective January 1, 2002, goodwill and intangible assets with indefinite lives are to no longer be amortized but are to be reviewed annually (or more frequently if impairment indicators arise) for impairment. Goodwill was being amortized on a straight-line basis over 40 years. The amortization was discontinued as of January 1, 2002. There have been no changes in the carrying amount of goodwill for the period ended September 30, 2004.

        Revenue Recognition and Recourse Agreements—Income from the sale of new and used trucks is recognized when the seller and customer execute a purchase contract, delivery has occurred and there are no significant uncertainties related to financing or collectibility. The Company facilitates the financing of new and used trucks for its customers. Generally, the Company will execute a finance contract and immediately sell such contract to a third-party finance company. The Company recognizes finance income in the amount received from the third-party finance companies, net of a provision for estimated repossession losses and interest charge backs. The Company may, upon such a sale, agree to accept limited recourse in the event the truck is subsequently repossessed. The Company's recourse obligation is determined, based on the model year of the truck sold and other factors. The Company provides a reserve for repossession losses after considering historical loss experience and the existing

F-6



portfolio of limited recourse contracts outstanding. If a customer prepays or fails to pay a contract, thereby terminating a finance contract prior to scheduled maturity, a portion of the finance income may be charged back to the Company based on the relevant terms of the contract. The Company provides for this charge back exposure based on historical charge back experience and early termination rates. The Company, through ATS Financial, will retain certain finance contracts for its own account. Finance income on retained contracts is recognized over the life of the contract. A reserve for loan losses is provided for estimated losses related to retained contracts.

        The Company recognized repossession and loan loss expense of approximately $2,016,712 for the nine month period ended September 30, 2004 and $1,216,840 for the nine month period ended September 30, 2003 which are included in "Income from Finance and Leasing, Net", in the accompanying consolidated statements of income. Parts and service revenue is recognized when the Company sells a part to its customer or when service work is completed.

        Income Taxes—Effective January 1, 2000, the Company elected S Corporation filing status under Internal Revenue Service regulations. Accordingly, federal income taxes are not imposed upon the Company, except in certain limited circumstances where taxes may be assessed on gains realized due to the sale of certain assets. The Company also incurs taxes at the state level, including income and franchise taxes.

        Fair Value of Financial Instruments—The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, debt and an interest rate swap agreement. The fair values of cash and cash equivalents, accounts receivable, notes receivable and accounts payable approximate their respective carrying values. The fair value of debt is estimated based on current rates available for similar debt with similar maturities and security. All of the Company's debt bears interest rates approximating market rates as of September 30, 2004 and, as a result, the carrying value of the Company's debt approximates its fair value.

        The fair value of the interest rate swap agreement is estimated based upon the amount that the Company would receive or pay to terminate the swap agreement at the reporting date, taking into consideration current interest rates and any related credit risk. The Company does not anticipate nonperformance by the financial institution, and no material loss would be expected from their nonperformance.

2. Inventories

        Inventories as of September 30, are as follows:

 
  2004
  2003
New Trucks   $ 25,937,502   $ 32,412,946
Used Trucks     6,661,059     13,014,699
Parts and Accessories     6,456,453     6,109,778
   
 
    $ 39,055,014   $ 51,537,423
   
 

        Substantially all inventories of new and used trucks are pledged as collateral in connection with the floor plan lines of credit.

F-7



3. Property and Equipment

        Property and equipment as of September 30, are as follows:

 
  Estimated
Useful Lives
(In Years)

  2004
  2003
Land     $ 8,047,398   $ 8,390,392
Buildings and improvements   5-39     15,282,412     14,386,784
Equipment   3-5     5,109,287     4,748,568
Furniture and fixtures   5     1,517,229     1,537,200
Leased vehicles   3-5     10,398,318     7,064,485
Company vehicles   5     1,547,365     1,874,850
Construction in progress           168,945
       
 
          41,902,009     38,171,224
Less accumulated depreciation         13,870,108     13,893,361
       
 
        $ 28,031,901   $ 24,277,863
       
 

        Substantially all of the Company's real property is pledged under long-term debt agreements.

4. Floor Plan Lines of Credit

        The Company uses floor plan lines of credit (the Floor Plan) to facilitate its purchases of new and used truck inventories. The Company's Floor Plan is secured by its new and used truck inventories and any cash or receivables resulting from the sale of such collateral and is guaranteed by a stockholder of the Company. The total amount of credit available fluctuates depending on the level of new truck purchases. The Floor Plan interest rate is based on the 30 day Commercial Paper Index as reported on the first day of each month in the Wall Street Journal, plus 2.125% (for a total rate of 3.185% as of September 30, 2004 and 3.725% as of September 30, 2003). Floor Plan is generally paid off on the third day following the receipt of payment on a vehicle sale to allow the funds to become available. Borrowings under the Floor Plan are due upon demand.

        Amounts of collateral as of September 30, are as follows:

 
  2004
  2003
Inventories, new and used trucks   $ 32,255,719   $ 43,955,562
Truck sale related accounts receivable     10,828,827     3,789,880
Truck sale related contracts-in-transit     5,813,085     5,547,077
Cash held for Floor Plan payment related to receipts from Truck sales     3,607,690     870,515
   
 
Total     52,505,321     54,163,034
   
 
Floor plan lines of credit   $ 48,716,324   $ 51,641,661
   
 

F-8


5. Long Term Debt

        Total long term debt as of September 30, is as follows:

 
  2004
  2003
Equipment financing notes payable   $ 9,085,526   $ 6,035,639
Real estate mortgage notes payable     15,308,263     16,556,632
Acquisition financing note payable        
Revolving lines of credit         5,124,078
   
 
      24,393,789     27,716,349
Less current portion     3,438,806     10,443,000
   
 
Floor plan lines of credit   $ 20,954,983   $ 17,273,349
   
 

        Equipment Financing Notes Payable—The Company, mostly through ATS Financial, has entered into financing arrangements with several third-party finance institutions. In general, the Company will obtain loans from the financial institutions to provide funding for the purchase of equipment to be leased to freight carriers or to provide funding for loans to fleets or owner/operators seeking to purchase equipment. Each loan is individually negotiated and is secured by the underlying equipment and/or the Company's rights in all accounts, chattel paper, equipment, instruments and contract rights. The loans outstanding bear interest at rates ranging from 0% to 9.18% and mature on various dates through February 2008.

        Real Estate Mortgage Notes Payable—The Company has both fixed and variable rate real estate notes with several lenders. The proceeds from the issuance of the variable and fixed rate real estate notes were used primarily to acquire land, buildings, and to make improvements. These notes are secured by real estate. The Company's variable interest rate notes have rates based on several indices, with rates ranging from 3.6% to 6.875% for the period ended September 30, 2004. Monthly payments on these notes range from $3,400 to $59,028, plus interest. Maturities of these notes range from October 2004 to November 2027. The Company's fixed rate debt has a rate of 7.25% and matures in August 2006. Payments are $3,300 per month. The stockholders of the Company and many of the Company's subsidiaries guarantee the notes. Under the terms of the notes, the Company is obligated to maintain certain collateral coverage covenants and is restricted as to future transactions involving additional indebtedness. For the period ended September 30, 2004, the Company was in compliance with all such covenants.

        Revolving Lines of Credit—The Company has a revolving line-of-credit facility (the Credit Facility) with a bank under which ATS may borrow up to $6,000,000. As of September 30, 2004 and 2003, the outstanding line-of-credit balance was $0.00 and $5,124,078, respectively. The Credit Facility bears interest at a variable rate of Libor plus 2% (3.78% and 3.12% at September 30, 2004 and 2003, respectively). Interest is payable monthly. Borrowings outstanding under the Credit Facility are due on November 15, 2004. The Credit Facility is secured by substantially all of ATS's tangible assets not previously pledged. Under the terms of the Credit Facility, the Company is obligated to maintain certain financial covenants and is restricted as to future transactions involving additional secured debt, dividends, security issuances, recapitalizations, capital expenditures and lease commitments. At the period ended September 30, 2004, the Company was in compliance with all such covenants. The stockholders of the Company guarantee the Credit Facility.

F-9



        Maturities on long-term debt as of September 30, 2004, are as follows:

12 months ending September 30,

   
2005   $ 3,438,806
2006     3,706,519
2007     5,738,598
2008     3,079,283
2009     845,349
Thereafter     7,585,234
   
    $ 24,393,789
   

        Interest Rate Swap Agreement—During 2003, the Company entered into an interest rate swap agreement with a major financial institution in order to reduce the impact of changes in market interest rates on HPLC. The agreement provides for the Company to pay the financial institution monthly interest payments at a fixed rate of 5.55%, in exchange for the receipt of monthly interest payments based on the LIBOR rate. The original notional amount was $12,759,231, and the LIBOR rate is adjusted monthly. The agreement matures in July 2013 and is secured by real estate owned by HPLC. The fair value of the interest rate swap was $1,022,413 at September 30, 2004 and $1,410,458 at September 30, 2003, and is recorded in other liabilities. Additionally, the Company's performance under this agreement is guaranteed by the stockholders of the Company and other subsidiaries.

6. Stockholders' Equity

        In 1997, the Company entered into a plan and agreement of reorganization (the Plan) by and among (a) the Company, (b) NPI, ATS Leasing and LPI (the Nashville Group), (c) DPL, HPLC and ATS Financial (the Dallas Group), (d) MKJ Family Enterprises, Inc., and MKJ, owners of the Dallas Group and (e) the Baker Nashville Partnership (the Sellers), owners of the Nashville Group. Under the terms of the Plan, the Dallas Group acquired the Nashville Group and in 1998, the Company became obligated to repurchase certain shares of the Company's Class A common stock previously owned by one of the Seller' principals. The Company recorded such shares as treasury stock in 1998 and the final payment due pursuant to the repurchase obligation was paid during 2001. In 1999, an officer of the Company purchased all of the remaining Class A common stock of the Company owned by the Sellers. In the event that the Company completes an initial public offering within six years of the date of repurchase of each Sellers' ownership interest, additional consideration may be due to the Sellers.

        For the nine month periods ended September 30, 2004 and 2003, the Company declared and paid dividends to its stockholders in the aggregate amount of $1,247,232 and $2,245,699, respectively.

F-10



7. Income Taxes

        The provision (benefit) for income taxes for the nine month period ended September 30, 2004, is as follows:

 
  2004
  2003
Current income taxes   $ 144,162   $ 65,893
Deferred income taxes        
   
 
  Income tax provision (benefit)   $ 144,162   $ 65,893
   
 

8. Related Party Transactions

        The Company periodically makes non-interest bearing cash advances to or receives payments from certain affiliated persons and entities, including transactions with the Company's principal stockholders, who are also chairman and president of the Company, and with other affiliates including an aviation company. Advances to these entities are generally to provide operating funds or to make capital expenditures. Payments from these entities are generally to repay amounts previously advanced or to take advantage of the Company's resources for investing cash. No due dates have been established for repayment of some of the advances. The net receivables from affiliated entities were $2,651,229 and $861,539 at September 30, 2004 and 2003.

        On September 30, 2000, the Company consummated a promissory note receivable from one of its stockholders. The note consists of a $5,000,000 revolving line of credit, which bears interest at 7.00% and matures on December 31, 2010. At September 30, 2004 and 2003 the note receivable balances were $10,449,348 and $6,733,458, respectively.

        On August 10, 2000, the Company extended a promissory note receivable from a stockholder for the purchase of the Sellers' shares of Class A common stock. The note consists of a $4,000,000 revolving line of credit, which bears interest at 7.00% and matures on December 31, 2010. At September 30, 2004 and 2003, the note receivable balances were $806,509 and $1,000,000.

        On July 31, 2000, HPLC executed a $6,011,810 note receivable from an affiliate of the Company, bearing interest at 7.00%. The note was amended on February 9, 2001 (due to a large principal payment in December 31, 2000), to provide for monthly installments of principal and interest of $23,452 through July 31, 2030. At September 30, 2004 and 2003, the note receivable balances were $3,376,850 and $3,406,108, respectively. The note is secured by a second lien on real estate.

        The Company recognized approximately $685,927 of interest income from related-party receivables for the nine month period ended September 30, 2004 and $594,270 of interest income from related-party receivables for the nine month period ended September 30, 2003.

        An affiliate of the Company owns and operates an airplane. During the nine month periods ended September 30, 2004 and 2003, the Company incurred approximately $378,000 and $635,000, respectively related to use of the affiliate's aircraft. This expense is included in selling, general and administrative expense in the consolidated statements of income.

9. Commitments and Contingencies

        The Company leases certain facilities and equipment under lease agreements that have been classified as operating leases. A portion of the operating lease commitments relates to equipment that

F-11



is subleased to customers. Total rental expense included in the accompanying consolidated statement of income for the nine month period ended September 30, 2004 and 2003 for such leases is approximately $833,000 and $1,064,000, respectively. Future minimum lease payments under noncancelable operating leases with initial or remaining terms in excess of one year as of September 30, 2004, are as follows:

12 months ending September 30,

   
2005   $ 1,221,553
2006     641,505
2007     420,856
2008     31,117
Thereafter     2,230
   
  Future minimum lease payments   $ 2,317,261
   

        Minimum lease payments to be received for noncancelable leases and subleases in effect at September 30, 2004, are as follows:

12 months ending September 30,

   
2005   $ 123,490
2006     61,472
2007     16,799
2008    
Thereafter    
   
  Future minimum lease receipts   $ 201,761
   

        The Company has guaranteed a loan made to the affiliated aviation company (see Note 8). The note balance at September 30, 2004 and 2003 is approximately $2,261,104 and $2,492,575, respectively and is secured by an airplane owned by the affiliated aviation company. This guarantee would require payment only in the event of default on payment by the debtor. Management believes the likelihood is remote that payment will be required under this guarantee.

10. Concentrations of Risk

        Substantially all of the Company's trade receivables result from the sales of new and used trucks to owner-operators or heavy-duty truck fleet owners or from the sale of parts and service to owners of heavy-duty trucks. The concentration of customers in a single industry may impact the Company's overall risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions. In general, the Company may mitigate its risk of collection of funds from sales of new and used trucks by transferring the receivables to third-party lenders. Receivables from the sale of parts and service are generally not collateralized.

        The Company is dependent on Peterbilt for its new truck inventories. Peterbilt operates three manufacturing plants, one in Denton, Texas, one in Nashville, Tennessee, and one in Ste-Therese, Quebec. Peterbilt manufactures a limited number of trucks each year and the demand for such trucks by the Company and by other Peterbilt dealers may be greater than Peterbilt's manufacturing capacity.

F-12



        The Company maintains cash deposits in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced losses in such accounts and does not currently believe it is exposed to any significant credit risk related to its cash and cash equivalents.

11. Retirement Plan

        The Company provides a 401(k) plan for all eligible employees. Employee contributions are by salary reduction and are made at the individual employee's discretion, within limits set forth in the 401(k) plan agreement and in the Internal Revenue Code. The employer may elect to match employee contributions up to a designated amount. Employer matching contributions amounted to approximately $137,000 and $138,000 for the nine month periods ended September 30, 2004 and 2003, respectively.

F-13



Independent Auditors' Report

The Board of Directors and Stockholders of
American TruckSource, Inc. and Subsidiaries

        We have audited the accompanying consolidated balance sheets of American TruckSource, Inc. (a Delaware corporation), and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American TruckSource, Inc., and Subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

        As discussed in Note 12 to the consolidated financial statements, the Company discovered errors regarding accrued liability related to finance income charge backs and to vacation pay. Accordingly adjustments have been made for the correction of these errors.

        As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2002.

April 9, 2004, except for Note 12 which is as of September 14, 2004.
Dallas, Texas

F-14



American TruckSource, Inc. and Subsidiaries

Consolidated Balance Sheets

 
  December 31,
2003

  December 31,
2002

 
Assets              
Cash and cash equivalents   $ 24,562,027   $ 18,974,841  
Accounts receivable, net of allowance for doubtful accounts of $121,598 and $193,322     9,023,522     10,045,466  
Inventories     51,801,506     45,676,404  
Notes receivable     1,367,260     2,903,844  
Prepaid expenses and other     949,577     788,877  
   
 
 
Total current assets     87,703,892     78,389,432  
   
 
 
Property and equipment, net     30,007,284     21,529,151  
Other assets              
  Receivables from affiliates, net     13,917,140     10,214,360  
  Notes receivable, net of current portion     572,991     710,419  
  Other, net of accumulated amortization of $529,593 for both years     4,869,360     4,589,789  
   
 
 
Total other assets     19,359,491     15,514,568  
   
 
 
    $ 137,070,667   $ 115,433,151  
   
 
 
Liabilities and Stockholders' Equity              
Current liabilities              
  Floor plan lines of credit   $ 63,600,482   $ 46,279,839  
  Current portion of long-term debt     9,018,580     9,767,412  
  Accounts payable     3,985,742     3,701,863  
  Accrued liabilities     5,768,570     7,050,974  
  Income taxes payable (refundable)     (40,610 )   81,278  
   
 
 
Total current liabilities     82,332,764     66,881,366  
   
 
 
Long term debt, net of current portion     22,333,518     18,183,887  
Other liabilities     1,553,960     1,602,481  
   
 
 
Total liabilities     106,220,242     86,667,734  
   
 
 
Commitments and contingencies              
Stockholders' equity              
  Class A common stock, $.01 par value, 20,000,000 shares authorized, 10,300,000 shares issued and 9,977,859 shares outstanding     103,000     103,000  
  Additional paid-in capital     4,578,083     4,578,083  
  Treasury stock at cost, 322,141 Class A shares     (1,074,000 )   (1,074,000 )
  Retained earnings     27,243,342     25,158,334  
   
 
 
Total stockholders' equity     30,850,425     28,765,417  
   
 
 
    $ 137,070,667   $ 115,433,151  
   
 
 

See accompanying notes to consolidated financial statements.

F-15



American TruckSource, Inc. and Subsidiaries

Consolidated Statements of Income

 
  December 31,
2003

  December 31,
2002

 
Revenues              
  New and used trucks   $ 205,424,015   $ 219,475,919  
  Parts and service     54,438,819     51,585,328  
  Income from finance and leasing, net     3,035,157     5,060,107  
   
 
 
      262,897,991     276,121,354  
   
 
 
Cost of products sold              
  New and used trucks     191,187,427     203,903,546  
  Parts and service     34,299,820     31,986,515  
   
 
 
      225,487,247     235,890,061  
   
 
 
Gross profit     37,410,744     40,231,293  
   
 
 
Operating expenses              
  Selling, general and administrative     30,172,074     31,178,924  
  Depreciation and amortization     3,006,121     2,994,977  
   
 
 
      33,178,195     34,173,901  
   
 
 
Operating income     4,232,549     6,057,392  
   
 
 
Other income (expense)              
  Interest and investment income     2,427,232     1,725,691  
  Interest expense     (2,551,593 )   (2,096,657 )
  Other     (16,868 )   151,454  
   
 
 
      (141,229 )   (219,512 )
   
 
 
Income before income taxes     4,091,320     5,837,880  
Income tax provision (benefit)     (239,387 )   108,101  
   
 
 
Net income   $ 4,330,707   $ 5,729,779  
   
 
 

See accompanying notes to consolidated financial statements.

F-16



American Truck Source, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

 
  Class A
Common
Stock

  Additional
Paid In
Capital

  Treasury
Stock

  Retained
Earnings

  Receivable
from Affiliate

  Total
 
Balance, December 31, 2001   $ 103,000   $ 7,541,574   $ (1,074,000 ) $ 19,428,555   $ (3,747,106 ) $ 22,252,023  
Net income                 5,729,779         5,729,779  
Affiliate receivable                     (2,066,385 )   (2,066,385 )
Rescission of receivable from affiliate         (5,813,491 )           5,813,491      
Merger related payment to shareholder         (150,000 )               (150,000 )
Capital contributed         3,000,000                 3,000,000  
   
 
 
 
 
 
 
Balance, December 31, 2002     103,000     4,578,083     (1,074,000 )   25,158,334         28,765,417  
Net income                 4,330,707         4,330,707  
Dividend to Shareholders                 (2,245,699 )       (2,245,699 )
   
 
 
 
 
 
 
Balance, December 31, 2003   $ 103,000   $ 4,578,083   $ (1,074,000 ) $ 27,243,342   $   $ 30,850,425  
   
 
 
 
 
 
 

See accompanying notes to consolidated financial statements.

F-17



American Truck Source, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 
  December 31,
2003

  December 31,
2002

 
Cash flows from operating activities              
  Net income   $ 4,330,707   $ 5,729,779  
  Adjustments to reconcile net income to net cash provided by operating activities:              
    Depreciation and amortization     3,006,121     2,994,977  
    Gain on sales of assets     97,022     12,774  
    Imputed Interest     (554,446 )   (703,750 )
    Provision for doubtful accounts     79,131     166,344  
  Changes in operating assets and liabilities:              
    Accounts receivable     942,813     (2,190,343 )
    Inventories     (1,713,169 )   (10,313,455 )
    Prepaid expenses and other     (160,700 )   139,655  
    Receivables from affiliates, net     (3,265,223 )   1,195,911  
    Floor plan lines of credit     14,874,424     15,617,065  
    Accounts payable and accrued liabilities     (998,529 )   (73,044 )
    Income taxes payable     (121,888 )   (21,179 )
    Other     (328,092 )   440,096  
   
 
 
      Net cash provided by operating activities     16,188,171     12,994,830  
Cash flows from investing activities              
  Capital expenditures     (7,883,663 )   (3,605,426 )
  Net proceeds from sales of assets     326,377     294,974  
  Proceeds from issuance of notes receivable, net     1,674,013     1,221,483  
   
 
 
      Net cash used in investing activities     (5,883,273 )   (2,088,969 )
Cash flows from financing activities              
  Borrowings under long-term debt agreements     18,526,889     28,163,613  
  Repayments of long-term debt     (20,998,902 )   (27,657,519 )
  Dividends paid to Shareholders     (2,245,699 )    
   
 
 
      Net cash provided by (used in) financing activities     (4,717,712 )   506,094  
Increase in cash and cash equivalents     5,587,186     11,411,955  
Cash and cash equivalents at beginning of year     18,974,841     7,562,886  
   
 
 
Cash and cash equivalents at end of year   $ 24,562,027   $ 18,974,841  
   
 
 

See accompanying notes to consolidated financial statements.

F-18



American TruckSource, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Organization and Summary of Significant Accounting Policies

        Business—American TruckSource, Inc. and Subsidiaries (the Company), is a holding company formed in February 1997 to own and manage certain heavy-duty truck dealers franchised to sell new Peterbilt trucks and PACCAR Inc. (PACCAR) parts. Peterbilt trucks are manufactured by Peterbilt Motors Company (Peterbilt), a wholly owned subsidiary of PACCAR. In addition to new trucks and parts, the Company also sells used heavy-duty trucks, provides financing and insurance for new and used trucks and provides maintenance and body shop services through its service and body shop facilities.

        The Company's direct and indirect wholly owned operating subsidiaries are Dallas Peterbilt, Ltd., L.L.P. (DPL), Nashville Peterbilt, Inc. (NPI), Louisville Peterbilt, Inc. (LPI), Birmingham Peterbilt, Inc. (BPI), American TruckSource Financial Corporation (ATS Financial), American TruckSource Leasing, Inc. (ATS Leasing), and Highland Park Land Company (HPLC). DPL, NPI, LPI, and BPI are heavy-duty truck dealerships located in Dallas, Texas; Nashville, Tennessee; Jeffersonville, Indiana, and Birmingham, Alabama, respectively. DPL also has locations in Tyler, Fort Worth and Abilene, Texas. ATS Financial is a finance company in the business of retail and lease financing for new and used trucks and trailers. ATS Leasing is a franchise of PACLease (a division of PACCAR) and leases Peterbilt trucks to third-party freight carriers. HPLC owns the land and buildings at DPL's, NPI's, and LPI's primary locations, as well as other real estate properties.

        Consolidation—The accompanying consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated.

        Management Estimates—The preparation of the consolidated financial statements of the Company in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

        Consolidated Statements of Cash Flows—For purposes of the consolidated statements of cash flows, cash and cash equivalents include all deposits with original maturities of three months or less as well as all contracts in transit, which will be converted to cash within several days of their origination. Contracts in transit represent financing contracts on vehicles sold for which the proceeds are in transit from financing institutions.

        During 2003 and 2002, interest paid totaled approximately $2,509,000 and $2,109,000 and income taxes paid totaled approximately $176,000 and $129,000, respectively. During 2002, equity was contributed through the forgiveness of a note payable with a shareholder of $3,000,000 and reduced through the recession of a receivable from an affiliate of $5,813,491.

        Trade Receivables and Allowance for Doubtful Accounts—Trade receivables are customer obligations due under normal trade terms and are accounted for on a cost basis. Management performs continuing credit evaluations of customers' financial condition and generally does not require collateral from customers. The Company provides an allowance for doubtful accounts based on its historic collection experience. Receivables are written off when management deems them uncollectible, based on historical experience with the individual account.

        Note Receivables and Loan Loss Reserve—Note receivables are carried on a cost basis, with interest income recognized as received. During 2003, the notes earned interest at rates ranging from 5.50% to 19.9%. The Company records an allowance for these receivables based on historical experience with the

F-19



account. The allowance at December 31, 2003 and 2002 was $100,000 and $500,736, respectively, and was included in the accrued liabilities $5,798,570 and $7,050,975, respectively, in the accompanying consolidated balance sheets.

        Inventories—Inventories are stated at the lower of cost or market value. New and used truck inventories are carried at actual cost determined by specific identification. Parts and accessories inventories are carried at average cost

        Property and Equipment—Property and equipment are carried at cost and depreciated on the straight-line method over their estimated useful lives. When assets are retired, sold or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected as other income during that accounting period. The costs of repairs and maintenance are expensed as incurred, and significant renewals or improvements are capitalized.

        The Company reviews for impairment whenever circumstances indicate that the carrying value of an asset may not be recoverable based on the estimated future cash flows (undiscounted and without interest charges) expected to result from use of that asset and its eventual disposition. Impairment is recognized only if the carrying amount of an asset is greater than the expected future cash flows and the impairment is based on the fair value of the asset. Management has evaluated the need for impairment and determined that no impairment exists as of December 31, 2003.

        Other Assets—Other assets primarily consist of goodwill related to acquisitions of approximately $4,020,000. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Under SFAS 142, effective January 1, 2002, goodwill and intangible assets with indefinite lives are to no longer be amortized but are to be reviewed annually (or more frequently if impairment indicators arise) for impairment. Goodwill was being amortized on a straight-line basis over 40 years. The amortization was discontinued as of January 1, 2002. There have been no changes in the carrying amount of goodwill for the year ended December 31, 2003. In accordance with SFAS 142, management has evaluated goodwill and determined that no impairment exists as of December 31, 2003.

        Revenue Recognition and Recourse Agreements—Income from the sale of new and used trucks is recognized when the seller and customer execute a purchase contract, delivery has occurred and there are no significant uncertainties related to financing or collectibility. The Company facilitates the financing of new and used trucks for its customers. Generally, the Company will execute a finance contract and immediately sell such contract to a third-party finance company. The Company recognizes finance income in the amount received from the third-party finance companies, net of a provision for estimated repossession losses and interest charge backs. The Company may, upon such a sale, agree to accept limited recourse in the event the truck is subsequently repossessed. The Company's recourse obligation is determined, based on the model year of the truck sold and other factors. The Company provides a reserve for repossession losses after considering historical loss experience and the existing portfolio of limited recourse contracts outstanding. If a customer prepays or fails to pay a contract, thereby terminating a finance contract prior to scheduled maturity, a portion of the finance income may be charged back to the Company based on the relevant terms of the contract. The Company provides for this charge back exposure based on historical charge back experience and early termination rates. The Company, through ATS Financial, will retain certain finance contracts for its own account. Finance income on retained contracts is recognized over the life of the contract. A reserve for loan losses is provided for estimated losses related to retained contracts.

F-20



        The Company recognized repossession and loan loss expense of approximately $3,582,000 in 2003 and $2,405,000 in 2002, which is included in "Income from Finance and Leasing, Net", in the accompanying consolidated statements of income. Parts and service revenue is recognized when the Company sells a part to its customer or when service work is completed.

        Income Taxes—Effective January 1, 2000, the Company elected S Corporation filing status under Internal Revenue Service regulations. Accordingly, federal income taxes are not imposed upon the Company, except in certain limited circumstances where taxes may be assessed on gains realized due to the sale of certain assets. The Company also incurs taxes at the state level, including income and franchise taxes.

        Fair Value of Financial Instruments—The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, debt and an interest rate swap agreement. The fair values of cash and cash equivalents, accounts receivable, notes receivable and accounts payable approximate their respective carrying values. The fair value of debt is estimated based on current rates available for similar debt with similar maturities and security. All of the Company's debt bears interest rates approximating market rates as of December 31, 2003 and, as a result, the carrying value of the Company's debt approximates its fair value.

        The fair value of the interest rate swap agreement is estimated based upon the amount that the Company would receive or pay to terminate the swap agreement at the reporting date, taking into consideration current interest rates and any related credit risk. The Company does not anticipate nonperformance by the financial institution, and no material loss would be expected from their nonperformance.

        Reclassification—The Company entered into an interest rate swap agreement in 2001. This agreement was accounted for as a cash flow hedge in 2001 and 2002. The hedge was not effective and the 2002 financial statements have been reclassified to reflect that no comprehensive income (loss) had occurred.

2. Inventories

        Inventories as of December 31, are as follows:

 
  2003
  2002
New trucks   $ 31,467,178   $ 27,545,302
Used trucks     13,984,906     12,036,879
Parts and accessories     6,349,422     6,094,223
   
 
    $ 51,801,506   $ 45,676,404
   
 

        Substantially all inventories of new and used trucks are pledged as collateral in connection with the floor plan lines of credit.

F-21



3. Property and Equipment

        Property and equipment as of December 31, are as follows:

 
  Estimated Useful Lives
(In Years)

  2003
  2002
Land     $ 8,247,398   $ 6,645,292
Buildings and improvements   5-39     14,944,032     14,440,941
Equipment   3-5     4,911,494     4,981,236
Furniture and fixtures   5     1,517,229     1,537,200
Leased vehicles   3-5     9,942,828     3,186,755
Company vehicles   5     1,656,356     1,695,225
Construction in progress             168,946
       
 
        $ 41,219,337   $ 32,655,595
Less accumulated depreciation         11,212,053     11,126,444
       
 
        $ 30,007,284   $ 21,529,151
       
 

        Substantially all of the Company's real property is pledged under long-term debt agreements.

4. Floor Plan Lines of Credit

        The Company uses floor plan lines of credit (the Floor Plan) to facilitate its purchases of new and used truck inventories. The Company's Floor Plan is secured by its new and used truck inventories and any cash or receivables resulting from the sale of such collateral and is guaranteed by a stockholder of the Company. The total amount of credit available fluctuates depending on the level of new truck purchases. The Floor Plan interest rate is based on the 30 day Commercial Paper Index as reported on the first day of each month in the Wall Street Journal, plus 2.125% (for a total rate of 3.125% at December 31, 2003). Floor Plan is generally paid off on the third day following the receipt of payment on a vehicle sale to allow the funds to become available. Borrowings under the Floor Plan are due upon demand.

        Amounts of collateral as of December 31, are as follows:

 
  2003
  2002
Inventories, new and used trucks   $ 45,452,084   $ 39,582,181
Truck sale related accounts receivable     3,773,132     4,163,652
Truck sale related contracts-in-transit     12,294,566     6,728,658
Cash held for Floor Plan payment related to receipts from Truck sales     6,091,781     3,512,627
   
 
Total     67,611,563     53,987,118
   
 
Floor plan lines of credit   $ 63,600,482   $ 46,279,839
   
 

F-22


5. Long Term Debt

        Total long term debt as of December 31, is as follows:

 
  2003
  2002
Equipment financing notes payable   $ 10,492,692   $ 9,395,587
Real estate mortgage notes payable     16,235,328     15,958,965
Acquisition financing note payable         2,281,170
Revolving lines of credit     4,624,078     315,577
   
 
      31,352,098     27,951,299
Less current portion     9,018,580     9,767,412
   
 
  Total long term debt   $ 22,333,518   $ 18,183,887
   
 

        Equipment Financing Notes Payable—The Company, mostly through ATS Financial, has entered into financing arrangements with several third-party finance institutions. In general, the Company will obtain loans from the financial institutions to provide funding for the purchase of equipment to be leased to freight carriers or to provide funding for loans to fleets or owner/operators seeking to purchase equipment. Each loan is individually negotiated and is secured by the underlying equipment and/or the Company's rights in all accounts, chattel paper, equipment, instruments and contract rights. The loans outstanding bear interest at rates ranging from 0% to 9.18% and mature on various dates through February 2008.

        Real Estate Mortgage Notes Payable—The Company has both fixed and variable rate real estate notes with several lenders. The proceeds from the issuance of the variable and fixed rate real estate notes were used primarily to acquire land, buildings, and to make improvements. These notes are secured by real estate. The Company's variable interest rate notes have rates based on several indices, with rates ranging from 3.14% to 6.875% at December 31, 2003. Monthly payments on these notes range from $3,400 to $59,028, plus interest. Maturities of these notes range from June 2004 to November 2027. The Company's fixed rate debt has a rate of 7.25% and matures in August 2006. Payments are $3,300 per month. The stockholders of the Company and many of the Company's subsidiaries guarantee the notes. Under the terms of the notes, the Company is obligated to maintain certain collateral coverage covenants and is restricted as to future transactions involving additional indebtedness. At December 31, 2003 and 2002, the Company was in compliance with all such covenants.

        Revolving Lines of Credit—The Company has a revolving line-of-credit facility (the Credit Facility) with a bank under which ATS may borrow up to $6,000,000. As of December 31, 2003, the outstanding line-of-credit balance was $4,624,078. The Credit Facility bears interest at a variable rate of Libor plus 2% (3.154% at December 31, 2003). Interest is payable monthly. Borrowings outstanding under the Credit Facility are due on September 30, 2004. The Credit Facility is secured by substantially all of ATS's tangible assets not previously pledged. Under the terms of the Credit Facility, the Company is obligated to maintain certain financial covenants and is restricted as to future transactions involving additional secured debt, dividends, security issuances, recapitalizations, capital expenditures and lease commitments. At December 31, 2003 and 2002, the Company was in compliance with all such covenants. The stockholders of the Company guarantee the Credit Facility.

F-23



        Maturities on long-term debt as of December 31, 2003, are as follows:

Year ending,

   
2004   $ 9,018,580
2005     2,682,645
2006     3,078,832
2007     5,485,862
2008     2,867,844
Thereafter     8,218,335
   
    $ 31,352,098
   

        Interest Rate Swap Agreement—During 2003, the Company entered into an interest rate swap agreement with a major financial institution in order to reduce the impact of changes in market interest rates on HPLC. The agreement provides for the Company to pay the financial institution monthly interest payments at a fixed rate of 5.55%, in exchange for the receipt of monthly interest payments based on the LIBOR rate. The original notional amount was $12,759,231, and the LIBOR rate is adjusted monthly. The agreement matures in July 2013 and is secured by real estate owned by HPLC. The fair value of the interest rate swap was $1,132,210 at December 31, 2003, and is recorded in other liabilities. Additionally, the Company's performance under this agreement is guaranteed by the stockholders of the Company and other subsidiaries.

6. Stockholders' Equity

        In 1997, the Company entered into a plan and agreement of reorganization (the Plan) by and among (a) the Company, (b) NPI, ATS Leasing and LPI (the Nashville Group), (c) DPL, HPLC and ATS Financial (the Dallas Group), (d) MKJ Family Enterprises, Inc., and MKJ, owners of the Dallas Group and (e) the Baker Nashville Partnership (the Sellers), owners of the Nashville Group. Under the terms of the Plan, the Dallas Group acquired the Nashville Group and in 1998, the Company became obligated to repurchase certain shares of the Company's Class A common stock previously owned by one of the Seller' principals. The Company recorded such shares as treasury stock in 1998 and the final payment due pursuant to the repurchase obligation was paid during 2001. In 1999, an officer of the Company purchased all of the remaining Class A common stock of the Company owned by the Sellers. In the event that the Company completes an initial public offering within six years of the date of repurchase of each Sellers' ownership interest, additional consideration may be due to the Sellers.

        In 2003, the Company declared and paid dividends to its stockholders in the aggregate amount of $2,245,699.

7. Income Taxes

        The provision (benefit) for income taxes for the year ended December 31, is as follows:

 
  2003
  2002
Current income taxes   $ (239,387 ) $ 108,101
Deferred income taxes        
   
 
  Income tax provision (benefit)   $ (239,387 ) $ 108,101
   
 

F-24


8. Related Party Transactions

        The Company periodically makes non-interest bearing cash advances to or receives payments from certain affiliated persons and entities, including transactions with the Company's principal stockholders, who are also chairman and president of the Company, and with other affiliates including an aviation company. Advances to these entities are generally to provide operating funds or to make capital expenditures. Payments from these entities are generally to repay amounts previously advanced or to take advantage of the Company's resources for investing cash. No due dates have been established for repayment of some of the advances. The net receivables from affiliated entities were $1,620,594 and $243,064 at December 31, 2003 and 2002, respectively.

        On June 30, 2000, the Company consummated a promissory note receivable from one of its stockholders. The note consists of a $5,000,000 revolving line of credit, which bears interest at 7.00% and matures on December 31, 2010. At December 31, 2003 and 2002, the note receivable balance was $7,897,625 and $5,355,748, respectively.

        On August 10, 2000, the Company extended a promissory note receivable from a stockholder for the purchase of the Sellers' shares of Class A common stock. The note consists of a $4,000,000 revolving line of credit, which bears interest at 7.00% and matures on December 31, 2010. At December 31, 2003, the note receivable balance was $1,000,000.

        On July 31, 2000, HPLC executed a $6,011,810 note receivable from an affiliate of the Company, bearing interest at 7.00%. The note was amended on February 9, 2001 (due to a large principal payment in December 31, 2000), to provide for monthly installments of principal and interest of $23,452 through July 31, 2030. At December 31, 2003 and 2002, the note receivable balance was $3,398,921 and $3,437,436, respectively. The note is secured by a second lien on real estate.

        The Company recognized approximately $813,622 and $926,000 of interest income from related-party receivables in 2003 and 2002, respectively.

        An affiliate of the Company owns and operates an airplane. During 2003 and 2002, the Company incurred approximately $826,000 and $902,000, respectively, related to use of the affiliate's aircraft. This expense is included in selling, general and administrative expense in the consolidated statements of income.

9. Commitments and Contingencies

        The Company leases certain facilities and equipment under lease agreements that have been classified as operating leases. A significant portion of the operating lease commitments relates to equipment that is subleased to customers. Total rental expense included in the accompanying consolidated statement of income for 2003 and 2002 for such leases is approximately $1,353,000 and $823,000, respectively. Future minimum lease payments under noncancelable operating leases with initial or remaining terms in excess of one year as of December 31, 2003, are as follows:

Year ending,

   
2004   $ 904,686
2005     664,837
2006     522,433
2007     259,343
2008     1,071
   
    $ 2,352,370
   

F-25


        Minimum lease payments to be received for noncancelable leases and subleases in effect at December 31, 2003, are as follows:

Year ending,

   
2004   $ 181,740
2005     111,420
2006     47,141
2007     12,599
2008      
   
    $ 352,900
   

        The Company has guaranteed a loan made to the affiliated aviation company (see Note 8). The note balance at December 31, 2003 is approximately $2,424,000 and is secured by an airplane owned by the affiliated aviation company. This guarantee would require payment only in the event of default on payment by the debtor. Management believes the likelihood is remote that payment will be required under this guarantee.

10. Concentrations of Risk

        Substantially all of the Company's trade receivables result from the sales of new and used trucks to owner-operators or heavy-duty truck fleet owners or from the sale of parts and service to owners of heavy-duty trucks. The concentration of customers in a single industry may impact the Company's overall risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions. In general, the Company may mitigate its risk of collection of funds from sales of new and used trucks by transferring the receivables to third-party lenders. Receivables from the sale of parts and service are generally not collateralized.

        The Company is dependent on Peterbilt for its new truck inventories. Peterbilt operates three manufacturing plants, one in Denton, Texas, one in Nashville, Tennessee, and one in Ste-Therese, Quebec. Peterbilt manufactures a limited number of trucks each year and the demand for such trucks by the Company and by other Peterbilt dealers may be greater than Peterbilt's manufacturing capacity.

        The Company maintains cash deposits in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced losses in such accounts and does not currently believe it is exposed to any significant credit risk related to its cash and cash equivalents.

11. Retirement Plan

        The Company provides a 401(k) plan for all eligible employees. Employee contributions are by salary reduction and are made at the individual employee's discretion, within limits set forth in the 401(k) plan agreement and in the Internal Revenue Code. The employer may elect to match employee contributions up to a designated amount. Employer matching contributions amounted to approximately $128,000 and $145,000 for 2003 and 2002, respectively.

12. Restatement for Correction of Error

        During 2004, errors regarding accrued liabilities related to finance income charge backs and to vacation pay were discovered. Accordingly, the 2003 and 2002 consolidated financial statements have been restated to correct these errors. The effect of the correction to the finance income charge back liability increases accrued liabilities by $1,392,221 and $863,881, at December 31, 2003 and 2002, respectively, and decreases net income by $528,340 and $863,881 for 2003 and 2002, respectively. The effect of the correction to the vacation pay liability increases accrued liabilities and decreases retained earnings by $306,624 at December 31, 2001, and increases accrued liabilities by $295,297 and $306,624, at December 31, 2003 and 2002, respectively, and increased net income by $11,327 and $0 for 2003 and 2002, respectively.

F-26



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Rush Enterprises, Inc.:

        We have audited the accompanying consolidated balance sheets of Rush Enterprises, Inc., a Texas corporation, and subsidiaries as of December 31, 2002 and 2003, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 consolidated financial position of Rush Enterprises, Inc., and subsidiaries as of December 31, 2002 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

        As discussed in Note 2 to the consolidated financial statements, in 2002 the company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and other Intangible Assets."

San Antonio, Texas
February 20, 2004

F-27



RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2002 AND 2003

(In Thousands, Except Shares and Per Share Amounts)

 
  December 31,
2002

  December 31,
2003

ASSETS            
CURRENT ASSETS:            
  Cash and cash equivalents   $ 24,763   $ 34,389
  Accounts receivable     25,535     24,492
  Inventories     115,333     137,423
  Prepaid expenses and other     1,764     1,122
  Assets held for sale     16,962     8,824
  Deferred income taxes     4,375     2,863
   
 
      Total current assets     188,732     209,113
PROPERTY AND EQUIPMENT, net     117,859     114,477
OTHER ASSETS, net     38,519     43,288
   
 
      Total assets   $ 345,110   $ 366,878
   
 
LIABILITIES AND SHAREHOLDERS' EQUITY            
CURRENT LIABILITIES:            
  Floor plan notes payable   $ 89,288   $ 108,235
  Current maturities of long-term debt     24,958     23,767
  Advances outstanding under lines of credit     22,395     17,732
  Trade accounts payable     15,082     16,170
  Accrued expenses     29,014     29,096
   
 
      Total current liabilities     180,737     195,000
LONG-TERM DEBT, net of current maturities     69,958     66,261
DEFERRED INCOME TAXES, net     14,720     16,911
SHAREHOLDERS' EQUITY:            
  Preferred stock, par value $.01 per share; 1,000 shares authorized; 0 shares outstanding in 2002 and 2003        
  Common stock, par value $.01 per share; 50,000,000 shares authorized; 14,004,088 shares outstanding in 2002 and 14,042,304 outstanding in 2003     140     140
  Additional paid-in capital     39,155     39,337
  Retained earnings     40,400     49,229
   
 
Total shareholders' equity     79,695     88,706
   
 
      Total liabilities and shareholders' equity   $ 345,110   $ 366,878
   
 

The accompanying notes are an integral part of these consolidated financial statements.

F-28



RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

(In Thousands, Except Per Share Amounts)

 
  2001
  2002
  2003
 
REVENUES:                    
  New and used truck sales   $ 438,143   $ 488,456   $ 501,757  
  Parts and service     188,566     211,478     249,818  
  Construction equipment sales     31,666     24,324     28,263  
  Lease and rental     25,040     25,277     25,847  
  Finance and insurance     5,251     5,448     6,286  
  Other     2,847     2,164     3,361  
   
 
 
 
    Total revenues     691,513     757,147     815,332  
COST OF PRODUCTS SOLD:                    
  New and used truck sales     407,243     450,918     466,396  
  Parts and service     108,491     125,084     151,373  
  Construction equipment sales     28,015     21,482     25,158  
  Lease and rental     18,567     18,458     19,155  
   
 
 
 
    Total cost of products sold     562,316     615,942     662,082  
   
 
 
 
GROSS PROFIT     129,197     141,205     153,250  
SELLING, GENERAL AND ADMINISTRATIVE     101,832     111,721     124,207  
DEPRECIATION AND AMORTIZATION     9,176     8,594     8,929  
   
 
 
 
OPERATING INCOME     18,189     20,890     20,114  
INTEREST INCOME (EXPENSE):                    
  Interest income     429     239     290  
  Interest expense     (9,696 )   (6,738 )   (6,638 )
   
 
 
 
    Total interest expense, net     (9,267 )   (6,499 )   (6,348 )
GAIN ON SALE OF ASSETS     1,067     155     1,984  
   
 
 
 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES     9,989     14,546     15,750  
PROVISION FOR INCOME TAXES     3,996     5,818     6,300  
   
 
 
 
INCOME FROM CONTINUING OPERATIONS     5,993     8,728     9,450  
(LOSS) FROM DISCONTINUED OPERATIONS, NET     (2,731 )   (10,472 )   (621 )
   
 
 
 
NET INCOME (LOSS)   $ 3,262   $ (1,744 ) $ 8,829  
   
 
 
 
EARNINGS PER SHARE (Note 14):                    
EARNINGS (LOSS) PER COMMON SHARE — BASIC                    
  Income from continuing operations   $ 0.43   $ 0.62   $ 0.67  
   
 
 
 
  Net income (loss)   $ 0.23   $ (0.12 ) $ 0.63  
   
 
 
 
EARNINGS (LOSS) PER COMMON SHARE — DILUTED                    
  Income from continuing operations   $ 0.42   $ 0.60   $ 0.63  
   
 
 
 
  Net income (loss)   $ 0.23   $ (0.12 ) $ 0.59  
   
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-29



RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

(In Thousands)

 
  Common Stock
   
   
 
 
  Shares
Issued and
Outstanding

  $.01
Par
Value

  Additional
Paid-In
Capital

  Retained
Earnings

 
BALANCE, December 31, 2000   14,004   $ 140   $ 39,155   $ 38,882  
NET INCOME               3,262  
   
 
 
 
 
BALANCE, December 31, 2001   14,004     140     39,155     42,144  
NET (LOSS)               (1,744 )
   
 
 
 
 
BALANCE, December 31, 2002   14,004     140     39,155     40,400  
EXERCISE OF EMPLOYEE STOCK OPTIONS   38           182        
NET INCOME               8,829  
   
 
 
 
 
BALANCE, December 31, 2003   14,042   $ 140   $ 39,337   $ 49,229  
   
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-30



RUSH ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

(In Thousands)

 
  2001
  2002
  2003
 
CASH FLOWS FROM OPERATING ACTIVITIES:                    
  Income from continuing operations   $ 5,993   $ 8,728   $ 9,450  
  Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of acquisitions-                    
    (Loss) from discontinued operations     (2,731 )   (10,472 )   (621 )
    Depreciation and amortization     15,848     15,846     15,542  
    Gain on sale of property and equipment     (1,614 )   (557 )   (1,444 )
    Provision for deferred income tax expense     2,910     (659 )   3,703  
    Net charges related to discontinued operations         11,972      
    Change in accounts receivable, net     (6,032 )   1,468     1,043  
    Change in inventories     65,084     (12,741 )   (13,154 )
    Change in prepaid expenses and other, net     2,572     (520 )   642  
    Change in trade accounts payable     1,127     (202 )   1,088  
    Change in accrued expenses     5,543     3,105     82  
   
 
 
 
      Net cash provided by operating activities     88,700     15,968     16,331  
   
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:                    
  Acquisition of property and equipment     (20,726 )   (16,526 )   (18,772 )
  Proceeds from the sale of property and equipment     6,773     3,946     7,521  
  Business acquisitions     (2,646 )       (5,547 )
  Change in other assets     (4,628 )   929     (33 )
   
 
 
 
      Net cash used in investing activities     (21,227 )   (11,651 )   (16,831 )
   
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:                    
  Proceeds from long-term debt     23,481     21,777     19,230  
  Payments on long-term debt     (16,297 )   (25,031 )   (24,118 )
  Draws (payments) on floor plan notes payable, net     (62,291 )   3,988     19,590  
  Draws on lines of credit, net     (11,320 )   (64 )   (4,663 )
  Issuance of shares relating to employee stock options             182  
  Debt issuance costs     (86 )   (76 )   (95 )
   
 
 
 
      Net cash provided by (used in) financing activities     (66,513 )   594     10,126  
   
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS     960     4,911     9,626  
CASH AND CASH EQUIVALENTS, beginning of year     18,892     19,852     24,763  
   
 
 
 
CASH AND CASH EQUIVALENTS, end of year   $ 19,852   $ 24,763   $ 34,389  
   
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                    
  Cash paid during the year for-                    
    Interest   $ 12,161   $ 8,176   $ 7,086  
   
 
 
 
    Income taxes   $ 401   $ 824   $ 1,487  
   
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-31



RUSH ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND OPERATIONS:

        Rush Enterprises, Inc. (the "Company") was incorporated in June 1996 under the laws of the State of Texas. The Company, founded in 1965, now operates a Heavy-Duty Truck segment, a Construction Equipment segment and a Retail segment. The Heavy-Duty Truck segment operates a regional network of 37 truck centers that provide an integrated one-stop source for the trucking needs of its customers, including retail sales of new Peterbilt and used heavy-duty trucks; parts, service and body shop facilities; and financial services, including assisting in the financing of new and used truck purchases, insurance products and truck leasing and rentals. The Company's truck centers are located in areas on or near major highways in Texas, California, Colorado, Oklahoma, Arizona, Florida, Alabama and New Mexico. The Construction Equipment segment, formed during 1997, operates a John Deere equipment center in Houston, Texas. A portion of this segment, that operated five John Deere Equipment Centers in Michigan, was discontinued during 2002 (see Note 3). Dealership operations include the retail sale of new and used equipment, aftermarket parts and service facilities, equipment rentals and the financing of new and used equipment (see Note 19). The Retail segment's primary line of business is the retail sale of farm and ranch supplies including fencing, horse and cattle trailers, veterinarian supplies and western wear. The Retail segment is currently operating as a discontinued operation pending disposal (see Note 3).

        In February 2003, the Company acquired the common stock of Orange County Truck and Trailers, Inc. ("Orange County"), a Peterbilt dealer in central Florida. The acquisition provides Rush with the exclusive rights to sell Peterbilt trucks and parts from three new locations in central Florida, including Orlando, Haines City, and Tampa. The transaction was valued at approximately $5.4 million, with the purchase price paid in cash.

        In April 2003, the Company purchased substantially all of the assets of Peterbilt of Mobile, Inc., which consisted of a dealership location in Mobile, Alabama. Peterbilt of Mobile, Inc.'s primary line of business is the sale of new Peterbilt and used heavy-duty trucks, parts and service. The transaction was valued at approximately $1.4 million, with the purchase price paid in cash.

        As part of the Company's corporate reorganization in connection with its initial public offering ("Offering") in June 1996, the Company acquired, as a wholly owned subsidiary, a managing general agent (the "MGA") to manage all of the operations of Associated Acceptance, Inc. ("AA"). W. Marvin Rush, the sole shareholder of AA, is prohibited from the sale or transfer of the capital stock of AA under the MGA agreement, except as designated by the Company. Therefore, the financial position and operations of AA have been included as part of the Company's consolidated financial position and results of operations for all periods presented.

        Effective at the close of business on July 9, 2002 (the "Record Date"), pursuant to action taken by the shareholders at the Annual Meeting of the Company held July 9, 2002, and described in the Proxy Statement dated May 15, 2002, the Board of Directors of the Company reclassified the outstanding common stock, $0.01 par value per share (the "Old Common Stock"), as Class B Common Stock, $0.01 par value per share (the "Class B Common Stock"), and declared a stock dividend of one share of a new Class A Common Stock, $.01 par value per share, for each share of Class B Common Stock held by shareholders of record on the Record Date. Each share of Class A Common Stock ranks substantially equal to each share of Class B Common Stock with respect to receipt of any dividends or distributions declared on shares of common stock and the right to receive proceeds on liquidation or dissolution of the Company after payment of the Company's indebtedness and liquidation preference payments to holders of preferred shares. However, holders of Class A Common Stock will have 1/20th of one vote per share on all matters requiring a shareholder vote, while holders of Class B Common Stock will retain their full vote per share. The Company's stock trades on the NASDAQ National

F-32



Market under the symbols RUSHA and RUSHB. Prior to the reclassification and stock dividend, the Company had 7,002,044 shares of Old Common Stock outstanding. Subsequent to the reclassification and stock dividend, the Company had 7,002,044 shares of Class A Common Stock and 7,002,044 shares of Class B Common Stock outstanding. Additionally, all stock option information in Note 13 has been adjusted to reflect the above transaction for all periods presented. The adjustment has caused the total number of options to double, and the grant price per option to be reduced by 50%.

        All significant interdivision and intercompany accounts and transactions have been eliminated in consolidation. Certain prior period balances have been reclassified for comparative purposes.

2. SIGNIFICANT ACCOUNTING POLICIES:

Estimates in Financial Statements

        The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Inventories

        Inventories are stated at the lower of cost or market value. Cost is determined by specific identification for new and used truck and construction equipment inventory and by the first-in, first-out method for tires, parts and accessories. An allowance is provided when it is anticipated that cost will exceed net realizable value.

Property and Equipment

        Property and equipment are depreciated over their estimated useful lives. Leasehold improvements are amortized over the useful life of the improvement, or the term of the lease, whichever is shorter. Provision for depreciation of property and equipment is calculated primarily on a straight-line basis. The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest, when incurred, is added to the cost of underlying assets and is amortized over the estimated useful life of such assets. The Company did not incur any capitalized interest related to major capital projects in the periods presented. The cost, accumulated depreciation and amortization and estimated useful lives are summarized as follows (in thousands):

 
  December 31,
   
 
  Estimated
Life
(Years)

 
  2002
  2003
Land   $ 15,582   $ 15,698  
Buildings and improvements     42,224     42,239   31-39
Leasehold improvements     10,009     9,053   7-15
Machinery and shop equipment     14,244     16,721   5-7
Furniture and fixtures     17,345     19,133   5-7
Transportation equipment     15,675     16,598   2-5
Leasing vehicles     48,267     51,033   4-8
Construction in progress     2,402     2,288    
Accumulated depreciation and amortization     (47,889 )   (58,286 )  
   
 
   
    $ 117,859   $ 114,477    
   
 
   

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Allowance for Doubtful Receivables and Repossession Losses

        The Company provides an allowance for doubtful receivables and repossession losses after considering historical loss experience and other factors, which might affect the collection of accounts receivable and the ability of customers to meet their obligations on finance contracts sold by the Company.

Other Assets

        Other assets consist primarily of goodwill related to acquisitions of approximately $37.7 million as of December 31, 2002 and $42.5 million as of December 31, 2003. Accumulated amortization of other assets at December 31, 2002 was approximately $4.4 million and at December 31, 2003 was approximately $4.6 million. Annually, the Company assesses the appropriateness of the asset valuations of other assets and the related amortization period if applicable.

        Financial Accounting Standards Board ("FASB") Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of SFAS 142 became effective January 1, 2002. SFAS 142 is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of SFAS 142 are to be reported as resulting from a change in accounting principle. The Company completed its initial impairment review and recorded no impairment charges in its financial statements at the date of adoption. However, the Company is exposed to the possibility that changes in market conditions could result in significant impairment charges in the future, thus resulting in a potential increase in earnings volatility. In addition, as a result of SFAS 142, the Company's amortization expense is lower as the Company no longer amortizes goodwill. Assuming the adoption of SFAS 142 had occurred at the beginning of 2001, net income and earnings per share would have been as follows for the three years ended December 31, 2003 (in thousands):

 
  Pro Forma
2001

  Actual
2002

  Actual
2003

 
Income from continuing operations   $ 5,993   $ 8,728   $ 9,450  
Amortization expense, net of tax     714          
   
 
 
 
Adjusted income from continuing operations   $ 6,707   $ 8,728   $ 9,450  
(Loss) from discontinued operations   $ (2,731 ) $ (10,472 ) $ (621 )
Amortization expense, net of tax     105          
   
 
 
 
Adjusted (loss) from discontinued operations   $ (2,626 ) $ (10,472 ) $ (621 )

Net Income (loss)

 

$

4,081

 

$

(1,744

)

$

8,829

 
   
 
 
 
Basic earnings per share from continuing operations   $ 0.48   $ 0.62   $ 0.67  
   
 
 
 
Basic earnings per share   $ 0.29   $ (0.12 ) $ 0.63  
   
 
 
 
Diluted earnings per share from continuing operations   $ 0.47   $ 0.60   $ 0.63  
   
 
 
 
Diluted earnings per share   $ 0.29   $ (0.12 ) $ 0.59  
   
 
 
 

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        Included in the (Loss) from discontinued operations above for 2002 are goodwill impairment losses, net of taxes, of $1.3 million, related to the sale of the Michigan John Deere construction equipment stores, and $0.9 million, related to the pending sale of the Seguin D&D store (see Note 3).

        The Company has completed its impairment review for goodwill related to continuing operations at December 31, 2003 and recorded no impairment charges in its financial statements.

Income Taxes

        Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in a company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement and tax bases of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse.

Revenue Recognition Policies

        Income on the sale of vehicles and construction equipment (collectively, "unit") is recognized when the seller and customer execute a purchase contract, delivery has occurred and there are no significant uncertainties related to financing or collectibility. Finance income related to the sale of a unit is recognized over the period of the respective finance contract, based on the effective interest rate method, if the finance contract is retained by the Company. During 2001, 2002 and 2003, no finance contracts were retained for any significant length of time by the Company but were generally sold, with limited recourse, to certain finance companies concurrent with the sale of the related unit. Gain or loss is recognized by the Company upon the sale of such finance contracts to the finance companies, net of a provision for estimated repossession losses and early repayment penalties. Lease and rental income is recognized over the period of the related lease or rental agreement. Parts and services revenue is earned at the time the Company sells the parts to its customers or at the time the Company completes the service work order related to service provided to the customer's unit. Payments received on prepaid maintenance plans are deferred as a component of accrued expenses and recognized as income when the maintenance is performed.

Cost of Sales

        For the Company's new and used truck and construction equipment operations, and its parts operations, cost of sales consists primarily of the Company's, actual purchase price, less manufacturer's incentives, for new and used trucks and construction equipment and parts. For the Company's service and body shop operations, technician labor cost is the primary component of cost of sales. For the Company's rental and leasing operations, cost of sales consist primarily of depreciation and interest expense on the portion of the lease and rental fleet owned by the Company, rent and interest expense on the portion of the lease and rental fleet leased by the Company, and the maintenance cost of the lease and rental fleet. There are no cost of sales associated with the Company's Finance and insurance revenue or Other revenue.

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Selling General and Administrative Expenses

        Selling, general and administrative expenses consist primarily of incentive-based compensation for sales, finance and general management personnel, salaries for administrative personnel and expenses for rent, marketing, insurance, utilities and other general operating purposes.

Stock Options

        In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was issued. SFAS 123 defines a fair value based method of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period of the award, which is usually the vesting period. However, SFAS 123 also allows entities to continue to measure compensation costs for employee stock compensation plans using the intrinsic value method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Because the Company has elected to continue to follow APB 25, SFAS 123 requires disclosure of pro forma net income and earnings per share as if the new fair value accounting method were adopted.

        If the Company had adopted the fair value accounting method under SFAS 123, the Company's net income and earnings per, as reported, share would have been reduced by stock based employee costs, net of tax effects, that were not included in the determination of income from continuing

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operations or net income to the pro forma amounts indicated below (in thousands, except per share amounts):

 
  2001
  2002
  2003
Income from continuing operations                  
  As reported   $ 5,993   $ 8,728   $ 9,450
  Stock based employee costs, net of tax effects     980     1,045     845
   
 
 
  Pro forma     5,013     7,683     8,605

Basic earnings per share—

 

 

 

 

 

 

 

 

 
  As reported   $ 0.43   $ 0.62   $ 0.67
  Pro forma     0.36     0.55     0.61

Diluted earnings per share—

 

 

 

 

 

 

 

 

 
  As reported   $ 0.42   $ 0.60   $ 0.63
  Pro forma     0.36     0.53     0.57

Net income

 

 

 

 

 

 

 

 

 
  As reported   $ 3,262   $ (1,744 ) $ 8,829
  Stock based employee costs, net of tax effects     980     1,045     845
   
 
 
  Pro forma     2,282     (2,789 )   7,984

Basic earnings per share—

 

 

 

 

 

 

 

 

 
  As reported   $ 0.23   $ (0.12 ) $ 0.63
  Pro forma     0.16     (0.20 )   0.57

Diluted earnings per share—

 

 

 

 

 

 

 

 

 
  As reported   $ 0.23   $ (0.12 ) $ 0.59
  Pro forma     0.16     (0.19 )   0.53

        The fair value of these options was estimated using a Black-Scholes option pricing model with a risk-free interest rate of 6.0% for 2001 and 2002 and a range of 3.65% to 4.2% for 2003, volatility factors of 1.891 for 2001, a range of 1.792 to 1.877 for 2002 and a range of .433 to .471 for 2003, a dividend yield of 0%, and an expected option life from zero to seven years for 2001, 2002 and 2003.

Advertising Costs

        The Company charges advertising costs to expenses as incurred. Advertising and marketing expense related to operations was $1.2 million for fiscal year 2001, $1.3 million for fiscal year 2002, and $1.4 million for fiscal year 2003. Advertising and marketing expense is included in selling, general and administrative expense.

Statement of Cash Flows

        Cash and cash equivalents generally consist of cash and other money market instruments. The Company considers any temporary investments that mature in three months or less when purchased to be cash equivalents for reporting cash flows.

F-37



Accounting Pronouncements

        In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The statement requires that the amount recorded as a liability be capitalized by increasing the carrying amount of the related long-lived asset. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS 143 became effective for financial statements beginning January 1, 2003. The application of the new accounting standard did not have a material impact on the Company's financial statements.

        In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," and establishes accounting standards for the impairment and disposal of long-lived assets and criteria for determining when a long-lived asset is held for sale. SFAS 144 removes the requirement to allocate goodwill to long-lived assets to be tested for impairment, requires that the depreciable life of a long-lived asset to be abandoned be revised in accordance with APB Opinion No. 20, "Accounting Changes," provides that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired and broadens the presentation of discontinued operations to include more disposal transactions. SFAS 144 became effective for financial statements beginning January 1, 2002. The Company has complied with the requirements of SFAS 144 in reporting its discontinued operations in 2002 (see Note 3).

        In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair market value in the period in which the liability is incurred except for a liability for onetime termination benefits that is incurred over time. The provisions of SFAS 146 became effective for exit or disposal activities initiated after December 31, 2002. The Company has adopted SFAS 146 and it did not have a material impact on our financial position or results of operations.

        In November 2002, FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, we must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for

F-38



financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted FIN 45 and it did not have a material impact on our financial position or results of operations.

        In December 2002, FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS 148 amends SFAS 123 to provide alternate methods of transition for an entity that changes to the fair-value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure provisions of SFAS 123 to require expanded and more prominent disclosure of the effects of an entity's accounting policy in the summary of significant accounting policies section with respect to stock-based employee compensation. The amendment of the annual disclosure requirements of SFAS 123 is effective for fiscal years ending after December 15, 2002. The Company has included the amended disclosure requirement of SFAS 148 in the Notes to Consolidated Financial Statements.

        In January 2003, FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," and in December 2003 issued a revised interpretation ("FIN 46R"). FIN 46 and FIN 46R address the accounting for, and disclosure of, investments in variable interest entities. The Company has adopted FIN 46 and FIN 46R and they did not have a material impact on our financial position or results of operations.

        In April 2003, FASB issued Statement of Financial Accounting Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends SFAS 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. The Company has adopted SFAS 149 for all contracts entered into or modified after June 30, 2003 and it did not have a material impact on our financial condition or results of operations.

        On May 15, 2003, FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The statement established standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 must be applied immediately to instruments entered into or modified after May 31, 2003. The Company has adopted SFAS 150 and has determined it will not have a material impact on our financial position or results of operations.

3. DISCONTINUED OPERATIONS

        On November 12, 2002, the Company announced that it would sell its Michigan John Deere construction equipment stores as a result of continuing deterioration in the Michigan construction equipment market and its location in regards to the Company's other operations and its plans for future expansion. The sale of the Michigan construction equipment stores was substantially complete at December 31, 2002. Prior to the sale, Michigan construction equipment stores were part of the Company's Construction Equipment segment. The Construction Equipment segment has been restated for all periods presented to exclude the Michigan stores.

        On November 12, 2002 the Company decided to discontinue its Retail segment, which operated three farm and ranch retail stores in Seguin, Hockley and Denton, Texas. The Company decided that the Retail segment did not fit into its long-term plans of growing its core heavy-duty truck and construction equipment businesses. The Denton store was closed in December 2002, the Hockley store began liquidating inventory during November 2002 and completed the liquidation on March 9, 2003.

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The Company is actively marketing the Seguin store and expects to sell the store by December 31, 2004. As a result of these actions, the Retail segment will no longer be reported as a separate business segment.

        As a result of these decisions the Company recognized nonrecurring and unusual charges, net of income tax benefits, of $8.3 million ($0.58 per diluted share) in the fourth quarter of 2002. Following is a discussion that describes the components of the $8.3 million in charges based on their classification in the Company's consolidated financial statements.

        The $8.3 million in charges recorded in the fourth quarter of 2002 included charges, net of income tax benefits, of approximately $2.5 million related to the Michigan John Deere construction equipment stores sold during December 2002. The remaining $5.8 million in charges relate to closing, liquidation and pending sale of Retail segment stores described above. These charges are included in discontinued operations in the Company's consolidated statements of income in accordance with SFAS 144. In addition, the results of operations of these businesses have been classified as discontinued operations in the Company's consolidated statements of income for all periods presented. Similarly, certain assets of these businesses have been separately identified in the consolidated balance sheet as being held for sale. The Company expects to complete the sale of these assets by December 31, 2004. Depreciation and amortization expense are no longer being recorded with respect to the assets of these businesses in accordance with SFAS 144. These assets are recorded at estimated fair value less cost to sell at December 31, 2003. Changes in the estimated fair value will be recorded in future periods as determined.

        Net sales and earnings (loss) before income taxes related to the discontinued businesses were as follows (in thousands):

 
  2001
  2002
  2003
 
Michigan Construction Equipment Stores                    
  Net Sales   $ 50,844   $ 37,407   $ 251  
  Earnings (loss) before income taxes:                    
  Results of operations from discontinued operations     (552 )   (1,425 )    
  Charges related to discontinued operations         (4,128 )    
   
 
 
 
  (Loss) before income taxes     (552 )   (5,553 )    
  Income tax benefit (expense)     221     2,222      
   
 
 
 
  Net (loss) from discontinued operations   $ (331 ) $ (3,331 ) $  
   
 
 
 
Retail Segment Stores (D&D)                    
  Net Sales   $ 40,808   $ 39,571   $ 17,298  
  Earnings (loss) before income taxes:                    
  Results of operations from discontinued operations     (4,001 )   (2,119 )   (1,035 )
  Charges related to discontinued operations         (9,007 )    
   
 
 
 
  (Loss) before income taxes     (4,001 )   (11,126 )   (1,035 )
  Income tax benefit (expense)     1,601     3,985     414  
   
 
 
 
  Net (loss) from discontinued operations   $ (2,400 ) $ (7,141 ) $ (621 )
   
 
 
 

        Included in the $4.1 million Michigan construction equipment stores charge for 2002 was a goodwill impairment of $2.2 million, a loss on the disposal of inventory of $1.5 million, $0.7 million expense for early termination benefits, and a gain on the sale of fixed assets of $0.3 million. The remaining charges are related to costs associated with infrastructure reduction, including professional fees and facilities. No further charges related to the disposition were incurred during 2003.

F-40


        Included in the $9.0 million D&D charge for 2002 was a $5.1 million loss for the sale of fixed assets, $1.5 million loss on the disposal of inventory, $1.1 million expense for early termination benefits and a $1.0 million impairment of goodwill. The remaining charges were related to costs associated with infrastructure reduction, including professional fees and facilities. No further charges related to the disposition were incurred during 2003.

        The major classes of assets of the discontinued operations classified as held for sale and included in the consolidated balance sheet were as follows (in thousands):

 
  2002
  2003
Inventories   $ 10,218   $ 2,496
Property and equipment, net     6,744     6,328
   
 
Assets held for sale   $ 16,962   $ 8,824
   
 

4. SUPPLIER AND CUSTOMER CONCENTRATION:

Major Suppliers and Dealership Agreements

        The Company has entered into dealership agreements with various companies ("Distributors"). These agreements are nonexclusive agreements that allow the Company to stock, sell at retail and service trucks, equipment and products of the Distributors in the Company's defined market. The agreements allow the Company to use the Distributor's name, trade symbols and intellectual property and expire as follows:

Distributor

  Expiration Dates
PACCAR   August 2004 to October 2006
John Deere   Indefinite

        These agreements, as well as agreements with various other Distributors, impose a number of restrictions and obligations on the Company, including restrictions on a change in control of the Company and the maintenance of certain required levels of working capital. Violation of these restrictions could result in the loss of the Company's right to purchase the Distributor's products and use the Distributor's trademarks. As of December 31, 2003, the Company's management believes it was in compliance with all the restrictions and obligations of its dealership agreements.

        The Company purchases most of its new vehicles and parts from PACCAR, the maker of Peterbilt trucks and parts, at prevailing prices charged to all franchised dealers. Sales of new Peterbilt trucks accounted for 97%, 98% and 95% of the Company's new vehicle sales for the years ended December 31, 2001, 2002 and 2003, respectively.

        The Company purchases most of its new construction equipment and parts from John Deere at prevailing prices charged to all franchised dealers. Sales of new John Deere equipment accounted for 85%, 91% and 93% of the Company's new equipment sales for the years ended December 31, 2001, 2002 and 2003, respectively.

Primary Lenders

        The Company purchases its new and used truck and construction equipment inventories with the assistance of floor plan financing programs offered by various financial institutions and John Deere.

F-41



The financial institution used for truck inventory purchases also provides the Company with a line of credit that allows borrowings of up to $13,500,000 and with notes on certain real estate properties. The floor plan agreement with the financial institution, used for truck inventory purchases, provides that such agreement may be terminated at the option of the lender with notice of 120 days.

        The floor plan agreement with one of the financial institutions used for construction equipment purchases expires in June 2004. Additionally, floor plan financing is provided by John Deere pursuant to the Company's equipment dealership agreement. Furthermore, the agreements also provide that the occurrence of certain events will be considered events of default. There were no known events of default as of December 31, 2003. In the event that the Company's financing becomes insufficient, or its relationship with the current primary lenders terminates, the Company would need to obtain similar financing from other sources. Management believes it can obtain additional floor plan financing or alternative financing if necessary.

        The Company's debt agreements include certain restrictive covenants including maintaining a tangible net worth of at least $15.0 million and a debt to tangible net worth ratio of 9 to 1. The Company was in compliance with these and all debt covenants as of December 31, 2003.

Concentrations of Credit Risks

        Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with what it considers to be quality financial institutions. At December 31, 2003, the Company had deposits in excess of federal insurance totaling approximately $39.3 million.

        Concentrations of credit risk with respect to trade receivables are reduced because a large number of geographically diverse customers make up the Company's customer base, thus spreading the trade credit risk. A majority of the Company's business, however, is concentrated in the United States heavy-duty trucking and construction equipment markets and related aftermarkets. The Company controls credit risk through credit approvals and by selling certain trade receivables without recourse. Related to the Company's finance contracts, after the finance contract is entered into, the Company generally sells the contracts to a third party. The finance contracts are sold both with and without recourse. A majority of the Company's finance contracts are sold without recourse. Historically, bad debt expense associated with the Company's accounts receivable and finance contracts has not been significant.

F-42



5. ACCOUNTS RECEIVABLE:

        The Company's accounts receivable, net, consisted of the following (in thousands):

 
  December 31,
 
 
  2002
  2003
 
Trade accounts receivable from sale of vehicles and construction equipment   $ 12,786   $ 12,122  
Other trade receivables     3,717     3,982  
Warranty claims     3,199     3,457  
Other accounts receivable     6,283     5,381  
Less allowance for doubtful receivables     (450 )   (450 )
   
 
 
  Total   $ 25,535   $ 24,492  
   
 
 

        For the years ended December 31, 2001, 2002 and 2003, the Company had no significant related-party sales.

6. INVENTORIES:

        The Company's inventories consisted of the following (in thousands):

 
  December 31,
 
 
  2002
  2003
 
New vehicles   $ 67,138   $ 79,871  
Used vehicles     7,361     11,600  
Construction equipment—new     3,244     4,505  
Construction equipment—used     1,307     657  
Construction equipment—rental     3,541     913  
Parts and accessories     31,852     39,476  
Other     1,866     1,424  
Less allowance     (976 )   (1,023 )
   
 
 
  Total   $ 115,333   $ 137,423  
   
 
 

7. VALUATION ACCOUNTS

        Valuation and allowance accounts include the following (in thousands):

 
  December 31,
 
 
  2001
  2002
  2003
 
Balance at the Beginning of Year   $ 2,694   $ 1,911   $ 1,426  
Net Charged to Costs and Expenses     1,631     404     1,450  
Acquisitions     513              
Net Write-Offs     (2,927 )   (889 )   (1,403 )
   
 
 
 
Balance at the End of Year   $ 1,911   $ 1,426   $ 1,473  
   
 
 
 

F-43


Allowance for Doubtful Receivables

        The Company provides an allowance for uncollectible warranty receivables. The Company evaluates the collectibility of its warranty claims receivable based on a combination of factors, including aging and correspondence with the applicable manufacturer. Management reviews the warranty claims receivable aging and adjusts the allowance based on historical experience. The Company sells a majority of its customer accounts receivable to a third party that is responsible for qualifying the customer for credit at the point of sale. As all credit risk is assumed by the third party, the Company provides no allowance for customer accounts receivable.

Inventory

        The Company provides a reserve for obsolete and slow moving parts. The reserve is reviewed and, if necessary, adjustments are made on a quarterly basis. The Company relies on historical information to support its reserve. Once the inventory is written down, the Company does not adjust the reserve balance until the inventory is sold. The Company recognized $126,000 of pretax parts valuation losses for obsolete and slow moving parts during 2002 and $121,000 during 2003.

        The valuation for new and used truck inventory is based on specific identification. A detail of new and used truck inventory is reviewed and, if necessary, adjustments to the value of specific units are made on a quarterly basis. The Company recognized $500,000 of pretax new and used vehicle inventory valuation losses during 2002 and $1.3 million of pretax new and used vehicle inventory valuation losses during 2003.

8. FLOOR PLAN NOTES PAYABLE AND LINES OF CREDIT:

Floor Plan Notes Payable

        Floor plan notes are financing agreements to facilitate the Company's purchase of new and used trucks and construction equipment. These notes are collateralized by the inventory purchased and accounts receivable arising from the sale thereof. The Company's floor plan notes have interest rates based on the Prime rate or LIBOR, as defined in the agreements. The interest rates applicable to these agreements ranged from approximately 3.35% to approximately 5.50% as of December 31, 2003. The amounts borrowed under these agreements are due when the related truck or construction equipment inventory (collateral) is sold and the sales proceeds are collected by the Company, or in the case of construction equipment rentals, when the carrying value of the equipment is reduced. These lines may be modified, suspended or terminated by the lender as described in Note 4.

        The Company's floor plan agreement with its primary truck lender limits the borrowing capacity based on the number of new and used trucks that may be financed. As of December 31, 2003, the aggregate amount of unit capacity for new and used trucks was 1,390 and 553, respectively, and the availability for new and used trucks was 130 and 238, respectively.

        The Company's floor plan agreement with one of its construction equipment lenders is based on the book value of the Company's construction equipment inventory. As of December 31, 2003, the aggregate amount of borrowing capacity with this lender was $10.5 million, with approximately $4.5 million outstanding. Additional amounts are available under the Company's John Deere dealership agreement. At December 31, 2003, approximately $1.5 million was outstanding pursuant to the John Deere dealership agreement.

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        Amounts of collateral as of December 31, 2002 and 2003 were as follows (in thousands):

 
  December 31,
 
  2002
  2003
Inventories, new and used vehicles and construction equipment at cost based on specific identification   $ 82,591   $ 97,546
Construction equipment inventory included in assets held for sale     1,332    
Truck and construction equipment sale related accounts receivable     12,786     12,122
   
 
  Total   $ 96,709   $ 109,668
   
 
Floor plan notes payable   $ 89,288   $ 108,235
   
 

Lines of Credit

        The Company has a separate line of credit agreement with a financial institution that provides for an aggregate maximum borrowing of $13.5 million, with advances generally limited to 75% of the Company's new parts inventory. Advances bear interest at prime less 0.5%, which was 3.5% on December 31, 2003. Advances under the line-of-credit agreement are secured by new parts inventory. The line of credit agreement contains financial covenants. The Company was in compliance with these covenants on December 31, 2003. Either party may terminate the agreement with 30 days written notice. As of December 31, 2002 and 2003, advances outstanding under this line-of-credit agreement amounted to $13.5 million. As of December 31, 2003, there were no funds available for future borrowings. This line is discretionary and may be modified, suspended or terminated at the election of the lender. The Company has four additional separate secured lines of credit that provide for an aggregate maximum borrowing of $13.6 million. Advances outstanding under these secured lines of credit in aggregate were $4.2 million, leaving $9.4 million available for future borrowings as of December 31, 2003.

9. LONG-TERM DEBT:

        Long-term debt was comprised of the following (in thousands):

 
  December 31,
 
 
  2002
  2003
 
Variable interest rate term notes   $ 14,536   $ 9,740  
Fixed interest rate term notes     80,380     80,288  
   
 
 
  Total debt     94,916     90,028  
Less—Current maturities     (24,958 )   (23,767 )
   
 
 
    $ 69,958   $ 66,261  
   
 
 

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        As of December 31, 2003, debt maturities were as follows (in thousands):

2004   $ 23,767
2005     14,328
2006     10,502
2007     7,886
2008     6,838
Thereafter     26,707
   
    $ 90,028
   

        The interest rates on the Company's variable interest rate notes are based on LIBOR and the Prime rate on December 31, 2003. Interest rates on the notes ranged from approximately 3.37% to 4.22% on December 31, 2003. Payments on the notes range from $1,945 to $67,000 per month, plus interest. Maturities of these notes range from April 2004 to September 2014.

        The Company's fixed interest rate notes are primarily with financial institutions and had interest rates ranging from approximately 3.86% to 10.79% on December 31, 2003. Payments on the notes range from $220 to $34,833 per month, plus interest. Maturities of these notes range from January 2004 to January 2016.

        The proceeds from the issuance of the notes were used primarily to acquire land, buildings and improvements, transportation equipment and leasing vehicles. The notes are secured by the assets acquired with the proceeds of such notes.

10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

        The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company:

11. DEFINED CONTRIBUTION PLAN:

        The Company has a defined contribution plan (the "Rush Plan"), which is available to all Company employees and the employees of certain affiliates. Each employee who has completed six months of continuous service is entitled to enter the Rush Plan. Participating employees may contribute from 1% to 50% of total gross compensation. However, certain higher paid employees are limited to a maximum contribution of 15% of total gross compensation. For the first 10% of an employee's contribution, the Company, at its discretion, may contribute an amount equal to 25% of the employees' contributions for those employees with less than five years of service and an amount equal to 50% of the employees' contributions for those employees with more than five years of service. During the year ended December 31, 2001, the Company incurred expenses of approximately $1.6 million related to the

F-46



Rush Plan. During the year ended December 31, 2002, the Company incurred expenses of approximately $1.5 million related to the Rush Plan. During the year ended December 31, 2003, the Company incurred expenses of approximately $1.6 million related to the Rush Plan.

        The Company currently does not provide any postretirement benefits nor does it provide any postemployment benefits.

12. LEASES:

Vehicle Leases

        The Company leases vehicles primarily over periods ranging from one to ten years under operating lease arrangements. These vehicles are subleased to customers under various agreements in its own leasing operation. Generally, the Company is required to incur all operating costs and pay a minimum rental and an excess mileage charge based on maximum mileage over the term of the lease. Vehicle lease expenses for the years ended December 31, 2001, 2002 and 2003, were approximately $5.4 million, $5.0 million and $5.3 million, respectively.

        Minimum rental commitments for noncancelable vehicle leases in effect on December 31, 2003, are as follows (in thousands):

2004   $ 5,915
2005     4,789
2006     3,938
2007     3,224
2008     2,484
Thereafter     4,266
   
  Total   $ 24,616
   

Customer Vehicle Leases

        A Company division leases both owned and leased vehicles to customers primarily over periods of one to ten years under operating lease arrangements. The leases require a minimum rental and a contingent rental based on mileage. Rental income during the years ended December 31, 2001, 2002 and 2003, consisted of minimum payments of approximately $11.3 million, $12.5 million and $13.7 million, respectively, and contingent rentals of approximately $2.8 million, $3.0 million and $3.0 million, respectively. Minimum lease payments to be received for noncancelable leases and subleases in effect at December 31, 2003, are as follows (in thousands):

2004   $ 14,080
2005     11,833
2006     9,292
2007     7,338
2008     5,290
Thereafter     6,254
   
  Total   $ 54,087
   

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        As of December 31, 2002 and 2003, the Company had $32.9 million (net of accumulated depreciation of $15.3 million) and $32.1 million (net of accumulated depreciation of $18.9 million), respectively, of leasing vehicles included in property and equipment.

Other Leases—Land and Buildings

        The Company leases various assets under operating leases, which expire at various times through 2023. Rental expense for the years ended December 31, 2001, 2002 and 2003, was $1.9 million, $1.8 million and $2.2 million, respectively. Future minimum lease payments under noncancelable leases at December 31, 2003, are as follows (in thousands):

2004   $ 2,321
2005     1,855
2006     1,487
2007     915
2008     915
Thereafter     4,338
   
Total   $ 11,831
   

13. STOCK OPTIONS AND STOCK PURCHASE WARRANTS:

        In April 1996, the Board of Directors and shareholders adopted the Rush Enterprises, Inc. Long-Term Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for the grant of stock options (which may be nonqualified stock options or incentive stock options for tax purposes), stock appreciation rights issued independent of or in tandem with such options ("SARs"), restricted stock awards and performance awards.

        The aggregate number of shares of common stock subject to stock options or SARs that may be granted to any one participant in any year under the Incentive Plan is 100,000 shares of Class A Common Stock and 100,000 shares of Class B Common Stock. The Company has 2,600,000 shares of Class A Common Stock and 1,400,000 shares of Class B Common Stock reserved for issuance upon exercise of any awards granted under the Company's Incentive Plan.

        On April 8, 1996, the Board of Directors of the Company declared a dividend of one common share purchase right (a "Right") for each share of common stock outstanding. Each Right entitles the registered holder to purchase from the Company one share of Class A Common Stock and one share of Class B Common Stock at a price of $17.50 per share (the "Purchase Price"). The Rights are not exercisable until the distribution date, as defined in the Rights Agreement. The Rights will expire on April 7, 2006 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company.

        In March 2001 and 2002, the Company granted options under the Incentive Plan to purchase an aggregate of 212,200 and 250,000 shares, respectively, of the Old Common Stock to employees. Each option granted becomes exercisable in three annual installments beginning on the third anniversary of the grant date. The options are exercisable at a price equal to the fair value of the Company's Old Common Stock at the grant date. However, each option has now been divided into two options, one option for the purchase of Class A Common Stock and one option for the purchase of Class B

F-48


Common Stock. Each of the options is exercisable at one-half of the fair value of the Company's Old Common Stock on the grant date.

        In March 2003, the Company granted options under the Incentive Plan to purchase an aggregate of 380,000 shares of Class A Common Stock and 93,000 shares of Class B Common Stock. Each option granted becomes exercisable in three annual installments beginning on the third anniversary of the grant date.

        During 2000, the Company granted options outside of any plan to purchase an aggregate of 169,258 shares of Old Common Stock to employees. A total of 69,258 of these options were terminated in 2001 and 2002. The remaining 100,000 options were divided into two options, one for Class A Common Stock and one for Class B Common Stock, and are exercisable at a price equal to one-half of the fair value of the Company's Old Common Stock at the grant date. These options are exercisable four years from the grant date.

        During 1997, the Board of Directors and shareholders adopted the Rush Enterprises, Inc. 1997 Non-Employee Director Stock Option Plan (the "Director Plan"). The Director Plan is designed to attract and retain highly qualified non-employee directors, reserving 300,000 shares of Old Common Stock for issuance upon exercise of any awards granted under the Plan. Under the terms of the Director Plan, each non-employee director received options to purchase 10,000 shares of the Old Common Stock as of the date of adoption or on their respective date of election, all of which are fully vested and are exercisable immediately, and expire ten years from the grant date. During the year ended December 31, 2002, 30,000 options were granted and were exercisable at a price equal to the fair value of the Company's Old Common Stock on the grant date. However, each option has now been divided into two options, one option for the purchase of Class A Common Stock and one option for the purchase of Class B Common Stock. Each of the options is exercisable at one-half of the fair value of the Company's Old Common Stock on the grant date. During the year ended December 31, 2003, 60,000 options of Class A Common Stock were granted under the terms of the Director Plan.

        During 2001, the Company granted options outside any plan to purchase an aggregate of 60,000 shares of Old Common Stock to non-employee directors, all of which are fully vested and were exercisable immediately, and expire ten years from the grant date. The options were exercisable at a price equal to the fair value of the Company's Old Common Stock on the grant date. However, each option has now been divided into two options; one option for the purchase of Class A Common Stock and one option for the purchase of Class B Common Stock. Each of the options is exercisable at one-half of the fair value of the Company's Old Common Stock on the grant date.

F-49


        A summary of the Company's stock option activity and related information for the years ended December 31, 2001, 2002 and 2003 follows:

 
  2001
  2002
  2003
 
  Options
  Weighted
Average
Exercise
Price

  Options
  Weighted
Average
Exercise
Price

  Options
  Weighted
Average
Exercise
Price

Outstanding, beginning of year   1,549,822   $ 4.50   2,028,034   $ 3.85   2,452,730   $ 3.82
  Granted   604,400     2.08   560,000     3.71   533,000     3.80
  Exercised               (46,248 )   5.14
  Forfeited   (126,188 )   3.39   (135,304 )   3.74   (33,916 )   4.29
   
 
 
 
 
 
Outstanding, end of year   2,028,034   $ 3.85   2,452,730     3.82   2,905,566     3.79
   
 
 
 
 
 
Exercisable, end of year   612,084   $ 4.24   889,508   $ 4.56   1,140,135   $ 4.62
   
 
 
 
 
 
Weighted average fair value of options granted
during the year
      $ 2.06       $ 3.68       $ 1.95

        The following table summarizes the information about the Company's options outstanding at December 31, 2003:

 
  Options Outstanding
   
   
 
  Options Exercisable
 
   
  Weighted
Average
Remaining
Contractual
Life

   
Exercise Price

  Number
Outstanding

  Weighted
Average
Exercise
Price

  Number
Exercisable

  Weighted
Average
Exercise
Price

$2.06-$2.25   575,400   7.2   $ 2.08   180,000   $ 2.13
$3.10-$4.32   1,659,596   7.4   $ 3.59   348,376   $ 3.92
$4.85-$6.00   610,570   5.5   $ 5.52   551,759   $ 5.49
$8.13   60,000   5.4   $ 8.13   60,000   $ 8.13
   
           
     
    2,905,566             1,140,135      

        In October 1997, the Company issued warrants to purchase an aggregate of 171,875 shares of the Old Common Stock to C. Jim Stewart & Stevenson in connection with the purchase of the assets of the John Deere construction equipment store. The warrants were exercisable during the five-year period commencing October 6, 1997, at an exercise price equal to $6.00 per share. These warrants expired without being exercised during 2002.

        In March 1998 and 2000, the Company issued, to certain employees, warrants to purchase an aggregate of 18.75% of the common stock of Rush Retail Centers, Inc., its wholly owned subsidiary, for $375,000. The warrants were exercisable on various dates between March 2001 and March 2003 and expire ten years from the grant date. None of these warrants were exercised as of December 31, 2003.

14. EARNINGS PER SHARE:

        Earnings per share for all periods have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which established standards for computing and presenting earnings per share ("EPS") for entities with publicly held

F-50



common stock or potential common stock. This statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. Basic EPS were computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversions of potentially dilutive options and warrants that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income.

 
  2001
  2002
  2003
Numerator—                  
  Numerator for basic and diluted earnings per share—                  
    Net income (loss) available to common shareholders   $ 3,262,000   $ (1,744,000 ) $ 8,829,000
   
 
 
Denominator—                  
  Denominator for basic earnings per share, weighted average shares     14,004,088     14,004,088     14,042,304
  Effect of dilutive securities—                  
    Stock options     162,352     456,520     981,933
    Warrants            
   
 
 
  Dilutive potential common shares     162,352     456,520     981,933
  Denominator for diluted earnings per share, adjusted weighted average shares and assumed conversions     14,166,440     14,460,608     15,024,237
   
 
 
Basic earnings (loss) per common share   $ 0.23   $ (0.12 ) $ 0 .63
   
 
 
Diluted earnings (loss) per common share and common share equivalents   $ 0.23   $ (0.12 ) $ 0.59
   
 
 

        Warrants and options to purchase shares of common stock that were outstanding for the years ended December 31, 2000, 2001 and 2002, that were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market prices of the common shares are as follows:

 
  2001
  2002
  2003
Warrants   343,750    
Options   1,423,634   855,280   188,305
   
 
 
Total antidilutive securities   1,767,384   855,280   188,305
   
 
 

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15. INCOME TAXES:

Provision for Income Taxes

        The tax provision for the years ended December 31, 2001, 2002 and 2003, are summarized as follows (in thousands):

 
  2001
  2002
  2003
Current provision—                  
  Federal   $ (996 ) $ (127 ) $ 2,029
  State     391     397     341
   
 
 
      (605 )   270     2,370
   
 
 
Deferred provision—                  
  Federal     2,911     (354 )   3,189
  State     (132 )   (305 )   327
   
 
 
      2,779     (659 )   3,516
   
 
 
Provision for income taxes   $ 2,174   $ (389 ) $ 5,886
   
 
 

        The following summarizes the tax effect of significant cumulative temporary differences that are included in the net deferred income tax liability as of December 31, 2002 and 2003 (in thousands):

 
  2002
  2003
 
Differences in depreciation and amortization   $ 14,720   $ 16,911  
Accruals and reserves not deducted for tax purposes until paid     (4,124 )   (2,642 )
Other, net     (251 )   (221 )
   
 
 
    $ 10,345   $ 14,048  
   
 
 

        A reconciliation of taxes based on the federal statutory rates and the provisions for income taxes for the years ended December 31, 2001, 2002 and 2003, are summarized as follows (in thousands):

 
  2001
  2002
  2003
Income taxes at the federal statutory rate   $ 1,903   $ (747 ) $ 5,150
State income taxes, net of federal benefit     190     (181 )   587
Nondeductible impairment of goodwill         211    
Nonrealizable state deferred tax asset related to discontinued operations         254    
Other, net     81     74     149
   
 
 
Provision for income taxes   $ 2,174   $ (389 ) $ 5,886
   
 
 

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        Following is a summary of the Company's income tax provision for the years ended December 31, 2001, 2002 and 2003 (in thousands):

 
  2001
  2002
  2003
 
Income tax expense on continuing operations   $ 3,996   $ 5,818   $ 6,300  
Income tax (benefit) from discontinued operations     (1,822 )   (6,207 )   (414 )
   
 
 
 
Provision for income taxes   $ 2,174   $ (389 ) $ 5,886  
   
 
 
 

16. COMMITMENTS AND CONTINGENCIES:

        The Company is contingently liable to finance companies for certain notes initiated on behalf of such finance companies related to the sale of trucks and construction equipment. The majority of finance contracts are sold without recourse to the Company. The Company's liability related to finance contracts sold with recourse is generally limited to 5% to 20% of the outstanding amount of each note initiated on the behalf of the finance company. The Company provides an allowance for repossession losses and early repayment penalties.

        Finance contracts initiated and sold during the years ended December 31, 2001, 2002 and 2003, were $149.9 million, $144.1 million and $165.1 million, respectively.

        The Company is involved in various claims and legal actions arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any of the claims or proceedings to which the Company is a party would have a material adverse effect on the Company's financial position or results of operations; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company's results of operations for the fiscal period in which such resolution occurred.

17. ACQUISITIONS:

        In August 2001, the Company acquired substantially all the assets of El Paso Trucks, which consisted of two dealership locations in El Paso, Texas and Las Cruces, New Mexico. The transaction was valued at $2.5 million with the purchase price paid in cash.

        The acquisition has been accounted for as a purchase; operations of the business acquired have been included in the accompanying consolidated financial statements from the respective date of acquisition. The purchase price has been allocated based on the fair values of the assets at the date of acquisition as follows (in thousands):

Inventories   $ 680  
Property and equipment     574  
Prepaid expenses and other     20  
Accrued expenses     (82 )
Goodwill     1,300  
   
 
  Total   $ 2,492  
   
 

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        In November 2001, the Company purchased substantially all the assets of Perfection, which operates an oil and gas up-fitting business, a medium-duty truck accessory and up-fitting business and a parts distribution business in Oklahoma City, Oklahoma. The assets acquired were valued at $6.7 million with a purchase price of $4.2 million paid in cash.

        The acquisition has been accounted for as a purchase; operations of the business acquired have been included in the accompanying consolidated financial statements from the respective date of acquisition. The purchase price was less than the fair value of the assets acquired. The purchase price has been allocated by reducing the property and equipment with a fair value of $1.9 million to $0, and inventory with a fair value of $3.1 million to $2.5 million, and recording accounts receivable, net of an allowance for doubtful accounts, at its fair value of $1.7 million.

        In February 2003, the Company acquired the common stock of Orange County, a Peterbilt dealer in central Florida. The acquisition provides the Company with the exclusive rights to sell Peterbilt trucks and parts from three new locations in central Florida, including Orlando, Haines City and Tampa. The transaction was valued at approximately $5.4 million, with the purchase price paid in cash.

        The Orange County acquisition has been accounted for as a purchase; operations of the business acquired have been included in the accompanying consolidated financial statements from the respective date of acquisition. The purchase price has been allocated based on the fair values of the assets and liabilities at the date of acquisition as follows (in thousands):

Cash   $ 1,270  
Inventories     5,172  
Accounts receivable & other assets     2,518  
Property and equipment, net     568  
Accounts payable & accrued expenses     (5,734 )
Notes payable     (1,832 )
Goodwill     3,421  
   
 
  Total   $ 5,383  
   
 

        Since the Orange County acquisition was a stock purchase, the goodwill is not deductible for tax purposes.

        In April 2003, the Company purchased substantially all of the assets of Peterbilt of Mobile, Inc., which consisted of a dealership location in Mobile, Alabama. Peterbilt of Mobile, Inc.'s primary line of business is the sale of new Peterbilt and used heavy-duty trucks, parts and service.

        The Peterbilt of Mobile, Inc. acquisition has been accounted for as a purchase; operations of the business acquired have been included in the accompanying consolidated financial statements from the respective date of acquisition. The purchase price has been allocated based on the fair values of the assets at the date of acquisition as follows (in thousands):

Inventories   $ 448
Property and equipment     126
Goodwill     860
   
  Total   $ 1,434
   

        All of the goodwill acquired in the Peterbilt of Mobile, Inc. acquisition will be amortized over 15 years and deducted for income tax purposes.

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        The following unaudited pro forma summary presents information as if the Orange County and Peterbilt of Mobile, Inc. acquisitions had taken place at the beginning of 2002. The pro forma information is provided for information purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the Company. The following summary is for the years ended December 31, 2002 and 2003 (unaudited) (in thousands, except per share amounts):

 
  2002
  2003
Revenues   $ 823,080   $ 823,779
   
 
Income from continuing operations after pro forma provision for income taxes   $ 8,448   $ 9,461
   
 
Basic income from continuing operations per share   $ 0.60   $ 0.67
   
 
Diluted income from continuing operations per share   $ 0.58   $ 0.63
   
 

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18. UNAUDITED QUARTERLY FINANCIAL DATA:

        (In thousands, except per share amounts.)

 
  First
Quarter

  Second
Quarter

  Third
Quarter

  Fourth
Quarter

 
2002                          
Revenues   $ 162,559   $ 172,435   $ 224,853   $ 197,300  
Gross Profit     32,130     35,019     39,058     34,998  
Operating income from continuing operations     3,561     5,128     7,096     5,105  
Income from continuing operations before income taxes     1,913     3,561     5,545     3,527  
Income from continuing operations     1,148     2,137     3,327     2,116  
(Loss) from discontinued operations, net     (714 )   (147 )   (431 )   (9,180 )
Net income (loss)   $ 434   $ 1,990   $ 2,896   $ (7,064 )
Earning per share: Basic                          
Income from continuing operations   $ 0.08   $ 0.15   $ 0.24   $ 0.15  
Net income (loss)   $ 0.03   $ 0.14   $ 0.21   $ (0.50 )
Earning per share: Diluted                          
Income from continuing operations   $ 0.08   $ 0.14   $ 0.23   $ 0.15  
Net income (loss)   $ 0.03   $ 0.14   $ 0.20   $ (0.49 )

2003

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues   $ 159,616   $ 193,259   $ 222,795   $ 239,662  
Gross Profit     34,174     38,419     41,422     39,235  
Operating income from continuing operations     2,895     5,313     6,853     5,053  
Income from continuing operations before income taxes     1,455     3,891     5,316     5,088  
Income from continuing operations     873     2,334     3,190     3,053  
Gain (loss) from discontinued operations, net     (547 )   (100 )   (36 )   62  
Net income   $ 326   $ 2,234   $ 3,154   $ 3,115  
Earning per share: Basic                          
Income from continuing operations   $ 0.06   $ 0.16   $ 0.23   $ 0.22  
Net income   $ 0.02   $ 0.16   $ 0.23   $ 0.22  
Earning per share: Diluted                          
Income from continuing operations   $ 0.06   $ 0.16   $ 0.21   $ 0.20  
Net income   $ 0.03   $ 0.15   $ 0.21   $ 0.20  

19. SEGMENTS:

        The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). This statement requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate, and their major customers.

        As mentioned previously, the Company announced in November 2002 its decision to sell its John Deere construction equipment stores in Michigan, and discontinue its D&D operations. In connection with this decision, financial information related to the Company's construction equipment operations in

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Michigan will not be included in the Construction Equipment segment below, and the Retail Segment will no longer be presented as a separate operating segment. Following is a brief description of the activities of each of the Company's business segments.

        The Company has two reportable segments: the Heavy-Duty Truck segment and the Construction Equipment segment. The Heavy-Duty Truck segment operates a regional network of truck centers that provide an integrated one-stop source for the trucking needs of its customers, including retail sales of new Peterbilt and used heavy-duty trucks, aftermarket parts, service and body shop facilities, and a wide array of financial services, including the financing of new and used truck purchases, insurance products and truck leasing and rentals. The Construction Equipment segment operates a full-service John Deere dealership that serves the Houston, Texas metropolitan and surrounding areas. Dealership operations include the retail sale of new and used equipment, aftermarket parts and service facilities, equipment rentals, and the financing of new and used equipment.

        The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on income before income taxes not including extraordinary items.

        The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. There were no material intersegment sales during the years ended December 31, 2001, 2002 and 2003.

        The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business unit requires different technology and marketing strategies. Business units were maintained through expansion and acquisitions. Assets held for sale and goodwill related to discontinued operations are included in the Heavy-Duty Truck segment.

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The following table contains summarized information about reportable segment profit or loss and segment assets for the years ended December 31, 2001, 2002 and 2003 (in thousands):

 
  Heavy-Duty
Truck
Segment

  Construction
Equipment
Segment

  All
Other

  Totals
2001                        
Revenues from external customers   $ 639,336   $ 44,417   $ 7,760   $ 691,513
Interest income     429             429
Interest expense     8,474     1,027     195     9,696
Depreciation and amortization     8,198     621     357     9,176
Segment income from continuing operations before income tax     8,714     774     501     9,989
Segment assets     310,012     19,384     9,415     338,811
Goodwill     37,696     4,103     152     41,951
Expenditures for segment assets     20,019     235     143     20,397

2002

 

 

 

 

 

 

 

 

 

 

 

 
Revenues from external customers   $ 713,113   $ 36,777   $ 7,257   $ 757,147
Interest income     239             239
Interest expense     6,011     565     162     6,738
Depreciation and amortization     7,857     398     339     8,594
Segment income from continuing operations before income tax     12,881     1,327     338     14,546
Segment assets     316,923     18,193     9,994     345,110
Goodwill     33,672     4,075     116     37,863
Expenditures for segment assets     15,262     105     827     16,194

2003

 

 

 

 

 

 

 

 

 

 

 

 
Revenues from external customers   $ 765,565   $ 41,422   $ 8,345   $ 815,332
Interest income     290             290
Interest expense     6,121     382     135     6,638
Depreciation and amortization     8,347     226     356     8,929
Segment income from continuing operations before income tax     13,448     2,385     (83 )   15,750
Segment assets     341,037     15,873     9,968     366,878
Goodwill     38,431     4,075     114     42,620
Expenditures for segment assets     19,511     619     1,045     21,175

        Revenues from segments below the quantitative thresholds are attributable to three operating segments of the Company. Those segments include a tire company, an insurance company, and a hunting lease operation. None of those segments has ever met any of the quantitative thresholds for determining reportable segments.

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