| RUSH ENTERPRISES INC \TX\ Item 1A Risk Factors An investment in our common stock is subject to risks inherent to our business |
| In addition to the other information contained in this Form 10-K, we recommend that you carefully consider the following risk factors in evaluating our business |
| If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected |
| If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment |
| Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations |
| This report is qualified in its entirety by these risk factors |
| 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 Peterbilt |
| Peterbilt is a division of PACCAR During 2005, a significant portion of our revenues resulted from sales of trucks purchased from Peterbilt and parts purchased from PACCAR Due to our dependence on PACCAR and its Peterbilt division, we believe that the long-term success of our Rush Truck Centers depends, in large part, on the following: • maintaining our relationship with PACCAR; • the manufacture and delivery of competitively-priced, high quality Peterbilt trucks and parts by PACCAR in quantities sufficient to meet our requirements; • PACCAR’s consent to our future acquisition of Peterbilt dealerships; • the overall success of PACCAR and Peterbilt; • PACCAR’s promotion of its Peterbilt division; • the goodwill associated with the Peterbilt trademark, which can be adversely affected by decisions made by PACCAR and the owners of other Peterbilt dealerships; and • the management of the Peterbilt dealership system by PACCAR 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 |
| 14 ______________________________________________________________________ We have entered into nonexclusive dealership agreements with Peterbilt that authorize us to act as a dealer of Peterbilt trucks |
| Peterbilt may 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, W Marvin Rush’s family members and other Rush executives decreases below 30prca (such persons currently control 31dtta3prca of the voting power with respect to the election of directors); 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 may 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 if the voting power of W Marvin Rush and his family falls below certain percentages, typically 25prca |
| If our dealership agreements with any manufacturer we currently represent are terminated, we will lose the right to purchase such manufacturer’s products and the right to use certain trademarks, which would have a material adverse effect on our operations, revenues and profitability |
| 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 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 dealership agreements have current terms expiring between March 2006 and January 2008 |
| Our Volvo dealership agreement has a current terms expiring August 2010 |
| Our dealership agreements with GMC, Hino, UD and Isuzu for the sale of medium-duty trucks have current terms expiring between June 2006 and October 2010 |
| Upon expiration of each agreement, 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 could have an adverse impact on our business |
| We depend on relationships with component suppliers for sales incentives, discounts and similar programs which are material to our operations |
| Each heavy-duty 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 |
| 15 ______________________________________________________________________ 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 we currently serve 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 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, 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 truck inventories with the assistance of a floor plan financing agreement through GE Capital 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 its 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 |
| 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 executive officers, 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 December 31, 2005, our backlog of new truck orders was approximately dlra584dtta0 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 14 days and six months for us to receive delivery of a truck once a customer special order is placed depending on the truck specifications and demand for the particular model ordered |
| 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 December 31, 2005 |
| 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 |
| 16 ______________________________________________________________________ If Texas law were changed to impose the Texas franchise tax or new taxes on the assets or income of our subsidiary limited partnership, the amount of taxes we pay could increase significantly |
| Under current law, Texas imposes a franchise tax (which is based in part on net income) on corporations and limited liability companies that conduct business in Texas, but the Texas franchise tax is not currently imposed on limited partnerships that conduct business in Texas or on corporations and limited liability companies that are limited partners in such limited partnerships if the limited partners do not otherwise conduct business in Texas |
| A substantial portion of our assets located in Texas are held in Rush Truck Centers of Texas, LP, a limited partnership, the limited partners of whom are subsidiary corporations |
| As a result, no Texas franchise tax is currently imposed on the assets or income of Rush Truck Centers of Texas, LP On November 22, 2005, the Supreme Court of Texas held that the system for funding Texas public schools violates the provision of the Texas Constitution prohibiting a state property tax |
| In response to this recent decision, the Governor of Texas has said that he will call a special session of the Texas Legislature to address the constitutional deficiencies in the current public school finance system and has further stated that the entire tax system needs substantial reform |
| In past sessions of the Texas Legislature, several bills to address the public school finance system were introduced that would have subjected limited partnerships to the Texas franchise tax or would have subjected corporations and limited liability companies that are limited partners in limited partnerships to the Texas franchise tax, even if such corporations and limited liability companies did not otherwise conduct business in Texas |
| If such a bill is enacted by the Texas Legislature or new laws are enacted that subject the assets or income of our subsidiary limited partnership to new taxes, whether enacted in the anticipated special session or in any later session, the amount of taxes we pay will increase significantly |
| 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, 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 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 |
| W Marvin Rush owns approximately 0dtta01prca of our issued and outstanding shares of class A common stock and 34dtta9prca of our issued and outstanding class B common stock |
| Rush will have the power to 17 ______________________________________________________________________ effectively control us, including the election of directors, the determination of matters requiring shareholder approval and other matters pertaining to corporate governance |
| 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 the right to receive proceeds on liquidation or dissolution of us after payment of our 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 dealership agreements 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 Peterbilt dealership agreements, except as may be otherwise approved from time to time by Peterbilt, W Marvin Rush, W M “Rusty” Rush, W Marvin Rush’s family members and other of our executives, in the aggregate, are required to retain a control of at least 30prca 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 rights under our Peterbilt 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 Peterbilt 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 100cmam000 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 Peterbilt 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 without further action by our 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 its 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 |