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**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended December 31,2008**

 

**Commission file number 0-20797**

 

**RUSH ENTERPRISES, INC**.

(Exact name of registrant as specified in itscharter)

 

| **Texas**                                                      | ** ** | **74-1733016**                        |
|----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R. S. Employer Identification No.) |
|                                                           |       |                                  |
| **555 IH 35 South, New Braunfels, TX**                         | ** ** | **78130**                             |
| (Address of principal executive offices)                       |       | (Zip Code)                            |

 

Registrant’s telephone number, including areacode:  **(830) 626-5200**

 

Securities registered pursuant to Section 12(b) ofthe Act:

**None**

 

Securities registered pursuant to Section 12(g) ofthe Act:

**Class A and Class BCommon Stock, $.01 par value**

(Title of Class)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.
|   | Yes  o | No  x |
|--------|--------|-------|

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.
|   | Yes  o | No  x |
|--------|--------|-------|

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.
|   | Yes  x | No  o |
|--------|--------|-------|

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer,” “accelerated filer”and smaller reporting company in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o | Smaller Reporting Company o |
|---------------------------|---------------------|-------------------------|-----------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).
|   | Yes  o | No  x |
|--------|--------|-------|

 

The aggregate market value ofcommon stock held by non-affiliates of the registrant as of June 30, 2008was approximately $481,933,449based upon the last sales price on June 30, 2008 on The NASDAQ GlobalSelect MarketSM of $14.48 for the registrant’s Class Acommon stock and $13.96 for the registrant’s Class B common stock.  Shares of common stock held by each executiveofficer and director and by each shareholder affiliated with a director or anexecutive officer have been excluded from this calculation because such personsmay be deemed to be affiliates.  Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

 

The registrant had 26,307,584 shares Class A common stock and 10,685,144 shares of Class Bcommon stock outstanding on March 9, 2009.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

**Portions of registrant’s definitive proxy statement for the registrant’s2009 Annual Meeting of Shareholders, to be filed with the Securities andExchange Commission not later than April 30, 2009, are incorporated byreference into Part III of this Form 10-K.**

 

 

 

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**RUSH ENTERPRISES, INC.**

 

**Index to Form 10-K**

 

**Year ended December 31, 2008**

 
| ** **        | ** **                                                                                                          | **Page No.** |
|-------------------|---------------------------------------------------------------------------------------------------------------------|-------------------|
| **Part I**   |
|              |                                                                                                                |              |
| Item 1            | Business                                                                                                            | **2**             |
| Item 1A           | Risk Factors                                                                                                        | **13**            |
| Item 1B           | Unresolved Staff  Comments                                                                                          | **19**            |
| Item 2            | Properties                                                                                                          | **19**            |
| Item 3            | Legal Proceedings                                                                                                   | **19**            |
| Item 4            | Submission of  Matters to a Vote of Security Holders                                                                | **19**            |
|              |                                                                                                                |              |
| **Part II**  |
|              |                                                                                                                |              |
| Item 5            | Market for  Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases  of Equity Securities | **20**            |
| Item 6            | Selected Financial  Data                                                                                            | **22**            |
| Item 7            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | **23**            |
| Item 7A           | Quantitative and Qualitative  Disclosures about Market Risk                                                         | **38**            |
| Item 8            | Financial  Statements and Supplementary Data                                                                        | **40**            |
| Item 9            | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               | **69**            |
| Item 9A           | Controls and  Procedures                                                                                            | **69**            |
| Item 9B           | Other Information                                                                                                   | **72**            |
|              |                                                                                                                |              |
| **Part III** |
|              |                                                                                                                |              |
| Item 10           | Directors and Executive Officers of the  Registrant                                                                 | **72**            |
| Item 11           | Executive Compensation                                                                                              | **72**            |
| Item 12           | Security Ownership of Certain Beneficial  Owners and Management and Related Shareholder Matters                     | **72**            |
| Item 13           | Certain Relationships and Related  Transactions                                                                     | **72**            |
| Item 14           | Principal Accountant Fees and Services                                                                              | **72**            |
|              |                                                                                                                |              |
| **Part IV**  |
|              |                                                                                                                |              |
| Item 15           | Exhibits and Financial Statement Schedules                                                                          | **73**            |

 

 

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**NOTEREGARDING FORWARD-LOOKING STATEMENTS**

 

*Certain statements contained in this Form 10-K (orotherwise made by the Company or on the Company’s behalf from time to time inother reports, filings with the Securities and Exchange Commission, newsreleases, conferences, website postings or otherwise) that are not statementsof historical fact constitute “forward-looking statements” within the meaningof Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Exchange Act of 1934, as amended(the “Exchange Act”), notwithstandingthat such statements are not specifically identified. Forward-lookingstatements include statements about the Company’s financial position, businessstrategy and plans and objectives of management of the Company for futureoperations.  These forward-lookingstatements reflect the best judgments of the Company about the future eventsand trends based on the beliefs of the Company’s management as well asassumptions made by and information currently available to the Company’smanagement.  Use of the words “may,” “should,”“continue,” “plan,” “potential,” “anticipate,” “believe,” “estimate,” “expect”and “intend” and words or phrases of similar import, as they relate to theCompany or its subsidiaries or Company management, are intended to identifyforward-looking statements but are not the exclusive means of identifying suchstatements.  Forward-looking statementsreflect the current view of the Company with respect to future events and aresubject to risks and uncertainties that could cause actual results to differmaterially from those in such statements. Important factors that could causeactual results to differ materially from those in the forward-lookingstatements include, but are not limited to, those set forth under Item 1A—RiskFactors as well as future growth rates and margins for certain of our productsand services, future demand for our products and services, risks associatedwith the current global economic crisis and its impact on capital markets andliquidity, competitive factors, general economic conditions, cyclicality,economic conditions in the new and used truck and equipment markets, customerrelations, relationships with vendors, the interest rate environment,governmental regulation and supervision, seasonality, distribution networks,product introductions and acceptance, technological change, changes in industrypractices, one-time events and other factors described herein and in theCompany’s quarterly and other reports filed with the Securities and ExchangeCommission (collectively, “Cautionary Statements”). Although the Companybelieves that its expectations are reasonable, it can give no assurance that suchexpectations will prove to be correct. Based upon changing conditions, shouldany one or more of these risks or uncertainties materialize, or should anyunderlying assumptions prove incorrect, actual results may vary materially fromthose described in any forward-looking statements. All subsequent written andoral forward-looking statements attributable to the Company or persons actingon its behalf are expressly qualified in their entirety by the applicableCautionary Statements. All forward-looking statements speak only as the date onwhich they are made and the Company undertakes no duty to update or revise anyforward-looking statements.*

 

**NOTE REGARDING INCORPORATION BY REFERENCE**

 

*The Securities and Exchange Commission (“SEC”) allows us to disclose importantinformation to you by referring you to other documents we have filed with theSEC. The information we refer to is “incorporated by reference” into this Form 10-K.Please read that information.*

 

**NOTE REGARDING TRADEMARKS USED INTHIS FORM 10-K**

 

*Peterbilt**®** is a registered trademark of Peterbilt MotorsCompany. PACCAR**®** is a registered trademark of PACCAR, Inc.GMC**®** is a registered trademark of General MotorsCorporation. Hino**®** is a registered trademark of Hino Motors, Ltd.UD**®** is a registered trademark of Nissan DieselMotor Co., Ltd. Isuzu**®** is a registered trademark of Isuzu MotorsLimited. John Deere**®** is a registered trademark of Deere &Company. Kenworth**®** is a registered trademark of PACCAR, Inc.doing business as Kenworth Truck Company. Volvo**®** is a registered trademark of Volvo TrademarkHolding AB. Freightliner**®** is a registered trademark of FreightlinerCorporation. Mack**®** is a registered trademark of Mack Trucks, Inc.Navistar**®** is a registered trademark of NavistarInternational Corporation. Caterpillar**®** is a registered trademark of Caterpillar, Inc.Cummins**®** is a registered trademark of Cummins EngineCompany, Inc. PacLease**®** is a registered trademark of PACCAR LeasingCorporation. CitiCapital**®** is a registered trademark of Citicorp. Ford**®** is a registered trademark of Ford MotorCompany.  Cummins**®** is a registered trademark of CumminsIntellectual Property, Inc.  Eatonis a registered trademark of Eaton Corporation. Arvin Meritor**®** is a registered trademark of MeritorTechnology, Inc.**®** Case is a registered trademark of Case Corporation.  Komatsu**®** is a registered trademark of Kabushiki KaishaKomatsu Seisakusho Corporation Japan. The CIT Group**®** is a registered trademark of CIT GroupHoldings, Inc.  JPMorgan Chase**®** is a registered trademark of JP Morgan Chase &Co.  SAP**®** is a registered trademark of SAPAktiengesellschaft. **International**®** is a registered trademark of NavistarInternational Transportation Corp. B**lue Bird**®** is aregistered trademark of Blue Bird Investment Corporation.*

 

 

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**PART I**

 

**Item 1.  Business**

 

Referencesherein to “the Company,” “Rush Enterprises,” “Rush,” “we,” “our” or “us” meanRush Enterprises, Inc., a Texas corporation, its subsidiaries andAssociated Acceptance, Inc., the insurance agency affiliated with theCompany, unless the context requires otherwise.

 

**Access to Company Information**

 

Rush electronically files annual reports, quarterly reports,and special reports with the SEC.  Youmay read and copy any of the materials that we have filed with the SEC at theSEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.You may obtain information about the Public Reference Room by calling theSEC at 1-800-SEC-0330.  Our filings arealso available to you on the SEC’s website at www.sec.gov.

 

Rush makes certain of our SEC filings available, free ofcharge, through our website, including annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and allamendments to these reports.  Thesefilings are available as soon as reasonably practicable after such material iselectronically filed with or furnished to the SEC.  Rush’s website address is www.rushenterprises.com.  The information contained on our website, oron other websites linked to our website, is not part of this document.

 

**General**

 

Rush Enterprises, Inc.was incorporated in Texas in 1965 and currently consists of two reportablesegments: the Truck Segment and the Construction Equipment Segment.  The Company conducts business throughnumerous subsidiaries, all of which it wholly owns, directly orindirectly.  Its principal offices arelocated at 555 IH 35 South, New Braunfels, Texas 78130.

 

TheCompany is a full-service, integrated retailer of premium transportation andconstruction equipment and related services. The Company’s Rush Truck Centers sell vehicles manufactured by PeterbiltMotors Company (a division of PACCAR, Inc.), International, Volvo, GMC,Hino, UD, Ford, Isuzu and Blue Bird.  TheCompany also operates John Deere construction equipment dealerships at its RushEquipment Centers in Southeast Texas. Through its strategically located networkof Rush Truck Centers and its Rush Equipment Centers, the Company providesone-stop service for the needs of its customers, including retail sales of newand used trucks and construction equipment, aftermarket parts sales, serviceand repair facilities, and financing, leasing and rental, and insuranceproducts.

 

TheCompany’s Rush Truck Centers are principally located in high traffic areasthroughout the southern United States. Since commencing operations as a Peterbilt heavy-duty truck dealer in1966, the Company has grown to operate more than 50 Rush Truck Centers inAlabama, Arizona, California, Colorado, Florida, Georgia, New Mexico, NorthCarolina, Oklahoma, Tennessee and Texas.

 

Ourbusiness strategy consists of providing our customers with competitively pricedproducts supported with timely and reliable service through our integrateddealer network. We intend to continue to implement our business strategy,reinforce customer loyalty and remain a market leader by continuing to developour Rush Truck Centers and Rush Equipment Centers as we extend our geographicfocus through strategic acquisitions of new locations and expansions of ourexisting facilities and product lines.

 

*Rush Truck*Centers*.*  Our Rush Truck Centers are located inAlabama, Arizona, California, Colorado, Florida, Georgia, New Mexico, NorthCarolina, Oklahoma, Tennessee and Texas. The following chart reflects our franchises and parts, service and bodyshop operations by location.

 

 

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| **Rush Truck Center   Location** | ** **   | **Heavy-Duty   Franchise(s)** | ** **   | **Medium-Duty and Bus********Franchise(s)** | ** **   | **Parts**    | ** **   | **Service**  | ** **   | **Body   Shop** |
|----------------------------------|--------------|-------------------------------|--------------|---------------------------------------------|--------------|--------------|--------------|--------------|--------------|-----------------|
|                             |         |                          |         |                                        |         |         |         |         |         |            |
| ***Alabama******:***             | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| Mobile                           |         | Peterbilt                     |         | Peterbilt                                   |         | Yes          |         | Yes          |         | Yes             |
|                             |         |                          |         |                                        |         |         |         |         |         |            |
| ***Arizona******:***             | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| Flagstaff                        |         | None                          |         | None                                        |         | Yes          |         | Yes          |         | No              |
| Phoenix                          |         | Peterbilt                     |         | Peterbilt, GMC,  Hino                       |         | Yes          |         | Yes          |         | Yes             |
| Tucson                           |         | Peterbilt                     |         | Peterbilt, GMC,  Hino                       |         | Yes          |         | Yes          |         | No              |
|                             |         |                          |         |                                        |         |         |         |         |         |            |
| ***California******:***          | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| El  Centro                       |         | Peterbilt                     |         | Peterbilt                                   |         | Yes          |         | Yes          |         | No              |
| Escondido                        |         | Peterbilt                     |         | Peterbilt, Hino                             |         | Yes          |         | Yes          |         | No              |
| Fontana  Heavy-Duty              |         | Peterbilt                     |         | Peterbilt                                   |         | Yes          |         | Yes          |         | Yes             |
| Fontana  Medium-Duty             |         | None                          |         | Peterbilt, GMC,  Hino, Isuzu, UD            |         | Yes          |         | Yes          |         | No              |
| Pico  Rivera                     |         | Peterbilt                     |         | Peterbilt, UD  (parts only)                 |         | Yes          |         | Yes          |         | Yes             |
| San  Diego                       |         | Peterbilt                     |         | Peterbilt, GMC,  Hino                       |         | Yes          |         | Yes          |         | Yes             |
| San  Luis Obispo                 |         | None                          |         | None                                        |         | Yes          |         | Yes          |         | No              |
| Sylmar                           |         | Peterbilt                     |         | Peterbilt, UD                               |         | Yes          |         | Yes          |         | No              |
| *** ***                     | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| ***Colorado******:***            | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| Denver  Heavy-Duty               |         | Peterbilt                     |         | Peterbilt                                   |         | Yes          |         | Yes          |         | Yes             |
| Denver Medium-Duty               |         | None                          |         | Ford, Isuzu                                 |         | Yes          |         | Yes          |         | No              |
| Greeley                          |         | Peterbilt                     |         | Peterbilt                                   |         | Yes          |         | Yes          |         | No              |
| Pueblo                           |         | Peterbilt                     |         | Peterbilt                                   |         | Yes          |         | Yes          |         | No              |
| ** **                       | ** **   | ** **                    | ** **   | ** **                                  | ** **   | ** **   | ** **   | ** **   | ** **   | ** **      |
| ***Florida******:***             | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| Haines  City                     |         | Peterbilt                     |         | Peterbilt                                   |         | Yes          |         | Yes          |         | Yes             |
| Tampa                            |         | Peterbilt                     |         | Peterbilt                                   |         | Yes          |         | Yes          |         | No              |
| Winter  Garden                   |         | Peterbilt                     |         | Peterbilt, GMC,  Isuzu, UD                  |         | Yes          |         | Yes          |         | No              |
| Jacksonville                     |         | Peterbilt                     |         | Peterbilt, Hino                             |         | Yes          |         | Yes          |         | Yes             |
|                             |         |                          |         |                                        |         |         |         |         |         |            |
| ***Georgia******:***             | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| Atlanta                          |         | None                          |         | GMC, Hino,  Isuzu, UD                       |         | Yes          |         | Yes          |         | No              |
|                             |         |                          |         |                                        |         |         |         |         |         |            |
| ***New Mexico******:***          | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| Albuquerque                      |         | Peterbilt                     |         | Peterbilt, UD                               |         | Yes          |         | Yes          |         | Yes             |
| Las  Cruces                      |         | None                          |         | None                                        |         | Yes          |         | Yes          |         | No              |
| *** ***                     | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| ***North Carolina******:***      | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| Charlotte                        |         | Peterbilt                     |         | Peterbilt, Hino,  Isuzu                     |         | Yes          |         | Yes          |         | No              |
| Charlotte                        |         | International                 |         | International                               |         | Yes          |         | Yes          |         | Yes             |
| *** ***                     | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| ***Oklahoma******:***            | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| Ardmore                          |         | Peterbilt                     |         | Peterbilt                                   |         | Yes          |         | Yes          |         | No              |
| Oklahoma  City                   |         | Peterbilt                     |         | Peterbilt, GMC,  Hino                       |         | Yes          |         | Yes          |         | Yes             |
| Tulsa                            |         | Peterbilt, Volvo              |         | Peterbilt, GMC,  Hino                       |         | Yes          |         | Yes          |         | Yes             |
|                             |         |                          |         |                                        |         |         |         |         |         |            |
| ***Tennessee******:***           | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| Nashville                        |         | Peterbilt                     |         | Peterbilt                                   |         | Yes          |         | Yes          |         | Yes             |

 

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| **Rush Truck Center   Location** | ** **   | **Heavy-Duty   Franchise(s)** | ** **   | **Medium-Duty and Bus********Franchise(s)** | ** **   | **Parts**    | ** **   | **Service**  | ** **   | **Body   Shop** |
|----------------------------------|--------------|-------------------------------|--------------|---------------------------------------------|--------------|--------------|--------------|--------------|--------------|-----------------|
| ** **                       | ** **   | ** **                    | ** **   | ** **                                  | ** **   | ** **   | ** **   | ** **   | ** **   | ** **      |
| ***Texas******:***               | *** *** | *** ***                  | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** | *** ***    |
| Abilene                          |         | Peterbilt                     |         | Peterbilt                                   |         | Yes          |         | Yes          |         | No              |
| Alice                            |         | Peterbilt                     |         | Peterbilt, Blue  Bird                       |         | Yes          |         | Yes          |         | No              |
| Austin                           |         | Peterbilt                     |         | Peterbilt, GMC,  Hino, Isuzu, UD, Blue Bird |         | Yes          |         | Yes          |         | No              |
| Dallas  Heavy-Duty               |         | Peterbilt                     |         | Peterbilt, Blue  Bird                       |         | Yes          |         | Yes          |         | Yes             |
| Dallas  Medium-Duty              |         | None                          |         | Peterbilt, GMC,  Hino, UD,Blue Bird         |         | Yes          |         | Yes          |         | No              |
| El  Paso                         |         | Peterbilt                     |         | Peterbilt, GMC,  Hino (service only)        |         | Yes          |         | Yes          |         | Yes             |
| Fort  Worth                      |         | Peterbilt                     |         | Peterbilt, UD,  Blue Bird                   |         | Yes          |         | Yes          |         | No              |
| Houston                          |         | Peterbilt                     |         | Peterbilt, GMC,  Hino, Blue Bird            |         | Yes          |         | Yes          |         | Yes             |
| Laredo                           |         | Peterbilt                     |         | Peterbilt, Blue  Bird                       |         | Yes          |         | Yes          |         | Yes             |
| Lufkin                           |         | Peterbilt                     |         | Peterbilt, Blue  Bird                       |         | Yes          |         | Yes          |         | Yes             |
| Pharr                            |         | Peterbilt                     |         | Peterbilt, Hino,  UD, Blue Bird             |         | Yes          |         | Yes          |         | Yes             |
| San  Antonio                     |         | Peterbilt                     |         | Peterbilt, GMC,  Hino, Blue Bird            |         | Yes          |         | Yes          |         | Yes             |
| Sealy                            |         | Peterbilt                     |         | Peterbilt, Blue  Bird                       |         | Yes          |         | Yes          |         | No              |
| Texarkana                        |         | Peterbilt                     |         | Peterbilt, GMC,  Hino, Isuzu,Blue Bird      |         | Yes          |         | Yes          |         | No              |
| Tyler                            |         | Peterbilt                     |         | Peterbilt, Blue  Bird                       |         | Yes          |         | Yes          |         | No              |
| Waco                             |         | Peterbilt                     |         | Peterbilt, GMC,  Hino, Isuzu,Blue Bird      |         | Yes          |         | Yes          |         | No              |

 

*Rush Equipment Center.* Our Rush Equipment Centersin Southeast Texas, provide a full line of John Deere construction equipment,including backhoe loaders, hydraulic excavators, crawler-dozers and four-wheeldrive loaders.

 

*Leasing and Rental Services.*  Through certain of our Rush Truck Centers andthree stand-alone Rush Truck Leasing stores, we provide a broad line of productselections for lease or rent, including Class 4, Class 5, Class 6,Class 7 and Class 8 trucks, heavy-duty cranes and refusehaulers.  Our lease and rental fleets areoffered on a daily, monthly or long-term basis.

 

*Financial and Insurance Products.*  At our dealerships we offer third-partyfinancing to assist customers in purchasing new and used trucks andconstruction equipment. Additionally, we sell, as agent, a complete line ofproperty and casualty insurance, including collision and liability insurance ontrucks, cargo insurance and credit life insurance.

 

*Perfection Equipment.*  Our Perfection Equipment subsidiary operatesout of two locations in Oklahoma City. Perfection Equipment offers installation of equipment, equipment repair,parts installation, and paint and body repair to owners of commercial vehicles.  Perfection Equipment carries over 120 linesof truck and industrial parts and over 100 lines of equipment.  Perfection Equipment specializes inup-fitting a variety of trucks used by oilfield service providers and otherspecialized service providers.

 

*WorldWide Tires*.  We operate World Wide Tires stores in fourlocations in Texas.  World Wide Tiresprimarily sells tires for use on Class 8 trucks.

 

**Industry**

 

See Part II, Item 7,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Industry” for a description of our industry and the markets inwhich we operate.

 

 

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**Our Business Strategy**

 

*Operating Strategy.*  Our strategy is to operate an integrateddealer network that primarily markets Peterbilt heavy-duty trucks, medium-dutytrucks from various manufacturers, Blue Bird buses and John Deere constructionequipment and provides complementary products and services. Our strategyincludes the following key elements:

 

·                  One-Stop Centers. We havedeveloped our truck and construction equipment dealerships as “one-stop centers”where, at one convenient location, our customers can do the following: purchasenew and used trucks, buses or construction equipment; finance, lease or renttrucks or construction equipment; purchase aftermarket parts and accessories;and have service performed by certified technicians. We believe that thisfull-service strategy also helps to mitigate cyclical economic fluctuationsbecause the parts and service sales at our dealerships generally tend to beless volatile than our new and used truck and construction equipment sales.

 

·                  Branding Program. We employ abranding program for our dealerships through distinctive signage and uniformmarketing programs to take advantage of our existing name recognition and tocommunicate the standardized high quality of our products and reliability ofour services throughout our dealership network.

 

·                  Management by DealershipUnits. At each of our dealerships, we operate one or more of the followingbusiness units: new sales, used sales, financial services, parts, service orbody shop. Our general managers measure and manage the operations of each ofour dealerships according to the specific business units operating at thatlocation. We believe that this system enhances the profitability of all aspectsof a dealership and increases our overall operating margins. Operating goalsfor each business unit at each of our dealerships are established annually andmanagers are rewarded for performance.

 

·                  Integrated ManagementInformation Systems. In order to efficiently operate separate businessunits within each dealership, we rely upon our management information systemsto determine and monitor appropriate inventory levels and product mix at eachRush Truck Center.  Each Rush TruckCenter can access a centralized real-time inventory tracking system that isaccessible simultaneously by all locations. Our parts reordering system assistseach Rush Truck Center in maintaining the proper inventory levels and typicallypermits inventory delivery to each location, or directly to customers, within24 hours from the time the order is placed. In addition, by activelymonitoring market conditions, assessing product and expansion strategies andremaining abreast of changes within the market, we are able to proactivelyaddress market-by-market changes by realigning and, if necessary, addingproduct lines and models.

 

*Growth Strategy.*  Through our expansion and acquisitioninitiatives, we have grown to operate a large, multistate, full-service networkof truck dealerships. As described below, we intend to continue to grow ourbusiness internally and through acquisitions by expanding into new geographicareas, expanding our product offerings and opening new one-stop truck andequipment centers in existing markets.

 

·                  Expansion Into NewGeographic Areas. We plan to continue to expand our Rush Truck Centernetwork and build a Rush Equipment Center network by acquiring additionaldealerships in geographic areas contiguous to our current operations. We havesuccessfully expanded our presence from our Texas base into a coast-to-coastnetwork of Rush Truck Centers. We believe the geographic diversity of our RushTruck Center network has significantly expanded our customer base whilereducing the effects of local economic cycles. Geographic diversificationsupports the sale of trucks and parts by allowing us to allocate our inventoryamong the geographic regions we serve based on market demand within theseregions.

 

·                  Expansion of ProductOfferings. We intend to continue to expand our product lineswithin our Rush Truck Centers and our Rush Equipment Centers by adding productcategories that are both complementary to our existing product lines and wellsuited to our operating model.

 

Webelieve that there are many additional product and service offerings that wouldcomplement our primary product lines. We expect any product category expansionthat we pursue to satisfy our requirements that:

 

 

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·                  the products serve a commercial customerbase;

 

·                  the products provide opportunities forincremental income through related aftermarket sales, service or financing; and

 

·                  Rush operating controls can be implemented toenhance the financial performance of the business.

 

·                  Open New Rush Truck andEquipment Centers in Existing Areas of Operation. We believethat there are opportunities to increase our share of the heavy-duty truckmarket by introducing our one-stop centers to underserved markets within our currentareas of operation.  The introduction ofadditional one-stop centers enables us to enhance revenues from our existingcustomer base as well as increase the awareness of the “Rush” brand name fornew customers.

 

Inidentifying new areas for expansion, we analyze the target market’s level ofnew truck registrations, customer buying and leasing trends and the existenceof competing franchises. We also assess the potential performance of a partsand service center to determine whether a market is suitable for a Rush TruckCenter. After a market has been strategically reviewed, we survey the regionfor a well-situated location. Whether we acquire existing dealerships or open anew Rush Truck Center, we will introduce our branding program and implement ourintegrated management system.

 

**Management of Our Dealerships**

 

Wemanage our dealerships as described below.

 

*Rush Truck Centers*

 

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

 

NewTruck Sales.   New heavy-duty truck salesrepresent the largest portion of our revenue, accounting for approximately$665.5 million, or 40.2%, of our total revenues in 2008. New Class 8heavy-duty Peterbilt truck sales accounted for approximately 73.6% of our newtruck revenues for 2008.

 

OurRush Truck Centers that sell new and used Class 8 heavy-duty trucks alsosell Class 6 and Class 7 medium-duty Peterbilt trucks.  Certain Rush Truck Centers also sellmedium-duty trucks manufactured by GMC, Hino, Isuzu, Ford or UD and busesmanufactured by Blue Bird (see Part I, Item 1, “General — *Rush Truck Centers*” for a description of our industry andthe markets in which we operate).  Newmedium-duty truck sales, excluding new bus sales, accounted for approximately$202.7 million, or 12.2% of our total revenues for 2008, and 22.7% of ournew truck revenues for 2008. Our customers use heavy- and medium-duty trucks tohaul various materials, including general freight, petroleum, wood products,refuse and construction materials.  In2008, we acquired the Blue Bird bus franchise for the majority of Texas.  New bus sales accounted for approximately$19.4 million, or 1.2% of our total revenues for 2008, and 2.2% of our newtruck revenues for 2008.

 

Asignificant portion of our new truck sales are to fleet customers (customerswho purchase more than five trucks in any 12-month period).  Because of the size of our Rush Truck Centernetwork, our strong relationships with our fleet customers and our ability tohandle large quantities of used truck trade-ins, we are able to successfullymarket and sell to fleet customers nationwide. We believe that we have a competitive advantage over most other dealersin that we can absorb multi-unit trade-ins often associated with fleet salesand effectively disperse the used trucks for resale throughout our dealershipnetwork.  We believe that our attentionto customer service and our broad range of trucking services, including ourability to offer truck financing and insurance to our customers, has resultedin a high level of customer loyalty.

 

UsedTruck Sales.  Used truck sales accounted for approximately$149.9 million, or 9.1%, of our total revenues for 2008.  We sell used heavy- and medium-duty trucks atmost of our Rush Truck Centers.  Webelieve that we are well positioned to market used heavy-duty trucks due to ourability to recondition them for resale utilizing the parts and servicedepartments of our Rush Truck Centers and our ability to move used trucksbetween Rush Truck Centers to satisfy customer demand. The majority of our usedtruck fleet consists of trucks taken as trade-ins from new truck customers, butwe supplement our used truck fleet by purchasing used trucks from third partiesfor resale.

 

 

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TruckParts and Service. Truck-related parts and service revenues accounted for approximately$457.6 million, or 27.6%, of our total revenues for 2008.  The parts business enhances our sales andservice functions and is a source of recurring revenue. Most Rush Truck Centerscarry a wide variety of Peterbilt and other truck parts in its inventory.  We also have field service trucks andtechnicians who are capable of making on-site repairs at our customers’locations.

 

CertainRush Truck Centers also feature fully equipped service and body shopfacilities, the combination and configuration of which varies by location,capable of handling a broad range of truck repairs on most makes and classes oftrucks.  Each Rush Truck Center is awarranty service center for the truck manufacturers represented at thatlocation and most are also authorized service centers for other manufacturers,including the following: Caterpillar, Cummins, Eaton and Arvin Meritor. We havemore than 900 service and body shop bays, including 23 paint booths, throughoutour Rush Truck Center network.

 

Weperform both warranty and nonwarranty service work on heavy- and medium-dutytrucks and components. The cost of warranty work is generally reimbursed by theapplicable manufacturer at retail consumer rates.  A majority of the service technicians at ourRush Truck Centers have been certified by various truck or component manufacturers.

 

TruckLeasing and Rental.   Truck leasing and rental revenuesaccounted for approximately $54.8 million, or 3.3%, of our total revenuesfor 2008.  At our Rush Truck Leasinglocations, we engage in full-service truck leasing under the PacLease tradename at eleven locations and are the largest PacLease dealer in the UnitedStates.  During 2008, we acquired anIdealease franchise in Charlotte, North Carolina.  Leasing and rental customers contribute toadditional parts sales and service work at Rush Truck Centers because most ofour leases require service and maintenance for the leased trucks to beperformed at our facilities (or at facilities outside our service area, as wedirect). Rented trucks are also generally serviced at our facilities.  We had 2,570 units in our lease and rentalfleet as of December 31, 2008 compared to 2,404 units as of December 31,2007.  As of December 31, 2008, weowned approximately 83% of our lease and rental fleet, and leased the remainingtrucks in our fleet primarily from PACCAR Leasing Company (“PACCAR Leasing”).Currently, the average age of the trucks in our lease and rental fleet isapproximately 31 months.  Generally,we hold trucks in our lease and rental fleet for approximately 6 years,depending on the type of truck, and then sell them through the used salesoperations at our Rush Truck Centers. Historically, we have realized gains on the sale of used lease trucks inexcess of the cost of the purchase option contained in our leases with PACCARLeasing or the book value of trucks owned by the Company.

 

*Rush Equipment Center*

 

OurRush Equipment Centers are responsible for sales of new and used constructionequipment and related parts and service.

 

NewConstruction Equipment Sales.   Newconstruction equipment sales accounted for approximately $59.0 million, or3.6%, of our total revenues for 2008. Our Rush Equipment Centers carry a complete line of John Deereconstruction equipment. A new piece of John Deere construction equipmenttypically ranges in price from $50,000 for a backhoe to $500,000 for anexcavator.  We carry a full line ofcomplementary construction equipment manufactured by other suppliers to enhanceour John Deere product line.  We sellconstruction equipment to a diverse customer base including residential andcommercial construction contractors, utility companies, government agencies,and various petrochemical, industrial and material supply businesses.

 

Webelieve that John Deere’s reputation for manufacturing high qualityconstruction equipment attracts new and repeat customers who value lowermaintenance and repair costs and a higher residual value at trade-in.  We attempt to increase this brand loyaltywith an operating strategy that is similar to the operating strategy used byour Rush Truck Centers and focuses on providing fast, reliable service.  We believe that our operating strategy willenable us to both increase our customer base and generate repeat business forall product offerings.

 

UsedConstruction Equipment Sales.   Usedconstruction equipment sales accounted for approximately $3.2 million, or0.2%, of our total revenues for 2008.  Wesell used construction equipment manufactured by several manufacturers,including John Deere, Case, Caterpillar, and Komatsu.  Our used construction equipment inventory isderived from trade-ins from our construction equipment customers and purchasesfrom third parties.

 

ConstructionEquipment Parts and Service.   Constructionequipment related parts and service revenues accounted for approximately $20.8 million,or 1.3%, of our total revenues for 2008. Our Rush Equipment Centers carry a wide variety of John Deere and otherparts in its inventory, which consists of over 7,000 items from more than 15suppliers.  We are an 

 

 

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authorizedJohn Deere construction equipment parts and accessories supplier in theHouston, Texas area.  We maintain a fullyequipped service operation capable of handling repairs on John Deereconstruction equipment and most other brands of construction equipment at ourRush Equipment Centers.  We enhance ourservice presence with field service trucks and technicians who are capable ofmaking on-site repairs at our customers’ locations.

 

Additionalinformation related to these operating segments for 2008, 2007 and 2006 isincluded in Note 20 — Segments in the Notes to the Company’s ConsolidatedFinancial Statements in Item 8.

 

*Financial and Insurance Products*

 

Wesell, as agent, a complete line of property and casualty insurance to our truckcustomers and other truck owners.  Ouragency is licensed to sell truck liability, general liability, collision andcomprehensive, workers’ compensation, cargo, credit life and occupationalaccident insurance coverage.  We serve assales representatives for a number of leading insurance companies including theGreat American Insurance Companies, Hartford Insurance Group and AmericanGeneral Financial Group. Our renewal rate during 2008 was 80%.

 

At our Rush Truck Centers and our Rush Equipment Centers we havepersonnel responsible for arranging third-party financing for our productofferings.  We also have licensedinsurance agents at some of our dealerships in Alabama, California, Colorado,Florida, New Mexico, North Carolina, Tennessee and Texas who arrange insurancefor our customers.  The sale of financialand insurance products accounted for approximately $12.3 million, or 0.7%,of our total revenue for 2008.  Financeand insurance revenues have minimal direct costs and, therefore, contribute adisproportionate share of our operating profits.

 

Newand Used Truck Financing.  We arranged customer financingthrough various commercial lending sources for approximately 30% of our new andused truck sales in 2008 and 2007. Generally, truck finance contracts are memorialized through the use ofinstallment contracts, which are secured by the trucks financed, and require a downpayment of 10% to 30% of the value of the financed truck, with the remainingbalance financed over a two to five-year period. The majority of financecontracts are sold without recourse to the Company.  The Company’s recourse liability related tofinance contracts sold with recourse to the Company ranges from 5% to 100% ofthe outstanding amount of each note initiated on behalf of the finance company(see “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations — Critical Accounting Policies”). The Company provides an allowance for repossession losses and earlyrepayment penalties.

 

Newand Used Construction Equipment Financing.  We arranged customer financing through various commerciallending sources forapproximately $32.7 million of our new and used construction equipment sales in2008, a decrease of 31.2% from approximately $47.5 million in 2007.  Generally, construction equipment financecontracts are memorialized through the use of installment or lease contracts,which are secured by the construction equipment financed, and generally requirea down payment of 0% to 10% of the value of the financed piece of constructionequipment, with the remaining balance being financed over a three to five-yearperiod.  All finance contracts forconstruction equipment are assigned without recourse.

 

**Sales and Marketing**

 

Ourestablished expansion and acquisition strategy and long history of operationsin the heavy- and medium-duty truck business have resulted in a strong customerbase that is diverse in terms of geography, industry and scale ofoperations.  Rush Truck Centers’customers include owner operators, regional and national truck fleets,corporations and local governments. During 2008, no single customer of our Rush Truck Centers accounted formore than 10% of our total truck sales by dollar volume.  Our Rush Equipment Centers’ customer base issimilarly diverse and, during 2008, no single Rush Equipment Center customeraccounted for more than 10% of our total construction equipment sales by dollarvolume.  We generally promote ourproducts and related services through direct customer contact by our salespersonnel, advertisements in trade magazines and attendance at industry shows.

 

Webelieve that the consistently reliable service received by our customers, ourlongevity and our geographic diversity have resulted in increased marketrecognition of the “Rush” brand name and have served to reinforce customerloyalty.  In an effort to enhance ourname recognition and to communicate the standardized high level of qualityproducts and services provided at our Rush Truck Centers and our Rush EquipmentCenters, we implement our “Rush” brand name concept at each of ourdealerships.  Each of our dealerships isidentified as either a Rush Truck Center or Rush Equipment Center.

 

 

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**Facility Management**

 

                *Personnel.*  Each Rush Truck Center and Rush EquipmentCenter is typically managed by a general manager who oversees the operations,personnel and the financial performance of the location, subject to thedirection of our corporate office. Additionally, each Rush Truck Center istypically staffed by a sales manager, parts manager, service manager, salesrepresentatives, parts employees, and other service and makeready employees, asappropriate, given the services offered. The sales staff of each Rush Truck Center and Rush Equipment Center iscompensated on a salary plus commission basis, with a high percentage of theircompensation consisting of commission, while the general manager, parts managerand service manager receive a combination of salary and performance bonus, witha high percentage of their compensation consisting of the performancebonus.  We believe that our employees areamong the highest paid in their respective industry which enables us to attractand retain qualified personnel.

 

                On an annual basis, generalmanagers prepare detailed monthly profit and loss forecasts based uponhistorical information and projected trends. A portion of each general manager’sperformance bonus is based upon whether they meet or exceed their operatingplans. During the year, general managers regularly review their facility’sprogress with senior management and make appropriate adjustments as needed.  Most of our employees receive annualperformance evaluations.

 

                We have been successful inretaining our senior management and general managers.  To promote communication and efficiency inoperating standards, general managers and members of senior management attendcompany-wide strategy sessions each year. In addition, management personnelattend various industry-sponsored leadership and management seminars andreceive continuing education on the products we distribute, marketingstrategies and management information systems.

 

                Members of senior managementregularly travel to each location to provide on-site management andsupport.  Each location is audited regularly for compliance withcorporate policies and procedures.  Theseroutine unannounced internal audits, objectively measure dealership performancewith respect to corporate expectations in the management and administration ofsales, truck and equipment inventory, parts inventory, parts sales, servicesales, body shop sales, corporate policy compliance, human resourcescompliance, and environmental and safety compliance matters.  The Company has instituted successionplanning pursuant to which employees in each Rush Truck Center and RushEquipment Center are groomed as assistant managers to assume managementresponsibilities in existing and future dealerships.

 

                *Purchasingand Suppliers.*  We believethat pricing is an important element of our marketing strategy.  Because of our size, our Rush Truck Centersbenefit from volume purchases at favorable prices that permit them to achieve acompetitive pricing position in the industry. We purchase our truck inventoryand parts and accessories directly from the manufacturer. All othermanufacturers’ parts and accessories, including those of Caterpillar, Cumminsand other component manufacturers, are purchased through wholesale vendors orfrom PACCAR, which buys such products in bulk for resale to the Company andother Peterbilt dealers. All purchasing commitments are negotiated by personnelat our corporate headquarters. We have been able to negotiate favorable pricinglevels and terms, which enables us to offer competitive prices for ourproducts. We purchase all of our John Deere construction equipment inventoryand John Deere parts directly from John Deere.

 

                *ManagementInformation Systems.*  EachRush Truck Center and Rush Equipment Center maintains a centralized real-timeinventory tracking system which is accessible simultaneously by all locationsand by our corporate office. We utilize our management information systems tomonitor the inventory level of trucks and parts at each of our dealerships.From information assimilated from management information systems, managementhas developed a model reflecting historic sales levels of different productlines. This model enables management to identify the appropriate level andcombination of inventory and forms the basis of our operating plan. Ourmanagement information systems and databases are also used to monitor marketconditions and sales information and assess product and expansion strategies.

 

                Information received frommanufacturers, industry analysts and industry contacts allows us to determinemarket share statistics and gross volume sales numbers for our products as wellas those of competitors. This information impacts ongoing operations becausemanagement remains aware of changes within the markets we service and is ableto react accordingly by realigning product lines and by adding new productlines and models.

 

                *Distributionand Inventory Management.*  Weutilize a real-time inventory tracking system to maintain a close link betweeneach Rush Truck Center.  This link allowsfor timely and cost-effective sharing of managerial and sales information aswell as the prompt transfer of inventory among various locations. The transferof inventory reduces delays in delivery, helps maximize inventory turns andassists in controlling problems created by overstock and understock

 

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 situations. We are linked directly to ourmajor suppliers, including Peterbilt, GMC, and John Deere, via real-timecommunication links for purposes of ordering and inventory management. Theseautomated reordering and communication systems allow us to maintain properinventory levels and permit us to have inventory delivered to our locations, ordirectly to customers, typically within 24 hours of an order being placed.

 

**Recent Acquisitions and Dispositions**

 

                In June 2008, the Companyacquired certain assets of Capital Bus Sales and Service of Texas, Inc.,which included a Blue Bird bus franchise for the majority of Texas.  The Company is selling buses at most RushTruck Centers throughout Texas.  Thetransaction was valued at approximately $5.6 million, with the purchase pricepaid in cash.

 

                In May 2008, the Company acquired certain assetsof Peterbilt Carolina, Inc., which included a Peterbilt, Hino and Isuzuheavy- and medium-duty truck dealership in Charlotte, North Carolina.  The Company is operating thefacility as a full-service Rush Truck Center offering Peterbilt heavy-duty andmedium-duty trucks as well as medium-duty trucks manufactured by Hino andIsuzu, and parts and service.  Thetransaction was valued at approximately $13.4 million, with the purchase pricepaid in cash.

 

                In May 2008, the Company also acquired thecommon stock of Adams International Trucks, Inc., an International heavy-and medium-duty truck and Workhorse Custom Chassis dealership in Charlotte,North Carolina.  The Company isoperating the facility as a full-service Rush Truck Center offeringInternational heavy-duty and medium-duty trucks, parts and service andleasing.  The transaction was valued atapproximately $20.1 million, with the purchase price paid in cash.  Included in the acquisition was the purchase of AdamsCollision Center.  The Company alsopurchased the real estate used in the operations of Adams International Trucks, Inc.for $6.2 million.

 

                In August 2007, the Companypurchased certain assets of San Luis Truck Service Garage, Inc., whichconsisted of a parts and service center in San Luis Obispo, California.  The Company is operating the facility as aRush Truck Center offering parts and service. The transaction was valued at approximately $0.8 million, with thepurchase price paid in cash.

 

                In March 2007, the Companypurchased certain assets of Allen-Jensen, Inc., which consisted of a GMCand Isuzu truck dealership in Waco, Texas. The Company is operating the facility as a full-service Rush TruckCenter offering Peterbilt heavy- and medium-duty trucks as well as medium-dutytrucks manufactured by GMC and Isuzu, and parts and service.  The transaction was valued at approximately$6.3 million, with the purchase price paid in cash.

 

                In March 2007,the Company purchased certain assets of Advanced Transportation InsuranceServices, Inc., an insurance agency headquartered in Laguna Niguel,California.  In connection with thisacquisition, the Company also purchased the stock of Advance Premium Finance, Inc.,a premium finance company associated with Advanced Transportation InsuranceServices, Inc.  The totaltransaction was valued at approximately $2.1 million, with the purchase pricefinanced with cash of $0.6 million and notes payable of $1.5 million.

 

                See Note 17 of the Notes to Consolidated FinancialStatements for a detailed discussion of the allocation of the purchase price ofthese acquisitions.

 

**Competition**

 

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

 

·                  the accessibility of dealership locations;

 

·                  the number of dealership locations;

 

·                  price, value, quality and design of the productssold; and

 

·                  attention to customer service (including technicalservice).

 

                Our new truck products competewith trucks made by other manufacturers and sold through competing independentand factory-owned truck dealerships, including trucks manufactured by Navistar,Mack, Freightliner,

 

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Kenworth,Volvo, Western Star Truck Holdings, Ltd., and other manufacturers.Kenworth heavy-duty trucks are also manufactured by PACCAR, Peterbilt’s parentcompany, but are distributed through a different network of competing dealers.Our construction equipment products compete with construction equipmentmanufactured by Case, Caterpillar, Komatsu and other manufacturers. We believethat our dealerships are able to compete with manufacturer-owned dealers,independent dealers, wholesalers, rental service companies and industrialauctioneers in distributing our products because of the following: the overallquality and reputation of the products we sell; “Rush” brand name recognitionand reputation for quality service; and our ability to provide comprehensiveparts and service support, as well as financing, insurance and other customerservices.

 

**Dealership Agreements**

 

                *Peterbilt.*  We have entered into nonexclusive dealershipagreements with Peterbilt which authorize us to act as a dealer of Peterbiltheavy- and medium-duty trucks. Our Peterbilt areas of responsibility currentlyencompass areas in the states of Alabama, Arizona, California, Colorado,Florida, New Mexico, North Carolina, Oklahoma, Tennessee and Texas. These dealershipagreements currently have terms expiring between March 2009 and May 2011and impose certain operational obligations and financial requirements upon usand our dealerships. The Company’s dealership agreements with Peterbiltmay be terminable by Peterbilt in the event the aggregate voting power of W.Marvin Rush, W.M. “Rusty” Rush, other members of the Rush family and certainexecutives of the Company decreases below 30%. These agreements also grant Peterbilt rights of first refusal undercertain circumstances relating to any sale or transfer of our dealershiplocations or if certain Rush family members desire to sell more than 100,000shares of our voting common stock within a 12-month period to anyone other thanfamily members or certain other specified persons.  Any termination or non-renewal of thesedealership agreements by Peterbilt must follow certain guidelines establishedby both state and federal legislation designed to protect motor vehicle dealersfrom arbitrary termination or non-renewal of franchise agreements. TheAutomobile Dealers Day in Court Act and other similar state laws provide thatthe termination or non-renewal of a motor vehicle dealership agreement must bedone in “good faith” and upon a showing of “good cause” by the manufacturer forsuch termination or non-renewal, as such terms have been defined by statute andinterpreted in case law.

 

*                OtherTruck Suppliers.*  In additionto our truck dealership agreements with Peterbilt, various Rush Truck Centershave entered into dealership agreements with other commercial vehiclemanufacturers including Ford, GMC, Hino, Isuzu, UD, International, Blue Birdand Volvo.

 

                Sales of non-Peterbiltmedium-duty trucks and buses accounted for approximately 8.1% of our totalrevenues for 2008.  These dealershipagreements currently have terms expiring between May 2009 and August 2013.  These dealership agreements impose operatingrequirements upon us and require consent from the affected supplier for sale ortransfer of such dealership agreement.

 

                *JohnDeere.*  We have entered into anonexclusive dealership agreement with John Deere which authorizes us to act asa dealer of John Deere construction, utility and forestry equipment. This JohnDeere dealership agreement has no specified term or duration. Our current areaof responsibility for the sale of John Deere construction equipment is thegreater Houston, Texas metropolitan area. The John Deere dealership agreementimposes operational obligations and financial requirements of the Company.Similar to the dealership agreements with Peterbilt, the dealership agreementwith John Deere is terminable if the outstanding aggregate voting power of W.Marvin Rush and other executives of the Company falls below 25%, grants limitedrights of first refusal and imposes certain financial requirements upon us andour dealership.  Although someprotections exist, construction equipment dealers are not protected fromarbitrary termination or non-renewal of dealership agreements by thelegislation enacted to protect motor vehicle dealers discussed above.

 

                *OtherConstruction Equipment Suppliers.* In addition to John Deere, we are an authorized dealer for suppliers ofother construction equipment. The terms of such arrangements vary, but most ofthese dealership agreements contain termination provisions allowing thesupplier to terminate the agreement after a specified notice period (usually180 days).

 

**Floor Plan Financing**

 

                *Trucks.*  We finance substantially our entire new truckinventory and the loan value of our used truck inventory under a floor planarrangement with General Electric Capital Corporation (“GE Capital”).  Effective August 1, 2007, the Companyentered into an Amended and Restated Wholesale Security Agreement with GECapital.  Interest under the floor planfinancing agreement is payable monthly and the rate varies from LIBOR plus1.15% to 1.50% depending on the average aggregate month-end balance ofdebt.  As of December 31, 2008, wehad approximately $266.0 million outstanding

 

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underour GE Capital floor plan arrangement. GE Capital may terminate this agreement without cause upon 120 daysnotice.

 

                *ConstructionEquipment.*  We financesubstantially our entire new construction equipment inventory under floor planfacilities with John Deere and JPMorgan Chase (“Chase”).  Our John Deere facility has no set expirationdate and its interest rate is the prime rate plus 1.5%.  The facility with Chase expires in June 2009and the interest rate is the prime rate less 1.5%.  As of December 31, 2008, we had$3.7 million outstanding under the floor plan arrangement with John Deereand $13.0 million outstanding under the floor plan arrangement with Chase.

 

**Product Warranties**

 

                The manufacturers we representprovide retail purchasers of their products with a limited warranty againstdefects in materials and workmanship, excluding certain specified componentsthat are separately warranted by the suppliers of such components. We do notundertake to provide any warranty to our customers.

 

                We generally sell used trucksand construction equipment in “as is” condition without manufacturer’swarranty, although manufacturers sometimes will provide a limited warranty ontheir used products if such products have been properly reconditioned prior toresale or if the manufacturer’s warranty on such product is transferable andhas not expired. We do not provide any warranty on used trucks or usedconstruction equipment.

 

**Trademarks**

 

                The Peterbilt, John Deere,Volvo, GMC, Hino, Isuzu, Ford, International, Blue Bird and UD trademarks andtrade names, which are used in connection with our marketing and sales efforts,are subject to limited licenses included in our dealership agreements with eachmanufacturer. The licenses are for the same periods as our dealershipagreements. These trademarks and trade names are recognized internationally andare important in the marketing of our products. Each licensor engages in acontinuous program of trademark and trade name protection.  We hold registered trademarks from the U.S.Patent and Trademark Office for the names “Rush Enterprises,” “Rush TruckCenter,” “Rush Equipment Center,” “Associated Truck Insurance Services” and “ChromeCountry.”  We currently have trademarkapplications for “Rig Tough” pending before the U.S. Patent and TrademarkOffice.

 

**Employees**

 

                On December 31, 2008, theCompany had 2,706 employees. The Company has no contracts or collectivebargaining agreements with labor unions and has never experienced workstoppages.  The Company considers itsrelations with its employees to be good.

 

# **Seasonality**

# ** **

TheCompany’s heavy-duty truck business is moderately seasonal. Seasonal effects onnew truck sales related to the seasonal purchasing patterns of any singlecustomer type are mitigated by the diverse geographic locations of ourdealerships and the Company’s diverse customer base, including regional andnational fleets, local governments, corporations and owner operators. However,truck parts and service operations historically have experienced higher salesvolumes in the second and third quarters.

 

                Seasonal effectsin the construction equipment business are primarily driven by theweather.  Seasonal effects onconstruction equipment sales related to the seasonal purchasing patterns of anysingle customer type are mitigated by the Company’s diverse customer base thatincludes contractors for residential and commercial construction, utilitycompanies, federal, state and local government agencies, and variouspetrochemical, industrial and material supply type businesses that requireconstruction equipment in their daily operations.

 

**Backlog**

 

On December 31, 2008, the Company’s backlog oftruck orders was approximately $106.2 million as compared to a backlog of truckorders of approximately $216.0 million on December 31, 2007. The Companyincludes only confirmed orders in its backlog. The deliverytime for a custom-ordered truck varies depending on the truck specificationsand demand for the particular model ordered, however, the Company expects tofill all of its backlog orders during 2009. The

 

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Company sells themajority of its new trucks by customer special order, with the remainder soldout of inventory. Orders from a number of the Company’s major fleetcustomers are included in the Company’s backlog as of December 31, 2008.

 

**Environmental Standards and OtherGovernmental Regulations**

 

                Our operations are subject tonumerous federal, state and local laws and regulations, including laws andregulations designed to protect the environment by regulating the discharge ofmaterials into the environment. EPA emission guidelines have traditionally hada major impact on our operations.

 

                EPA emissions guidelines regarding nitrousoxides are scheduled to go into effect for all diesel engines built subsequentto January 1, 2010.  Based on current economic andmarket conditions, the Company does not expect a strong pre-buy of Class 8trucks to occur in 2009. The magnitude of any pre-buy will belargely dependent upon general economic conditions in the U.S.  The EPA has also passed regulations requiringmanufacturers to install on-board diagnostic systems that monitorthe functioning ofemission control components and alert the vehicle operator to any detected needfor emission-related repair on 2010 and later heavy- and medium-dutytrucks, which could also impact demand for trucks.

 

**Item 1A.**  **Risk Factors**

 

An investment in our common stock is subject to risks inherent to ourbusiness.  In addition to the otherinformation contained in this Form 10-K, we recommend that you carefullyconsider 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 andadversely affected. If this were to happen, the value of our common stock coulddecline significantly, and you could lose all or part of your investment.  Please note that additional risks notpresently known to us or that we currently deem immaterial may also impair ourbusiness and operations.  This report isqualified in its entirety by these risk factors.

 

**Risks Related to Our Business**

 

*Our results of operations and financial condition have beenand could continue to be adversely affected by the conditions in the creditmarkets and the declining economic conditions in the United States.*

 

Therecent turmoil in the credit markets has resulted in tighter credit conditionsand has adversely impacted our business. In the commercial vehicle andconstruction equipment finance markets, tight credit conditions have resultedin a decrease in the availability of commercial vehicle and constructionequipment loans and have led to more stringent lending restrictions.  The decrease in availability of credit hasadversely impacted demand for new and used construction equipment. Additionally, the declining economic conditions in the United States haveadversely impacted general demand for new and used commercial vehicles andconstruction equipment. As a result, our new and used commercial vehicle andconstruction equipment sales and margins have been adversely impacted.  If the unfavorable economic conditionscontinue and the availability of financing options remains limited, weanticipate that our commercial vehicle and construction equipment sales andmargins will continue to be adversely impacted.

 

Marketconditions could also make it more difficult for us to raise additional capitalor obtain additional financing to fund capital expenditure projects oracquisitions.  We cannot be certain thatadditional funds will be available if needed and to the extent required or, ifavailable, on acceptable terms. If we cannot raise necessary additional fundson acceptable terms, there could be an adverse impact on our business andoperations. We also may not be able to fund expansion, take advantage of futureopportunities or respond to competitive pressures or unanticipatedrequirements.

 

*We are substantially dependent upon PACCAR for the supply ofPeterbilt trucks and parts, the sale of which generate a substantial part ofour revenues.*

 

                We currently operate as a dealerof Peterbilt trucks and parts pursuant to dealership agreements with Peterbilt.Peterbilt is a division of PACCAR. During 2008, a significant portion of our revenues resulted from salesof trucks purchased from Peterbilt and parts purchased from PACCAR. Due to ourdependence on PACCAR and its Peterbilt division, we believe that the long-termsuccess of our Rush Truck Centers depends, in large part, on the following:

 

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·                  maintaining our relationship with PACCAR;

 

·                  the manufacture and delivery ofcompetitively-priced, high quality Peterbilt trucks and parts by PACCAR inquantities sufficient to meet our requirements;

 

·                  the overall success of PACCAR and Peterbilt;

 

·                  PACCAR’s continuation of its Peterbiltdivision;

 

·                  the goodwill associated with the Peterbilttrademark, which can be adversely affected by decisions made by PACCAR and theowners of other Peterbilt dealerships; and

 

·                  the management of the Peterbilt dealershipsystem by PACCAR; and

 

·                  continued policy of no direct sales byPeterbilt.

 

Wehave no control over the management or operation of PACCAR or Peterbiltdealerships that we do not own.

 

*Our dealership agreements may be terminable upon a change ofcontrol and we cannot control whether or not our controlling shareholder andmanagement maintain their current positions.*

 

                We have entered intononexclusive dealership agreements with Peterbilt that authorize us to act as adealer of Peterbilt trucks. Peterbilt may terminate our dealership agreementsin the event of a change of control of the Company or if we violate any numberof provisions in the dealership agreements. Under our Peterbilt dealershipagreements, a change of control occurs if (i) with respect to the electionof directors, the aggregate voting power held by W. Marvin Rush, W. M. “Rusty”Rush, W. Marvin Rush’s family members and other executives of the Companydecreases below 30% (such persons currently control 34.8% of the aggregatevoting power with respect to the election of directors); or (ii) anyperson or entity other than W. Marvin Rush, W. M. “Rusty” Rush and other Rushexecutives or any person or entity who has been approved in writing by PACCAR,owns common stock with a greater percentage of the voting power with respect tothe election of our directors than W. Marvin Rush and W. M. “Rusty” Rush andother executives of the Company, in the aggregate, or any person other than W.Marvin Rush, W. M. “Rusty” Rush, Robin M. Rush or any person who has beenapproved in writing by PACCAR holds the office of Chairman of the Board,President or Chief Executive Officer of the Company. We have no control overthe transfer or disposition by W. Marvin Rush or by his estate of his commonstock. If W. Marvin Rush were to sell his Class B common stock or bequesthis Class B common stock to nonfamily members or if his estate is requiredto liquidate his Class B common stock to pay estate taxes or otherwise,the change of control provisions of the Peterbilt dealership agreements may betriggered and cause us to lose our critical right to sell Peterbilt products.Our John Deere dealership agreement and some of our medium-duty truckdealership agreements are also terminable if the aggregate voting power of W.Marvin Rush and his family falls below certain percentages, typically 25%.  If our dealership agreements with anymanufacturer we currently represent are terminated, we will lose the right topurchase such manufacturer’s products and the right to use certain trademarks,which would have a material adverse effect on our operations, revenues andprofitability.

 

*If state dealer laws are repealed or weakened, ourdealerships will be more susceptible to termination, nonrenewal orrenegotiation of their dealership agreements.*

 

                Our truck dealership agreementsimpose certain operational obligations and financial requirements on us. Statedealer laws generally provide that a manufacturer may not terminate or refuseto renew a dealership agreement unless it has first provided the dealer withwritten notice setting forth good cause and stating the grounds for terminationor nonrenewal. Manufacturers’ lobbying efforts may lead to the repeal orrevision of state motor vehicle dealer laws. If motor vehicle dealer laws arerepealed in the states in which we operate dealerships, our manufacturers maybe able to terminate our vehicle dealership agreements without providingadvance notice, an opportunity to cure or a showing of good cause. Without theprotection of state dealer laws, or if such laws are weakened, we will besubject to higher risk of termination or non-renewal of our vehicle dealershipagreements. Termination or non-renewal of our vehicle dealership agreementscould have a material adverse effect on our operations, revenues andprofitability.

 

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

 

                Our Peterbilt dealershipagreements have current terms expiring between March 2009 and May 2011.  Our Volvo dealership agreement has a currentterm expiring August 2010.  OurInternational dealership agreement has a current term expiring May 2013.  Our dealership agreements with GMC, Hino, UD,Ford, Isuzu, and Blue Bird for the sale of medium-duty trucks and buses havecurrent terms expiring between September 2009 and August 2013.  Upon expiration of each agreement, we mustrequest and negotiate a renewal. In many states state dealer franchise lawsrestrict the manufacturer’s ability to refuse to renew dealership agreements orto impose new terms upon renewal. To the extent such laws do permit non-renewalor imposition of new terms, the relatively short terms will give themanufacturers the opportunity to exercise such rights. Any non-renewal orimposition of less favorable terms upon renewal could have an adverse impact onour business.

 

*We depend on relationships with component suppliers forsales incentives, discounts and similar programs which are material to ouroperations.*

 

Eachtruck we sell is custom-built and each of our customers can choose componentsfrom any one of several component suppliers to construct their truck.Therefore, our dealerships depend on the component suppliers for salesincentives, discounts, warranties and other programs that are intended topromote our use of their components. Most of the incentives and discounts areindividually negotiated and not always the same as those made available to ourcompetitors. These incentives and discounts are material to our operations. Areduction or discontinuation of a component supplier’s incentive program, orour component suppliers making the same incentives and discounts available toour competitors, could materially adversely affect our profitability.

 

*Substantial competition may affect our profitability.*

 

                We face vigorous competition forcustomers and for suitable dealership locations. We compete with a large numberof independent and factory-owned dealers, some of which operate in more thanone location, but most of which operate in a single location. There issignificant competition both within the markets we currently serve and inmarkets that we may enter. Moreover, our Peterbilt dealership agreements andour dealership agreements with other manufacturers do not contractually provideus with exclusive dealerships in any territory. Manufacturers we representcould elect to create additional dealers in our market areas in the future.While our dealership agreements generally restrict dealers from operating salesor service facilities outside their assigned territory, such agreements do notrestrict fleet or other sales or marketing activity outside the assignedterritory. Accordingly, we engage in fleet sales and other marketing activitiesoutside our assigned territories and other dealers may engage in similaractivities within our territories. Dealer competition continues to increase andis affected by a number of factors including the accessibility of dealershiplocations, the number of dealership locations, product pricing, product value,product quality, product design and customer service (including technicalservice). We anticipate that we will continue to face strong competition in thefuture.

 

*Wecould incur substantial business interruptions during our dealer managementsystem conversion*.

 

We will continue toimplement SAP enterprise software and a new SAP dealership management systemthroughout the organization during 2009 and 2010.  The estimated cost of theimplementation is approximately $30.0 million to $32.0 million.  SAP’s dealership management system will become oursole dealership management system for our existing Rush Truck Centers.  We currently operate on a KARMAK LegendEnterprise Solution and our Rush Truck Centers operate on KARMAK Legend dealermanagement system.  By implementing SAP, webelieve that we will be able to standardize operational processes throughoutour network of Rush Truck Centers. However, if our implementation of SAP is unsuccessful, we couldincur substantial business interruptions, including the inability to performroutine business transactions, which could have a significant impact on our financialperformance.

 

*If we lose key personnel or are unable to attract additionalqualified personnel, our business could be adversely affected because we relyon the industry knowledge and relationships of our key personnel.*

 

                We believe that our successdepends significantly upon the efforts and abilities of our executivemanagement and key employees, including, in particular, W. Marvin Rush and W.M. “Rusty” Rush.  Additionally, ourbusiness is dependent upon our ability to continue to attract and retainqualified personnel, such as executive officers, managers and salespersonnel.  The loss of the services ofone 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 onus and materially impair the efficiency and 

 

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productivityof our operations.  In addition, the lossof any of our key employees or the failure to attract additional qualifiedexecutive officers, managers and sales personnel could have a material adverseeffect on our business and may materially impact the ability of our dealershipsto conduct their operations in accordance with our business strategy.

 

*Our growthis subject to a number of economic risks.*

 

During economicdownturns, new and used commercial vehicle and construction equipment retailsales tend to experience periods of decline characterized by oversupply andweak demand. The commercial vehicle and construction equipment retailindustries may experience sustained periods of decline in commercial vehicleand construction equipments sales in the future. Any decline or change of thistype could materially affect our business, financial condition and results ofoperations.

 

As previouslydiscussed, our business is subject to the adverse economic conditions currentlypresent in the United States, including, without limitation, decreased levelsof business activity, decreased freight demand, decreased constructionactivity, interest rate volatility, and limited credit availability.  These adverse economic conditions couldmaterially affect our business, financial condition and results of operations.

 

Our new commercialvehicle and construction equipment sales may differ from industry sales, due toparticular economic conditions and other factors in the geographic markets inwhich we operate. Adverse regional economic and competitive conditions in theseareas could materially affect our business, financial condition and results ofoperations.

 

Economicconditions and the other factors described above also may materially adverselyimpact our sales of finance and insurance products, and parts and repair services.

 

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

 

                Our business requiresinventories held for sale to be maintained at dealer locations in order tofacilitate immediate sales to customers on demand. We generally purchaseinventories with the assistance of floor plan financing agreements. Our floorplan financing agreements are with companies that have exposure to many different industries andcounterparties, and routinely execute transactions with counterparties in thefinancial services industry, including brokers and dealers, commercial banks,investment banks and other institutional clients.  Additionally, our floor plan providers mayhave exposure to financial institutions in the form of equity investments andunsecured debt instruments. Write-downs of mortgage-backed securities,credit default swaps and other derivative securities, have caused manyfinancial institutions to seek additional capital, to merge with larger andstronger institutions and, in some cases, to fail. Many lenders andinstitutional investors have reduced, and in some cases, ceased to providefunding to borrowers including other financial institutions such as our floorplan providers. In the event that our floor plan financing becomes insufficientto satisfy our future requirements or our floor plan providers are unable tocontinue to extend credit under our floor plan agreements, we would need toobtain similar financing from other sources. There is no assurance that suchadditional floor plan financing or alternate financing could be obtained or, ifobtained, that it will be on commercially reasonable terms.

 

*Changes in interest rates could have a material adverse effect on ourprofitability.*

 

Our floor planfinancing agreements and some of our other debt are subject to variableinterest rates. Therefore, our interest expense would rise with any increase ininterest rates. A rise in interest rates may also have the effect of depressingdemand in the interest rate sensitive aspects of our business, particularly newand used commercial vehicle and construction equipment sales, because many ofour customers finance these large purchases. As a result, a rise in interestrates may have the effect of simultaneously increasing our costs and reducingour revenues, which could materially affect our business, financial conditionand results of operations. See “Quantitative and Qualitative Disclosures aboutMarket Risk” for a discussion regarding our interest rate sensitivity.

 

*Natural disasters and adverse weather events can disrupt ourbusiness.*

 

Our dealershipsare concentrated in states and regions in the United States in which actual orthreatened natural disasters and severe weather events (such as hurricanes,earthquakes and hail storms) may disrupt our store operations, which mayadversely impact our business, results of operations, financial condition andcash flows. In addition to business interruption, our business is subject tosubstantial risk of property loss due to the significant concentration ofproperty at dealership locations. Although we have, subject to certainlimitations and exclusions, substantial insurance, we cannot 

 

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assure you that we willnot be exposed to uninsured or underinsured losses that could have a materialadverse effect on our business, financial condition, results of operations orcash flows.

 

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

 

Asof December 31, 2008, our backlog of new truck orders was approximately$106.2 million. Our backlog is determined quarterly by multiplying thenumber of new trucks for each particular type of truck on order at our RushTruck Centers by the recent average selling price for that type of truck.

 

                We only include confirmed ordersin our backlog.  However, such orders aresubject to cancellation.  In the event oforder cancellation, we have no contractual right to the total revenuesreflected in our backlog.  The delivery time for acustom-ordered truck varies depending on the truck specifications and demandfor the particular model ordered.  We sell the majority of our new heavy-dutytrucks by customer special order, with the remainder sold out ofinventory.  Orders from a number of ourmajor fleet customers are included in our backlog as of December 31,2008.  There can be no assurance that ourmajor fleet customers will not cancel these orders.

 

                Reductions in backlog due tocancellation by a customer or for other reasons adversely affect, potentiallyto a material extent, the revenue and profit we actually receive from ordersprojected in our backlog. If we were to experience significant cancellations oforders in our backlog, our financial condition could be significantly adverselyaffected.

 

*Our dealerships are subject to federal, state and localenvironmental regulations that may result in claims and liabilities, which couldbe material.*

 

                We are subject to a wide rangeof federal, state and local environmental laws and regulations, including thosegoverning discharges into the air and water; the operation and removal ofunderground and aboveground storage tanks; the use, handling, storage anddisposal of hazardous substances and other materials; and the investigation andremediation of contamination. As with truck or construction equipmentdealerships generally, and service, parts and body shop operations inparticular, our business involves the use, storage, handling and contractingfor recycling or disposal of hazardous materials or wastes and otherenvironmentally sensitive materials. Operations involving the management ofhazardous and nonhazardous materials are subject to requirements of theResource Conservation and Recovery Act, or RCRA, and comparable state statutes.Our business also involves the operation of storage tanks containing suchmaterials. Storage tanks are subject to periodic testing, containment, upgradingand removal under RCRA and comparable statutes. Furthermore, investigation orremediation may be necessary in the event of leaks or other discharges fromcurrent or former underground or aboveground storage tanks. We may also haveliability in connection with materials that were sent to third-party recycling,treatment, or disposal facilities under the Comprehensive EnvironmentalResponse, Compensation and Liability Act, and comparable state statutes, whichimpose liability for investigation and remediation of contamination withoutregard to fault or the legality of the conduct that contributed to thecontamination. Similar to many of our competitors, we have incurred and willcontinue to incur, capital and operating expenditures and other costs in complyingwith such laws and regulations.

 

                Soil and groundwatercontamination is known to exist at some of our current properties.  Further, environmental laws and regulationsare complex and subject to change. In addition, in connection withacquisitions, it is possible that we will assume or become subject to new orunforeseen environmental costs or liabilities, some of which may be material.In connection with our dispositions, or prior dispositions made by companies weacquire, we may retain exposure for environmental costs and liabilities, someof which may be material. Compliance with current or amended, or new or morestringent, laws or regulations, stricter interpretations of existing laws orthe future discovery of environmental conditions could require additionalexpenditures by us, and those expenditures could be material.

 

*Negative conditions in global credit markets may impair our investmentsin auction rate securities.*

 

Auction rate securities (“ARS”) are long-term debt instruments withinterest rates reset through periodic short-term auctions.  Holders of ARS can either sell into theauction or bid based on a desired interest rate or hold and accept the reset rate. If there are insufficient buyers, thenthe auction fails and holders are unable to liquidate their investment throughthe auction.  A failed auction is not adefault of the debt instrument, but does set a new interest rate in accordancewith the original terms of the debt instrument. The result of a failed auction is that the ARS continues to pay interestin accordance with its terms; however, liquidity for holders is limited untilthere is a successful auction or until such time as another market for ARSdevelops.  ARS are generally callable atany time by the issuer.  Auctionscontinue to be held as scheduled until the ARS matures or until it is called.

 

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As a result of the recent conditions in the global credit markets, wehave been unable to liquidate our holdings of certain ARS because the amount ofsecurities submitted for sale has exceeded the amount of purchase orders forsuch securities and the auctions failed. As of December 31, 2008, the Company holds approximately $7.6million in ARS.  For failed auctions, wecontinue to earn interest on these investments at the contractual rate.  In the event we need to access these funds,we will not be able to do so until a future auction is successful, the issuerredeems the securities, a buyer is found outside of the auction process or thesecurities mature.  If these ARS areunable to successfully clear at future auctions or issuers do not redeem thesecurities, we may be required to adjust the carrying value of the securitiesand record an impairment charge.  If wedetermine that the fair value of these ARS is temporarily impaired, we wouldrecord a temporary impairment within other comprehensive income, a component ofstockholders’ equity.  If it isdetermined that the fair value of these securities is other than temporarilyimpaired, we would record a loss in our Consolidated Statements of Income,which could materially adversely impact our results of operations and financialcondition.  Additionally, it may becomenecessary to classify failed ARS holdings as long-term investments in ourConsolidated Balance Sheets in future periods. For further discussion of the risks related to our auction ratesecurities, see Note 7 — Investments of the Notes to Consolidated FinancialStatements and Item 7A — Quantitative and Qualitative Disclosures about MarketRisk.

 

**Risks Related to Our Common Stock**

 

*We are controlled by a single shareholder and hisaffiliates.*

 

W.Marvin Rush owns approximately 0.1% of our issued and outstanding shares of Class Acommon stock and 38.2% of our issued and outstanding Class B commonstock.  W. Marvin Rush and W. M. “Rusty”Rush control more than 34.8% of the aggregate voting power of our outstandingshares and voting power which is superior to that of any other person or group.As a result of such ownership, W. Marvin Rush and W. M. “Rusty” Rush have thepower to effectively control the Company, including the election of directors,the determination of matters requiring shareholder approval and other matterspertaining to corporate governance.

 

*The Class A common stock has limited voting power.*

 

Eachshare of Class A common stock ranks substantially equal to each share of Class Bcommon stock with respect to receipt of any dividends or distributions declaredon shares of common stock and the right to receive proceeds on liquidation ordissolution of us after payment of our indebtedness and liquidation preferencepayments to holders of preferred shares. However, holders of Class Acommon stock have 1/20th of one vote per share on all matters requiring ashareholder vote, while holders of Class B common stock have one full voteper share.

 

*Our dealership agreements could discourage another companyfrom acquiring us and impede our ability to issue additional stock to raisecapital or as consideration for future acquisitions.*

 

Anumber of our dealership agreements impose restrictions on the sale andtransfer of our common stock. These restrictions also may prevent or deterprospective acquirers from acquiring control of us and, therefore, mayadversely impact the value of our common stock. For example, under thePeterbilt dealership agreements, except as may be otherwise approved from timeto time by Peterbilt, W. Marvin Rush, W. M. “Rusty” Rush, W. Marvin Rush’sfamily members and other of our executives, in the aggregate, are required toretain control of at least 30% of the aggregate voting power of our outstandingshares and voting power equal or superior to that of any other person or group.

 

Inaddition, W. Marvin Rush and members of his immediate family have grantedPeterbilt a right of first refusal to purchase their respective shares ofcommon stock in the event that any of such individuals desire to transfer inexcess of 100,000 shares in any 12-month period to any person other thanan immediate family member, an associate or a Dealer Principal (as defined inthe Peterbilt dealership agreements). This right of first refusal, the numberof shares owned by W. Marvin Rush and the requirement in our dealershipagreements that certain dealer principals retain a controlling interest in us,combined with the ability of the Board of Directors to issue shares ofpreferred stock without further vote or action by the shareholders, maydiscourage, delay or prevent a change in control without further action by ourshareholders, which could adversely affect the market price of our common stockor prevent or delay a merger or acquisition that our shareholders may considerfavorable. We do not have the right to waive the right of first refusal or theterms of its dealership agreements in order to accept a favorable offer, butour Board of Directors may redeem the rights under the rights plan to accept afavorable offer.

 

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Actionsby our shareholders or prospective shareholders that would violate any of theabove restrictions on our dealership agreements are generally outside ourcontrol. If we are unable to renegotiate these restrictions, we may be forcedto terminate or sell one or more of our dealerships, which could have amaterial adverse effect on us. This may also inhibit our ability to acquireadditional dealerships. These restrictions also may impede our ability to raiserequired capital or to issue our stock as consideration for futureacquisitions.

 

**Item 1B.  Unresolved StaffComments**

 

None

 

**Item2.  Properties**

 

TheCompany’s corporate headquarters are currently located in New Braunfels,Texas.  As of December 2008, theCompany also owns or leases numerous facilities relating to our operations inthe following states:  Alabama, Arizona,California, Colorado, Florida, Georgia, New Mexico, North Carolina, Oklahoma, Tennessee and Texas.  A Rush Truck Center or Rush Equipment Centermay be comprised of one or more locations, generally in close proximity, in thesame metropolitan area.  These facilitiesconsist primarily of office space, display lots, servicefacilities, parking lots and offices. The Company believes that its facilities are sufficient for its currentneeds and are in good condition in all material respects.

 

TheCompany’s insurance agency occupies approximately 7,000 square feet of leasedspace in San Antonio, Texas; 2,000 square feet of leased space in WinterGarden, Florida; 525 square feet of leased space in Austin, Texas; 800 squarefeet of leased space in Chino, California; and 2,440 square feet of leasedspace in Laguna Niguel, California. The Company leases a hangar in NewBraunfels, Texas for the corporate aircraft. The Company also owns and operates a hunting ranch of approximately9,500 acres in Cotulla, Texas.  TheCompany uses the ranch for client development purposes and sells hunting tripson the ranch.

 

**Item 3.  Legal Proceedings**

 

Fromtime to time, we are involved in litigation arising out of the Company’soperations in the ordinary course of business. We maintain liability insurance,including product liability coverage, in amounts deemed adequate by management.To date, aggregate costs to us for claims, including product liability actions,have not been material. However, an uninsured or partially insured claim, orclaim for which indemnification is not available, could have a material adverseeffect on the Company’s financial condition. We believe that there are noclaims or litigation pending, the outcome of which could have a materialadverse effect on the Company’s financial position or results of operations.However, due to the inherent uncertainty of litigation, there can be noassurance that the resolution of any particular claim or proceeding would nothave a material adverse effect on the Company’s results of operations for thefiscal period in which such resolution occurred.

 

**Item 4.  Submission of Matters toa Vote of Security Holders**

 

Nomatters were submitted to a vote of the Company’s shareholders during thefourth quarter of the fiscal year ended December 31, 2008.

 

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** **

**PART II**

 

**Item 5.  Market for Registrant’s Common Equity,Related Shareholder Matters, and Issuer Purchases of Equity Securities**

 

Ourcommon stock trades on The NASDAQ Global Select MarketSM under the symbols RUSHA and RUSHB.

 

Thefollowing table sets forth the high and low sales prices for the Class Acommon stock and Class B common stock for the fiscal periods indicated andas quoted on The NASDAQ Global Select MarketSM.

 

| ** **                      | ** **   | **2008**     | ** **   | **2007**     | ** **   |
|---------------------------------|--------------|--------------|--------------|--------------|--------------|
| ** **                      | ** **   | **High**     | ** **   | **Low**      | ** **   | **High** | ** ** | **Low** | ** ** |
| ***Class A Common Stock*** |         |         |         |         |         |   |   |   |   |
|                            |         |         |         |         |         |   |   |   |   |
| First Quarter                   |         | $            | 18.78        |         | $            | 14.00 |   | $ | 13.65 |   | $ | 11.07 |   |
| Second Quarter                  |         | 17.27        |         | 11.90        |         | 17.12 |   | 12.66 |   |
| Third Quarter                   |         | 15.14        |         | 10.66        |         | 19.95 |   | 14.55 |   |
| Fourth Quarter                  |         | 12.69        |         | 5.29         |         | 18.85 |   | 13.97 |   |
| *** ***                    | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| ***Class B Common Stock*** |         |         |         |         |         |   |   |   |   |
|                            |         |         |         |         |         |   |   |   |   |
| First Quarter                   |         | $            | 18.25        |         | $            | 13.41 |   | $ | 12.93 |   | $ | 10.34 |   |
| Second Quarter                  |         | 16.16        |         | 10.35        |         | 16.23 |   | 11.93 |   |
| Third Quarter                   |         | 14.04        |         | 9.56         |         | 18.86 |   | 14.09 |   |
| Fourth Quarter                  |         | 12.70        |         | 5.75         |         | 18.58 |   | 13.81 |   |

 

As of March 4, 2008, there were approximately 44record holders of the Class A common stock and approximately 50 recordholders of the Class B common stock and approximately 3,101 beneficialholders of the Class A common stock and approximately 775 beneficialholders of the Class B common stock.

 

On September 20, 2007, our Board of Directors declared a 3-for-2stock split of the Class A common stock and Class B common stock, tobe effected in the form of a stock dividend. On October 10, 2007, RushEnterprises, Inc. distributed one additional share of stock for every twoshares of Class A common stock and Class B common stock held byshareholders of record as of October 1, 2007.  The high and low sales prices set forth abovehave been adjusted and restated to reflect the stock dividend as if it occurredon the first day of the earliest period presented.

 

Other than the stock dividend in connection with the stock splitdescribed above, the Company did not pay dividends during the fiscal year endedDecember 31, 2008 or the fiscal year ended December 31, 2007.  The Board of Directors intends to retain anyearnings of the Company to support operations and to finance expansion and doesnot intend to pay cash dividends in the foreseeable future. Any futuredetermination as to the payment of dividends will be at the discretion of theBoard of Directors of the Company and will depend on the Company’s financialcondition, results of operations, capital requirements and such other factorsas the Board of Directors deems relevant.

 

The Company has not sold any securities in the last three years thatwere not registered under the Securities Act.

 

A  summary of the repurchase activity for theCompany’s fourth quarter of 2008 is as follows:

 
| **Period**                                    | ** ** | **Total Number of Shares Purchased (1)** | ** ** | **Average Price Paid Per Share (1)** | ** ** | **Total Number of Shares Purchased as Part of Publicly Announced  Plans or Programs (2)** | ** ** | **Approximate Dollar Value of Shares that May Yet be Purchased  Under the Plans or Programs (3)** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| October 1 —  October 31, 2008  |       | 860,628                                  |       | $                                    | 9.13       |                                                                                           | 860,628    |                                                                                                   | $          | 2,093,321 |   |
| November 1 — November 30, 2008 |       | —                                   |       | —                               |       | —                                                                                         |       | 2,093,321                                                                                              |       |
| December 1 — December 31, 2008 |       | —                                   |       | —                               |       | —                                                                                         |       | 2,093,321                                                                                              |       |
| Total                                         |       | 860,628                                  |       |                                 |       | 860,628                                                                                        |       | $                                                                                                      | 2,093,321  |   |
|                                               |            |                                          |            |                                      |            |                                                                                                |            |                                                                                                        |            |  |  |

 

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(1)         The calculation of the average pricepaid per share does not give effect to any fees, commissions or other costsassociated with the repurchase of such shares.

 

(2)         The shares represent Class Bcommon stock repurchased by the Company.

 

(3)         The Company repurchased shares under aprogram announced on July 23, 2008, which authorized the repurchase of upto $20,000,000 of its shares of Class A common stock and/or Class Bcommon stock.  The stock repurchaseprogram has no expiration date and may be suspended or discontinued at anytime.

 

Information regarding the Company’s equity compensation plans isincorporated by reference from Item 12, “Security Ownership of CertainBeneficial Owners and Management and Related Shareholder Matters,” of thisannual report on Form 10-K, and should be considered an integral part ofthis Item 5.

 

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** **

**Item 6.  Selected Financial Data**

 

Theinformation below was derived from the audited consolidated financialstatements included in this report and reports we have previously filed withthe SEC. This information should be read together with those consolidatedfinancial statements and the notes to those consolidated financial statements.These historical results are not necessarily indicative of the results to beexpected in the future. The selected financial data presented below may notbe comparable between periods in all material respects or indicative of theCompany’s future financial position or results of operations due primarily toacquisitions and discontinued operations which occurred during the periodspresented. See Note 17 to the Company’s Consolidated Financial Statements for adiscussion of such acquisitions.  Theselected financial data presented below should be read in conjunction with theCompany’s other financial information included elsewhere herein.

 
| ** **                                              | ** ** | **Year Ended December 31,**             | ** **    |
|---------------------------------------------------------|------------|----------------------------------------------|---------------|
| ** **                                              | ** ** | **2008**                                     | ** **    | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **SUMMARY  OF INCOME STATEMENT DATA**                   | ** ** | **(in thousands, except per share amounts)** | ** **    |
| Revenues                                                |       |                                         |          |   |   |   |   |   |   |   |   |
| New and used truck sales                                | ** ** | **$**                                        | **1,041,189** |   | $ | 1,393,253 |   | $ | 1,780,418 |   | $ | 1,400,736 |   | $ | 738,225 |   |
| Parts and service                                       | ** ** | **478,439**                                  |          | 480,611 |   | 441,424 |   | 365,908 |   | 285,206 |   |
| Construction equipment sales                            | ** ** | **62,168**                                   |          | 74,986 |   | 59,545 |   | 41,692 |   | 32,305 |   |
| Lease and rental                                        | ** ** | **54,813**                                   |          | 52,103 |   | 41,776 |   | 33,975 |   | 27,193 |   |
| Finance and insurance                                   | ** ** | **12,291**                                   |          | 21,663 |   | 19,197 |   | 15,356 |   | 7,909 |   |
| Other                                                   | ** ** | **6,056**                                    |          | 8,163 |   | 8,163 |   | 7,103 |   | 4,141 |   |
| Total revenues                                          | ** ** | **1,654,956**                                |          | 2,030,779 |   | 2,350,523 |   | 1,864,770 |   | 1,094,979 |   |
| Cost of products sold                                   | ** ** | **1,358,244**                                |          | 1,678,711 |   | 1,997,856 |   | 1,582,078 |   | 909,837 |   |
| Gross profit                                            | ** ** | **296,712**                                  |          | 352,068 |   | 352,667 |   | 282,692 |   | 185,142 |   |
| Selling, general and administrative                     | ** ** | **228,057**                                  |          | 240,661 |   | 230,056 |   | 188,667 |   | 141,947 |   |
| Depreciation and amortization                           | ** ** | **15,878**                                   |          | 14,935 |   | 12,889 |   | 10,487 |   | 9,119 |   |
| Operating income from continuing operations             | ** ** | **52,777**                                   |          | 96,472 |   | 109,722 |   | 83,538 |   | 34,076 |   |
| Interest expense, net                                   | ** ** | **7,830**                                    |          | 14,909 |   | 15,718 |   | 12,895 |   | 5,950 |   |
| Gain on sale of assets                                  | ** ** | **140**                                      |          | 239 |   | 54 |   | 495 |   | 624 |   |
| Income from continuing operations before income taxes   | ** ** | **45,087**                                   |          | 81,802 |   | 94,058 |   | 71,138 |   | 28,750 |   |
| Provision for income taxes                              | ** ** | **16,222**                                   |          | 30,310 |   | 35,272 |   | 26,513 |   | 11,574 |   |
| Income from continuing operations                       | ** ** | **28,865**                                   |          | 51,492 |   | 58,786 |   | 44,625 |   | 17,176 |   |
| (Loss) from discontinued operations, net                | ** ** | **0**                                        |          | 0 |   | 0 |   | 0 |   | (260 | ) |
| Net income                                              | ** ** | **$**                                        | **28,865**    |   | $ | 51,492 |   | $ | 58,786 |   | $ | 44,625 |   | $ | 16,916 |   |
|                                                    |       |                                         |          |   |   |   |   |   |   |   |   |
| Earnings Per Share:                                     |       |                                         |          |   |   |   |   |   |   |   |   |
| Earnings per Common Share — Basic                  |       |                                         |          |   |   |   |   |   |   |   |   |
| Income from continuing operations                       | ** ** | **$**                                        | **0.76**      |   | $ | 1.35 |   | $ | 1.57 |   | $ | 1.23 |   | $ | 0.73 |   |
| Net income                                              | ** ** | **$**                                        | **0.75**      |   | $ | 1.35 |   | $ | 1.57 |   | $ | 1.23 |   | $ | 0.72 |   |
| Earnings per Common Share — Diluted                |       |                                         |          |   |   |   |   |   |   |   |   |
| Income from continuing operations                       | ** ** | **$**                                        | **0.76**      |   | $ | 1.33 |   | $ | 1.55 |   | $ | 1.19 |   | $ | 0.69 |   |
| Net income                                              | ** ** | **$**                                        | **0.75**      |   | $ | 1.33 |   | $ | 1.55 |   | $ | 1.19 |   | $ | .068 |   |
|                                                    |       |                                         |          |   |   |   |   |   |   |   |   |
| Basic weighted average shares                           | ** ** | **38,089**                                   |          | 38,059 |   | 37,476 |   | 36,303 |   | 23,526 |   |
| Diluted weighted average shares and assumed conversions | ** ** | **38,587**                                   |          | 38,746 |   | 37,890 |   | 37,436 |   | 24,911 |   |

 

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| ** **                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **OPERATING DATA**           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of locations —   | ** ** | **54**                           |       | 54 |   | 52 |   | 48 |   | 39 |   |
| Unit truck sales —      |       |                             |       |   |   |   |   |   |   |   |   |
| New trucks                   | ** ** | **9,289**                        |       | 12,712 |   | 16,492 |   | 12,918 |   | 7,140 |   |
| Used trucks                  | ** ** | **3,234**                        |       | 4,101 |   | 4,005 |   | 3,677 |   | 2,716 |   |
| Total unit trucks sales      | ** ** | **12,523**                       |       | 16,813 |   | 20,497 |   | 16,595 |   | 9,856 |   |
| Truck lease and rental units | ** ** | **2,570**                        |       | 2,404 |   | 2,345 |   | 1,798 |   | 1,427 |   |

 
| ** **                                           | ** ** | **December 31,** | ** **  |
|------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                           | ** ** | **2008**              | ** **  | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(in thousands)**    | ** **  |
| **BALANCE SHEET DATA**                               |       |                  |        |   |   |   |   |   |   |   |   |
| Working capital                                      | ** ** | **$**                 | **177,117** |   | $ | 197,805 |   | $ | 156,297 |   | $ | 126,137 |   | $ | 138,241 |   |
| Inventories                                          | ** ** | **362,234**           |        | 365,947 |   | 484,696 |   | 338,212 |   | 189,792 |   |
| Total assets                                         | ** ** | **1,056,790**         |        | 1,031,591 |   | 1,128,410 |   | 840,234 |   | 565,933 |   |
|                                                 |       |                  |        |   |   |   |   |   |   |   |   |
| Floor plan notes payable                             | ** ** | **282,702**           |        | 273,653 |   | 446,354 |   | 315,985 |   | 168,002 |   |
| Line-of-credit borrowings                            | ** ** | **—**            |        | — |   | — |   | 2,755 |   | 2,434 |   |
| Long-term debt, including current portion            | ** ** | **209,677**           |        | 198,945 |   | 192,124 |   | 133,152 |   | 96,056 |   |
| Capital lease obligations, including current portion |       | **14,820**            |        | 17,543 |   | 17,732 |   | 16,905 |   | — |   |
| Shareholders’ equity                            | ** ** | **416,041**           |        | 399,577 |   | 339,608 |   | 273,620 |   | 222,807 |   |
|                                                      |            |                       |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**General**

 

The ongoing weakness inthe economy and deteriorating credit markets continue to impact consumerconfidence and spending, and ultimately, our financial performance.  These factors also make it extremelydifficult for the Company to forecast future results of operations.

 

A.C.T. Research Co., LLC(“A.C.T. Research”), a truck industry data and forecasting service provider,currently predicts U.S. retail sales of Class 8 trucks of approximately124,600 units in 2009, a 10.9% decline from the number of deliveries in2008.  However, the Company expects that2009 sales of Class 8 units could be as low as 110,000 to 120,000units.  The Company expects the firstquarter of 2009 to be the weakest quarter since the truck market downturn beganin 2007.  Based on current economic and market conditions, the Companydoes not expect a significant pre-buy of Class 8 trucks to occur in 2009as a result of diesel emissions regulations that go into effect in 2010.  However, the Company expects demand for new Class 8trucks to gradually increase due to the age of vehicles in operation andimpending 2010 diesel emissions regulations.

 

Medium-duty truck salesdeclined 31% in 2008 as compared to 2007. A.C.T. Research currently predicts U.S. retail sales of Class 4, 5,6, and 7 medium-duty trucks of approximately 167,500 units in 2009, a 5%decline from the number of deliveries in 2008. The Company believes U.S. retail sales of medium-duty trucks in 2009could be off as much as 15% compared to 2008.

 

The Company’s parts,service and body shop sales decreased 0.5% in 2008 compared to 2007.  The Company’s truck dealerships overallabsorption rate was 105.5%, in 2008 compared to 104.5% in 2007, while samestore absorption rate increased to 106.2% for 2008.

 

In 2008, the Company’sconstruction equipment segment revenue decreased by 13.8%.  This decrease was largely attributable to theweakening construction market in the Houston area.  Current industry forecasts suggest thatconstruction equipment sales will decline approximately 30% in the Company’sarea of responsibility during 2009.

 

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The Company is continuingits strategic focus to improve the quality of earnings by building a networkthat is diverse in product offerings, customer base and geography.

 

**StockDividend**

 

On September 20, 2007, our shareholdersapproved an amendment to Rush Enterprises, Inc.’s Restated Articles ofIncorporation increasing the total number of authorized shares of Class Acommon stock from 40,000,000 to 60,000,000 and total number of authorizedshares of Class B common stock from 10,000,000 to 20,000,000.  On the same date, our Board of Directorsdeclared a 3-for-2 stock split of the Class A common stock and Class Bcommon stock, to be effected in the form of a stock dividend. On October 10,2007, Rush Enterprises, Inc. distributed one additional share of stock forevery two shares of Class A common stock and Class B common stockheld by shareholders of record as of October 1, 2007.  All share and per share data (except parvalue) in this Form 10-K have been adjusted and restated to reflect thestock dividend as if it occurred on the first day of the earliest periodpresented.

 

**Critical Accounting Policies and Estimates**

 

The Company’s discussion and analysis of its financial condition andresults of operations are based on the Company’s consolidated financialstatements, which have been prepared in accordance with U.S. generally acceptedaccounting principles. The preparation of these consolidated financialstatements requires the Company to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. There can be no assurance that actual results will notdiffer from those estimates. The Company believes the following accountingpolicies, which are also described in Note 2 of the Notes to theConsolidated Financial Statements, affect its more significant judgments andestimates 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 identificationof 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 isanticipated that cost will exceed net realizable value plus a reasonable profitmargin.

 

***Goodwill***

 

Asstated in Note 2 of the Notes to the Consolidated Financial Statements,the Financial Accounting Standards Board’s (the “FASB”) Statement No. 142,“*Goodwill and Other Intangible Assets*” (“SFAS142”) requires that goodwill and other intangible assets that have indefinitelives not be amortized but instead be tested at least annually by reportingunit for impairment, or more frequently when events or changes in circumstancesindicate that the asset might be impaired, and intangible assets that havefinite useful lives should continue to be amortized over their useful lives.  For indefinite lived intangible assets,impairment is tested by comparing the carrying value of the asset to the fairvalue of the reporting unit, which is the same as the segment to which they areassigned.

 

For its goodwill impairmenttests, the Company determines the fair value of its reporting units using thediscounted cash flow method.  Thediscounted cash flow method uses various assumptions and estimates regardingfuture revenue, expenses and cash flow projections.  The analysis is based upon availableinformation regarding expected future cash flows of each reporting unitdiscounted at rates consistent with the cost of capital specific to thereporting unit.  If the carrying amount ofthe reporting unit exceeds the estimated fair value determined using thediscounted cash flow method, then goodwill impairment may be present.

 

Goodwill was tested forimpairment during the fourth quarter of 2008 and no impairment write down wasrequired.  However, the Company cannotpredict the occurrence of certain events that might adversely affect thereported value of goodwill in the future. Such events may include, but are not limited to, strategic decisionsmade in response to economic and competitive conditions or the impact of thecurrent economic environment.

 

***Revenue Recognition Policies***

 

Income on the sale of a truck or a piece of construction equipment isrecognized when the customer executes a purchase contract with us, the unit hasbeen delivered to the customer and there are no significant uncertaintiesrelated to financing or collectability. Lease and rental income is recognized over the period of the relatedlease or rental agreement.

 

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Parts and service revenue is recognized at the time the Company sellsthe parts to its customers or at the time the Company completes the servicework order related to service provided to the customer’s unit. Paymentsreceived on prepaid maintenance plans are deferred as a component of accruedexpenses and recognized as income when the maintenance is performed.

 

***Finance and Insurance Revenue Recognition***

 

Financeincome related to the sale of a unit is recognized when the finance contract issold to a finance company.  During 2008,2007 and 2006, finance contracts were not retained by the Company for anysignificant length of time because finance contracts are generally sold tofinance companies concurrent with the sale of the related unit. The Companyarranges financing for customers through various retail funding sources andreceives a commission from the lender equal to either the difference betweenthe interest rates charged to customers over the predetermined interest ratesset by the financing institution or a commission for the placement ofcontracts. The Company also receives commissions from the sale of variousinsurance products to customers.  Revenueis recognized by the Company upon the sale of such finance and insurancecontracts to the finance and insurance companies net of a provision forestimated repossession losses and interest charge-backs on finance contracts.The Company is not the obligor under any of these underlying contracts. In thecase of finance contracts, a customer may prepay, or fail to pay, therebyterminating the underlying contract. If the customer terminates a retailfinance contract or other insurance product prior to scheduled maturity, aportion of the commissions previously paid to the Company may be charged backto the Company depending on the terms of the relevant contracts. The estimateof ultimate charge-back exposure is based on the Company’s historicalcharge-back expense arising from similar contracts, including the impact ofrefinance and default rates on retail finance contracts and cancellation rateson other insurance products. The actual amount of historical charge-backs hasnot been significantly different than the Company’s estimates.

 

***InsuranceAccruals***

 

TheCompany is partially self-insured for medical, workers compensation, andproperty and casualty insurance and calculates a reserve for those claims thathave been incurred but not reported and for the remaining portion of thoseclaims that have been reported. The Company uses information provided bythird-party administrators to determine the reasonableness of the calculationsit performs.

 

***Accounting forIncome Taxes***

 

Significant management judgment is required to determine the provisionsfor income taxes and to determine whether deferred tax assets will be realizedin full or in part.  Deferred income taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences are expectedto be recovered or settled.  When it ismore likely than not that all or some portion of specific deferred income taxassets will not be realized, a valuation allowance must be established for theamount of deferred income tax assets that are determined not to berealizable.  The Company has a valuationallowance related to deferred tax assets in certain states.  Accordingly, the facts and financialcircumstances impacting state deferred income tax assets are reviewed quarterlyand management’s judgment is applied to determine the amount of valuationallowance required in any given period.

 

Additionally,despite the Company’s belief that its tax return positions are consistent withapplicable tax law, management believes that certain positions may bechallenged by taxing authorities. Settlement of any challenge can result in no change, a completedisallowance, or some partial adjustment reached through negotiations.

 

Effective January 1, 2007,the Company adopted FIN 48.  Thisinterpretation clarified the accounting for uncertainty in income taxesrecognized in the financial statements by prescribing a recognition thresholdand measurement attribute for a tax position taken or expected to be taken in atax return.  FIN 48 prescribes how acompany should recognize, measure, present and disclose uncertain tax positionsthat the company has taken or expects to take in its income tax returns.  FIN 48 requires that only income tax benefitsthat meet the “more likely than not” recognition threshold be recognized orcontinue to be recognized on its effective date.  The Company’s income tax expense includes theimpact of reserve provisions and changes to reserves that it considersappropriate, as well as related interest. Unfavorable settlement of any particular issue would require use of theCompany’s cash and a charge to income tax expense.  Favorable resolution would be recognized as areduction to income tax expense at the time of resolution.

 

For additionalinformation regarding the adoption of FIN 48, see Note 15 of Notes to theConsolidated Financial Statements.

 

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***Stock Based Compensation***

 

The Companyaccounts for stock-based compensation in accordance with Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS123(R)”), which requires the measurement and recognition of compensationexpense for all share-based payment awards made to the Company’s employees anddirectors including employee stock options, restricted share awards andemployee stock purchases related to the Employee Stock Purchase Plan based onestimated fair values.

 

The Companyadopted SFAS 123(R) using the modified prospective transition method,which requires the application of the accounting standard as of January 1,2006.  The Company’s ConsolidatedFinancial Statements reflect the impact of SFAS 123(R).  Stock-based compensation expense related tostock options and employee stock purchases under SFAS 123(R) for the yearended December 31, 2008, was $3.6 million, for the year ended December 31,2007, was $3.4 million and for the year ended December 31, 2006, was $2.6million.

 

SFAS 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The fair value of the portion of the award that is ultimately expectedto vest is recognized as expense over the requisite service periods in theCompany’s Consolidated Statements of Income. Stock-based compensation expense is based on the fair value of theportion of share-based payment awards that is ultimately expected to vestduring the period.  In conjunction withthe adoption of SFAS 123(R), compensation expense for all share-based paymentawards is recognized using the straight-line single-option method.  As stock-based compensation expenserecognized in the Consolidated Statements of Income is based on awardsultimately expected to vest, it has been reduced for estimatedforfeitures.  SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.

 

The Companycontinues to use the Black-Scholes option-pricing model.  For additional information, see Note 12.  The Company’s determination of fair value ofshare-based payment awards on the date of grant using an option-pricing modelis affected by the Company’s stock price as well as assumptions regarding anumber of highly complex and subjective variables.  These variables include, but are not limitedto, the Company’s expected stock price volatility over the term of the awards,and actual and projected stock option exercise behaviors.  Option-pricing models were developed for usein estimating the value of traded options that have no vesting or hedgingrestrictions and are fully transferable. Because the Company’s stock options have certain characteristics thatare significantly different from traded options, and because changes in thesubjective assumptions can materially affect the estimated value, in management’sopinion, the existing valuation models may not provide an accurate measure ofthe fair value of the Company’s stock options. Although the fair value of stock options is determined in accordancewith SFAS 123(R) using an option-pricing model, that value may not beindicative of the fair value observed in a market transaction between a willingbuyer and a willing seller.

 

**New Accounting Standards**

 

In December 2007,the FASB issued SFAS No. 141(R),**“Business Combinations” (“SFAS 141(R)”),which establishes principles and requirements for how the acquirer:  (a) recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizesand measures the goodwill acquired in the business combination or a gain from abargain purchase; and (c) determines what information to disclose toenable users of the financial statements to evaluate the nature and financialeffects of the business combination.  SFAS 141(R) requires contingentconsideration to be recognized at its fair value on the acquisition date and,for certain arrangements, changes in fair value to be recognized in earningsuntil settled.  SFAS 141(R) also requires acquisition-relatedtransaction and restructuring costs to be expensed rather than treated as partof the cost of the acquisition.  SFAS 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  The Company does not expect the adoption of SFAS 141(R) tohave a significant impact on its consolidated results of operations andfinancial position, but will impact accounting for any business combinationsthat close on or after January 1, 2009.

 

In June 2008,the FASB issued FASB Staff Position EITF 03-6-1, “Determining WhetherInstruments Granted in Share-Based Payment Transactions are ParticipatingSecurities.”  EITF 03-6-1 requires unvested share-based payment awardsthat contain non-forfeitable rights to dividends or dividend equivalents to betreated as participating securities asdefined in EITF Issue No. 03-6, “Participating Securities and the Two-Class Methodunder FASB Statement No. 128,” and, therefore, included in the earningsallocation in computing earnings per share under the two-class method describedin FASB Statement No. 128, “Earnings per Share.”  Upon adoption, all previously reported earningsper share data should be

 

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adjusted retrospectivelyto conform with the requirements of EITF 03-6-1.  The Company is required to adopt EITF 03-6-1starting in 2009.  The Company does not expect EITF 03-6-1 to have aneffect on its consolidated financial statements.

 

**KeyPerformance Indicator**

 

*Absorption Rate.*Themanagement of the Company uses several performance metrics to evaluate theperformance of its dealerships.  TheCompany considers its “absorption rate” to be of critical importance.  Absorption rate is calculated by dividing thegross profit from the parts, service and body shop departments by the overheadexpenses of all of a dealership’s departments, except for the selling expensesof the new and used truck departments and carrying costs of new and used truckinventory.  When 100% absorption is achieved,then gross profit from the sale of a truck, after sales commissions andinventory carrying costs, directly impacts operating profit.  In 1999, the Company’s truck dealerships’absorption rate was approximately 80%. The Company has made a concerted effort to increase its absorption ratesince then.  The Company’s truckdealerships achieved a 104.5% absorption rate for the year in 2007 and 105.5%absorption rate for the year in 2008.

 

**Results of Operations**

 

The following discussion and analysis includes theCompany’s historical results of operations for 2008, 2007 and 2006.

 

Thefollowing table sets forth for the years indicated certain financial data as apercentage of total revenues:

 
| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                |       |                             |       |   |   |   |   |
| New and used truck sales            | ** ** | **62.9**                         | **%**      | 68.6 | % | 75.8 | % |
| Parts and service                   | ** ** | **28.9**                         |       | 23.7 |   | 18.8 |   |
| Construction equipment sales        | ** ** | **3.8**                          |       | 3.7 |   | 2.5 |   |
| Lease and rental                    | ** ** | **3.3**                          |       | 2.5 |   | 1.8 |   |
| Finance and insurance               | ** ** | **0.7**                          |       | 1.1 |   | 0.8 |   |
| Other                               | ** ** | **0.4**                          |       | 0.4 |   | 0.3 |   |
| Total revenues                      | ** ** | **100.0**                        |       | 100.0 |   | 100.0 |   |
|                                |       |                             |       |   |   |   |   |
| Cost of products sold               | ** ** | **82.0**                         |       | 82.7 |   | 85.0 |   |
| Gross profit                        | ** ** | **18.0**                         |       | 17.3 |   | 15.0 |   |
|                                |       |                             |       |   |   |   |   |
| Selling, general and administrative | ** ** | **13.8**                         |       | 11.9 |   | 9.8 |   |
| Depreciation and amortization       | ** ** | **1.0**                          |       | 0.7 |   | 0.5 |   |
| Operating income                    | ** ** | **3.2**                          |       | 4.7 |   | 4.7 |   |
| Interest expense, net               | ** ** | **0.5**                          |       | 0.7 |   | 0.7 |   |
| Income before income taxes          | ** ** | **2.7**                          |       | 4.0 |   | 4.0 |   |
| Income taxes                        | ** ** | **1.0**                          |       | 1.5 |   | 1.5 |   |
| Net income                          | ** ** | **1.7**                          | **%**      | 2.5 | % | 2.5 | % |

 

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Thefollowing table sets forth the unit sales and revenue for new heavy-duty, newmedium-duty and used trucks and the absorption rate for the years indicated(revenue in millions): 

 
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **% Change**       | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|------------|------------|--------------------|------------|
| ** **                            | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2008  vs  2007** | ** ** | **2007  vs  2006** | ** ** |
| **Truck unit sales:**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **         | ** ** | ** ** | ** ** |
| New heavy-duty trucks                 |       | 5,516      |       | 7,230      |       | 11,799     |       | -23.7              | %          | -38.7 | % |
| New medium-duty trucks                |       | 3,773      |       | 5,482      |       | 4,693      |       | -31.2              | %          | 16.8 | % |
| Total new truck unit sales            |       | 9,289      |       | 12,712     |       | 16,492     |       | -26.9              | %          | -22.9 | % |
|                                  |       |       |       |       |       |       |       |               |       |   |   |
| Used trucks                           |       | 3,234      |       | 4,101      |       | 4,005      |       | -21.1              | %          | 2.4 | % |
|                                  |       |       |       |       |       |       |       |               |       |   |   |
| **Truck revenue:**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **         | ** ** | ** ** | ** ** |
| New heavy-duty trucks                 |       | $          | 665.5      |       | $          | 871.8      |       | $                  | 1,317.9    |   | -23.7 | % | -33.8 | % |
| New medium-duty trucks                |       | 222.1      |       | 289.4      |       | 253.0      |       | -23.3              | %          | 14.4 | % |
| Total new truck revenue               |       | $          | 887.6      |       | $          | 1,161.2    |       | $                  | 1,570.9    |   | -23.6 | % | -26.1 | % |
|                                  |       |       |       |       |       |       |       |               |       |   |   |
| Used truck revenue                    |       | $          | 149.9      |       | $          | 211.7      |       | $                  | 191.9      |   | -29.2 | % | 10.3 | % |
|                                  |       |       |       |       |       |       |       |               |       |   |   |
| Other truck revenue(1)                |       | $          | 3.7        |       | $          | 20.4       |       | $                  | 17.6       |   | -81.9 | % | 15.9 | % |
|                                  |       |       |       |       |       |       |       |               |       |   |   |
| **Truck dealership absorption rate:** |       | 105.5      | %          | 104.5      | %          | 105.2      | %          | 1.0                | %          | -0.7 | % |

----

(1) Includes sales ofglider kits, truck bodies, trailers and other new equipment.

 

**Industry**

 

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

 

*Heavy-Duty Truck Market*

 

The Company serves the southern U.S. retail heavy-duty truck market,which is affected by a number of factors relating to general economicconditions, including fuel prices, government regulation, interest ratefluctuations, economic recessions and customer business cycles. In addition,unit sales of new trucks have historically been subject to substantial cyclicalvariation based on such general economic conditions.  According to data published by A.C.T.Research, in recent years total U.S. retail sales of new Class 8 truckshave ranged from a low of approximately 140,000 in 2001 and 2008 to a high ofapproximately 291,000 in 2006.  Class 8trucks are defined by the American Automobile Association as trucks with aminimum gross vehicle weight rating above 33,000 pounds.  The Company’s share of the U.S. Class 8truck sales market decreased approximately 15% to 3.9% in 2008, down from 4.6%in 2007.  We attribute the majority ofthis decrease in market share to the fact that most of our major fleetcustomers did not purchase any vehicles in 2008.  We believe that our share of the U.S. Class 8truck sales market should return to approximately 4.3% to 4.6% when our largefleet customers resume normal purchasing practices.

 

Typically, Class 8 trucks are assembled by manufacturers utilizingcertain components manufactured by other companies, including engines,transmissions, axles, wheels and other components. As trucks and truckcomponents have become increasingly complex, the ability to providestate-of-the-art service for a wide variety of truck equipment has become acompetitive factor in the industry. The ability to provide such servicerequires a significant capital investment in diagnostic and other equipment,parts inventory and highly trained service personnel. Environmental ProtectionAgency (“EPA”) and U.S. Department of Transportation (“DOT”) regulatoryguidelines for service processes, including body shop, paint work and wastedisposal, require sophisticated operating and testing equipment to ensurecompliance with environmental and safety standards. Additionally, we believethat more of our customers will lease Class 8 trucks as fleets,particularly private fleets, seek to establish full-service leases or rentalcontracts, which provide for turnkey service including parts, maintenance and,potentially, fuel, fuel tax reporting and other services. Differentiation betweentruck dealers has become less dependent on pure price competition and isincreasingly based on a dealer’s ability to offer a wide variety of services totheir clients. Such services include the following: efficient, convenientlylocated and easily accessible truck service centers with an adequate supply ofreplacement parts; financing for truck purchases; leasing and rental

 

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programs;and the ability to accept multiple unit trade-ins related to large fleetpurchases. We believe our one-stop center concept and the size and geographicdiversity of our dealer network gives us a competitive advantage in providing theseservices.

 

A.C.T.Research currently estimates approximately 124,600 new Class 8 trucks willbe sold in the United States in 2009, compared to approximately 140,000 newtrucks sold in 2008.  However, theCompany believes that 2009 sales of Class 8 trucks could be as low as110,000 to 120,000.  A.C.T. Researchcurrently forecasts sales of Class 8 trucks in the U.S. to beapproximately 170,000 in 2010.  The Company expects the first quarter of2009 to be the weakest quarter since the truck market downturn began in2007.  Based on current economic and market conditions, the Company doesnot expect a significant pre-buy of Class 8 trucks to occur in 2009 as aresult of diesel emissions regulations that go into effect in 2010. However,the Company believes that demand for new Class 8 trucks will graduallyincrease throughout 2009 due to the age of vehicles in operation and impending2010 diesel emissions regulations if general economic conditions begin toimprove.

 

*Medium-Duty Truck Market*

 

Many of our Rush Truck Centers sell medium-duty trucks manufactured byPeterbilt, International, GMC, Hino, UD, Ford or Isuzu, and all of our RushTruck Centers provide parts and service for medium-duty trucks. Medium-dutytrucks are principally used in short-haul, local markets as delivery vehicles.Medium-duty trucks typically operate locally and generally do not venture outof their service areas overnight.

 

A.C.T.Research currently forecasts sales of Class 4 through 7 trucks in the U.S.to be approximately 167,500 in 2009 compared to 176,000 in 2008.  The Company believes that U.S. retail salesof medium-duty trucks could be off as much as 15% compared to 2008, resultingin sales of only approximately 150,000 medium-duty trucks in 2009.  A.C.T. Research currently forecasts sales of Class 4through 7 trucks in the U.S. to be approximately 176,500 in 2010.  See Note 17 to the Company’s ConsolidatedFinancial Statements for a discussion of the Company’s medium-duty acquisitionsin 2008.

 

*Construction Equipment Market*

 

Our Rush Equipment Centers are authorized John Deere constructionequipment dealers serving Southeast Texas. According to data compiled by John Deere, approximately 2,404 unitsof construction equipment were put into use in our area of responsibility in2008 compared to 2,949 in 2007.  In 2008,we expect new construction equipment unit sales to decrease approximately 25%to 30% in our area of responsibility to approximately 1,800 units.  John Deere’s market share in the Houston areaconstruction equipment market, which includes shipments of John Deere equipmentto customers that did not purchase such equipment from a Rush Equipment Center,decreased to 18.2% in the in 2008 from 22.2% in 2007.  The Company’s market share in the Houston areaconstruction equipment market decreased to 16.9% in 2008 from 18.4% in2007.  This decrease in market share waslargely attributable to other manufacturer’s dealers purchasing largequantities of equipment to add to their rental fleets.  Our Rush Equipment Centershave the right to sell new John Deere construction equipment and parts withinits assigned area of responsibility, which means competition within its marketcomes primarily from dealers of competing manufacturers and rental companies.

 

John Deere equipment users are a diverse group that includesresidential and commercial construction businesses, independent rentalcompanies, utility companies, government agencies, and various petrochemical,industrial and material supply businesses. Industry statistics suggest that a majorityof all construction equipment is owned by a relatively small percentage of thecustomer base. Accordingly, John Deere and its dealer group, including RushEquipment Center, are aggressively developing more sophisticated ways to servelarge equipment fleet owners.

 

Market factors affecting the construction equipment industry includethe following:

 

·                  levels of commercial, residential, and publicconstruction activities; and

 

·                  state and federal highway and road constructionappropriations.

 

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**Year Ended December 31, 2008 Compared to Year Ended December 31,2007**

 

*Revenues*

 

Revenues decreased $375.8 million, or 18.5%, in 2008 compared to2007.  Sales of new and used trucksdecreased $352.1 million, or 25.3%, in 2008 compared to 2007.  Uncertain economic conditions, the weak freight environment, slowingconstruction markets, historically high fuel prices and tight credit markets contributed todecreased demand for Class 8, medium-duty and used trucks in 2008.

 

The Company sold5,516 heavy-duty units in 2008, a 23.7% decrease compared to 7,230 heavy-dutytrucks in 2007.  According toA.C.T. Research, the U.S. Class 8 truck market decreased 11.2% in 2008compared to 2007. The Company’s share of the U.S. Class 8 truck salesmarket decreased approximately 15% to 3.9% in 2008, down from 4.6% in2007.  The Company expects its share torange between 3.9% and 4.1% of the U.S. Class 8 truck market in 2009,which would result in the sale of approximately 4,400 to 4,800 Class 8trucks based on our current retail sales estimates of 110,000 to 120,000units.  These estimates are based on ourassumption that most of our large fleet customers will not resume normalpurchasing practices until 2010.

 

The Company sold3,773 medium-duty trucks in 2008, a 31.2% decrease compared to 5,482medium-duty trucks in 2007.  Overall, newmedium-duty truck sales revenue decreased approximately $67.3 million, or23.3%, in 2008 compared to 2007.  A.C.T. Researchestimates that unit sales of Class 4 through 7 trucks in the U.S.decreased approximately 27% in 2008 compared to the 2007.  In 2008, the Company achieved a 2.1% share ofthe Class 4 through 7 truck sales market in the U.S down from 2.2% in2007.  The Company expects its share torange between 1.9% to 2.0% of the U.S. Class 4 through 7 truck salesmarket in 2009, which would result in the sale of approximately 3,200 to 3,500 Class 4through 7 trucks based on A.C.T. Research’s current 2009 U.S. retail salesestimates of approximately 167,500 units.

 

The Company sold3,234 used trucks in 2008, a 21.1% decrease compared to 4,101 used trucks in2007.  Used truck average revenue perunit decreased by approximately 10.2% in 2008. For 2009, used truck sales volumes and prices will be primarily drivenby general economic conditions, fuel prices and the availability of credit,which collectively have had a severe impact on this market during 2008.  The Company does not believe that demand forused trucks will increase until general economic conditions begin to improveand credit is made available to a wider range of buyers on reasonableterms.  The Company is hopeful this willhappen in the second half of 2009. Accordingly, the Company expects to sell approximately 2,800 to 3,200used trucks in 2009.

 

Partsand service sales decreased $2.2 million, or 0.5%, in 2008 compared to2007.  Same store parts and service salesdecreased $19.9 million, or 4.1%, in 2008 compared to 2007 primarily due toweakening economic conditions.    TheCompany expects parts and service sales to decrease slightly during 2009relative to 2008.

 

Sales of new and usedconstruction equipment decreased $12.8 million, or 17.1%, in 2008 compared to2007.  This decrease was largelyattributable to the weakening construction market in the Houston area.  John Deere’s rolling twelve month averagemarket share in the Houston area construction equipment market decreased to18.2% as of December 31, 2008 from a rolling twelve month average of 22.2%as of December 31, 2007.  Thisdecrease in market share was largely attributable to other manufacturer’sdealers purchasing large quantities of equipment to add to their rentalfleets.  In 2009, the Company expects newconstruction equipment unit sales in our area of responsibility to decreaseapproximately 25% to 30%, compared to 2008.

 

Truck lease and rentalrevenues increased $2.7 million, or 5.2%, in 2008 compared to 2007.  This increase in lease and rental revenue isconsistent with management’s expectations, considering the increased number ofunits put into service in the rental fleet during 2008, which was primarily dueto the acquisition of an Idealease location in North Carolina.  The lease and rental fleet increasedapproximately 6.9% to 2,570 units at December 31, 2008 from 2,404 units atDecember 31, 2007.  The Companyexpects lease and rental revenue to increase approximately 2% to 5% in 2009compared to 2008.

 

Finance andinsurance revenues decreased $9.4 million, or 43.3%, in 2008 compared to2007.  The decrease in finance andinsurance revenue is a direct result of the decline in truck sales and thetight credit market.  The Company expectsfinance and insurance revenue to fluctuate proportionately with the new Class 8truck market in 2009.  Finance andinsurance revenues have limited direct costs and, therefore, contribute adisproportionate share of the Company’s operating profits.

 

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Otherincome decreased $2.1 million, or 25.8% in 2008 compared to 2007.  Other income consists primarily of the gainon sale realized on trucks from the lease and rental fleet, commissions earnedfrom John Deere for direct manufacturer sales into our area of responsibility,document fees related to truck sales and purchase discounts.

 

*GrossProfit*

 

Grossprofit decreased $55.4 million, or 15.7%, in 2008 compared to 2007.  Gross profit as a percentage of salesincreased to 18.0% in 2008 from 17.3% in 2007. This increase is primarily a result of a change in our product salesmix.  Truck sales, a lower margin revenueitem, decreased as a percentage of total revenue to 62.9% in 2008 from 68.6% in2007. Parts and service revenue, a higher margin revenue item, increased as apercentage of total revenue to 28.9% in 2008 from 23.7% in 2007.

 

Gross margins on Class 8 truck sales decreased to 7.7% in 2008from 8.6% in 2007.  A large portion ofthe decrease in gross margins on Class 8 trucks was due to write-downs on the value of new truckinventory throughout 2008.  Gross margins on Class 8 truck saleswere also negatively impacted by decreased demand for new trucks as a result ofuncertain economic conditions, the weak freight environment, historically high fuelprices throughout most of 2008, and tightening credit markets.  In 2009, the Company expectsoverall gross margins from Class 8 truck sales of approximately 6.0% to7.0%.  The Company continually evaluatesits reserve for new truck valuation losses. The Company recorded expense of $5.2 million to increase its newheavy-duty truck valuation allowance in 2008 and $3.3 million in 2007.

 

Gross margins on medium-duty truck sales decreased to 5.1% in 2008 from5.5% in 2007.  Medium-duty gross marginswere negatively impacted by the same factors that adversely impacted grossmargins on Class 8 truck sales in 2008. Gross margins on medium-duty trucks are difficult to forecast accuratelybecause gross margins vary significantly depending upon the mix of fleet andnon-fleet purchasers and types of medium-duty trucks sold.  For 2009, the Company expects overall grossmargins from medium-duty truck sales of approximately 5.0% to 5.5%.  The Company recorded expense of $1.7 millionto increase its new medium-duty truck valuation allowance in 2008 and $2.8million in 2007.

 

Gross margins on used truck sales decreased to 3.6% in 2008 from 8.6%in 2007.  Write-downs of used truck inventory valuesthroughout 2008 caused gross margins on used truck sales to decrease in 2008compared to 2007.  The write-downs werenecessary because of decreased demand for used trucks as a result of worseninggeneral economic conditions, decreased freight demand, and the tight creditmarket.  The Company is hopeful thatmargins on used trucks will be in the range of approximately 6.5% to 8.5%during 2009, but this will largely depend upon general economic conditions andthe availability of credit.  The Companycontinually evaluates its reserve for used truck valuation losses.  The Company recorded expense of $8.5 millionto increase its used truck valuation allowance in 2008 and $2.9 million in2007.

 

Gross margins from the Company’s parts, service andbody shop operations increased to 41.1% in 2008 from 40.9% in 2007.  Gross profit for the parts, service and bodyshop departments decreased slightly to $196.5 million in 2008 from $196.7million in 2007.  The Company expectsgross margins on parts, service and body shop operations of approximately 39.0%to 41.0% during 2009.

 

Gross margins on new and used construction equipmentsales decreased to 9.8% in 2008 from 11.0% in 2007.  This decrease in gross margin is primarilyattributable to decreased demand for construction equipment in the Houstonmarket and our continued efforts to increase John Deere’s market share.  The Company expects 2009 gross margins toremain in a range of approximately 9.0% to 11.0% as the Company continuesefforts to increase its market share.

 

Gross margins fromtruck lease and rental sales decreased to 14.5% in 2008 from approximately15.4% in 2007.  The decrease inthe gross margin from lease and rental sales is primarily due to the decreasedutilization of crane-mounted trucks in our rental fleet.  The Company expects gross margins from lease andrental sales of approximately 15.0% to 18.0% during 2008.  The Company’s policy is to depreciate its lease andrental fleet using a straight line method over the customer’s contractual leaseterm.  The lease unit is depreciated to aresidual value that approximates fair value at the expiration of the leaseterm.  This policy results in the Companyrealizing reasonable gross margins while the unit is in service and acorresponding gain or loss on sale when the unit is sold at the end of thelease term.

 

Financeand insurance revenues and other income, as described above, have limiteddirect costs and, therefore, contribute a disproportionate share of grossprofit.

 

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*Selling, General and Administrative Expenses*

 

Selling,General and Administrative (“SG&A”) expenses decreased $12.6 million, or5.2%, in 2008 compared to 2007.  SG&Aexpenses as a percentage of sales increased to 13.8% in 2008 from 11.9% in2007.  SG&A expenses as a percentageof sales have historically ranged from 10.0% to 15.0%.  In 2008, the selling portion of SG&Aexpenses, which consists primarily of commissions on truck and constructionequipment sales, decreased 28.7% and the general and administrative portion ofSG&A decreased 2.3% compared to 2007. In 2009, the Company expects the selling portion of SG&A expenses tobe approximately 25% to 28% of new and used truck gross profit.  The selling portion of SG&A varies basedon the gross profit derived from truck sales. The Company took action throughout 2008 to reduce overhead expenses to alevel more appropriate to serve the current market.  For 2009, the Company will continue to adjustthe general and administrative portion of SG&A in accordance with marketconditions.

 

*Interest Expense, Net*

 

Netinterest expense decreased $7.1 million, or 47.5%, in 2008 compared to2007.  In 2008, floor plan interestexpense decreased compared to 2007 primarily due to the decrease in floor plannotes payable throughout most of 2008 and lower floor plan interest rates.  If floor plan interest rates remain atcurrent levels, the Company expects net interest expense in 2009 to decreaseapproximately 10.0% compared to 2008.

 

*Income Before Income Taxes*

 

Income before income taxes decreased $36.7 million, or 44.9%, in 2008 compared to 2007, as a result ofthe factors described above.  The Companybelieves that income before income taxes in 2009 will decrease compared to 2008based on the factors described above.

 

*Income Taxes*

 

Incometaxes decreased $14.1 million, or 46.5%, in 2008 compared to 2007.  The Company provided for taxes at a 36.0%effective rate in 2008 and expects the effective tax rate to be approximately37.0% in 2009.  The decrease in theCompany’s effective tax rate results from the application of tax credits forsales of alternative fuel vehicles to tax-exempt municipalities that claim thetax credits.  During 2009, the Companyexpects to continue to apply for alternative fuel vehicle tax credits for sales ofalternative fuel vehicles to tax-exempt municipalities.  These transactions will increase the Company’sSG&A expense because the Company passes a portion of these credits on tothese tax-exempt municipalities in the form of a discretionary rebate.  As a result, the Company’s effective tax ratemay vary significantly depending on the number of alternative fuel vehiclessold to tax-exempt entities.

 

**Year Ended December 31, 2007 Compared to Year Ended December 31,2006**

 

*Revenues*

 

Revenues decreased $319.7 million, or 13.6%, in 2007 compared to2006.  Sales of new and used trucksdecreased $387.2 million, or 21.7%, in 2007 compared to 2006.  This decrease in new and used truck revenuewas primarily due to decreased sales of new Class 8 trucks due to thediesel engine emissions guidelines that caused a pre-buy of Class 8 trucksin 2006 and resulted in decreased demand for new Class 8 trucks withengines built subsequent to January 1, 2007. Uncertain economic conditionsin the U.S. and decreased freight demand also contributed to decreased demandfor Class 8 trucks in 2007.  Thedecrease was offset by increased sales of medium-duty trucks in 2007 primarilydue to acquisitions, and increased demand for used trucks.

 

Unit sales of new Class 8 trucks decreased 38.7% in 2007 comparedto 2006.  According to A.C.T. Research,the U.S. Class 8 truck market decreased 46.2% in 2007 compared to2006.  In 2007, the Company’s share ofthe U.S. Class 8 truck market increased to 4.6% compared to 4.1% in 2006.

 

Unit sales of newmedium-duty trucks increased 16.8% in 2007 compared to 2006.  Acquisitionscontributed to this increase in unit sales of medium-duty trucks. Overall, new medium-duty truck sales revenue increased approximately$36.4 million, or 14.4%, in 2007 compared to 2006.

 

Unit sales of usedtrucks increased 2.4% in 2007 compared to 2006.  Used truckaverage revenue per unit increased by approximately 7.7%.

 

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Parts and service salesincreased $39.2 million, or 8.9%, in 2007 compared to 2006.  Same store parts and service sales increased$25.7 million, or 5.8%, in 2007 compared to 2006.

 

Sales of new and usedconstruction equipment increased $15.4 million, or 25.9%, in 2007 compared to2006.  During 2007, the Company continuedits concerted effort to increase its market share in the Houston area.  According to data compiled by John Deere,approximately 2,949 units of construction equipment were put into use inour area of responsibility in 2007 compared to 2,585 in 2006.

 

Truck lease and rentalrevenues increased $10.3 million, or 24.7%, in 2007 compared to 2006.  This increase in lease and rental revenue wasconsistent with management’s expectations, considering the increased number ofunits put into service in the rental fleet during the last quarter of2006.  The lease and rental fleetincreased approximately 2.5% to 2,404 units at December 31, 2007 from2,345 units at December 31, 2006.

 

Finance and insurancerevenues increased $2.5 million, or 12.8%, in 2007 compared to 2006.  This increase was due to the Companyarranging financing on a higher percentage of trucks it sold during 2007 thanduring 2006 and to a $1.4 million nonrecurring reserve release related to theCompany’s early repayment charge back program. The Company expected finance income from new Class 8 truck sales todecrease during 2007 compared to 2006 because of the expected decline in new Class 8truck sales.  However, this decrease wasoffset by increases in finance revenue from medium-duty truck sales, thenonrecurring reserve release, and insurance revenue resulting from productexpansion and acquisitions.

 

Other income remainedflat at $8.2 million in 2007 compared to 2006.  Other income consists of the gain on salerealized on trucks from the lease and rental fleet, commissions earned fromJohn Deere for direct manufacturer sales into our area of responsibility,document fees related to truck sales and purchase discounts.

 

*GrossProfit*

 

Gross profit decreased$0.6 million, or 0.2%, in 2007 compared to 2006.  Gross profit as a percentage of salesincreased to 17.3% in 2007 from 15.0% in 2006. This increase was primarily a result of a change in our product salesmix.  Truck sales, a lower margin revenueitem, decreased as a percentage of total revenue to 68.6% in 2007 from 75.7% in2006.  Parts and service revenue, ahigher margin revenue item, increased as a percentage of total revenue to 23.7%in 2007 from 18.8% in 2006.

 

Grossmargins on Class 8 truck sales increased to 8.6% in 2007 from 7.2% in2006.  The Company’s 2007 gross marginson Class 8 trucks increased because a larger percentage of sales were tonon-fleet customers.  The Companyrecorded expense of $3.3 million to increase its new heavy-duty truck valuationallowance in 2007 and $1.3 million in 2006.

 

Grossmargins on medium-duty truck sales decreased to 5.5% in 2007 from 5.7% in2006.  The Company recorded expense of$2.8 million to increase its new medium-duty truck valuation allowance in 2007and $1.6 million in 2006.

 

Grossmargins on used truck sales decreased to 8.6% in 2007 from 9.1% in 2006.  The Company recorded expense of $2.9 millionto increase its used truck valuation allowance in 2007 and $0.4 million in2006.

 

Gross margins from theCompany’s parts, service and body shop operations decreased to 40.9% in 2007from 41.1% in 2006.  Gross profit for theparts, service and body shop departments increased to $196.7 million in 2007from $181.6 million in 2006.

 

Gross margins on new andused construction equipment sales decreased to 11.0% in 2007 from 11.8% in2006.  The lower gross margins for 2007were due to the Company’s efforts to increase its market share in the Houstonarea.  Additionally, gross margins on newand used construction equipment can fluctuate depending on the mix of productssold.

 

Gross margins from trucklease and rental sales decreased to 15.4% in 2007 from approximately 21.9% in2006.    The decrease in the gross marginfrom lease and rental sales was primarily due to the decline in the utilizationof the rental fleet, which is a result of the additions to our rental fleet in 2006.

 

Finance and insurancerevenues and other income, as described above, have limited direct costs and,therefore, contribute a disproportionate share of gross profit.

 

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*Selling, General and Administrative Expenses*

 

Selling, General andAdministrative (“SG&A”) expenses increased $10.6 million, or 4.6%, in 2007compared to 2006.  SG&A expenses as apercentage of sales increased to 11.9% in 2007 from 9.8% in 2006.  In 2007, the selling portion of SG&Aexpenses, which consists primarily of commissions on truck sales, decreased12.6% and the general and administrative portion of SG&A increased 7.3%compared to 2006.

 

*Interest Expense, Net*

 

Net interest expensedecreased $0.8 million, or 5.1%, in 2007 compared to 2006.  In 2007, floor plan interest expensedecreased compared to 2006 primarily due to the decrease in floor plan notespayable.  To take advantage of increasedtruck demand in 2006, the Company maintained higher levels of truck inventorythan it has traditionally maintained, which increased the Company’s floor plannotes payable in 2006 and the first half of 2007.  The decrease in net interest expense in 2007was compounded by earnings on the Company’s investment of available cash.

 

*Income Before Income Taxes*

 

Incomebefore income taxes decreased $12.3 million, or 13.0%, in 2007 compared to 2006, as a result ofthe factors described above.

 

*Income Taxes*

 

Incometaxes decreased $5.0 million, or 14.1%, in 2007 compared to 2006.  The Company provided for taxes at a 37.0%effective rate in 2007.

 

**Liquidityand Capital Resources**

 

The Company’s short-termcash requirements are primarily for working capital, inventory financing, theimprovement and expansion of existing facilities, the implementation of SAPenterprise software and dealership management system, and the construction ofnew facilities.  Historically, these cashrequirements have been met through the retention of profits and borrowingsunder our floor plan arrangements. As of December 31, 2008, the Companyhad working capital of approximately $177.1 million, including $146.4 millionin cash available to fund our operations. The Company believes that these funds are sufficient to meet its short-termand long-term cash requirements.

 

The Company may requestworking capital advances in the minimum amount of $100,000 from GE Capital, itsprimary truck lender.  However, suchworking capital advances may not cause the total indebtedness owed GE Capitalto exceed an amount equal to the wholesale advances made against the thencurrent inventory less any payment reductions then due.  There were no working capital advancesoutstanding under this agreement at December 31, 2008.

 

The Company has a securedline of credit that provides for a maximum borrowing of $8.0 million.  There were no advances outstanding under thissecured line of credit at December 31, 2008, however, $5.9 million waspledged to secure various letters of credit related to self-insurance products,leaving $2.1 million available for future borrowings as of December 31,2008.

 

TheCompany’s long-term real estate debt agreements require the Company to satisfy various financial ratios such asthe debt to worth ratio and the fixed charge coverage ratio.  The Company’s floor plan financing agreementwith GE Capital does not contain financial covenants.  At December 31, 2008, the Company is incompliance with all debt covenants.  TheCompany does not anticipate any breach of the covenants in the foreseeablefuture.

 

Titan Technology Partners is currently implementingSAP enterprise software and a new SAP dealership management system for theCompany.  The total cost of the SAPsoftware and implementation is estimated to be approximately $30.0 million to$32.0 million.  As of December 31,2008, the Company had expenditures of $20.9 million related to the SAPproject.  The Company expects to spendapproximately $7.0 million to $8.0 million related to the SAP project in 2009.

 

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The Company is currently constructing a new facilityfor its Rush Truck Center location in Oklahoma City, Oklahoma at an estimatedcost of $12.0 million.  As of December 31,2008, the Company had expenditures of $3.1 million related to the constructionof the new facility.

 

On July 22, 2008,the Company’s Board of Directors approved a stock repurchase programauthorizing the Company to repurchase, from time to time, up to an aggregate of$20,000,000 of its shares of Class A common stock and/or Class Bcommon stock.  Repurchases will be madeat times and in amounts as the Company deems appropriate and will be madethrough open market transactions, privately negotiated transactions and otherlawful means. The manner, timing and amount of any repurchases will bedetermined by the Company based on an evaluation of market conditions, stockprice and other factors, including those related to the ownership requirementsof its dealership agreements with manufacturers it represents. The stockrepurchase program has no expiration date and may be suspended or discontinuedat any time.  While the stock repurchase programdoes not obligate the Company to acquire any particular amount or class ofcommon stock, the Company anticipates that it will be repurchasing primarilyshares of its Class B common stock. As of December 31, 2008, the Company has repurchased 1,639,843shares of its Class B common stock at a cost of $17.9 million.

 

The Company has no other material commitments forcapital expenditures as of December 31, 2008, except that the Company will continueto purchase vehicles for its lease and rental division and authorize capitalexpenditures for improvement and expansion of its dealership facilities basedon market opportunities.  TheCompany expects to purchase trucks worth approximately $30.0 million for itsleasing operations in 2009, depending on customer demand.

 

**CashFlows**

 

Cashand cash equivalents decreased by $40.6 million during the year ended December 31,2008 and increased by $25.5 million during the year ended December 31,2007.  The major components of thesechanges are discussed below.

 

*CashFlows from Operating Activities*

 

Cash flows from operatingactivities include net income adjusted for non-cash items and the effects ofchanges in working capital.  During 2008,operating activities resulted in net cash provided by operations of $83.1million.  Cash provided by operatingactivities was primarily impacted by the decreased levels of new truckinventory, offset by decreases in accounts payable and accrued expenses.  The majority of truck inventory is financedthrough the Company’s floor plan financing provider.  During 2007, operating activities resulted innet cash provided by operations of $258.7 million.

 

Cash flows from operatingactivities as adjusted for all draws and (payments) on floor plan notes (“AdjustedCash Flows from Operating Activities”) was $88.9 million for the year ended December 31,2008 and $86.0 million for the year ended December 31, 2007.  Generally, all vehicle and constructionequipment dealers finance the purchase of vehicles and construction equipmentwith floor plan borrowings, and our agreements with our floor plan providersrequire us to repay amounts borrowed for the purchase of such vehicles andequipment immediately after they are sold. As a result, changes in floor plan notes payable are directly linked tochanges in vehicle and construction equipment inventory.  However, as reflected in our consolidatedstatements of cash flows, changes in inventory are recorded as cash flows fromoperating activities, and draws and (payments) on floor plan notes are recordedas cash flows from financing activities.

 

The Company’s managementbelieves that information about Adjusted Cash Flows from Operating Activitiesprovides investors with a relevant measure of liquidity and a useful basis forassessing the Company’s ability to fund its activities and obligations fromoperating activities.  Floor plan notespayable is classified as a current liability and, therefore, is included in theworking capital amounts discussed above.

 

Adjusted Cash Flows fromOperating Activities is a non-GAAP financial measure and should be consideredin addition to, and not as a substitute for, cash flows from operatingactivities as reported in our consolidated statements of cash flows inaccordance with U.S. GAAP.  Additionally,this measure may vary among other companies; thus, Adjusted Cash Flows fromOperating Activities as presented herein may not be comparable to similarlytitled non-GAAP financial measures of other companies.  Set forth below is a reconciliation of cashflow from operating activities as reported in our consolidated statement ofcash flows, as if all changes in floor plan notes payable were classified as anoperating activity (in thousands).

 

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| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                     |       |                             |       |   |   |
| Net cash provided by operating activities (GAAP)         |       | $                                | 83,059     |   | $ | 258,701 |   |
| Draws (payments) on floor plan notes payable             |       | 5,864                            |       | (172,701 | ) |
|                                                     |       |                             |       |   |   |
| Adjusted Cash Flows from Operating Activities (Non-GAAP) |       | $                                | 88,923     |   | $ | 86,000 |   |

 

*CashFlows from Investing Activities*

 

Cash flows from investing activities consist primarily of cash used forcapital expenditures and business acquisitions. During 2008, the Company used $111.0 million in investing activities.Capital expenditures consisted of purchases of property and equipment, andimprovements to our existing dealership facilities of $68.2 million.  Of this amount, $31.2 million was used topurchase additional units for the rental and leasing operations during 2008,which was directly offset by borrowings of long-term debt.  The Company expects truck purchases ofapproximately $30.0 million for its leasing operations in 2009 depending oncustomer demand.  During 2009, theCompany expects to make capital expenditures for recurring items such ascomputers, shop equipment and vehicles of approximately $10.0 million, inaddition to $7.0 million to $8.0 million for the SAP software implementationdescribed above.  Cash used in businessacquisitions was $37.4 million during the year ended December 31,2008.  See Note 17 of the Notes toConsolidated Financial Statements for a detailed discussion of theseacquisitions.

 

During 2007, cash used in investing activities was $67.5 million.  Capital expenditures consisted of purchasesof property and equipment, and improvements to our existing dealershipfacilities of $65.3 million. Of this amount, $37.6 million was used to purchaseadditional units for the rental and leasing operations during 2007 which wasdirectly offset by borrowings of long-term debt.  Cash used in business acquisitions was $7.9million during the year ended December 31, 2007.  See Note 17 of the Notes to ConsolidatedFinancial Statements for a detailed discussion of these acquisitions.

 

*CashFlows from Financing Activities*

 

Cash flows used in financing activities include borrowings andrepayments of long-term debt and net payments of floor plan notes payable.  Cash used in financing activities was $12.6million during the year ended December 31, 2008. The Company hadborrowings of long-term debt of $46.7 million and repayments of long-term debtof $43.3 million during the year ended December 31, 2008.   The Company had net draws of floor plannotes payable of $5.9 million during the year ended December 31,2008.  The borrowings of long-term debtare primarily related to the increase in the lease and rental fleet and realestate refinancing.  During the yearended December 31, 2008, the Company repurchased 1,639,843 sharesof Class B common stock at a cost of $17.9 million pursuant to a stockrepurchase program approved by the Company’s Board of Directors.  See Note 13 of the Notes toConsolidated Financial Statements for a detailed discussion of the stockrepurchase program.

 

Cash used in financing activities was $165.7 million during the yearended December 31, 2007. The Company had borrowings of long-term debt of$43.2 million and repayments of long-term debt of $37.9 million during the yearended December 31, 2007.   TheCompany had net payments of floor plan notes payable of $172.7 million duringthe year ended December 31, 2007. The borrowings of long-term debt are primarily related to the increasein the lease and rental fleet and real estate refinancing.

 

Substantially all of the Company’s truck purchases are made on termsrequiring payment within 15 days or less from the date the trucks are invoicedfrom the factory.  Effective August 1,2007, the Company entered into an Amended and Restated Wholesale SecurityAgreement with GE Capital, which can be terminated by GE Capital with 120 daysnotice at any time.  Interest under thefloor plan financing agreement is payable monthly and the rate varies fromLIBOR plus 1.15% to LIBOR plus 1.50% depending on the average aggregatemonth-end balance of debt.  The Companyfinances substantially all of the purchase price of its new truck inventory,and the loan value of its used truck inventory under the floor plan financingagreement with GE Capital, under which GE Capital pays the manufacturerdirectly with respect to new trucks. The Company makes monthly interestpayments to GE Capital on the amount financed, but is not required to commenceloan principal repayments on any vehicle until such vehicle has been floor plannedfor 12 months or is sold.

 

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The floor plan financingagreement allows for prepayments and working capital advances with monthlyadjustments to the interest due on outstanding advances.  On December 31, 2008,the Company had approximately $266.0 million outstanding under its floor planfinancing agreement with GE Capital.  In connection with the Amended andRestated Wholesale Agreement with GE Capital, the Company executed a ContinuingGuaranty in favor of GE Capital to a maximum principal amount of $600 million,plus unpaid interest and reasonable costs of collection.  Except for theprocedures and other terms and conditions set forth in the Amended and RestatedWholesale Agreement, the Company is not aware of any limitation on the Company’sability to access capital through this facility.

 

Substantially allof the Company’s new construction equipment purchases are financed by JohnDeere and JPMorgan Chase (“Chase”).  The agreement with John Deereprovides an interest-free financing period after which time the amount financedis required to be paid in full.  When construction equipment is sold priorto the expiration of the interest-free finance period, the Company is requiredto repay the principal within approximately ten days of the sale. If theconstruction equipment financed by John Deere is not sold within theinterest-free finance period, it is transferred to the Chase floor plan. The Company makes principal payments for sold inventory to Chase on the 15th day of eachmonth. Construction equipment is financed to a maximum of book value under thefloor plan financing agreement with Chase.  The Company makes monthlyinterest payments on the amount financed and is required to commence loanprincipal repayments on construction equipment as book value is reduced. Principal payments for sold used construction equipment are made no later thanthe 15th day of each month following the sale. Theloans are collateralized by a lien on the construction equipment.  TheCompany’s floor plan financing agreement with Chase permits financing of up to$20.0 million in construction equipment and expires in June 2009.  OnDecember 31,2008, the Company had $3.7 million outstanding under its floor plan financingagreement with John Deere and $13.0 million outstanding under its floor planfinancing agreement with Chase.

 

**Cyclicality**

 

The Company’s business is dependent on a number of factors relating togeneral economic conditions, including fuel prices, interest rate fluctuations,credit availability, economic recessions, environmental and other governmentregulations and customer business cycles. Unit sales of new trucks havehistorically been subject to substantial cyclical variation based on thesegeneral economic conditions. According to data published by A.C.T. Research, inrecent years total U.S. retail sales of new Class 8 trucks have rangedfrom a low of approximately 140,000 in 2001 and 2008 to a high of approximately291,000 in 2006.  Through geographicexpansion, concentration on higher margin parts and service operations anddiversification of its customer base, the Company believes it can reduce thenegative impact on the Company’s earnings of adverse general economicconditions or cyclical trends affecting the heavy-duty truck industry.

 

**Effects of Inflation**

 

TheCompany believes that the relatively moderate rates of inflation over the lastfew years have not had a significant impact on revenues or profitability. TheCompany does not expect inflation to have any near-term material effects on thesale of its products and services.

 

**Off-Balance SheetArrangements**

 

TheCompany does not have any obligation under any transaction, agreement or othercontractual arrangement to which an entity unconsolidated with the Company is aparty, that has or is reasonably likely to have a material effect on theCompany’s financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources that is material to investors.

 

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**Contractual Obligations**

 

The Company has certain contractual obligations that will impact itsshort and long-term liquidity. At December 31, 2008, such obligations wereas 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) |       | $                          | 209,676    |   | $ | 37,665 |   | $ | 103,214 |   | $ | 60,272 |   | $ | 8,525 |   |
| Capital lease obligations(2)   |       | 16,893                     |       | 4,631 |   | 7,020 |   | 4,490 |   | 752 |   |
| Operating lease obligations(3) |       | 38,130                     |       | 8,074 |   | 12,463 |   | 7,030 |   | 10,563 |   |
| Floor plan debt obligation     |       | 282,702                    |       | 282,702 |   | — |   | — |   | — |   |
| Interest obligations (4)       |       | 39,082                     |       | 20,187 |   | 14,137 |   | 4,486 |   | 272 |   |
| Purchase obligations(5)        |       | 12,131                     |       | 9,947 |   | 1,248 |   | 936 |   | — |   |
| Total                          |       | $                          | 598,614    |   | $ | 363,206 |   | $ | 138,082 |   | $ | 77,214 |   | $ | 20,112 |   |

----

(1)           Refer to Note 8 of Notes to ConsolidatedFinancial Statements.

 

(2)           Refer to Note 11 of Notes toConsolidated Financial Statements. Amounts include interest.

 

(3)           Refer to Note 11 of Notes toConsolidated Financial Statements.

 

(4)           In computing interest expense, theCompany used its weighted average interest rate outstanding on fixed rate debtto estimate its interest expense on fixed rate debt.  The Company used its weighted averagevariable interest rate on outstanding variable rate debt at December 31,2008 and added 0.25 percent per year to estimate its interest expense onvariable rate debt.

 

(5)           Purchase obligations represent non-cancelablecontractual obligations at December 31, 2008.  Our non-cancelable contractual obligationsare related to the construction projection for our Oklahoma City facility andour SAP implementation.

 

# **Item 7A. Quantitative and Qualitative Disclosures about MarketRisk**

# ** **

Market risk represents the risk of loss that may impact the financialposition, results of operations, or cash flows of the Company due to adversechanges in financial market prices, including interest rate risk, and otherrelevant market rate or price risks.

 

The Company is exposed to some market risk through interest rates relatedto our floor plan financingagreements, variable rate debt anddiscount rates related to finance sales. Floor plan borrowings are based on LIBOR and are used to meet workingcapital needs.  As of December 31, 2008, the Company had floor plan borrowings ofapproximately $282.7 million.  Assumingan increase in LIBOR of 100 basis points, annual interest expense couldincrease by approximately $2.8 million. The Company provides all customer financing opportunities to variousfinance providers. The Company receives all finance charges in excess of anegotiated discount rate from the finance providers in the month following thedate of the financing. The negotiated discount rate is variable, thus subjectto interest rate fluctuations. This interest rate risk is mitigated by theCompany’s ability to pass discount rate increases to customers through higherfinancing rates.

 

The Company is also exposed to some market risk through interest ratesrelated to the investment of our current cash and cash equivalents whichtotaled $146.4 million on December 31, 2008.  These funds are generally invested invariable interest rate instruments in accordance with the Company’s investmentpolicy.  As such instruments mature andthe funds are reinvested, we are exposed to changes in market interest rates.This risk is mitigated by management’s ongoing evaluation of the bestinvestment rates available for current and noncurrenthigh quality investments. If market interest rates were to increase or decreaseimmediately and uniformly by 100 basis points, the Company’s annual interestincome could correspondingly increase or decrease by approximately $1.5million.

 

In the past, the Companyinvested in interest-bearing short-term investments consisting ofinvestment-grade auction rate securities classified as available-for-sale.  As a result of the recent liquidity issuesexperienced in the global credit and capital markets, auctions for investmentgrade securities held by the Company have failed.  The auction rate securities continue to payinterest in accordance with the terms of the underlying security; however,liquidity will be limited until there is a successful auction or until suchtime as other markets for these investments develop.

 

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As of December 31, 2008, the Companyholds $7.6 million of auction rate securities with underlying tax-exemptmunicipal bonds with stated maturities of 22 years.  Given the current market conditions in theauction rate securities market, if the Company determines that the fair valueof these securities has temporarily decreased by 10%, the Company’s equitycould correspondingly decrease by approximately $0.8 million.  If it is determined that thefair value of these securities is other-than-temporarily impaired by 10%, theCompany could record a loss on its Consolidated Statements of Income of approximately $0.8 million.  For further discussion of the risks relatedto our auction rate securities, see Note 18 — Investments of the Notes toConsolidated Financial Statements and Item 1A — Risk Factors.

 

TheCompany has not used derivative financialinstruments in our investment portfolio.

 

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**Item 8.  Financial Statements andSupplementary Data**

 
| Report  of Independent Registered Public Accounting Firm                                                        | 41     |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   |
| Consolidated  Balance Sheets as of December 31, 2008 and 2007                                              | 42     |
|                                                                                                            |   |
| Consolidated Statements of Income for the Years Ended  December 31, 2008, 2007 and 2006                    | 43     |
|                                                                                                            |   |
| Consolidated Statements of Shareholders’ Equity for  the Years Ended December 31, 2008, 2007 and 2006 | 44     |
|                                                                                                            |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2008, 2007 and 2006                | 45     |
|                                                                                                            |   |
| Notes to  Consolidated Financial Statements                                                                     | 46     |

 

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Report of Independent Registered Public AccountingFirm

 

The Board of Directorsand Shareholders of Rush Enterprises, Inc.

 

We have audited theaccompanying consolidated balance sheets of Rush Enterprises, Inc. andsubsidiaries (“the Company”) as of December 31, 2008 and 2007, and therelated consolidated statements of income, shareholders’ equity, and cash flowsfor each of the three years in the period ended December 31, 2008.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Rush Enterprises, Inc.and subsidiaries at December 31, 2008 and 2007, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2008, in conformity with U.S. generallyaccepted accounting principles.

 

As discussed in Note 2 tothe financial statements, in 2006 the Company changed its method of accountingfor share based payments and in 2007 the Company changed its method foraccounting for income taxes.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), Rush Enterprises, Inc.’s internal control over financialreporting as of December 31, 2008, based on criteria established inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 10,2009 expressed an unqualified opinion thereon.

 

/s/Ernst & Young LLP

 

San Antonio, Texas

March 10, 2009

 

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#### *RUSHENTERPRISES, INC. AND SUBSIDIARIES*

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Shares and Per Share Amounts)

 
| ** **                                                                                                                                                                                                                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                                                                                                                                                                                             |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                   |       | $                     | 146,411    |   | $ | 187,009 |   |
| Investments                                                                                                                                                                                                                                                                                                                                                 |       | 7,575                 |       | — |   |
| Accounts receivable, net                                                                                                                                                                                                                                                                                                                                    |       | 55,274                |       | 48,781 |   |
| Inventories, net                                                                                                                                                                                                                                                                                                                                            |       | 362,234               |       | 365,947 |   |
| Prepaid expenses and other                                                                                                                                                                                                                                                                                                                                  |       | 3,369                 |       | 1,699 |   |
| Deferred income taxes, net                                                                                                                                                                                                                                                                                                                                  |       | 6,730                 |       | 7,028 |   |
|                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                        |       | 581,593               |       | 610,464 |   |
|                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                                 |       | 332,147               |       | 299,013 |   |
|                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                               |       | 141,904               |       | 120,582 |   |
|                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Other assets, net                                                                                                                                                                                                                                                                                                                                           |       | 1,146                 |       | 1,532 |   |
|                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| **Total assets**                                                                                                                                                                                                                                                                                                                                            |       | $                     | 1,056,790  |   | $ | 1,031,591 |   |
|                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| **Liabilities and shareholders’ equity**                                                                                                                                                                                                                                                                                                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Floor plan notes payable                                                                                                                                                                                                                                                                                                                                    |       | $                     | 282,702    |   | $ | 273,653 |   |
| Current maturities of long-term debt                                                                                                                                                                                                                                                                                                                        |       | 37,665                |       | 33,593 |   |
| Current maturities of capital lease obligations                                                                                                                                                                                                                                                                                                             |       | 3,454                 |       | 4,444 |   |
| Trade accounts payable                                                                                                                                                                                                                                                                                                                                      |       | 31,530                |       | 40,452 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                                            |       | 49,125                |       | 60,517 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                   |       | 404,476               |       | 412,659 |   |
|                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Long-term debt, net of current maturities                                                                                                                                                                                                                                                                                                                   |       | 172,011               |       | 165,352 |   |
| Capital lease obligations, net of current maturities                                                                                                                                                                                                                                                                                                        |       | 11,366                |       | 13,099 |   |
| Deferred income taxes, net                                                                                                                                                                                                                                                                                                                                  |       | 52,896                |       | 40,904 |   |
|                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Shareholders’ equity:                                                                                                                                                                                                                                                                                                                                  |       |                  |       |   |   |
| Preferred stock, par value $.01 per share; 1,000,000 shares  authorized; 0 shares outstanding in 2008 and 2007                                                                                                                                                                                                                                              |       | —                |       | — |   |
| Common stock, par value $.01 per share; 60,000,000 class A  shares and 20,000,000 class B shares authorized; 26,327,734 class A shares  and 12,324,987 class B shares issued and 26,255,974 class A shares and  10,685,144 class B shares outstanding in 2008; 26,070,595 class A shares and  12,265,437 class B shares issued and outstanding in 2007 |       | 386                   |       | 383 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                  |       | 183,818               |       | 178,274 |   |
| Treasury stock, at cost: 1,639,843 shares                                                                                                                                                                                                                                                                                                                   |       | (17,948               | )          | — |   |
| Retained earnings                                                                                                                                                                                                                                                                                                                                           |       | 249,785               |       | 220,920 |   |
|                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Total shareholders’ equity                                                                                                                                                                                                                                                                                                                             |       | 416,041               |       | 399,577 |   |
|                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| **Total liabilities and shareholders’ equity**                                                                                                                                                                                                                                                                                                         |       | $                     | 1,056,790  |   | $ | 1,031,591 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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RUSH ENTERPRISES, INC. ANDSUBSIDIARIES

## CONSOLIDATEDSTATEMENTS OF INCOME

(In Thousands, Except PerShare Amounts)

 
| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                |       |                             |       |   |   |   |   |
| **Revenues:**                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| New and used truck sales            |       | $                                | 1,041,189  |   | $ | 1,393,253 |   | $ | 1,780,418 |   |
| Parts and service                   |       | 478,439                          |       | 480,611 |   | 441,424 |   |
| Construction equipment sales        |       | 62,168                           |       | 74,986 |   | 59,545 |   |
| Lease and rental                    |       | 54,813                           |       | 52,103 |   | 41,776 |   |
| Finance and insurance               |       | 12,291                           |       | 21,663 |   | 19,197 |   |
| Other                               |       | 6,056                            |       | 8,163 |   | 8,163 |   |
|                                |       |                             |       |   |   |   |   |
| Total revenue                       |       | 1,654,956                        |       | 2,030,779 |   | 2,350,523 |   |
|                                |       |                             |       |   |   |   |   |
| **Cost of products sold:**          |       |                             |       |   |   |   |   |
| New and used truck sales            |       | 973,404                          |       | 1,283,993 |   | 1,652,913 |   |
| Parts and service                   |       | 281,902                          |       | 283,912 |   | 259,801 |   |
| Construction equipment sales        |       | 56,095                           |       | 66,737 |   | 52,527 |   |
| Lease and rental                    |       | 46,843                           |       | 44,069 |   | 32,615 |   |
|                                |       |                             |       |   |   |   |   |
| Total cost of products sold         |       | 1,358,244                        |       | 1,678,711 |   | 1,997,856 |   |
|                                |       |                             |       |   |   |   |   |
| **Gross profit**                    |       | 296,712                          |       | 352,068 |   | 352,667 |   |
|                                |       |                             |       |   |   |   |   |
| Selling, general and administrative |       | 228,057                          |       | 240,661 |   | 230,056 |   |
|                                |       |                             |       |   |   |   |   |
| Depreciation and amortization       |       | 15,878                           |       | 14,935 |   | 12,889 |   |
|                                |       |                             |       |   |   |   |   |
| **Operating income**                |       | 52,777                           |       | 96,472 |   | 109,722 |   |
|                                |       |                             |       |   |   |   |   |
| Interest income (expense):          |       |                             |       |   |   |   |   |
| Interest income                     |       | 2,636                            |       | 2,840 |   | 2,162 |   |
| Interest expense                    |       | (10,466                          | )          | (17,749 | ) | (17,880 | ) |
|                                |       |                             |       |   |   |   |   |
| Total interest expense, net         |       | (7,830                           | )          | (14,909 | ) | (15,718 | ) |
|                                |       |                             |       |   |   |   |   |
| Gain on sale of assets, net         |       | 140                              |       | 239 |   | 54 |   |
|                                |       |                             |       |   |   |   |   |
| **Income before taxes**             |       | 45,087                           |       | 81,802 |   | 94,058 |   |
|                                |       |                             |       |   |   |   |   |
| Provision for income taxes          |       | 16,222                           |       | 30,310 |   | 35,272 |   |
|                                |       |                             |       |   |   |   |   |
| **Net income**                      |       | $                                | 28,865     |   | $ | 51,492 |   | $ | 58,786 |   |
|                                |       |                             |       |   |   |   |   |
| **Earnings per common share:**      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                               |       | $                                | 0.76       |   | $ | 1.35 |   | $ | 1.57 |   |
| Diluted                             |       | $                                | 0.75       |   | $ | 1.33 |   | $ | 1.55 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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RUSH ENTERPRISES, INC. ANDSUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY

## (In Thousands)

 
| ** **                                                                          | ** ** | **Common Stock**                   | ** ** | ** **       | ** ** | ** **              | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** **  |
|-------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|--------------|-------------|
| ** **                                                                          | ** ** | **Shares Issued and  Outstanding** | ** ** | **$0.01  Par**   | ** ** | **Additional  Paid-In** | ** ** | **Treasury** | ** ** | **Retained** | ** ** | ** **   | ** **  |
| ** **                                                                          | ** ** | **Class A**                   | ** ** | **Class B** | ** ** | **Value**               | ** ** | **Capital**  | ** ** | **Stock**    | ** ** | **Earnings** | ** **  | **Total** | ** ** |
| ** **                                                                          | ** ** | ** **                         | ** ** | ** **       | ** ** | ** **              | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** **  | ** ** | ** ** |
| **Balance, December 31, 2005**                                                 |       | 25,155                             |       | 11,844           |       | $                       | 247        |         | $          | 162,603      |       | $            | —      |   | $ | 110,770 |   | $ | 273,620 |   |
|                                                                                |       |                               |       |             |       |                    |       |         |       |         |       |         |        |   |   |
| Stock options exercised (including tax benefit of $2,349)                           |       | 392                                |       | 264              |       | 4                       |       | 4,091        |       |         |       |         |        | 4,095 |   |
| Stock-based compensation related to stock options and employee stock  purchase plan |       | —                             |       | —           |       | —                  |       | 2,647        |       |         |       |         |        | 2,647 |   |
| Issuance of common stock under employee stock purchase plan                         |       | 57                                 |       | —           |       | —                  |       | 460          |       |         |       |         |        | 460 |   |
| Net income                                                                          |       | —                             |       | —           |       | —                  |       | —       |       | —       |       | 58,786       |        | 58,786 |   |
|                                                                                |       |                               |       |             |       |                    |       |         |       |         |       |         |        |   |   |
| **Balance, December 31, 2006**                                                 |       | 25,604                             |       | 12,108           |       | 251                     |       | 169,801      |       | —       |       | 169,556      |        | 339,608 |   |
|                                                                                |       |                               |       |             |       |                    |       |         |       |         |       |         |        |   |   |
| Stock options exercised (including tax benefit of $2,239)                           |       | 408                                |       | 157              |       | 4                       |       | 4,459        |       |         |       |         |        | 4,463 |   |
| Stock-based compensation related to stock options and employee stock  purchase plan |       | —                             |       | —           |       | —                  |       | 3,442        |       |         |       |         |        | 3,442 |   |
| Issuance of common stock under employee stock purchase plan                         |       | 59                                 |       | —           |       | —                  |       | 572          |       |         |       |         |        | 572 |   |
| Stock dividend (50%)                                                                |       | —                             |       | —           |       | 128                     |       | —       |       |         |       | (128         | )           | — |   |
| Net income                                                                          |       | —                             |       | —           |       | —                  |       | —       |       | —       |       | 51,492       |        | 51,492 |   |
|                                                                                |       |                               |       |             |       |                    |       |         |       |         |       |         |        |   |   |
| **Balance, December 31, 2007**                                                 |       | 26,071                             |       | 12,265           |       | 383                     |       | 178,274      |       | —       |       | 220,920      |        | 399,577 |   |
|                                                                                |       |                               |       |             |       |                    |       |         |       |         |       |         |        |   |   |
| Stock options exercised (including tax benefit of $791)                             |       | 130                                |       | 15               |       | 2                       |       | 1,295        |       |         |       |         |        | 1,297 |   |
| Stock-based compensation related to stock options and employee stock  purchase plan |       | —                             |       | —           |       | —                  |       | 3,632        |       |         |       |         |        | 3,632 |   |
| Issuance of common stock under employee stock purchase plan                         |       | 55                                 |       | —           |       | 1                       |       | 617          |       |         |       |         |        | 618 |   |
| Common stock repurchases                                                            |       |                               |       |             |       |                    |       |         |       | (17,948      | )          |         |        | (17,948 | ) |
| Net income                                                                          |       | —                             |       | —           |       | —                  |       | —       |       | —       |       | 28,865       |        | 28,865 |   |
|                                                                                |       |                               |       |             |       |                    |       |         |       |         |       |         |        |   |   |
| **Balance, December 31, 2008**                                                 |       | 26,256                             |       | 12,280           | ** ** | **$**                   | **386**    | ** **   | **$**      | **183,818**  | ** ** | **$**        | **(17,948** | **)** | **$** | **249,785** | ** ** | **$** | **416,041** | ** ** |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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RUSH ENTERPRISES, INC. ANDSUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(In Thousands)

 
| ** **                                                                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                          | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                |       |                             |       |   |   |   |   |
| **Cash flows from operating activities:**                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from continuing operations                                                                   |       | $                                | 28,865     |   | $ | 51,492 |   | $ | 58,786 |   |
| Adjustments to reconcile net income to net cash used in operating  activities, net of acquisitions- |       |                             |       |   |   |   |   |
| Depreciation and amortization                                                                       |       | 38,508                           |       | 35,798 |   | 27,074 |   |
| Gain on sale of property and equipment, net                                                         |       | (276                             | )          | (239 | ) | (825 | ) |
| Stock-based compensation expense related to employee stock options  and employee stock purchases    |       | 3,632                            |       | 3,442 |   | 2,647 |   |
| Provision for deferred income tax expense                                                           |       | 9,944                            |       | 7,516 |   | 6,877 |   |
| Excess tax benefits from stock-based compensation                                                   |       | (791                             | )          | (2,239 | ) | (2,349 | ) |
| Change in accounts receivable, net                                                                  |       | (4,821                           | )          | 25,689 |   | (10,133 | ) |
| Change in inventories                                                                               |       | 30,057                           |       | 132,357 |   | (114,380 | ) |
| Change in prepaid expenses and other, net                                                           |       | (1,670                           | )          | 429 |   | (280 | ) |
| Change in trade accounts payable                                                                    |       | (8,922                           | )          | 3,003 |   | 14,039 |   |
| Change in accrued expenses                                                                          |       | (11,467                          | )          | 1,453 |   | 11,682 |   |
|                                                                                                |       |                             |       |   |   |   |   |
| Net cash provided by (used in) operating activities                                                 |       | 83,059                           |       | 258,701 |   | (6,862 | ) |
|                                                                                                |       |                             |       |   |   |   |   |
| **Cash flows from investing activities:**                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of investments                                                                             |       | (355,575                         | )          | — |   | — |   |
| Proceeds from the sale of investments                                                               |       | 348,000                          |       | — |   | — |   |
| Acquisition of property and equipment                                                               |       | (68,160                          | )          | (65,268 | ) | (112,766 | ) |
| Proceeds from the sale of property and equipment                                                    |       | 1,487                            |       | 4,916 |   | 6,333 |   |
| Business acquisitions                                                                               |       | (37,397                          | )          | (7,866 | ) | (36,087 | ) |
| Other                                                                                               |       | 602                              |       | 712 |   | 664 |   |
|                                                                                                |       |                             |       |   |   |   |   |
| Net cash used in investing activities                                                               |       | (111,043                         | )          | (67,506 | ) | (141,856 | ) |
|                                                                                                |       |                             |       |   |   |   |   |
| **Cash flows from financing activities:**                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Payments) draws on floor plan notes payable, net                                                   |       | 5,864                            |       | (172,701 | ) | 120,003 |   |
| Payments on lines of credit, net                                                                    |       | —                           |       | — |   | (2,755 | ) |
| Proceeds from long-term debt                                                                        |       | 46,728                           |       | 43,211 |   | 102,448 |   |
| Payments on long-term debt                                                                          |       | (43,344                          | )          | (37,890 | ) | (44,334 | ) |
| Payments on capital lease obligations                                                               |       | (5,672                           | )          | (3,344 | ) | (2,512 | ) |
| Issuance of shares relating to employee stock options and employee  stock purchase plan             |       | 1,124                            |       | 2,796 |   | 2,206 |   |
| Excess tax benefits from stock-based compensation                                                   |       | 791                              |       | 2,239 |   | 2,349 |   |
| Purchase of treasury stock                                                                          |       | (17,948                          | )          | — |   | — |   |
| Debt issuance costs                                                                                 |       | (157                             | )          | (55 | ) | (198 | ) |
|                                                                                                |       |                             |       |   |   |   |   |
| Net cash provided by (used in) financing activities                                                 |       | (12,614                          | )          | (165,744 | ) | 177,207 |   |
|                                                                                                |       |                             |       |   |   |   |   |
| **Net increase (decrease) in cash and cash  equivalents**                                           |       | (40,598                          | )          | 25,451 |   | 28,489 |   |
|                                                                                                |       |                             |       |   |   |   |   |
| Cash and cash equivalents, beginning of year                                                        |       | 187,009                          |       | 161,558 |   | 133,069 |   |
|                                                                                                |       |                             |       |   |   |   |   |
| Cash and cash equivalents, end of year                                                              |       | $                                | 146,411    |   | $ | 187,009 |   | $ | 161,558 |   |
|                                                                                                |       |                             |       |   |   |   |   |
| **Supplemental disclosure of cash flow  information:**                                              | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid during the year for:                                                                      |       |                             |       |   |   |   |   |
| Interest                                                                                            |       | $                                | 16,605     |   | $ | 23,690 |   | $ | 20,761 |   |
| Income taxes, net of refunds                                                                        |       | $                                | 6,387      |   | $ | 18,716 |   | $ | 31,758 |   |
| Noncash investing and financing activities:                                                         |       |                             |       |   |   |   |   |
| Assets acquired under capital leases                                                                |       | $                                | 2,949      |   | $ | 3,511 |   | $ | 3,339 |   |
| Note payable related to acquisition                                                                 |       | —                           |       | $ | 1,500 |   | — |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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RUSH ENTERPRISES, INC. ANDSUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.       ORGANIZATION AND OPERATIONS:

 

Rush Enterprises, Inc.(the “Company”) was incorporated in 1965 under the laws of the State ofTexas.  The Company now operates a Trucksegment and a Construction Equipment segment. The Truck segment operates a regional network of Rush TruckCenters.  Rush Truck Centers sell trucksmanufactured by Peterbilt, Volvo, GMC, Hino, UD, Ford or Isuzu.  Through its strategically located network ofRush Truck Centers, the Company provides one-stop service for the needs of itscustomers, including retail sales of new and used trucks, aftermarket partssales, service and repair facilities, financing, leasing and rental, andInsurance products.  The Company’s truckcenters are located in areas on or near major highways in Alabama, Arizona,California, Colorado, Florida, Georgia, New Mexico, North Carolina, Oklahoma,Tennessee and Texas. The Construction Equipment segment, formed in 1997,operates John Deere equipment centers in Southeast Texas.  Construction equipment dealership operationsinclude the retail sale of new and used construction equipment, aftermarketparts and service facilities, equipment rentals and the financing of new andused equipment.  See Note 20 of the Notesto Consolidated Financial Statements for segment information.

 

On September 20, 2007, our shareholdersapproved an amendment to our Restated Articles of Incorporation increasing thetotal number of authorized shares of Class A common stock from 40,000,000to 60,000,000 and total number of authorized shares of Class B commonstock from 10,000,000 to 20,000,000.  Onthe same date, our Board of Directors declared a 3-for-2 stock split of the Class Acommon stock and Class B common stock, to be effected in the form of astock dividend.  On October 10,2007, Rush Enterprises, Inc. distributed one additional share of stock forevery two shares of Class A common stock and Class B common stockheld by shareholders of record as of October 1, 2007.  All share and per share data (except parvalue) in this Form 10-K have been adjusted and restated to reflect thestock dividend as if it occurred on the first day of the earliest periodpresented.

 

2.       SIGNIFICANT ACCOUNTING POLICIES:

 

Principlesof Consolidation

 

Theconsolidated financial statements presented herein include the accounts of RushEnterprises, Inc. together with our consolidated subsidiaries.  All significant inter-company balances andtransactions have been eliminated in consolidation.

 

Estimatesin Financial Statements

 

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results may differ from those estimates.

 

Cashand Cash Equivalents

 

Cashand cash equivalents generally consist of cash and other money marketinstruments. The Company considers all highly liquid investments with anoriginal maturity of ninety days or less to be cash equivalents.

 

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Allowancefor Doubtful Receivables and Repossession Losses

 

TheCompany provides an allowance for doubtful receivables and repossession lossesafter considering historical loss experience and other factors that mightaffect the collection of accounts receivable and the ability of customers tomeet their obligations on finance contracts sold by the Company.

 

Inventories

 

Inventories arestated at the lower of cost or market value. Cost is determined by specific identification of new and used truck andconstruction equipment inventory and by the first-in, first-out method fortires, parts and accessories.  Anallowance is provided when it is anticipated that cost will exceed netrealizable value plus a reasonable profit margin.

 

Propertyand Equipment

 

Propertyand equipment are stated at cost and depreciated over their estimated usefullives. Leasehold improvements are amortized over the useful life of theimprovement, or the term of the lease, whichever is shorter. Provision fordepreciation of property and equipment is calculated primarily on astraight-line basis. The Company capitalizes interest on borrowings during theactive construction period of major capital projects. Capitalized interest,when incurred, is added to the cost of underlying assets and is amortized overthe estimated useful life of such assets. The Company did not incur anycapitalized interest related to major capital projects in the periodspresented. The cost, accumulated depreciation and amortization and estimateduseful lives are summarized as follows (in thousands):

 

| ** **                                | ** ** | **2008** | ** ** | **2007** | ** ** | **Estimated Life   (Years)** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|------------------------------|------------|
|                                      |       |     |       |     |       |                         |       |
| Land                                      |       | $        | 44,523     |     | $          | 37,333                       |       | — |   |
| Buildings and improvements                |       | 86,862   |       | 76,350   |       | 31  - 39                     |       |
| Leasehold improvements                    |       | 18,330   |       | 16,712   |       | 2  - 35                      |       |
| Machinery and shop equipment              |       | 27,851   |       | 26,679   |       | 5  - 15                      |       |
| Furniture, fixtures and computers         |       | 26,541   |       | 26,717   |       | 3  -   7           |       |
| Transportation equipment                  |       | 30,670   |       | 28,046   |       | 2  - 15                      |       |
| Lease and rental vehicles                 |       | 189,107  |       | 170,765  |       | 2  -   8           |       |
| Construction in progress                  |       | 32,860   |       | 16,562   |       |                         |       |
| Accumulated depreciation and amortization |       | (124,597 | )          | (100,151 | )          |                         |       |
|                                      |       |     |       |     |       |                         |       |
| Total                                     |       | $        | 332,147    |     | $          | 299,013                      |       |   |   |

 

Asof December 31, 2008, the Company had $14.3 million (net of accumulateddepreciation of $8.0 million) in lease and rental vehicles under variouscapital leases included in property and equipment.  The charge to income resulting from amortizationof these assets recorded under capital leases is included in lease and rentalcost of products sold.

 

Goodwill

 

Goodwillrelated to acquisitions was approximately $141.9 million as of December 31,2008 and $120.6 million as of December 31, 2007.  Goodwill increased $21.4 million in 2008 and$3.5 million in 2007.  Accumulatedamortization of goodwill was approximately $3.8 million at December 31,2008 and December 31, 2007.

 

Goodwillrepresents the excess purchase price over the fair value of net assetsacquired.  The Company applies theprovisions of the Financial Accounting Standards Board’s (the “FASB”) StatementNo. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), in ouraccounting for goodwill.  SFAS 142requires that goodwill and other intangible assets that have indefinite livesnot be amortized but instead be tested at

 

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leastannually by reporting unit for impairment, or more frequently when events orchanges in circumstances indicate that the asset might be impaired.  For indefinite lived intangible assets,impairment is tested by comparing the carrying value of the asset to the fairvalue of the reporting unit, which is the same as the segment to which they areassigned.

 

For its goodwillimpairment tests, the Company determines the fair value of its reporting unitsusing the discounted cash flow method. The discounted cash flow method uses various assumptions and estimatesregarding future revenue, expenses and cash flow projections.  The analysis is based upon availableinformation regarding expected future cash flows of each reporting unit discountedat rates consistent with the cost of capital specific to the reportingunit.  If the carrying amount of thereporting unit exceeds the estimated fair value determined using the discountedcash flow method, then goodwill impairment may be present.

 

Goodwill was tested forimpairment during the fourth quarter of 2008 and no impairment write down wasrequired.  However, the Company cannotpredict the occurrence of certain events that might adversely affect thereported value of goodwill in the future. Such events may include, but are not limited to, strategic decisionsmade in response to economic and competitive conditions or the impact of thecurrent economic environment.

 

OtherAssets

 

Otherassets include the long-term portion of notes receivable of $0.2 million at December 31,2008 and $0.7 million at December 31, 2007.  The Company recognizes interest income onnotes receivable monthly as earned. Accumulated amortization of other assets was approximately $1.0 millionat December 31, 2008 and $0.9 million at December 31, 2007.  The Company annually assesses theappropriateness of the asset valuations of other assets and the relatedamortization period as applicable.

 

Income Taxes

 

Significant management judgment is required to determine the provisionsfor income taxes and to determine whether deferred tax assets will be realizedin full or in part.  Deferred income taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. When it is more likely than not that all or some portion of specificdeferred income tax assets will not be realized, a valuation allowance must beestablished for the amount of deferred income tax assets that are determinednot to be realizable.  The Company has avaluation allowance related to deferred tax assets in certain states.  Accordingly, the facts and financialcircumstances impacting state deferred income tax assets are reviewed quarterlyand management’s judgment is applied to determine the amount of valuationallowance required in any given period.

 

Additionally,despite the Company’s belief that its tax return positions are consistent withapplicable tax law, management believes that certain positions may bechallenged by taxing authorities. Settlement of any challenge can result in no change, a completedisallowance, or some partial adjustment reached through negotiations.

 

The Company adopted FASBInterpretation 48,*Accounting forUncertainty in Income Taxes* (“FIN 48”), effective January 1,2007.  FIN 48 prescribes how a company should recognize, measure, presentand disclose uncertain tax positions that the company has taken or expects totake in its income tax returns.  FIN 48requires that only income tax benefits meeting the “more likely than not”recognition threshold be recognized or continue to be recognized on itseffective date.

 

RevenueRecognition Policies

 

Incomeon the sale of a vehicle or a piece of construction equipment (each a “unit”)is recognized when the seller and customer execute a purchase contract,delivery has occurred and there are no significant uncertainties related tofinancing or collectibility. Finance income related to the sale of a unit isrecognized

 

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overthe period of the respective finance contract, based on the effective interestrate method, if the finance contract is retained by the Company.  During 2008, 2007 and 2006, no financecontracts were retained for any significant length of time by the Company butwere generally sold, with limited recourse, to certain finance companiesconcurrent with the sale of the related unit. Gain or loss is recognized by theCompany upon the sale of such finance contracts to the finance companies, netof a provision for estimated repossession losses and early repayment penalties.Lease and rental income is recognized over the period of the related lease orrental agreement. Parts and services revenue is earned at the time the Companysells the parts to its customers or at the time the Company completes theservice work order related to service provided to the customer’s unit. Paymentsreceived on prepaid maintenance plans are deferred as a component of accruedexpenses and recognized as income when the maintenance is performed.

 

Costof Sales

 

Forthe Company’s new and used truck and construction equipment operations and itsparts operations, cost of sales consists primarily of the Company’s actualpurchase price, less manufacturer’s incentives, for new and used trucks andconstruction equipment and parts. The Company is subject to a chargeback ofmanufacturer incentives for trucks that are not sold to the customer for which theywere ordered.  The Company records aliability for a potential chargeback of manufacturer incentives in itsfinancial statements.  For the Company’sservice and body shop operations, technician labor cost is the primarycomponent of cost of sales. For the Company’s rental and leasing operations,cost of sales consists primarily of depreciation, rent and interest expense onthe lease and rental fleet owned and leased by the Company, and the maintenancecost of the lease and rental fleet. There are no costs of sales associated withthe Company’s finance and insurance revenue or other revenue.

 

Selling,General and Administrative Expenses

 

Selling,general and administrative expenses consist primarily of incentive-basedcompensation for sales, finance and general management personnel, salaries foradministrative personnel and expenses for rent, marketing, insurance,utilities, shipping and handling costs and other general operating purposes.

 

StockBased Compensation

 

The Company accounts forstock-based compensation in accordance with Statement of Financial AccountingStandards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”),which requires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors including grants ofstock options, restricted stock awards and employee stock purchases under theCompany’s Employee Stock Purchase Plan based on estimated fair values.

 

The Company adopted SFAS123(R) using the modified prospective transition method, which requiresthe application of the accounting standard as of January 1, 2006.  The Company’s Consolidated FinancialStatements reflect the impact of SFAS 123(R).

 

SFAS 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The fair value of the portion of the award that is ultimately expectedto vest is recognized as expense over the requisite service periods in the Company’sConsolidated Statements of Income.

 

Stock-based compensationexpense recognized is based on the fair value of the portion of share-basedpayment awards that is ultimately expected to vest during the period.  Stock-based compensation expense recognized inthe Company’s Consolidated Statements of Income for the years ended December 31,2008, 2007 and 2006 included compensation expense for share-based paymentawards granted prior to, but not yet vested as of December 31, 2005, basedon the grant date fair value estimated in accordance with the pro formaprovisions of SFAS 123 and compensation expense for the share-based paymentawards granted subsequent to December 31, 2005, based on the grant datefair value estimated in accordance with the provisions of SFAS 123(R).  In conjunction with the adoption of SFAS123(R), compensation expense for all share-based payment awards is recognizedusing the straight-line single-option method. As stock-based

 

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 compensation expense recognized in theConsolidated Statements of Income is based on awards ultimately expected tovest, it has been reduced for estimated forfeitures.  SFAS 123(R) requires forfeitures to be estimatedat the time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates.

 

The Company uses theBlack-Scholes option-pricing model which was previously used for the Company’spro forma information required under SFAS 123. For additional information, seeNote 12. The Company’s determination of fair value of share-based paymentawards on the date of grant using an option-pricing model is affected by theCompany’s stock price as well as assumptions regarding a number of highlycomplex and subjective variables.  Thesevariables include, but are not limited to, the Company’s expected stock pricevolatility over the term of the awards, and actual and projected stock optionexercise behaviors.  Option-pricingmodels were developed for use in estimating the value of traded options thathave no vesting or hedging restrictions and are fully transferable.  Because the Company’s stock options havecertain characteristics that are significantly different from traded options,and because changes in the subjective assumptions can materially affect theestimated value, in management’s opinion, the existing valuation models may notprovide an accurate measure of the fair value of the Company’s stockoptions.  Although the fair value ofstock options is determined in accordance with SFAS 123(R) using anoption-pricing model, that value may not be indicative of the fair valueobserved in a market transaction between a willing buyer and a willing seller.

 

The following tablereflects the weighted-average fair value of stock options granted during eachperiod using the Black-Scholes option valuation model with the followingweighted-average assumptions used:

 

| ** **                                           | ** ** | **2008**      | ** ** | **2007**      | ** ** | **2006**      | ** ** |
|------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Expected stock volatility                            |       | 35.7%  - 36.7 | %          | 36.7%  - 38.9 | %          | 25.5%  - 32.2 | %          |
| Weighted-average stock volatility                    |       | 36.73         | %          | 38.78         | %          | 26.86         | %          |
| Expected dividend yield                              |       | 0.0           | %          | 0.0           | %          | 0.0           | %          |
| Risk-free interest rate                              |       | 2.41          | %          | 4.66          | %          | 4.69          | %          |
| Expected life (years)                                |       | 5.0           |       | 5.0           |       | 5.0  - 7.0    |       |
| Weighted-average fair value of stock options granted |       | $             | 5.62       |          | $          | 5.66          |       | $ | 4.95 |   |
|                                                      |            |               |            |               |            |               |            |  |  |  |

 

The Company computes itshistorical stock price volatility in accordance with SFAS 123(R).   The risk-free interest rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of grant. The dividend yield assumption is based on the Company’s history andexpectation of dividend payouts.  Theexpected life of stock options represents the weighted-average period the stockoptions are expected to remain outstanding.

 

AdvertisingCosts

 

Advertisingcosts are expensed as incurred. Advertising and marketing expense related to operations was $3.6 millionfor 2008, $4.2 million for 2007 and $3.1 million for 2006. Advertising andmarketing expense is included in selling, general and administrative expense.

 

Accounting for InternalUse Software

 

The American Institute ofCertified Public Accountants issued Statement of Position 98-1, “Accounting forthe Costs of Computer Software Developed or Obtained for Internal Use” (“SOP98-1”) in March 1998.  SOP 98-1 provides guidance on accounting forthe costs of computer software developed or obtained for internal use andidentifies characteristics of internal-use software.  The Company’saccounting policy with respect to accounting for computer software developed orobtained for internal use is consistent with SOP 98-1.  The Company hascapitalized software costs of approximately $20.9 million at December 31,2008, and $11.9 million at December 31, 2007.

 

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New AccountingPronouncements

 

In December 2007,the FASB issued SFAS No. 141(R),**“Business Combinations” (“SFAS 141(R)”),which establishes principles and requirements for how the acquirer:  (a) recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizesand measures the goodwill acquired in the business combination or a gain from abargain purchase; and (c) determines what information to disclose toenable users of the financial statements to evaluate the nature and financialeffects of the business combination.  SFAS 141(R) requires contingentconsideration to be recognized at its fair value on the acquisition date and,for certain arrangements, changes in fair value to be recognized in earningsuntil settled.  SFAS 141(R) also requires acquisition-relatedtransaction and restructuring costs to be expensed rather than treated as partof the cost of the acquisition.  SFAS 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  The Company does not expect the adoption of SFAS 141(R) tohave a significant impact on its consolidated results of operations andfinancial position, but will impact any business combinations that close on or afterJanuary 1, 2009.

 

In June 2008, theFASB issued FASB Staff Position EITF 03-6-1, “Determining Whether InstrumentsGranted in Share-Based Payment Transactions are Participating Securities.” EITF 03-6-1 requires unvested share-based payment awards that containnon-forfeitable rights to dividends or dividend equivalents to be treated as participating securities as definedin EITF Issue No. 03-6, “Participating Securities and the Two-Class Methodunder FASB Statement No. 128,” and, therefore, included in the earningsallocation in computing earnings per share under the two-class method describedin FASB Statement No. 128, “Earnings per Share.”  Upon adoption, all previously reportedearnings per share data should be adjusted retrospectively to conform with therequirements of EITF 03-6-1.  The Companyis required to adopt EITF 03-6-1 starting in 2009.  The Company does notexpect EITF 03-6-1 to have an effect on its consolidated financial statements.

 

3.       SUPPLIER AND CUSTOMER CONCENTRATION:

 

MajorSuppliers and Dealership Agreements

 

TheCompany has entered into dealership agreements with various manufacturers ofvehicles and construction equipment (“Manufacturers”). These agreements arenonexclusive agreements that allow the Company to stock, sell at retail andservice trucks, equipment and products of the Manufacturers in the Company’sdefined market. The agreements allow the Company to use the Manufacturers’names, trade symbols and intellectual property and expire as follows:

 

| ***Distributor*** | *** *** | ***Expiration Dates***                     |
|-------------------|--------------|--------------------------------------------|
| **Peterbilt**     | ** **   | **March 2009  through May 2011** |
| International     |         | May 2013                              |
| Volvo             |         | August 2010                           |
| GMC               |         | October 2010                          |
| Isuzu             |         | Indefinite                                 |
| Hino              |         | December 2009                         |
| UD                |         | September 2009 through Indefinite     |
| Ford              |         | Indefinite                                 |
| Blue Bird         |         | August 2013                           |
| John Deere        |         | Indefinite                                 |

 

Theseagreements, as well as agreements with various other Manufacturers, impose anumber of restrictions and obligations on the Company, including restrictionson a change in control of the Company and the maintenance of certain requiredlevels of working capital. Violation of these restrictions could result in theloss of the Company’s right to purchase the Manufacturers’ products and use theManufacturers’ trademarks.

 

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TheCompany purchases its new Peterbilt vehicles and most of its parts from PACCAR,the maker of Peterbilt trucks and parts, at prevailing prices charged to allfranchised dealers.  Sales of new Peterbilttrucks accounted for approximately 83% of the Company’s new vehicle sales forthe year ended December 31, 2008, and December 31, 2007.

 

TheCompany purchases most of its new construction equipment and parts from JohnDeere at prevailing prices charged to all franchised dealers. Sales of new JohnDeere equipment accounted for approximately 86.6% of the Company’s newequipment sales for the year ended December 31, 2008, and 91.5% of theCompany’s new equipment sales for the year ended December 31, 2007.

 

PrimaryLenders

 

TheCompany purchases its new and used vehicle and construction equipmentinventories with the assistance of floor plan financing programs offered byvarious financial institutions and John Deere. Additional floor plan financing is provided by John Deere pursuant tothe Company’s equipment dealership agreement. These agreements provide that theoccurrence of certain events will be considered events of default. There wereno known events of default as of December 31, 2008. In the event that theCompany’s financing becomes insufficient, or its relationship with the currentprimary lenders terminates, the Company would need to obtain similar financingfrom other sources. Management believes it can obtain additional floor planfinancing or alternative financing if necessary.

 

TheCompany’s debt agreements include certain restrictive covenants. The Companywas in compliance with these and all debt covenants as of December 31,2008.

 

### Concentrations of Credit Risks

###  

Financialinstruments that potentially subject the Company to significant concentrationsof credit risk consist principally of cash and cash equivalents and accountsreceivable. The Company places its cash and cash equivalents with what itconsiders to be quality financial institutions. As of December 31, 2008, the Company had deposits in excess offederal insurance protection totaling approximately $29.6 million.

 

TheCompany controls credit risk through credit approvals and by selling a majorityof its trade receivables without recourse. Concentrations of credit risk with respect to trade receivables arereduced because a large number of geographically diverse customers make up theCompany’s customer base, thus spreading the trade credit risk. A majority ofthe Company’s business, however, is concentrated in the United States heavy-and medium-duty truck and construction equipment markets and relatedaftermarkets.

 

TheCompany generally sells finance contracts it enters into with customers tofinance the purchase of trucks or construction equipment to third parties.  These finance contracts are sold both withand without recourse.  A majority of theCompany’s finance contracts are sold without recourse. The Company provides anallowance for doubtful receivables and a reserve for repossession lossesrelated to finance contracts sold. Historically, the Company’s allowance and reserve have covered lossesinherent in these receivables.

 

4.       ACCOUNTS RECEIVABLE:

 

TheCompany’s accounts receivable, net, consisted of the following (in thousands):

 

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| ** **                                                                 | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                 | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                                                       |       |                  |       |   |   |
| Trade accounts receivable from sale of vehicles and construction equipment |       | $                     | 25,187     |   | $ | 23,284 |   |
| Other trade receivables                                                    |       | 10,390                |       | 6,605 |   |
| Warranty claims                                                            |       | 8,091                 |       | 6,046 |   |
| Other accounts receivable                                                  |       | 12,117                |       | 13,173 |   |
| Less allowance for bad debt and warranty receivable                        |       | (511                  | )          | (327 | ) |
|                                                                       |       |                  |       |   |   |
| Total                                                                      |       | $                     | 55,274     |   | $ | 48,781 |   |

 

5.       INVENTORIES:

 

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

 
| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                        |       |                  |       |   |   |
| New vehicles                |       | $                     | 233,712    |   | $ | 223,444 |   |
| Used vehicles               |       | 23,081                |       | 28,646 |   |
| New construction equipment  |       | 17,854                |       | 18,243 |   |
| Used construction equipment |       | 321                   |       | 606 |   |
| Parts and accessories       |       | 87,883                |       | 95,019 |   |
| Other                       |       | 5,182                 |       | 5,058 |   |
| Less allowance              |       | (5,799                | )          | (5,069 | ) |
|                        |       |                  |       |   |   |
| Total                       |       | $                     | 362,234    |   | $ | 365,947 |   |

 

6. VALUATION ACCOUNTS:

 

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

 
| ** **                                              | ** ** | **Balance Beginning  of Year** | ** ** | **Net Charged to Costs and Expenses** | ** ** | **Acquisitions** | ** ** | **Net Write-Offs** | ** ** | **Balance  End  of Year** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|------------------|------------|--------------------|------------|--------------------------------|------------|
|                                                    |       |                                |       |                                  |       |             |       |               |       |                           |       |
| 2008                                                    |       |                                |       |                                  |       |             |       |               |       |                           |       |
| Reserve for warranty receivable and accounts receivable |       | $                                   | 327        |                                  | $          | 469              |       |               |       | $                              | (285       | ) | $ | 511 |   |
| Reserve for parts inventory                             |       | 1,603                               |       | 933                                   |       | $                | 315        |               | (1,238     | )                              | 1,613      |   |
| Reserve for equipment inventory                         |       | 328                                 |       | 911                                   |       |             |       | (516               | )          | 723                            |       |
| Reserve for truck inventory                             |       | 3,138                               |       | 15,413                                |       |             |       | (15,088            | )          | 3,463                          |       |
|                                                    |       |                                |       |                                  |       |             |       |               |       |                           |       |
| 2007                                                    |       |                                |       |                                  |       |             |       |               |       |                           |       |
| Reserve for warranty receivable and accounts receivable |       | 526                                 |       | 170                                   |       |             |       | (369               | )          | 327                            |       |
| Reserve for parts inventory                             |       | 2,025                               |       | 894                                   |       | 232              |       | (1,548             | )          | 1,603                          |       |
| Reserve for equipment inventory                         |       | 408                                 |       | (31                                   | )          |             |       | (49                | )          | 328                            |       |
| Reserve for truck inventory                             |       | 1,014                               |       | 8,953                                 |       |             |       | (6,829             | )          | 3,138                          |       |
|                                                    |       |                                |       |                                  |       |             |       |               |       |                           |       |
| 2006                                                    |       |                                |       |                                  |       |             |       |               |       |                           |       |
| Reserve for warranty receivable                         |       | 273                                 |       | 676                                   |       |             |       | (480               | )          | 469                            |       |
| Reserve for parts inventory                             |       | 1,448                               |       | 2,183                                 |       | 709              |       | (2,315             | )          | 2,025                          |       |
| Reserve for equipment inventory                         |       | 0                                   |       | 443                                   |       |             |       | (35                | )          | 408                            |       |
| Reserve for truck inventory                             |       | 150                                 |       | 3,223                                 |       |             |       | (2,359             | )          | 1,014                          |       |
|                                                         |            |                                     |            |                                       |            |                  |            |                    |            |                                |            |  |  |  |  |  |

 

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*Allowance for Doubtful Receivables*

 

The Company provides an allowance for uncollectible warrantyreceivables. The Company evaluates the collectibility of its warranty claimsreceivable based on a combination of factors, including aging andcorrespondence with the applicable manufacturer. Management reviews thewarranty claims receivable aging and adjusts the allowance based on historicalexperience. The Company records charge-offs related to warranty receivables onan as-needed basis.  The Company sells amajority of its customer accounts receivable on a non-recourse basis to a thirdparty that is responsible for qualifying the customer for credit at the pointof sale.  If the third party approves thecustomer for credit, then the third party assumes all credit risk related tothe transaction.

 

*Inventory*

 

TheCompany provides a reserve for obsolete and slow moving parts. The reserve isreviewed and, if necessary, adjustments are made on a quarterly basis. TheCompany relies on historical information to support its reserve. Once theinventory is written down, the Company does not adjust the reserve balanceuntil the inventory is sold.

 

Thevaluation for new and used truck and equipment inventory is based on specificidentification. A detail of new and used truck and equipment inventory isreviewed and, if necessary, adjustments to the value of specific units are madeon a quarterly basis.

 

7.       FLOOR PLAN NOTESPAYABLE AND LINES OF CREDIT:

 

Floor Plan Notes Payable

 

Floor plan notes are financing agreements to facilitate the Company’spurchase of new and used trucks and construction equipment. These notes arecollateralized by the inventory purchased and accounts receivable arising fromthe sale thereof. The Company’s floor plan notes have interest rates based onthe prime rate or LIBOR, as defined in the agreements. The interest ratesapplicable to these agreements ranged from approximately 1.75% to 4.75% as of December 31,2008. Amounts borrowed under these agreements are due when the related truck orconstruction equipment inventory (collateral) is sold and the sales proceedsare collected by the Company, or in the case of construction equipment rentals,when the carrying value of the equipment is reduced. These agreements may bemodified, suspended or terminated by the lender as described in Note 3.

 

The Company finances substantially all of the purchase price of its newtruck inventory, and the loan value of its used truck inventory under a floorplan financing agreement with GE Capital, under which GE Capital pays themanufacturer directly with respect to new trucks.  On December 31, 2008, the Company hadapproximately $266.0 million outstanding under its floor plan financingagreement with GE Capital.

 

The Company’s floor plan agreement with Chase is based on the bookvalue of the Company’s construction equipment inventory. As of December 31,2008, the aggregate amount of borrowing capacity with this lender was $20.0 million,with approximately $13.0 million outstanding. Additional amounts areavailable for construction equipment inventory purchases under the Company’sJohn Deere dealership agreement.  At December 31,2008, approximately $3.7 million was outstanding pursuant to the JohnDeere dealership agreement.

 

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Assets pledged as collateral asof December 31, 2008 and 2007 were as follows (in thousands):

 
| ** **                                                                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                              | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Inventories, new and used trucks and construction equipment at cost  based on specific identification, net of allowance |       | $                     | 270,630    |   | $ | 267,472 |   |
| Truck and construction equipment sale related accounts receivable                                                       |       | 25,185                |       | 23,284 |   |
|                                                                                                                    |       |                  |       |   |   |
| Total                                                                                                                   |       | $                     | 295,815    |   | $ | 290,756 |   |
|                                                                                                                    |       |                  |       |   |   |
| Floor plan notes payable related to truck and construction equipment                                                    |       | $                     | 282,702    |   | $ | 273,653 |   |

 

Lines of Credit

 

The Company mayrequest working capital advances in the minimum amount of $100,000 from GECapital, its primary truck lender. However, such working capital advances may not cause the totalindebtedness owed GE Capital to exceed an amount equal to the wholesaleadvances made against the then current inventory less any payment reductionsowed to GE Capital.  There were noworking capital advances outstanding under this agreement at December 31,2008.  The Company has a secured line ofcredit that provides for a maximum borrowing of $8.0 million.  There were no advances outstanding under thissecured line of credit at December 31, 2008, however, $5.9 million waspledged to secure various letters of credit related to self-insurance products,leaving $2.1 million available for future borrowings as of December 31,2008.

 

8.       LONG-TERM DEBT:

 

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

 

| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                              |       |                  |       |   |   |
| Variable interest rate term notes |       | $                     | 18,171     |   | $ | 3,200 |   |
| Fixed interest rate term notes    |       | 191,505               |       | 195,745 |   |
|                              |       |                  |       |   |   |
| Total debt                        |       | 209,676               |       | 198,945 |   |
|                              |       |                  |       |   |   |
| Less- current maturities          |       | (37,665               | )          | (33,593 | ) |
|                              |       |                  |       |   |   |
| Total                             |       | $                     | 172,011    |   | $ | 165,352 |   |

 

Asof December 31, 2008, debt maturities were as follows (in thousands): 

 

| 2009       |   | $      | 37,665  |   |
|------------|--------|--------|---------|--------|
| 2010       |   | 55,510 |    |
| 2011       |   | 47,704 |    |
| 2012       |   | 29,494 |    |
| 2013       |   | 30,778 |    |
| Thereafter |   | 8,525  |    |
|       |   |   |    |
| Total      |   | $      | 209,676 |   |

 

The interest rates on the Company’s variable interest rate notes arebased on LIBOR.  The interest rates onthe notes range from approximately 2.68% to 2.94% on December 31,2008.  Payments on the notes range from$12,578 to $24,667 per month, plus interest. Maturities of these notes range from December 2012 to December 2013.

 

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The Company’s fixed interest rate notes are primarily with financialinstitutions and had interest rates that ranged from approximately 3.66% to8.50% on December 31, 2008. Payments on the notes range from $168 to $76,196 per month, plusinterest.  Maturities of these notesrange from January 2009 to September 2016.

 

The proceeds from the issuance of the notes were used primarily toacquire land, buildings and improvements, transportation equipment and leasingvehicles.  The notes are secured by theassets acquired with the proceeds of such notes.

 

TheCompany’s long-term debt agreements require the Company to satisfy various financial ratios.  At December 31, 2008, the Company is incompliance with all debt covenants.  Wedo not anticipate any breach of the covenants in the foreseeable future.

 

9.       FAIR VALUE OF FINANCIAL INSTRUMENTS:

 

The following methods and assumptions were used by the Company inestimating the fair value of financial instruments at December 31, 2008:

 

Thecarrying value of current assets and current liabilities approximates the fairvalue due to the short maturity of these items.

 

Thefair value of the Company’s long-term debt is based on secondary marketindicators.  Since the Company’s debt isnot quoted, estimates are based on each obligation’s characteristics, includingremaining maturities, interest rate, credit rating, collateral, amortizationschedule and liquidity.  The carryingamount approximates fair value.

 

10.     DEFINED CONTRIBUTIONPLAN:

 

The Company has a defined contribution plan (the “Rush 401K Plan”),which is available to all Company employees and the employees of certainaffiliates. Each employee who has completed 90 days of continuous service isentitled to enter the Rush 401K Plan on the first day of the following month.Participating employees may contribute from 1% to 50% of total grosscompensation. However, certain higher paid employees are limited to a maximumcontribution of 15% of total gross compensation. For the first 10% of anemployee’s contribution, the Company, at its discretion, may contribute anamount equal to 25% of the employees’ contributions for those employees withless 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. TheCompany incurred expenses related to the Rush 401K Plan of approximately $3.4million during the year ended December 31, 2008, $3.6 million during theyear ended December 31, 2007, and $3.1 million during the year ended December 31,2006.

 

The Company currently does not provide any postretirement benefits nordoes it provide any post employment benefits.

 

11.     LEASING ACTIVITIES:

 

VehicleLeases as Lessee

 

TheCompany leases vehicles, as lessee, primarily over periods ranging from one toten years under operating lease and capital lease arrangements. As discussedbelow, these vehicles are then subleased by the Company to customers undervarious agreements.  Future minimumsublease rentals to be received by the Company under non-cancelable subleases,as described below, are $34.0 million. Generally, the Company is required to incur all operating costs and paya minimum rental.  The Company guarantees the residual value ofvehicles under operating lease and capital lease arrangements.  At December 31, 2008, the Companyguaranteed vehicle residual values of $6.9 million under operating leasearrangements and $6.1 million under capital lease arrangements.  Historically, the Company purchases thesevehicles at the end of the lease term and recognizes a gain on the sale of thevehicle.  The residual values are notreflected in the 

 

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futureminimum lease payments for operating leases. Vehicle lease expenses were approximately $4.4 million for the yearended December 31, 2008, $4.8 million for the year ended December 31,2007, and $4.8 million for the year ended December 31, 2006.

 

Futureminimum lease payments under capital and non-cancelable vehicle leases as of December 31,2008, are as follows (in thousands):

 

| ** **                                            | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| 2009                                                  |       | $                   | 4,631      |                  | $          | 3,944 |   |
| 2010                                                  |       | 3,405               |       | 3,263                 |       |
| 2011                                                  |       | 3,615               |       | 2,624                 |       |
| 2012                                                  |       | 3,220               |       | 2,205                 |       |
| 2013                                                  |       | 1,270               |       | 1,453                 |       |
| Thereafter                                            |       | 752                 |       | 908                   |       |
|                                                  |       |                |       |                  |       |
| Total minimum lease payments                          |       | $                   | 16,893     |                  | $          | 14,397 |   |
| Less amount representing interest                     |       | (2,073              | )          |                  |       |
| Present value of net minimum capital lease payments   |       | 14,820              |       |                  |       |
| Less current portion                                  |       | (3,454              | )          |                  |       |
| Obligations under capital leases less current portion |       | $                   | 11,366     |                  |       |   |

 

Customer Vehicle Leases as Lessor

 

A division of the Company leases both owned and leased vehicles tocustomers primarily over periods of one to ten years under operating leasearrangements. These leases require a minimum rental payment and a contingentrental payment based on mileage. Rental income during the year ended December 31,2008 consisted of minimum rental payments of approximately $41.9 million andcontingent rental payments of $6.9 million. Rental income during the year ended December 31, 2007, consisted ofminimum rental payments of approximately $34.2 million and contingent rentalspayments of approximately $5.4 million. Rental income during the year ended December 31, 2006, consisted ofminimum rental payments of approximately $24.7 million and contingent rentalpayments of $4.1 million.   Minimum leasepayments to be received for non-cancelable leases and subleases in effect at December 31,2008, are as follows (in thousands):

 

| 2009       |   | $      | 36,368  |   |
|------------|--------|--------|---------|--------|
| 2010       |   | 31,803 |    |
| 2011       |   | 25,573 |    |
| 2012       |   | 17,966 |    |
| 2013       |   | 9,174  |    |
| Thereafter |   | 3,747  |    |
|       |   |   |    |
| Total      |   | $      | 124,631 |   |

 

Asof December 31, 2008, the Company had $133.6 million (net of accumulateddepreciation of $55.5 million) of lease vehicles included in property andequipment.  As of December 31, 2007,the Company had $131.0 million (net of accumulated depreciation of $39.8million) of lease vehicles included in property and equipment.

 

Other Leases - Land and Buildings

 

The Company leases various assets under operating leases withexpiration dates ranging from January 2009 through November 2027.  Monthly rental payments range fromapproximately $800 per month to $36,926 per month.  Rental expense was $4.8 million for the yearended December 31, 2008, $4.3 million for the 

 

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year ended December 31, 2007, and $4.2 million for the year ended December 31,2006.  Future minimum lease payments undernon-cancelable leases at December 31, 2008, are as follows (in thousands):

 

| 2009       |   | $      | 4,130  |   |
|------------|--------|--------|--------|--------|
| 2010       |   | 3,628  |   |
| 2011       |   | 2,948  |   |
| 2012       |   | 1,833  |   |
| 2013       |   | 1,539  |   |
| Thereafter |   | 9,656  |   |
|       |   |   |   |
| Total      |   | $      | 23,734 |   |

 

12.     STOCK OPTIONS ANDINCENTIVE PLANS:

 

*Employee Stock Purchase Plan*

 

The Company has an Employee Stock Purchase Plan that allows eligibleemployees to contribute up to 10% of their base earnings toward the semi-annualpurchase of the Company’s Class A common stock. The employee’s purchaseprice is 85% of the lesser of the closing price of the Class A commonstock on the first business day or the last business day of the semi-annualoffering period, as reported by The NASDAQ Global Select MarketSM. Employees may purchaseshares having a fair market value of up to $25,000 (measured as of the firstday of each semi-annual offering period) for each calendar year.  Under the Employee Stock Purchase Plan,900,000 shares of the Company’s Class A common stock have been reservedfor issuance.  The Company issued 54,532shares under the Employee Stock Purchase Plan during the year ended December 31,2008 and 58,713 shares during the year ended December 31, 2007.  Of the 2,706 employees eligible toparticipate, 287 were participants in the plan as of December 31, 2008.

 

*Non-Employee Director Stock Option Plan*

 

On May 16, 2006, the Board of Directors and shareholders adoptedthe Rush Enterprises, Inc. 2006 Non-Employee Director Stock Option Plan(the “Director Plan”), reserving 1,500,000 shares of Class A common stockfor issuance upon exercise of any awards granted under the Plan. This DirectorPlan was Amended and Restated on May 20, 2008 to expand the type of awardthat may be granted under the plan to include Class A common stock awards.

 

The Director Plan is designed to attract and retain highly qualifiednon-employee directors.  Historically,each non-employee director received options to purchase 20,000 shares of theCompany’s Class A common stock upon their respective date of appointmentand each year on the date that they are elected or reelected by theshareholders to serve on the Board of Directors.  Each option has a ten year term from thegrant date and vested immediately.  In2008, in lieu of options, each non-employee director received an outright grantof 7,566 shares of the Company’s Class A common stock on the date thatthey were reelected by the shareholders to serve on the Board of Directors. Under the Director Plan, 1,500,000 shares of the Company’s Class Acommon stock have been reserved for issuance. The Company granted 30,264 shares of Class A common stock under theDirector Plan during the year ended December 31, 2008 and 120,000 optionsto purchase Class A common stock under the Director Plan during the yearended December 31, 2007.

 

*Employee Incentive Plans*

 

InMay 2007, the Board of Directors and shareholders adopted the RushEnterprises, Inc. 2007 Long-Term Incentive Plan (the “2007 Incentive Plan”).The 2007 Incentive Plan provides for the grant of stock options (which may benonqualified stock options or incentive stock options for tax purposes), stockappreciation rights issued independent of or in tandem with such options (“SARs”),restricted stock awards and performance awards. The 2007 Incentive Plan replaced the Rush Enterprises, Inc.Long-Term Incentive Plan (“Incentive Plan”) effective May 22, 2007.

 

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The aggregate number of shares of common stock subject to stock optionsor SARs that may be granted to any one participant in any year under the 2007Incentive Plan is 100,000 shares of Class A common stock or 100,000shares of Class B common stock. Each option has a ten year term from the grant date and vests in threeequal annual installments beginning on the third anniversary of the grantdate.  The Company has 2,550,000 sharesof Class A common stock and 450,000 shares of Class B common stockreserved for issuance upon exercise of any awards granted under the Company’s2007 Incentive Plan.  During the yearended December 31, 2008, the Company granted 396,865 options and 73,190restricted stock awards under the 2007 Incentive Plan.  During the year ended December 31, 2007,the Company granted 561,832 options under the Incentive Plan and 37,500 optionsunder the 2007 Incentive Plan.

 

*Valuation and Expense Informationunder SFAS 123(R)*

 

Stock-based compensationexpense related to stock options, restricted stock awards and employee stockpurchases under SFAS 123(R) for the year ended December 31, 2008 was$3.6 million, for the year ended December 31, 2007 was $3.4 million andfor the year ended December 31, 2006 was $2.6 million.

 

Cash received fromoptions exercised and shares purchased under all share-based paymentarrangements was $1.1 million for the year ended December 31, 2008, $2.8million for the year ended December 31, 2007, and $2.2 million for theyear ended December 31, 2006.

 

A summary of the Company’s stockoption activity and related information for the year ended December 31,2008, follows:

 
| ** **                                       | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**        | ** ** | ** **    | ** ** |
|--------------------------------------------------|------------|------------|------------|--------------|------------|---------------------|------------|---------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Average**         | ** ** | ** **    | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | **Average**  | ** ** | **Remaining**       | ** ** | **Aggregate** | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Contractual**     | ** ** | **Intrinsic** | ** ** |
| **Options**                                      | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Life (in Years)** | ** ** | **Value**     | ** ** |
|                                             |       |       |       |         |       |                |       |          |       |
| Balance at January 1, 2008                  |       | 2,606,569  |       | $            | 9.91       |                |       |          |       |   |
| Granted                                          |       | 396,865    |       | 15.53        |       |                |       |          |       |
| Exercised                                        |       | (160,135   | )          | 3.16         |       |                |       |          |       |
| Forfeited                                        |       | (50,329    | )          | 12.82        |       |                |       |          |       |
|                                             |       |       |       |         |       |                |       |          |       |
| Balance at December 31, 2008                |       | 2,792,970  |       | $            | 11.04      |                | 6.89       |          | $          | 2,387,332 |   |
|                                             |       |       |       |         |       |                |       |          |       |
| Vested and exercisable at December 31, 2008 |       | 999,368    |       | $            | 7.72       |                | 5.45       |          | $          | 2,344,646 |   |

----

The aggregate intrinsic value in the preceding table represents thetotal pretax intrinsic value, based on an average of the closing price as of December 31,2008, of the Company’s Class A common stock and Class B common stockof $8.38.  The total intrinsic value ofoptions exercised was $1.7 million during the year ended December 31,2008, $6.1 million during the year ended December 31, 2007, and $6.3million during the year ended December 31, 2006.

 

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A summary of the status of the Company’s non-vested shares as of December 31,2008, and changes during the year ended December 31, 2008, follows:

 

| ** **                           | ** ** | ** **    | ** ** | **Weighted**   | ** ** |
|--------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                           | ** ** | ** **    | ** ** | **Average**    | ** ** |
| ** **                           | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| **Non-vested Shares**                | ** ** | **Shares**    | ** ** | **Fair Value** | ** ** |
|                                 |       |          |       |           |       |
| Non-vested at January 1, 2008   |       | 1,907,978     |       | $              | 4.56       |   |
| Granted                              |       | 396,865       |       | 5.62           |       |
| Vested                               |       | (462,632      | )          | 2.97           |       |
| Forfeited                            |       | (48,609       | )          | 5.11           |       |
|                                 |       |          |       |           |       |
| Non-vested at December 31, 2008 |       | 1,793,602     |       | $              | 5.19       |   |

 

The total fairvalue of options vested was $1.4 million during the year ended December 31,2008, $2.0 million during the year ended December 31, 2007, and $1.6million during the year ended December 31, 2006.

 

*Restricted Stock Awards*

 

The Companygranted restricted stock awards to its employees under the 2007 IncentivePlan and unrestricted stock awards to its non-employee directors under theDirector Plan. Theshares granted to employees carry a legend which restricts theirtransferability for a term of one to three years and are forfeited in the eventthe recipient’s employment or relationship with the Company is terminated priorto the lapse of the restriction.  Thefair value of the restricted stock awards to the Company’s employees isamortized to expense on a straight-line basis over the restricted stock’svesting period.

 

The followingtable presents a summary of the Company’s restricted stock awards outstandingat December 31, 2008:

 

| **Restricted Stock Awards**         | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|
|                                |       |                  |       |                                          |       |
| Outstanding, January 1, 2008   |       | —                |       | $                                             | —     |   |
| Granted                             |       | 103,454               |       | 15.90                                         |       |
| Vested                              |       | (30,264               | )          | 16.52                                         |       |
| Forfeited                           |       | (1,430                | )          | 15.52                                         |       |
|                                |       |                  |       |                                          |       |
| Outstanding, December 31, 2008 |       | 71,760                |       | $                                             | 15.65      |   |

 

The total fair marketvalue of the shares issued upon the vesting of restricted stock awards duringthe year ended December 31, 2008 was $0.5 million.

 

As of December 31,2008, there was $4.2 million of total unrecognized compensation cost related tounvested share-based compensation arrangements granted under the Incentive Planand the 2007 Incentive Plan.  That costis expected to be recognized over a weighted-average period of 2.8 years.

 

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13.     STOCK DIVIDEND AND STOCKREPURCHASE PLAN:

 

*StockDividend*

 

On September 20, 2007, our shareholdersapproved an amendment to our Restated Articles of Incorporation increasing thetotal number of authorized shares of Class A common stock from 40,000,000to 60,000,000 and total number of authorized shares of Class B commonstock from 10,000,000 to 20,000,000.  Onthe same date, our Board of Directors declared a 3-for-2 stock split of the Class Acommon stock and Class B common stock, to be effected in the form of astock dividend. On October 10, 2007, Rush Enterprises, Inc.distributed one additional share of stock for every two shares of Class Acommon stock and Class B common stock held by shareholders of record as ofOctober 1, 2007.  All share and pershare data (except par value) in this Form 10-K have been adjusted andrestated to reflect the stock dividend as if it occurred on the first day ofthe earliest period presented.

 

*Stock Repurchase Plan*

 

On July 22, 2008,the Company’s Board of Directors approved a stock repurchase programauthorizing the Company to repurchase, from time to time, up to an aggregate of$20,000,000 of its shares of Class A common stock and/or Class B commonstock.  Repurchases will be made at timesand in amounts as the Company deems appropriate and will be made through openmarket transactions, privately negotiated transactions and other lawful means.The manner, timing and amount of any repurchases will be determined by theCompany based on an evaluation of market conditions, stock price and otherfactors, including those related to the ownership requirements of itsdealership agreements with manufacturers it represents. The stock repurchaseprogram has no expiration date and may be suspended or discontinued at anytime.  While the stock repurchase programdoes not obligate the Company to acquire any particular amount or class ofcommon stock, the Company anticipates that it will be repurchasing primarilyshares of its Class B common stock.

 

As of December 31,2008, the Company repurchased 1,639,843 shares of Class B common stock ata cost of $17.9 million.  The Company isholding the repurchased shares of the common stock as treasury stock and isaccounting for the treasury stock pursuant to the cost method.  The Company includes treasury stock as acomponent of stockholders’ equity.

 

14.     EARNINGS PER SHARE:

 

Basic earnings per share (“EPS”) were computed by dividing net incomeby the weighted average number of shares of common stock outstanding during theperiod. Diluted EPS differs from basic EPS due to the assumed conversions ofpotentially dilutive options and warrants that were outstanding during theperiod. The Company’s Class A common stockand Class B common stock have equal claims on earnings of theCompany.  The following is a reconciliationof the numerators and the denominators of the basic and diluted per sharecomputations for net income.  Share andper share data for 2006 has been adjusted and restated to reflect the stock dividend discussedabove.

 

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| ** **                                                                                            | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Numerator-                                                                                            |       |       |       |       |       |       |       |
| Numerator for basic and diluted earnings per share-                                                   |       |       |       |       |       |       |       |
| Net income available to common shareholders                                                           |       | $          | 28,865,000 |       | $          | 51,492,000 |       | $ | 58,786,000 |   |
|                                                                                                  |       |       |       |       |       |       |       |
| Denominator-                                                                                          |       |       |       |       |       |       |       |
| Denominator for basic earnings per share, weighted average shares                                     |       | 38,088,687 |       | 38,059,240 |       | 37,475,426 |       |
|                                                                                                  |       |       |       |       |       |       |       |
| Effect of dilutive securities-                                                                        |       |       |       |       |       |       |       |
| Stock options                                                                                         |       | 498,263    |       | 686,477    |       | 413,904    |       |
|                                                                                                  |       |       |       |       |       |       |       |
| Denominator for diluted earnings per share, adjusted weighted average  shares and assumed conversions |       | 38,586,950 |       | 38,745,717 |       | 37,889,330 |       |
|                                                                                                  |       |       |       |       |       |       |       |
| Basic earnings per common share                                                                       |       | $          | 0.76       |       | $          | 1.35       |       | $ | 1.57 |   |
|                                                                                                  |       |       |       |       |       |       |       |
| Diluted earnings per common share and common share equivalents                                        |       | $          | 0.75       |       | $          | 1.33       |       | $ | 1.55 |   |

 

Options to purchase shares of common stock that were outstanding for theyears ended December 31, 2008, 2007 and 2006 that were not included in thecomputation of diluted earnings per share because the exercise prices weregreater than the average market prices of the common shares are as follows:

 

| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Options                        |       | 545,215  |       | 157,500  |       | 393,925  |       |
|                           |       |     |       |     |       |     |       |
| Total anti-dilutive securities |       | 545,215  |       | 157,500  |       | 393,925  |       |

 

15.               INCOME TAXES:

 

Provision for Income Taxes

 

The tax provisions aresummarized as follows (in thousands):

 

| ** **                 | ** ** | **Year  Ended December 31,** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current provision-         |       |                              |       |   |   |   |   |
| Federal                    |       | $                                 | 4,468      |   | $ | 20,516 |   | $ | 26,189 |   |
| State                      |       | 1,805                             |       | 2,278 |   | 2,469 |   |
|                       |       |                              |       |   |   |   |   |
|                       |       | 6,273                             |       | 22,794 |   | 28,658 |   |
|                       |       |                              |       |   |   |   |   |
| Deferred provision-        |       |                              |       |   |   |   |   |
| Federal                    |       | 9,809                             |       | 8,027 |   | 6,173 |   |
| State                      |       | 140                               |       | (511 | ) | 441 |   |
|                       |       |                              |       |   |   |   |   |
|                       |       | 9,949                             |       | 7,516 |   | 6,614 |   |
|                       |       |                              |       |   |   |   |   |
| Provision for income taxes |       | $                                 | 16,222     |   | $ | 30,310 |   | $ | 35,272 |   |

 

The following summarizes the components of deferred tax assets andliabilities included in the balance sheet (in thousands):

 

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| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Current:                              |       |                  |       |   |   |
| Deferred tax assets:                  |       |                  |       |   |   |
| Inventory                             |       | $                     | 2,210      |   | $ | 2,083 |   |
| Accounts receivable                   |       | 139                   |       | 179 |   |
| Capital lease obligations             |       | 1,360                 |       | 1,616 |   |
| Stock options                         |       | 595                   |       | 403 |   |
| Other                                 |       | 2,426                 |       | 2,747 |   |
| Current deferred tax asset            |       | $                     | 6,730      |   | $ | 7,028 |   |
|                                  |       |                  |       |   |   |
| Non-Current:                          |       |                  |       |   |   |
| Deferred tax assets:                  |       |                  |       |   |   |
| Capital lease obligations             |       | $                     | 4,079      |   | $ | 4,849 |   |
| Stock options                         |       | 2,379                 |       | 1,611 |   |
| Other                                 |       | 474                   |       | 622 |   |
|                                  |       | 6,932                 |       | 7,082 |   |
| Deferred tax liabilities:             |       |                  |       |   |   |
| Difference between book and tax basis |       | (59,828               | )          | (47,986 | ) |
|                                  |       |                  |       |   |   |
| Net non-current tax liability         |       | $                     | (52,896    | ) | $ | (40,904 | ) |

 

TheCompany’s various state net operating loss carry forwards expire from 2011through 2021.

 

A reconciliation of taxes based on the federal statutory rates and theprovisions for income taxes are summarized as follows (in thousands):

 

| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Income taxes at the federal statutory rate |       | $                                | 15,781     |   | $ | 28,631 |   | $ | 32,920 |   |
| State income taxes, net of federal benefit |       | 1,236                            |       | 1,148 |   | 1,995 |   |
| Tax effect of permanent differences        |       | (684                             | )          | (143 | ) | 17 |   |
| State tax valuation allowance              |       | —                           |       | — |   | (73 | ) |
| Other, net                                 |       | (111                             | )          | 674 |   | 413 |   |
|                                       |       |                             |       |   |   |   |   |
| Provision for income taxes                 |       | $                                | 16,222     |   | $ | 30,310 |   | $ | 35,272 |   |

 

The Company includedaccruals for unrecognized income tax benefits totaling $1.9 million as acomponent of accrued liabilities as of December 31, 2008 and $2.0 millionas of December 31, 2007.  Theunrecognized tax benefits of $1.9 million at December 31, 2008, ifrecognized, would impact the Company’s effective tax rate.  As of December 31, 2008, the Companyaccrued interest of $185,000 related to unrecognized tax benefits in thecurrent provision for income taxes.  Noamounts were accrued for penalties.

 

The Company does notanticipate a significant change in the amount of unrecognized tax benefits inthe next 12 months.  As of December 31,2008, the tax years ended December 31, 2005, through 2008 remained subjectto examination by tax authorities.  TheU.S. Internal Revenue Service is currently examining the Company’s federalincome tax return for the tax year 2005.

 

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A reconciliation of thechange in the unrecognized tax benefits from January 1, 2007, to December 31,2008, is as follows:

 

 

| Unrecognized tax benefits at January 1, 2007    |   | $         | 1,430,204 |   |
|------------------------------------------------------|--------|-----------|-----------|--------|
| Gross increases – tax positions in prior years  |   | 535,224   |      |
|                                                 |   |      |      |
| Unrecognized tax benefits at December  31, 2007 |   | 1,965,428 |      |
| Gross increases – tax positions in current year |   | 426,590   |      |
| Reductions due to lapse of statute of limitations    |   | (453,334  | )         |
|                                                 |   |      |      |
| Unrecognized tax benefits at December  31, 2008 |   | $         | 1,938,684 |   |

 

16.               COMMITMENTS ANDCONTINGENCIES:

 

The Company is contingently liable to financecompanies for certain notes initiated on behalf of such finance companiesrelated to the sale of trucks and construction equipment.  The majority of finance contracts are soldwithout recourse against the Company. A majority of the Company’s liabilityrelated to finance contracts sold with recourse is generally limited to 5% to20% of the outstanding amount of each note initiated on behalf of the financecompany.  The Company provides for anallowance for repossession losses and early repayment penalties that it may beliable for under finance contracts sold without recourse.

 

The Company is involved invarious 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 claimsor proceedings to which the Company is a party would have a material adverseeffect on the Company’s financial position or results of operations; however,due to the inherent uncertainty of litigation, there can be no assurance thatthe resolution of any particular claim or proceeding would not have a materialadverse effect on the Company’s results of operations for the fiscal period inwhich such resolution occurred.

 

During the second quarterof 2007, the Company renegotiated its contractual obligations with its retailfunding sources regarding early repayment penalties, which occur as a result ofa premature termination of finance contracts sold by the Company.  As aresult of these negotiations, the Company expects to decrease the amount offinance income it will recognize at the time the contract is sold and todecrease the amount of early repayment penalties it will owe its retail fundingsources in the future.

 

In 2006, the Company signed an agreementwith Titan Technology Partners to implement SAP enterprise software and a new SAPdealership management system.  The costof the SAP software and implementation is estimated at $30.0 million to $32.0million, of which $20.9 million was expended at December 31, 2008.

 

17.               ACQUISITIONS:

 

Allof the following acquisitions, unless otherwise noted, were considered businesscombinations accounted for under SFAS 141.

 

In June 2008, the Company acquired certainassets of Capital Bus Sales and Service of Texas, Inc., which included aBlue Bird bus franchise for the majority of Texas.  The Company is selling buses at most RushTruck Centers throughout Texas.  Thetransaction was valued at approximately $5.6 million, with the purchase pricepaid in cash.

 

The Capital Bus Sales andService of Texas, Inc. acquisition was accounted for as a purchase;operations of the business acquired are included in the accompanyingconsolidated financial statements from the date of the acquisition.  Pro forma information is not included becauseCapital Bus Sales and Service of Texas, Inc.’s results of operations wouldnot have a material effect on the Company’s financial statements.  The purchase price was allocated based on thefair values of the assets at the date of acquisition as follows(in thousands):

 

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| Inventories      |   | $3,645 |   |
|------------------|--------|--------|--------|
| Accrued expenses |   | (27    | )      |
| Goodwill         |   | 2,020  |   |
|             |   |   |   |
| Total            |   | $5,638 |   |

 

All of the goodwill acquiredin the Capital Bus Sales and Service of Texas, Inc. acquisition will beamortized over 15 years for tax purposes.

 

In May 2008,the Company acquired certain assets of Peterbilt Carolina, Inc. whichconsisted of a Peterbilt, Hino and Isuzu heavy- and medium-duty truckdealership in Charlotte, North Carolina. The Company is operating the facility as a full-service Rush TruckCenter offering Peterbilt heavy- and medium-duty trucks as well as medium-dutytrucks manufactured by Hino and Isuzu, and parts and service.  The transaction was valued at approximately $13.4million, with the purchase price paid in cash.

 

The operations of PeterbiltCarolina, Inc. are included in the accompanying consolidated financialstatements from the date of the acquisition. Pro forma information is not included because Peterbilt Carolina, Inc.’sresults of operations would not have a material effect on the Company’sfinancial statements.  The purchase pricewas allocated based on the fair values of the assets at the date of acquisitionas follows (in thousands):

 

| Cash                   |   | $      | 1      |   |
|------------------------|--------|--------|--------|--------|
| Inventories            |   | 8,529  |   |
| Property and equipment |   | 99     |   |
| Accrued expenses       |   | (626   | )      |
| Goodwill               |   | 5,383  |   |
|                   |   |   |   |
| Total                  |   | $      | 13,386 |   |

 

All of the goodwill acquiredin the Peterbilt Carolina, Inc. acquisition will be amortized over 15years for tax purposes.

 

In May 2008,the Company executed agreements to acquire the common stock of AdamsInternational Trucks, Inc., an International heavy- and medium-duty truckdealership in Charlotte, North Carolina. The Company is operating the facility as a full-service Rush TruckCenter offering International heavy- and medium-duty trucks, parts and serviceand leasing.  The transaction was valuedat approximately $20.1 million, with the purchase price paid in cash.

 

The operations of Adams International Trucks, Inc. are includedin the accompanying consolidated financial statements from the date of theacquisition.  Pro forma information isnot included because AdamsInternational Trucks, Inc.’s results of operationswould not have a material effect on the Company’s financial statements.  The purchase price was allocated based on thefair values of the assets at the date of acquisition as follows(in thousands):

 

| Cash                     |   | $      | 3,225  |   |
|--------------------------|--------|--------|--------|--------|
| Prepaid expenses         |   | 44     |   |
| Accounts receivable      |   | 1,672  |   |
| Inventories              |   | 6,313  |   |
| Property and equipment   |   | 3,071  |   |
| Other assets             |   | 10     |   |
| Accrued expenses         |   | (2,587 | )      |
| Floor plan notes payable |   | (3,185 | )      |
| Notes payable            |   | (2,379 | )      |
| Goodwill                 |   | 13,918 |   |
|                     |   |   |   |
| Total                    |   | $      | 20,102 |   |

 

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The portion of goodwillrelated to the stock purchase of Adams International Trucks, Inc. will not beamortized for tax purposes, while the portion of goodwill related to theacquisition of the International franchise rights will be amortized over 15years for tax purposes.

 

In addition to the stock and asset purchases describedabove, the Company purchased the real estate of the North Carolina dealershipoperations for $6.2 million.  The realestate transaction was financed by a bank with a $5.0 million note payable.

 

In August 2007, the Company purchased certainassets of San Luis Truck Service Garage, Inc., which consisted of a partsand service center in San Luis Obispo, California.  The Company is operating the facility as a RushTruck Center offering parts and service. The transaction was valued at approximately $0.8 million, with thepurchase price paid in cash.

 

The San Luis Truck ServiceGarage, Inc. acquisition was accounted for as a purchase; operations ofthe business acquired are included in the accompanying consolidated financialstatements from the date of the acquisition. Pro forma information is not included because San Luis Truck ServiceGarage, Inc.’s results of operations would not have a material effect onthe Company’s financial statements.  Thepurchase price was allocated based on the fair values of the assets at the dateof acquisition as follows (in thousands):

 

| Inventories            |   | $      | 200    |   |
|------------------------|--------|--------|--------|--------|
| Property and equipment |   | 36     |   |
| Accounts receivable    |   | 1      |   |
| Accrued expenses       |   | (5     | )      |
| Goodwill               |   | 584    |   |
|                   |   |   |   |
| Total                  |   | $      | 816    |   |

 

All of the goodwill acquired in the San Luis TruckService Garage, Inc. acquisition will be amortized over 15 years for taxpurposes.

 

In March 2007, the Company purchased certainassets of Allen-Jensen, Inc., which consisted of a GMC and Isuzu truckdealership in Waco, Texas.  The Companyis operating the facility as a full-service Rush Truck Center offeringPeterbilt heavy- and medium-duty trucks as well as medium-duty trucksmanufactured by GMC and Isuzu, and parts and service.  The transaction was valued at approximately$6.3 million, with the purchase price paid in cash.

 

The Allen-Jensen, Inc.acquisition was accounted for as a purchase; operations of the businessacquired are included in the accompanying consolidated financial statementsfrom the date of the acquisition.  Proforma information is not included because Allen-Jensen, Inc.’s results ofoperations would not have a material effect on the Company’s financialstatements.  The purchase price wasallocated based on the fair values of the assets at the date of acquisition asfollows (in thousands):

 

| Inventories            |   | $      | 5,570  |   |
|------------------------|--------|--------|--------|--------|
| Property and equipment |   | 47     |   |
| Accounts receivable    |   | 28     |   |
| Accrued expenses       |   | (11    | )      |
| Goodwill               |   | 678    |   |
|                   |   |   |   |
| Total                  |   | $      | 6,312  |   |

 

All of the goodwill acquiredin the Allen-Jensen, Inc. acquisition will be amortized over 15 years fortax purposes.

 

In March 2007, the Company purchasedcertain assets of Advanced Transportation Insurance Services, Inc., aninsurance agency headquartered in Laguna Niguel, California.  In connection with this acquisition, theCompany also purchased the stock of Advance Premium Finance, Inc., apremium finance company 

 

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associated with Advanced TransportationInsurance Services, Inc.  The totaltransaction was valued at approximately $2.1 million, with the purchase pricefinanced with cash of $0.6 million and notes payable of $1.5 million.  Pro forma information is not included becauseAdvanced Transportation Insurance Services, Inc.’s results of operationswould not have a material effect on the Company’s financial statements.  The entire purchase price was allocated togoodwill and $1.6 million of the goodwill will be amortized over 15 years fortax purposes.

 

18.               INVESTMENTS:

 

On a quarterly basis, the Company assesses itsinvestments for impairment.  If theinvestments are deemed to be impaired, the Company determines whether the impairmentis temporary or other than temporary.  Ifthe impairment is deemed to be temporary, the Company records an unrealizedloss in other comprehensive income.  Ifthe impairment is deemed other than temporary, the Company records theimpairment in the Company’s consolidated statement of income.

 

The Company historically invested ininterest-bearing short-term investments primarily consisting ofinvestment-grade auction rate securities classified as available-for-sale andreported at fair value.  These types ofinvestments were designed to provide liquidity through an auction process thatreset the applicable interest rates at predetermined periods ranging from 1 to35 days.  This reset mechanism wasintended to allow existing investors to continue to own their respectiveinterest in the auction rate security or to gain immediate liquidity by sellingtheir interests at par.

 

As a result of the recent liquidity issuesexperienced in the global capital markets, auctions for investment gradesecurities held by the Company have failed. An auction fails when there is insufficient demand.  However, a failed auction does not representa default by the issuer.  The auctionrate securities continue to pay interest in accordance with the terms of theunderlying security; however, liquidity will be limited until there is asuccessful auction or until such time as other markets for these investmentsdevelop.  The Company believes that itsauction rate securities will liquidate within the next twelve months and hasclassified them as a current asset on its consolidated balance sheet.  The Company has the intent and ability tohold these auction rate securities until liquidity returns to the market.  The Company does not believe that the lack ofliquidity relating to its auction rate securities will have a material impacton its ability to fund operations.

 

As of December 31, 2007, the Company did notcarry any short-term investments, as its previous practice had been toliquidate its short-term investments, including auction rate securities nearthe end of each fiscal quarter.  However,as of December 31, 2008, the Company holds $7.6 million of auction ratesecurities with underlying tax-exempt municipal bonds with stated maturities of22 years.  These bonds have credit wrapinsurance and have been rated AAA by credit agencies.

 

The Company believes that the credit quality andfair value of the auction rate securities it holds has not been negativelyimpacted; therefore, no impairment charges have been recorded as of December 31,2008.  As of December 31, 2008, theCompany has valued these investments at fair value, which approximatescost.  The Company used observable inputsto determine fair value, including consideration of broker quotes, the overallquality of the underlying municipality, the credit quality of the insurancecompany, as well as successful subsequent auctions.  Accordingly, the Company has considered thisfair value to be a Level 2 valuation under SFAS No. 157, “Fair Value Measurement.”  If the credit quality of theseinvestments deteriorates, or adverse developments occur in the bond insurancemarket, the Company may be required to record an impairment charge on theseinvestments in the future.

 

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19.               UNAUDITEDQUARTERLY FINANCIAL DATA:

(In thousands, except per share amounts.)

 
| ** **                 | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                 | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| **2008**                   | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
|                       |       |        |       |        |       |        |       |        |       |
| Revenues                   |       | $           | 403,858    |        | $          | 454,718     |       | $           | 413,696    |   | $ | 382,684 |   |
| Gross Profit               |       | 78,179      |       | 74,413      |       | 76,385      |       | 67,735      |       |
| Operating income           |       | 17,359      |       | 11,474      |       | 13,975      |       | 9,969       |       |
| Income before income taxes |       | 15,481      |       | 9,706       |       | 12,167      |       | 7,733       |       |
| Net income                 |       | $           | 9,675      |        | $          | 6,067       |       | $           | 8,000      |   | $ | 5,123 |   |
| Earnings per share:        |       |        |       |        |       |        |       |        |       |
| Basic                      |       | $           | 0.25       |        | $          | 0.16        |       | $           | 0.21       |   | $ | 0.14 |   |
| Diluted                    |       | $           | 0.25       |        | $          | 0.16        |       | $           | 0.21       |   | $ | 0.14 |   |
|                       |       |        |       |        |       |        |       |        |       |
| **2007**                   | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
|                       |       |        |       |        |       |        |       |        |       |
| Revenues                   |       | $           | 531,258    |        | $          | 519,404     |       | $           | 521,598    |   | $ | 458,519 |   |
| Gross Profit               |       | 89,496      |       | 91,725      |       | 89,741      |       | 81,106      |       |
| Operating income           |       | 25,446      |       | 25,511      |       | 24,192      |       | 21,323      |       |
| Income before income taxes |       | 21,006      |       | 21,046      |       | 20,839      |       | 18,911      |       |
| Net income                 |       | $           | 13,024     |        | $          | 13,048      |       | $           | 13,128     |   | $ | 12,292 |   |
| Earnings per share:        |       |        |       |        |       |        |       |        |       |
| Basic                      |       | $           | 0.34       |        | $          | 0.34        |       | $           | 0.34       |   | $ | 0.32 |   |
| Diluted                    |       | $           | 0.34       |        | $          | 0.34        |       | $           | 0.34       |   | $ | 0.32 |   |

 

20.               SEGMENTS:

 

TheFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 131, “Disclosures about Segments of an Enterprise andRelated Information” (“SFAS 131”). This statement requires that publicbusiness enterprises report certain information about operating segments incomplete sets of financial statements of the enterprise and in condensedfinancial statements of interim periods issued to shareholders. It alsorequires that public business enterprises report certain information abouttheir products and services, the geographic areas in which they operate, andtheir major customers.

 

TheCompany currently has two reportable business segments: the Truck segment andthe Construction Equipment segment. The Truck segment operates a regionalnetwork of truck centers that provide an integrated one-stop source for thetrucking needs of its customers, including retail sales of new and used heavy-and medium-duty trucks; aftermarket parts, service and body shop facilities;and a wide array of financial services, including the financing of new and usedtruck purchases, insurance products and truck leasing and rentals. TheConstruction Equipment segment operates a full-service John Deere dealership thatserves the Houston, Texas area. Construction Equipment dealership operations include the retail sale ofnew and used construction equipment, aftermarket parts and service facilities,equipment rentals, and the financing of new and used construction equipment.

 

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

 

TheCompany accounts for intersegment sales and transfers as if the sales ortransfers were to third parties, that is, at current market prices. There wereno material intersegment sales during the years ended December 31, 2008,2007 and 2006.

 

TheCompany’s reportable segments are strategic business units that offer differentproducts and services. They are managed separately because each business unitrequires different technology and marketing 

 

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strategies.Business units were maintained through expansion and acquisitions. Thefollowing table contains summarized information about reportable segment profitor loss and segment assets for the years ended December 31, 2008, 2007 and2006 (in thousands):

 
| ** **                       | ** ** | ** **  | ** ** | **Construction** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------|------------|-------------|------------|------------------|------------|------------|------------|------------|------------|
| ** **                       | ** ** | **Truck**   | ** ** | **Equipment**    | ** ** | **All**    | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Segment** | ** ** | **Segment**      | ** ** | **Other**  | ** ** | **Totals** | ** ** |
| **2008**                         | ** ** | ** **  | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues from external customers |       | $           | 1,553,298  |             | $          | 83,763     |       | $          | 17,895     |   | $ | 1,654,956 |   |
| Interest income                  |       | 2,636       |       | —           |       | —     |       | 2,636      |       |
| Interest expense                 |       | 9,359       |       | 600              |       | 507        |       | 10,466     |       |
| Depreciation and amortization    |       | 14,483      |       | 605              |       | 790        |       | 15,878     |       |
| Segment income before income tax |       | 38,549      |       | 6,045            |       | 493        |       | 45,087     |       |
| Segment assets                   |       | 1,000,470   |       | 29,570           |       | 26,750     |       | 1,056,790  |       |
| Goodwill                         |       | 135,191     |       | 4,075            |       | 2,638      |       | 141,904    |       |
| Expenditures for segment assets  |       | 79,938      |       | 323              |       | 312        |       | 80,573     |       |
|                             |       |        |       |             |       |       |       |       |       |
| **2007**                         | ** ** | ** **  | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues from external customers |       | $           | 1,914,897  |             | $          | 97,130     |       | $          | 18,752     |   | $ | 2,030,779 |   |
| Interest income                  |       | 2,840       |       | —           |       | —     |       | 2,840      |       |
| Interest expense                 |       | 16,324      |       | 860              |       | 565        |       | 17,749     |       |
| Depreciation and amortization    |       | 13,665      |       | 558              |       | 712        |       | 14,935     |       |
| Segment income before income tax |       | 71,736      |       | 8,527            |       | 1,539      |       | 81,802     |       |
| Segment assets                   |       | 973,434     |       | 30,494           |       | 27,663     |       | 1,031,591  |       |
| Goodwill                         |       | 113,869     |       | 4,075            |       | 2,638      |       | 120,582    |       |
| Expenditures for segment assets  |       | 70,363      |       | 1,022            |       | 592        |       | 71,977     |       |
|                             |       |        |       |             |       |       |       |       |       |
| **2006**                         | ** ** | ** **  | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues from external customers |       | $           | 2,254,123  |             | $          | 77,816     |       | $          | 18,584     |   | $ | 2,350,523 |   |
| Interest income                  |       | 2,162       |       | —           |       | —     |       | 2,162      |       |
| Interest expense                 |       | 16,697      |       | 830              |       | 353        |       | 17,880     |       |
| Depreciation and amortization    |       | 12,056      |       | 367              |       | 466        |       | 12,889     |       |
| Segment income before income tax |       | 86,116      |       | 5,624            |       | 2,318      |       | 94,058     |       |
| Segment assets                   |       | 1,084,343   |       | 22,914           |       | 21,153     |       | 1,128,410  |       |
| Goodwill                         |       | 112,535     |       | 4,075            |       | 461        |       | 117,071    |       |
| Expenditures for segment assets  |       | 109,938     |       | 443              |       | 5,724      |       | 116,105    |       |

 

Revenuesfrom segments below the quantitative thresholds are attributable to threeoperating segments of the Company. Those segments include a tire retailingcompany, an insurance company and a hunting lease operation. None of thosesegments has ever met any of the quantitative thresholds for determiningreportable segments.

 

**Item 9.Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

 

There were no changes or disagreements on anymatters of accounting principles or financial statement disclosure between theCompany and its independent auditors during the two most recent fiscal years orany subsequent interim period.

 

**Item 9A.  Controls and Procedures**

 

*Evaluation of Disclosure Controls andProcedures*

 

In accordance with Exchange Act Rules 13a-15and 15d-15, we carried out an evaluation, under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer 

 

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concluded that our disclosure controls andprocedures were effective as of December 31, 2008, to provide reasonableassurance that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

*Changesin Internal Control Over Financial Reporting*

 

There were no changes in the Company’s internalcontrol over financial reporting that occurred during the quarter ended December 31,2008 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

*Management’s Report on Internal Control overFinancial Reporting*

 

The Company’s management is responsible forestablishing and maintaining adequate internal control over financial reportingfor the Company.  The Company’s internalcontrol over financial reporting is a process designed under the supervision ofthe Company’s Chief Executive Officer and Chief Financial Officer to providereasonable assurance regarding the reliability of financial reporting and thepreparation of the Company’s financial statements for external purposes inaccordance with generally accepted accounting principles.

 

As of December 31, 2008, management assessed theeffectiveness of the Company’s internal control over financial reporting basedon the criteria for effective internal control over financial reportingestablished in “Internal Control — Integrated Framework,” issued by theCommittee of Sponsoring Organizations (COSO) of the Treadway Commission. Basedon the assessment, management determined that the Company maintained effectiveinternal control over financial reporting as of December 31, 2008, basedon those criteria.

 

Ernst & Young LLP, the independent registeredpublic accounting firm that audited the consolidated financial statements ofthe Company included in this annual report on Form 10-K, has issued anattestation report on the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2008. The report, which expressesunqualified opinions on the effectiveness of the Company’s internal controlover financial reporting as of December 31, 2008, is included in this Item9A under the heading “Attestation Report of Independent Registered PublicAccounting Firm.”

 

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*Attestation Report of IndependentRegistered Public Accounting Firm*

 

**Report of Ernst & Young LLP**

**IndependentRegistered Public Accounting Firm**

**To theBoard of Directors and Shareholders of Rush Enterprises, Inc.**

 

We have audited RushEnterprises, Inc.’s internal control over financial reporting as of December 31,2008, based on criteria established in Internal Control- Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria).  Rush Enterprises, Inc.’smanagement is responsible for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’sReport on Internal Control over Financial Reporting.  Our responsibility is to express an opinionon the company’s internal control over financial reporting based on our audit.

 

We conducted our auditin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk, and performing such other procedures as we considerednecessary in the circumstances.  Webelieve that our audit provides a reasonable basis for our opinion.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, RushEnterprises, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2008, based on theCOSO criteria.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Rush Enterprises, Inc.and subsidiaries as of December 31, 2008 and 2007 and the relatedconsolidated statements of income, shareholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2008 of RushEnterprises, Inc. and subsidiaries and our report dated March 10,2009 expressed an unqualified opinionthereon.

 

/s/ Ernst & Young LLP

 

San Antonio,Texas

March 10,2009

 

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**Item 9B. Other Information**

 

None.

 

**PART III**

 

**Item 10. Directors and Executive Officers of the Registrant**

 

Theinformation called for by Item 10 of Form 10-K is incorporated herein byreference to such information included in the Company’s Proxy Statement for the2009 Annual Meeting of Shareholders.

 

*Code of Ethics*

 

We maintain a code of ethics applicable to ourprincipal executive officer, principal financial officer, principal accountingofficer or controller, and other persons performing similar functions. To viewthis code of ethics free of charge, please visit our website at www.rushenterprises.com(This website address is not intended to function as a hyperlink, and theinformation contained in our website is not intended to be a part of thisfiling). We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-Kregarding an amendment to, or waiver from, a provision of this code of ethics,if any, by posting such information on our website as set forth above.

 

**Item 11. Executive Compensation**

 

Theinformation called for by Item 11 of Form 10-K is incorporated herein byreference to such information included in the Company’s Proxy Statement for the2009 Annual Meeting of Shareholders.

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Shareholder Matters**

 

Theinformation called for by Item 12 of Form 10-K is incorporated herein byreference to such information included in the Company’s Proxy Statement for the2009 Annual Meeting of Shareholders.

 

**Item 13. Certain Relationships and Related Transactions**

 

Theinformation called for by Item 13 of Form 10-K is incorporated herein byreference to such information included in the Company’s Proxy Statement for the2009 Annual Meeting of Shareholders.

 

**Item 14.  Principal Accountant Fees and Services**

 

Theinformation called for by Item 14 of Form 10-K is incorporated herein byreference to such information included in the Company’s Proxy Statement for the2009 Annual Meeting of Shareholders.

 

 

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**PART IV**

 

**Item 15. Exhibits and Financial Statement Schedules**

 

**(a)(1) FinancialStatements**

 

Includedin Item 8 of Part II of this annual report on Form 10-K are thefollowing: Report of Independent Registered Public Accounting Firm;Consolidated Balance Sheets as of December 31, 2008 and 2007; ConsolidatedStatements of Income for the years ended December 31, 2008, 2007 and 2006;Consolidated Statements of Shareholders’ Equity for the years ended December 31,2008, 2007 and 2006; Consolidated Statements of Cash Flows for the years ended December 31,2008, 2007 and 2006; and Notes to Consolidated Financial Statements.

 

**(a)(2) FinancialStatement Schedules**

 

These schedules areomitted as the required information is inapplicable or the information ispresented in the consolidated financial statements or related notes.

 

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**(a)(3) Exhibits**

 

**Index to Exhibits:**

 
| **Exhibit  No.** | ** ** | **Identification of Exhibit**                                                                                                                                                                                                                                                                           |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                    |
| 3.1              |       | Restated Articles of  Incorporation of Rush Enterprises, Inc. (incorporated herein by  reference to Exhibit 3.1 of the Company’s Quarterly Report on  Form 10-Q (File No. 000-20797) for the quarter ended June 30,  2008)                                                |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 3.2              |       | Rush  Enterprises, Inc. Amended and Restated Bylaws (incorporated herein by  reference toExhibit 3.1 of the Company’s Current Report on Form 8-K  (File No. 000-20797) filed December 9, 2008)                                                                            |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 4.1              |       | Specimen  of certificate representing Common Stock (now Class B Common Stock),  $.01 par value, of Rush Enterprises, Inc. (incorporated herein by  reference to Exhibit 4.1 of the Company’s Registration Statement  No. 333-03346 on Form S-1 filed April 10, 1996) |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 4.2              |       | Specimen  of certificate representing Class A Common Stock, $.01 par value, of the  Registrant (incorporated herein by reference to Exhibit 4.1 of the  Company’s Registration Statement onForm 8-A filed July 9, 2002)                                                        |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 10.1             |       | Right  of First Refusal dated April 1, 1996 between Peterbilt Motors Company  and W. Marvin Rush (incorporated herein by reference to Exhibit 10.76 of  the Company’s Registration Statement No. 333-03346 on Form S-1  filed April 10, 1996)                             |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 10.2             |       | Right  of First Refusal dated April 1, 1996 between Peterbilt Motors Company  and Barbara Rush (incorporated herein by reference to Exhibit 10.77 of  the Company’s Registration Statement No. 333-03346 on Form S-1  filed April 10, 1996)                               |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 10.3             |       | Right  of First Refusal dated April 1, 1996 between Peterbilt Motors Company  and W.M. “Rusty” Rush (incorporated herein by reference to Exhibit 10.78  of the Company’s Registration Statement No. 333-03346 on Form S-1  filed April 10, 1996)                |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 10.4             |       | Right  of First Refusal dated April 1, 1996 between Peterbilt Motors Company  and Robin Rush (incorporated herein by reference to Exhibit 10.79 of the  Company’s Registration Statement No. 333-03346 on Form S-1 filed  April 10, 1996)                                 |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 10.5+            |       | Rush  Enterprises, Inc. Long-Term Incentive Plan, as amended (incorporated  herein by reference to Exhibit 4.1 of the Company’s Registration  Statement No. 333-117305 on Form S-8 filed July 12, 2004)                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 10.6+            |       | Form of  Rush Enterprises, Inc. Long-Term Incentive Plan Stock Option Agreement  (incorporated herein by reference to Exhibit 10.85 of the Company’s  Registration Statement No. 333-03346 on Form S-1 filed April 10,  1996)                                        |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 10.7+            |       | Rush  Enterprises, Inc. Amended and Restated 1997 Non-Employee Director Stock  Option Plan, as amended (incorporated herein by reference to  Exhibit 4.3 of the Company’s Registration Statement No. 333-117305  on Form S-8 filed July 12, 2004)                         |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 10.8+            |       | Form of Rush  Enterprises, Inc. 1997 Non-Employee Director Stock Option Agreement (incorporated  herein by reference to Exhibit 4.4 of the Company’s Registration  Statement No. 333-117305 on Form S-8 filed July 12, 2004)                                         |
|             |       |                                                                                                                                                                                                                                                                                                    |
| 10.9+            |       | Rush  Enterprises, Inc. 2004 Employee Stock Purchase Plan, as amended (incorporated  herein by reference to Exhibit 4.1 of the Company’s Registration  Statement No. 333-121355 on Form S-8 filed December 17, 2004)                                                      |

 

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| 10.10+  |   | Rush  Enterprises, Inc. Amended and Restated 2006 Non-Employee Director Stock  Plan (incorporated herein by reference to Appendix A of the Company’s Proxy  Statement filed April 9, 2008)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11+  |   | Form of Rush  Enterprises, Inc. 2006 Non-Employee Director Stock Option Agreement  (incorporated herein by reference to Exhibit 4.4 of the Company’s  Registration Statement No. 333-138556 on Form S-8 filed November 9,  2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.12+  |   | Rush  Enterprises, Inc. 2007 Long-Term Incentive Plan (incorporated herein by  reference to Appendix A to the Company’s Proxy Statement filed April 17,  2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.13*+ |   | Form of Rush  Enterprises Inc. 2007 Long-Term Incentive Plan Restricted Stock Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.14+  |   | Form of Rush  Enterprises Inc. 2007 Long-Term Incentive Plan Stock Option Agreement  (incorporated herein by reference to Exhibit 4.4 of the Company’s  Form S-8 (File No. 333-144821) filed July 24, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.15   |   | Form of  dealer agreement between Peterbilt Motors Company and Rush Truck Centers  (incorporated herein by reference to Exhibit 10.18 of the Company’s  Form 10-K (File  No. 000-20797) for the year ended December 31, 1999)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.16   |   | Amended Restated  Wholesale Security Agreement, dated August 15, 2007, by and among Rush  Truck Centers of Alabama, Inc., Rush Truck Centers of  Arizona, Inc., Rush Truck Centers of California, Inc., Rush Medium  Duty Truck Centers of Colorado, Inc., Rush Truck Centers of  Colorado, Inc., Rush Truck Centers of Florida, Inc., Rush Truck  Centers of Georgia, Inc., Rush Truck Centers of New Mexico, Inc.,  Rush Truck Centers of Oklahoma, Inc., Rush Truck Centers of  Tennessee, Inc., and Rush Truck Centers of Texas, L.P., Rush GMC Truck  Center of El Paso, Inc., Rush GMC Truck Center of Phoenix, Inc.,  Rush GMC Truck Center of San Diego, Inc., Rush GMC Truck Center of  Tucson, Inc. and General Electric Capital Corporation (incorporated  herein by reference to Exhibit 10.1 of the Company’s Current Report on  Form 8-K (File No. 000-20797) filed August 20, 2007)                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.17   |   | First Amendment to  Amended and Restated Wholesale Security Agreement, dated October 3,  2007, by and among Rush Truck Centers of Alabama, Inc., Rush Truck  Centers of Arizona, Inc., Rush Truck Centers of California, Inc.,  Rush Medium Duty Truck Centers of Colorado, Inc., Rush Truck Centers of  Colorado, Inc., Rush Truck Centers of Florida, Inc., Rush Truck  Centers of Georgia, Inc., Rush Truck Centers of New Mexico, Inc.,  Rush Truck Centers of Oklahoma, Inc., Rush Truck Centers of  Tennessee, Inc., and Rush Truck Centers of Texas, L.P., Rush GMC Truck  Center of El Paso, Inc., Rush GMC Truck Center of Phoenix, Inc.,  Rush GMC Truck Center of San Diego, Inc., Rush GMC Truck Center of  Tucson, Inc. and General Electric Capital Corporation (incorporated  herein by reference to Exhibit 10.2 of the Company’s Current Report on  Form 8-K (File No. 000-20797) filed October 3, 2007 ) |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.18+  |   | Form of Indemnity  Agreement (incorporated herein by reference to Exhibit 10.1 of the  Company’s Current Report on Form 8-K (File No. 000-20797) filed  February 27, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.19+  |   | Rush  Enterprises, Inc. Executive Transition Plan (incorporated herein by  reference to Exhibit 10.1 of the Company’s Current Report on  Form 8-K (File No. 000-20797) filed July 25, 2008)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 21.1*   |   | Subsidiaries of the  Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 23.1*   |   | Consent  of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1*   |   | Certification  of Chairman and Chief Executive Officer pursuant to  Rules 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2*++ |   | Certification  of Senior Vice President and Chief Financial Officer pursuant to  Rules 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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| 32.1*++ |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                               |
| 32.2*++ |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

----

*              Filed herewith.

 

+              Management contract orcompensatory plan or arrangement.

 

++                                  This exhibitshall not be deemed “filed” for purposes of Section 18 of the SecuritiesExchange Act of 1934, or otherwise subject to the liability of that section,and shall not be deemed to be incorporated by reference into any filing underthe Securities Act of 1933 or the Securities Exchange Act of 1934.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   | RUSH ENTERPRISES, INC. |                                  |   |
|--------|------------------------|---------------------------------------|--------|
|   |                   |                                  |   |   |
|   | By:                    | /s/ W. M.”RUSTY” RUSH       |   | Date: March 13, 2009 |
|   |                   | W. M. “Rusty” Rush          |   |   |
|   |                   | President and Chief Executive Officer |   |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities on the dates indicated:

 
| **Signature**                    | ** ** | **Capacity**                             | ** ** | **Date**            |
|----------------------------------|------------|------------------------------------------|------------|---------------------|
|                             |       |                                     |       |                |
| /s/ W. MARVIN RUSH               |       | Chairman of the Board and Director       |       | March 13, 2009 |
| W. Marvin Rush                   |       |                                     |       |                |
|                             |       |                                     |       |                |
| /s/ W. M. “RUSTY” RUSH |       | President and Chief Executive Officer,   |       | March 13, 2009 |
| W. M. “Rusty” Rush     |       | Director (Principal Executive Officer)   |       |                |
|                             |       |                                     |       |                |
| /s/ STEVEN L. KELLER             |       | Vice President and                       |       | March 13, 2009 |
| Steven L. Keller                 |       | Chief Financial Officer                  |       |                |
|                             |       | (Principal Financial Accounting Officer) |       |                |
|                             |       |                                     |       |                |
| /s/ THOMAS A. AKIN               |       | Director                                 |       | March 13, 2009 |
| Thomas A. Akin                   |       |                                     |       |                |
|                             |       |                                     |       |                |
| /s/ RONALD J. KRAUSE             |       | Director                                 |       | March 13, 2009 |
| Ronald J. Krause                 |       |                                     |       |                |
|                             |       |                                     |       |                |
| /s/ HAROLD D. MARSHALL           |       | Director                                 |       | March 13, 2009 |
| Harold D. Marshall               |       |                                     |       |                |
|                             |       |                                     |       |                |
| /s/ JAMES C. UNDERWOOD           |       | Director                                 |       | March 13, 2009 |
| James C. Underwood               |       |                                     |       |                |
|                             |       |                                     |       |                |
| /s/ GERALD R. SZCZEPANSKI        |       | Director                                 |       | March 13, 2009 |
| Gerald R. Szczepanski            |       |                                     |       |                |

 

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