Acquisition of Gordon Trucking, Inc.

On November 11, 2013, Heartland Express, Inc. of Iowa (the "Buyer" or the "Borrower"), a wholly owned subsidiary of the Company, in its capacity as guarantor, entered into a Stock Purchase Agreement with Gordon Trucking, Inc., a Washington corporation ("GTI"), the stockholders of GTI (the "Sellers"), and Mr. Larry Gordon, in his capacity as Sellers' Representative. GTI is a truckload carrier headquartered near Seattle, Washington, offering local, regional, and trans-continental freight transportation.

Pursuant to the Stock Purchase Agreement dated November 11, 2013, the Buyer purchased 100% of GTI's issued and outstanding common stock (the "Transaction"). The Buyer paid $285.0 million of total consideration, which was paid in cash, restricted shares of the Company's common stock, and the assumption of certain indebtedness of GTI. The cash portion of the consideration was funded pursuant to a promissory note due November 13, 2013 (two days after closing) to allow for movement of funds given that the closing occurred on a non-banking day. The purchase price remains subject to a post-closing true-up of working capital balances as well as other customary terms related to sellers representations. Up to an additional $20.0 million is payable in an earn-out for performance through 2017. The Stock Purchase Agreement included an election under the Internal Revenue Code Section 338(h)(10). In addition, the Buyer purchased the personal goodwill of Mr. Gordon for $15.0 million pursuant to an Asset Purchase Agreement. This personal goodwill is considered part of the total consideration for the Transaction.

The Stock Purchase Agreement contained customary representations, warranties, covenants, and indemnification provisions. At closing, $24.0 million of the purchase price in the form of the Company's common stock was placed in escrow to secure payment of any post-closing adjustments to the purchase price and to secure the Sellers' indemnification obligations to the Buyer, and $6.0 million of the purchase price in cash was placed in escrow to secure the post-closing working capital adjustment.

The funds to pay the cash consideration payable to the Sellers and Mr. Gordon was funded out of the Company's available cash at the time of the acquisition. The shares issued as part of the purchase price were issued from treasury shares. In connection with the Transaction, the Borrower, the Company, GTI, and the other members the Company's consolidated group entered into an unsecured revolving credit facility in the amount of up to $250.0 million (the "Financing"). Proceeds of the Financing were used in part to repay all of GTI's existing debt shortly after closing of the Transaction. See Note 5 for further details of the Financing.

The results of the acquired business have been included in the consolidated financial statements since the date of acquisition and represented 48.6% of consolidated total assets as of December 31, 2013 and 9.6% of operating revenue for 2013. Acquisition related expenses of $2.2 million are included in the consolidated statement of comprehensive income for the year ended December 31, 2013.

The following unaudited pro forma consolidated results of operations for the years ended December 31, 2013 and 2012 assume that the acquisition of GTI occurred as of January 1, 2012.



	Year ended
	December 31, 2012		December 31, 2013
	(in thousands)
Operating revenue	$	972,340	$	961,525
Net income	64,769		90,821

These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred at the beginning of the periods presented or that may be obtained in the future.

The allocation of the purchase price is detailed in the tables below. The final purchase price allocation remains subject to a post closing working capital adjustment, earn-out amounts achieved (if any), and other adjustments. The goodwill recognized represents expected synergies from combining the operations of the Company with GTI, as well as other intangible assets that did not meet the criteria for separate recognition. All tax goodwill recognized in the Transaction is deductible for tax purposes over 15 years.



ALLOCATION OF PURCHASE PRICE	(in thousands)
Cash paid (before netting $20 million cash acquired)				$	130,900
Value of common stock issued (2.86 million shares)				41,100
Total fair value of consideration transferred (before netting $20 million cash acquired), excluding debt assumed				172,000
Allocated to:
Historical book value of GTI's assets and liabilities	$	92,125
Adjustments to recognize assets and liabilities at acquisition-date fair value:
Property, plant, and equipment	(17,912		)
Other assets	3,450
Liabilities	(18,576		)
Fair value of tangible net assets acquired				59,087
Identifiable intangibles at acquisition-date fair value				19,042
Excess of consideration transferred over the net amount of assets and liabilities recognized, including $13.6 million attributable to the fair value of a potential earn-out obligation (goodwill)				$	93,871

Excess of consideration transferred over the net amount of assets and liabilities recognized, (goodwill), is still subject to final purchase price consideration related to post closing working capital adjustment.

The assets and liabilities associated with GTI were recorded at their fair values as of the acquisition date and the amounts are as follows:



	(in thousands)
Cash and cash equivalents	$	21,485
Accounts receivable	45,679
Other current assets	14,371
Property and equipment	189,409
Other non-current assets	3,916
Intangible assets	19,042
Goodwill	93,871
Total assets	387,773
Accounts payable and accrued expenses	(29,165		)
Insurance accruals	(23,821		)
Long-term debt	(147,942		)
Other accruals	(14,845		)
Total consideration transferred	$	172,000



TOTAL PURCHASE PRICE CONSIDERATION	(in thousands)
Cash paid pursuant to Stock Purchase Agreement	$	115,900
Cash paid pursuant to an Asset Allocation Agreement	15,000
Cash acquired included in historical book value of GTI assets and liabilities	(20,000		)
Net cash paid at closing	$	110,900

Common stock issued (par value of $0.01)	$	41,100
Debt assumption	148,000
	$	300,000

Included in adjustments to recognize assets and liabilities at acquisition-date fair values was a liability of $1.5 million, included in accounts payable and accrued liabilities as of December 31, 2013 representing a working capital adjustment for additional amounts owed to sellers for the cash balance delivered at closing that exceeded the estimated cash balance of $20.0 million paid at closing and debt balance delivered at closing that was less than the estimated debt balance of $148.0 million used in calculating the total purchase price consideration paid at closing.

As part of Stock Purchase Agreement, the Company entered into a contingent consideration agreement with certain previous owners of GTI. The contingent consideration agreement includes various earn-out targets tied to operational performance of GTI as well as the Company over the period of 2014 through 2017. The total potential earn-out is $20.0 million with maximum amounts payable each year as follows:



	(in thousands)
2014	$	6,000
2015	6,000
2016-2017	8,000
	$	20,000

Per the terms of the Stock Purchase Agreement, the sellers will be entitled to any unearned earn-out amounts for 2014 and 2015 if the maximum earn-out target is achieved in either the 2016 or 2017 earn out period. The contingent liability was estimated as of the acquisition date and has been included in the adjustments to liabilities at acquisition-date fair value recorded. Estimated fair value of this contingent liability as of the acquisition date was calculated using unobservable, Level 3 inputs, due to lack of observable market inputs. The valuation of the contingent liability was generated by third party valuation personnel using a Monte Carlo, assuming Geometric Brownian Motion, simulation model to hypothetically replicate the Company's future performance model-based techniques that use significant assumptions not observable in the market including estimated future operating performance of the Company, a risk-free rate, volatility rate, and the underlying time period. As such, the fair value of the contingent liability is subject to change based on actual results of GTI and the Company in future years. The Company may be required to record an operating expense in a future period for any difference in the recorded liability, $13.6 million, included in other long-term liabilities at December 31, 2013 and the potential earn-out maximum payment of $20.0 million based on actual results.