QUARTERLY FINANCIAL INFORMATION

12 Months Ended

Dec. 31, 2014

QUARTERLY FINANCIAL INFORMATION

QUARTERLY FINANCIAL INFORMATION

NOTE W - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

As further described in Note B - “Restatement of Previously Issued Consolidated Financial Statements.” the previously reported financial information for the first two quarters of 2014 and for all fiscal 2013 quarters have been restated.  In lieu of filing amended Quarterly Report on Form 10-Q for the first and second quarter of 2014 and a Quarterly Report on Form 10-Q for the third quarter of 2014, quarterly financial data for 2014 (as restated for the first and second quarter) and 2013 (as restated) is included in this report in the tables that follow.  Amounts are computed independently each quarter, therefore, the sum of the quarterly amounts may not equal the total amount for the respective year due to rounding.

HANGER, INC.

QUARTERLY CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except par value and share amounts)

(Unaudited)

	(As Restated)
	As of March 31, 2014			As of June 30, 2014			As of September 30, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	45,836		$	1,630		$	1,565
Accounts receivable, net of allowance for doubtful accounts of $7,920, $9,078, $10,197 at March 31, June 30 and September 30, 2014, respectively	146,060			159,471			165,787
Inventories	85,783			90,506			86,155
Other current assets	27,466			33,097			46,604
Deferred income taxes	71,569			70,789			70,333
Total current assets	376,714			355,493			370,444
Non-current assets:
Property, plant and equipment, net	120,225			119,677			114,223
Goodwill	702,769			715,010			716,571
Other intangible assets, net	60,352			62,600			60,553
Debt issuance costs, net	8,034			7,572			7,110
Other assets	17,826			18,384			20,055
Total assets	$	1,285,920		$	1,278,736		$	1,288,956
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	21,906		$	24,505		$	25,677
Accounts payable	43,964			45,642			49,658
Accrued expenses and other current liabilities	44,508			47,436			68,118
Accrued interest payable	5,646			2,274			5,950
Accrued compensation related costs	21,417			24,664			35,656
Total current liabilities	137,441			144,521			185,059
Long-term liabilities:
Long-term debt, less current portion	559,096			535,093			511,698
Deferred income taxes	61,640			62,338			62,786
Other liabilities	42,120			44,734			44,150
Total liabilities	800,297			786,686			803,693
Shareholders’ Equity:
Common stock, $.01 par value; 60,000,000 shares authorized, 35,486,033, 35,527,002 and 35,537,528 shares issued and 35,344,879, 35,385,848 and 35,396,374 shares outstanding at March 31, June 30 and September 30, 2014, respectively	355			355			355
Additional paid-in capital	299,384			302,581			304,596
Accumulated other comprehensive loss	(1,020		)	(1,020		)	(1,020		)
Retained earnings	187,560			190,790			181,988
	486,279			492,706			485,919
Treasury stock, at cost 141,154 shares at March 31, June 30 and September 30, 2014, respectively	(656		)	(656		)	(656		)
Total shareholders’ equity	485,623			492,050			485,263
Total liabilities and shareholders’ equity	$	1,285,920		$	1,278,736		$	1,288,956

HANGER, INC.

QUARTERLY CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except par value and share amounts)

(Unaudited)

	(As Restated)
	As of March 31, 2013			As of June 30, 2013			As of September 30, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	6,273		$	2,858		$	1,246
Accounts receivable, net of allowance for doubtful accounts of $4,941, $4,971, $5,837 at March 31, June 30 and September 30, 2013, respectively	139,756			150,276			149,952
Inventories	79,575			81,214			83,293
Other current assets	29,313			28,937			22,861
Deferred income taxes	61,055			64,153			64,209
Total current assets	315,972			327,438			321,561
Non-current assets:
Property, plant and equipment, net	106,249			109,475			113,144
Goodwill	675,451			678,748			679,721
Other intangible assets, net	59,311			58,520			56,906
Debt issuance costs, net	13,169			9,420			8,958
Other assets	16,064			15,872			16,305
Total assets	$	1,186,216		$	1,199,473		$	1,196,595
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	13,229		$	15,652		$	15,437
Accounts payable	36,189			47,798			44,921
Accrued expenses and other current liabilities	40,096			41,605			41,043
Accrued interest payable	6,645			2,351			5,934
Accrued compensation related costs	22,084			25,914			35,304
Total current liabilities	118,243			133,320			142,639
Long-term liabilities:
Long-term debt, less current portion	522,189			505,751			474,068
Deferred income taxes	66,489			65,935			65,906
Other liabilities	37,257			37,744			39,256
Total liabilities	744,178			742,750			721,869
Shareholders’ Equity:
Common stock, $.01 par value; 60,000,000 shares authorized, 34,953,812, 35,062,931 and 35,062,367 shares issued and 34,812,658, 34,921,777 and 34,921,213 shares outstanding at March 31, June 30 and September 30, 2013, respectively	350			352			352
Additional paid-in capital	285,486			288,971			291,455
Accumulated other comprehensive loss	(1,919		)	(1,919		)	(1,919		)
Retained earnings	158,777			169,975			185,494
	442,694			457,379			475,382
Treasury stock, at cost 141,154 shares at March 31, June 30, and September 30, 2013, respectively	(656		)	(656		)	(656		)
Total shareholders’ equity	442,038			456,723			474,726
Total liabilities and shareholders’ equity	$	1,186,216		$	1,199,473		$	1,196,595

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE (LOSS) INCOME

(dollars in thousands, except share and per share amounts)

(Unaudited)

	As Restated
	Three Months Ended			Three Months Ended			Six Months Ended			Three Months Ended			Nine Months Ended			Three Months Ended
	March 31,			June 30,			June 30,			September 30,			September 30,			December 31,
	2014			2014			2014			2014			2014			2014
Net revenue	$	215,917		$	255,574		$	471,491		$	261,699		$	733,190		$	278,910
Material costs	70,572			81,109			151,681			86,238			237,919			86,365
Personnel costs	82,228			88,738			170,966			89,104			260,070			93,516
Other operating costs	32,337			34,291			66,628			34,621			101,249			35,636
General and administrative expenses	19,616			22,545			42,161			21,794			63,955			22,383
Professional accounting and legal fees	1,457			2,600			4,057			20,973			25,030			19,768
Depreciation and amortization	9,307			9,826			19,133			9,818			28,951			9,978
Income (loss) from operations	400			16,465			16,865			(849		)	16,016			11,264
Interest expense, net	6,768			7,063			13,831			7,255			21,086			7,191
(Loss) income from continuing operations before income taxes	(6,368		)	9,402			3,034			(8,104		)	(5,070		)	4,073
(Benefit) provision for income taxes	(22		)	10,832			10,810			(10,054		)	756			1,267
Net (loss) income from continuing operations	(6,346		)	(1,430		)	(7,776		)	1,950			(5,826		)	2,806
(Loss) income from discontinued operations, net of income taxes	(3,621		)	4,661			1,040			(10,751		)	(9,711		)	(6,235		)
Net (loss) income	$	(9,967	)	$	3,231		$	(6,736	)	$	(8,801	)	$	(15,537	)	$	(3,429	)
Other comprehensive loss:
Unrealized loss on SERP, net of tax benefit of $525 for Q4 2014	$	—		$	—		$	—		$	—		$	—		$	(868	)
Total other comprehensive loss	—			—			—			—			—			(868		)
Comprehensive (loss) income	$	(9,967	)	$	3,231		$	(6,736	)	$	(8,801	)	$	(15,537	)	$	(4,297	)
Basic Per Common Share Data
Net (loss) income from continuing operations	$	(0.18	)	$	(0.04	)	$	(0.22	)	$	0.05		$	(0.17	)	$	0.08
Net (loss) income from discontinued operations	(0.10		)	0.13			0.03			(0.30		)	(0.27		)	(0.18		)
Basic (loss) income per share	$	(0.28	)	$	0.09		$	(0.19	)	$	(0.25	)	$	(0.44	)	$	(0.10	)
Shares used to compute basic per common share amounts	35,056,902			35,377,939			35,209,849			35,388,862			35,275,046			35,397,195
Diluted Per Common Share Data
Net (loss) income from continuing operations	$	(0.18	)	$	(0.04	)	$	(0.22	)	$	0.05		$	(0.17	)	$	0.08
Net (loss) income from discontinued operations	(0.10		)	0.13			0.03			(0.30		)	(0.27		)	(0.18		)
Diluted (loss) income per share	$	(0.28	)	$	0.09		$	(0.19	)	$	(0.25	)	$	(0.44	)	$	(0.10	)
Shares used to compute diluted per common share amounts	35,056,902			35,377,939			35,209,849			35,571,188			35,275,046			35,615,092

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(dollars in thousands, except share and per share amounts)

(Unaudited)

	(As Restated)
	Three Months Ended		Three Months Ended			Six Months Ended			Three Months Ended			Nine Months Ended			Three Months Ended
	March 31,		June 30,			June 30,			September 30,			September 30,			December 31,
	2013		2013			2013			2013			2013			2013
Net revenue	$	213,837	$	253,667		$	467,504		$	253,217		$	720,721		$	255,048
Material costs	67,966		77,273			145,239			78,933			224,172			77,831
Personnel costs	77,131		82,836			159,967			82,071			242,038			83,742
Other operating costs	31,223		28,620			59,843			28,526			88,369			27,398
General and administrative expenses	16,476		21,204			37,680			19,137			56,817			21,841
Professional accounting and legal fees	1,400		1,501			2,901			1,715			4,616			1,205
Depreciation and amortization	8,367		8,805			17,172			8,526			25,698			8,487
Income from operations	11,274		33,428			44,702			34,309			79,011			34,544
Interest expense, net	8,646		8,616			17,262			6,942			24,204			6,372
Extinguishment of debt	—		6,645			6,645			—			6,645			—
Income from continuing operations before income taxes	2,628		18,167			20,795			27,367			48,162			28,172
Provision for income taxes	875		6,688			7,563			9,815			17,378			13,077
Net income from continuing operations	1,753		11,479			13,232			17,552			30,784			15,095
Income (loss) from discontinued operations, net of income taxes	11		(282		)	(271		)	(2,034		)	(2,305		)	(3,063		)
Net income	$	1,764	$	11,197		$	12,961		$	15,518		$	28,479		$	12,032
Other comprehensive income
Unrealized gain on SERP, net of tax provision of $531 for Q4 2013	$	—	$	—		$	—		$	—		$	—		$	899
Total other comprehensive income	—		—			—			—			—			899
Comprehensive income	$	1,764	$	11,197		$	12,961		$	15,518		$	28,479		$	12,931
Basic Per Common Share Data
Net income from continuing operations	$	0.05	$	0.33		$	0.38		$	0.50		$	0.89		$	0.43
Net loss from discontinued operations	—		(0.01		)	(0.01		)	(0.06		)	(0.07		)	(0.09		)
Basic income per share	$	0.05	$	0.32		$	0.37		$	0.44		$	0.82		$	0.34
Shares used to compute basic per common share amounts	34,570,836		34,872,430			34,710,269			34,927,373			34,782,207			34,945,120
Diluted Per Common Share Data
Net income from continuing operations	$	0.05	$	0.33		$	0.38		$	0.50		$	0.88		$	0.43
Net loss from discontinued operations	—		(0.01		)	(0.01		)	(0.06		)	(0.07		)	(0.09		)
Diluted income per share	$	0.05	$	0.32		$	0.37		$	0.44		$	0.81		$	0.34
Shares used to compute diluted per common share amounts	35,062,115		35,211,878			35,124,223			35,298,046			35,180,990			35,364,729

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	(As Restated)
	Three Months Ended March 31, 2014			Six Months Ended June 30, 2014			Nine Months Ended September 30, 2014
Cash flows from operating activities:
Net loss	$	(9,967	)	$	(6,736	)	$	(15,537	)
(Loss) income from discontinued operations, net of income taxes	(3,621		)	1,040			(9,711		)
Net loss from continuing operations	(6,346		)	(7,776		)	(5,826		)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	9,307			19,133			28,951
Provision for doubtful accounts	1,989			4,463			9,094
Impairment of long-lived assets and intangible assets	—			—			1,503
Compensation expense on restricted stock units	2,356			5,152			7,138
Provision for deferred income taxes	358			1,836			2,535
Amortization of debt issuance costs	617			1,306			1,987
Gain on sale and disposal of property, plant and equipment	(553		)	(620		)	(1,412		)
Contingent consideration gains	—			—			(49		)
Changes in operating assets and liabilities, net of effects of acquired companies:
Net accounts receivable	9,521			(5,076		)	(16,599		)
Inventories	(2,293		)	(5,897		)	(2,212		)
Other current assets and income taxes	(3,966		)	(8,560		)	(21,566		)
Accounts payable	(4,335		)	(2,971		)	(751		)
Accrued expenses, other current liabilities and accrued interest payable	2,117			1,172			25,499
Accrued compensation related costs	(17,779		)	(15,050		)	(3,618		)
Other liabilities	(144		)	1,511			(750		)
Net cash (used in) provided by operating activities - continuing operations	(9,151		)	(11,377		)	23,924
Net cash (used in) provided by operating activities - discontinued operations	(1,479		)	3,482			(1,774		)
Net cash (used in) provided by operating activities	(10,630		)	(7,895		)	22,150
Cash flows from investing activities:
Purchase of property, plant and equipment, net of acquisitions	(8,526		)	(14,805		)	(18,924		)
Purchase of equipment leased to third parties under operating leases	(564		)	(1,663		)	(2,609		)
Acquisitions, net of cash acquired	(19,142		)	(33,934		)	(36,784		)
Purchase of company-owned life insurance investment	(2,294		)	(2,294		)	(2,294		)
Proceeds from sale of property, plant and equipment	595			1,674			2,331
Net cash used in investing activities - continuing operations	(29,931		)	(51,022		)	(58,280		)
Net cash used in investing activities - discontinued operations	(265		)	(464		)	(532		)
Net cash used in investing activities	(30,196		)	(51,486		)	(58,812		)
Cash flows from financing activities:
Repayment of term loan	(1,406		)	(2,813		)	(5,625		)
Borrowings under revolving credit agreement	125,000			228,000			252,000
Repayments under revolving credit agreement	(38,000		)	(163,000		)	(203,000		)
Payment of seller notes	(1,631		)	(3,569		)	(6,845		)
Payment of contingent consideration	(375		)	(626		)	(700		)
Payment of financing obligations	(426		)	(866		)	(1,491		)
Excess tax benefit from stock-based compensation	1,803			2,191			2,197
Proceeds from issuance of common stock	87			87			87
Net cash provided by financing activities - continuing operations	85,052			59,404			36,623
Net cash used in financing activities - discontinued operations	(3		)	(6		)	(9		)
Net cash provided by financing activities	85,049			59,398			36,614
Increase (decrease) in cash and cash equivalents	44,223			17			(48		)
Cash and cash equivalents, at beginning of year	1,613			1,613			1,613
Cash and cash equivalents, at end of period	$	45,836		$	1,630		$	1,565
SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:
Cash paid during the period for:
Interest	$	2,537		$	12,344		$	15,283
Income taxes	11,159			11,538			19,095
Non-cash financing and investing activities:
Issuance of seller notes in connection with acquisitions	8,450			11,901			13,172
Additions to property, plant and equipment acquired through finance obligations	1,266			1,973			3,001
Retirements of financed property, plant and equipment	7			7			2,097
Purchase of property, plant & equipment in accounts payable	2,184			1,169			1,793

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	(As Restated)
	Three Months Ended March 31, 2013			Six Months Ended June 30, 2013			Nine Months Ended September 30, 2013
Cash flows from operating activities:
Net income	$	1,764		$	12,961		$	28,479
Income (loss) from discontinued operations, net of income tax	11			(271		)	(2,305		)
Net income from continuing operations	1,753			13,232			30,784
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	8,367			17,172			25,698
Provision for doubtful accounts	474			1,705			3,441
Compensation expense on restricted stock units	2,093			4,599			7,004
Provision for deferred income taxes	—			(2,564		)	(2,564		)
Amortization of debt issuance costs	1,038			1,975			2,607
Loss on extinguishment of debt	—			6,645			6,645
Gain on sale and disposal of property, plant and equipment	(277		)	(900		)	(6,369		)
Contingent consideration gains	—			(57		)	(702		)
Changes in operating assets and liabilities, net of effects of acquired companies:
Net accounts receivable	9,332			747			791
Inventories	(1,449		)	(2,258		)	(3,740		)
Other current assets and income taxes	(2,845		)	(953		)	2,130
Accounts payable	(639		)	11,141			5,940
Accrued expenses, other current liabilities and accrued interest payable	3,990			(269		)	3,158
Accrued compensation related costs	(23,186		)	(18,900		)	(9,952		)
Other liabilities	198			572			1,969
Net cash (used in) provided by operating activities - continuing operations	(1,151		)	31,887			66,840
Net cash provided by (used in) operating activities - discontinued operations	109			(2,227		)	(2,261		)
Net cash (used in) provided by operating activities	(1,042		)	29,660			64,579
Cash flows from investing activities:
Purchase of property, plant and equipment, net of acquisitions	(3,450		)	(13,741		)	(19,174		)
Purchase of equipment leased to third parties under operating leases	(660		)	(1,849		)	(2,889		)
Acquisitions, net of cash acquired	(65		)	(5,776		)	(6,621		)
Change in restricted cash associated with workers’ compensation program	—			—			3,120
Proceeds from sale of property, plant and equipment	663			1,644			4,717
Net cash used in investing activities - continuing operations	(3,512		)	(19,722		)	(20,847		)
Net cash used in investing activities - discontinued operations	(256		)	(604		)	(944		)
Net cash used in investing activities	(3,768		)	(20,326		)	(21,791		)
Cash flows from financing activities:
Borrowings under term loan	—			225,000			225,000
Repayment of term loan	(750		)	(293,300		)	(294,706		)
Borrowings under revolving credit agreement	50,000			120,000			163,000
Repayments under revolving credit agreement	(50,000		)	(65,000		)	(137,000		)
Payment of seller notes	(1,411		)	(3,117		)	(6,449		)
Payment of contingent consideration	(675		)	(925		)	(1,965		)
Payment of financing obligations	(324		)	(658		)	(997		)
Payment of fees associated with debt modifications and extinguishments	—			(3,665		)	(3,665		)
Excess tax benefit from stock-based compensation	1,054			2,005			2,058
Proceeds from issuance of common stock	62			1,628			1,629
Purchase and retirement of common stock	—			(1,567		)	(1,567		)
Net cash used in financing activities - continuing operations	(2,044		)	(19,599		)	(54,662		)
Net cash used in financing activities - discontinued operations	(3		)	(7		)	(10		)
Net cash used in financing activities	(2,047		)	(19,606		)	(54,672		)
Decrease in cash and cash equivalents	(6,857		)	(10,272		)	(11,884		)
Cash and cash equivalents, at beginning of year	13,130			13,130			13,130
Cash and cash equivalents, at end of period	$	6,273		$	2,858		$	1,246

SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:

Cash paid during the period for:
Interest	$	4,221	$	16,314	$	19,144
Income taxes	5,591		15,558		21,033
Non-cash financing and investing activities:
Issuance of seller notes in connection with acquisitions	—		268		614
Additions to property, plant and equipment acquired through finance obligations	386		740		2,797
Retirements of financed property, plant and equipment	—		150		529
Purchase of property, plant & equipment in accounts payable	357		574		638

The following tables present the impacts of the restatement adjustments to the previously reported financial information for the March 31, 2014 ended quarter, the June 30, 2014 ended quarter, and for each quarterly period within fiscal 2013.  Refer to discussion in Note B - “Restatement of Previously Issued Consolidated Financial Statements”.  The references identified in the tickmarks to the following tables directly correlate to the adjustments detailed below.  Amounts are computed independently each quarter, therefore, the sum of the quarterly amounts may not equal the total amount for the respective year due to rounding.

The individual restatement misstatements are described below:

a. Inventory Valuation - The Company has identified misstatements in its historical inventory valuations.  The misstatements related primarily to the valuation of work-in-process inventory (“WIP”), and included intentional misstatements that had the effect of overstating the number of items in WIP, the relative stages of completion of WIP, and the overall valuation of WIP.  The Company’s valuation of WIP requires the use of various estimates.  Other misstatements included not reducing raw materials and WIP for vendor rebates and not ensuring inventory is recorded at the lower of cost or market.  Refer to further discussions regarding inventory valuation in Note C - “Significant accounting policies.”

b. Allowance for Disallowed Revenue and Doubtful Accounts - The historical estimates of allowances for disallowed revenue and doubtful accounts did not sufficiently consider changes to the Company’s collection experience or differentiate between payor types.  When preparing its estimates, the Company inappropriately relied upon aggregate averages of prior periods’ collections experience from varying numbers of older historical periods.  The Company did not timely recognize adverse changes in its collection experience, and did not consider likely write-offs of residual receivable balances, as well as consider differences in collection patterns between payor types and aging categories.  Additionally, misstatements in the classification of bad debt expense have been corrected and presented as disallowed revenue.  Refer to further discussion regarding allowances for disallowed revenue and bad debts in Note E - “Accounts Receivable.”

c. Property, Plant and Equipment, net - During the periods covered by the restated consolidated financial statements, misstatements occurred in the Company’s accounting for property, plant and equipment.  These misstatements included improper capitalization of certain labor associated with internal-use software and improper capitalization into property, plant and equipment costs that should have been expensed.  The Company also found misstatements in the commencement of depreciation of its fixed assets and not recording disposals on a timely basis.  Misstatements regarding leasehold improvement related items, which are recorded in property, plant and equipment in the financial statements, are included in the real property lease adjustment below.

d. Real Property Leases - The Company did not properly apply real property lease accounting standards.  The Company identified misstatements with respect to the determination of the proper term of its leases, establishment of proper balances for deferred rent and tenant improvement allowances, determining depreciable lives of leasehold improvements, consideration of lessee involvement in the construction of leased assets (resulting in not properly identifying certain build-to-suit arrangements, which are accounted for as financings after evaluating sale leaseback accounting), and proper evaluation of capital lease obligations.  Additionally, the Company did not properly establish and account for asset retirement obligations.

All Other Restatement Adjustments

e. Certain Revenue Adjustments - The Company determined that it had not properly established a liability to reserve for revenue collected from third-party payors and patients that was subject to refund in subsequent periods resulting in misstatements of net revenue.  Additionally, the Company recognized purchase rebates as net revenue rather than a reduction of cost of materials.  The misstatements overstated previously reported income from operations before income taxes.

f. Revenue Accrual - The Company often invoice patients or payors after a device is delivered.  To account for this delay, the Company records an estimated revenue accrual for devices delivered but not yet invoiced at period-end. The Company’s historical revenue accrual estimation model did not reasonably estimate the proper cut-off related to goods delivered but not yet invoiced, resulting in misstatements of both “Net revenue” and “Accounts receivable.”

g. Method of Accrual for Accounts Payable - The Company recorded an accrual for estimated accounts payable which utilized average accounts payable levels from historical periods.  This model was prepared based upon when invoices were received, not when goods or services were received.  This misstatement produced misstatements of previously reported “Accounts payable” and “Income before income taxes.”

h. Education Fair training event - The Company originally deferred and recognized expenses for its annual Education Fair training event ratably over each quarter in a fiscal year.  The Company has determined these expenses should have been recognized as incurred in the first quarter each year.  This misstatement understated previously reported “Other operating costs” in the first quarter of each year and overstated previously reported “Other operating costs” in the second, third, and fourth quarter of each year.

i. Janus Depreciation - The Company did not commence depreciation of Janus, its new patient management system, in the reporting period the system was ready for its intended use.  In addition, misstatements were also identified regarding the capitalization of certain expenses relating to the new system.  The misstatements overstated previously reported fixed assets and understated previously reported “Depreciation & amortization expenses” and “Other operating costs.”

j. Accrued Compensation Costs - The Company has identified misstatements that primarily relate to recognizing compensation related costs in the proper reporting periods.  These misstatements are primarily associated with employee bonuses, employee benefits, and vacation, and resulted in misstatements of previously reported “Personnel costs” and “Accrued compensation.”

k. Loss on firm purchase commitment - As described in additional detail in Note Q - “Commitments and Contingencies,” the Company’s SPS subsidiary entered into a firm purchase commitment in the second quarter of 2014.  The Company did not sufficiently evaluate this agreement in the second quarter of 2014 which resulted in an understatement of previously reported second quarter of 2014 income before income taxes of $3.4 million.

l. Demo equipment - The Company originally recorded an out of period adjustment amounting to $1.4 million in the second quarter of 2014 to fully depreciate certain older demonstration equipment that was incorrectly recorded in inventory.  In the restated consolidated financial statements, the Company is now correcting this error retrospectively in earlier periods.

m. Other Profit & Loss Restatement Adjustments - There are certain other restatement misstatements not otherwise described in items (a) through (l) of this Note.  The related adjustments are individually insignificant to previously reported income (loss) from operations before income taxes for each period presented.

n. Cash and cash equivalents - The Company identified balance sheet classification misstatements in which cash balances were overstated due to certain checks not being recognized as a reduction of cash in the period in which they were issued, which also understated other current assets.  Additionally, certain cash receipts were not recorded as an increase to cash and a decrease to accounts receivable in a timely manner.  Lastly, the Company misclassified restricted cash as “Cash and cash equivalents”; restricted cash is now classified as “Other current assets.”

o. Common Stock and APIC - The Company identified misstatements related to the incorrect application of stock compensation accounting standards.  Restricted stock units with a performance condition were not expensed using the graded-vesting methodology.  In addition, modifications to certain outstanding units were not recorded correctly.  Restricted stock units were incorrectly recorded as share issuances on their grant date, rather than an issuance of shares on their vesting date.

p. Income Taxes - The Company has identified certain errors in its historical accounting for income taxes, primarily related to uncertain tax positions and reconciliation of deferred tax balances.  In addition, the more significant adjustments primarily relate to the income tax effects of other restatement adjustments noted above.

Other adjustments to previously reported financial information

The Company has also made certain reclassification adjustments to the previously reported consolidated financial statements.  These adjustments do not relate to the correction of misstatements and are discussed in more detail below.

aa.  Reclassification of expenses - Due to increases and resultant materiality of certain expenses in 2014, and to enable the presentation of the consolidated statements of operations and comprehensive income to be more comparable with other health care services companies, the Company concluded that certain expenses should be reported separately in 2014.  The Company reclassified prior year balances to conform to the current year presentation.  For additional disclosure information, see Note C - “Significant Accounting Policies.”

bb.  Discontinued operations - On November 5, 2014, the Audit Committee of the Board of Directors approved a plan to sell and/or otherwise dispose of the Company’s Dosteon distribution product group (“Dosteon”), part of its Patient Care operating segment.  Dosteon is presented in the accompanying consolidated financial statements as a discontinued operation in accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations, ASC 360-10 Property, Plant and Equipment - Overall, and ASC 350-20 Intangibles - Goodwill and Other - Goodwill, as of December 31, 2014.  The operating results and cash flows of Dosteon have been presented separately as discontinued operations on the consolidated statements of operations and comprehensive (loss) income and the consolidated statements of cash flows, respectively, for the year ended December 31, 2014 and all comparable periods presented herein.  For additional disclosure information refer to Note T - “Discontinued Operations.”

cc.   Reclassification of Equipment Capital Lease Liabilities - The Company previously reported the current portion of equipment capital lease liabilities within “accrued expenses and other current liabilities” and the non-current portion within “Other liabilities.”  The Company is now presenting lease related financing liabilities, including capital leases and financing obligations related to certain real property transactions within “Long-term debt, less current portion” and “Current portion of long-term debt,” respectively, as the balances are similar in nature to long-term debt.  For additional disclosure information, see Note O - “Long-Term Debt.”

HANGER, INC.

QUARTERLY CONSOLIDATED BALANCE SHEET

(dollars in thousands, except par value and share amounts)

(Unaudited)

	As of March 31, 2014
	As Previously Reported			Restatement Adjustment			Restatement Reference	As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	55,624		$	(9,788	)	m,n	$	45,836
Accounts receivable, net of allowance for doubtful accounts of $7,920	183,548			(37,488		)	b,e,f,m,n	146,060
Inventories	153,952			(68,169		)	a,m	85,783
Other current assets	27,678			(212		)	d,h,j,m,n,p	27,466
Deferred income taxes	30,366			41,203			p	71,569
Total current assets	451,168			(74,454		)		376,714
Non-current assets:
Property, plant and equipment, net	131,419			(11,194		)	c,d,g,i,m	120,225
Goodwill	702,455			314			c,m	702,769
Other intangible assets, net	61,367			(1,015		)	m	60,352
Debt issuance costs, net	8,134			(100		)	m	8,034
Other assets	15,142			2,684			d,m	17,826
Total assets	$	1,369,685		$	(83,765	)		$	1,285,920
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	20,869		$	1,037		d,m,cc	$	21,906
Accounts payable	41,789			2,175			g,i,m	43,964
Accrued expenses and other current liabilities	22,734			21,774			c,d,e,h,j,m,p,cc	44,508
Accrued interest payable	5,534			112			d	5,646
Accrued compensation related costs	21,605			(188		)	j,m	21,417
Total current liabilities	112,531			24,910				137,441
Long-term liabilities:
Long-term debt, less current portion	541,066			18,030			d,m,cc	559,096
Deferred income taxes	76,971			(15,331		)	p	61,640
Other liabilities	48,615			(6,495		)	d,m,p,cc	42,120
Total liabilities	779,183			21,114				800,297
Shareholders’ Equity:
Common stock, $.01 par value; 60,000,000 shares authorized, 35,486,033 shares issued and 35,344,879 shares outstanding	363			(8		)	o	355
Additional paid-in capital	297,006			2,378			j,m,o	299,384
Accumulated other comprehensive loss	(1,020		)	—				(1,020		)
Retained earnings	294,809			(107,249		)	a - j,l,m,o	187,560
	591,158			(104,879		)		486,279
Treasury stock, at cost 141,154 shares	(656		)	—				(656		)
Total shareholders’ equity	590,502			(104,879		)		485,623
Total liabilities and shareholders’ equity	$	1,369,685		$	(83,765	)		$	1,285,920

HANGER, INC.

QUARTERLY CONSOLIDATED BALANCE SHEET

(dollars in thousands, except par value and share amounts)

(Unaudited)

	As of June 30, 2014
	As Previously Reported			Restatement Adjustments			Restatement Reference	As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	4,902		$	(3,272	)	m,n	$	1,630
Accounts receivable, net of allowance for doubtful accounts of $9,078	205,325			(45,854		)	b,e,f,m.n	159,471
Inventories	158,957			(68,451		)	a,k,l,m	90,506
Other current assets	21,147			11,950			d,h,j,k,m,n,p	33,097
Deferred income taxes	30,381			40,408			p	70,789
Total current assets	420,712			(65,219		)		355,493
Non-current assets:
Property, plant and equipment, net	142,650			(22,973		)	c,d,g,i,m	119,677
Goodwill	715,656			(646		)	c,m	715,010
Other intangible assets, net	62,517			83			m	62,600
Debt issuance costs, net	7,703			(131		)	m	7,572
Other assets	15,321			3,063			c,d,m	18,384
Total assets	$	1,364,559		$	(85,823	)		$	1,278,736
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	23,638		$	867		d,m,cc	$	24,505
Accounts payable	31,815			13,827			g,i,k,m	45,642
Accrued expenses and other current liabilities	26,339			21,097			c,d,e,g,h,j,m,p,cc	47,436
Accrued interest payable	2,049			225			d,m	2,274
Accrued compensation related costs	23,051			1,613			j,m	24,664
Total current liabilities	106,892			37,629				144,521
Long-term liabilities:
Long-term debt, less current portion	516,251			18,842			d,m,cc	535,093
Deferred income taxes	76,784			(14,446		)	p	62,338
Other liabilities	58,589			(13,855		)	c,d,k,m,cc	44,734
Total liabilities	758,516			28,170				786,686
Shareholders’ Equity:
Common stock, $.01 par value; 60,000,000 shares authorized, 35,527,002 issued and 35,385,848 shares outstanding	364			(9		)	o	355
Additional paid-in capital	299,927			2,654			j,m,o	302,581
Accumulated other comprehensive loss	(1,020		)	—				(1,020		)
Retained earnings	307,428			(116,638		)	a - m, o	190,790
	606,699			(113,993		)		492,706
Treasury stock at cost, 141,154 shares	(656		)	—				(656		)
Total shareholders’ equity	606,043			(113,993		)		492,050
Total liabilities and shareholders’ equity	$	1,364,559		$	(85,823	)		$	1,278,736

HANGER, INC.

QUARTERLY CONSOLIDATED BALANCE SHEET

(dollars in thousands, except par value and share amounts)

(Unaudited)

	As of March 31, 2013
	As Previously  Reported			Restatement  Adjustments			Restatement  Reference	As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	15,033		$	(8,760	)	m,n	$	6,273
Accounts receivable, net of allowance for doubtful accounts of $4,941	156,813			(17,057		)	b,e,f,m,n	139,756
Inventories	132,492			(52,917		)	a,m	79,575
Other current assets	22,911			6,402			d,h,j,m,n,p	29,313
Deferred income taxes	28,043			33,012			p	61,055
Total current assets	355,292			(39,320		)		315,972
Non-current assets:
Property, plant and equipment, net	111,901			(5,652		)	c,d,g,i,m	106,249
Goodwill	674,416			1,035			m	675,451
Other intangible assets, net	62,661			(3,350		)	m	59,311
Debt issuance costs, net	13,169			—				13,169
Other assets	11,482			4,582			m	16,064
Total assets	$	1,228,921		$	(42,705	)		$	1,186,216
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	11,528		$	1,701		d,m,cc	$	13,229
Accounts payable	26,345			9,844			g,i,m	36,189
Accrued expenses and other current liabilities	23,089			17,007			d,e,h,j,m,cc	40,096
Accrued interest payable	6,516			129			d	6,645
Accrued compensation related costs	22,134			(50		)	j,m	22,084
Total current liabilities	89,612			28,631				118,243
Long-term liabilities:
Long-term debt, less current portion	506,958			15,231			d,m,cc	522,189
Deferred income taxes	77,730			(11,241		)	p	66,489
Other liabilities	38,989			(1,732		)	d,m,cc	37,257
Total liabilities	713,289			30,889				744,178
Shareholders’ Equity:
Common stock, $.01 par value; 60,000,000 shares authorized, 34,953,812 shares issued and 34,812,658 shares outstanding	359			(9		)	j,o	350
Additional paid-in capital	283,130			2,356			j,o	285,486
Accumulated other comprehensive loss	(1,919		)	—				(1,919		)
Retained earnings	234,718			(75,941		)	a - j,m,o	158,777
	516,288			(73,594		)		442,694
Treasury stock, at cost 141,154 shares	(656		)	—				(656		)
Total shareholders’ equity	515,632			(73,594		)		442,038
Total liabilities and shareholders’ equity	$	1,228,921		$	(42,705	)		$	1,186,216

HANGER, INC.

QUARTERLY CONSOLIDATED BALANCE SHEET

(dollars in thousands, except par value and share amounts)

(Unaudited)

	As of June 30, 2013
	As Previously  Reported			Restatement  Adjustments			Restatement  Reference	As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	5,766		$	(2,908	)	m,n	$	2,858
Accounts receivable, net of allowance for doubtful accounts of $4,971	170,601			(20,325		)	b,e,f,m,n	150,276
Inventories	137,557			(56,343		)	a,m	81,214
Other current assets	21,453			7,484			d,g,h,j,m,n,p	28,937
Deferred income taxes	30,920			33,233			p	64,153
Total current assets	366,297			(38,859		)		327,438
Non-current assets:
Property, plant and equipment, net	115,242			(5,767		)	c,d,g,i,m	109,475
Goodwill	676,190			2,558			m	678,748
Intangible assets, net	61,262			(2,742		)	m	58,520
Debt issuance costs, net	9,424			(4		)	m	9,420
Other assets	11,209			4,663			m	15,872
Total assets	$	1,239,624		$	(40,151	)		$	1,199,473
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	13,802		$	1,850		d,cc	$	15,652
Accounts payable	34,314			13,484			g,i,m	47,798
Accrued expenses and other current liabilities	24,496			17,109			d,e,h,j,m,cc	41,605
Accrued interest payable	2,205			146			d	2,351
Accrued compensation related costs	24,940			974			j,m	25,914
Total current liabilities	99,757			33,563				133,320
Long-term liabilities:
Long-term debt, less current portion	490,672			15,079			d,m,cc	505,751
Deferred income taxes	76,509			(10,574		)	p	65,935
Other liabilities	39,638			(1,894		)	d,m,cc	37,744
Total liabilities	706,576			36,174				742,750
Shareholders’ Equity:
Common stock, $.01 par value; 60,000,000 shares authorized, 35,062,931 shares issued and 34,921,777 shares outstanding	360			(8		)	o	352
Additional paid-in capital	286,467			2,504			j,o	288,971
Accumulated other comprehensive loss	(1,919		)	—				(1,919		)
Retained earnings	248,796			(78,821		)	a - j,m,o	169,975
	533,704			(76,325		)		457,379
Treasury stock, at cost 141,154 shares	(656		)	—				(656		)
Total shareholders’ equity	533,048			(76,325		)		456,723
Total liabilities and shareholders’ equity	$	1,239,624		$	(40,151	)		$	1,199,473

HANGER, INC.

QUARTERLY CONSOLIDATED BALANCE SHEET

(dollars in thousands, except par value and share amounts)

(Unaudited)

	As of September 30, 2013
	As Previously  Reported			Restatement  Adjustments			Restatement  Reference	As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	7,216		$	(5,970	)	m,n	$	1,246
Accounts receivable, net of allowance for doubtful accounts of $5,837	176,663			(26,711		)	b,e,f,m,n	149,952
Inventories	144,374			(61,081		)	a,m	83,293
Other current assets	14,560			8,301			d,g,h,j,m,n,p	22,861
Deferred income taxes	31,115			33,094			p	64,209
Total current assets	373,928			(52,367		)		321,561
Non-current assets:
Property, plant and equipment, net	115,963			(2,819		)	c,d,g,i,m	113,144
Goodwill	678,215			1,506			m	679,721
Intangible assets, net	58,638			(1,732		)	m	56,906
Debt issuance costs, net	8,994			(36		)	m	8,958
Other assets	12,261			4,044			m	16,305
Total assets	$	1,247,999		$	(51,404	)		$	1,196,595
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	13,673		$	1,764		d,m,cc	$	15,437
Accounts payable	32,339			12,582			g,i,m	44,921
Accrued expenses and other current liabilities	30,391			10,652			d,e,h,j,m,p,cc	41,043
Accrued interest payable	5,772			162			d	5,934
Accrued compensation related costs	33,991			1,313			j,m	35,304
Total current liabilities	116,166			26,473				142,639
Long-term liabilities:
Long-term debt, less current portion	457,384			16,684			d,m,cc	474,068
Deferred income taxes	76,480			(10,574		)	p	65,906
Other liabilities	40,869			(1,613		)	d,m,cc	39,256
Total liabilities	690,899			30,970				721,869
Shareholders’ Equity:
Common stock, $.01 par value; 60,000,000 shares authorized, 35,062,367 shares issued and 34,921,213 shares outstanding	360			(8		)	o	352
Additional paid-in capital	288,860			2,595			j,o	291,455
Accumulated other comprehensive loss	(1,919		)	—				(1,919		)
Retained earnings	270,455			(84,961		)	a - j,m,o	185,494
	557,756			(82,374		)		475,382
Treasury stock at cost, 141,154 shares	(656		)	—				(656		)
Total shareholders’ equity	557,100			(82,374		)		474,726
Total liabilities and shareholders’ equity	$	1,247,999		$	(51,404	)		$	1,196,595

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except share and per share amounts)

(Unaudited)

	For the Three Months Ended March 31, 2014
	As  Previously  Reported		Restatement  Adjustments			Restatement  Reference	Reclassification  Adjustments (aa)			Discontinued  Operations (bb)			As Restated
Net revenue	$	235,605	$	(9,134	)	b,e,f,m	$	—		$	(10,554	)	$	215,917
Material costs	67,345		8,016			a,g,m	—			(4,789		)	70,572
Personnel costs	96,431		2,679			a,c,j,m,o	(11,046		)	(5,836		)	82,228
Other operating costs	45,600		485			a,b,c,d,e,g,h,j,m	(10,027		)	(3,721		)	32,337
General and administrative expenses	—		—				19,616			—			19,616
Professional accounting and legal fees	—		—				1,457			—			1,457
Depreciation and amortization	10,199		(483		)	c,d,i,m	—			(409		)	9,307
Income from operations	16,030		(19,831		)		—			4,201			400
Interest expense, net	6,098		667			d,m	—			3			6,768
Income (loss) from continuing operations before income taxes	9,932		(20,498		)		—			4,198			(6,368		)
Provision (benefit) for income taxes	3,935		(4,534		)	p	—			577			(22		)
Income (loss) from continuing operations	5,997		(15,964		)		—			3,621			(6,346		)
Loss from discontinued operations, net of taxes	—		—				—			(3,621		)	(3,621		)
Net income (loss)	$	5,997	$	(15,964	)		$	—		$	—		$	(9,967	)
Comprehensive income (loss)	$	5,997	$	(15,964	)		$	—		$	—		$	(9,967	)
Basic Per Common Share Data Income (loss) from continuing operations	$	0.17	$	(0.45	)		$	—		$	0.10		$	(0.18	)
Loss from discontinued operations	—		—				—			(0.10		)	(0.10		)
Basic income (loss) per share	$	0.17	$	(0.45	)		$	—		$	—		$	(0.28	)
Shares used to compute basic per common share amounts	35,076,828		(19,926		)	o	—			—			35,056,902
Diluted Per Common Share Data
Income (loss) from continuing operations	$	0.17	$	(0.45	)		$	—		$	0.10		$	(0.18	)
Loss from discontinued operations	—		—				—			(0.10		)	(0.10		)
Diluted income (loss) per share	$	0.17	$	(0.45	)		$	—		$	—		$	(0.28	)
Shares used to compute diluted per common share amounts	35,415,018		(358,116		)	o	—			—			35,056,902

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

(dollars in thousands, except share and per share amounts)

(Unaudited)

		For the Three Months Ended June 30, 2014
	As Previously  Reported			Restatement  Adjustments			Restatement  Reference	Reclassification  Adjustments (aa)			Discontinued  Operations (bb)			As Restated
Net revenue	$		275,854	$	(8,794	)	b,e,f,m	$	—		$	(11,486	)	$	255,574
Material costs	81,822			3,855			a,g,k,m	—			(4,568		)	81,109
Personnel costs	102,755			1,712			a,c,j,m,o	(10,017		)	(5,712		)	88,738
Other operating costs	52,741			688			a,b,c,d,g,h,j,k,m	(15,128		)	(4,010		)	34,291
General and administrative expenses	—			—				22,545			—			22,545
Professional accounting and legal fees	—			—				2,600			—			2,600
Depreciation and amortization	12,133			(1,898		)	c,d,i,l,m	—			(409		)	9,826
Income from operations	26,403			(13,151		)		—			3,213			16,465
Interest expense, net	6,201			892			c,d,m	—			(30		)	7,063
Income from continuing operations before income taxes	20,202			(14,043		)		—			3,243			9,402
Provision for income taxes	7,583			(4,655		)	p	—			7,904			10,832
Income (loss) from continuing operations	12,619			(9,388		)		—			(4,661		)	(1,430		)
Income from discontinued operations, net of income taxes	—			—				—			4,661			4,661
Net income	$		12,619	$	(9,388	)		$	—		$	—		$	3,231
Comprehensive income	$		12,619	$	(9,388	)		$	—		$	—		$	3,231
Basic Per Common Share Data
Income (loss) from continuing operations	$		0.36	$	(0.27	)		$	—		$	(0.13	)	$	(0.04	)
Income from discontinued operations	—			—				—			0.13			0.13
Basic income per share	$		0.36	$	(0.27	)		$	—		$	—		$	0.09
Shares used to compute basic per common share amounts	35,469,769			(91,830		)	o	—			—			35,377,939
Diluted Per Common Share Data
Income (loss) from continuing operations	$		0.35	$	(0.26	)		$	—		$	(0.13	)	$	(0.04	)
Income from discontinued operations	—			—				—			0.13			0.13
Diluted income per share	$		0.35	$	(0.26	)		$	—		$	—		$	0.09
Shares used to compute diluted per common share amounts	35,591,764			(213,825		)	o	—			—			35,377,939

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except share and per share amounts)

(Unaudited)

	For the Six Months Ended June 30, 2014
	As Previously  Reported		Restatement  Adjustments			Restatement  Reference	Reclassification  Adjustments (aa)			Discontinued  Operations (bb)			As Restated
Net revenue	$	511,459	$	(17,928	)	b,e,f,m	$	—		$	(22,040	)	$	471,491
Material costs	149,167		11,871			a,g,k,m	—			(9,357		)	151,681
Personnel costs	199,186		4,391			a,c,j,m,o	(21,063		)	(11,548		)	170,966
Other operating costs	98,341		1,173			a,b,c,d,e,g,h,j,k,m	(25,155		)	(7,731		)	66,628
General and administrative expenses	—		—				42,161			—			42,161
Professional accounting and legal fees	—		—				4,057			—			4,057
Depreciation and amortization	22,332		(2,381		)	c,d,i,l,m	—			(818		)	19,133
Income from operations	42,433		(32,982		)		—			7,414			16,865
Interest expense, net	12,299		1,559			c,d,m	—			(27		)	13,831
Income from continuing operations before income taxes	30,134		(34,541		)		—			7,441			3,034
Provision for income taxes	11,518		(9,189		)	p	—			8,481			10,810
Income (loss) from continuing operations	18,616		(25,352		)		—			(1,040		)	(7,776		)
Income from discontinued operations, net of income taxes	—		—				—			1,040			1,040
Net income (loss)	$	18,616	$	(25,352	)		$	—		$	—		$	(6,736	)
Comprehensive income (loss)	$	18,616	$	(25,352	)		$	—		$	—		$	(6,736	)
Basic Per Common Share Data
Income (loss) from continuing operations	$	0.53	$	(0.72	)		$	—		$	(0.03	)	$	(0.22	)
Income from discontinued operations	—		—				—			0.03			0.03
Basic income (loss) per share	$	0.53	$	(0.72	)		$	—		$	—		$	(0.19	)
Shares used to compute basic per common share amounts	35,319,944		(110,095		)	o	—			—			35,209,849
Diluted Per Common Share Data
Income (loss) from continuing operations	$	0.52	$	(0.71	)		$	—		$	(0.03	)	$	(0.22	)
Income from discontinued operations	—		—				—			0.03			0.03
Diluted income (loss) per share	$	0.52	$	(0.71	)		$	—		$	—		$	(0.19	)
Shares used to compute diluted per common share amounts	35,470,170		(260,321		)	o	—			—			35,209,849

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

(dollars in thousands, except share and per share amounts)

(Unaudited)

	For the Three Months Ended March 31, 2013
	As Previously Reported		Restatement Adjustments			Restatement Reference	Reclassification Adjustments (aa)			Discontinued Operations (bb)			As Restated
Net revenue	$	229,350	$	(4,581	)	b,e,f,m	$	—		$	(10,932	)	$	213,837
Material costs	67,739		4,247			a,g,m	—			(4,020		)	67,966
Personnel costs	89,953		1,681			a,c,j,m,o	(9,565		)	(4,938		)	77,131
Other operating costs	39,657		1,475			a,b,c,d,g,h,j,m	(8,311		)	(1,598		)	31,223
General and administrative expenses	—		—				16,476			—			16,476
Professional accounting and legal fees	—		—				1,400			—			1,400
Depreciation and amortization	9,285		(578		)	c,d,m	—			(340		)	8,367
Income from operations	22,716		(11,406		)		—			(36		)	11,274
Interest expense, net	7,777		884			d,i,m	—			(15		)	8,646
Income from continuing operations before income taxes	14,939		(12,290		)		—			(21		)	2,628
Provision for income taxes	5,449		(4,564		)	p	—			(10		)	875
Income from continuing operations	9,490		(7,726		)		—			(11		)	1,753
Income from discontinued operations, net of income taxes	—		—				—			11			11
Net income	$	9,490	$	(7,726	)		$	—		$	—		$	1,764
Comprehensive income	$	9,490	$	(7,726	)		$	—		$	—		$	1,764
Basic Per Common Share Data
Income from continuing operations	$	0.27	$	(0.22	)		$	—		$	—		$	0.05
Income from discontinued operations	—		—				—			—			—
Basic income per share	$	0.27	$	(0.22	)		$	—		$	—		$	0.05
Shares used to compute basic per common share amounts	34,598,494		(27,658		)	o	—			—			34,570,836
Diluted Per Common Share Data
Income from continuing operations	$	0.27	$	(0.22	)		$	—		$	—		$	0.05
Income from discontinued operations	—		—				—			—			—
Diluted income per share	$	0.27	$	(0.22	)		$	—		$	—		$	0.05
Shares used to compute diluted per common share amounts	35,066,032		(3,917		)	o	—			—			35,062,115

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

(dollars in thousands, except share and per share amounts)

(Unaudited)

	For the Three Months Ended June 30, 2013
	As Previously Reported		Restatement Adjustments			Restatement Reference	Reclassification Adjustments (aa)			Discontinued Operations (bb)			As Restated
Net revenue	$	267,798	$	(2,963	)	b,e,f,m	$	—		$	(11,168	)	$	253,667
Material costs	79,446		2,023			a,g,m	—			(4,196		)	77,273
Personnel costs	93,176		1,462			a,c,j,m,o	(6,604		)	(5,198		)	82,836
Other operating costs	49,022		(2,452		)	a,b,c,d,g,h,i,j,m	(16,101		)	(1,849		)	28,620
General and administrative expenses	—		—				21,204			—			21,204
Professional accounting and legal fees	—		—				1,501			—			1,501
Depreciation and amortization	9,510		(344		)	c,d,m	—			(361		)	8,805
Income from operations	36,644		(3,652		)		—			436			33,428
Interest expense, net	7,708		926			d,i,m	—			(18		)	8,616
Extinguishment of debt	6,645		—				—			—			6,645
Income from continuing operations before income taxes	22,291		(4,578		)		—			454			18,167
Provision for income taxes	8,212		(1,696		)	p	—			172			6,688
Income from continuing operations	14,079		(2,882		)		—			282			11,479
Loss from discontinued operations, net of income taxes	—		—				—			(282		)	(282		)
Net income	$	14,079	$	(2,882	)		$	—		$	—		$	11,197
Comprehensive income	$	14,079	$	(2,882	)		$	—		$	—		$	11,197
Basic Per Common Share Data
Income from continuing operations	$	0.40	$	(0.08	)		$	—		$	0.01		$	0.33
Loss from discontinued operations	—		—				—			(0.01		)	(0.01		)
Basic income per share	$	0.40	$	(0.08	)		$	—		$	—		$	0.32
Shares used to compute basic per common share amounts	34,849,659		22,771			o	—			—			34,872,430
Diluted Per Common Share Data
Income from continuing operations	$	0.40	$	(0.08	)		$	—		$	0.01		$	0.33
Loss from discontinued operations	—		—				—			(0.01		)	(0.01		)
Diluted income per share	$	0.40	$	(0.08	)		$	—		$	—		$	0.32
Shares used to compute diluted per common share amounts	35,307,697		(95,819		)	o	—			—			35,211,878

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

(dollars in thousands, except share and per share amounts)

(Unaudited)

	For the Six Months Ended June 30, 2013
	As Previously Reported		Restatement Adjustments			Restatement Reference	Reclassification Adjustments (aa)			Discontinued Operations (bb)			As Restated
Net revenue	$	497,148	$	(7,544	)	b,e,f,m	$	—		$	(22,100	)	$	467,504
Material costs	147,184		6,271			a,g,m	—			(8,216		)	145,239
Personnel costs	183,129		3,143			a,c,j,m,o	(16,169		)	(10,136		)	159,967
Other operating costs	88,680		(978		)	a,b,c,d,g,h,i,j,m	(24,412		)	(3,447		)	59,843
General and administrative expenses	—		—				37,680			—			37,680
Professional accounting and legal fees	—		—				2,901			—			2,901
Depreciation and amortization	18,795		(922		)	c,d,m	—			(701		)	17,172
Income from operations	59,360		(15,058		)		—			400			44,702
Interest expense, net	15,485		1,810			d,i,m	—			(33		)	17,262
Extinguishment of debt	6,645		—				—			—			6,645
Income from continuing operations before income taxes	37,230		(16,868		)		—			433			20,795
Provision for income taxes	13,661		(6,260		)	p	—			162			7,563
Income from continuing operations	23,569		(10,608		)		—			271			13,232
Loss from discontinued operations, net of income taxes	—		—				—			(271		)	(271		)
Net income	$	23,569	$	(10,608	)		$	—		$	—		$	12,961
Comprehensive income	$	23,569	$	(10,608	)		$	—		$	—		$	12,961
Basic Per Common Share Data
Income from continuing operations	$	0.68	$	(0.31	)		$	—		$	0.01		$	0.38
Loss from discontinued operations	—		—				—			(0.01		)	(0.01		)
Basic income per share	$	0.68	$	(0.31	)		$	—		$	—		$	0.37
Shares used to compute basic per common share amounts	34,724,077		(13,808		)	o	—			—			34,710,269
Diluted Per Common Share Data
Income from continuing operations	$	0.67	$	(0.30	)		$	—		$	0.01		$	0.38
Loss from discontinued operations	—		—				—			(0.01		)	(0.01		)
Diluted income per share	$	0.67	$	(0.30	)		$	—		$	—		$	0.37
Shares used to compute diluted per common share amounts	35,225,871		(101,648		)	o	—			—			35,124,223

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

(dollars in thousands, except share and per share amounts)

(Unaudited)

	For the Three Months Ended September 30, 2013
	As Previously Reported		Restatement Adjustments			Restatement Reference	Reclassification Adjustments (aa)			Discontinued Operations (bb)			As Restated
Net revenue	$	271,053	$	(8,383	)	b,e,f,m	$	—		$	(9,453	)	$	253,217
Material costs	79,401		3,417			a,g,m	—			(3,885		)	78,933
Personnel costs	94,768		(552		)	a,c,j,m,o	(6,775		)	(5,370		)	82,071
Other operating costs	47,754		(2,015		)	a,b,c,d,g,h,i,j,m	(14,077		)	(3,136		)	28,526
General and administrative expenses	—		—				19,137			—			19,137
Professional accounting and legal fees	—		—				1,715			—			1,715
Depreciation and amortization	9,224		(317		)	c,d,m	—			(381		)	8,526
Income from operations	39,906		(8,916		)		—			3,319			34,309
Interest expense, net	6,017		932			d,i,m	—			(7		)	6,942
Income from continuing operations before income taxes	33,889		(9,848		)		—			3,326			27,367
Provision for income taxes	12,230		(3,707		)	p	—			1,292			9,815
Net income from continuing operations	21,659		(6,141		)		—			2,034			17,552
Loss from discontinued operations, net of income taxes	—		—				—			(2,034		)	(2,034		)
Net income	$	21,659	$	(6,141	)		$	—		$	—		$	15,518
Comprehensive income	$	21,659	$	(6,141	)		$	—		$	—		$	15,518
Basic Per Common Share Data
Income from continuing operations	$	0.62	$	(0.18	)		$	—		$	0.06		$	0.50
Loss from discontinued operations	—		—				—			(0.06		)	(0.06		)
Basic income per share	$	0.62	$	(0.18	)		$	—		$	—		$	0.44
Shares used to compute basic per common share amounts	34,902,103		25,270			o	—			—			34,927,373
Diluted Per Common Share Data
Income from continuing operations	$	0.61	$	(0.17	)		$	—		$	0.06		$	0.50
Loss from discontinued operations	—		—				—			(0.06		)	(0.06		)
Diluted income per share	$	0.61	$	(0.17	)		$	—		$	—		$	0.44
Shares used to compute diluted per common share amounts	35,401,273		(103,227		)	o	—			—			35,298,046

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

(dollars in thousands, except share and per share amounts)

(Unaudited)

	For the Nine Months Ended September 30, 2013
	As Previously Reported		Restatement Adjustments			Restatement Reference	Reclassification Adjustments (aa)			Discontinued Operations (bb)			As Restated
Net revenue	$	768,201	$	(15,927	)	b,e,f,m	$	—		$	(31,553	)	$	720,721
Material costs	226,585		9,688			a,g,m	—			(12,101		)	224,172
Personnel costs	277,897		2,591			a,c,j,m,o	(22,944		)	(15,506		)	242,038
Other operating costs	136,434		(2,993		)	a,b,c,d,g,h,i,j,m	(38,489		)	(6,583		)	88,369
General and administrative expenses	—		—				56,817			—			56,817
Professional accounting and legal fees	—		—				4,616			—			4,616
Depreciation and amortization	28,019		(1,239		)	c,d,m	—			(1,082		)	25,698
Income from operations	99,266		(23,974		)		—			3,719			79,011
Interest expense, net	21,502		2,742			d,i,m	—			(40		)	24,204
Extinguishment of debt	6,645		—			d,m	—			—			6,645
Income from continuing operations before income taxes	71,119		(26,716		)		—			3,759			48,162
Provision for income taxes	25,891		(9,967		)	p	—			1,454			17,378
Income from continuing operations	45,228		(16,749		)		—			2,305			30,784
Loss from discontinued operations, net of income taxes	—		—				—			(2,305		)	(2,305		)
Net income	$	45,228	$	(16,749	)		$	—		$	—		$	28,479
Comprehensive income	$	45,228	$	(16,749	)		$	—		$	—		$	28,479
Basic Per Common Share Data
Income from continuing operations	$	1.30	$	(0.48	)		$	—		$	0.07		$	0.89
Loss from discontinued operations	—		—				—			(0.07		)	(0.07		)
Basic income per share	$	1.30	$	(0.48	)		$	—		$	—		$	0.82
Shares used to compute basic per common share amounts	34,783,419		(1,212		)	o	—			—			34,782,207
Diluted Per Common Share Data
Income from continuing operations	$	1.28	$	(0.47	)		$	—		$	0.07		$	0.88
Loss from discontinued operations	—		—				—			(0.07		)	(0.07		)
Diluted income per share	$	1.28	$	(0.47	)		$	—		$	—		$	0.81
Shares used to compute diluted per common share amounts	35,315,897		(134,907		)	o	—			—			35,180,990

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

(dollars in thousands, except share and per share amounts)

(Unaudited)

	For the Three Months Ended December 31, 2013
	As Previously Reported		Restatement Adjustments			Restatement Reference	Reclassification Adjustments (aa)			Discontinued Operations (bb)			As Restated
Net revenue	$	278,237	$	(12,049	)	b,e,f,m	$	—		$	(11,140	)	$	255,048
Material costs	92,461		(8,949		)	a,m	—			(5,681		)	77,831
Personnel costs	91,841		6,673			a,c,j,m,o	(8,861		)	(5,911		)	83,742
Other operating costs	49,870		(4,185		)	a,b,c,d,g,h,i,j,m	(14,185		)	(4,102		)	27,398
General and administrative expenses	—		—				21,841			—			21,841
Professional accounting and legal fees	—		—				1,205			—			1,205
Depreciation and amortization	9,467		(580		)	c,d,m	—			(400		)	8,487
Income from operations	34,598		(5,008		)		—			4,954			34,544
Interest expense, net	4,973		1,411			d,i,m	—			(12		)	6,372
Income from continuing operations before income taxes	29,625		(6,419		)		—			4,966			28,172
Provision for income taxes	11,269		(95		)	p	—			1,903			13,077
Income from continuing operations	18,356		(6,324		)		—			3,063			15,095
Loss from discontinued operations, net of income taxes	—		—				—			(3,063		)	(3,063		)
Net income	$	18,356	$	(6,324	)		$	—		$	—		$	12,032
Other comprehensive income
Unrealized gain on SERP, net of tax provision of $531	$	899	$	—			$	—		$	—		$	899
Total other comprehensive income	899		—				—			—			899
Comprehensive income	$	19,255	$	(6,324	)		$	—		$	—		$	12,931
Basic Per Common Share Data
Income from continuing operations	$	0.53	$	(0.19	)		$	—		$	0.09		$	0.43
Loss from discontinued operations	—		—				—			(0.09		)	(0.09		)
Basic income per share	$	0.53	$	(0.19	)		$	—		$	—		$	0.34
Shares used to compute basic per common share amounts	34,922,599		22,521			o	—			—			34,945,120
Diluted Per Common Share Data
Income from continuing operations	$	0.52	$	(0.18	)		$	—		$	0.09		$	0.43
Loss from discontinued operations	—		—				—			(0.09		)	(0.09		)
Diluted income per share	$	0.52	$	(0.18	)		$	—		$	—		$	0.34
Shares used to compute diluted per common share amounts	35,463,539		(98,810		)	o	—			—			35,364,729

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	For the Three Months Ended March 31, 2014
	As Previously Reported			Restatement Adjustments			Reference	As Restated
Cash flows from operating activities:
Net income (loss)	$	5,997		$	(15,964	)	a - j, m - p	$	(9,967	)
Loss from discontinued operations, net of income taxes	—			(3,621		)	bb	(3,621		)
Income (loss) from continuing operations	5,997			(12,343		)		(6,346		)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	10,199			(892		)	c,d,i,m	9,307
Provision for doubtful accounts	3,754			(1,765		)	b,h	1,989
Compensation expense on restricted stock units	2,418			(62		)	o	2,356
Provision for deferred income taxes	358			—			p	358
Amortization of debt issuance costs	430			187			m	617
Gain on sale of property, plant and equipment	(547		)	(6		)	c	(553		)
Changes in operating assets and liabilities, net of effects of acquired companies:
Net accounts receivable	1,537			7,984			b,e,f,m	9,521
Inventories	(10,589		)	8,296			a,m	(2,293		)
Other current assets and income taxes	(12,736		)	8,770			c,d,h,j,n,p	(3,966		)
Accounts payable	2,126			(6,461		)	g,m	(4,335		)
Accrued expenses, other current liabilities and accrued interest payable	2,384			(267		)	e,m	2,117
Accrued compensation related costs	(15,040		)	(2,739		)	j	(17,779		)
Other liabilities	(253		)	109			d,m,k	(144		)
Net cash used in operating activities - continuing operations	(9,962		)	811				(9,151		)
Net cash used in operating activities - discontinued operations	—			(1,479		)	bb	(1,479		)
Net cash used in operating activities	(9,962		)	(668		)		(10,630		)
Cash flows from investing activities:
Purchase of property, plant and equipment, net of acquisitions	(8,297		)	(229		)	c,d,g,m	(8,526		)
Purchase of equipment leased to third parties under operating leases	(564		)	—				(564		)
Acquisitions, net of cash acquired	(19,167		)	25			m	(19,142		)
Purchase of company-owned life insurance investment	(2,294		)	—				(2,294		)
Proceeds from sale of property, plant and equipment	522			73			c	595
Net cash used in investing activities - continuing operations	(29,800		)	(131		)		(29,931		)
Net cash used in investing activities - discontinued operations	—			(265		)	bb	(265		)
Net cash used in investing activities	(29,800		)	(396		)		(30,196		)
Cash flows from financing activities:
Repayment of term loan	(1,406		)	—				(1,406		)
Borrowings under revolving credit agreement	125,000			—				125,000
Repayments under revolving credit agreement	(38,000		)	—				(38,000		)
Payment of seller notes	(1,594		)	(37		)	m	(1,631		)
Payment of contingent consideration	—			(375		)	m	(375		)
Payment of financing obligations	(340		)	(86		)	d	(426		)
Excess tax benefit from stock-based compensation	1,780			23			m	1,803
Proceeds from issuance of common stock	86			1			m	87
Net cash provided by financing activities - continuing operations	85,526			(474		)		85,052
Net cash used in financing activities - discontinued operations	—			(3		)	bb	(3		)
Net cash provided by financing activities	85,526			(477		)		85,049
Increase in cash and cash equivalents	45,764			(1,541		)		44,223
Cash and cash equivalents, at beginning of year	9,860			(8,247		)	n	1,613
Cash and cash equivalents, at end of period	$	55,624		$	(9,788	)		$	45,836
SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:
Cash paid during the period for:
Interest	$	1,629		$	908		m	$	2,537
Income taxes	11,159			—			m	11,159
Non-cash financing and investing activities:
Issuance of seller notes in connection with acquisitions	9,300			(850		)	m	8,450
Additions to property, plant and equipment acquired through finance obligations	—			1,266			d	1,266
Retirements of financed property, plant and equipment	—			7			d	7
Purchase of property, plant & equipment in accounts payable	—			2,184			c,g	2,184

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	For the Six Months Ended June 30, 2014
	As Previously Reported			Restatement Adjustments			Reference	As Restated
Cash flows from operating activities:
Net income (loss)	$	18,616		$	(25,352	)	a - m,o,p	$	(6,736	)
Income from discontinued operations, net of income taxes	—			1,040			bb	1,040
Income (loss) from continuing operations	18,616			(26,392		)		(7,776		)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	22,332			(3,199		)	c,d,m	19,133
Provision for doubtful accounts	8,808			(4,345		)	b,h	4,463
Compensation expense on restricted stock units	5,265			(113		)	o	5,152
Provision for deferred income taxes	358			1,478			p	1,836
Amortization of debt issuance costs	861			445			m	1,306
Gain on sale of property, plant and equipment	(939		)	319			c	(620		)
Contingent consideration gains	(318		)	318			m	—
Changes in operating assets and liabilities, net of effects of acquired companies:
Net accounts receivable	(23,564		)	18,488			b,e,f,m	(5,076		)
Inventories	(14,467		)	8,570			a,l,m	(5,897		)
Other current assets and income taxes	(5,104		)	(3,456		)	c,d,h,j,n,p	(8,560		)
Accounts payable	(6,430		)	3,459			g,m	(2,971		)
Accrued expenses, other current liabilities and accrued interest payable	1,080			92			e,m,k	1,172
Accrued compensation related costs	(13,772		)	(1,278		)	j	(15,050		)
Other liabilities	(211		)	1,722			d,m,k	1,511
Net cash used in operating activities - continuing operations	(7,485		)	(3,892		)		(11,377		)
Net cash provided by operating activities - discontinued operations	—			3,482			bb	3,482
Net cash used in operating activities	(7,485		)	(410		)		(7,895		)
Cash flows from investing activities:
Purchase of property, plant and equipment, net of acquisitions	(20,248		)	5,443			c,d,g,m	(14,805		)
Purchase of equipment leased to third parties under operating leases	(1,438		)	(225		)	c	(1,663		)
Acquisitions, net of cash acquired	(34,201		)	267			m	(33,934		)
Purchase of company-owned life insurance investment	(2,294		)	—				(2,294		)
Proceeds from sale of property, plant and equipment	1,079			595			c	1,674
Net cash used in investing activities - continuing operations	(57,102		)	6,080				(51,022		)
Net cash used in investing activities - discontinued operations	—			(464		)	bb	(464		)
Net cash used in investing activities	(57,102		)	5,616				(51,486		)
Cash flows from financing activities:
Repayment of term loan	(2,813		)	—				(2,813		)
Borrowings under revolving credit agreement	228,000			—				228,000
Repayments under revolving credit agreement	(163,000		)	—				(163,000		)
Payment of seller notes	(3,765		)	196			m	(3,569		)
Payment of contingent consideration	—			(626		)	m	(626		)
Payment of financing obligations	(754		)	(112		)	d	(866		)
Excess tax benefit from stock-based compensation	1,875			316			j	2,191
Proceeds from issuance of common stock	86			1			m	87
Net cash provided by financing activities - continuing operations	59,629			(225		)		59,404
Net cash used in financing activities - discontinued operations	—			(6		)	bb	(6		)
Net cash provided by financing activities	59,629			(231		)		59,398
(Decrease) increase in cash and cash equivalents	(4,958		)	4,975				17
Cash and cash equivalents, at beginning of year	9,860			(8,247		)	n	1,613
Cash and cash equivalents, at end of period	$	4,902		$	(3,272	)		$	1,630
SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:
Cash paid during the period for:
Interest	$	10,537		$	1,807		m	$	12,344
Income taxes	11,538			—			m	11,538
Non-cash financing and investing activities:
Issuance of seller notes in connection with acquisitions	12,900			(999		)	m	11,901
Additions to property, plant and equipment acquired through finance obligations	10,717			(8,744		)	d	1,973
Retirements of financed property, plant and equipment	—			7			d	7
Purchase of property, plant & equipment in accounts payable	—			1,169			c,g	1,169

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	For the Three Months Ended March 31, 2013
	As Previously Reported			Restatement Adjustments			Reference	As Restated
Cash flows from operating activities:
Net income	$	9,490		$	(7,726	)	a - j,m,o,p	$	1,764
Income from discontinued operations, net of income taxes	—			11			bb	11
Income from continuing operations	9,490			(7,737		)		1,753
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	9,285			(918		)	c,d,m	8,367
Provision for doubtful accounts	1,657			(1,183		)	b,h	474
Compensation expense on restricted stock units	1,667			426			o	2,093
Amortization of debt issuance costs	864			174			m	1,038
Loss (gain) on sale of property, plant and equipment	52			(329		)	c	(277		)
Changes in operating assets and liabilities, net of effects of acquired companies:
Net accounts receivable	7,216			2,116			b,e,f,m	9,332
Inventories	(5,197		)	3,748			a,m	(1,449		)
Other current assets and income taxes	(3,860		)	1,015			c,d,h,j,n,p	(2,845		)
Accounts payable	(2,006		)	1,367			g,m	(639		)
Accrued expenses, other current liabilities and accrued interest payable	3,883			107			e,m	3,990
Accrued compensation related costs	(19,544		)	(3,642		)	j	(23,186		)
Other liabilities	(1,314		)	1,512			d,m,k	198
Net cash provided by (used in) operating activities - continuing operations	2,193			(3,344		)		(1,151		)
Net cash provided by operating activities - discontinued operations	—			109			bb	109
Net cash provided by (used in) operating activities	2,193			(3,235		)		(1,042		)
Cash flows from investing activities:
Purchase of property, plant and equipment, net of acquisitions	(5,110		)	1,660			c,d,g,m	(3,450		)
Purchase of equipment leased to third parties under operating leases	(288		)	(372		)	c	(660		)
Acquisitions, net of cash acquired	—			(65		)		(65		)
Proceeds from sale of property, plant and equipment	91			572			c	663
Net cash used in investing activities - continuing operations	(5,307		)	1,795				(3,512		)
Net cash used in investing activities - discontinued operations	—			(256		)	bb	(256		)
Net cash used in investing activities	(5,307		)	1,539				(3,768		)
Cash flows from financing activities:
Repayment of term loan	(750		)	—				(750		)
Borrowings under revolving credit agreement	—			50,000			m	50,000
Repayments under revolving credit agreement	—			(50,000		)	m	(50,000		)
Payment of seller notes	(1,410		)	(1		)	m	(1,411		)
Payment of contingent consideration	—			(675		)	m	(675		)
Payment of financing obligations	(180		)	(144		)	d	(324		)
Excess tax benefit from stock-based compensation	1,214			(160		)	j	1,054
Proceeds from issuance of common stock	62			—				62
Net cash used in financing activities - continuing operations	(1,064		)	(980		)		(2,044		)
Net cash used in financing activities - discontinued operations	—			(3		)	bb	(3		)
Net cash used in financing activities	(1,064		)	(983		)		(2,047		)
Decrease in cash and cash equivalents	(4,178		)	(2,679		)		(6,857		)
Cash and cash equivalents, at beginning of year	19,211			(6,081		)	n	13,130
Cash and cash equivalents, at end of period	$	15,033		$	(8,760	)		$	6,273
SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:
Cash paid during the period for:
Interest	$	3,290		$	931		m	$	4,221
Income taxes	5,591			—			m	5,591
Non-cash financing and investing activities:
Issuance of seller notes in connection with acquisitions	—			—				—
Additions to property, plant and equipment acquired through finance obligations	—			386			d	386
Purchase of property, plant & equipment in accounts payable	—			357			c,g	357

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	For the Six Months Ended June 30, 2013
	As Previously Reported			Restatement Adjustments			Reference	As Restated
Cash flows from operating activities:
Net income	$	23,569		$	(10,608	)	a - j,m,o,p	$	12,961
Loss from discontinued operations, net of income taxes	—			(271		)	bb	(271		)
Income from continuing operations	23,569			(10,337		)		13,232
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	18,795			(1,623		)	c,d,m	17,172
Provision for doubtful accounts	4,591			(2,886		)	b,h	1,705
Compensation expense on restricted stock units	4,060			539			o	4,599
Provision for deferred income taxes	(2,564		)	—				(2,564		)
Amortization of debt issuance costs	8,273			(6,298		)	m	1,975
Loss on extinguishment of debt	—			6,645			m	6,645
Loss (gain) on sale of property, plant and equipment	169			(1,069		)	c	(900		)
Contingent consideration gains	(57		)	—				(57		)
Changes in operating assets and liabilities, net of effects of acquired companies:
Net accounts receivable	(7,712		)	8,459			b,e,f,m	747
Inventories	(7,940		)	5,682			a,m	(2,258		)
Other current assets and income taxes	(2,746		)	1,793			c,d,h,j,n,p	(953		)
Accounts payable	7,611			3,530			g,m	11,141
Accrued expenses, other current liabilities and accrued interest payable	(202		)	(67		)	e,m	(269		)
Accrued compensation related costs	(18,612		)	(288		)	j	(18,900		)
Other liabilities	409			163			d,m,k	572
Net cash provided by operating activities - continuing operations	27,644			4,243				31,887
Net cash used in operating activities - discontinued operations	—			(2,227		)	bb	(2,227		)
Net cash provided by operating activities	27,644			2,016				29,660
Cash flows from investing activities:
Purchase of property, plant and equipment, net of acquisitions	(15,939		)	2,198			c,d,g,m	(13,741		)
Purchase of equipment leased to third parties under operating leases	(2,106		)	257			c	(1,849		)
Acquisitions, net of cash acquired	(4,741		)	(1,035		)	m	(5,776		)
Proceeds from sale of property, plant and equipment	894			750			c	1,644
Net cash used in investing activities - continuing operations	(21,892		)	2,170				(19,722		)
Net cash used in investing activities - discontinued operations	—			(604		)	bb	(604		)
Net cash used in investing activities	(21,892		)	1,566				(20,326		)
Cash flows from financing activities:
Borrowings under term loan	225,000			—				225,000
Repayment of term loan	(293,300		)	—				(293,300		)
Borrowings under revolving credit agreement	120,000			—				120,000
Repayments under revolving credit agreement	(65,000		)	—				(65,000		)
Payment of seller notes	(4,042		)	925			m	(3,117		)
Payment of contingent consideration	—			(925		)	m	(925		)
Payment of financing obligations	(411		)	(247		)	d	(658		)
Payment of fees associated with debt modifications and extinguishments	(3,665		)	—				(3,665		)
Excess tax benefit from stock-based compensation	2,159			(154		)	j	2,005
Proceeds from issuance of common stock	1,628			—				1,628
Purchase and retirement of common stock	(1,566		)	(1		)	m	(1,567		)
Net cash used in financing activities - continuing operations	(19,197		)	(402		)		(19,599		)
Net cash used in financing activities - discontinued operations	—			(7		)	bb	(7		)
Net cash used in financing activities	(19,197		)	(409		)		(19,606		)
Decrease in cash and cash equivalents	(13,445		)	3,173				(10,272		)
Cash and cash equivalents, at beginning of year	19,211			(6,081		)	n	13,130
Cash and cash equivalents, at end of period	$	5,766		$	(2,908	)		$	2,858
SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:
Cash paid during the period for:
Interest	$	13,105		$	3,209		m	$	16,314
Income taxes	14,973			585			m	15,558
Non-cash financing and investing activities:
Issuance of seller notes in connection with acquisitions	300			(32		)	m	268
Additions to property, plant and equipment acquired through finance obligations	220			520			d	740
Retirements of financed property, plant and equipment	—			150			d	150
Purchase of property, plant & equipment in accounts payable	—			574			c,g	574

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	For the Nine Months Ended September 30, 2013
	As Previously Reported			Restatement Adjustments			Reference	As Restated
Cash flows from operating activities:
Net income	$	45,228		$	(16,749	)	a - j,m,o,p	$	28,479
Loss from discontinued operations, net of income taxes	—			(2,305		)	bb	(2,305		)
Income from continuing operations	45,228			(14,444		)		30,784
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	28,019			(2,321		)	c,d,m	25,698
Provision for doubtful accounts	8,545			(5,104		)	b,h	3,441
Compensation expense on restricted stock units	6,398			606			o	7,004
Provision for deferred income taxes	(2,564		)	—				(2,564		)
Amortization of debt issuance costs	8,703			(6,096		)	m	2,607
Loss on extinguishment of debt	—			6,645			m	6,645
Gain on sale of property, plant and equipment	(5,570		)	(799		)	c	(6,369		)
Contingent consideration gains	(363		)	(339		)	m	(702		)
Changes in operating assets and liabilities, net of effects of acquired companies:
Net accounts receivable	(14,586		)	15,377			b,e,f,m	791
Inventories	(14,676		)	10,936			a,m	(3,740		)
Other current assets and income taxes	5,028			(2,898		)	c,d,h,j,n,p	2,130
Accounts payable	4,581			1,359			g,m	5,940
Accrued expenses, other current liabilities and accrued interest payable	5,421			(2,263		)	e,m	3,158
Accrued compensation related costs	(9,584		)	(368		)	j	(9,952		)
Other liabilities	3,946			(1,977		)	d,m,k	1,969
Net cash provided by operating activities - continuing operations	68,526			(1,686		)		66,840
Net cash used in operating activities - discontinued operations	—			(2,261		)	bb	(2,261		)
Net cash provided by operating activities	68,526			(3,947		)		64,579
Cash flows from investing activities:
Purchase of property, plant and equipment, net of acquisitions	(24,429		)	5,255			c,d,g,m	(19,174		)
Purchase of equipment leased to third parties under operating leases	(3,041		)	152			c	(2,889		)
Acquisitions, net of cash acquired	(5,695		)	(926		)	m	(6,621		)
Change in restricted cash associated with workers’ compensation program	3,120			—				3,120
Proceeds from sale of property, plant and equipment	4,595			122			c	4,717
Net cash used in investing activities - continuing operations	(25,450		)	4,603				(20,847		)
Net cash used in investing activities - discontinued operations	—			(944		)	bb	(944		)
Net cash used in investing activities	(25,450		)	3,659				(21,791		)
Cash flows from financing activities:
Borrowings under term loan	225,000			—				225,000
Repayment of term loan	(294,706		)	—				(294,706		)
Borrowings under revolving credit agreement	163,000			—				163,000
Repayments under revolving credit agreement	(137,000		)	—				(137,000		)
Payment of seller notes	(9,168		)	2,719			m	(6,449		)
Payment of contingent consideration	—			(1,965		)	m	(1,965		)
Payment of financing obligations	(808		)	(189		)	d	(997		)
Payment of fees associated with debt modifications and extinguishments	(3,665		)	—				(3,665		)
Excess tax benefit from stock-based compensation	2,214			(156		)	j	2,058
Proceeds from issuance of common stock	1,628			1			m	1,629
Purchase and retirement of common stock	(1,566		)	(1		)	m	(1,567		)
Net cash used in financing activities - continuing operations	(55,071		)	409				(54,662		)
Net cash used in financing activities - discontinued operations	—			(10		)	bb	(10		)
Net cash used in financing activities	(55,071		)	399				(54,672		)
Decrease in cash and cash equivalents	(11,995		)	111				(11,884		)
Cash and cash equivalents, at beginning of year	19,211			(6,081		)	n	13,130
Cash and cash equivalents, at end of period	$	7,216		$	(5,970	)		$	1,246
SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:
Cash paid during the period for:
Interest	$	16,299		$	2,845		m	$	19,144
Income taxes	21,033			—			m	21,033
Non-cash financing and investing activities:
Issuance of seller notes in connection with acquisitions	675			(61		)	m	614
Additions to property, plant and equipment acquired through finance obligations	—			2,797			d	2,797
Retirements of financed property, plant and equipment	—			529			d	529
Purchase of property, plant & equipment in accounts payable	—			638			c,g	638