NOTE B - RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

This Annual Report on Form 10-K for the year ended December 31, 2014 includes audited consolidated financial statements for the years ended December 31, 2014, 2013 and 2012. The consolidated balance sheet as of December 31, 2013 and the consolidated statements of operations and comprehensive income for the years ended December 31, 2013 and 2012 have been restated. The consolidated statements of changes in shareholders’ equity and the consolidated statements of cash flows for the years ended December 31, 2013 and 2012 have also been restated primarily to reflect the correction of misstatements to the consolidated balance sheets and consolidated statements of operations and comprehensive income. The Company has also corrected certain disclosures within the consolidated financial statements.

Restatement Background

During and subsequent to the preparation of our Quarterly Report on Form 10-Q for the third quarter of 2014 (which was not filed), misstatements were identified in our previously issued consolidated financial statements. In response, an extensive accounting review was initiated by the Company, which included an investigation conducted by the Audit Committee of the Board of Directors into the circumstances surrounding the misstatements. This investigation concluded that, based on evidence uncovered in the investigation, it is more likely than not that certain former employees and officers, including in some instances the former Chief Financial Officer and former Chief Accounting Officer, engaged in inappropriate historical accounting practices relating to management estimates and certain accruals. Additionally, in connection with the accounting review, the Company identified numerous material weaknesses in its internal control over financial reporting, described in further detail in Item 9A, “Controls and Procedures,” contained in this Annual Report on Form 10-K. As a result of these misstatements, the Company has restated its consolidated financial statements for the following periods in accordance with ASC 250, Accounting Changes and Error Corrections (the “restated consolidated financial statements”):

As of and for the three months ended March 31, 2014 and as of and for the three and six months ended June 30, 2014 (unaudited);

As of and for the year ended December 31, 2013; as well as all interim periods for the year ended December 31, 2013 (unaudited); and

For the year ended December 31, 2012;

The restated interim financial information is included in Note W - “Quarterly Financial Information (Unaudited).”

Summary impact of restatement adjustments to previously reported financial information

The following tables summarize the cumulative impacts of the primary restatement adjustments on previously reported retained earnings as of December 31, 2013, 2012, and 2011. We have also presented their impact to the restated consolidated income from operations before income taxes for the years ended December 31, 2013 and 2012. After the descriptions of the restatement adjustments, full consolidated financial statement tables separately present the impact of the restatement adjustments, the reclassification of certain expenses, and the recognition of discontinued operations to the previously reported consolidated financial statements. Additionally, a separate set of tables present the individual impact of the more prominent cumulative restatement adjustments to the previously reported consolidated statements of operations and comprehensive income for the years ended December 31, 2013 and 2012.

	As of December 31,
(in thousands)	2013			2012			2011
As previously reported - Retained Earnings	$	288,813		$	225,229		$	161,537
Inventory valuation	(61,323		)	(51,275		)	(39,907		)
Allowance for disallowed revenue and doubtful accounts	(28,301		)	(14,997		)	(12,952		)
Property, plant and equipment, net	(11,311		)	(10,489		)	(8,214		)
Real property leases	(7,542		)	(6,681		)	(5,031		)
All other restatement adjustments	(32,113		)	(24,013		)	(17,332		)

Total restatement adjustments	(140,590		)	(107,455		)	(83,436		)

Tax effect of restatement adjustments	49,302			39,240			30,889

As restated - Retained Earnings	$	197,525		$	157,014		$	108,990

	As of December 31,
(in thousands)	2013			2012
As previously reported - Income before Income Taxes	$	100,744		$	98,169
Inventory valuation	(10,048		)	(11,368		)
Allowance for disallowed revenue and doubtful accounts	(13,304		)	(2,045		)
Property, plant and equipment, net	(822		)	(2,275		)
Real property leases	(861		)	(1,650		)
All other restatement adjustments	(8,100		)	(6,681		)

Total restatement adjustments	(33,135		)	(24,019		)

Restated Income before Income Taxes	67,609			74,150
Adjustment for loss from discontinued operations	8,725			315

As restated - Income from Continuing Operations before Income Taxes	$	76,334		$	74,465

Descriptions of Restatement Adjustments

The categories of misstatements and their impact on previously reported consolidated financial statements for 2013 and 2012 annual periods are described below.

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.” The misstatements overstated previously reported income from operations before taxes by approximately $10.0 million and $11.4 million for the years ended December 31, 2013 and 2012, respectively. The cumulative pre-tax misstatement was a decrease to retained earnings of $61.3 million as of December 31, 2013.

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 are presented as disallowed revenue. Refer to further discussion regarding allowances for disallowed revenue and doubtful accounts in Note E - “Accounts Receivable, Net” The misstatements overstated previously reported income from operations before taxes by approximately $13.3 million and $2.0 million for the years ended December 31, 2013 and 2012, respectively. The cumulative pre-tax misstatement was a decrease to retained earnings of $28.3 million as of December 31, 2013.

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. The misstatements overstated previously reported income from operations before taxes by approximately $0.8 million and $2.3 million for the years ended December 31, 2013 and 2012, respectively. The cumulative pre-tax misstatement was a decrease to retained earnings of $11.3 million as of December 31, 2013.

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. The misstatements overstated previously reported income from operations before taxes of approximately $0.9 million and $1.7 million for the years ended December 31, 2013 and 2012, respectively. The cumulative pre-tax misstatement was a decrease to retained earnings of $7.5 million as of December 31, 2013.

All Other Restatement Adjustments

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 recorded purchase commissions as revenue rather than a reduction of cost of materials. The misstatements overstated previously reported income from operations before taxes by approximately $3.7 million for the year ended December 31, 2013. The cumulative pre-tax misstatement was a decrease to retained earnings of $3.1 million as of December 31, 2013.

Revenue Accrual - The Company often invoices 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. The misstatements overstated previously reported income from operations before taxes by approximately $1.3 million and $1.5 million for the years ended December 31, 2013 and 2012, respectively. The cumulative pre-tax misstatement was a decrease to retained earnings of $3.3 million as of December 31, 2013.

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 accrual method overstated the estimated amount of accounts payables outstanding at December 31, 2013 and understated the estimated amount of accounts payables outstanding at December 31, 2012. The misstatement understated previously reported income from operations before taxes by approximately $0.2 million for the year-ended December 31, 2013 and overstated previously reported income from operations before taxes by approximately $1.5 million for the year ended December 31, 2012. The cumulative pre-tax misstatement was a decrease to retained earnings of $3.4 million as of December 31, 2013.

Other Profit & Loss Restatement Adjustments - There are other misstatements not otherwise described in items (a) through (g) of this Note, which are individually insignificant to previously reported income from operations before income taxes for the years ended December 31, 2013 and December 31, 2012. The other misstatements overstated previously reported income from operations before taxes by approximately $3.2 million and $3.7 million for the years ended December 31, 2013 and 2012, respectively. The cumulative pre-tax misstatement was a decrease to retained earnings of $22.3 million as of December 31, 2013.

Cash and Cash Equivalents - The Company identified balance sheet classification misstatements in which cash balances were overstated due to certain outstanding 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.” For additional disclosure information, see Note C - “Significant Accounting Policies.” These corrections, along with the correction of other misstatements included within item (h) above, resulted in a net reduction to previously reported cash and cash equivalents of approximately $8.2 million as of December 31, 2013.

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. The cumulative misstatements understated additional paid-in capital and income from operations before taxes for multiple years by approximately $2.4 million as of December 31, 2013.

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 the resultant materiality of certain expenses in 2014, and to enable the presentation of the consolidated statements of operations and comprehensive (loss) 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 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. As discussed in further detail in Note T - “Discontinued Operations,” assets of these businesses that were expected to be disposed of by sale are reported as “Assets held for sale” on the Company’s consolidated balance sheets as of December 31, 2014.

See Note T - “Discontinued Operations” for the details of our discontinued operations in 2014.

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. The 2013 equipment capital leases have been reclassified accordingly. For additional disclosure information, see Note O - “Long-Term Debt.”

Refer also to Note W - “Quarterly Financial Information (Unaudited)” for disclosure of the nature of the restatement adjustments and adjustment amounts on each of the quarterly and year-to-date periods ended March 31 and June 30, 2014, as well as each quarterly and year-to-date period within 2013.

Consolidated financial statement adjustment tables

The following tables present the differing adjustments to previously issued consolidated financial statements from the restatement adjustments as well as the reclassification of expenses and discontinued operations. This information is presented for each impacted caption of the previously reported consolidated balance sheets as of December 31, 2013, consolidated statement of operations and comprehensive income for the years ended December 31, 2013 and 2012 and consolidated statement of cash flows for the years ended December 31, 2013 and 2012. The corrections of misstatements affecting fiscal years prior to 2012 are reflected as a cumulative adjustment to the balance of retained earnings as of December 31, 2011 on the consolidated statements of changes in shareholders’ equity.

HANGER, INC.

CONSOLIDATED BALANCE SHEET

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

	As of December 31, 2013
	As Previously Reported			Restatement Adjustments			Restatement Reference	As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	9,860		$	(8,247	)	h,i	$	1,613
Accounts receivable, net of allowance for doubtful accounts of $6,472	185,769			(31,030		)	b,e,f,h,i	154,739
Inventories	141,518			(59,261		)	a,h	82,257
Other current assets	15,519			6,087			d,h,k,i	21,606
Deferred income taxes	30,298			45,318			k	75,616
Total current assets	382,964			(47,133		)		335,831

Non-current assets:
Property, plant and equipment, net	126,798			(10,509		)	c,d,g,h	116,289
Goodwill	681,547			1,081			h,k	682,628
Other intangible assets, net	58,021			(1,781		)	h	56,240
Debt issuance costs, net	8,564			(68		)	h	8,496
Other assets	13,766			1,738			d,h	15,504

Total assets	$	1,271,660		$	(56,672	)		$	1,214,988


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	15,998		$	1,730		d,h,cc	$	17,728
Accounts payable	36,729			7,790			g,h	44,519
Accrued expenses and other current liabilities	24,923			19,510			d,e,g,h,k,cc	44,433
Accrued interest payable	1,898			121			d	2,019
Accrued compensation related costs	36,331			2,275			h	38,606

Total current liabilities	115,879			31,426				147,305

Long-term liabilities:
Long-term debt, less current portion	452,261			17,557			d,h,cc	469,818
Deferred income taxes	76,545			(11,216		)	k	65,329
Other liabilities	46,755			(5,532		)	d,h,cc	41,223

Total liabilities	691,440			32,235				723,675

Commitments and contingent liabilities

Shareholders’ Equity:
Common stock, $.01 par value; 60,000,000 shares authorized, 35,158,196 shares issued and 35,017,042 shares outstanding	361			(10		)	j	351
Additional paid-in capital	292,722			2,391			j,h	295,113
Accumulated other comprehensive loss	(1,020		)	—				(1,020		)
Retained earnings	288,813			(91,288		)	a,b,c,d,e,f, g,h,j	197,525

	580,876			(88,907		)		491,969

Treasury stock at cost, 141,154 shares	(656		)	—				(656		)

Total shareholders’ equity	580,220			(88,907		)		491,313

Total liabilities and shareholders’ equity	$	1,271,660		$	(56,672	)		$	1,214,988

HANGER, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

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

	For the Year Ended December 31, 2013
	As Previously Reported		Restatement Adjustments			Restatement Reference	Reclassification of Expenses (aa)			Discontinued Operations (bb)			As Restated
Net revenue	$	1,046,438	$	(27,976	)	b,e,f,h	$	—		$	(42,693	)	$	975,769
Material costs	319,046		738			a,h	—			(17,781		)	302,003
Personnel costs	369,738		9,264			a,c,h,j	(31,805		)	(21,417		)	325,780
Other operating costs	186,304		(7,178		)	a,b,c,d,g,h	(52,674		)	(10,685		)	115,767
General and administrative expenses	—		—				78,658			—			78,658
Professional accounting and legal fees	—		—				5,821			—			5,821
Depreciation and amortization	37,486		(1,819		)	c,d,h	—			(1,482		)	34,185

Income from operations	133,864		(28,981		)		—			8,672			113,555
Interest expense, net	26,475		4,154			d,h	—			(53		)	30,576
Extinguishment of debt	6,645		—				—			—			6,645

Income from continuing operations before income taxes	100,744		(33,135		)		—			8,725			76,334
Provision for income taxes	37,160		(10,062		)	k	—			3,357			30,455

Income from continuing operations	63,584		(23,073		)		—			5,368			45,879
Loss from discontinued operations, net of income taxes	—		—				—			(5,368		)	(5,368		)

Net income	$	63,584	$	(23,073	)		$	—		$	—		$	40,511


Other comprehensive income
Unrealized gain on SERP net of tax provision of $531	$	899	$	—			$	—		$	—		$	899

Total other comprehensive income	899		—				—			—			899

Comprehensive income	$	64,483	$	(23,073	)		$	—		$	—		$	41,410


Basic Per Common Share Data
Income from continuing operations	$	1.83	$	(0.67	)		$	—		$	0.16		$	1.32
Loss from discontinued operations, net of income taxes	—		—				—			(0.16		)	(0.16		)

Basic income per share	$	1.83	$	(0.67	)		$	—		$	—		$	1.16

Shares used to compute basic per common share amounts	34,818,214		7,653			j	—			—			34,825,867


Diluted Per Common Share Data
Income from continuing operations	$	1.80	$	(0.65	)		$	—		$	0.15		$	1.30
Loss from discontinued operations, net of income taxes	—		—				—			(0.15		)	(0.15		)

Diluted income per share	$	1.80	$	(0.65	)		$	—		$	—		$	1.15

Shares used to compute diluted per common share amounts	35,394,721		(185,967		)	j	—			—			35,208,754

HANGER, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME

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

	For the Year Ended December 31, 2012
	As Previously Reported			Restatement Adjustments			Restatement Reference	Reclassification of expenses (aa)			Discontinued Operations (bb)			As Restated
Net revenue	$	974,429		$	(11,629	)	b,e,f,h	$	—		$	(39,279	)	$	923,521
Material costs	296,193			2,686			a,h	—			(13,006		)	285,873
Personnel costs	335,328			9,255			a,c,h,j	(27,133		)	(18,446		)	299,004
Other operating costs	178,918			(2,047		)	a,b,c,d,g,h	(58,956		)	(7,034		)	110,881
General and administrative expenses	—			—				81,182			—			81,182
Professional accounting and legal fees	—			—				4,907			—			4,907
Depreciation and amortization	34,652			(1,044		)	c,d,h	—			(1,019		)	32,589

Income from operations	129,338			(20,479		)		—			226			109,085
Interest expense, net	31,169			3,540			d,h	—			(89		)	34,620

Income from continuing operations before income taxes	98,169			(24,019		)		—			315			74,465
Provision for income taxes	34,477			(8,351		)	k	—			80			26,206

Income from continuing operations	63,692			(15,668		)		—			235			48,259
Loss from discontinued operations, net of income taxes	—			—				—			(235		)	(235		)

Net income	$	63,692		$	(15,668	)		$	—		$	—		$	48,024


Other comprehensive income
Unrealized loss on SERP, net of tax benefit of $439	$	(734	)	$	—			$	—		$	—		$	(734	)

Total other comprehensive loss	(734		)	—				—			—			(734		)

Comprehensive income	$	62,958		$	(15,668	)		$	—		$	—		$	47,290


Basic Per Common Share Data
Income from continuing operations	$	1.86		$	(0.46	)		$	—		$	0.01		$	1.41
Loss from discontinued operations, net of income taxes	—			—				—			(0.01		)	(0.01		)

Basic income per share	$	1.86		$	(0.46	)		$	—		$	—		$	1.40

Shares used to compute basic per common share amounts	34,282,591			(8,970		)	j	—			—			34,273,621


Diluted Per Common Share Data
Income from continuing operations	$	1.83		$	(0.45	)		$	—		$	0.01		$	1.39
Loss from discontinued operations, net of income taxes	—			—				—			(0.01		)	(0.01		)

Diluted income per share	$	1.83		$	(0.45	)		$	—		$	—		$	1.38

Shares used to compute diluted per common share amounts	34,832,830			(95,410		)	j	—			—			34,737,420

HANGER, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

	For the Year Ended December 31, 2013
	As Previously Reported			Restatement Adjustments			Restatement Reference	As Restated
Cash flows from operating activities:
Net income	$	63,584		$	(23,073	)	a - h,j,k	$	40,511
Loss from discontinued operations, net of income taxes	—			(5,368		)	bb	(5,368		)

Income from continuing operations	63,584			(17,705		)		45,879
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	37,486			(3,301		)	c,d,h	34,185
Provision for doubtful accounts	14,330			(9,277		)	b,h	5,053
Compensation expense on restricted stock units	9,080			266			j	9,346
Benefit from deferred income taxes	(1,602		)	(12,897		)	k	(14,499		)
Amortization of debt issuance costs	2,488			730			h	3,218
Loss on extinguishment of debt	6,645			—				6,645
Gain on sale of property, plant and equipment	(5,914		)	(344		)	c	(6,258		)
Contingent consideration gains	(1,032		)	(429		)	h	(1,461		)
Changes in operating assets and liabilities, net of effects of acquired companies:
Net accounts receivable	(32,060		)	23,205			b,e,f,h	(8,855		)
Inventories	(11,329		)	7,836			a,h	(3,493		)
Other current assets and income taxes	4,689			2,320			d,h,k	7,009
Accounts payable	6,235			(1,139		)	g,h	5,096
Accrued expenses and other current liabilities, accrued interest payable	(223		)	910			d,e,g,h	687
Accrued compensation related costs	(7,379		)	813			h	(6,566		)
Other liabilities	1,262			2,886			d,h,k	4,148

Net cash provided by operating activities - continuing operations	86,260			(6,126		)		80,134
Net cash used in operating activities - discontinued operations	—			(3,102		)	bb	(3,102		)

Net cash provided by operating activities	86,260			(9,228		)		77,032

Cash flows from investing activities:
Purchase of property, plant and equipment, net of acquisitions	(34,236		)	8,329			c,d,g,h	(25,907		)
Purchase of equipment leased to third parties under operating leases	(4,210		)	107			c	(4,103		)
Acquisitions, net of cash acquired	(9,296		)	(999		)	h	(10,295		)
Change in restricted cash associated with workers’ compensation program	3,120			—				3,120
Proceeds from sale of property, plant and equipment	8,684			382			c	9,066

Net cash used in investing activities - continuing operations	(35,938		)	7,819				(28,119		)
Net cash used in investing activities - discontinued operations	—			(1,438		)	bb	(1,438		)

Net cash used in investing activities	(35,938		)	6,381				(29,557		)

Cash flows from financing activities:
Borrowings under term loan	225,000			—				225,000
Repayment of term loan	(296,113		)	—				(296,113		)
Borrowings under revolving credit agreement	249,000			—				249,000
Repayments under revolving credit agreement	(224,000		)	—				(224,000		)
Payment of seller notes	(12,410		)	3,754			h	(8,656		)
Payment of contingent consideration	—			(2,590		)		(2,590		)
Payment of financing obligations	(1,047		)	(320		)	d	(1,367		)
Payment of fees associated with debt modifications and extinguishments	(3,667		)	2			h	(3,665		)
Excess tax benefit from stock-based compensation	3,501			(153		)	h	3,348
Proceeds from issuance of common stock	2,437			—				2,437
Purchase and retirement of common stock	(2,374		)	—				(2,374		)

Net cash used in financing activities - continuing operations	(59,673		)	693				(58,980		)
Net cash used in financing activities - discontinued operations	—			(12		)	bb	(12		)

Net cash used in financing activities	(59,673		)	681				(58,992		)

Decrease in cash and cash equivalents	(9,351		)	(2,166		)		(11,517		)
Cash and cash equivalents, at beginning of year	19,211			(6,081		)	i	13,130

Cash and cash equivalents, at end of year	$	9,860		$	(8,247	)		$	1,613

HANGER, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

	For the Year Ended December 31, 2012
	As Previously Reported			Restatement Adjustments			Restatement Reference	As Restated
Cash flows from operating activities:
Net income	$	63,692		$	(15,668	)	a - h, j,k	$	48,024
Loss from discontinued operations, net of income taxes	—			(235		)	bb	(235		)

Income from continuing operations	63,692			(15,433		)		48,259
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	34,652			(2,063		)	c,d,h	32,589
Provision for doubtful accounts	9,589			(5,166		)	b,h	4,423
Compensation expense on restricted stock units	8,061			152			j	8,213
Benefit from deferred income taxes	(4,303		)	(9,509		)	k	(13,812		)
Amortization of debt issuance costs	3,452			439			h	3,891
Loss (gain) on sale of property, plant and equipment	64			(2,083		)	c	(2,019		)
Contingent consideration gains	(993		)	(395		)	h	(1,388		)
Changes in operating assets and liabilities, net of effects of acquired companies:
Net accounts receivable	(30,259		)	14,725			b,e,f,h	(15,534		)
Inventories	(12,827		)	13,149			a,h	322
Other current assets and income taxes	3,867			(2,369		)	d,h,k	1,498
Accounts payable	(2,114		)	3,378			g,h	1,264
Accrued expenses, other current liabilities and accrued interest payable	3,501			(50		)	d,e,g,h	3,451
Accrued compensation related costs	4,348			(1,541		)	h	2,807
Other liabilities	589			(758		)	d,h,k	(169		)

Net cash provided by operating activities - continuing operations	81,319			(7,524		)		73,795
Net cash used in operating activities - discontinued operations	—			(3,037		)	bb	(3,037		)

Net cash provided by operating activities	81,319			(10,561		)		70,758

Cash flows from investing activities:
Purchase of property, plant and equipment, net of acquisitions	(29,492		)	4,989			c,d,g,h	(24,503		)
Purchase of equipment leased to third parties under operating leases	(3,671		)	908			c	(2,763		)
Acquisitions, net of cash acquired	(62,500		)	1,099			h	(61,401		)
Change in restricted cash associated with workers’ compensation program	(3,120		)	—				(3,120		)
Purchase of company-owned life insurance investment	(2,000		)	—				(2,000		)
Proceeds from sale of property, plant and equipment	1,732			1,499			c	3,231

Net cash used in investing activities - continuing operations	(99,051		)	8,495				(90,556		)
Net cash used in investing activities - discontinued operations	—			(1,118		)	bb	(1,118		)

Net cash used in investing activities	(99,051		)	7,377				(91,674		)

Cash flows from financing activities:
Repayment of term loan	(3,700		)	—				(3,700		)
Payment of seller notes	(5,255		)	351			h	(4,904		)
Payment of contingent consideration	—			(2,915		)		(2,915		)
Payment of financing obligations	(713		)	(391		)	d	(1,104		)
Excess tax benefit from stock-based compensation	1,505			(16		)	h	1,489
Proceeds from issuance of common stock	3,560			—			h	3,560
Purchase and retirement of common stock	(1,350		)	—				(1,350		)

Net cash used in financing activities - continuing operations	(5,953		)	(2,971		)		(8,924		)
Net cash used in financing activities - discontinued operations	—			(353		)	bb	(353		)

Net cash used in financing activities	(5,953		)	(3,324		)		(9,277		)

Decrease in cash and cash equivalents	(23,685		)	(6,508		)		(30,193		)
Cash and cash equivalents, at beginning of year	42,896			427			i	43,323

Cash and cash equivalents, at end of year	$	19,211		$	(6,081	)		$	13,130

Impact of restatement adjustments on previously reported consolidated statements of operations and comprehensive income

The following set of tables separately present the impact of each of the more prominent cumulative restatement adjustments to the previously reported consolidated statements of operations and comprehensive income for the years ended December 31, 2013 and 2012.

For the Year Ended December 31, 2013

(in thousands)	Total Restatement Adjustments			Inventory Valuation (a)			Allowances for Disallowed Revenue and Doubtful Accounts (b)			Property, Plant and Equipment, net (c)			Real Property Leases (d)			All Other Adjustments (e,f,g,h)
Net revenue	$	(27,976	)	$	—		$	(20,616	)	$	—		$	—		$	(7,360	)
Material costs	738			3,455			—			—			—			(2,717		)
Personnel costs	9,264			6,656			—			2,312			—			296
Other operating costs	(7,178		)	(63		)	(7,312		)	1,216			(2,972		)	1,953
Depreciation and amortization	(1,819		)	—			—			(2,706		)	1,002			(115		)
Income from operations	(28,981		)	(10,048		)	(13,304		)	(822		)	1,970			(6,777		)
Interest expense, net	4,154			—			—			—			2,831			1,323
Income from continuing operations before taxes	$	(33,135	)	$	(10,048	)	$	(13,304	)	$	(822	)	$	(861	)	$	(8,100	)

For the Year Ended December 31, 2012

(in thousands)	Total Restatement Adjustments			Inventory Valuation (a)			Allowances for Disallowed Revenue and Doubtful Accounts (b)			Property, Plant and Equipment, net (c)			Real Property Leases (d)			All Other Adjustments (e,f,g,h)
Net revenue	$	(11,629	)	$	—		$	(5,940	)	$	—		$	—		$	(5,689	)
Material costs	2,686			4,587			—			—			—			(1,901		)
Personnel costs	9,255			5,347			—			2,889			—			1,019
Other operating costs	(2,047		)	1,434			(3,895		)	1,703			(2,588		)	1,299
Depreciation and amortization	(1,044		)	—			—			(2,317		)	1,239			34
Income from operations	(20,479		)	(11,368		)	(2,045		)	(2,275		)	1,349			(6,140		)
Interest expense, net	3,540			—			—			—			2,999			541
Income from continuing operations before taxes	$	(24,019	)	$	(11,368	)	$	(2,045	)	$	(2,275	)	$	(1,650	)	$	(6,681	)