NOTE V — QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The tables below present summarized unaudited quarterly financial statements for the years ended December 31, 2017 and 2016. In lieu of filing Quarterly Reports on Form 10-Q for each quarter of 2017 and 2016, quarterly financial information 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 of			As of			As of
	March 31,			June 30,			September 30,
	2017			2017			2017
ASSETS
Current assets:
Cash and cash equivalents	$	1,414		$	911		$	460
Net accounts receivable, less allowance for doubtful accounts of $13,611 at March 31, 2017, $13,109 at June 30, 2017, and $13,472 at September 30, 2017	125,776			133,646			134,424
Inventories	72,878			72,338			74,095
Income taxes receivable	12,351			12,855			13,784
Other current assets	18,465			19,066			19,176

Total current assets	230,884			238,816			241,939


Non-current assets:
Property, plant and equipment, net	96,540			93,381			93,346
Goodwill	249,678			249,678			249,678
Other intangible assets, net	30,471			28,027			25,666
Deferred income taxes	100,273			99,771			101,402
Other assets	27,433			26,785			26,547

Total assets	$	735,279		$	736,458		$	738,578

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	27,398		$	21,476		$	13,129
Accounts payable	57,491			49,654			50,337
Accrued expenses and other current liabilities	78,482			70,731			69,383
Accrued interest payable	447			393			539
Accrued compensation related costs	16,991			29,928			29,220

Total current liabilities	180,809			172,182			162,608


Long-term liabilities:
Long-term debt, less current portion	456,663			462,339			474,434
Other liabilities	49,316			48,911			49,103

Total liabilities	686,788			683,432			686,145


Shareholders’ Equity:
Common stock, $.01 par value; 60,000,000 shares authorized, 36,402,093 shares, 36,478,597 shares, and 36,486,490 shares issued and 36,259,272 shares, 36,335,776 shares and 36,343,669 shares outstanding at March 31, June 30, and September 30, 2017, respectively	364			365			365
Additional paid-in capital	323,113			326,027			329,613
Accumulated other comprehensive loss	(1,458		)	(1,475		)	(1,492		)
Retained deficit	(272,832		)	(271,195		)	(275,357		)
Treasury stock, at cost 142,821 shares at March 31, June 30, and September 30, 2017, respectively	(696		)	(696		)	(696		)

Total shareholders’ equity	48,491			53,026			52,433

Total liabilities and shareholders’ equity	$	735,279		$	736,458		$	738,578

	As of			As of			As of
	March 31,			June 30,			September 30,
	2016			2016			2016
ASSETS
Current assets:
Cash and cash equivalents	$	19,962		$	49,011		$	1,003
Net accounts receivable, less allowance for doubtful accounts of $16,296 at March 31, 2016, $15,241 at June 30, 2016, and $14,418 at September 30, 2016	149,816			145,605			139,203
Inventories	69,163			71,092			74,563
Income taxes receivable	41,066			41,736			10,999
Other current assets	24,014			19,199			18,102

Total current assets	304,021			326,643			243,870

Non-current assets:
Property, plant and equipment, net	109,124			105,286			102,485
Goodwill	335,642			335,642			335,642
Other intangible assets, net	43,178			39,232			35,630
Deferred income taxes	98,254			98,254			98,254
Other assets	23,680			25,413			25,582

Total assets	$	913,899		$	930,470		$	841,463

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	29,447		$	29,713		$	28,833
Accounts payable	40,813			68,909			59,113
Accrued expenses and other current liabilities	81,934			78,026			75,443
Accrued interest payable	7,636			5,255			554
Accrued compensation related costs	25,131			23,772			22,193

Total current liabilities	184,961			205,675			186,136

Long-term liabilities:
Long-term debt, less current portion	525,521			519,952			457,021
Other liabilities	55,304			54,925			53,803

Total liabilities	765,786			780,552			696,960

Shareholders’ Equity:
Common stock, $.01 par value; 60,000,000 shares authorized, 36,044,247 shares, 36,144,560 shares, and 36,158,347 shares issued and 35,901,426 shares, 36,001,739 shares and 36,015,526 shares outstanding at March 31, June 30, and September 30, 2015, respectively	361			362			362
Additional paid-in capital	315,908			318,022			320,065
Accumulated other comprehensive loss	(1,394		)	(1,376		)	(1,356		)
Retained earnings	(166,066		)	(166,394		)	(173,872		)
Treasury stock, at cost 142,821 shares at March 31, June 30, and September 30, 2016, respectively	(696		)	(696		)	(696		)

Total shareholders’ equity	148,113			149,918			144,503

Total liabilities and shareholders’ equity	$	913,899		$	930,470		$	841,463

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE (LOSS) INCOME

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

(Unaudited)

	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,
	2017			2017			2017			2017			2017			2017

Net revenue	$	233,681		$	263,386		$	497,067		$	257,966		$	755,033		$	285,736
Material costs	74,405			83,657			158,062			82,345			240,407			88,816
Personnel costs	87,955			87,831			175,786			90,065			265,851			95,239
Other operating costs	32,689			31,861			64,550			33,184			97,734			32,097
General and administrative expenses	25,570			25,411			50,981			25,540			76,521			33,557
Professional accounting and legal fees	12,650			8,521			21,171			7,844			29,015			7,224
Depreciation and amortization	10,137			9,825			19,962			9,632			29,594			9,665
Impairment of intangible assets	—			—			—			—			—			54,735

(Loss) income from operations	(9,725		)	16,280			6,555			9,356			15,911			(35,597		)
Interest expense, net	14,009			14,091			28,100			15,097			43,197			14,491

(Loss) income from continuing operations before income taxes	(23,734		)	2,189			(21,545		)	(5,741		)	(27,286		)	(50,088		)
(Benefit) provision for income taxes	(6,000		)	552			(5,448		)	(1,580		)	(7,028		)	34,325

(Loss) income from continuing operations	(17,734		)	1,637			(16,097		)	(4,161		)	(20,258		)	(84,413		)

Net (loss) income	$	(17,734	)	$	1,637		$	(16,097	)	$	(4,161	)	$	(20,258	)	$	(84,413	)


Other comprehensive (loss) income:
Unrealized loss on DB SERP, net of tax	$	(17	)	$	(17	)	$	(34	)	$	(17	)	$	(51	)	$	(195	)

Comprehensive (loss) income	$	(17,751	)	$	1,620		$	(16,131	)	$	(4,178	)	$	(20,309	)	$	(84,608	)


Basic Per Common Share Data:
Basic (loss) income per share	$	(0.49	)	$	0.05		$	(0.44	)	$	(0.11	)	$	(0.56	)	$	(2.32	)

Shares used to compute basic per common share amounts	36,085			36,287			36,187			36,340			36,239			36,410


Diluted Per Common Share Data:
Diluted (loss) income per share	$	(0.49	)	$	0.04		$	(0.44	)	$	(0.11	)	$	(0.56	)	$	(2.32	)

Shares used to compute diluted per common share amounts	36,085			36,544			36,187			36,340			36,239			36,410

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

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

(Unaudited)

	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,
	2016			2016			2016			2016			2016			2016

Net revenue	$	236,461		$	264,456		$	500,917		$	260,084		$	761,001		$	281,053
Material costs	76,700			82,971			159,671			85,437			245,108			86,963
Personnel costs	89,138			88,406			177,544			89,113			266,657			96,880
Other operating costs	36,761			31,970			68,731			34,139			102,870			36,154
General and administrative expenses	27,558			30,170			57,728			25,726			83,454			23,770
Professional accounting and legal fees	11,689			10,692			22,381			9,023			31,404			9,829
Depreciation and amortization	11,728			11,660			23,388			11,339			34,727			10,160
Impairment of intangible assets	—			—			—			—			—			86,164

(Loss) income from operations	(17,113		)	8,587			(8,526		)	5,307			(3,219		)	(68,867		)
Interest expense, net	8,838			9,818			18,656			12,809			31,465			13,734
Loss on extinguishment of debt	—			(10		)	(10		)	6,041			6,031			—

Loss from continuing operations	(25,951		)	(1,221		)	(27,172		)	(13,543		)	(40,715		)	(82,601		)
Benefit for income taxes	(8,414		)	(321		)	(8,735		)	(5,687		)	(14,422		)	(1,488		)

Loss from continuing operations	(17,537		)	(900		)	(18,437		)	(7,856		)	(26,293		)	(81,113		)
Income (loss) from discontinued operations, net of income taxes	—			572			572			378			950			(15		)

Net loss	$	(17,537	)	$	(328	)	$	(17,865	)	$	(7,478	)	$	(25,343	)	$	(81,128	)


Other comprehensive loss:
Unrealized gain (loss) on DB SERP, net of tax	$	19		$	19		$	38		$	19		$	57		$	(84	)

Comprehensive loss	$	(17,518	)	$	(309	)	$	(17,827	)	$	(7,459	)	$	(25,286	)	$	(81,212	)


Basic and Diluted Per Common Share Data:
Loss from continuing operations	$	(0.49	)	$	(0.03	)	$	(0.51	)	$	(0.22	)	$	(0.73	)	$	(2.25	)
Income from discontinued operations, net of income taxes	—			0.02			0.01			0.01			0.02			—

Basic loss per share	$	(0.49	)	$	(0.01	)	$	(0.50	)	$	(0.21	)	$	(0.71	)	$	(2.25	)

Shares used to compute basic per common share amounts	35,742			35,949			35,846			36,008			35,900			36,032

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	Three Months Ended			Six Months Ended			Nine Months Ended
	March 31, 2017			June 30, 2017			September 30, 2017
Cash flows from operating activities:
Loss from continuing operations	$	(17,734	)	$	(16,097	)	$	(20,258	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	10,137			19,962			29,594
Provision for doubtful accounts	2,360			4,517			6,850
Stock-based compensation expense	2,164			5,080			8,693
Benefit for deferred income taxes	(6,050		)	(5,548		)	(7,179		)
Amortization of debt issuance costs	1,952			3,874			6,348
Gain on sale and disposal of fixed assets	(672		)	(1,196		)	(1,664		)

Changes in operating assets and liabilities, net of effects of acquired companies:
Net accounts receivable	15,367			5,061			1,772
Inventories	(4,653		)	(4,113		)	(5,870		)
Other current assets	39			947			1,510
Income taxes	849			345			(584		)
Accounts payable	6,333			(1,267		)	(348		)
Accrued expenses and accrued interest payable	(683		)	(8,488		)	(9,690		)
Accrued compensation related costs	(19,171		)	(6,234		)	(6,942		)
Other liabilities	(1,901		)	(3,176		)	(3,240		)

Net cash used in operating activities - continuing operations	(11,663		)	(6,333		)	(1,008		)

Cash flows from investing activities:
Purchase of property, plant and equipment	(2,348		)	(6,433		)	(11,237		)
Purchase of equipment leased to third parties under operating leases	(629		)	(1,333		)	(3,714		)
Restricted cash	12			24			56
Purchase of company-owned life insurance investment	(555		)	(555		)	(555		)
Proceeds from sale of property, plant and equipment	2,179			3,216			4,185

Net cash used in investing activities - continuing operations	(1,341		)	(5,081		)	(11,265		)

Cash flows from financing activities:
Repayment of term loan	(5,625		)	(11,250		)	(19,688		)
Borrowings under revolving credit agreement	49,500			110,000			140,965
Repayments under revolving credit agreement	(31,500		)	(85,000		)	(105,965		)
Payment of employee taxes on stock-based compensation	(1,338		)	(1,339		)	(1,367		)
Payment on seller’s note and other contingent consideration	(3,498		)	(3,808		)	(4,633		)
Payment of capital lease obligations	(278		)	(572		)	(873		)
Payment of debt issuance costs and fees	—			(2,863		)	(2,863		)

Net cash provided by financing activities - continuing operations	7,261			5,168			5,576

Decrease in cash and cash equivalents	(5,743		)	(6,246		)	(6,697		)
Cash and cash equivalents, at beginning of year	7,157			7,157			7,157

Cash and cash equivalents, at end of period	$	1,414		$	911		$	460


SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:

Cash paid during the period for:
Interest	$	12,218		$	24,387		$	36,807
Income taxes (refunds received) paid	(849		)	(345		)	584

Non-cash financing and investing activities:
Additions to property, plant and equipment acquired through finance obligations	623			669			1,299
Retirements of financed property, plant and equipment	—			135			135
Purchase of property, plant and equipment in accounts payable	1,337			1,100			865

HANGER, INC.

QUARTERLY CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	Three Months Ended			Six Months Ended			Nine Months Ended
	March 31, 2016			June 30, 2016			September 30, 2016
Cash flows from operating activities:
Net loss	$	(17,537	)	$	(17,865	)	$	(25,343	)
Income from discontinued operations, net of income taxes	—			572			950

Loss from continuing operations	(17,537		)	(18,437		)	(26,293		)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	11,728			23,388			34,727
Provision for doubtful accounts	4,249			5,780			7,546
Stock-based compensation expense	2,948			5,425			7,552
Amortization of debt issuance costs	766			1,618			2,845
Loss (gain) on extinguishment of debt	—			(10		)	6,031
Gain on sale and disposal of fixed assets	(704		)	(1,213		)	(1,901		)

Changes in operating assets and liabilities, net of effects of acquired companies:
Net accounts receivable	20,522			23,102			28,336
Inventories	(685		)	(2,614		)	(6,085		)
Other current assets	(2,055		)	(602		)	421
Income taxes	(8,640		)	(9,671		)	20,994
Accounts payable	(13,287		)	14,608			4,259
Accrued expenses and accrued interest payable	6,560			393			(6,881		)
Accrued compensation related costs	(23,037		)	(24,396		)	(25,975		)
Other liabilities	(223		)	(1,230		)	(2,060		)

Net cash (used in) provided by operating activities - continuing operations	(19,395		)	16,141			43,516
Net cash used in operating activities - discontinued operations	—			(850		)	(1,425		)

Net cash (used in) provided by operating activities	(19,395		)	15,291			42,091


Cash flows from investing activities:
Purchase of property, plant and equipment	(6,364		)	(9,963		)	(13,943		)
Purchase of equipment leased to third parties under operating leases	(608		)	(1,190		)	(1,914		)
Restricted cash	4			2,676			2,716
Purchase of company-owned life insurance investment	(2,543		)	(2,543		)	(2,543		)
Proceeds from sale of property, plant and equipment	1,136			1,922			2,647
Other investing activities, net	(10		)	(10		)	(10		)

Net cash used in investing activities - continuing operations	(8,385		)	(9,108		)	(13,047		)
Net cash provided by investing activities - discontinued operations	—			850			1,425

Net cash used in investing activities	(8,385		)	(8,258		)	(11,622		)


Cash flows from financing activities:
Borrowings under term loan	—			—			274,400
Repayment of term loan	(4,219		)	(8,438		)	(14,063		)
Borrowings under revolving credit agreement	—			—			20,000
Repayments under revolving credit agreement	—			—			(144,000		)
Payment of senior notes	—			—			(200,000		)
Payment of employee taxes on stock-based compensation	(259		)	(259		)	(271		)
Payment on seller notes and other contingent consideration	(4,536		)	(5,817		)	(7,751		)
Payment of capital lease obligations	(230		)	(494		)	(702		)
Payment of debt issuance costs and fees	(1,767		)	(1,767		)	(15,832		)

Net cash used in financing activities - continuing operations	(11,011		)	(16,775		)	(88,219		)
Decrease in cash and cash equivalents	(38,791		)	(9,742		)	(57,750		)
Cash and cash equivalents, at beginning of year	58,753			58,753			58,753

Cash and cash equivalents, at end of period	$	19,962		$	49,011		$	1,003


SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:

Cash paid during the period for:
Interest	$	3,759		$	15,111		$	30,850
Income taxes paid (refunds received)	168			1,077			(33,821		)

Non-cash financing and investing activities:
Additions to property, plant and equipment acquired through finance obligations	162			213			269
Retirements of financed property, plant and equipment	1,663			2,157			2,228
Purchase of property, plant and equipment in accounts payable	747			998			1,900