UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the quarterly period ended ~~June 30, 2012~~March 31, 2013

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the transition period from to

Commission file number 1-10670

HANGER, INC.

(Exact name of registrant as specified in its charter)

Delaware		84-0904275
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

10910 Domain Drive, Suite 300, Austin, TX		78758
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (512) 777-3800

~~Formerly Hanger Orthopedic Group, Inc.~~Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o

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

As of ~~July 27, 2012 34,199,023~~May 3, 2013 34,667,638 shares of common stock, $.01 par value per share, were outstanding.

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HANGER, INC.

INDEX

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets — ~~June 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012	1

	Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2013 and ~~Six Months ended June 30,~~ 2012 ~~and 2011~~	3

	Consolidated Statements of Cash Flows for the ~~Six~~Three Months ~~endedJune 30,~~Ended March 31, 2013 and 2012 ~~and 2011~~	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1715

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3026

Item 4.	Controls and Procedures	3026

Part II.	OTHER INFORMATION

Item 1A.	Risk Factors	3027

Item 6.	Exhibits	3329

SIGNATURES		3430

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HANGER, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	June 30,		December 31,		March 31,		December 31,
	2012		2011		2013		2012

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	41,613	$	42,896	$	15,033	$	19,211
Restricted cash	3,120		—		3,120		3,120
Accounts receivable, less allowance for doubtful accounts of $24,382 and $22,028 in 2012 and 2011, respectively	142,551		138,826
Accounts receivable, less allowance for doubtful accounts of $21,295 and $21,379 in 2013 and 2012, respectively					156,813		165,668
Inventories	124,815		114,086		132,492		127,295
Prepaid expenses, other assets, and income taxes receivable	18,273		17,015		19,791		15,673
Deferred income taxes	20,652		20,648		28,043		27,685
Total current assets	351,024		333,471		355,292		358,652

PROPERTY, PLANT AND EQUIPMENT
Land	794		794		794		794
Buildings	7,302		4,400		8,896		8,896
Furniture and fixtures	17,991		17,281		19,789		19,582
Machinery and equipment	58,264		56,137		60,887		60,364
Equipment leased to third parties under operating leases	34,314		33,830		34,869		34,827
Leasehold improvements	67,801		65,245		76,141		74,615
Computer and software	91,107		81,775		100,712		98,186
Total property, plant and equipment, gross	277,573		259,462		302,088		297,264
Less accumulated depreciation	168,262		154,690		190,187		182,803
Total property, plant and equipment, net	109,311		104,772		111,901		114,461

INTANGIBLE ASSETS
Goodwill	615,732		609,484		674,416		674,774
Patents and other intangible assets, net	54,732		54,894
Patents and other intangible assets, less accumulated amortization of $22,312 and $20,643 in 2013 and 2012, respectively					62,661		64,281
Total intangible assets, net	670,464		664,378		737,077		739,055

OTHER ASSETS
Debt issuance costs, net	15,759		17,485		13,169		14,033
Other assets	8,623		8,394		11,482		11,126
Total other assets	24,382		25,879		24,651		25,159

TOTAL ASSETS	$	1,155,181	$	1,128,500	$	1,228,921	$	1,237,327

The accompanying notes are an integral part of the consolidated financial statements.

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HANGER, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in ~~thousands)~~thousands, except share and per share amounts)

(Unaudited)

	June 30,			December 31,			March 31,			December 31,
	2012			2011			2013			2012

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES
Current portion of long-term debt	$	6,115		$	8,065		$	11,528		$	11,082
Accounts payable	29,116			26,561			26,345			28,923
Accrued expenses	22,915			18,247			23,089			22,357
Accrued interest payable	3,034			3,040			6,516			3,041
Accrued compensation related costs	23,990			35,829			22,134			41,784
Total current liabilities	85,170			91,742			89,612			107,187

LONG-TERM LIABILITIES
Long-term debt, less current portion	498,311			499,968			506,958			509,564
Deferred income taxes	74,257			74,309			77,730			77,730
Other liabilities	37,025			32,818			38,989			39,752
Total liabilities	694,763			698,837			713,289			734,233

COMMITMENTS AND CONTINGENCIES (Note H)

SHAREHOLDERS’ EQUITY
Common stock, $.01 par value; 60,000,000 shares authorized, 35,504,100 and 35,127,230 shares issued and outstanding at 2012 and 2011, respectively	355			351
Common stock, $.01 par value; 60,000,000 shares authorized, 35,937,455 and 35,617,884 shares issued and outstanding at 2013 and 2012, respectively							359			356
Additional paid-in capital	274,345			268,535			283,130			280,084
Accumulated other comprehensive loss	(1,185		)	(1,185		)	(1,919		)	(1,919		)
Retained earnings	187,559			162,618			234,718			225,229
	461,074			430,319			516,288			503,750
Treasury stock at cost (141,154 shares)	(656		)	(656		)	(656		)	(656		)
Total shareholders’ equity	460,418			429,663			515,632			503,094

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,155,181		$	1,128,500		$	1,228,921		$	1,237,327

The accompanying notes are an integral part of the consolidated financial statements.

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HANGER, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31,

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

(Unaudited)

	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2012		2011		2012		2011		2013		2012

Net sales	$	251,754	$	234,751	$	469,846	$	435,190	$	233,535	$	218,091
Cost of goods sold - materials	72,899		68,514		136,998		126,622
Material costs									67,739		66,697
Personnel costs	83,435		81,014		167,054		159,903		89,953		81,153
Other operating expenses	51,256		44,603		93,389		81,993		43,769		40,144
Relocation expenses	—		42		—		417
Acquisition expenses									73		75
Depreciation and amortization	8,438		7,696		16,723		14,988		9,285		8,285
Income from operations	35,726		32,882		55,682		51,267		22,716		21,737

Interest expense	7,684		7,791		15,461		16,170		7,777		7,777
Income before taxes	28,042		25,091		40,221		35,097		14,939		13,960

Provision for income taxes	10,656		9,660		15,280		13,453		5,449		5,324
Net income	$	17,386	$	15,431	$	24,941	$	21,644	$	9,490	$	8,636

Other comprehensive income	—		—		—		—		—		—
Comprehensive income	$	17,386	$	15,431	$	24,941	$	21,644	$	9,490	$	8,636

Basic Per Common Share Data
Net income	$	0.51	$	0.46	$	0.73	$	0.65	$	0.27	$	0.25
Shares used to compute basic per common share amounts	34,268,941		33,499,268		34,110,820		33,429,502		34,598,494		34,036,539

Diluted Per Common Share Data
Net income	$	0.50	$	0.45	$	0.72	$	0.63	$	0.27	$	0.25
Shares used to compute diluted per common share amounts	34,720,489		34,365,395		34,637,769		34,284,513		35,066,032		34,639,660

The accompanying notes are an integral part of the consolidated financial statements.

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HANGER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the ~~Six~~Three Months Ended ~~June 30,~~March 31,

(Dollars in thousands)

(Unaudited)

	2012			2011			2013			2012

Cash flows from operating activities:
Net income	$	24,941		$	21,644		$	9,490		$	8,636
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Loss (gain) on disposal of assets	1			(45		)
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on disposal of assets							52			—
Reduction of seller notes and earnouts	(870		)	(281		)	—			(177		)
Provision for bad debts	12,925			10,891
Provision for deferred income taxes	—			(343		)
Provision for doubtful accounts							5,229			4,723
Depreciation and amortization	16,723			14,988			9,285			8,285
Amortization of debt issuance costs	1,726			1,607			864			863
Compensation expense on restricted stock	4,014			3,874
Excess tax benefit from stock-based compensation	(448		)	(1,095		)
Compensation expense on stock options and restricted stock units							1,667			1,971
Changes in operating assets and liabilities, net of effects of acquired companies:
Accounts receivable	(16,190		)	(12,779		)	3,644			851
Inventories	(10,272		)	(4,181		)	(5,197		)	(7,868		)
Prepaid expenses, other current assets, and income taxes	1,915			5,021			(3,860		)	(2,443		)
Accounts payable	2,327			(7,583		)	(2,006		)	(522		)
Accrued expenses and accrued interest payable	501			(1,854		)	3,883			4,294
Accrued compensation related costs	(12,562		)	(19,332		)	(19,544		)	(17,504		)
Other	2,270			106			(1,314		)	183
Net cash provided by operating activities	27,001			10,638			2,193			1,292

Cash flows from investing activities:
Purchase of property, plant and equipment (net of acquisitions)	(14,907		)	(13,630		)	(5,110		)	(4,777		)
Purchase of equipment leased to third parties under operating leases	(1,063		)	(1,639		)	(288		)	(539		)
Acquisitions and contingent purchase price (net of cash acquired)	(6,395		)	(6,064		)
Acquisitions and contingent considerations (net of cash acquired)							—			(2,402		)
Restricted cash							—			(3,120		)
Proceeds from sale of property, plant and equipment	—			94			91			—
Restricted cash	(3,120		)	—
Net cash used in investing activities	(25,485		)	(21,239		)	(5,307		)	(10,838		)

Cash flows from financing activities:
Borrowings under revolving credit agreement	—			10,000
Repayment under revolving credit agreement	—			(10,000		)
Repayment of term loan	(2,200		)	(1,500		)	(750		)	(1,450		)
Repayment of long-term debt	(2,451		)	(2,119		)
Scheduled repayment of seller’s notes							(1,410		)	(488		)
Repayment of capital lease obligations	(168		)	—			(180		)	—
Deferred financing costs	—			(4,230		)
Excess tax benefit from stock-based compensation	448			1,095			1,214			209
Proceeds from issuance of common stock	1,572			573			62			627
Purchase and retirement of treasury stock							—			—
Net cash used in financing activities	(2,799		)	(6,181		)	(1,064		)	(1,102		)

Decrease in cash and cash equivalents	(1,283		)	(16,782		)	(4,178		)	(10,648		)
Cash and cash equivalents, at beginning of period	42,896			36,308			19,211			42,896
Cash and cash equivalents, at end of period	$	41,613		$	19,526		$	15,033		$	32,248

The accompanying notes are an integral part of the consolidated financial statements.

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HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A — BASIS OF PRESENTATION

The unaudited interim consolidated financial statements as of ~~June 30,~~March 31, 2013 and December 31, 2012 and for the three ~~and six~~ months ended ~~June 30,~~March 31, 2013 and 2012 ~~and 2011~~ have been prepared by Hanger, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair statement of the Company’s financial position, results of operations and cash flows for such periods. The year-end consolidated data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The results of operations for the three ~~and six~~ months ended ~~June 30, 2012~~March 31, 2013 are not necessarily indicative of the results to be expected for the full fiscal year.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, ~~2011,~~2012, filed by the Company with the SEC.

NOTE B — SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. At various times throughout the year, the Company maintains cash balances in excess of Federal Deposit Insurance Corporation limits.

Restricted Cash

Restricted cash has statutory or contractual restrictions that prevent it from being used in the Company’s operations. The Company agreed to restrict $3.1 million of cash to eliminate letters of credit obligations used as collateral under the revolving credit facility.

~~Inventories~~Credit Risk

~~Inventories,~~The Company primarily provides O&P (orthotics and prosthetics) devices and services and products throughout the United States of America and is reimbursed by the patients’ third-party insurers, governmentally funded health insurance programs, and, for those products distributed through the Products & Services business, from independent O&P providers. The Company also provides advanced rehabilitation technology and clinical programs to skilled nursing facilities in the United States primarily through operating leases. The Company performs ongoing credit evaluations of its customers. Accounts receivable are not collateralized. The ability of the Company’s debtors to meet their obligations is dependent upon their financial stability which ~~consist principally of raw materials, work in process~~could be affected by future legislation and ~~finished goods, are stated at the lower of cost or market using the first-in, first-out method. For its Patient-Care Services segment,~~regulatory actions. Additionally, the Company ~~calculates cost of goods sold—materials in accordance with the gross profit method~~maintains reserves for ~~all reporting periods.~~potential losses from these receivables that historically have been within management’s expectations.

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~~NOTE B — SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)~~Inventories

Inventories in the Patient Care segment consisting principally of raw materials and work-in-process, which amounted to $102.3 million and $96.6 million as of March 31, 2013 and December 31, 2012, respectively, are valued based on the gross profit method which approximates lower of cost or market using the first-in first-out method. The Company ~~bases the estimates used in applying~~applies the gross profit method on a patient care clinic basis in this segment’s inventory to determine ending inventory at the ~~actual results~~end of each interim period except on October 31st, which is the ~~most recently completed fiscal year and other factors, such as a change in the sales mix or changes in the trend~~date of ~~purchases. Cost of goods sold—materials during the interim periods are reconciled and adjusted when the~~our Physical inventory. The annual physical inventory for this segment values the inventory at lower of cost or market using the first-in first-out method and includes work-in-process consisting of materials, labor and overhead which is ~~taken. The Company treats these adjustments~~valued based on established standards for the stage of completion of each custom order. Adjustments to reconcile the physical inventory to our books are treated as changes in accounting ~~estimates.~~estimates and are recorded in the fourth quarter. The October 31st inventory is subsequently adjusted during interim periods to apply the gross profit method described above.

Inventories in the Products & Services segments consist principally of finished goods which are stated at the lower of cost or market using the first-in, first-out method for all reporting periods and are valued based on perpetual records.

Fair Value Measurements

The Company follows the authoritative guidance for financial assets and liabilities, which establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. The authoritative guidance requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy by which these assets and liabilities must be categorized, based on significant levels of inputs as follows:

Level 1 unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company

Level 2 inputs that are observable in the marketplace other than those inputs classified as Level 1

Level 3 inputs that are unobservable in the marketplace and significant to the valuation

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Financial Instruments

Assets measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012, are $7.0 million and $11.0 million, respectively, and are comprised of cash equivalent money market investments. The money market investments are based on Level 1 observable market prices and are equivalent to one dollar. The carrying value of the Company’s short-term financial instruments, such as receivables and payables, approximate their fair values based on the short-term maturities of these instruments. The carrying value of the Company’s ~~long-term debt, excluding the Senior Notes,~~Term Loan as of March 31, 2013 and December 31, 2012, $292.6 million and $293.3 million, respectively, approximates fair value for debt with similar terms and remaining maturities based on rates currently available to the Company ~~for debt with similar terms~~ and ~~remaining maturities (level 2).~~are considered Level 2 measurements. The carrying value of the Senior Notes was $200.0 million and $200.0 million as of March 31, 2013 and December 31, 2012, respectively. The fair value of the Senior Notes, based on a Level 1 quoted market ~~prices (level 1), as of June 30, 2012~~price, was ~~$206.0~~$216.0 million ~~as compared to the carrying value of $200.0~~and $211.5 million as of March 31, 2013 and December 31, 2012. Seller Notes are recorded at contractual carrying values of $25.9 million and $27.3 million as of March 31, 2013 and December 31, 2012, respectively, and carrying value approximates fair value for similar debt in all material respects. The Company estimates fair value with a discounted cash flow model using unobservable rates and that ~~date.~~they therefore represent Level 3 measurements.

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Revenue Recognition

Revenues in the Company’s ~~patient-care centers~~patient care clinics are derived from the sale of O&P devices and the maintenance and repair of existing devices and are recorded net of all contractual adjustments and discounts. The sale of O&P devices includes the design, fabrication, assembly, fitting and delivery of a wide range of braces, limbs and other devices. Revenues from the sale of these devices are recorded when (i) acceptance by and delivery to the patient has occurred; (ii) persuasive evidence of an arrangement exists and there are no further obligations to the patient; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenues from maintenance and repairs are recognized when the service is provided.

Revenues on the ~~sale~~distribution of O&P devices to customers ~~by the Distribution segment~~ are recorded upon the shipment of products, in accordance with the terms of the invoice, net of merchandise returns received and the amount established for anticipated returns. Discounted sales are recorded at net realizable value. Revenues ~~in the Therapeutic Solutions segment are primarily~~ derived from leasing rehabilitation technology combined with clinical therapy programs and education and ~~training. The revenue is~~training are recorded on a monthly basis according to terms of the contracts with our customers.

Certain accounts receivable may be uncollectible, even if properly pre-authorized and billed. Regardless of the balance, accounts receivable amounts are periodically evaluated to assess collectability. In addition to the actual bad debt expense recognized during collection activities, the Company estimates the amount of potential bad debt expense that may occur in the future. This estimate is based upon historical experience as well as a review of the receivable balances.

On a quarterly basis, the Company evaluates cash collections, accounts receivable balances and write-off activity to assess the adequacy of the allowance for doubtful accounts. Additionally, a company-wide evaluation of collectability of receivable balances older than 180 days is performed at least semi-annually, the results of which are used in the next allowance analysis. In these detailed reviews, the account’s net realizable value is estimated after considering the customer’s payment history, past efforts to collect on the balance and the outstanding balance, and a specific reserve is recorded if needed. From time to time, the Company may outsource the collection of such accounts to collection agencies after internal collection efforts are exhausted. In the cases when valid accounts receivable cannot be collected, the uncollectible account is written ~~off to bad debt expense.~~off.

6Property, Plant and Equipment

~~Table of Contents~~

~~NOTE B — SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)~~Property, plant and equipment are recorded at cost less accumulated depreciation and amortization, with the exception of assets acquired through acquisitions, which are initially recorded at fair value. Equipment acquired under capital leases is recorded at the lower of fair market value or the present value of the future minimum lease payments. The cost and related accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the respective accounts, and any resulting gains or losses are included in the Consolidated Statements of Income and Comprehensive Income.

Income Taxes

The Company recognizes deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes a valuation allowance on the deferred tax assets if it is more likely than not that the assets will not be realized in future years. Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. The Company believes that its tax positions are consistent with applicable tax law, but certain positions may be challenged by taxing authorities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, the Company is subject to periodic audits and examinations by the Internal Revenue Service and other state and local taxing authorities. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates.

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Segment Information

The Company applies a “management” approach to disclosure of segment information. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the basis of the Company’s operating segments. During the first quarter of 2013, the Company assessed and updated their operating segments to align with how the business is managed and determined their reportable segments are the same as their operating segments. The description of the Company’s ~~reportable~~ segments and the disclosure of segment information are presented in Note L.

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangibles for Impairment”. This ASU amended guidance that simplifies how entities test indefinite-lived intangible assets other than goodwill for impairment. After assessment of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is impaired, entities must perform the quantitative impairment test. Otherwise, the quantitative test becomes optional. The amended guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company adopted this new guidance in the first quarter of 2013, and the adoption did not impact the Company’s Condensed Consolidated Financial Statements.

In February 2013, the FASB issued ASU 2013-2, “Other Comprehensive Income.” This ASU amends ASC 220, “Comprehensive Income,” and supersedes ASU 2011-05 “Presentation of Comprehensive Income” and ASU 2011-12 “Comprehensive Income,” to require reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. The standard does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the guidance requires an entity to provide enhanced disclosures to present separately by component reclassifications out of accumulated other comprehensive income. The amendments in this ASU are effective prospectively for reporting periods beginning after December 15, 2012. The Company has adopted this guidance and its implementation did not have a material impact on its consolidated financial statements.

NOTE C - SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION

The supplemental disclosure requirements for the statements of cash flows are as follows:

Six Months Ended

June 30,

(In thousands)

2012

2011

(Unaudited)

(Unaudited)

Cash paid during the period for:

Interest

$
13,444

$
13,885

Income taxes (net of refunds)

8,818

3,077

Non-cash financing and investing activities:

Non-cash property, plant and equipment purchases

615

218

Earnouts payable on acquisitions

1,842

647

Issuance of notes in connection with acquistions

1,250

1,100

Issuance of restricted shares of common stock

5,478

12,963

~~NOTE D - GOODWILL~~

The Company determined that it has three reporting units with goodwill to be evaluated, which are the same as its reportable segments: (i) Patient-Care Services; (ii) Distribution; and (iii) Therapeutic Solutions. The Company completes its annual goodwill impairment analysis in October of each year. The fair value of the Company’s reporting units is primarily determined based on the income approach and considers the market and cost approach.

	Three Months Ended
	March 31,
(In thousands)	2013		2012

Cash paid during the period for:
Interest	$	3,290	$	3,278
Income taxes (net of refunds)	5,591		1,566

Non-cash financing and investing activities:
Purchase of property, plant and equipment in accounts payable	1,308		1,028
Capital lease obligations	65		—
Issuance of restricted stock units of common stock	9,617		8,419

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NOTE D — GOODWILL ~~(CONTINUED)~~AND OTHER INTANGIBLE ASSETS

The ~~activity related~~Company completes its annual goodwill and indefinite lived intangible impairment analysis in the fourth quarter of each year. The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. If the Company determines that a two-step goodwill impairment test is necessary or more efficient than a qualitative approach, it will measure the fair value of the Company’s reporting units using a combination of income, market and cost approaches. In conjunction with the Company’s evaluation of operating segments disclosed in Note L, the Company assessed its reporting unit structure and determined no changes were necessary. As such, the Company concluded there was not a triggering event to re-evaluate whether a potential impairment of goodwill had occurred. No triggering events have transpired since December 31, 2012.

Goodwill allocated to the Company’s operating segments for the ~~six~~three months ended ~~June 30,~~March 31, 2013 and 2012 ~~and 2011~~ is as follows:

Patient-Care Services

Therapeutic

Accumulated

Distribution

Solutions

(In thousands)

Goodwill

Impairment Loss

Net

Goodwill

Goodwill

Total

Balance at December 31, 2011

$
519,974

$
(45,808
)
$
474,166

$
38,388

$
96,930

$
609,484

Additions due to acquisitions

4,807

—

4,807

—

964

5,771

Additions due to contingent considerations

477

—

477

—

—

477

Balance at June 30, 2012 (unaudited)

$
525,258

$
(45,808
)
$
479,450

$
38,388

$
97,894

$
615,732

(In thousands)	Patient Care			Products & Services		Total
Balance at December 31, 2012	$	538,492		$	136,282	$	674,774
Additions due to acquisitions	—			—		—
Contingent considerations (1)	—			—		—
Adjustments	(358		)	—		(358		)
Balance at March 31, 2013 (unaudited)	$	538,134		$	136,282	$	674,416

Patient-Care Services

Therapeutic

Accumulated

Distribution

Solutions

(In thousands)

Goodwill

Impairment Loss

Net

Goodwill

Goodwill

Total

Balance at December 31, 2010

$
502,040

$
(45,808
)
$
456,232

$
38,388

$
96,079

$
590,699

Additions due to acquisitions

4,910

—

4,910

—

423

5,333

Additions due to contingent considerations

741

—

741

—

—

741

Balance at June 30, 2011 (unaudited)

$
507,691

$
(45,808
)
$
461,883

$
38,388

$
96,502

$
596,773

	Patient Care		Products & Services		Total
Balance at December 31, 2011	$	474,166	$	135,318	$	609,484
Additions due to acquisitions	1,372		—		1,372
Contingent considerations (1)	127		—		127
Adjustments	163		—		163
Balance at March 31, 2012 (unaudited)	$	475,828	$	135,318	$	611,146

(1) Contingent consideration relates to acquisitions completed prior to the adoption of ASC 805.

The balances related to intangible assets for the three months ended March 31, 2013 and 2012 is as follows:

	31-Mar-13							31-Dec-12
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
(In thousands)	Amount		Amortization			Amount		Amount		Amortization			Amount
Customer Lists	$	48,044	$	(8,872	)	$	39,172	$	48,044	$	(7,846	)	$	40,198
Trade Name	9,070		—			9,070		9,070		—			9,070
Patents and Other Intangibles	27,859		(13,440		)	14,419		27,810		(12,797		)	15,013
	84,973		(22,312		)	62,661		84,924		(20,643		)	64,281

Customer lists are amortized over their estimated period of benefit, generally 10 to 14 years. Patents are amortized using the straight-line method over 5 years. Total intangible amortization expenses were $1.7 million and $2.8 million for the three months ended March 31, 2013 and March 31, 2012, respectively.

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NOTE E — INVENTORIES

Inventories ~~which are~~ recorded ~~at the lower of cost or market~~ using the ~~first-in, first-out~~gross profit method ~~were as follows:~~primarily consisted of raw materials and work-in-process held by the Patient Care segment. Inventories using the perpetual method primarily consisted of finished goods held by the Products and Services segment. A description of the Company’s inventory valuation methodologies are presented in Note B.

	June 30,		December 31,
(In thousands)	2012		2011		31-Mar-13		31-Dec-12
	(Unaudited)		(Unaudited)

Raw materials	$	39,627	$	39,121	$	39,478	$	39,478
Work-in-process	56,636		45,735
Work in process					62,774		57,143
Finished goods	28,551		29,230		30,240		30,674
	$	124,815	$	114,086	$	132,492	$	127,295

NOTE F — ACQUISITIONS

During the ~~six~~three months ended ~~June 30,~~March 31, 2013, the Company did not acquire any new patient care centers.

During the three months ended March 31, 2012, the Company acquired ~~five~~one O&P ~~companies,~~company, operating a total of ~~eight patient-care centers.~~two patient care clinics. The aggregate purchase price for these O&P businesses was ~~$8.6~~$2.0 million. Of this aggregate purchase price, $1.2 million consisted of promissory notes, $1.8 million is made up of contingent consideration payable within the next five years, and $5.6 million was paid in cash. Contingent consideration is reported as other liabilities on the Company’s consolidated balance sheet. The Company recorded approximately $5.5 million of goodwill related to these acquisitions, and the expenses incurred related to this acquisition were insignificant and are included in other operating expenses. During the six months ended June 30, 2011, the Company acquired three O&P companies, operating a total of four patient care centers. The aggregate purchase price for these O&P businesses was $7.3 million. Of this aggregate purchase price, $1.1 million consisted of promissory notes and $0.9 million is made up of contingent consideration payable within the next two years and $5.3 million was paid in cash. The Company recorded approximately $4.9$1.4 million of goodwill related to these acquisitions and the expenses incurred related to these acquisitions were insignificant and ~~are~~were included in other operating expenses.

The results of operations for ~~these acquisitions~~this acquisition are included in the Company’s results of operations from the date of acquisition. Pro forma results would not be materially different. ~~The Company intends to make an election to treat the acquisitions in 2012 as asset acquisitions for tax purposes which will result in the goodwill being amortizable for tax purposes.~~

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~~NOTE F — ACQUISITIONS (CONTINUED)~~

In connection with contingent consideration agreements with acquisitions completed prior to adoption of the revised authoritative guidance effective for business combinations for which the acquisition date iswas on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, the Company made payments of ~~$0.5~~$0 million and ~~$0.7~~$0.1 million during the ~~six~~three months ended ~~June 30,~~March 31, 2013 and 2012, ~~and 2011,~~ respectively. The Company has accounted for these amounts as additional purchase price, resulting in an increase in goodwill. In connection with contingent consideration agreements with acquisitions completed subsequent to adoption of revised authoritative guidance, the Company made payments of ~~$0.8~~$0.7 million in the first ~~six~~three months of ~~2012~~2013 and ~~$0.6~~$0.4 million in the same period ~~2011. The~~2012. As of March 31, 2013 the Company ~~estimates that it may pay up to~~has accrued a total of ~~$7.9~~$5.7 million related to contingent consideration provisions ofrelated to acquisitions made in ~~future~~prior periods.

NOTE G — LONG TERM DEBT

Long-term debt consists of the following:

	June 30,			December 31,			March 31,			December 31,
(In thousands)	2012			2011			2013			2012
	(Unaudited)			(Unaudited)

Revolving Credit Facility	$	—		$	—		$	—		$	—
Term Loan	294,800			297,000			292,550			293,300
7 1/8% Senior Notes due 2018	200,000			200,000			200,000			200,000
Subordinated seller notes, non-collateralized, net of unamortized discount with principal and interest payable in either monthly, quarterly or annual installments at effective interest rates ranging from 3.00% to 7.00%, maturing through November 2016	9,627			11,033
	504,427			508,033
Subordinated seller notes, non-collateralized, net of unamortized discount with principal and interest payable in either monthly, quarterly or annual installments at effective interest rates ranging from 2.00% to 4.00%, maturing through November 2018							25,936			27,346
Total Debt							518,486			520,646
Less current portion	(6,115		)	(8,065		)	(11,528		)	(11,082		)
	$	498,311		$	499,968
Long Term Debt							$	506,958		$	509,564

~~Amendment to Credit Agreement~~10

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On March 11, 2011, the Company entered into an amendment to its Credit Agreement dated as of December 1, 2010 (as amended, the “Credit Agreement”). The amendment (i) reduced the interest rate margin applicable to the Term Loans under the Credit Agreement by 0.75% to 3.0% and (ii) reduced the LIBOR floor applicable to the Term Loans under the Credit Agreement from 1.5% to 1.0%. The Company incurred $4.1 million of fees related to this amendment, which will be amortized into interest expense over the remaining term of the debt.

Revolving Credit Facility

The $100.0 million Revolving Credit Facility matures on December 1, 2015 and bears interest at LIBOR plus ~~3.75%~~3.25%, or the applicable rate (as defined in the Credit Agreement). The Revolving Credit Facility requires compliance with various covenants including but not limited to (i) minimum consolidated interest coverage ratio of ~~3.25:1.00 from October 1, 2011 to September 30, 2012, and~~ 3.50:1.00 ~~thereafter until maturity;~~and (ii) maximum total leverage ratio of ~~5.00:1.00 until December 31, 2011, 4.50:1.00 from January 1, 2012 to September 30, 2012, and~~ 4.00:1.00 from October 1, 2012 thereafter until maturity; and (iii) maximum annual capital expenditures of 7.5% of consolidated net revenues of the preceding fiscal year with an additional maximum rollover of $15.0 million from the prior year’s allowance if not expended in the fiscal year for which it is permitted.1.00. As of ~~June 30,~~March 31, 2012, the Company was in compliance with these covenants. As of March 31, 2013, the Company had $99.5 million available under ~~the Revolving Credit Facility. Availability under the Revolving Credit Facility~~this facility. This availability as of ~~June 30, 2012~~March 31, 2013 was net of standby letters of credit of approximately $0.5 million. As of ~~June 30, 2012,~~March 31, 2013, the Company had no funds drawn on the Revolving Credit Facility. The obligations under the Revolving Credit Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected interest in the equity interests of the Company’s subsidiaries, all of the Company’s assets, and all the assets of the Company’s subsidiaries.

~~Table of Contents~~

~~NOTE G — LONG TERM DEBT (CONTINUED)~~

Term Loan

The $300.0 million Term Loan Facility matures on December 1, 2016 and requires quarterly principal payments of ~~$750,000 that commenced on March 31, 2011.~~$0.75 million. From time to time, mandatory prepayments may be required as a result of excess free cash flow as defined in the Credit Agreement, certain additional debt incurrences, certain asset sales, or other events as defined in the Credit Agreement. No such mandatory prepayments were required during the first quarter of 2013 or 2012. The Term Loan Facility bears interest at LIBOR plus 3.0%, or applicable rate (as defined in the Credit Agreement), and includes a 1.0% LIBOR floor. ~~During the first six months of 2012 the Company made a mandatory prepayment on its Term Loan Facility of $700,000. There were no mandatory prepayments made during the first six months of 2011.~~ As of ~~June 30, 2012,~~March 31, 2013, the interest rate on the Term Loan Facility was 4.0%. The obligations under the Term Loan Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected interest in the equity interests of the Company’s subsidiaries, all of the Company’s assets, and all the assets of the Company’s subsidiaries.

71/8% Senior Notes

The 71/8% Senior Notes mature November 15, 2018 and are senior ~~indebtness~~indebtedness, which is guaranteed on a senior unsecured basis by all of the Company’s current and future subsidiaries. Interest is payable semi-annually on May 15 and November 15 of each ~~year, commencing May 15, 2011.~~year.

On or prior to November 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 107.125% of the principal amount thereof, plus accrued and unpaid interest and additional interest to the redemption date with the proceeds of a public offering of its equity securities. On or after November 15, 2014, the Company may redeem all or ~~from time to time~~ a part of the notes ~~upon not less than 30 days and not more than 60 days’ notice,~~with a premium, as described in further detail in the Company’s Annual Report on form 10-K for the twelve month period beginning on November 15, of the indicated years at (i) 103.563% during 2014; (ii) 101.781% during 2015; and (iii) 100.00% during 2016 and thereafter through November 15, 2018.year ended December 31, 2012.

Subsidiary Guarantees

The Revolving and Term Loan Facilities and the 71/8% Senior Notes are guaranteed by all of the Company’s subsidiaries. Separate condensed consolidating information is not included as the ~~Company~~parent company does not have independent assets or operations. The ~~Guarantees~~guarantees are full and unconditional and joint and ~~several, and any subsidiaries of the Company other than the Guarantor Subsidiaries are minor.~~several. There are no restrictions on the ability of our subsidiaries to transfer cash to the Company or to co-guarantors. ~~All consolidated amounts in the Company’s financial statements are representative of the combined guarantors.~~

Debt Covenants

The terms of the Senior Notes, the Revolving Credit Facility, and the Term Loan Facility limit the Company’s ability to, among other things, purchase capital assets, incur additional indebtedness, create liens, pay dividends on or redeem capital stock, make certain investments, make restricted payments, make certain dispositions of assets, engage in transactions with affiliates, engage in certain business activities, and engage in mergers, consolidations and certain sales of assets. At ~~June 30, 2012,~~March 31, 2013, the Company was in compliance with all covenants under these debt agreements.

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NOTE H — COMMITMENTS AND CONTINGENT LIABILITIES

Contingencies

The Company is subject to legal proceedings and claims which arise from time to time in the ordinary course of its business, including additional payments under business purchase agreements. In the opinion of management, the amount of ultimate liability, if any with respect to these actions, will not have a materially adverse effect on the financial position, liquidity or results of operations of the Company.

The Company is in a highly regulated industry and receives regulatory agency inquiries from time to time in the ordinary course of its business, including inquiries relating to the Company’s billing activities. To date these inquiries have not resulted in material liabilities, but no assurance can be given that future regulatory agencies’ inquiries will be consistent with the results to date or that any discrepancies identified during a regulatory review will not have a material adverse effect on the Company’s consolidated financial statements.

Guarantees and Indemnifications

In the ordinary course of its business, the Company may enter into service agreements with service providers in which it agrees to indemnify or limit the service provider against certain losses and liabilities arising from the service provider’s performance of the agreement. The Company has reviewed its existing contracts containing indemnification or clauses of guarantees and does not believe that its liability under such agreements is material to the Company’s operations.

NOTE I — NET INCOME PER COMMON SHARE

Basic per common share amounts are computed using the weighted average number of common shares outstanding during the year. Diluted per common share amounts are computed using the weighted average number of common shares outstanding during the year and dilutive potential common shares. Dilutive potential common shares consist of stock options and restricted shares and are calculated using the treasury stock method.

Net income per share is computed as follows:

	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
(In thousands, except share and per share data)	2012		2011		2012		2011		2013		2012
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)

Net income	$	17,386	$	15,431	$	24,941	$	21,644	$	9,490	$	8,636

Shares of common stock outstanding used to compute basic per common share amounts	34,268,941		33,499,268		34,110,820		33,429,502		34,598,494		34,036,539
Effect of dilutive restricted stock and options (1)	451,548		866,127		526,949		855,011		467,538		603,121
Shares used to compute dilutive per common share amounts	34,720,489		34,365,395		34,637,769		34,284,513		35,066,032		34,639,660

Basic income per share	$	0.51	$	0.46	$	0.73	$	0.65	$	0.27	$	0.25
Diluted income per share	$	0.50	$	0.45	$	0.72	$	0.63	$	0.27	$	0.25

(1) There were no anti-dilutive options for the three ~~or six~~ months ended ~~June 30, 2012~~March 31, 2013 and ~~2011.~~2012.

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NOTE J — SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

The Company’s unfunded noncontributory defined benefit plan (the “Plan”) covers certain senior executives, is administered by the Company and calls for annual payments upon retirement based on years of service and final average salary. Benefit costs and liabilities balances are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates and other factors. Actual results that differ from the assumptions are accumulated and amortized over future periods, affecting the recorded obligation and expense in future periods.

The following assumptions were used in the calculation of the net benefit cost and obligation at ~~June 30,~~March 31, 2013 and 2012:

~~Discount rate~~		~~3.90~~	%
~~Average rate of increase in compensation~~		~~3.00~~	%

	2013		2012
Discount rate	3.25	%	3.90	%
Average rate of increase in compensation	3.00	%	3.00	%

The Company believes the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses. The change in the Plan’s net benefit obligation for the ~~six~~three months ended ~~June 30, 2012~~March 31, 2013 and ~~2011 is as follows:~~2012:

	(in thousands)			(in thousands)
Net benefit cost accrued at December 31, 2011 (unaudited)	$	20,230
Net benefit cost accrued at December 31, 2012				$	22,377
Service cost	230			169
Interest cost	190			173
Payments	(525		)	(705		)
Net benefit cost accrued at March 31, 2012 (unaudited)	$	20,125
Service cost	230
Interest cost	190
Payments	(180		)
Net benefit cost accrued at June 30, 2012 (unaudited)	$	20,365
Net benefit cost accrued at March 31, 2013 (unaudited)				$	22,014

	(in thousands)			(in thousands)
Net benefit cost accrued at December 31, 2010 (unaudited)	$	17,510
Net benefit cost accrued at December 31, 2011				$	20,230
Service cost	247			230
Interest cost	202			190
Payments	(526		)	(525		)
Net benefit cost accrued at March 31, 2011 (unaudited)	$	17,433
Service cost	247
Interest cost	202
Net benefit cost accrued at June 30, 2011 (unaudited)	$	17,882
Net benefit cost accrued at March 31, 2012 (unaudited)				$	20,125

NOTE K - STOCK-BASED COMPENSATION

The Company utilizes the authoritative guidance using the modified prospective method. Compensation expense for all awards granted is calculated according to the provisions of such guidance.

On May 13, 2010, the shareholders of the Company approved the 2010 Omnibus Incentive Plan (the “2010 Plan”) and ~~terminated~~suspended future grants under the Amended and Restated 2002 Stock Incentive and Bonus Plan (the “2002 Plan”) and the 2003 Non-Employee Directors’ Stock Incentive Plan (the “2003 Plan”). No new awards will be granted under the 2002 Plan or the 2003 Plan; however, awards granted under either the 2002 Plan or the 2003 Plan that were outstanding on May 13, 2010 remain outstanding and continue to be subject to all of the terms and conditions of the 2002 Plan or the 2003 Plan, as applicable.

~~Table of Contents~~

~~NOTE K - STOCK-BASED COMPENSATION (CONTINUED)~~

The 2010 Plan provides that 2.5 million shares of Common Stock are reserved for issuance, subject to adjustment as set forth in the 2010 Plan; provided, however, that only 1.5 million shares may be issued pursuant to the exercise of incentive stock options. Of these 2.5 million shares, 2.0 million are shares that are newly authorized for issuance under the 2010 Plan and 0.5 million are unissued shares not subject to awards that have been carried over from the shares previously authorized for issuance under the terms of the 2002 Plan and the 2003 Plan. Unless earlier terminated by the Board of Directors, the 2010 Plan will remain in effect until the earlier of (i) the date that is ten years from the date the plan is approved by the Company’s shareholders, which is the effective date for the 2010 plan, namely May 13, 2020, or (ii) the date all shares reserved for issuance have been issued.

Table of Contents

As of ~~June 30, 2012,~~March 31, 2013, of the 2.5 million shares of common stock authorized for issuance under the Company’s 2010 Plan, approximately ~~1,122,000~~1.5 million shares have been issued. During the first ~~six~~three months of ~~2012,~~2013, the Company issued approximately ~~509,000~~0.4 million shares of restricted stock units under the 2010 Plan. The total fair value of these grants is ~~$10.4~~$10.7 million. Total unrecognized share-based compensation cost related to unvested restricted stock ~~awards~~units was approximately ~~$14.5~~$18.9 million as of ~~June 30, 2012~~March 31, 2013 and is expected to be expensed as compensation expense over approximately four years.

~~During~~For the ~~six~~three months ended ~~June 30,~~March 31, 2013 and 2012, ~~and 2011, no options were cancelled under either the 2002 Plan or the 2003 Plan.~~

~~For the six months ended June 30, 2012 and 2011,~~ the Company has included approximately ~~$4.0~~$1.7 million and ~~$3.9~~$2.0 million, respectively, for share-based compensation cost in the accompanying condensed consolidated statements of income for the 2002, 2003 and 2010 Plans. Compensation expense relates to restricted ~~share~~stock units grants.

NOTE L — SEGMENT AND RELATED INFORMATION

~~The~~During the quarter, management changed its internal structure to align with their end-market customers. Due to the change, the Company assessed its operating segment structure and determined it has two operating segments: (i) Patient Care and (ii) Products & Services and that its reportable segments are the same as its operating segments. Because management had previously identified three ~~reportable segments in which it operates based on the products and services it provides.~~operating segments; all prior periods have been retroactively adjusted to reflect this change. The Company evaluates segment performance and allocates resources based on ~~the segments’~~each segment’s income from operations. The ~~reportable segments are: (i) Patient-Care Services (ii) Distribution, and (iii) Therapeutic solutions. The reportable~~operating segments are described further below:

~~Patient-Care Services~~Patient Care —This segment consists of (i) the Company’s owned and operated ~~patient-care centers.~~patient care clinics and (ii) its contracting and network management business. The ~~patient-care centers~~patient care clinics provide services to design and fit O&P devices to patients. These ~~centers~~clinics also instruct patients in the use, care and maintenance of the devices. The principal reimbursement sources for the Company’s services are:

· Commercial and other, which consist of individuals, rehabilitation providers, private insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation, workers’ compensation programs and similar sources;

· Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons, which provides reimbursement for O&P products and services based on prices set forth in fee schedules for 10 regional service areas;

~~Table of Contents~~

~~NOTE L — SEGMENT AND RELATED INFORMATION (CONTINUED)~~

· Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons in financial need, regardless of age, which may supplement Medicare benefits for financially needy persons aged 65 or older; and

· U.S. Department of Veterans Affairs.

The Company estimates that government reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately ~~41.3%~~40.2% and ~~40.6%~~41.2%, of the Company’s net sales for the ~~six~~three months ended ~~June 30,~~March 31, 2013 and 2012, ~~and 2011,~~ respectively.

Our contract and network management business is the only network management company dedicated solely to serving the O&P market and is focused on managing the O&P services of national and regional insurance companies. We partner with healthcare insurance companies by securing a national or regional contract either as a preferred provider or to manage their O&P network of providers. Our network now includes approximately 1,130 O&P provider locations, including over 400 independent providers. As of March 31, 2013, we had 56 contracts with national and regional providers.

~~Distribution~~Products & Services—This segment consists of its distribution business, which distributes and fabricates O&P products and ~~components to both the O&P industry and the Company’s own patient-care practices. This segment also includes the Company’s Fabrication centers which are involved in the fabrication of O&P~~ components for both the O&P industry and the Company’s own ~~patient-care centers.~~

~~Therapeutic Solutions~~~~—This segment consists of the leasing of~~patient care clinics, and its rehabilitation ~~equipment from, and the provision of clinical program by, ACP as well the operations of IN, Inc. ACP is a developer of specialized~~solutions business. Rehabilitation solutions leases rehabilitation ~~technologies~~equipment and provides evidence-based clinical programs ~~for~~to post-acute ~~rehabilitation. IN, Inc. specializes in bringing~~rehabilitation service providers. This segment also develops emerging neuromuscular technologies tofor the O&P ~~market.~~and rehabilitation markets.

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Other—This ~~segment~~ consists of ~~Hanger~~ corporate overhead and ~~Linkia. Linkia is a national managed-care agent for O&P services~~includes unallocated expense such as personnel costs, professional fees and ~~a patient referral clearing house.~~corporate offices expenses.

The accounting policies of the segments are the same as those described in the summary of “Significant Accounting Policies” in Note B to the consolidated financial statements.

Summarized financial information concerning the Company’s ~~reportable~~operating segments is shown in the following table. Intersegment sales mainly include sales of O&P components from the ~~Distribution~~Products & Services segment to the ~~Patient-Care Services~~Patient Care segment and were made at prices which approximate market values.

~~Table of Contents~~

~~NOTE L — SEGMENT AND RELATED INFORMATION (CONTINUED)~~

(In thousands)

Patient-Care
Services

Distribution

Therapeutic
Solutions

Other

Consolidating
Adjustments

Total

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Three Months Ended June 30, 2012

Net sales

Customers

$
207,791

$
27,413

$
16,356

$
194

$
—

$
251,754

Intersegments

—

53,147

1,000

—

(54,147
)
—

Depreciation and amortization

3,381

324

2,712

2,021

—

8,438

Income (loss) from operations

40,454

9,473

941

(14,974
)
(168
)
35,726

Interest (income) expense

7,552

830

1,435

(2,133
)
—

7,684

Income (loss) before taxes

32,902

8,643

(494
)
(12,841
)
(168
)
28,042

Three Months Ended June 30, 2011

Net sales

Customers

$
192,976

$
25,578

$
16,067

$
130

$
—

$
234,751

Intersegments

—

48,940

986

—

(49,926
)
—

Depreciation and amortization

3,029

299

2,575

1,793

—

7,696

Income (loss) from operations

39,005

7,479

811

(14,371
)
(42
)
32,882

Interest (income) expense

7,094

848

1,440

(1,591
)
—

7,791

Income (loss) before taxes

31,911

6,631

(628
)
(12,781
)
(42
)
25,091

Six Months Ended June 30, 2012

Net sales

Customers

$
384,163

$
53,653

$
31,688

$
342

$
—

$
469,846

Intersegments

—

100,716

1,844

—

(102,560
)
—

Depreciation and amortization

6,797

648

5,386

3,892

—

16,723

Income (loss) from operations

65,324

18,015

1,208

(28,420
)
(445
)
55,682

Interest (income) expense

15,135

1,662

2,875

(4,211
)
—

15,461

Income (loss) before taxes

50,189

16,353

(1,667
)
(24,209
)
(445
)
40,221

Capital expenditures

4,677

220

1,359

9,714

—

15,970

Six Months Ended June 30, 2011

Net sales

Customers

$
353,527

$
49,038

$
32,323

$
302

$
—

$
435,190

Intersegments

—

90,567

1,732

—

(92,299
)
—

Depreciation and amortization

5,990

583

5,077

3,338

—

14,988

Income (loss) from operations

61,378

14,366

1,562

(26,099
)
60

51,267

Interest (income) expense

14,210

1,697

2,880

(2,617
)
—

16,170

Income (loss) before taxes

47,168

12,669

(1,318
)
(23,482
)
60

35,097

Capital Expenditures

7,058

630

2,006

5,575

—

15,269

Total Assets

March 31, 2012

1,335,910

188,321

135,350

(504,400
)
—

1,155,181

December 31, 2011

1,279,481

170,077

135,781

(456,839
)
—

1,128,500

~~NOTE M — CORPORATE OFFICE RELOCATION~~

The Company moved its corporate headquarters from Bethesda, Maryland to Austin, Texas in 2010. As of January 1, 2012 the relocation of the corporate office was complete. The following is a summary of the costs of the relocation incurred and to be paid in future periods:

~~Table of Contents~~

~~NOTE M — CORPORATE OFFICE RELOCATION (CONTINUED)~~

(in thousands)

Employee
Separation

Other
Relocation

Lease
Termination

Total

Balance as of December 31, 2011

$
226

$
—

$
3,085

$
3,311

Expenses incurred

—

—

—

—

Amounts paid

(83
)
—

(439
)
(522
)
Balance as of June 30, 2012

$
143

$
—

$
2,646

$
2,789

Employee
Separation

Other
Relocation

Lease
Termination

Total

Balance as of December 31, 2010

$
1,895

$
—

$
5,206

$
7,101

Expenses incurred

(159
)
576

—

417

Amounts paid

(1,312
)
(576
)
(1,306
)
(3,194
)
Balance as of June 30, 2011

$
424

$
—

$
3,900

$
4,324

~~Table of Contents~~

			Products and					Consolidating
(In thousands)	Patient Care		Services		Other			Adjustments			Total

Three Months Ended March 31, 2013
Net sales
Customers	$	193,212	$	40,323	$	—		$	—		$	233,535
Intersegments	—		51,083		—			(51,083		)	—
Depreciation and amortization	4,066		3,203		2,016			—			9,285
Income (loss) from operations	25,389		9,475		(11,885		)	(263		)	22,716
Interest (income) expense	7,750		3,335		(3,308		)	—			7,777
Income (loss) before taxes	17,639		6,140		(8,577		)	(263		)	14,939
Capital expenditures	2,903		107		2,388			—			5,398

Three Months Ended March 31, 2012
Net sales
Customers	$	176,518	$	41,573	$	—		$	—		$	218,091
Intersegments	—		48,413		—			(48,413		)	—
Depreciation and amortization	3,427		2,997		1,861			—			8,285
Income (loss) from operations	25,279		8,810		(12,075		)	(277		)	21,737
Interest (income) expense	7,582		2,272		(2,077		)	—			7,777
Income (loss) before taxes	17,697		6,538		(9,998		)	(277		)	13,960

Capital expenditures	2,543		714		2,059				—		5,316

Total Assets
March 31, 2013	1,398,550		341,005		—			(510,634		)	1,228,921
December 31, 2012	1,389,223		336,318		—			(488,214		)	1,237,327

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following is a discussion of our results of operations and financial condition for the periods described below. This discussion should be read in conjunction with the Consolidated Financial Statements included in this report. Our discussion of our results of operations and financial condition includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on our current expectations, which are inherently subject to risks and uncertainties. Refer to risk factors disclosed in Part II, Item 1A of this filing as well as the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012 for further discussion of risks and uncertainties. Our actual results and the timing of certain events may differ materially from those indicated in the forward looking statements.

Table of Contents

Business Overview

General

The goal of Hanger, Inc. (the “Company”) is to be the world’s premier provider of services and products that enhance human physical capabilities. Built on athe legacy of James Edward Hanger, the first amputee of the American Civil War, Hanger is steeped in 150 years of clinical excellence and innovation. We provide orthotic and prosthetic ~~patient-care~~patient care services, distribute O&P (orthotics and prosthetics) devices and components, manage O&P networks, and provide ~~therapeutic~~rehabilitative solutions to the broader ~~post acute~~post-acute market. For the three months ended March 31, 2013, our net sales were $233.5 million and we recorded net income of $9.5 million. For the three months ended March 31, 2012, our net sales were $218.1 million and we recorded net income of $8.6 million.

We have two segments—Patient Care and Products & Services. Our Patient Care segment is comprised of our patient care clinics and our contracting network management business. Through this segment, we (i) are the largest owner and operator of orthotic and prosthetic ~~patient-care centers~~patient care clinics in the United States and ~~through our distribution subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), the largest dedicated distributor~~(ii) manage an O&P provider network that coordinates all aspects of O&P ~~products in the United States.~~patient care for insurance companies. We operate in excess of ~~700~~730 O&P ~~patient-care centers~~patient care clinics located in 45 states and the District of Columbia and six strategically located distribution facilities. ~~In addition~~For the three months ended March 31, 2013, net sales to ~~providing O&P services and products we, through~~customers attributable to our ~~subsidiary, Linkia LLC (“Linkia”), manage an O&P provider network and develop programs to manage all aspects~~Patient Care segment were $193.2 million

Our Products & Services segment is comprised of our distribution business, one of the largest distributors of O&P ~~patient care for insurance companies. We also provide therapeutic~~products in the United States, and our rehabilitative solutions through our subsidiaries Innovative Neurotronics (“IN, Inc.”) and Accelerated Care Plus Corp (“ACP”). IN, Inc. introduces emerging neuromuscular technologies developed through independent research in a collaborative effort with industry suppliers worldwide. ACP is a developer ofbusiness. Our rehabilitative solutions business develops specialized rehabilitation technologies and is a leading provider of evidence-based clinical programs for post-acute rehabilitation serving more than ~~4,400~~4,600 long-term care facilities and other sub-acute rehabilitation providers throughout the U.S.

For the three and six months ended June 30, 2012, our net sales were $251.8 million and $469.8 million, respectively, and we recorded net income of $17.4 million and $24.9 million, respectively. For the three and six months ended June 30, 2011, our net sales were $234.8 million and $435.2 million respectively, and we recorded net income of $15.4 million and $21.6 million, respectively.

~~We have three segments—Patient-Care Services, Distribution and Therapeutic Solutions.~~ This segment also develops neuromuscular technologies through independent research. For the three months ended ~~June 30, 2012,~~March 31, 2013, net sales ~~attributable~~ to ~~our Patient-Care~~customers attributed to Products & Services ~~Distribution and Therapeutic Solutions segments~~segment were $207.8 million, $27.4 million and $16.4 million, respectively. For the six months ended June 30, 2012, net sales attributable to our Patient-Care Services, Distribution and Therapeutic Solutions segments were $384.2 million, $53.7 million and $31.7 million, respectively.$40.3 million. See Note L tofor our consolidated financial statements contained herein for further information related to our segments.

Industry Overview

We ~~provide goods and services to the O&P, post-acute, and other rehabilitation markets. We~~ estimate that ~~the O&P patient-care market~~approximately $4.3 billion is spent in the United States ~~is approximately $2.6 billion, of which we account~~each year for orthotic and prosthetic products and services. Our Patient Care segment, currently accounts for approximately ~~29%,~~20% share, provides a comprehensive portfolio of orthotic, prosthetic and ~~the post-acute rehabilitation and other rehabilitation markets, combined, are approximately $1.3 billion, of which we account for 5%.~~

~~Table of Contents~~

~~We commissioned a study~~post-operative solutions to patients in the ~~past that identified additional opportunities to leverage our expertise beyond the traditional O&P market,~~acute, post-acute, and ~~we believe these additional opportunities could potentially expand our available O&P market by an additional $1.4 billion to $4.0 billion.~~patient care clinic settings.

The traditional O&P ~~patient-care services market~~patient care industry is highly fragmented and is characterized by local, independent O&P businesses, with the majority of these businesses generally having a single facility with annual revenues of less than $1.0 million. We do not believe that any single competitor accounts for more than 2% of the country’s total estimated O&P ~~patient-care services revenue.~~patient care clinic revenues.

The ~~O&P services~~ industry is characterized by stable, recurring revenues, primarily resulting from new patients as well as the need for periodic replacement and modification of O&P devices. ~~Based on our experience,~~We believe, the average replacement time for orthotic devices is one to three years, while the average replacement time for prosthetic devices is three to five years. ~~There is also an attendant need for continuing O&P patient-care services. In addition to the inherent need for periodic replacement and modification of O&P devices and continuing care, we~~We expect the demand for O&P services to continue to grow as a result of several key trends, including the aging of the U.S. population, resulting in an increase in ~~incidence~~the prevalence of disease associated disability, and the demand for new and advanced replacement devices.

We estimate that approximately $2.1 billion is spent in the United States each year, principally by care providers, for O&P products, components, devices and supplies. Our Products & Services segment distributes O&P products, components, devices and supplies to independent customers and to our patient care clinics, and our distribution sales account for approximately 5% of the market outside of the Company.

We estimate the ~~post-acute~~market for rehabilitation ~~market to include approximately 15,000~~technologies, integrated clinical programs and therapist training in skilled nursing facilities ~~(“SNFs”)~~(SNF) to be approximately $240 million annually. We currently provide these products and ~~to have a market potential of approximately $200 million. We provide technologically advanced rehabilitation equipment and clinical programs~~services to approximately ~~31%~~30% of the ~~post-acute market.~~estimated 15,700 SNFs located in the U.S. We estimate the market for rehabilitation technologies, clinical programs and training within the broader post-acute rehabilitation markets ~~which include independent rehabilitation providers and providers in other post-acute settings,~~ to be approximately ~~$1.1 billion. We currently provide~~$600 million. Currently, our goods and services are only provided to ~~very few customers in~~a small segment of this ~~portion of the market,~~larger category; however, we believe ~~this market would benefit from our products and services.~~significant demand exists for future expansion.

Table of Contents

Business Description

~~Patient-Care Services~~Patient Care

AsOur Patient Care segment, which is now comprised of ~~June 30, 2012, we provided~~our patient care clinics and our contracting and network management business, provides O&P ~~patient-care~~patient care services through over ~~700 patient-care centers~~730 patient care clinics and over ~~1,195~~1,250 clinicians in 45 states and the District of Columbia. Substantially all of our clinicians are certified, or are candidates for formal certification, by the O&P industry certifying boards. ~~A clinician manages each of our patient-care centers.~~ Our ~~patient-care centers~~patient care clinics also employ highly trained technical personnel who assist in the provision of services to patients and who fabricate various O&P devices, as well as office administrators who schedule patient visits, obtain approvals from payors and bill and collect for services rendered.

In our orthotics business, we design, fabricate, fit and maintain a wide range of custom-made braces and other devices ~~(such as spinal, knee and sports-medicine braces)~~ that provide external support to patients suffering from musculoskeletal disorders, such as ailments of the back, extremities or joints ~~and~~due to injuries from sports or other activities. In our prosthetics business, we design, fabricate, fit and maintain custom-made artificial limbs for patients who are without limbs as a result of traumatic injuries, vascular diseases, diabetes, cancer or congenital disorders. O&P devices are increasingly becoming more technologically advanced and are custom-designed to add functionality and comfort to patients’ lives, shorten the rehabilitation process and lower the cost of rehabilitation.

Patients are referred to ~~Hanger~~our patient care clinics by an attending physician who determines a patient’s treatment and writes a prescription. Our clinicians then consult with both the referring physician and the patient with a view toward assisting in the design of ana custom orthotic or prosthetic device to meet the patient’s needs.

The fitting process often involves several stages in order to successfully achieve desired functional and cosmetic results. The clinician creates a cast and takes detailed measurements, frequently using our digital imaging system (Insignia), of the patient’s residual limb to ensure an anatomically correct fit. Prosthetic devices areThese custom ~~fabricated and fit by skilled clinicians.~~

~~Table of Contents~~

~~The majority of the orthotic devices provided by us are custom designed, fabricated and fit; the remainder are prefabricated but custom fit.~~

~~Custom~~ devices are fabricated by our skilled technicians using plaster castings, measurements and designs made by our ~~clinicians and by utilization of~~clinicians. Frequently our proprietary Insignia ~~system.~~system is used to measure and design devices. The Insignia system ~~replaces plaster casting of a patient’s residual limb with a computer generated image. Insignia provides~~scans the patient and produces a very accurate computer generated image of the patient which results in a faster turnaround for the ~~patient,~~patient’s device and a more professional overall experience. Technicians use advanced materials and technologies to fabricate a custom device under quality assurance guidelines. Custom designed devices that cannot be fabricated at the patient-care centers are fabricated at one of several central fabrication facilities.

~~To provide timely service to our patients, we employ technical personnel and maintain laboratories at many of our patient-care centers.~~ We have earned a strong reputation within the O&P industry for the development and use of innovative technology in our products, which has increased patient comfort and capability, and can significantly enhance the rehabilitation process. The quality of our services and the success of our technological advances have generated broad media coverage, building our brand equity among payors, patients and referring physicians.

~~The~~ A listings of our principal reimbursement sources for our services ~~are:~~

·Commercial and other, which consist of individuals, rehabilitation providers, private insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation, workers’ compensation programs and similar sources;

·Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons, which provides reimbursement for O&P products and services based on prices set forthis described in ~~fee schedules for 10 regional service areas;~~

·Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons in financial need, regardless of age, which may supplement Medicare benefits for financially needy persons aged 65 or older; and

·~~U.S. Department of Veterans Affairs.~~Note L.

Government reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately ~~41.3%~~40.2% and ~~40.6%~~41.2% of our net sales for the ~~six~~three months ended ~~June 30,~~March 31, 2013 and 2012, ~~and 2011,~~ respectively. These payors ~~have~~ set ~~maximum~~ reimbursement levels for O&P services and ~~products.~~products using a series of codes which designate the type of product and service being delivered. Medicare prices are adjusted each year based on the Consumer Price Index-Urban (“CPIU”) unless Congress acts to change or eliminate the adjustment. The Medicare price (decreases)/increases for 2013, 2012, ~~2011, 2010, 2009,~~ and ~~2008 were~~2011were 0.8%, 2.4%, and (0.1%)~~, 0.0%, 5.0%, and 2.7%~~, respectively. There can be no assurance that future changes will not reduce reimbursements for O&P services and products from these sources.

Table of Contents

We enter into one to three year contracts with ~~third-party~~commercial and other payors ~~that allow us~~ to ~~perform~~provide O&P services ~~for a~~to referred ~~patient and be paid under the contract with the third- party payor. These contracts typically have a stated term of one to three years.~~patients. These contracts generally may be terminated without cause by either party on 60 to 90 days’ notice or on 30 days’ notice if we have not complied with certain licensing, certification, program standards, Medicare or Medicaid requirements or other regulatory requirements. Reimbursement for services is typically based on a fee schedule negotiated with the third-party payor that reflects various factors, including geographic area and number of persons covered.

19O

~~Table of Contents~~

~~Through the normal course of business, we receive patient deposits on devices not yet delivered. At June 30, 2012~~ur contract and ~~December 31 2011, we held $1.2 million and $0.5 million of deposits, respectively, from our patients.~~

~~Provider Network Management~~

~~Linkia~~network management business is the only ~~provider~~ network management company dedicated solely to serving the O&P ~~market. Linkia is dedicated to managing the O&P services of~~market for national and regional insurance companies. ~~Linkia partners~~We partner with healthcare insurance companies ~~by securing a national or regional contract~~ either as a preferred provider or to manage their O&P network of providers. ~~Linkia’s~~Our network now includes approximately ~~1,050~~1,130 O&P provider locations, including ~~approximately 360~~over 400 independent providers. As of ~~June 30, 2012, Linkia~~March 31, 2013, we had 5356 contracts with national and regional providers.

~~Distribution~~Products & Services

WeOur Products & Services segment is the combination of our previously reported Distribution segment and Therapeutic Solutions segment. Through our distribution business, we distribute O&P components both to independent customers and to our own ~~patient-care centers through our wholly-owned subsidiary, SPS, which is~~patient care clinics. We also provide rehabilitative solutions to the ~~nation’s largest dedicated~~ O&P ~~distributor. We are also~~market and the post-acute rehabilitation market while being a leading manufacturer and distributor of therapeutic footwear for diabetic patients in the podiatric market. ~~SPS~~Our distribution business maintains approximately 30,000 individual SKUs in inventory ~~approximately 27,000 individual SKUs~~which are manufactured by more than ~~300~~390 different companies. ~~SPS operates~~Our distribution facilities in California, Florida, Georgia, Illinois, Pennsylvania, and Texas ~~which allows~~allow us to deliver products via ground shipment anywhere in the contiguous United States ~~typically~~ within two business days.

Our ~~Distribution~~distribution business enables us to:

· centralize our purchasing and thus lower our material costs by negotiating purchasing discounts from manufacturers;

· reduce our ~~patient-care center~~patient care clinic inventory levels and improve inventory turns;

· ~~perform~~manage inventory ~~quality control;~~quality;

· encourage our ~~patient-care centers~~patient care clinics to use the most clinically appropriate ~~products that enhance our profit margins;~~products; and

· coordinate new product development efforts with key vendor “partners”.

Marketing of our ~~Distribution~~ services is conducted on a national basis through a dedicated sales force, print and e-commerce catalogues, and exhibits at industry and medical meetings and conventions. We direct specialized catalogues to segments of the healthcare industry, such as orthopedic surgeons, physical and occupational therapists, and podiatrists.

~~Therapeutic Solutions~~

~~We provide therapeutic~~Our rehabilitative solutions ~~to the O&P market and post-acute rehabilitation market through our subsidiaries IN, Inc. and ACP. ACP~~business is the nation’s leading provider of rehabilitation technologies and integrated clinical programs to rehabilitation providers. ~~ACP’s~~Our unique value proposition is to provide ~~its~~our customers with a full-service “total solutions” approach encompassing proven medical ~~technology,~~technology; evidence based clinical programs, and continuous onsite therapist education and training. ~~ACP’s~~Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. ~~ACP has contracts to~~We serve more than ~~4,400~~4,600 skilled nursing facilities nationwide, including 21 of the 25 largest national providers. ~~ACP’s~~Our contracts contain negotiated pricing and service levels with terms ranging from one to five ~~years. ACP~~years, generally ~~bills its~~billed to our customers monthly, and revenue is recognized based upon the contractual terms of the agreements.

~~Table of Contents~~

~~IN, Inc. specializes~~We also have a product development business specializing in the ~~product development and~~ commercialization of emerging products in the O&P and Rehabilitation markets. Working with inventors under licensing and consulting agreements, ~~IN, Inc. commercializes~~we commercialize the design, ~~obtains~~obtain regulatory approvals, ~~develops~~develop clinical protocols for the technology, and then ~~introduces~~introduce the devices to the marketplace through a variety of distribution channels. ~~IN, Inc.~~We currently ~~has~~have two commercial products: the WalkAide System which benefits patients with a condition referred to as drop foot, and the V-Hold which is active vacuum technology used in lower extremity prosthetic devices. The V-Hold is primarily sold through our patient care centers. The WalkAide System is currently reimbursable for Medicare beneficiaries with foot drop due to incomplete spinal cord injuries. IN, Inc. is currently conducting clinical trials in an effort to gain additional coverage for stroke patients with foot drop, which represents the largest potential foot drop patient population. These trials are now fully enrolled with submission

Table of data to CMS anticipated in 2013. In addition to reimbursement with Medicare, IN, Inc. has been working with commercial insurance companies and has had limited success in receiving coverage for the WalkAide. The WalkAide is sold in the United States through our patient-care centers and SPS. IN, Inc. is also marketing the WalkAide internationally through a network of distributors in Europe, the Middle East/Africa, Latin America, Canada, and Asia.Contents

Critical Accounting Policies and Estimates

Our analysis and discussion of our financial condition and results of operations is based upon our Consolidated Financial Statements that have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. GAAP provides the framework from which to make these estimates, assumptions and disclosures. We have chosen accounting policies within GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note B to the Consolidated Financial Statements included elsewhere in this report. We believe the following accounting policies are critical to understanding our results of operations and the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

· Revenue Recognition: Revenues in our ~~Patient-Care Services~~Patient Care segment are derived from the sale of O&P devices and the maintenance and repair of existing devices and are recorded net of all contractual adjustments and discounts. The sale of O&P devices includes the design, fabrication, assembly, fitting and delivery of a wide range of braces, limbs and other devices. Revenues from the sale of these devices are recorded when (i) acceptance by and delivery to the patient has occurred; (ii) persuasive evidence of an arrangement exists and there are no further obligations to the patient; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenues from maintenance and repairs are recognized when the service is provided. ~~Revenues~~In our Products & Services segment, revenues on the ~~sale~~distribution of O&P devices to customers ~~by the Distribution segment~~ are recorded upon the shipment of products, in accordance with the terms of the invoice, net of merchandise returns received and the amount established for anticipated returns. Discounted sales are recorded at net realizable value. ~~Revenues in our Therapeutic Solutions segment are primarily derived~~We also derive revenue from leasing rehabilitation technology combined with clinical therapy programs and education and ~~training. The revenue~~training, which is recorded on a monthly basis according to terms of the contracts with our customers.

21·

~~Table of Contents~~Accounts Receivable:

Certain accounts receivable may be uncollectible, even if properly pre-authorized and billed. ~~Regardless of the balance, accounts~~Accounts receivable ~~amounts~~balances are periodically evaluated to assess collectability. In addition to the actual bad debt expense recognized during collection activities, we estimate the amount of potential bad debt expense that may occur in the future. This estimate is based upon our historical experience as well as a review of our receivable balances.

On a ~~quarterly~~monthly basis, we evaluate cash collections, accounts receivable balances and write-off activity to assess the adequacy of our allowance for doubtful accounts. Additionally, a company-wide evaluation of collectability of receivable balances older than 180 days is performed at least semi-annually, the results of which are used in the next allowance analysis. In these detailed reviews, the account’s net realizable value is estimated after considering the customer’s payment history, past efforts to collect on the balance and the outstanding balance, and a specific reserve is recorded if needed. From time to time, we may outsource the collection of such accounts to collection agencies after internal collection efforts are exhausted. In cases where valid accounts receivable cannot be collected, the uncollectible account is written off to bad debt expense.

The following represents the composition of our accounts receivable balance by type of payor:

June 30, 2012

(In thousands)

0-60 days

61-120 days

Over 120 days

Total

Patient Care Services

Commercial insurance

$
45,106

$
9,444

$
14,665

$
69,215

Private pay

4,489

4,158

8,310

16,957

Medicaid

12,266

2,899

3,626

18,791

Medicare

27,977

5,050

6,329

39,356

VA

2,102

299

248

2,649

Distribution & Therapeutic Solutions Trade accounts receivable

12,538

3,300

4,127

19,965

$
104,478

$
25,150

$
37,305

$
166,933

Table of Contents

December 31, 2011
March 31, 2013
(In thousands)	0-60 days		61-120 days		Over 120 days		Total		0-60 days		61-120 days		Over 120 days		Total
Patient Care Services
Patient Care
Commercial insurance	$	50,136	$	9,594	$	11,759	$	71,489	$	45,156	$	9,643	$	13,341	$	68,140
Private pay	3,936		3,791		9,219		16,946		7,172		4,766		7,371		19,309
Medicaid	12,018		3,678		4,173		19,869		12,816		3,402		4,549		20,767
Medicare	25,438		3,489		4,433		33,360		30,531		3,965		13,572		48,068
VA	1,428		373		159		1,960		1,997		611		548		3,156
Distribution & Therapeutic Solutions Trade accounts receivable	11,367		2,663		3,200		17,230
Products and Services
Trade accounts receivable									11,242		2,822		4,604		18,668
	$	104,323	$	23,588	$	32,943	$	160,854	$	108,914	$	25,209	$	43,985	$	178,108

December 31, 2012
(In thousands)	0-60 days		61-120 days		Over 120 days		Total
Patient Care
Commercial insurance	$	56,326	$	11,413	$	13,355	$	81,094
Private pay	5,928		4,955		6,655		17,538
Medicaid	12,879		3,468		3,519		19,866
Medicare	29,910		6,118		9,494		45,522
VA	2,270		608		353		3,231
Products and Services
Trade accounts receivable	12,556		3,149		4,091		19,796
	$	119,869	$	29,711	$	37,467	$	187,047

· Inventories: Inventories ~~which consist~~in the Patient Care segment consisting principally of raw materials ~~work~~and work-in-process are valued based on the gross profit method which approximates lower of cost or market using the first-in first-out method. The Company applies the gross profit method on a patient care clinic basis in ~~process~~this segment’s inventory to determine ending inventory at the end of each interim period except on October 31st, which is the date of our physical inventory. The annual physical inventory for this segment values the inventory at lower of cost or market using the first-in first-out method and includes work-in-process consisting of materials, labor and overhead which is valued based on established standards for the stage of completion of each custom order. Adjustments to reconcile the physical inventory to our books are treated as changes in accounting estimates and are recorded in the fourth quarter. The October 31st inventory is subsequently adjusted during interim periods to apply the gross profit method described above.

Inventories in the Products & Services segments consist principally of finished goods which are stated at the lower of cost or market using the first-in, first-out ~~method. At our Patient-Care Services segment, we calculate cost of goods sold—materials in accordance with the gross profit~~ method for all reporting ~~periods. We base the estimates used in applying the gross profit method~~periods and are valued based on the actual results of the most recently completed physical inventory and other factors, such as sales mix and purchasing trends among other factors. Cost of goods sold—materials is adjusted once the annual physical inventory is taken and the valuation is completed in the fourth quarter. We treat these inventory adjustments as changes in accounting estimates.perpetual records.

· Goodwill and Other Intangible Assets: Goodwill represents the excess of purchase price over the fair value of net identifiable assets of purchased businesses. We assess goodwill for impairment annually ~~on October 1,~~during the fourth quarter, or when events or circumstances indicate that the carrying value of the reporting units may not be recoverable. The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If the Company determines that a two-step goodwill impairment test is necessary or more efficient than a qualitative approach, it will measure the fair value of the Company’s reporting units using a combination of income, market and cost approaches. Any impairment would be recognized by a charge to operating results and a reduction in the carrying value of the intangible asset. ~~Our annual~~As of October 1, 2012, there were no indicators of impairment ~~test for goodwill primarily utilizes~~as the ~~income approach and considers~~fair values of the ~~market approach and the cost approach~~reporting units were substantially in ~~determining the value~~excess of ~~our reporting units.~~their carrying values.

2220

Table of Contents

Non-compete agreements are recorded ~~based on agreements entered~~when we enter into ~~by us~~the agreement and are amortized, using the straight-line method, over their terms ranging from five to seven years. Other definite-lived intangible assets are recorded at cost and are amortized, using the straight-line method, over their estimated useful lives of up to 1714 years. Whenever the facts and circumstances indicate that the carrying amounts of these intangibles may not be recoverable, we review and assess the future cash flows expected to be generated from the related intangible for possible impairment. Any impairment would be recognized as a charge to operating results and a reduction in the carrying value of the intangible asset. ~~As of October 1, 2011, there were no indicators of impairment as the fair value of the reporting units is substantially in excess of their carrying value.~~

· Income taxes: We are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Consolidated Balance Sheet. We then assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we establish a valuation allowance against the deferred tax asset.

We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine if the weight of available evidence indicates that the tax position has met the threshold for recognition; therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on the income tax provision and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods.

Guidance and Outlook

The Company expects ~~full year 2012~~2013 revenues of between ~~$970 million~~$1.06 and ~~$990 million~~$1.08 billion, resulting from ~~comparable store~~3% to 5% same center sales growth in ~~our~~its Patient Care ~~Services~~ segment, ofalong with 3% to 5% ~~and~~ growth in ~~our Distribution segment of 3% to 5%. We expect flat to slightly higher revenues in our Therapeutic Solution~~its Products & Services ~~segment for the year, with sales in the first half of the year down then trending up in the second half as the rate of new contract sales accelerates.~~segment. The Company anticipates adjusted diluted earnings per share of between ~~$1.74~~$2.02 and ~~$1.78, which includes~~$2.09 for 2013, excluding approximately ~~$0.01~~$0.05 for ~~one-time~~ training costs related to the implementation of ~~our~~Janus, a new ~~pratice~~clinic management ~~system.~~

~~Table of Contents~~

Assystem, and an increase in ~~past years, the Company’s goal is to increase~~adjusted operating margins ~~by twenty~~of between 30 to ~~forty~~50 basis points. The Company anticipates generating cash flow from operations of between ~~$70~~$80 million and ~~$80~~$100 million in ~~2012~~2013 and investing a total of $40 million to $50 million in capital additions. During ~~2012~~2013 the Company will continue its acquisition program with a goal of closing acquisitions that total approximately $20 million in annualized revenues.

Results of Operations

The following table sets forth for the periods indicated certain items from our Consolidated Statements of ~~Operations~~Income and Comprehensive Income as a percentage of our net sales:

Three Months Ended

Six Months Ended

June 30,

June 30,

2012

2011

2011

2010

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Net sales

100.0
%
100.0
%
100.0
%
100.0
%
Cost of goods sold - materials

29.0

30.5

29.2

30.3

Personnel costs

33.1

34.3

34.5

36.3

Other operating expenses

20.4

19.8

19.0

19.8

Relocation expenses

—

2.0

0.0

1.6

Depreciation and amortization

3.4

2.2

3.3

2.3

Income from operations

14.2

11.2

14.0

9.7

Interest expense

3.1

3.6

3.3

3.9

Income before taxes

11.1

7.6

10.7

5.8

Provision for income taxes

4.2

2.9

4.1

2.2

Net income

6.9
%
4.7
%
6.6
%
3.6
%

Table of Contents

	Three Months Ended
	March 31,
	2013		2012
	(Unaudited)		(Unaudited)

Net sales	100.0	%	100.0	%
Material costs	29.0		30.6
Personnel costs	38.5		37.2
Other operating expenses	18.8		18.4
Acquisition expenses	0.0		0.0
Depreciation and amortization	4.0		3.8
Income from operations	9.7		10.0
Interest expense, net	3.4		3.6
Income before taxes	6.3		6.4
Provision for income taxes	2.2		2.4
Net income	4.1	%	4.0	%

Three Months Ended ~~June 30, 2012~~March 31, 2013 Compared to the Three Months Ended ~~June 30, 2011~~March 31, 2012

Net Sales.Net sales for the three months ended ~~June 30, 2012~~March 31, 2013 increased ~~$17.0~~$15.4 million, or ~~7.2%~~7.1%, to ~~$251.6~~$233.5 million for the second quarter of 2012 compared to $234.8 million for the same period of 2011. The increase was the result of a $8.8 million, or 4.6%, increase in same-center sales in the Patient-Care Services segment; a $5.9 million increase from ~~acquired entities; a $1.8 million, or 7.0%, increase in sales in the Distribution segment; and a $0.3 million increase from the Therapeutic Solutions segment.~~

~~Cost of Goods Sold - Materials.~~ ~~Cost of goods sold - materials for the three months ended June 30, 2012 was $72.9 million, an increase of $4.4 million over $68.5~~$218.1 million for the three months ended ~~June 30, 2011.~~March 31, 2012. This increase was due to a $16.7 million, or 9.5%, increase in the Patient Care segment, and a $1.3 million offset, or 3.0%, decrease in sales in the Products & Services segment. The increase in sales in the Patient Care segment was ~~the~~a result of ~~growth~~an increase in ~~sales. Cost~~same store sales and the impact of ~~goods sold - materials~~2012 O&P acquisitions, including a number of former customers of the Products & Services segment. The decrease in sales in the Products & Services segment was a result of a number of its largest independent O&P customers being acquired by the Patient Care segment during 2012 and additional pressure put on independent O&P customers by the continuation of the CMS Recovery Audit Contractor (RAC) program.

Material Costs. Material costs for the three months ended March 31, 2013 was $67.7 million, an increase of $1.0 million over $66.7 million for the three months ended March 31, 2012 primarily due to sales growth. Material costs as a percentage of net sales decreased 20160 basis points primarily due to ~~revenue mix.~~a reduction in product cost arising from an effort to further consolidate our purchasing power and the impact of 2012 O&P acquisitions, which had a lower material costs than the consolidated percentage.

Personnel Costs. Personnel costs for the three months ended ~~June 30, 2012~~March 31, 2013 increased by ~~$2.4~~$8.8 million to ~~$83.4~~$90.0 million from ~~$81.0~~$81.2 million for the three months ended ~~June 30, 2011. The increase was due to costs from acquired entities and increased employee benefit costs, staffing and merit increases.~~March 31, 2012. As a percentage of net sales, personnel costs ~~decreased 140~~increased 130 basis points to ~~33.1%~~38.5% in 2013 from 37.2% in 2012. The increase was primarily due to merit and staffing increases related to acquisitions made in 2012 ~~from 34.5% in 2011 due to leveraging existing headcount over~~and increased ~~sales volume.~~healthcare costs.

Other Operating Expenses. Other operating expenses, ~~for the three months ended June 30, 2012~~which are comprised primarily of professional fees, facility costs, bad debt expense, incentive compensation, and reimbursable employee expenses, increased ~~$6.7~~$3.6 million to ~~$51.3~~$43.7 million, from $44.6 million for the three months ended June 30, 2011. The increase was primarily due to: (i) the addition of $1.1 million in operating expenses from acquired entities; (ii) $2.0 million in increased expenses related bad debt; (iii) $3.1 million in increased incentive compensation; and (iv) $0.5 million related to Instride trials. Other operating expenses as a percentageor 18.8% of net revenues, ~~increased 1.4% to 20.4% in 2012 from 19.0%~~ in the ~~prior year due~~first quarter of 2013 compared to $40.1 million, or 18.4% of net revenues, in the first quarter of 2012. The increase is primarily attributable to a $2.2 million increase in rent expenses ~~discussed above.~~and a $1.2 million increase in bonus expenses.

~~Table of Contents~~

~~Relocation Expenses.~~ As of January 1, 2012, we had completed the relocation of our corporate office from Bethesda, Maryland to Austin, Texas. During the three months ended June 30, 2011, we incurred nominal costs related to the relocation of employees.

Depreciation and Amortization. Depreciation and amortization for the three months ended ~~June 30, 2012~~March 31, 2013 increased ~~$0.7~~$1.0 million, to ~~$8.4~~$9.3 million, compared to ~~$7.7~~$8.3 million in the ~~second~~first quarter of ~~2011.~~2012. The increase was primarily due to ~~operating assets~~software, leasehold improvements, and machinery and equipment purchased over the last 12 months.

Income from Operations.Income from operations increased ~~$2.8~~$1.0 million, to ~~$35.7~~$22.7 million, for the three months ended ~~June 30, 2012~~March 31, 2013 compared to ~~$32.9~~$21.7 million for the three months ended ~~June 30, 2011~~March 31, 2012 due primarily to increased sales ~~volume and improved cost~~volume.

Table of ~~materials as a percentage of net revenues.~~Contents

Interest Expense.Interest expense remained consistent at ~~was $7.7~~$7.8 million for the three months ended ~~June 30, 2012,~~March 31, 2013, compared to $7.8 million, for the three months ended ~~June 30, 2011. Variable~~March 31, 2012, as variable interest ~~rates~~rate and outstanding levels of debt were comparable in the two ~~periods and the Company made required repayments of debt.~~periods.

Provision for Income Taxes. The provision for income taxes for the three months ended ~~June 30, 2012~~March 31, 2013 was ~~$10.7~~$5.5 million, or ~~38.0%~~36.5% of pre-tax income, compared to ~~$9.7~~$5.3 million, or ~~38.5%~~38.1% of pre-tax income, for the three months ended ~~June 30, 2011.~~March 31, 2012. The effective tax rate consists principally of the 35% federal statutory tax rate and state income taxes, less permanent tax differences. The ~~2011~~2013 period has a ~~higher~~lower effective tax rate primarily due ~~to higher state income tax rates~~the reinstatement of the 2012 federal Research and ~~discrete tax items.~~Development Tax Credit.

Net Income. Net income increased ~~$2.0~~$0.9 million, to ~~$17.4~~$9.5 million, for three months ended ~~June 30, 2012,~~March 31, 2013, from ~~$15.4~~$8.6 million for the three months ended ~~June 30, 2011, due primarily to increased sales volume.~~

~~Six Months Ended June 30,~~March 31, 2012, ~~Compared to the Six Months Ended June 30, 2011~~

~~Net Sales.~~ Net sales for the six months ended June 30, 2012 increased $34.6 million, or 8.0%, to $469.8 million from $435.2 million for the same period in 2011. The sales increase was driven by a $20.2 million, or 5.7%, increase in same-center sales in the Patient-Care Services segment; a $10.6 million increase from acquired entities; a $4.6 million or 9.4% increase in sales in the Distribution segment; and a $0.7 million decrease from the Therapeutic Solutions segment.

~~Cost of Goods Sold - Materials.~~ Cost of goods sold - materials for the six months ended June 30, 2012 was $137.0 million, an increase of $10.4 million over $126.6 million for the six months ended June 30, 2011. The increase was the result of growth in sales. Cost of goods sold - materials as a percentage of net sales increased 10 basis points due to mix of revenue.

~~Personnel Costs.~~ Personnel costs for the six months ended June 30, 2012 increased by $7.2 million to $167.1 million from $159.9 million for the six months ended June 30, 2011. The increase was due to costs from acquired entities and increased employee benefit costs, staffing and merit increases. As a percentage of net sales, personnel costs decreased 1.1% to 35.6% in 2012 from 36.7% in 2011 due to leveraging headcount over increased sales volume.

~~Other Operating Expenses.~~ Other operating expenses for the six months ended June 30, 2012 increased $11.4 million, to $93.4 million, from $82.0 million for the six months ended June 30, 2011. The increase was primarily due to: (i) the addition of $2.1 million in operating expenses from acquired entities; (ii) $3.4 million in increased expenses related to bad debt; (iii) $4.0 million in increased incentive compensation; (iv) $1.1 million related to Instride trials; and (v) 0.9 million in other costs. Other operating expenses as a percentage of net revenues increased 110 basis points to 19.9% in 2012 from 18.8% in the prior year due to the ~~increase expenses discussed~~reasons noted above.

~~Table of Contents~~

~~Relocation Expenses.~~ As of January 1, 2012, we had completed the relocation of our corporate office from Bethesda, Maryland to Austin, Texas. During the six months ended June 30, 2011, we incurred $0.4 million of employee relocation costs.

~~Depreciation and Amortization.~~ Depreciation and amortization for the six months ended June 30, 2012 increased $1.7 million, to $16.7 million, compared to $15.0 million in the first half of 2011. The increase was primarily due to operating assets purchased over the last 12 months.

~~Income from Operations.~~ Income from operations increased $4.4 million, to $55.7 million, for the six months ended June 30, 2012 compared to $51.3 million for the six months ended June 30, 2011 due to increased sales volume.

~~Interest Expense.~~ Interest expense decreased $0.7 million for the six months ended June 30, 2012, to $15.5 million, compared to $16.2 million for the six months ended June 30, 2011, primarily due to lower interest rates resulting from the amendment to our credit facilities in March 2011.

~~Provision for Income Taxes.~~ The provision for income taxes for the six months ended June 30, 2012 was $15.3 million, or 38.0% of pre-tax income, compared to $13.5 million, or 38.3% of pre-tax income, for the six months ended June 30, 2011. The effective tax rate consists principally of the 35% federal statutory tax rate and state income taxes, less permanent tax differences. The 2011 period has a higher effective tax rate due to higher state income tax rates and discrete tax items.

~~Net Income.~~ ~~Net income increased $3.3 million, to $24.9 million, for six months ended June 30, 2012, from $21.6 million for the six months ended June 30, 2011, due primarily to increased sales volume.~~

Financial Condition, Liquidity and Capital Resources

Cash Flows

Our working capital at ~~June 30, 2012~~March 31, 2013 was ~~$265.9~~$265.7 million, compared to ~~$201.6~~$250.9 million at ~~June 30, 2011.~~March 31, 2012. The increase in working capital is primarily due to increases in cash, inventory, and accounts ~~receivable.~~receivable due to the growth of the business and acquisitions completed in 2012. Days sales outstanding (“DSO”), which is the number of days between the billing date of O&P services and the date of receipt of payment thereof, for the ~~six~~three months ended ~~June 30, 2012~~March 31, 2013 increased to 5456 days from 5051 days for the same period last year. The increase in DSO is primarily related to an increase in CMS Recovery Audit Contractor (RAC) audits, which review claims submitted to Medicare. Net cash provided by operating activities was ~~$27.0~~$2.2 million for ~~six~~the three months ended ~~June 30, 2012~~March 31, 2013 compared to ~~$10.6~~$1.3 million for the same period in the prior year. The increase in cash provided by operating activities in the current year resulted primarily from increased net ~~income, and a decrease in incentive compensation payments in 2012.~~income.

Net cash used in investing activities was ~~$25.5~~$5.3 million for the ~~six~~three months ended ~~June 30, 2012,~~March 31, 2013, compared to ~~$21.2~~$10.8 million in the prior year. In the first ~~six~~three months of ~~2012,~~2013, we ~~acquired five~~did not acquire O&P ~~companies operating eight patient-care centers at an aggregate purchase price of $8.6 million.~~companies. During the same period in ~~2011,~~2012, we acquired ~~three O&P companies operating four patient-care center~~two patient care clinics for an aggregate purchase price of ~~$7.3~~$2.0 million. Additionally, in ~~the first six months of 2012,~~2013, we invested ~~$16.0~~$5.4 million in capital assets, compared to ~~$15.2~~$5.3 million for the same period in 2011. Capital assets acquired in the first six months of 2012 related to the development of the Company’s new practice management system, leasehold improvements in our patient care practices and computer equipment purchases. Additionally, during the first six months of 2012 we restricted $3.1 million of cash in order to eliminate letters of credit obligations under our revolving credit agreement.

~~Table of Contents~~2012.

Net cash used byin financing activities was ~~$2.8~~$1.1 million and ~~$6.2~~$1.1 million for the ~~six months~~quarters ended ~~June 30,~~March 31, 2013 and 2012, ~~and 2011,~~ respectively. During the first ~~six months~~quarter of ~~2012~~2013 we: (i) repaid ~~$2.2~~$0.8 million related to term loan borrowings under our credit facilities (“Term Loans”); (ii) made ~~$2.5~~$1.4 million of required repayments of promissory notes issued in connection with acquisitions (“Seller Notes”); and (iii) received ~~$1.6~~$1.2 million of proceeds from ~~issuance~~the exercise of stock options issued under employee stock compensation plans. During the first ~~six months~~quarter of ~~2011~~2012 we: (i) ~~borrowed and repaid $10.0 million under our revolving credit facility; (ii)~~ repaid $1.5 million related to term loan borrowings under our credit facilities (“Term ~~Loans; (iii)~~Loans”); (ii) made ~~$2.1~~$0.5 million of required repayments of promissory notes issued in connection with acquisitions (“Seller ~~Notes; (iv) incurred $4.2 million of financing costs related to the amendment to our credit agreement in the first quarter of 2011;~~Notes”); and ~~(v)~~(iii) received $0.6 million of proceeds from ~~issuance~~the exercise of stock options issued under employee stock compensation plans.

Debt

Long-term debt consisted of the following:

June 30,

December 31,

2012

2011

(Unaudited)

(Unaudited)

(In thousands)

Revolving Credit Facility

$
—

$
—

Term Loan

294,800

297,000

7 1/8% Senior Notes due 2018

200,000

200,000

Subordinated seller notes, non-collateralized, net of unamortized discount with principal and interest payable in either monthly, quarterly or annual installments at effective interest rates ranging from 3.00% to 7.00%, maturing through November 2016

9,627

11,033

504,427

508,033

Less current portion

(6,115
)
(8,065
)

$
498,311

$
499,968

~~Amendment to Credit Agreement~~Table of Contents

	March 31,			December 31,
(In thousands)	2013			2012
	(Unaudited)
Revolving Credit Facility	$	—		$	—
Term Loan	292,550			293,300
7 1/8% Senior Notes due 2018	200,000			200,000
Subordinated seller notes, non-collateralized, net of unamortized discount with principal and interest payable in either monthly, quarterly or annual installments at effective interest rates ranging from 2.00% to 4.00%, maturing through November 2018	25,936			27,346
Total Debt	518,486			520,646
Less current portion	(11,528		)	(11,082		)
Long Term Debt	$	506,958		$	509,564

Revolving Credit Facility

The $100.0 million Revolving Credit Facility matures on December 1, 2015 and bears interest at LIBOR plus ~~3.75%~~3.25%, or the applicable rate (as defined in the Credit Agreement). The Revolving Credit Facility requires compliance with various covenants including but not limited to (i) minimum consolidated interest coverage ratio of ~~3.25:1.00 from October 1, 2011 to September 30, 2012, and~~ 3.50:1.00 ~~thereafter until maturity;~~and (ii) maximum total leverage ratio of ~~5.00:1.00 until December 31, 2011, 4.50:1.00 from January 1, 2012 to September 30, 2012, and~~ 4.00:1.00 from October 1, 2012 thereafter until maturity; and (iii) maximum annual capital expenditures of 7.5% of consolidated net revenues of the preceding fiscal year with an additional maximum rollover of $15.0 million from the prior year’s allowance if not expended in the fiscal year for which it is permitted.1.00. As of ~~June 30, 2012,~~March 31, 2013, the Company was in compliance with these covenants. As of March 31, 2013, the Company had $99.5 million available under ~~the Revolving Credit Facility. Availability under the Revolving Credit Facility~~this facility. This availability as of ~~June 30,~~March 31, 2012 was net of standby letters of credit of approximately $0.5 million. As of ~~June 30, 2012,~~March 31, 2013, the Company had no funds drawn on the Revolving Credit Facility. The obligations under the Revolving Credit Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected interest in the equity interests of the Company’s subsidiaries, all of the Company’s assets, and all the assets of the Company’s subsidiaries.

~~Table of Contents~~

Term Loan

The $300.0 million Term Loan Facility matures on December 1, 2016 and requires quarterly principal payments of ~~$750,000 that commenced on March 31, 2011.~~$0.75 million. From time to time, mandatory prepayments may be required as a result of excess free cash flow as defined in the Credit Agreement, certain additional debt incurrences, certain asset sales, or other events as defined in the Credit Agreement. No such mandatory prepayments were required during the first quarter of 2013 or 2012. The Term Loan Facility bears interest at LIBOR plus 3.0%, or the applicable rate (as defined in the Credit Agreement), and includes a 1.0% LIBOR floor. ~~During the first six months of 2012 the Company made a mandatory prepayment on its Term Loan Facility of $700,000. There were no mandatory prepayments made during the first six months of 2011.~~ As of ~~June 30, 2012,~~March 31, 2013, the interest rate on the Term Loan Facility was 4.0%. The obligations under the Term Loan Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected interest in the equity interests of the Company’s subsidiaries, all of the Company’s assets, and all the assets of the Company’s subsidiaries.

71/8% Senior Notes

On or prior to November 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 107.125% of the principal amount thereof, plus accrued and unpaid interest and additional interest to the redemption date with the proceeds of a public offering of its equity securities. On or after November 15, 2014, the Company may redeem all or ~~from time to time~~ a part of the notes ~~upon not less than 30 days and not more than 60 days’ notice,~~with a premium, as described in further detail in the Company’s Annual Report on form 10-K for the ~~twelve month period beginning on November 15,~~year ended December 31, 2012.

Table of ~~the indicated years at (i) 103.563% during 2014; (ii) 101.781% during 2015; and (iii) 100.00% during 2016 and thereafter through November 15, 2018.~~Contents

Subsidiary Guarantees

Debt Covenants

~~Table of Contents~~

General

As of ~~June 30, 2012, $294.8~~March 31, 2013, $292.6 million, or ~~58.4%~~56.4%, of our total debt of ~~$504.4~~$518.5 million was subject to variable interest ~~rates.~~rates based on a LIBOR floor of 1%, plus a 3% spread. We believe that, based on current levels of operations and anticipated growth, cash generated from operations, together with other available sources of liquidity, including borrowings available under the Revolving Credit Facility, will be sufficient for at least the next twelve months to fund anticipated capital expenditures, to fund our acquisition plans and make required payments of principal and interest on our debt, including payments due on our outstanding debt.

Because of the favorable interest rate environment, we are currently considering refinancing our Term Loan and Revolving Credit Facilities.

Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments as of ~~June 30, 2012~~March 31, 2013 (unaudited):

Payments Due by Period

Remainder of 2012

2013

2014

2015

2016

Thereafter

Total

(In thousands)

Long-term debt

$
4,022

$
5,629

$
4,694

$
4,512

$
285,442

$
200,128

$
504,427

Interest payments on long-term debt

20,356

26,131

25,913

25,741

24,181

26,721

$
149,043

Operating leases

21,859

37,473

30,219

20,668

14,813

32,614

$
157,646

Capital leases and other long-term obligations (1)

7,795

14,211

12,768

11,057

5,094

12,982

$
63,907

Total contractual cash obligations

$
54,032

$
83,444

$
73,594

$
61,978

$
329,530

$
272,445

$
875,023

Payments Due by Period

(In thousands)	Remainder of 2013		2014		2015		2016		2017		Thereafter		Total

Long-term debt	$	8,952	$	10,972	$	10,474	$	287,607	$	630	$	199,851	$	518,486
Interest payments on long-term debt (1)	23,635		26,355		25,979		24,262		14,282		12,502		127,015
Operating leases	46,183		37,832		27,388		20,323		14,811		29,137		175,674
Capital leases	865		750		705		659		605		1,942		5,526
Other long-term obligations (2)	14,069		11,902		8,907		3,800		3,800		15,159		57,637
Total contractual cash obligations	$	93,704	$	87,811	$	73,453	$	336,651	$	34,128	$	258,591	$	884,338

(1) Interest projections were based on the assumptions that the future interest rate for the Term Loan will remain at the current rate of 4%, which is the Company’s estimate for such period based on current and projected LIBOR rates.

(2) Other long-term obligations include commitments under our SERP ~~plan.~~plan in addition to IT and telephone contracts. Refer to Note K of the Company’s Annual Report on Form 10-K for additional ~~disclosure.~~

The carrying value of our long-term debt, excluding the Senior Notes, approximates fair value based on rates currently available to the Company for debt with similar terms and remaining maturities (level 2). The fair value of the Senior Notes, as of June 30, 2012, was $206.0 million, as compared to the carrying value of $200.0 million at that date. The fair values of the Senior Notes were baseddisclosure on the ~~quoted market price as of June 30, 2012 (level 1).~~

~~Market Risk~~

We are exposed to the market risk that is associated with changes in interest rates. As of June 30, 2012, all our outstanding debt, with the exception of the $294.86 million borrowed under the Term Loan Facility, was subject to fixed interest rates (see Item 3 below).SERP plan.

Forward Looking Statements

This report contains forward-looking statements setting forth our beliefs or expectations relating to future revenues, contracts and operations, ~~as well as the results of an internal investigation~~ and certain legal proceedings. Actual results may differ materially from projected or expected results due to changes in the demand for our O&P products and services, uncertainties relating to the results of operations or recently acquired O&P ~~patient-care centers,~~patient care clinics, our ability to enter into and derive benefits from managed-care contracts, our ability to successfully attract and retain qualified O&P clinicians, federal laws governing the health-care industry, uncertainties inherent in incomplete investigations and legal proceedings, governmental policies affecting O&P operations and other risks and uncertainties generally affecting the health-care industry. Readers are cautioned not to put undue reliance on forward-looking statements. Refer to risk factors disclosed in Part II, Item 1A of this filing as well as the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012 for discussion of risks and uncertainties. We disclaim any intent or obligation to publicly update these forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

We have existing obligations relating to our 71/8% Senior Notes, Term Loan Facility, Revolver and Subordinated Seller Notes. As of ~~June 30, 2012,~~March 31, 2013, we had cash flow exposure to the changing interest rates on the ~~$294.8~~$292.6 million borrowed under the Term Loan Facility. The other obligations have fixed interest rates.

Presented below is an analysis of our financial instruments as of ~~June 30, 2012~~March 31, 2013 that are sensitive to changes in interest rates. The table demonstrates the changes in estimated annual cash flow related to the outstanding balance under the Term Loan Facility, calculated for an instantaneous parallel shift in interest rates, plus or minus 50 basis points (“BPS”), 100 BPS and 150 BPS. The LIBOR floor and applicable rate pursuant to the Term Loans under the Credit Agreement prevents the rate from dropping below 4.0%. As of ~~June 30, 2012,~~March 31, 2013, the current LIBOR and applicable rate, is 4.0%; therefore, a 7580 BPS increase or decrease in LIBOR would not reduce or increase estimated annual cash flows related to the outstanding balance on the Term Loan Facility.

															Annual Interest Expense Given an Interest Rate								Annual Interest Expense Given an Interest
Cash Flow Risk	Annual Interest Expense Given an Interest Rate Decrease of X Basis Points						No Change in Interest Rates		Annual Interest Expense Given an Interest Rate Increase of X Basis Points						Decrease of X Basis Points						No Change in		Rate Increase of X Basis Points
(In thousands)	(150 BPS)		(100 BPS)		(50 BPS)				50 BPS		100 BPS		150 BPS		(150 BPS)		(100 BPS)		(50 BPS)		Interest Rates		50 BPS		100 BPS		150 BPS
Term Loan	$	11,792	$	11,792	$	11,792	$	11,792	$	11,792	$	12,529	$	14,003	$	11,702	$	11,702	$	11,702	$	11,702	$	11,702	$	12,287	$	13,750

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s disclosure controls and procedures are designed toprovide reasonable assurance that information required to be disclosed by it in its periodic reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and ~~forms. Based on an evaluation of the Company’s disclosure controls~~forms and procedures conducted by the Company’s Chief Executive Officer and Chief Financial Officer, such officers concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2012 to ensure that information required to be disclosed in the reports filed under the Exchange Act was accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on an evaluation of the Company’s disclosure controls and procedures conducted by the Company’s Chief Executive Officer and Chief Financial Officer, such officers concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2013 as a result of the material weakness in our internal controls over financial reporting relating to the valuation of work-in-process inventory. Additional details are discussed in our Annual Report on Form 10-K for the year ended December 31, 2012, under Part II, Item 9A.

~~Change~~Status of Remediation of Material Weakness

As of March 31, 2013, we have implemented procedures designed to address the material weakness disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 related to the proper valuation of work-in-process inventory. Management has implemented additional quarterly reviews, analysis and calculations surrounding the valuation of the work-in-process inventory to account for the changing sales volume from period to period. Management believes these measures will remediate the material weakness identified in the Form 10-K Annual report. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address this material weakness or determine to modify the remediation steps described above.

Changes in Internal Control Over Financial Reporting

In accordance with Rule 13a-15(d) under the Securities Exchange Act of 1934, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, determined that there ~~was~~were no ~~change~~changes in the Company’s internal control over financial reporting, beyond those remediation processes discussed above, that occurred during the three months ended ~~June 30, 2012,~~March 31, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. Other Information

ITEM 1A. RISK FACTORS.

Part I, Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 sets forth information relating to important risks and uncertainties that could materially adversely affect the Company’s business, financial condition or operating results. Those risk factors continue to be relevant to an understanding of the Company’s business, financial condition and operating results.

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Certain of those risk factors have been updated in this Form 10-Q to provide updated information, as set forth below. References to “we,” “our” and “us” in these risk factors refer to the Company.

Changes in government reimbursement levels could adversely affect our net sales, cash flows and profitability.

We derived ~~41.3%~~40.2% and ~~40.6%~~41.2% of our net sales for the ~~six~~three months ended ~~June 30,~~March 31, 2013 and 2012, ~~and 2011,~~ respectively, from reimbursements for O&P services and products from programs administered by Medicare, Medicaid and the U.S. Department of Veterans Affairs. Each of these programs set ~~maximum~~ reimbursement levels for O&P services and products. If these agencies reduce reimbursement levels for O&P services and products in the future, our net sales could substantially decline. In addition, the percentage of our net sales derived from these sources may increase as the portion of the U.S. population over age 65 continues to grow, making us more vulnerable to ~~maximum~~ reimbursement ~~level~~ reductions by these organizations. Reduced government reimbursement levels could result in reduced private payor reimbursement levels because fee schedules of certain third-party payors are indexed to Medicare. Furthermore, the healthcare industry is experiencing a trend towards cost containment as government and other third-party payors seek to impose lower reimbursement rates and negotiate reduced contract rates with service providers. This trend could adversely affect our net sales. For example, a number of states have reduced their Medicaid reimbursement rates for O&P services and products, or have reduced Medicaid eligibility, and others are in the process of reviewing Medicaid reimbursement policies generally, including for prosthetic and orthotic devices. Additionally, Medicare provides for reimbursement for O&P products and services based on prices set forth in fee schedules for ten regional service areas. Medicare prices are adjusted each year based on the Consumer Price Index—Urban (“CPIU”) unless Congress acts to change or eliminate the adjustment. The Medicare price (decreases)/increases for 2013, 2012, and 2011 ~~2010, 2009, and 2008~~ were 0.8%, 2.4%, and (0.1%)~~, 0.0%, 5.0%, and 2.7%~~ respectively. The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, March 23, 2010 (“PPACA”) changed the Medicare inflation factors applicable to O&P (and other) suppliers. The annual updates for years subsequent to 2011 are based on the percentage increase in the CPI-U for the 12-month period ending with June of the previous year. Section 3401(m) of PPACA required that for 2011 and each subsequent year, the fee schedule update factor based on the CPI-U for the 12-month period ending with June of the previous year is to be adjusted by the annual economy-wide private nonfarm business multifactory productivity (“the MFP Adjustment”). The MFP Adjustment may result in that percentage increase being less than zero for a year and may result in payment rates for a year being less than such payment rates for the preceding year. CMS has not yet issued a final rule implementing these adjustments for years beyond 2011, but has indicated in a proposed rule that it will do so as part of the annual program instructions to the O&P fee schedule updates. See 75 Fed. Reg. 40040, 40122, et seq. (July 13, 2010). If the U.S. Congress were to legislate additional modifications to the Medicare fee schedules, our net sales from Medicare and other payors could be adversely and materially affected.

In addition to the risks to our Patient Care segment businesses discussed above, changes in government reimbursement levels could also adversely affect the net sales, cash flows and profitability of our Products & Services segment business. In particular, a significant majority of ACP’s sales involve devices and related services provided to skilled nursing facilities (SNFs) and similar businesses. Reductions in government reimbursement levels to SNFs could cause such SNFs to reduce or cancel their use of ACP’s devices and modalities, negatively impacting net sales, cash flows and profitability. For example in July 2011 CMS announced an across the board reduction of approximately 10% in SNF reimbursement levels, negatively impacting the demand for ACP’s devices and treatment modalities. We cannot predict whether any ~~such~~other modifications to ~~the fee schedules~~reimbursement levels will be ~~enacted~~implemented, or if implemented what ~~the final~~ form of any modifications might ~~be.~~take.

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Our substantial indebtedness could impair our financial condition and our ability to fulfill our obligations under our indebtedness.

We have substantial debt. As of ~~June 30, 2012,~~March 31, 2013, we had approximately ~~$504.4~~$518.5 million of total indebtedness and $99.5 million available under our Revolving Credit Facility.

The level of our indebtedness could have important consequences to us. For example, our substantial indebtedness could:

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· make it more difficult for us to satisfy our obligations;

· increase our vulnerability to adverse general economic and industry conditions;

· require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements;

· limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

· place us at a competitive disadvantage compared to our competitors that have proportionately less debt;

· make it more difficult for us to borrow money for working capital, capital expenditures, acquisitions or other purposes;

· limit our ability to refinance indebtedness, or the associated costs may increase; and

· expose us to the risk of increased interest rates with respect to that portion of our debt that has a variable rate of interest.

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ITEM 6. Exhibits

(a) Exhibits. The following exhibits are filed herewith:

Exhibit No.		Document

~~3.1~~		Composite of Amended and Restated Certificate of Incorporation of Hanger, Inc., as amended through June 8, 2012. (Incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on June 8, 2012).

~~10.1~~		Agreement and General Release, dated May 21, 2012, by and between Thomas F. Kirk and Hanger Prosthetics & Orthotics, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on May 21, 2012).

31.1		Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from the Company’s Quarterly Report on Form 10-Q, for the period ended ~~June 30, 2012,~~March 31, 2013, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements (1)

(1)Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HANGER, INC.


Dated: ~~August 3, 2012~~May 9, 2013	/s/Vinit K. Asar
	Vinit K. Asar
	President and
	Chief Executive Officer
	(Principal Executive Officer)


Dated: ~~August 3, 2012~~May 9, 2013	/s/George E. McHenry
	George E. McHenry
	Executive Vice President and Chief Financial Officer
	(Principal Financial ~~Officer)~~


~~Dated: August 3, 2012~~	~~/s/Thomas C. Hofmeister~~
	~~Thomas C. Hofmeister~~
	~~Vice President of Finance~~
	~~(Chief~~Officer and Principal Accounting Officer)

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	Patient-Care Services									Therapeutic
			Accumulated					Distribution		Solutions
(In thousands)	Goodwill		Impairment Loss			Net		Goodwill		Goodwill		Total
Balance at December 31, 2011	$	519,974	$	(45,808	)	$	474,166	$	38,388	$	96,930	$	609,484
Additions due to acquisitions	4,807		—			4,807		—		964		5,771
Additions due to contingent considerations	477		—			477		—		—		477
Balance at June 30, 2012 (unaudited)	$	525,258	$	(45,808	)	$	479,450	$	38,388	$	97,894	$	615,732

(In thousands)	Patient-Care Services		Distribution		Therapeutic Solutions			Other			Consolidating Adjustments			Total
	(Unaudited)		(Unaudited)		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Three Months Ended June 30, 2012
Net sales
Customers	$	207,791	$	27,413	$	16,356		$	194		$	—		$	251,754
Intersegments	—		53,147		1,000			—			(54,147		)	—
Depreciation and amortization	3,381		324		2,712			2,021			—			8,438
Income (loss) from operations	40,454		9,473		941			(14,974		)	(168		)	35,726
Interest (income) expense	7,552		830		1,435			(2,133		)	—			7,684
Income (loss) before taxes	32,902		8,643		(494		)	(12,841		)	(168		)	28,042

Three Months Ended June 30, 2011
Net sales
Customers	$	192,976	$	25,578	$	16,067		$	130		$	—		$	234,751
Intersegments	—		48,940		986			—			(49,926		)	—
Depreciation and amortization	3,029		299		2,575			1,793			—			7,696
Income (loss) from operations	39,005		7,479		811			(14,371		)	(42		)	32,882
Interest (income) expense	7,094		848		1,440			(1,591		)	—			7,791
Income (loss) before taxes	31,911		6,631		(628		)	(12,781		)	(42		)	25,091

Six Months Ended June 30, 2012
Net sales
Customers	$	384,163	$	53,653	$	31,688		$	342		$	—		$	469,846
Intersegments	—		100,716		1,844			—			(102,560		)	—
Depreciation and amortization	6,797		648		5,386			3,892			—			16,723
Income (loss) from operations	65,324		18,015		1,208			(28,420		)	(445		)	55,682
Interest (income) expense	15,135		1,662		2,875			(4,211		)	—			15,461
Income (loss) before taxes	50,189		16,353		(1,667		)	(24,209		)	(445		)	40,221

Capital expenditures	4,677		220		1,359			9,714			—			15,970

Six Months Ended June 30, 2011
Net sales
Customers	$	353,527	$	49,038	$	32,323		$	302		$	—		$	435,190
Intersegments	—		90,567		1,732			—			(92,299		)	—
Depreciation and amortization	5,990		583		5,077			3,338			—			14,988
Income (loss) from operations	61,378		14,366		1,562			(26,099		)	60			51,267
Interest (income) expense	14,210		1,697		2,880			(2,617		)	—			16,170
Income (loss) before taxes	47,168		12,669		(1,318		)	(23,482		)	60			35,097

Capital Expenditures	7,058		630		2,006			5,575			—			15,269

Total Assets
March 31, 2012	1,335,910		188,321		135,350			(504,400		)	—			1,155,181
December 31, 2011	1,279,481		170,077		135,781			(456,839		)	—			1,128,500

(in thousands)	Employee Separation			Other Relocation		Lease Termination			Total
Balance as of December 31, 2011	$	226		$	—	$	3,085		$	3,311
Expenses incurred	—			—		—			—
Amounts paid	(83		)	—		(439		)	(522		)
Balance as of June 30, 2012	$	143		$	—	$	2,646		$	2,789

June 30, 2012
(In thousands)	0-60 days		61-120 days		Over 120 days		Total
Patient Care Services
Commercial insurance	$	45,106	$	9,444	$	14,665	$	69,215
Private pay	4,489		4,158		8,310		16,957
Medicaid	12,266		2,899		3,626		18,791
Medicare	27,977		5,050		6,329		39,356
VA	2,102		299		248		2,649
Distribution & Therapeutic Solutions Trade accounts receivable	12,538		3,300		4,127		19,965
	$	104,478	$	25,150	$	37,305	$	166,933

			Payments Due by Period
	Remainder of 2012		2013		2014		2015		2016		Thereafter		Total
(In thousands)
Long-term debt	$	4,022	$	5,629	$	4,694	$	4,512	$	285,442	$	200,128	$	504,427
Interest payments on long-term debt	20,356		26,131		25,913		25,741		24,181		26,721		$	149,043
Operating leases	21,859		37,473		30,219		20,668		14,813		32,614		$	157,646
Capital leases and other long-term obligations (1)	7,795		14,211		12,768		11,057		5,094		12,982		$	63,907
Total contractual cash obligations	$	54,032	$	83,444	$	73,594	$	61,978	$	329,530	$	272,445	$	875,023