UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10-Q/A~~

~~Amendment No. 1~~10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2013 OR o TRANSITION 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 March 31, 2012~~

OR

o	~~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 ~~April 27, 2012 34,117,244~~August 2, 2013 34,757,520 shares of common stock, $.01 par value per share, were outstanding.

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~~EXPLANATORY NOTE~~

We are filing this Amendment No. 1 on Form 10-Q/A (the “Amended Filing”) to our Quarterly Report on Form 10-Q for the period ended March 31, 2012 originally filed with the Securities and Exchange Commission (“SEC”) on May 4, 2012 (the “Original Filing”) to present a correction of an error related to calculating the value of work-in-process inventory (“WIP”), which results in a $0.03 and a $0.02 increase in earnings per diluted share, a $0.03 and $0.01 increase in basic earnings per share, and a $1.1 million and a $.5 million increase in net income for the first quarter of 2012 and 2011, respectively. Corresponding adjustments to material costs, personnel costs, other operating expense, inventories, and the associated tax impacts have also been corrected herein.

~~In accordance with applicable SEC rules, this Amended Filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.~~

Except for the items noted above, the information included in Item 4 of Part I regarding the material weakness in our internal control over financial reporting and clarification of our inventory policy, no other information included in the Original Filing is being amended by this Amended Filing. The Amended Filing continues to speak as of the date of the Original Filing and we have not updated the Original Filing to reflect events occurring subsequent to the date of the Original Filing, including but not limited to our June 8, 2012 name change from Hanger Orthopedic Group, Inc. to Hanger, Inc. Accordingly, this Amended Filing should be read in conjunction with our filings made with the SEC subsequent to the date of the Original Filing. Refer to Note B — Significant Accounting Policies - Restatement and Revision of Previously Reported Consolidated Financial Information.

~~Table of Contents~~

HANGER, ~~ORTHOPEDIC GROUP,~~ INC.

INDEX~~INDEX~~

			Page No.

~~Part I.~~
Part I.	FINANCIAL INFORMATION (unaudited)

Item 1.		Consolidated Financial Statements ~~(unaudited)~~

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

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

		Consolidated Statements of Cash Flows for the ~~Three~~Six Months ~~ended March 31,~~Ended June 30, 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	17	15

Item 3.		Quantitative and Qualitative Disclosures ~~About~~about Market Risk	29	25

Item 4.		Controls and Procedures	30	25

Part II.	OTHER INFORMATION

~~Part II.~~Item 1.	Legal Proceedings		~~OTHER INFORMATION~~	26

Item 1A.		Risk Factors	31	26

Item 6.		Exhibits	33	28

SIGNATURES	34		29

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HANGER, ~~ORTHOPEDIC GROUP,~~ INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	March 31,		December 31,		June 30,		December 31,
	2012		2011		2013		2012
			As Revised
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	32,248	$	42,896	$	5,766	$	19,211
Restricted cash	3,120		—		3,120		3,120
Accounts receivable, less allowance for doubtful accounts of $22,022 and $22,028 in 2012 and 2011, respectively	133,308		138,826
Accounts receivable, less allowance for doubtful accounts and disallowed sales of $25,485 and $21,379 in 2013 and 2012, respectively					170,601		165,668
Inventories	120,485		112,305		137,557		127,295
Prepaid expenses, other assets, and income taxes receivable	20,106		17,015		18,333		15,673
Deferred income taxes	20,652		20,648		30,920		27,685
Total current assets	329,919		331,690		366,297		358,652

PROPERTY, PLANT AND EQUIPMENT
Land	794		794		794		794
Buildings	7,294		4,400		8,896		8,896
Furniture and fixtures	17,464		17,281		19,956		19,582
Machinery and equipment	57,314		56,137		61,572		60,364
Equipment leased to third parties under operating leases	34,186		33,830		35,662		34,827
Leasehold improvements	66,410		65,245		79,491		74,615
Computer and software	84,216		81,775		106,569		98,186
Total property, plant and equipment, gross	267,678		259,462		312,940		297,264
Less accumulated depreciation	161,538		154,690		197,698		182,803
Total property, plant and equipment, net	106,140		104,772		115,242		114,461

INTANGIBLE ASSETS
Goodwill	611,147		609,484		676,190		674,774
Patents and other intangible assets, net	53,958		54,894
Patents and other intangible assets, less accumulated amortization of $23,974 and $20,643 in 2013 and 2012, respectively					61,262		64,281
Total intangible assets, net	665,105		664,378		737,452		739,055

OTHER ASSETS
Debt issuance costs, net	16,622		17,485		9,424		14,033
Other assets	8,661		8,394		11,209		11,126
Total other assets	25,283		25,879		20,633		25,159

TOTAL ASSETS	$	1,126,447	$	1,126,719	$	1,239,624	$	1,237,327

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

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HANGER, ~~ORTHOPEDIC GROUP,~~ INC.

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

	March 31,			December 31,			June 30,			December 31,
	2012			2011			2013			2012
				As Revised
LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES
Current portion of long-term debt	$	7,927		$	8,065		$	13,802		$	11,082
Accounts payable	26,105			26,561			34,314			28,923
Accrued expenses	19,325			17,547			24,496			22,357
Accrued interest payable	6,615			3,040			2,205			3,041
Accrued compensation related costs	19,031			35,829			24,940			41,784
Total current liabilities	79,003			91,042			99,757			107,187

LONG-TERM LIABILITIES
Long-term debt, less current portion	498,168			499,968			490,672			509,564
Deferred income taxes	74,257			74,309			76,509			77,730
Other liabilities	35,183			32,818			39,638			39,752
Total liabilities	686,611			698,137			706,576			734,233

COMMITMENTS AND CONTINGENCIES (Note H)

SHAREHOLDERS’ EQUITY
Common stock, $.01 par value; 60,000,000 shares authorized, 35,588,485 and 35,127,230 shares issued and outstanding at 2012 and 2011, respectively	356			351
Common stock, $.01 par value; 60,000,000 shares authorized, 36,031,041 and 35,617,884 shares issued and outstanding at 2013 and 2012, respectively							360			356
Additional paid-in capital	271,149			268,535			286,467			280,084
Accumulated other comprehensive loss	(1,185		)	(1,185		)	(1,919		)	(1,919		)
Retained earnings	170,172			161,537			248,796			225,229
	440,492			429,238			533,704			503,750
Treasury stock at cost (141,154 shares)	(656		)	(656		)
Treasury stock at cost (141,154 shares at 2013 and 2012)							(656		)	(656		)
Total shareholders’ equity	439,836			428,582			533,048			503,094

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,126,447		$	1,126,719		$	1,239,624		$	1,237,327

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

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HANGER, ~~ORTHOPEDIC GROUP,~~ INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

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

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

(Unaudited)

	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
	2012		2011		2013		2012		2013		2012
	As Restated		As Restated
Net sales	$	218,091	$	200,439	$	273,735	$	251,754	$	507,270	$	469,845
Material costs	66,697		59,111		79,446		72,899		147,184		139,597
Personnel costs	81,153		78,267		93,176		83,435		183,129		164,588
Other operating expenses	40,219		36,100		54,959		51,256		98,802		91,475
Relocation expenses	—		376
Depreciation and amortization	8,285		7,292		9,510		8,438		18,795		16,723
Income from operations	21,737		19,293		36,644		35,726		59,360		57,462

Interest expense	7,777		8,379		7,708		7,684		15,485		15,461
Extinguishment of debt					6,645		—		6,645		—
Income before taxes	13,960		10,914		22,291		28,042		37,230		42,001

Provision for income taxes	5,324		4,162		8,212		10,656		13,661		15,980
Net income	$	8,636	$	6,752	$	14,079	$	17,386	$	23,569	$	26,021

Other comprehensive income	—		—		—		—		—		—
Comprehensive income		8,636		6,752	$	14,079	$	17,386	$	23,569	$	26,021

Basic Per Common Share Data
Net income	$	0.25	$	0.20	$	0.40	$	0.51	$	0.68	$	0.76
Shares used to compute basic per common share amounts	34,036,539		33,360,840		34,849,659		34,268,941		34,724,077		34,110,820

Diluted Per Common Share Data
Net income	$	0.25	$	0.20	$	0.40	$	0.50	$	0.67	$	0.75
Shares used to compute diluted per common share amounts	34,639,660		34,134,067		35,307,697		34,720,489		35,225,871		34,637,769

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

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HANGER, ~~ORTHOPEDIC GROUP,~~ INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(Dollars in thousands)

(Unaudited)

	2012			2011				2013			2012
	As Restated			As Restated
Cash flows from operating activities:
Net income	$	8,636		$	6,752			$	23,569		$	26,021
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on disposal of assets	—			5				169			1
Reduction of seller notes and earnouts	(177		)	(257		)		(57		)	(870		)
Provision for bad debts	4,723			4,078
Provision for doubtful accounts and disallowed sales								14,905			12,925
Provision for deferred income taxes	—			(343		)		(2,564		)	—
Depreciation and amortization	8,285			7,292				18,795			16,723
Amortization of debt issuance costs	863			748				8,273			1,726
Compensation expense on restricted stock	1,971			1,658
Excess tax benefit from stock-based compensation	(209		)	(816		)
Compensation expense on stock options and restricted stock units								4,060			4,014
Changes in operating assets and liabilities, net of effects of acquired companies:
Accounts receivable	851			5,483				(18,026		)	(16,190		)
Inventories	(7,868		)	(2,277		)		(7,940		)	(12,053		)
Prepaid expenses, other current assets, and income taxes	(2,234		)	(3,010		)		(2,746		)	1,467
Accounts payable	(522		)	(6,339		)		7,611			2,327
Accrued expenses and accrued interest payable	4,294			2,040				(202		)	1,201
Accrued compensation related costs	(17,504		)	(25,531		)		(18,612		)	(12,562		)
Other	183			(1,794		)		409			2,271
Net cash provided by (used in) operating activities	1,292			(12,311		)
Net cash provided by operating activities								27,644			27,001

Cash flows from investing activities:
Purchase of property, plant and equipment (net of acquisitions)	(4,777		)	(5,437		)		(15,939		)	(14,907		)
Purchase of equipment leased to third parties under operating leases	(539		)	—				(2,106		)	(1,063		)
Acquisitions and contingent purchase price (net of cash acquired)	(2,402		)	(4,941		)
Acquisitions and contingent considerations (net of cash acquired)								(4,741		)	(6,395		)
Restricted cash								—			(3,120		)
Proceeds from sale of property, plant and equipment	—			3				894			—
Restricted cash	(3,120		)	—
Net cash used in investing activities	(10,838		)	(10,375		)		(21,892		)	(25,485		)

Cash flows from financing activities:
Borrowings under term loan								225,000			—
Repayment of term loan								(293,300		)	(2,200		)
Borrowings under revolving credit agreement	—			10,000				120,000			—
Repayment of term loan	(1,450		)	(750		)
Scheduled repayment of seller’s notes	(488		)	(406		)
Repayments under revolving credit agreement								(65,000		)	—
Repayment of seller’s notes and other contingent considerations								(4,042		)	(2,451		)
Repayment of capital lease obligations								(411		)	(168		)
Deferred financing costs	—			(4,189		)		(3,665		)	—
Excess tax benefit from stock-based compensation	209			816				2,159			448
Proceeds from issuance of common stock	627			573				1,628			1,572
Net cash (used in) provided by financing activities	(1,102		)	6,044
Purchase and retirement of treasury stock								(1,566		)	—
Net cash used in financing activities								(19,197		)	(2,799		)

Decrease in cash and cash equivalents	(10,648		)	(16,642		)		(13,445		)	(1,283		)
Cash and cash equivalents, at beginning of period	42,896			36,308				19,211			42,896
Cash and cash equivalents, at end of period	$	32,248		$	19,666			$	5,766		$	41,613

SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:							SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:

Issuance of restricted stock units of common stock								10,997			5,478

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

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HANGER, ~~ORTHOPEDIC GROUP,~~ INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A — BASIS OF PRESENTATION

The unaudited interim consolidated financial statements as of June 30, 2013, and for the three ~~months~~and six month periods ended ~~March 31,~~June 30, 2013 and 2012 ~~and 2011~~ have been prepared by Hanger, ~~Orthopedic Group,~~ 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 ~~months~~and six month periods ended ~~March 31, 2012~~June 30, 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.

Restatement and Revision of Previously Reported Consolidated Financial Information

During the fourth quarter of 2012, the Company identified adjustments necessary to correct prior periods for the overstatement of the value of work-in-process inventory at December 31, 2011 and 2010. The Company assessed the materiality of the errors on previously reported periods and concluded the impact was not material to any prior annual consolidated financial statements. Management, however, deemed the impact of this error on the consolidated financial statements for the three months ended March 31, 2012 and 2011 to be material and ~~has~~ restated the first quarter 2012 and 2011 financial results in ~~this~~the restated Quarterly Report on Form 10-Q/A, filed with the SEC on March 22, 2013 (the “Amended Filing”). These errors had no impact on operating cash flows for any of the periods. The impact of the error on the ~~Consolidated Balance Sheet as of December 31, 2011 and~~ Statements of Income and Comprehensive Income for the ~~three months~~six month period ended ~~March 31,~~June 30, 2012 ~~and 2011~~ is shown in the table below (in 000’s). The impact of the errors is included in the results of the Patient-Care Services segment in Note L.K. The error did not have an impact on the Consolidated Balance Sheets as of ~~March 31,~~June 30, 2012.

As of December 31, 2011

(in thousands)

As Previously
Reported

As Revised

Inventories

$
114,086

$
112,305

Accrued expenses

$
18,247

$
17,547

Three Months Ended March 31, 2012

Three Months Ended March 31, 2011

(in thousands, except per share amounts)

As Previously
Reported

As Restated

As Previously
Reported

As Restated

Material costs

$
64,098

$
66,697

$
58,108

$
59,111

Personnel costs

$
83,619

$
81,153

$
78,889

$
78,267

Other operating expenses

$
42,133

$
40,219

$
37,390

$
36,100

Income from operations

$
19,956

$
21,737

$
18,384

$
19,293

Income before taxes

$
12,179

$
13,960

$
10,005

$
10,914

Provision for income taxes

$
4,624

$
5,324

$
3,792

$
4,162

Net income

$
7,555

$
8,636

$
6,213

$
6,752

Basic earnings per share

$
0.22

$
0.25

$
0.19

$
0.20

Diluted earnings per share

$
0.22

$
0.25

$
0.18

$
0.20

~~Revision of Previously Reported Statement of Cash Flow Information~~

During the second quarter of 2011, the Company identified a misclassification within the consolidated statements of cash flows, resulting in the overstatement of the net cash provided by operating activities in prior periods. The offsetting understatement was to net cash provided by financing activities. The misclassification had no impact on total reported decrease in cash and cash equivalents for any period, and therefore had no impact on operating or net income. The Company assessed the materiality of this item on previously reported periods and concluded the misclassification was not material. Accordingly, the three month period ended March 31, 2011 has been revised.

~~The impact of the reclassification on the statement of cash flows for the three month period ended March 31, 2011 is shown in the table below:~~

As Previously

(in thousands)

Reported

Adjustment

As Revised

Net cash used in operating activities

$
(11,495
)
(816
)
$
(12,311
)
Net cash (used in) provided by financing activities

$
5,228

816

$
6,044

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

	Six Months Ended June 30, 2012
(in thousands, except per share amounts)	As Previously Reported		As Revised
Material costs	$	136,998	$	139,597
Personnel costs	$	167,054	$	164,588
Other operating expenses	$	93,389	$	91,475
Income from operations	$	55,682	$	57,462
Income before taxes	$	40,221	$	42,001
Provision for income taxes	$	15,280	$	15,980
Net income	$	24,941	$	26,021
Basic earnings per share	$	0.73	$	0.76
Diluted earnings per share	$	0.72	$	0.75

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.

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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.

Credit Risk

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 and private payors insurers, governmentally funded health insurance programs, and, for those products distributed through the Products & Services business, by 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 Products & Services segment customers. Accounts receivable are not collateralized. The ability of the Company’s debtors to meet their obligations is dependent upon their financial stability which could be affected by future legislation and regulatory actions. Additionally, the Company maintains reserves for potential losses from these receivables that historically have been within management’s expectations.

Inventories

Inventories in the ~~Patient-Care Services~~Patient Care segment consisting principally of raw materials and work-in-process, which amounted to $108.2 million and $96.6 million as of June 30, 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 applies the gross profit method on a patient care clinic basis in this segment’s inventory to determine ending inventory at the end of each interim period, except on October 31,st, which is the date of ~~our Physical~~the Company’s annual 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~~the Company’s books are treated as changes in accounting estimates and are recorded in the fourth quarter. The ~~Company recorded fourth quarter adjustments of an increase of $2.3 million and a decrease of $1.0 million to inventory as of~~ October 31 ~~2011 and 2010, respectively. The October 31~~st inventory is subsequently adjusted during interim periods to apply the gross profit method described above.

Inventories in the ~~Distribution and Therapeutic Solutions~~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.

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Financial Instruments

Assets measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, are $2.5 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. During the quarter, the Company refinanced its credit facilities by replacing its $300.0 million Term Loan and $100.0 million Revolving Credit Facility with a $225.0 million Term Loan Facility and a $200.0 million Revolving Credit Facility. See Note F for further information.

·The carrying ~~value~~values of the Company’s ~~long-term debt, excluding~~outstanding Term Loans as of June 30, 2013 and December 31, 2012, were $225.0 million and $293.0 million, respectively. The Company has determined the ~~Senior Notes,~~carrying value on these loans approximates fair value ~~based on rates currently available to the Company~~ for debt with similar terms and remaining maturities ~~(level 2).~~based on interest rates currently available and has therefore concluded these are Level 2 measurements.

·The carrying values of the Company’s outstanding Revolving Credit Facilities as of June 30, 2013 and December 31, 2012, were $55.0 million and $0 million, respectively. The Company has determined the carrying value on these loans approximates fair value for debt with similar terms and remaining maturities based on interest rates currently available and has therefore concluded these are Level 2 measurements.

·The carrying value of the Senior Notes was $200.0 million as of June 30, 2013 and December 31, 2012. The fair value of the Senior Notes, based on a Level 1 quoted market ~~prices (level 1), as of March 31, 2012~~price, was ~~$210.5~~$214.0 million ~~as compared to the carrying value of $200.0~~and $211.5 million as of ~~that date.~~June 30, 2013 and December 31, 2012.

·Seller Notes are recorded at contractual carrying values of $24.5 million and $27.3 million as of June 30, 2013 and December 31, 2012, respectively, and carrying value approximates fair value for similar debt in all material respects. The Company estimates fair value of the seller notes with a discounted cash flow model using unobservable rates and has determined these represent Level 3 measurements.

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 known 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.~~

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

received. 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~~the Company’s customers. The contracts contain negotiated pricing and service levels with terms ranging from one to five years, generally billed to the Company’s customers monthly, and revenue is recognized based upon the contractual terms of the agreements.

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.~~accounts and disallowed sales. Additionally, ~~a company-wide~~an evaluation of collectability of receivable balances older than 180 days is performed at the Company’s O&P clinics 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 ~~outsourced~~collection agencies after internal collection efforts are exhausted. In the cases when valid accounts receivable cannot be collected, the uncollectible account is written ~~off~~off.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost less accumulated depreciation, 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.

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Goodwill and Other Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net identifiable assets of purchased businesses. The Company assess goodwill for impairment annually 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 ~~bad debt expense.~~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. There were no impairment indicators since the last annual impairment test on October 1, 2012.

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~~statements 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.

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.K.

~~New~~Recent Accounting ~~Guidance~~Pronouncements

In ~~May 2011,~~July 2012, the FASB issued ~~Accounting Standards Update (“ASU”) 2011-04, “Amendments~~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 ~~Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends ASC 820, “Fair Value Measurement.”~~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 ~~changes~~was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company adopted this new guidance in the ~~wording used to describe many requirements in U.S. GAAP for measuring fair value~~first quarter of 2013, and ~~for disclosing information about fair value measurements.~~the adoption did not have a material impact the Company’s condensed consolidated financial statements.

~~Table~~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 ~~Contents~~

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

~~Additionally,~~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 ~~clarify the FASB’s intent about the application of existing fair value measurement requirements. The guidance provided~~ in this ASU ~~No. 2011-04 is~~were effective prospectively for ~~interim and annual~~reporting periods beginning after December 15, ~~2011 and is applied prospectively.~~2012. The Company has adopted ~~the amendments of~~ this ~~ASU effective January 1, 2012,~~guidance and ~~the initial adoption of the amendments in this ASU~~its implementation did not have a material impact on ~~our condensed consolidated financial statements.~~

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220),” which changes the presentation of comprehensive income. The amended guidance gives companies the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance provided in ASU No. 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company adopted the amendments of this ASU effective January 1, 2012, and the initial adoption of the amendments in this ASU did not have a material impact on our condensedits consolidated financial statements.

In July ~~2011,~~2013, the FASB issued ~~ASU No. 2011-07 “Presentation and Disclosures~~new accounting guidance that requires that unrecognized tax benefits be classified as an offset to deferred tax assets to the extent of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities.” The objective of this update is to provide financial statement users with greater transparency about a health care entity’sany net patient service revenue and the related allowance for doubtful accounts. This update provides information to assist financial statement users in assessing an entity’s sources of net patient service revenue and related changes in its allowance for doubtful accounts. The amendments require health care entities that recognize significant amounts of patient service revenueoperating loss carryforwards, similar tax loss carryforwards, or tax credit carryforwards available at the time the services are rendered even though they do not assess the patient’s ability to pay to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) on their statement of operations. The amendments in this update require certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changesreporting date in the ~~allowance~~applicable tax jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. An exception would apply if the tax law of the tax jurisdiction does not require the Company to use, and it does not intend to use, the deferred tax asset for ~~doubtful accounts. The~~such purpose. This guidance provided in ASU No. 2011-07 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company has determined that ASU No. 2011-07 has no impact on its financial statements.

In September 2011, FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment”, which provides entities the option to perform a qualitative assessment in order to determine whether additional quantitative impairment testing is necessary. This amendment is effective for reporting periods beginning after December 15, ~~2011. This amendment~~2013. The Company does not ~~impact~~expect the ~~quantitative testing methodology, should it be necessary. The Company adopted this standard on January 1, 2012 and the initial~~ adoption of ~~the amendments in this ASU did not~~these provisions to have a material ~~impact~~effect on ~~our condensed~~the consolidated financial statements.

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NOTE C ~~- SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION~~— GOODWILL AND OTHER INTANGIBLE ASSETS

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

Three Months Ended

March 31,

(In thousands)

2012

2011

(Unaudited)

(Unaudited)

Cash paid during the period for:

Interest

$
3,278

$
3,789

Income taxes (net of refunds)

1,566

1,030

Non-cash financing and investing activities:

Non-cash property, plant and equipment purchases

1,028

2,628

Earnouts payable on acquisitions

—

321

Issuance of notes in connection with acquistions

—

693

Issuance of restricted shares of common stock

8,419

11,566

~~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 and indefinite lived intangible impairment analysis in ~~October~~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 ~~is primarily determined based on the~~using a combination of income, ~~approach and considers the~~ market and cost ~~approach.~~approaches. No triggering events have transpired since December 31, 2012. Goodwill allocated to the Company’s operating segments for the six months ended June 30, 2013 and 2012 are as follows:

(In thousands)	Patient Care			Products & Services		Total
Balance at December 31, 2012	$	538,492		$	136,282	$	674,774
Additions due to acquisitions	2,711			—		2,711
Adjustments	(1,295		)	—		(1,295		)
Balance at June 30, 2013	$	539,908		$	136,282	$	676,190

	Patient Care		Products & Services		Total
Balance at December 31, 2011	$	474,166	$	135,318	$	609,484
Additions due to acquisitions	4,807		964		5,771
Contingent considerations (1)	477		—		477
Balance at June 30, 2012	$	479,450	$	136,282	$	615,732

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

The ~~activity~~balances related to ~~goodwill for the three months ended March~~intangible assets as of June 30, 2013 and December 31, 2012 ~~and 2011~~ is as follows:

Patient-Care Services

Distribution

Therapeutic
Solutions

(In thousands)

Goodwill

Accumulated
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

1,536

—

1,536

—

—

1,536

Additions due to contingent considerations

127

—

127

—

—

127

Balance at March 31, 2012 (unaudited)

$
521,637

$
(45,808
)
$
475,829

$
38,388

$
96,930

$
611,147

	June 30, 2013							December 31, 2012
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer Lists	$	47,252	$	(9,760	)	$	37,492	$	48,044	$	(7,846	)	$	40,198
Trade Name	9,895		—			9,895		9,070		—			9,070
Patents and Other Intangibles	28,089		(14,214		)	13,875		27,810		(12,797		)	15,013
	85,236		(23,974		)	61,262		84,924		(20,643		)	64,281

Patient-Care Services

Distribution

Therapeutic
Solutions

(In thousands)

Goodwill

Accumulated
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

3,552

—

3,552

—

423

3,975

Additions due to contingent considerations

341

—

341

—

—

341

Balance at March 31, 2011 (unaudited)

$
505,933

$
(45,808
)
$
460,125

$
38,388

$
96,502

$
595,015

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 $3.3 million and $2.5 million for the six months ended June 30, 2013 and June 30, 2012, respectively. The weighted average life of the additions to customer lists, patents and other intangibles is 7.7 years.

NOTE ED — 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 consists of raw materials and work-in-process held by the Patient Care segment. Inventories using the perpetual method primarily consists of finished goods held by the Products and Services segment. A description of the Company’s inventory valuation methodologies are presented in Note B.

	March 31,		December 31,
(In thousands)	2012		2011		June 30, 2013		December 31, 2012
	(Unaudited)		(Revised)
Raw materials	$	39,488	$	39,121	$	43,533	$	41,372
Work-in-process	52,970		43,954
Work in process					66,183		56,931
Finished goods	28,027		29,230		27,841		28,992
	$	120,485	$	112,305	$	137,557	$	127,295

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NOTE FE — ACQUISITIONS

During the ~~three~~six months ended ~~March 31, 2012,~~June 30, 2013, the Company acquired ~~one~~two O&P ~~company,~~companies, operating a total of ~~2 patient-care centers.~~nine patient care clinics. The aggregate purchase price for ~~this~~these O&P ~~business~~businesses was $2.0 million paid in cash. The Company recorded approximately $1.3 million of goodwill related to this acquisition, and the expenses incurred related to this acquisition were insignificant and are included in other operating expenses. During the three months ended March 31, 2011, the Company acquired one O&P company, operating a total of one patient care center. The aggregate purchase price for this O&P business was $5.8$6.9 million. Of this aggregate purchase price, ~~$0.7~~$0.3 million consisted of promissory notes, ~~and $0.6~~$1.8 million is made up of contingent consideration payable within the next two ~~years.~~years and $4.8 million was paid in cash. The Company recorded approximately $2.7 million of goodwill related to these acquisitions, and the expenses incurred related to these acquisitions were insignificant and were included in other operating expenses.

During the six months ended June 30, 2012, the Company acquired five O&P companies, operating a total of eight patient care clinics. The aggregate purchase price for these O&P businesses was $8.6 million. Of this aggregate purchase price, $1.2 million consisted of promissory notes, $1.8 million was 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 ~~$3.6~~$5.5 million of goodwill related to ~~this acquisition~~these acquisitions, and the expenses incurred related to this acquisition 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 this acquisition as an asset acquisition for tax purposes which will result in the goodwill being amortizable for tax purposes.~~

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 ~~$0.1~~$0 million and ~~$0.4~~$0.5 million during the ~~three~~six months ended ~~March 31,~~June 30, 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~~For acquisitions completed subsequent to adoption of revised authoritative guidance, the Company made payments in connection with contingent consideration agreements of ~~$0.4~~$0.9 million in the first ~~three~~six months of ~~2012~~2013 and ~~$0.1~~$0.8 million in the same period ~~2011. The~~2012. As of June 30, 2013 the Company ~~estimates that it may pay up to~~has accrued a total of ~~$6.6~~$5.7 million related to contingent consideration provisions ofrelated to acquisitions made in ~~future~~prior periods.

NOTE GF — LONG TERM DEBT

Long-term debt consists of the following:

	March 31,			December 31,			June 30,			December 31,
(In thousands)	2012			2011			2013			2012
	(Unaudited)
Revolving Credit Facility	$	—		$	—		$	55,000		$	—
Term Loan	295,550			297,000			225,000			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 3.00% to 7.00%, maturing through November 2016	10,545			11,033
	506,095			508,033
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							24,474			27,346
Total Debt							504,474			520,646
Less current portion	(7,927		)	(8,065		)	(13,802		)	(11,082		)
	$	498,168		$	499,968
Long Term Debt							$	490,672		$	509,564

~~Amendment to Credit Agreement~~Refinancing

~~On March 11, 2011,~~During the second quarter of 2013, the Company ~~entered into~~refinanced its bank credit facilities through a new 5 year credit agreement that increased its senior secured facilities to an ~~amendment~~aggregate principal amount of up to ~~its Credit Agreement dated as~~$425.0 million from $400.0 million previously. The new credit agreement includes a $200.0 million revolving credit facility and a $225.0 million term loan facility. Each new facility matures on June 17, 2018 and is subject to a leveraged-based pricing grid, with initial pricing of ~~December 1, 2010 (as amended, the “Credit Agreement”)~~LIBOR plus 1.75%. 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.

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

~~Revolving Credit Facility~~

The $100.0 million Revolving Credit Facility matures on December 1, 2015 and bears interest at LIBOR plus 3.75%, or the applicable rate (as defined in the Credit Agreement). The Revolving Credit Facilitycredit agreement 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~~4.00:1.00. As of June 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~~2013, the Company was in compliance with the credit agreement covenants. The proceeds of the ~~preceding fiscal year~~refinancing were used to repay the existing term loan and fund working capital requirements. In conjunction with ~~an additional maximum rollover~~the refinancing, the Company incurred a pre-tax non-cash charge of ~~$15.0~~approximately $6.6 million ~~from~~during the ~~prior year’s allowance if not expended~~second quarter of 2013 related to the write-off of existing debt issuance costs associated with its previous credit agreement, however, no prepayment penalties were incurred.

Revolving Credit Facility

The $200.0 million Revolving Credit Facility matures on June 17, 2018 and bears interest at LIBOR plus 1.75%, or the applicable rate (as defined in the ~~fiscal year for which it is permitted.~~Credit Agreement). As of ~~March 31, 2012,~~June 30, 2013, the Company had ~~$99.5~~$144.6 million available under ~~the Revolving Credit Facility. Availability~~this facility. The amounts outstanding under the Revolving Credit Facility as of ~~March 31, 2012 was~~June 30, 2013 were $55.0 million, net of standby letters of credit of approximately ~~$0.5~~$0.4 million. ~~As of March 31, 2012, 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 security interest in ~~the Company’s subsidiaries’ shares,~~ all of the Company’s assets, ~~and~~ all the assets of the Company’s subsidiaries and the equity interests of the Company’s subsidiaries.

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Term Loan

The ~~$300.0~~$225.0 million Term Loan Facility matures on ~~December 1, 2016~~June 17, 2018 and ~~requires quarterly~~bears interest at LIBOR plus 1.75%, or the applicable rate (as defined in the Credit Agreement). Quarterly principal payments ~~which commenced March 31, 2011.~~ranging from 0.625% to 3.750% are required throughout the life of the Term Loan, commencing September 30, 2013. 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. ~~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. There were no~~No such mandatory prepayments were required during the ~~first three months~~second quarter of ~~2012 or 2011. As of March 31, 2012, the interest rate on the Term Loan Facility was 4.0%.~~2013. 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 security interest in ~~the Company’s subsidiaries’ shares,~~ all of the Company’s assets, ~~and~~ all the assets of the Company’s subsidiaries and the equity interests 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.

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~~NOTE G — LONG TERM DEBT (CONTINUED)~~year ended December 31, 2012.

Subsidiary Guarantees

The Revolving ~~and~~Credit Facility, 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~~the Company’s 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 ~~March 31, 2012,~~June 30, 2013, the Company was in compliance with all covenants under these debt agreements.

NOTE HG — 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.

On May 20, 2013, the Staff of the SEC’s Division of Enforcement informed the Company that it was conducting an investigation of the Company and made a request for a voluntary production of documents and information concerning the Company’s calculations of bad debt expense and allowance for doubtful accounts. The Company is cooperating fully with the SEC Staff.

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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 IH — 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~~stock units and are calculated using the treasury stock method.

~~Table of Contents~~

~~NOTE I — NET INCOME PER COMMON SHARE (CONTINUED)~~

Net income per share is computed as follows:

	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
(In thousands, except share and per share data)	2012		2011		2013		2012		2013		2012
	(Unaudited)		(Unaudited)
	(Restated)		(Restated)
Net income	$	8,636	$	6,752	$	14,079	$	17,386	$	23,569	$	26,021

Shares of common stock outstanding used to compute basic per common share amounts	34,036,539		33,360,840		34,849,659		34,268,941		34,724,077		34,110,820
Effect of dilutive restricted stock and options (1)	603,121		773,227
Effect of dilutive restricted stock units and options (1)					458,038		451,548		501,794		526,949
Shares used to compute dilutive per common share amounts	34,639,660		34,134,067		35,307,697		34,720,489		35,225,871		34,637,769

Basic income per share	$	0.25	$	0.20	$	0.40	$	0.51	$	0.68	$	0.76
Diluted income per share	$	0.25	$	0.20	$	0.40	$	0.50	$	0.67	$	0.75

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

NOTE JI — 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~~cost and ~~liabilities~~liability 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 ~~March 31, 2012:~~June 30:

~~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~~the Company’s benefit obligation and future expenses. The change in the Plan’s net benefit obligation for the ~~three~~six months ended ~~March 31, 2012~~June 30, 2013 and ~~2011 is as follows:~~2012:

	(in thousands)
Net benefit cost accrued at December 31, 2011	$	20,230
(In thousands)
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
Net benefit cost accrued at March 31, 2013				$	22,014
Service cost				246
Interest cost				173
Payments				$	—
Net benefit cost accrued at June 30, 2013				$	22,433

	(in thousands)
Net benefit cost accrued at December 31, 2010	$	17,510
(In thousands)
Net benefit cost accrued at December 31, 2011			$	20,230
Service cost	247		230
Interest cost	202		190
Net benefit cost accrued at March 31, 2011 (unaudited)	$	17,959
Payments			(525		)
Net benefit cost accrued at March 31, 2012			$	20,125
Service cost			230
Interest cost			190
Payments			(180		)
Net benefit cost accrued at June 30, 2012			$	20,365

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NOTE KJ - 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 ~~stockholders~~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.

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 ~~stockholders,~~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.

As of ~~March 31, 2012,~~June 30, 2013, of the 2.5 million shares of common stock authorized for issuance under the Company’s 2010 Plan, approximately ~~1,061,000~~1.5 million shares have been issued. During the first ~~three~~six months of ~~2012,~~2013, the Company issued approximately ~~448,000~~0.4 million shares of restricted stock units under the 2010 Plan. The total fair value of these grants is ~~$9.0~~$12.1 million. Total unrecognized share-based compensation cost related to unvested restricted stock ~~awards~~units was approximately ~~$19.1~~$18.1 million as of ~~March 31, 2012~~June 30, 2013 and is expected to be expensed as compensation expense over approximately four years.

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

~~For the three months ended March 31, 2012 and 2011,~~ the Company has included approximately ~~$2.0~~$4.1 million and ~~$1.7~~$4.0 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. The Company calculates the fair value of stock options using the Black-Scholes model. The total value of the stock option awards is expensed ratably over the requisite service period of the employees receiving the awards. The Company had no unrecognized expense related to its stock option grants for the periods ended March 31, 2012 and 2011.

NOTE LK — SEGMENT AND RELATED INFORMATION

The Company has identified ~~three reportable~~two operating segments ~~in which it operates~~and both performance evaluation and resource allocation decisions are determined based on ~~the products and services it provides. The Company evaluates segment performance and allocates resources based on the segments’~~each operating 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 other O&P operations 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.

~~Table of Contents~~

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

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:

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· 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;

· 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 ~~41.2%~~40.6% and ~~40.4%~~41.3%, of the Company’s net sales for the ~~three~~six months ended ~~March 31,~~June 30, 2013 and 2012, ~~and 2011,~~ respectively.

The Company’s 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. The Company partners 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. The Company’s network now includes approximately 1,135 O&P provider locations, including over 400 independent providers. As of June 30, 2013, the Company had 57 contracts with national and regional providers.

~~Distribution~~Products & Services—This segment consists of the Company’s 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 rehabilitation equipment from,~~patient care clinics, and the ~~provision of clinical program by, ACP as well the operations of IN, Inc. ACP is a developer of specialized~~Company’s rehabilitation ~~technologies~~solutions business. Rehabilitation solutions leases rehabilitation 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.

Other—This 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. ~~The Patient-Care Services segment results below are restated as described in footnote B.~~

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~~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 March 31, 2012

Net sales

Customers

$
176,369

$
26,241

$
15,333

$
148

$
—

$
218,091

Intersegments

—

47,569

844

—

(48,413
)
—

Depreciation and amortization

3,417

324

2,673

1,871

—

8,285

Income (loss) from operations

26,651

8,542

268

(13,447
)
(277
)
21,737

Interest (income) expense

7,582

832

1,440

(2,077
)
—

7,777

Income (loss) before taxes

19,069

7,710

(1,172
)
(11,370
)
(277
)
13,960

Capital Expenditures

2,541

90

624

2,061

—

5,316

Three Months Ended March 31, 2011

Net sales

Customers

$
160,551

$
23,461

$
16,257

$
170

$
—

$
200,439

Intersegments

—

41,627

745

—

(42,372
)
—

Depreciation and amortization

2,961

284

2,474

1,573

—

7,292

Income (loss) from operations

23,282

6,887

751

(11,728
)
101

19,293

Interest (income) expense

7,116

849

1,440

(1,026
)
—

8,379

Income (loss) before taxes

16,166

6,038

(689
)
(10,702
)
101

10,914

Capital Expenditures

3,082

168

90

2,047

—

5,387

Total Assets

March 31, 2012

1,292,294

178,481

134,733

(479,061
)
—

1,126,447

December 31, 2011

1,277,700

170,077

135,781

(456,839
)
—

1,126,719

~~NOTE M — CORPORATE OFFICE RELOCATION~~

The Company moved its corporate headquarters from Bethesda, Maryland to Austin, Texas in 2010. As of 1/1/2012 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:

(in thousands)

Employee
Separation

Other
Relocation

Lease
Termination

Total

Balance as of December 31, 2011

$
226

$
—

$
3,085

$
3,311

Expenses incurred

—

—

—

—

Amounts paid

(35
)
—

(104
)
(139
)
Balance as of March 31, 2012

$
191

$
—

$
2,981

$
3,172

Employee
Separation

Other
Relocation

Lease
Termination

Total

Balance as of December 31, 2010

$
1,895

$
—

$
5,206

$
7,101

Expenses incurred

36

340

—

376

Amounts paid

(926
)
(340
)
(641
)
(1,907
)
Balance as of March 31, 2011

$
1,005

$
—

$
4,565

$
5,570

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

Three Months Ended June 30, 2013
Net sales
Customers	$	231,090	$	42,645	$	—		$	—		$	273,735
Intersegments	—		58,849		—			(58,849		)	—
Depreciation and amortization	4,067		3,343		2,100			—			9,510
Income (loss) from operations	41,620		11,065		(15,763		)	(278		)	36,644
Interest (income) expense	7,674		3,337		(3,303		)	—			7,708
Extinguishment of debt	—		—		6,645			—			6,645
Income (loss) before taxes	33,946		7,728		(19,105		)	(278		)	22,291

Three Months Ended June 30, 2012
Net sales
Customers	$	207,985	$	43,769	$	—		$	—		$	251,754
Intersegments	—		54,147		—			(54,147		)	—
Depreciation and amortization	3,388		3,036		2,014			—			8,438
Income (loss) from operations	39,054		10,414		(13,574		)	(168		)	35,726
Interest (income) expense	7,552		2,265		(2,133		)	—			7,684
Income (loss) before taxes	31,502		8,149		(11,441		)	(168		)	28,042

Six Months Ended June 30, 2013
Net sales
Customers	$	424,303	$	82,967	$	—		$	—		$	507,270
Intersegments	—		109,933		—			(109,933		)	—
Depreciation and amortization	8,133		6,546		4,116			—			18,795
Income (loss) from operations	67,008		20,540		(27,647		)	(541		)	59,360
Interest (income) expense	15,424		6,673		(6,612		)	—			15,485
Extinguishment of debt	—		—		6,645			—			6,645
Income (loss) before taxes	51,584		13,867		(27,680		)	(541		)	37,230

Capital expenditures	6,944		1,221		9,880			—			18,045

Six Months Ended June 30, 2012
Net sales
Customers	$	384,504	$	85,341	$	—		$	—		$	469,845
Intersegments	—		102,560		—			(102,560		)	—
Depreciation and amortization	6,814		6,034		3,875			—			16,723
Income (loss) from operations	64,331		19,224		(25,648		)	(445		)	57,462
Interest (income) expense	15,135		4,537		(4,211		)	—			15,461
Income (loss) before taxes	49,196		14,687		(21,437		)	(445		)	42,001

Capital expenditures	4,677		1,579		9,714			—			15,970

Total Assets
June 30, 2013	1,442,160		358,399		—			(560,935		)	1,239,624
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~~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.

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Business Overview

General

The goal of Hanger, ~~Orthopedic Group,~~ Inc. (the “Company”) is to be the world’s premier provider of services and products that enhance human physical capabilities. Built on the 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~~(O&P) patient care services, distribute O&P devices and components, manage O&P networks, and provide ~~therapeutic~~rehabilitative solutions to the broader ~~post acute~~post-acute market. For the three and six month periods ended June 30, 2013, our net sales were $273.7 million and $507.3 million, respectively, and we recorded net income of $14.1 million and $23.6 million, respectively. For the three and six month periods 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 $26.0 million, respectively.

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 and six month periods ended June 30, 2013, net sales to ~~providing O&P services~~customers attributable to our Patient Care segment were $231.1 million and ~~products we, through~~$424.3 million, respectively. For the three and six month periods ended June 30, 2012, net sales to customers attributable to our ~~subsidiary, Linkia LLC (“Linkia”), manage an O&P provider network~~Patient Care segment were $208.0 million and ~~develop programs to manage all aspects~~$384.5 million, respectively.

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 ~~4,200~~4,600 long-term care facilities and other sub-acute rehabilitation providers throughout the U.S.

This segment also develops neuromuscular technologies through independent research. For the three ~~months~~and six month periods ended ~~March 31, 2012, our~~June 30, 2013, net sales to customers attributed to Products & Services segment were ~~$218.1~~$42.6 million and ~~we recorded net income of $7.6 million.~~$83.0 million, respectively. For the three ~~months~~and six month periods ended ~~March 31, 2011, our net sales were $200.4 million and we recorded net income of $6.2 million.~~

~~We have three segments—Patient-Care Services, Distribution and Therapeutic Solutions. For the three months ended March 31,~~June 30, 2012, net sales ~~attributable~~ to ~~our Patient-Care~~customers attributed to Products & Services ~~Distribution and Therapeutic Solutions segments~~segment were ~~$176.5 million, $26.3~~$43.8 million and ~~$15.3~~$85.3 million, respectively. See Note ~~L to~~K for 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,~~each year for orthotic and prosthetic products and services. Our Patient Care segment, currently capturing an approximate 20% share of ~~which we account for approximately 29%,~~the market, 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%. We commissioned a study~~post-operative solutions to patients in the ~~past which 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.~~

~~Table of Contents~~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 ~~demands~~demand for new and advanced replacement devices.

We estimate that approximately $2.1 billion is spent in the ~~post-acute~~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. Our distribution sales account for approximately 5% of the market outside of the Company.

We estimate the 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.

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Business Description

~~Patient-Care Services~~Patient Care

AsOur Patient Care segment, which is now comprised of ~~March 31, 2012, we provided~~our patient care clinics and other O&P ~~patient-care~~operations and our contracting and network management business, provides O&P patient care services through over ~~700 patient-care centers~~730 patient care clinics and over ~~1,180~~1,275 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.~~

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~~Prosthetic devices are~~These custom ~~fabricated and fit by skilled clinicians. 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 listing of our principal reimbursement sources for our services ~~are:~~is described in Note K.

·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;

·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.~~

~~We estimate that government~~Government reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately ~~41.2%~~40.6% and ~~40.4%~~41.3% of our net sales for the ~~three~~six months ended ~~March 31,~~June 30, 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~~Congress acts to change or eliminate the adjustment. The Medicare price increase/(decreases)~~/increases~~ for 2013, 2012, ~~2011, 2010, 2009,~~ and ~~2008 were~~2011were 0.8%, 2.4%~~, (0.1%), 0.0%, 5.0%~~, and ~~2.7%~~(0.1%), respectively. There can be no assurance that future changes will not reduce reimbursements for O&P services and products from these sources.

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.

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~~Through the normal course of business, we receive patient deposits on devices not yet delivered. At March 31, 2012~~ur contract and ~~2011, we held $1.1 million and $1.3 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 ~~1,030~~1,135 O&P provider locations, including ~~approximately 350~~over 400 independent providers. As of ~~March 31, 2012, Linkia~~June 30, 2013, we had 5257 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 over 26,000 individual SKUs in inventory, ~~approximately 29,000 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.

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

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

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

· ~~perform~~improve 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 ~~4,200~~4,600 skilled nursing facilities nationwide, including 21 of the 25 largest national providers. ~~ACP’s contracts contain negotiated pricing and service levels with terms ranging from one to five years.~~

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~~ACP generally bills its customers monthly and revenue is recognized based upon the contractual terms of the agreements.~~

~~IN, Inc. specializes~~We also have a product development business specializing in the ~~product development and~~ commercialization of emerging products in the ~~Orthotic Prosthetic~~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 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.

Critical Accounting Policies and Estimates

Our analysis and discussion of our financial condition and results of operations is based upon our ~~Consolidated Financial Statements~~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~~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.~~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 known 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.~~received. Discounted sales are recorded at net realizable value. ~~Revenues in our Therapeutic Solutions 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. Our customer contracts in the Products & Services segment contain negotiated pricing and service levels with terms ranging from one to five years, generally billed to our customers monthly, and revenue is recognized based upon the contractual terms of the agreements.

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~~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.

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On a ~~quarterly~~monthly basis, we evaluate cash collections, accounts receivable balances and write-off activity to assess the adequacy of ~~our~~the allowance for doubtful ~~accounts.~~accounts and disallowed sales. Additionally, ~~a company-wide~~an evaluation of collectability of receivable balances older than 180 days is performed at our O&P clinics 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:

March 31, 2012
June 30, 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	$	40,808	$	10,377	$	12,789	$	63,974	$	50,686	$	12,500	$	13,774	$	76,960
Private pay	4,453		3,513		9,216		17,182		5,468		4,918		8,568		18,954
Medicaid	11,262		3,255		4,411		18,928		13,341		3,747		4,481		21,569
Medicare	25,111		3,608		5,275		33,994		34,538		4,521		15,753		54,812
VA	1,974		370		263		2,607		2,703		612		361		3,676
Distribution & Therapeutic Solutions Trade accounts receivable	11,688		3,011		3,946		18,645
Products & Services
Trade accounts receivable									12,141		3,212		4,762		20,115
	$	95,296	$	24,134	$	35,900	$	155,330	$	118,877	$	29,510	$	47,699	$	196,086

December 31, 2011
December 31, 2012
(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	$	56,326	$	11,413	$	13,355	$	81,094
Private pay	3,936		3,791		9,219		16,946		5,928		4,955		6,655		17,538
Medicaid	12,018		3,678		4,173		19,869		12,879		3,468		3,519		19,866
Medicare	25,438		3,489		4,433		33,360		29,910		6,118		9,494		45,522
VA	1,428		373		159		1,960		2,270		608		353		3,231
Distribution & Therapeutic Solutions Trade accounts receivable	11,367		2,663		3,200		17,230
Products & Services
Trade accounts receivable									12,556		3,149		4,091		19,796
	$	104,323	$	23,588	$	32,943	$	160,854	$	119,869	$	29,711	$	37,467	$	187,047

· Inventories: Inventories in the ~~Patient-Care Services~~Patient Care segment consisting principally of raw materials and work-in-process ~~respectively,~~ are valued based on the gross profit method which approximates lower of cost or market using the first-in first-out method. ~~We apply~~The Company applies the gross profit method on a patient care clinic basis in 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. ~~We recorded fourth quarter adjustments of an increase of $2.3 million and a decrease of $1.0 million to inventory as of October 31, 2011 and 2010, respectively.~~ The October 31stinventory is subsequently adjusted during interim periods to apply the gross profit method described above.

· 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.

~~Table~~ The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of ~~Contents~~

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~~There were no impairment indicators since our last annual impairment test ~~for goodwill primarily utilizes the income approach and considers the market approach and the cost approach in determining the value of our reporting units.~~ on October 1, 2012.

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

Table 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.~~Contents

· 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.

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~~New Accounting Guidance~~

In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends ASC 820, “Fair Value Measurement.” The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s year ended December 31, 2012. The Company adopted the amendments of this ASU effective January 1, 2012, and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220),” which changes the presentation of comprehensive income. The amended guidance gives companies the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance provided in ASU No. 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s year ended December 31, 2012. The Company adopted the amendments of this ASU effective January 1, 2012, and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

In July 2011, the FASB issued ASU No. 2011-07 “Presentation and Disclosures of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities.” The objective of this update is to provide financial statement users with greater transparency about a health care entity’s net patient service revenue and the related allowance for doubtful accounts. This update provides information to assist financial statement users in assessing an entity’s sources of net patient service revenue and related changes in its allowance for doubtful accounts. The amendments require health care entities that recognize significant amounts of patient service revenue at the time the services are rendered even though they do not assess the patient’s ability to pay to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) on their statement of operations. The amendments in this update require certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. The guidance provided in ASU No. 2011-07 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s year ended December 31, 2012. The Company has determined that ASU No. 2011-07 has no impact on its financial statements.

~~In September 2011,~~FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment”, which provides entities the option to perform a qualitative assessment in order to determine whether additional quantitative impairment testing is necessary. This amendment is effective for reporting periods beginning after December 15, 2011. This amendment does not impact the quantitative testing methodology, should it be necessary. The Company adopted this standard on January 1, 2012 and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

Guidance and Outlook

~~The Company expects full year 2012~~We expect 2013 revenues of between ~~$970 million~~$1.06 and ~~$990 million resulting from comparable store~~$1.08 billion, which includes 3% to 5% same center sales growth in our Patient Care ~~Services~~segment, and ~~Distribution segments of 3% to 5%. We expect~~ flat ~~to slightly higher revenues~~sales in our ~~Therapeutic~~Products & Services ~~segment~~segment. We increased our guidance 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 contracts accelerates. The Company anticipates~~adjusted diluted earnings per share to a range of ~~between $1.67 and $1.74, which includes approximately $0.05~~$2.07 to $2.13 for ~~one-time training~~2013, excluding costs related to the implementation of Janus of approximately $0.03, acquisition costs and debt issuance cost associated with the June 2013 refinancing of our ~~new patient management system.~~

~~Table~~bank credit facilities. This increased earnings guidance reflects lower interest expense related to the refinancing of ~~Contents~~

Asour bank credit facilities in ~~past years,~~June, partially offset by lower adjusted operating margin expansion for the ~~Company’s goal is~~year, which we believe will be in the range of 20 to ~~increase operating margins by twenty to forty~~40 basis points. ~~The Company anticipates~~We anticipate 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 the Company~~We will continue ~~its~~our acquisition program with a goal of closing acquisitions that total approximately $20 million in annualized ~~revenues.~~revenues in 2013.

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Results of Operations

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

	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
	2012		2011		2013		2012		2013		2012
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
	(Restated)		(Restated)
Net sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Material costs	30.6		29.5		29.0		29.0		29.0		29.7
Personnel costs	37.2		39.0		34.0		33.1		36.1		35.0
Other operating expenses	18.4		18.0		20.1		20.3		19.5		19.5
Relocation expenses	—		0.2
Depreciation and amortization	3.8		3.6		3.5		3.4		3.7		3.6
Income from operations	10.0		9.7		13.4		14.2		11.7		12.2
Interest expense	3.6		4.2
Interest expense, net					2.8		3.1		3.1		3.3
Extinguishment of debt					2.4		—		1.3		—
Income before taxes	6.4		5.5		8.2		11.1		7.3		8.9
Provision for income taxes	2.4		2.1		3.1		4.2		2.7		3.4
Net income	4.0	%	3.4	%	5.1	%	6.9	%	4.6	%	5.5	%

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

Net Sales.Net sales for the three ~~months~~month period ended ~~March 31, 2012~~June 30, 2013 increased ~~$17.7~~$21.9 million, or ~~8.8%~~8.7%, to ~~$218.1~~$273.7 million ~~from $200.4~~compared to $251.8 million for the ~~three months ended March 31, 2011. The~~same period of 2012. This increase was ~~the result of~~due to a ~~$11.4~~$23.1 million, or ~~7.1%~~11.1%, increase in ~~same-center~~the Patient Care segment, offset by a $1.1 million, or 2.6%, decrease in sales in the ~~Patient-Care~~Products & Services ~~segment; a $4.4 million increase from acquired entities; a $2.8 million, or 11.9%,~~segment. The increase in sales in the ~~Distribution segment;~~Patient Care segment was a result of an increase in same store sales and the impact of 2012 O&P clinic acquisitions. The 2.6% decline in the Products & Services segment sales was a result of lower sales from our distribution business, SPS, partially offset by a mid-single-digit increase in sales from our rehabilitative solutions business, ACP. The decrease in sales in the Products & Services segment was a result of two of its larger independent O&P customers being acquired by the Patient Care segment during 2012 and a ~~$0.9 million decrease~~decline in demand for higher-priced prosthetic devices from ~~the Therapeutic Solutions segment.~~independent O&P practices which may be due to pressure they are facing from CMS Recovery Audit Contractor (RAC) audits.

Material Costs.Material ~~costs~~Costs for the three ~~months~~month period ended ~~March 31, 2012~~June 30, 2013 was ~~$66.7~~$79.4 million, an increase of ~~$7.6~~$6.5 million ~~or 12.9%,~~ over ~~$59.1~~$72.9 million for the three ~~months~~month period ended ~~March 31, 2011. The increase was the result of growth in sales.~~June 30, 2012, primarily due to sales growth. Material costs as a percentage of net sales ~~increased 110 basis points due to mix of revenue.~~remained consistent with the prior year.

Personnel Costs. Personnel costs for the three ~~months~~month period ended ~~March 31, 2012~~June 30, 2013 increased by ~~$2.9~~$9.8 million to ~~$81.2~~$93.2 million from ~~$78.3~~$83.4 million for the three ~~months~~month period ended ~~March 31, 2011. The increase~~June 30, 2012. Approximately $5.5 million of the change was due to ~~costs from acquired entities and~~acquisitions of O&P facilities in 2012, $1.8 million was due to annual merit increases as well as increased ~~employee~~ benefit costs ~~staffing~~ and ~~merit increases.~~the balance was due to additions to our infrastructure to support growth. As a percentage of net sales, personnel costs ~~decreased 1.8%~~increased 0.9% to ~~37.2%~~34.0% in ~~2012~~2013 from ~~39.0%~~33.1% in ~~2011~~2012. The increase was predominantly due to ~~leveraging existing resources over increased sales volume.~~increases in employee benefit costs and staffing increases related primarily to acquisitions.

Other Operating Expenses. Other operating expenses ~~for the three months ended March 31, 2012~~are comprised primarily of professional fees, facility costs, bad debt expense, incentive compensation, and reimbursable employee expenses, increased ~~$4.1~~$3.7 million to ~~$40.2 million, from $36.1~~$55.0 million, for the three ~~months~~month period ended ~~March 31, 2011.~~June 30, 2013 compared to $51.3 million, for the three month period ended June 30, 2012. The increase ~~was~~is primarily ~~due to: (i) the addition of~~attributable to a $1.0 million increase in ~~operating~~rent expenses ~~from acquired entities; (ii)~~due in large part to acquisitions and a $1.2 million increase in ~~increased~~bad debt expenses ~~related bad debt; (iii) $0.8 million in increased incentive compensation; and (iv) $0.6 million related~~due principally to ~~Instride trials.~~the impact of RAC program audits. Other operating expenses as a percentage of ~~net revenues increased 0.4% to 18.4% in 2012 from 18.0%~~sales in the ~~prior year.~~

~~Table~~second quarter of ~~Contents~~

~~Relocation Expenses.~~ As2013 remained flat compared to the same period of January 1, 2012, we had completed the relocation of our corporate office from Bethesda, Maryland to Austin, Texas. During the three months ended March 31, 2011, we incurred $0.4 million of employee relocation costs.2012.

Depreciation and Amortization. Depreciation and amortization for the three ~~months~~month period ended ~~March 31, 2012~~June 30, 2013 increased ~~$1.0~~$1.1 million, to ~~$8.3~~$9.5 million, compared to ~~$7.3~~$8.4 million infor the ~~first quarter of 2011.~~three month period ended June 30, 2012. The increase was primarily due to ~~operating assets purchased~~leasehold improvements and additional capital expenditures over the last 12 months.

Income from Operations.Income from operations increased ~~$2.4~~$0.9 million, to ~~$21.7~~$36.6 million, for the three ~~months~~month period ended ~~March 31, 2012~~June 30, 2013 compared to ~~$19.3~~$35.7 million for the three ~~months~~month period ended ~~March 31, 2011~~June 30, 2012 due primarily to increased sales volume.

Interest Expense.Interest expense ~~decreased $0.6~~remained consistent at $7.7 million for the three ~~months~~month period ended ~~March 31, 2012, to $7.8 million,~~June 30, 2013, compared to ~~$8.4~~$7.7 million, for the three ~~months~~month period ended ~~March 31, 2011, primarily due to lower~~June 30, 2012. Both the amounts of our outstanding debt and the applicable interest ~~rates resulting from~~rate were comparable in the ~~amendment to~~two periods. The refinancing of our bank credit facilities had minimal impact on interest expense for the quarter because it did not occur until the second half of June 2013.

Extinguishment of Debt. In conjunction with our bank credit facility refinancing, in ~~March~~the second quarter of ~~2011.~~2013, we incurred a charge of approximately $6.6 million related to the write-off existing debt issuance cost associated with our previous credit agreements. There were no similar charges in the same period of 2012.

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Provision for Income Taxes. The provision for income taxes for the three ~~months~~month period ended ~~March 31, 2012~~June 30, 2013 was ~~$5.3~~$8.2 million, or ~~38.1%~~36.8% of pre-tax income, compared to ~~$4.2~~$10.7 million, or ~~38.1%~~38.0% of pre-tax income, for the three months ended ~~March 31, 2011.~~June 30, 2012. The effective tax rate consists principally of the 35% federal statutory tax rate and state income taxes, less permanent tax differences. The 2013 period has a lower effective tax rate primarily due to a higher domestic manufacturing deduction and a lower meals and entertainment exclusion.

Net Income. Net income decreased $3.3 million, to $14.1 million, for three month period ended June 30, 2013, from $17.4 million for the three month period ended June 30, 2012, primarily due to the write-off of previously deferred debt issuance costs related to the extinguishment of debt.

Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

Net Sales. Net sales for the six month period ended June 30, 2013 increased $37.5 million, or 8.0%, to $507.3 million compared to $469.8 million for the same period of 2012. This increase was due to a $39.8 million, or 10.4%, increase in the Patient Care segment, offset by a $2.4 million, or 2.8%, decrease in sales in the Products & Services segment. The increase in sales in the Patient Care segment was a result of an increase in same store sales and the impact of 2012 O&P clinic 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 two of its larger independent O&P customers being acquired by the Patient Care segment during 2012 and a decline in demand for higher-priced prosthetic devices from independent O&P practices due to pressure they are facing from CMS Recovery Audit Contractor (RAC) audits.

Material Costs. Material Costs for the six month period ended June 30, 2013 was $147.2 million, an increase of $7.6 million over $139.6 million for the six month period ended June 30, 2012, primarily due to sales growth. Material costs as a percentage of net sales decreased 0.7% primarily due to a change in the mix of sales favoring the Patient Care segment which has lower costs and a reduction in product cost arising from an effort to further consolidate our purchasing power.

Personnel Costs. Personnel costs for the six month period ended June 30, 2013 increased by $18.5 million to $183.1 million from $164.6 million for the six month period ended June 30, 2012. Approximately $11.2 million of the increase was due to the impact of O&P acquisitions, $3.5 million was due to the impact of merit increases and other benefit changes and the balance was due to additions to infrastructure to support growth. As a percentage of net sales, personnel costs increased 1.1% to 36.1% in 2013 from 35.0% in 2012. The increase was predominantly due to increases in employee benefit costs and staffing increases related primarily to acquisitions.

Other Operating Expenses. Other operating expenses are comprised primarily of professional fees, facility costs, bad debt expense, incentive compensation, and reimbursable employee expenses, increased $7.4 million to $98.8 million, for the six month period ended June 30, 2013 compared to $91.4 million, for the six month period ended June 30, 2012. The increase is primarily attributable to a $3.2 million increase due to the impact of O&P acquisitions and a $1.8 million increase in bad debt expense due principally to the impact of RAC program audits. Other operating expenses as a percentage of sales in the second quarter of 2013 remained flat compared to the same period of 2012.

Depreciation and Amortization. Depreciation and amortization for the six month period ended June 30, 2013 increased $2.1 million, to $18.8 million, compared to $16.7 million for the six month period ended June 30, 2012. The increase was primarily due to leasehold improvements and additional capital expenditures over the last 12 months.

Income from Operations. Income from operations increased $1.9 million, to ~~$8.6 million, for three months ended March 31, 2012, from $6.7~~$59.4 million, for the ~~three~~six months ended ~~March 31, 2011,~~June 30, 2013 compared to $57.5 million for the six months ended June 30, 2012 due primarily to increased sales volume.

Interest Expense. Interest expense remained consistent at $15.5 million for the six month period ended June 30, 2013, compared to $15.5 million, for the six month period ended June 30, 2012. Both the amounts of our outstanding debt and the applicable interest rate were comparable in the two periods. The refinancing of our bank credit facilities had minimal impact on interest expense for the quarter because it did not occur until the second half of June 2013.

Extinguishment of Debt. In conjunction with our bank credit facility refinancing, in the second quarter of 2013, we incurred a charge of approximately $6.6 million related to the write-off existing debt issuance cost associated with our previous credit agreements. There were no similar charges in the same period of 2012.

Provision for Income Taxes. The provision for income taxes for the six months ended June 30, 2013 was $13.7 million, or 36.7% of pre-tax income, compared to $16.0 million, or 38.0% of pre-tax income, for the six month period ended June 30, 2012. The effective tax rate consists principally of the 35% federal statutory tax rate and state income taxes, less permanent tax differences. The 2013 period has a lower effective tax rate primarily due to the reinstatement of the Federal Research and Development Tax Credit, a higher domestic manufacturing deduction and a lower meals and entertainment exclusion.

Net Income. Net income decreased $2.4 million, to $23.6 million, for six month period ended June 30, 2013, from $26.0 million for the six month period ended June 30, 2012, primarily due to the write-off of previously deferred debt issuance costs related to the extinguishment of debt.

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Financial Condition, Liquidity and Capital Resources

~~Cash Flows~~Liquidity and Capital Resources

Our working capital at ~~March 31, 2012~~June 30, 2013 was ~~$250.9~~$266.5 million, compared to ~~$194.1~~$251.5 million at ~~March~~December 31, ~~2011.~~2012. The increase in working capital is primarily due to increases in ~~cash, inventory,~~inventories, accounts receivable and ~~accounts receivable.~~other current assets. The increases are primarily due to the growth of the business, acquisitions completed in 2012 and the impact of RAC program audit related receivables. 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 ~~three~~six months ended ~~March 31, 2012~~June 30, 2013 increased to 5159 days from 4754 days for the same period last ~~year.~~ year, and excludes the impact of acquired accounts receivable. The increase in DSO is primarily related to an increase in accounts receivable under review by CMS Recovery Audit Contractor (RAC) audits.

Cash Flows

Net cash provided by operating activities was ~~$1.3~~$27.6 million for the ~~quarter~~six month period ended ~~March 31, 2012~~June 30, 2013 compared to ~~$12.3~~$27.0 million ~~used in operating activities~~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 sales, and a decrease~~the increase in ~~incentive compensation payments in 2012.~~working capital described above.

Net cash used in investing activities was ~~$10.8~~$21.9 million for the ~~quarter~~six month period ended ~~March 31, 2012,~~June 30, 2013, compared to ~~$10.4~~$25.5 million in the prior year. In ~~2012,~~the first six months of 2013, we ~~acquired one~~purchased two O&P ~~company operating 2 patient-care centers at an aggregate purchase price~~companies for $4.7 million, net of ~~$2.0 million.~~cash acquired. During the same period in ~~2011,~~2012, we acquired ~~one O&P company operating one patient-care center~~eight patient care clinics for ~~an aggregate purchase price~~$6.4 million, net of ~~$5.8 million.~~cash acquired. Additionally, in ~~2012,~~2013, we invested ~~$5.3~~$18.0 million in capital assets, compared to ~~$5.4~~$16.0 million for the same period in 2011. Capital assets acquired in 2012 related to the development of the Company’s new patient management system and machinery and equipment purchases. During the first quarter of 2012 we restricted $3.1 million of cash in order to eliminate letters of credit obligations.2012.

Net cash ~~(used in)/provided by~~used in financing activities was ~~$(1.1)~~$19.2 million and ~~$6.0~~$2.8 million for the ~~quarters~~six month period ended ~~March 31,~~June 30, 2013 and 2012, ~~and 2011,~~ respectively. During the second quarter of 2013 we: (i) refinanced our existing Term Loan Credit Facility resulting in term loan borrowings of $225.0 million under the new facility compared to $293.3 million under the previous facility, and (ii) refinanced our existing Revolving Credit Facility resulting in revolving loan borrowings of $55.0 million under the new facility compared to no borrowings under the previous facility. Additionally, in the first six months of 2013, we also (i) made $4.0 million of required payments of promissory notes issued in connection with acquisitions (“Seller Notes”) and (ii) received $2.2 million of proceeds from employee stock compensation plans. During the second quarter of 2012 we: (i) repaid ~~$1.4~~$2.2 million related to term loan borrowings under our credit ~~facilities (“Term Loans”);~~facilities; (ii) made ~~$0.5~~$2.5 million of required repayments of promissory notes issued in connection with acquisitions (“Seller Notes”); and (iii) received ~~$0.6~~$1.6 million of proceeds from ~~issuance of stock under~~ employee stock compensation plans. During the first quarter of 2011 we: (i) borrowed $10.0 million under our revolving credit facility; (ii) repaid $0.8 million related to Term Loans; (iii) made $0.4 million of required repayments of Seller Notes; (iv) incurred $4.2 million of financing costs related to the repricing of our debt in the first quarter of 2011; and (v) received $0.6 million of proceeds from issuance of stock under employee stock compensation plans.

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Debt

Long-term debt consisted of the following:

	March 31,			December 31,			June 30,			December 31,
(In thousands)	2012			2011			2013			2012
	(Unaudited)
Revolving Credit Facility	$	—		$	—		$	55,000		$	—
Term Loan	295,550			297,000			225,000			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 3.00% to 7.00%, maturing through November 2016	10,545			11,033
	506,095			508,033
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							24,474			27,346
Total Debt							504,474			520,646
Less current portion	(7,927		)	(8,065		)	(13,802		)	(11,082		)
	$	498,168		$	499,968
Long Term Debt							$	490,672		$	509,564

~~Amendment to Credit Agreement~~Refinancing

~~Revolving Credit Facility~~

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Revolving Credit Facility

The $200.0 million Revolving Credit Facility matures on June 17, 2018 and bears interest at LIBOR plus 1.75%, or the applicable rate (as defined in the ~~fiscal year for which it is permitted.~~Credit Agreement). As of ~~March 31, 2012,~~June 30, 2013, the Company had ~~$99.5~~$144.6 million available under this facility. As of June 30, 2013, $55.0 million was outstanding under the Revolving Credit ~~Facility. Availability under the Revolving Credit~~ Facility, ~~as of March 31, 2012 was~~ net of standby letters of credit of approximately ~~$0.5~~$0.4 million. ~~As of March 31, 2012, 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 security interest in ~~the Company’s subsidiaries’ shares,~~ all of the Company’s assets, ~~and~~ all the assets of the Company’s subsidiaries and the equity interests of the Company’s subsidiaries.

Term Loan

~~Table~~ranging from 0.625% to 3.750% are required throughout the life of ~~Contents~~

the Term Loan, commencing September 30, 2013. 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. ~~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. There were no~~No such mandatory prepayments were required during the ~~first three months~~second quarter of ~~2012 or 2011. As of March 31, 2012, the interest rate on the Term Loan Facility was 4.0%.~~2013. 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 security interest in ~~the Company’s subsidiaries’ shares,~~ all of the Company’s assets, ~~and~~ all the assets of the Company’s subsidiaries and the equity interests of the Company’s subsidiaries.

71/8% Senior Notes

Subsidiary Guarantees

The Revolving ~~and~~Credit Facility, 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

General

As of ~~March 31, 2012, $295.6~~June 30, 2013, $280.0 million, or ~~58.4%~~55.5%, of our total debt of ~~$506.1~~$504.5 million was subject to variable interest ~~rates.~~rates based on a LIBOR plus 1.75%. 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.

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Obligations and Commercial Commitments

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

Payments Due by Period

(In thousands)

Remainder of 2012

2013

2014

2015

2016

Thereafter

Total

Long-term debt

$
6,763

$
5,448

$
4,415

$
4,222

$
285,247

$
200,000

$
506,095

Interest payments on long-term debt

23,400

26,098

25,885

25,723

24,165

26,719

$
151,990

Operating leases

32,302

35,286

28,261

18,780

12,927

30,791

$
158,347

Capital leases and other long-term obligations (1)

12,960

14,027

11,347

8,570

3,369

12,357

$
62,630

Total contractual cash obligations

$
75,425

$
80,859

$
69,908

$
57,295

$
325,708

$
269,867

$
879,062

Payments Due by Period

(In thousands)	Remainder of 2013		2014		2015		2016		2017		Thereafter		Total
Long-term debt	$	7,756	$	16,443	$	21,565	$	23,022	$	28,781	$	406,907	$	504,474
Interest payments on long-term debt (1)	16,913		19,124		18,660		18,143		17,623		15,006		105,469
Operating leases	23,624		40,064		29,627		22,663		17,074		32,990		166,042
Capital leases	—		561		550		564		555		2,199		4,429
Other long-term obligations (2)	18,229		12,223		9,701		2,870		2,745		15,384		61,152
Total contractual cash obligations	$	66,522	$	88,415	$	80,103	$	67,262	$	66,778	$	472,486	$	841,566

(1) Interest projections were based on the assumptions that the future interest rate for the Revolving Credit Facility and Term Loan will remain at the current rate of 1.98%.

(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 March 31, 2012, was $210.5 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 March 31, 2012 (level 1).~~

~~Market Risk~~

We are exposed to the market risk that is associated with changes in interest rates. As of March 31, 2012, all our outstanding debt, with the exception of the $295.6 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.

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 ~~March 31, 2012,~~June 30, 2013, we had cash flow exposure to the changing interest rates on the ~~$295.6~~$280.0 million borrowed under the Revolving and Term Loan ~~Facility.~~Facilities. The other obligations have fixed interest rates.

Presented below is an analysis of our financial instruments as of ~~March 31, 2012~~June 30, 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 Revolving and Term Loan ~~Facility,~~Facilities, 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%.~~

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As of ~~March 31, 2012,~~June 30, 2013, the ~~current LIBOR and applicable~~interest rate ~~is 4.0%; therefore, a 76 BPS increase or decrease in LIBOR would not reduce or increase estimated annual cash flows related to the outstanding balance~~ on the Revolving and Term Loan ~~Facility.~~facilities was 1.98% based on a LIBOR rate of 0.23% and the applicable margin of 1.75%.

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

(In thousands)

(150 BPS)

(100 BPS)

(50 BPS)

50 BPS

100 BPS

150 BPS

Term Loan

$
11,822

$
11,822

$
11,822

$
11,822

$
11,822

$
12,531

$
14,009

Cash Flow Risk	Annual Interest Expense Given an Interest Rate Decrease of X Basis Points						No Change in		Annual Interest Expense Given an Interest Rate Increase of X Basis Points
(In thousands)	(150 BPS)		(100 BPS)		(50 BPS)		Interest Rates		50 BPS		100 BPS		150 BPS
Revolving and Term Loan	$	4,900	$	4,900	$	4,900	$	5,544	$	6,944	$	8,344	$	9,744

ITEM 4.Controls and Procedures

~~Management’s Consideration of Restatement of Previously Issued Financial Statements~~

As discussed in Item 4.02 (a) of the Company’s Current Report on Form 8-K, dated March 18, 2013, management of the Company has restated previously issued consolidated financial statements included in the Company’s Quarterly Report on Form 10-Q for the quarters ended March 31, 2012 and 2011 in this Amended Filing. The determination to restate these consolidated financial statements was made as a result of the Company’s identification of certain accounting errors as discussed in footnote B of the consolidated financial statements included in this Amended Filing.

Disclosure Controls and Procedures

~~Our~~The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by usit in ~~our~~its periodic reports filed ~~or submitted to~~with the Securities and Exchange Commission is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and ~~forms. At~~forms and to ensure that information required to be disclosed in the ~~time that our Quarterly Report~~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 ~~Form 10-Q for~~an evaluation of the ~~three month period ended March 31, 2012was filed on May 4, 2012, our CEO and CFO concluded that our~~Company’s disclosure controls and procedures ~~were effective as of March 31, 2012. Subsequent to that evaluation, our management, including our CEO~~conducted by the Company’s Chief Executive Officer and ~~CFO,~~Chief Financial Officer, such officers concluded that ~~our~~the Company’s disclosure controls and procedures were not effective as of ~~March 31, 2012because~~June 30, 2013 as a result of the material weaknessin 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.

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Status of Remediation of Material Weakness

As of June 30, 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, ~~discussed below. Notwithstanding~~management may determine to take additional measures to address this material weakness or determine to modify the ~~material weakness~~remediation steps described below, management, based upon the substantial work performed during the restatement process, has concluded that the Company’s consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q/A are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.above.

~~Material Weakness~~

We did not maintain effective controls over the valuation of work-in-process inventory. Specifically, the Company did not appropriately account for the effect of sales volume changes on the determination of the valuation of the Company's work-in-process inventory resulting in misstatements of inventory, material costs, personnel costs, other operating expenses and income taxes as of and for the periods ended December 31, 2011 and 2010 and the three months ended March 31, 2012 and 2011 and resulted in an audit adjustment for the year and three month period ended December 31, 2012. This control deficiency could result in further misstatement to the aforementioned account balances or disclosures that would result in material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.

~~Change~~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 ~~March 31, 2012,~~June 30, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Remediation of Material Weakness~~

In an effort to remediate the material weakness discussed in Management’s Annual Report on Internal Control Over Financial Reporting in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, management will implement additional annual and quarterly reviews, analyses and calculations related to the valuation of work-in-process inventory. We believe the remediation measures described above will remediate this material weakness going forward. Management will also continue to evaluate our controls and procedures, and may implement additional measures in the future or modify certain of the remediation measures described above.

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Part II. Other Information

ITEM 1. LEGAL PROCEEDINGS.

We are subject to legal proceedings and claims which arise from time to time in the ordinary course of our business, including additional payments under business purchase agreements. In the opinion of our 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 our operations.

We are in a highly regulated industry and receive regulatory agency inquiries from time to time in the ordinary course of our business, including inquiries relating to our 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 our consolidated financial statements.

On May 20, 2013, the Staff of the SEC’s Division of Enforcement informed us that it was conducting an investigation of the Company and made a request for a voluntary production of documents and information concerning our calculations of bad debt expense and allowance for doubtful accounts. We are cooperating fully with the SEC Staff.

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~~2012 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. Certain of those risk factors have been updated in this Form ~~10-Q/A~~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 ~~41.2%~~40.6% and ~~40.4%~~41.3% of our net sales for the ~~three~~six months ended ~~March 31,~~June 30, 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 increases/(decreases)~~/increases~~ for 2013, 2012, and 2011 ~~2010, 2009, and 2008~~ were ~~2.4%~~0.8%, ~~(0.1%), 0.0%, 5.0%~~2.4%, and ~~2.7%~~(0.1%) 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.

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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.

The Budget Control Act of 2011 required, among other things, mandatory across-the-board reductions in Federal spending, or “sequestration.” While delayed by the American Taxpayer Relief Act of 2012, President Obama issued a sequestration order on March 1, 2013. For services provided on or after April 1, 2013, Medicare fee-for-service claim payments, including those for DMEPOS (durable medical equipment (DME), prosthetics, orthotics, and supplies,) as well as claims under the DME Competitive Bidding Program, are reduced by 2 percent. This is a claims payment adjustment only with immaterial impact to the Company; no permanent reductions in the Medicare DMEPOS fee schedule have been made as a result of sequestration, therefore reimbursements from Medicaid, the VA and commercial payers who use the Medicare fee schedule as a basis for reimbursement have not been impacted.

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.~~

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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 ~~March 31, 2012,~~June 30, 2013, we had approximately ~~$506.1~~$504.5 million of total indebtedness and ~~$99.5~~$55.0 million ~~available~~borrowed under our Revolving Credit Facility.

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

· 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:

~~ITEM 6.~~	~~Exhibits~~

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

	Exhibit No.		Document

	~~3.1~~4.1			~~Amended~~Credit Agreement, dated June 17, 2013, among the Company and ~~Restated By-Laws of Hanger Orthopedic Group, Inc., as amended effective February 2, 2012.~~the lenders and agents party thereto. (Incorporated herein by reference to Exhibit ~~3.1~~4.1 to the Current Report on Form 8-K filed by the Registrant on ~~February 2, 1012)~~June 19, 2013).

4.2		Third Supplemental Indenture, dated June 27,2013, by and among the Hanger, Inc., each of the Subsidiary Guarantors party thereto and Wilmington Trust Company, as trustee.

10.1		~~Fifth Amended and Restated Employment Agreement, effective as of January~~Defined Contribution Supplemental Retirement Plan, dated May 1, ~~2012, by and between Thomas F. Kirk and the Company.~~2013. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on ~~January 26, 2012)~~May 13, 2013).

	~~10.2~~			Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between Vinit Asar and the Company. (Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on January 26, 2012).

	~~10.3~~			Fourth Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between George E. McHenry and the Company. (Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on January 26, 2012).

	~~10.4~~			Fourth Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between Richmond L. Taylor and the Company. (Incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the Registrant on January 26, 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/A,~~10-Q, for the period ended ~~March 31 2012,~~June 30, 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)

~~(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.

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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: ~~March 22,~~August 7, 2013		/s/Vinit K. Asar
		Vinit K. Asar
	President and
	Chief Executive Officer
		(Principal Executive Officer)


Dated: ~~March 22,~~August 7, 2013		/s/George E. McHenry
		George E. McHenry
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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	As of December 31, 2011
(in thousands)	As Previously Reported		As Revised

Inventories	$	114,086	$	112,305
Accrued expenses	$	18,247	$	17,547

	Three Months Ended March 31, 2012				Three Months Ended March 31, 2011
(in thousands, except per share amounts)	As Previously Reported		As Restated		As Previously Reported		As Restated

Material costs	$	64,098	$	66,697	$	58,108	$	59,111
Personnel costs	$	83,619	$	81,153	$	78,889	$	78,267
Other operating expenses	$	42,133	$	40,219	$	37,390	$	36,100
Income from operations	$	19,956	$	21,737	$	18,384	$	19,293
Income before taxes	$	12,179	$	13,960	$	10,005	$	10,914
Provision for income taxes	$	4,624	$	5,324	$	3,792	$	4,162
Net income	$	7,555	$	8,636	$	6,213	$	6,752
Basic earnings per share	$	0.22	$	0.25	$	0.19	$	0.20
Diluted earnings per share	$	0.22	$	0.25	$	0.18	$	0.20

	As Previously
(in thousands)	Reported			Adjustment		As Revised
Net cash used in operating activities	$	(11,495	)	(816	)	$	(12,311	)
Net cash (used in) provided by financing activities	$	5,228		816		$	6,044

	Patient-Care Services							Distribution		Therapeutic Solutions
(In thousands)	Goodwill		Accumulated 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	1,536		—			1,536		—		—		1,536
Additions due to contingent considerations	127		—			127		—		—		127
Balance at March 31, 2012 (unaudited)	$	521,637	$	(45,808	)	$	475,829	$	38,388	$	96,930	$	611,147

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

Three Months Ended March 31, 2012
Net sales
Customers	$	176,369	$	26,241	$	15,333		$	148		$	—		$	218,091
Intersegments	—		47,569		844			—			(48,413		)	—
Depreciation and amortization	3,417		324		2,673			1,871			—			8,285
Income (loss) from operations	26,651		8,542		268			(13,447		)	(277		)	21,737
Interest (income) expense	7,582		832		1,440			(2,077		)	—			7,777
Income (loss) before taxes	19,069		7,710		(1,172		)	(11,370		)	(277		)	13,960

Capital Expenditures	2,541		90		624			2,061			—			5,316

Three Months Ended March 31, 2011
Net sales
Customers	$	160,551	$	23,461	$	16,257		$	170		$	—		$	200,439
Intersegments	—		41,627		745			—			(42,372		)	—
Depreciation and amortization	2,961		284		2,474			1,573			—			7,292
Income (loss) from operations	23,282		6,887		751			(11,728		)	101			19,293
Interest (income) expense	7,116		849		1,440			(1,026		)	—			8,379
Income (loss) before taxes	16,166		6,038		(689		)	(10,702		)	101			10,914

Capital Expenditures	3,082		168		90			2,047			—			5,387

Total Assets
March 31, 2012	1,292,294		178,481		134,733			(479,061		)	—			1,126,447
December 31, 2011	1,277,700		170,077		135,781			(456,839		)	—			1,126,719

(in thousands)	Employee Separation			Other Relocation		Lease Termination			Total
Balance as of December 31, 2011	$	226		$	—	$	3,085		$	3,311
Expenses incurred	—			—		—			—
Amounts paid	(35		)	—		(104		)	(139		)
Balance as of March 31, 2012	$	191		$	—	$	2,981		$	3,172

	Payments Due by Period
(In thousands)	Remainder of 2012		2013		2014		2015		2016		Thereafter		Total

Long-term debt	$	6,763	$	5,448	$	4,415	$	4,222	$	285,247	$	200,000	$	506,095
Interest payments on long-term debt	23,400		26,098		25,885		25,723		24,165		26,719		$	151,990
Operating leases	32,302		35,286		28,261		18,780		12,927		30,791		$	158,347
Capital leases and other long-term obligations (1)	12,960		14,027		11,347		8,570		3,369		12,357		$	62,630
Total contractual cash obligations	$	75,425	$	80,859	$	69,908	$	57,295	$	325,708	$	269,867	$	879,062

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
(In thousands)	(150 BPS)		(100 BPS)		(50 BPS)				50 BPS		100 BPS		150 BPS
Term Loan	$	11,822	$	11,822	$	11,822	$	11,822	$	11,822	$	12,531	$	14,009