As filed with the Securities and Exchange Commission on July 14, 2010.

Registration No. 333-166400

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 2

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

AURORA DIAGNOSTICS, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		8071 (Primary Standard Industrial Classification Code Number)		27-2416884 (I.R.S. Employer Identification Number)

11025 RCA Center Drive, Suite 300
Palm Beach Gardens, FL 33410
(866) 420-5512

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Gregory A. Marsh
Chief Financial Officer
11025 RCA Center Drive, Suite 300
Palm Beach Gardens, FL 33410
(866) 420-5512

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:


J. Mark Ray Alston & Bird LLP 1201 West Peachtree Street Atlanta, GA 30309-3424 (404) 881-7000		Michael Benjamin Shearman & Sterling LLP 599 Lexington Avenue New York, NY 10022 (212) 848-4000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer þ	Smaller reporting company o

(Do not check if a smaller reporting company)

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.

The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and neither we nor the selling stockholders are soliciting offers to buy these securities in any state where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)
Issued July 14, 2010

Class A Common Stock

Aurora Diagnostics, Inc. is offering shares of its Class A common stock and the selling stockholders are offering shares of Class A common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price will be between $ and $ per share.

We have applied to have our Class A common stock listed on the NASDAQ Global Market under the symbol “ARDX.”

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 15.

Price $ Per Share

Underwriting

Proceeds to

Price to

Discounts and

Proceeds to

Selling

Public

Commissions

Stockholders

Per share

Total

We and the selling stockholders have granted the underwriters the right to purchase up to an additional shares of Class A common stock to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A common stock to purchasers on , 2010.


Morgan Stanley	UBS Investment Bank	Barclays Capital


RBC Capital Markets	BMO Capital Markets	Lazard Capital Markets

, 2010

TABLE OF CONTENTS


	Page

Prospectus Summary		1
Risk Factors		15
Forward-Looking Statements		36
Organizational Structure		38
Use of Proceeds		45
Dividend Policy		46
Capitalization		47
Dilution		49
Unaudited Pro Forma Financial Information		51
Selected Historical Consolidated Financial Data		58
Management’s Discussion and Analysis of Financial Condition and Results of Operations		61
Industry		86
Business		90
Management and Board of Directors		112
Executive Compensation — Compensation Discussion and Analysis		119
Principal and Selling Stockholders		127
Certain Relationships and Related Party Transactions		132
Description of Capital Stock		139
Shares Eligible for Future Sale		143
Certain U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders of Common Stock		145
Underwriters		149
Legal Matters		153
Experts		153
Where You Can Find More Information		154
Index to Consolidated Financial Statements		F-1
EX-10.5
EX-21.1
EX-23.1
EX-23.2
CORRESP.2

You should rely only on the information contained in this prospectus and in any free writing prospectus. We, the underwriters and the selling stockholders have not authorized anyone to provide you with information different from that contained in this prospectus. We, the underwriters and the selling stockholders are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our Class A common stock.

Until , 2010 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside of the United States, neither we, nor the selling stockholders or any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside of the United States.

INDUSTRY AND MARKET DATA

Industry and market data used throughout this prospectus were obtained through company research, surveys and studies conducted by third parties and industry and general publications. The information contained in “Prospectus Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry” and “Business” is based on studies, analyses and surveys including:


	•	“Laboratory Industry Strategic Outlook: Market Trends and Analysis 2009” prepared by Washington G-2 Reports, or the Washington G-2 Report, which is available for purchase at http://www.g2reports.com/issues/SPCRPT/1619642-1.html;


	•	“The U.S. Anatomic Pathology Market Forecast & Trends 2010” prepared by Laboratory Economics, or the Laboratory Economics Report, which is available for purchase at http://www.laboratoryeconomics.com;


	•	“Cancer Facts & Figures 2009” prepared by the American Cancer Society, or the American Cancer Society Report, which is available for download at http://www.cancer.org/Research/CancerFactsFigures/index;


	•	“Trendwatch Chartbook 2000: Trends Affecting Hospitals and Health Systems” prepared by the Lewin Group, Inc. for the American Hospital Association and “Trendwatch Chartbook 2009: Trends Affecting Hospitals and Health Systems” prepared by Avalere Health for the American Hospital Association, or the AHA Reports, which is available for download at http://www.aha.org/aha/research-and-trends/health-and-hospital-trends/2003-or-earlier.html and http://www.aha.org/aha/research-and-trends/chartbook/2009chartbook.html, respectively; and


	•	“Projections of the Population by Selected Age Groups and Sex for the United States: 2010 to 2050” prepared by the Population Division, U.S. Census Bureau, or the U.S. Census Bureau Report, which is available for download at http://www.census.gov/population/www/projections/summarytables.html.

Information originally published in Washington G-2 Reports “Laboratory Industry Strategic Outlook: Market Trends & Analysis 2009” is used herein with the express written permission of Washington G2 Reports. Copyright ^©2010. www.g2reports.com. While we are not aware of any misstatements regarding the industry data presented herein, estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.”

TRADEMARKS

AURORA DIAGNOSTICS and CONNECTDX THE INFORMATION GATEWAY and Design and other trademarks or service marks of Aurora appearing in this prospectus are our property. All trade names, trademarks and service marks of other companies appearing in this prospectus are the property of the respective holders.

PROSPECTUS SUMMARY

This summary highlights all material information about us and this offering, but does not contain all of the information that you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the “Risk Factors” and the consolidated financial statements and related notes. This prospectus includes forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.”

Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our,” “Aurora Diagnostics” and the “Company” refer to Aurora Diagnostics, Inc. and our subsidiaries, as well as the professional associations and professional corporations which are separate legal entities in certain states that we control through contractual arrangements. All information in this prospectus with respect to Aurora Diagnostics, Inc. gives effect to the reorganization transactions described under “Prospectus Summary — Reorganization Transactions” and “Organizational Structure” as if they had occurred on December 31, 2009. “Aurora Holdings” refers to our subsidiary “Aurora Diagnostics Holdings, LLC.” With respect to periods prior to April 23, 2010, the terms “we,” “us,” “our,” “Aurora” and the “Company” refer to Aurora Holdings and its subsidiaries.

Our Business

We are a leading specialized diagnostics company in terms of revenues, focused on the anatomic pathology market. We are well-positioned in the higher-growth subspecialties of anatomic pathology, with a leading market position in dermatopathology and in the women’s health pathology subspecialty, and a growing market position in urologic pathology, hematopathology and general surgical pathology. Our strengths in anatomic pathology are complemented by our specialized clinical and molecular diagnostics offerings, which enable us to provide a broad selection of diagnostic services to our referring physicians, our primary clients.

The majority of our revenues in 2009 were derived from physicians providing diagnostic services in the non-hospital outpatient channel of the anatomic pathology market, which in 2008 was one of the fastest-growing and largest channels of that market. We also maintain 36 exclusive contracts with hospitals under which we provide inpatient and outpatient professional anatomic pathology services. We also provide medical director services and, for some hospitals, technical slide preparation services.

Our business model builds upon the expertise of our experienced pathologists to provide seamless, reliable and comprehensive pathology and molecular diagnostics offerings to referring physicians. We typically have established, long-standing relationships with our referring physicians as a result of focused localized delivery of diagnostic services, personalized responses and frequent consultations, and flexible information technology, or IT, solutions that are customizable to our clients’ needs. Our IT and communications platform enables us to deliver diagnostic reports to our clients generally within 24 hours of specimen receipt, helping to improve patient care. In addition, our IT platform enables us to closely track and monitor volume trends from referring physicians.

The success of our business model and the value of our specialized diagnostic service offering are reflected in our significant growth allowing us to reach $171.6 million in annual revenues in 2009. Through a combination of organic growth and strategic acquisitions, we have achieved a scale allowing us to provide diagnostic services to the patients of our approximately 10,000 referring physicians, generating approximately 1.6 million accessions in 2009. With 19 primary laboratories across the United States, we have achieved a national footprint and a leading presence in our local markets upon which we are continuing to build a more integrated and larger-scale diagnostics company.

Our Industry

The U.S. diagnostic testing industry had revenues of approximately $55 billion in 2008 and grew at a rate of 7 percent compounded annually from 2000 to 2008, according to the Washington G-2 Report. Within the overall industry in 2008, the anatomic pathology market totaled approximately $13 billion in revenues, or 24 percent of total industry revenues, according to the Laboratory Economics Report. Anatomic pathology services involve the diagnosis of cancer and other medical conditions through the examination of tissues (histology) and the analysis of cells (cytology) and generally command higher reimbursement rates, on a per specimen basis, than clinical pathology services.

The non-hospital outpatient channel is the largest component of the anatomic pathology market and has grown more rapidly than other channels. This channel accounted for $7.6 billion, or 57 percent, of anatomic pathology revenues for the year ended December 31, 2008, representing 10 percent growth in 2008 according to the Laboratory Economics Report. The remainder of the anatomic pathology market is comprised of the hospital inpatient channel, which accounted for $3.7 billion or 28 percent, of anatomic pathology revenues, representing 2 percent growth in 2008, and the hospital outpatient channel, which accounted for $1.9 billion, or 15 percent, of anatomic pathology revenues, representing 4 percent growth in 2008, according to the Laboratory Economics Report.

We believe that demand for non-hospital outpatient anatomic pathology services will continue to expand due to the following trends:


	•	Aging of the U.S. Population: The number of individuals 65-years-old and older will increase to 55 million, or by 36 percent, over the next decade, a percentage rate that is nearly four times faster than that of the overall population, according to the U.S. Census Bureau Report. According to the American Cancer Society Report, the risk of being diagnosed with cancer increases as individuals age, with an estimated 52 percent of all new cancer cases diagnosed in persons 65-years-old and older in 2009.

	•	Increasing Incidence of Cancer: The number of new cancer cases grew by 2 percent between 2007 and 2009 to approximately 1.5 million new cases according to the American Cancer Society Report. The number of new skin cancer cases grew by 15 percent between 2007 and 2009, representing the highest percentage increase among all diagnosed cancer types.

	•	Expanding Demand for Non-Hospital Outpatient Services: The non-hospital outpatient channel of the anatomic pathology market is expected to continue growing at a higher percentage rate than the overall industry, principally driven by patient preference and the cost-effectiveness of outpatient diagnostic services compared to inpatient diagnostic services.

	•	Medical Advancements Allowing for Earlier Diagnosis and Treatment of Disease: Physicians are increasingly relying on diagnostic testing to help identify the risk of disease, to detect the symptoms of disease earlier, to aid in the choice of therapeutic regimen, to monitor patient compliance and to evaluate treatment results. We believe physicians, patients and payors increasingly recognize the value of diagnostic testing as a means to improve health and reduce the overall cost of health care through early detection.

The anatomic pathology market remains highly-fragmented, with the two largest clinical laboratory companies accounting for only 14 percent of annual revenues for the market in 2008. The remaining 86 percent of annual revenues for the market was comprised of over 13,000 pathologists and numerous specialized testing companies that offer a relatively narrow menu of diagnostic tests. In 2008, approximately 70 percent of pathologists licensed in the U.S. were in private practice according to the Washington G-2 Report. As a result, we believe that

there are substantial consolidation opportunities in the anatomic pathology market as smaller operators seek access to the resources of diagnostics companies with a more comprehensive selection of services for referring physicians.

Our Competitive Strengths

We believe that we are distinguished by the following competitive strengths:


	•	Leading Market Position in Higher-Growth Subspecialties of Expanding Industry. We are a leading specialized diagnostics company, focused on the faster-growing non-hospital outpatient channel within the anatomic pathology market with leading market positions in two of the three higher-growth subspecialties of the market: dermatopathology and women’s health pathology.

	•	Locally-Focused Business Model with National Scale. Our business model centers on achieving significant local market share, which yields operating efficiencies and national scale when consolidated across all of our operations. The diagnostic services we provide are designed specifically to meet the needs of the local markets we serve. Our national infrastructure enables us to more efficiently manage our operations, improve productivity and deliver a more extensive menu of diagnostic services to our local clients. As a result of our strong local presence and high-quality diagnostic services, we have established significant loyalty with referring physicians and key payors in our local markets. In 2009, we derived more than 85 percent of our revenues from locally-focused, in-network payor contracts.

	•	Experienced, Specialized Pathologists Focused on Client Service. We believe our pathologists have long-standing client relationships and provide high-quality service within their respective local communities. Over one-third of our pathologists are specialized in dermatopathology, with the remainder focused on women’s health pathology, urologic pathology, hematopathology and general surgical pathology. This alignment of our pathologists’ specialties with those of the referring physicians is critical to our ability to retain existing and attract new clients. Our clinical expertise and frequent interactions with clients on patient diagnoses enables us to establish effective consultative and long-term relationships with referring physicians.

	•	Professional Sales, Marketing and Client Service Team. We maintain a sales, marketing and client service team of over 100 professionals who are highly-trained and organized by subspecialty to better meet the needs of our referring physicians and their patients. Our sales representatives are incentivized through compensation plans to not only secure new physician clients, but also to maintain and enhance relationships with existing physician clients. As a result, they have enabled us to expand our geographic market presence to 30 states and increase market penetration and market share in our local markets.

	•	Proprietary IT Solutions. Delivery of clinical information is essential to our business and a critical aspect of the differentiated service that we provide to our clients. We have developed scalable IT solutions that maximize the flexibility, ease-of-use and speed of delivery of our diagnostic reports, which has enabled us to rapidly grow our accession volume and meet the increasing physician demand for our diagnostic services. We also monitor referral patterns on a daily basis using our IT infrastructure, which allows us to respond quickly to referring physicians through our sales and marketing teams. We achieved this through the development of a proprietary suite of IT solutions called ConnectDX that is compatible with most electronic medical record, or EMR, systems. ConnectDX incorporates customized interface solutions, low cost and efficient printer capabilities, compliant web portal capacities, and proprietary software, all resulting in efficient and reliable onsite client connections.

	•	Proven Acquisition, Integration and Development Capabilities. We have significant expertise and a proven track record of identifying, acquiring and integrating pathology practices into our diagnostic laboratory network. Our management team successfully expanded our operations through the acquisition of 16 anatomic pathology laboratories and one clinical laboratory and through the development of two de novo diagnostic laboratories. We have improved the performance of the laboratories we have acquired by applying our standard operating procedures, enhancing sales and marketing capabilities, implementing our IT platform and realizing efficiencies from our national operations and management. We believe our


		operational platform, expertise and value proposition enable us to capitalize on the considerable consolidation opportunities in the highly-fragmented anatomic pathology market.


	•	Experienced Senior Leadership. Our senior management team has approximately 80 years of combined experience in the health care industry, including senior management positions with leading diagnostic companies including AmeriPath, DIANON Systems and Laboratory Corporation of America, and collectively have successfully completed over 65 acquisitions and built a number of de novo specialized diagnostic laboratories. We believe that our management’s strong reputation, extensive network of industry relationships and experience in building and growing successful companies in the industry help us to drive operating performance, hire and retain talented pathologists and other employees and attract acquisition candidates.

Our Business Strategy

We intend to achieve growth by pursuing the following strategies:


	•	Continue to Drive Market Penetration through Sales and Marketing. We plan to drive organic growth through our professional sales and marketing organization. Our 63-person sales and marketing team provides us with broad coverage to augment and further penetrate existing physician relationships and to develop new referral relationships. We plan to strategically add sales professionals to laboratories in markets that will most benefit from enhanced outreach, increasing our presence in existing and new markets.

	•	Leverage our IT Platform to Increase Operating Efficiencies. We believe our IT platform will allow us to gain market share in our existing subspecialties by improving productivity and reducing turnaround times. We have recently introduced an IT solution called doc2MD, a leading EMR system for dermatology practices for which we have an exclusive, long-term license. We intend to continue to develop our internal IT operations into a better-integrated diagnostic platform, which will improve national coordination and provide real time visibility into key performance metrics. In addition, we plan to continue to introduce innovative IT solutions, interface capabilities and market-specific IT solutions that enhance our value proposition to referring physicians.

	•	Expand through Targeted Acquisitions. We plan to identify and acquire leading laboratories to augment our organic growth, broaden our geographic presence and enhance our service offering. We intend to continue to build our business and enhance our reputation as a preferred acquiror for independent laboratories. We believe that our recognizable identity and strong reputation make us a preferred partner for independent laboratories.

	•	Expand Diagnostic Services Capabilities. We intend to expand our services in the areas of clinical and molecular diagnostics to complement our existing anatomic pathology businesses. We believe we can leverage our depth of experience and physician relationships to sell these new diagnostic services in conjunction with our existing testing services as a comprehensive offering. As a “one-stop” diagnostic services provider, we would not only better serve our current clients, but also position ourselves to attract new business under a more diverse service model.

	•	Develop De Novo Diagnostics Laboratories. We plan to continue to selectively develop diagnostic laboratories on a de novo basis, as we have done in certain markets, to expand our market presence, broaden our service offering and leverage the capabilities of our existing laboratories and pathologists.

	•	Expand Contracts with Hospitals in Target Markets. We intend to continue to develop additional contracts with hospitals in target markets as part of a broader strategy to strengthen and grow our outpatient business and expand our local market share.

	•	Further Expand into Growing Long-Term Care Market. We have a growing presence providing clinical diagnostic services to the long-term care markets in Central and Northern Florida. We intend to expand this regional coverage into the large South Florida market and replicate our success in other states with growing long-term care markets. We believe that our IT solutions, and our ability to meet the rapid service requirements for the long term care market, provide us with a significant competitive advantage in these markets.

Risks Associated with Our Business

Our business is subject to numerous risks, which are highlighted in the section entitled “Risk Factors.” These risks represent challenges to the successful implementation of our strategy and the growth of our business. Some of these risks are:


	•	Adverse changes in coverage or reimbursement guidelines and amounts applicable to our specialized diagnostic services, including health care reimbursement reform and cost-containment measures implemented by government agencies or third-party payors, could reduce our revenues and have a material adverse impact on our business;

	•	If referring physicians, who are our primary clients, choose to internalize technologies or technical or professional diagnostic services functions that we currently use or perform, and we do not develop new or alternative technologies or functions that are attractive to our clients, it may reduce the demand for our specialized diagnostic services and adversely affect our business; and

	•	Recent and, if enacted, proposed federal or state health care reform measures could increase our costs, decrease our revenues, expose us to expanded liability or require us to revise the ways in which we conduct our business, any of which could adversely affect our operating results and financial condition.

For further discussion of these and other risks you should consider before making an investment in our Class A common stock, see the section entitled “Risk Factors” beginning on page 16.

Corporate History and Organizational Structure

We were incorporated in Delaware on April 23, 2010. We are a holding company and our principal asset after the completion of this offering will be our indirect equity interest in Aurora Holdings. In June 2006, Aurora Holdings was organized as a limited liability company and was initially capitalized by affiliates of Summit Partners, affiliates of GSO Capital Partners and members of our senior management team. In June 2009, GSO Capital Partners’ equity interest in Aurora Holdings was purchased by an affiliate of KRG Capital Partners. Prior to giving effect to the reorganization transactions described below, affiliates of Summit Partners, whom we refer to as the Summit Partners Equityholders, owned 51 percent of the economic interest in Aurora Holdings; an affiliate of KRG Capital Partners, whom we refer to as the KRG Equityholders, owned 34 percent of the economic interest in Aurora Holdings and members of our senior management team and consultants, whom we refer to as the Management Equityholders, owned 15 percent of the economic interest in Aurora Holdings. We refer to the Summit Partners Equityholders, the KRG Equityholders and the Management Equityholders as our Principal Equityholders. We refer to membership interests in Aurora Holdings as Aurora Holdings Units.

Reorganization Transactions

In connection with this offering, we will enter into a series of transactions as described below that will result in our indirect acquisition of all of the business and operational control of Aurora Holdings and percent of the Aurora Holdings Units. We refer to this series of transactions as the Reorganization Transactions.

As part of the Reorganization Transactions, we will indirectly, through a newly-formed, wholly-owned subsidiary, ARDX Sub, Inc., which we refer to as ARDX Sub, acquire Aurora Holdings Units from certain of the Summit Partners Equityholders and the KRG Equityholders in exchange for shares of our Class A common stock, as well as rights, which we refer to as TRA Rights, under an agreement that we refer to as the Tax Receivable Agreement. This Tax Receivable Agreement will obligate Aurora Diagnostics, Inc. to pay to an entity controlled by our Principal Equityholders 85 percent of certain cash tax savings, if any, realized by Aurora Diagnostics, Inc. after the completion of this offering. See “Certain Relationships and Related Party Transactions — Tax Receivable Agreement.”

Following the Reorganization Transactions, certain of the Summit Partners Equityholders and all of the Management Equityholders, whom we refer to as the Aurora Holdings Continuing Members, will continue to own percent of the Aurora Holdings Units. See “Organizational Structure — Reorganization Transactions.” The KRG Equityholders will not continue to own any Aurora Holdings Units following the consummation of the

Reorganization Transactions. In addition, we will indirectly acquire all of the business and operational control of Aurora Holdings, and an immaterial amount of cash, from the Aurora Holdings Continuing Members in exchange for newly-issued shares of our Class B common stock. The Aurora Holdings Continuing Members will also receive rights to distributions that are calculated in a manner that is similar to the TRA Rights under the Aurora Holdings limited liability company agreement, which will be further amended and restated in connection with the Reorganization Transactions. We refer to the Aurora Holdings limited liability company agreement, as further amended and restated, as the Second Amended and Restated Aurora Holdings LLC Agreement. See “Organizational Structure — Reorganization Transactions.” Our Class B common stock is intended to provide voting rights in us to the Aurora Holdings Continuing Members that reflect their continuing economic interest in Aurora Holdings after the completion of this offering.

All of these Reorganization Transactions will be consummated immediately prior to the closing of this offering. We intend to account for the Reorganization Transactions using a carryover basis as the contemplated transactions are exchanges among entities under common control that do not affect economic ownership.

Following the completion of the Reorganization Transactions, we will have two classes of common stock:


	•	Class A common stock. We will sell shares of our Class A common stock in this offering. Each share of our Class A common stock will be entitled to one vote on matters submitted to a vote of our stockholders. Our Class A common stock will represent all of the economic rights in us (including rights to dividends and distributions upon liquidation, but excluding the return of the par value of the Class B common stock upon liquidation). Immediately following consummation of the Reorganization Transactions, but without giving effect to the sale of shares of our Class A common stock by us or the selling stockholders in this offering:


	•	the Summit Partners Equityholders will hold shares of our Class A common stock;

	•	the KRG Equityholders will hold shares of our Class A common stock; and

	•	the Management Equityholders will hold no shares of our Class A common stock.


	•	Class B common stock. The Aurora Holdings Continuing Members will be the only holders of our Class B common stock. Each share of our Class B common stock will be entitled to one vote on matters submitted to a vote of our stockholders. Our Class B common stock will only represent voting rights and will not represent any economic rights in us (including rights to dividends and distributions upon liquidation, but excluding the return of the par value of the Class B common stock upon liquidation). The Aurora Holdings Continuing Members will hold one share of our Class B common stock for each Aurora Holdings Unit held by them. Immediately following consummation of the Reorganization Transactions, but without giving effect to the purchase of shares of our Class B common stock with a portion of the net proceeds that we will receive from this offering:


	•	the Summit Partners Equityholders will hold shares of our Class B common stock;

	•	the KRG Equityholders will hold no shares of our Class B common stock; and

	•	the Management Equityholders will hold shares of our Class B common stock.

See “Principal and Selling Stockholders” for more information on the shares of our Class A common stock to be offered by the selling stockholders in this offering.

The diagram below depicts our organizational structure immediately after giving effect to the Reorganization Transactions, this offering and the application of the net proceeds that we will receive from this offering.


(1)		The Summit Partners Equityholders will hold percent of the Aurora Holdings Units.
(2)		The Summit Partners Equityholders will hold percent of our Class A common stock.
(3)		The Summit Partners Equityholders will hold percent of our Class B common stock.
(4)		Public stockholders will hold percent of our Class A common stock.
(5)		The KRG Equityholders will hold percent our Class A common stock.
(6)		The Management Equityholders will hold percent our Class B common stock.
(7)		The Management Equityholders will hold percent of the Aurora Holdings Units.
(8)		We will hold 100 percent of ARDX Sub common stock.
(9)		ARDX Sub will hold percent of the Aurora Holdings Units.

Following the Reorganization Transactions, and after giving effect to this offering and the application of the net proceeds that we will receive from this offering, we will indirectly hold percent of the Aurora Holdings Units and will, through ARDX Sub, be the sole managing member of Aurora Holdings. As the sole managing member of Aurora Holdings, we will have all business and operational control of Aurora Holdings and its subsidiaries. We will consolidate the financial results of Aurora Holdings and our net income (loss) will be reduced by the noncontrolling interest expense to reflect the rights of the Aurora Holdings Continuing Members with respect to their retained Aurora Holdings Units.

As part of this offering, the Summit Partners Equityholders and the KRG Equityholders will sell a portion of their shares of our Class A common stock. We will not receive any of the proceeds from the sale of shares of our Class A common stock in this offering by the selling stockholders. Immediately following the completion of this offering, we will use a portion of the net proceeds that we will receive from this offering, along with TRA Rights, to purchase shares of our Class B common stock and Aurora Holdings Units from the Aurora Holdings Continuing Members.

Tax Receivable Agreement

In connection with this offering, Aurora Diagnostics, Inc. will enter into the Tax Receivable Agreement with ARDX Sub, Aurora Holdings and an entity controlled by our Principal Equityholders, which we refer to as the Tax Receivable Entity, to which our Principal Equityholders are contributing the TRA Rights they receive in the Reorganization Transactions. This Tax Receivable Agreement will provide for the payment by Aurora Diagnostics, Inc. to the Tax Receivable Entity of 85 percent of certain cash tax savings, if any, in U.S. federal, state, local and foreign income tax realized by Aurora Diagnostics, Inc. after the completion of this offering as a result of:


	•	favorable tax attributes associated with amortizable goodwill and other intangibles held by Aurora Holdings and created by its previous acquisitions;

	•	any step-up in tax basis in our share of Aurora Holdings’ assets resulting from:


	•	the acquisition by us of Aurora Holdings Units from the Aurora Holdings Continuing Members in exchange for shares of our Class A common stock or cash, or

	•	payments under the Tax Receivable Agreement to the Tax Receivable Entity; and


	•	tax benefits related to imputed interest deemed to be paid by us as a result of the Tax Receivable Agreement.

See “Organizational Structure — Reorganization Transactions.”

Corporate Information

We were incorporated in Delaware in April 2010 and began laboratory operations in June 2006. Our executive offices are located at 11025 RCA Center Drive, Suite 300, Palm Beach Gardens, FL 33410. Our telephone number is (866) 420-5512 or (561) 626-5512. Our website address is www.auroradx.com. Information included or referred to on our website is not part of this prospectus.

THE OFFERING


Shares of Class A common stock outstanding before this offering		shares

Shares of Class A common stock offered by us		shares

Shares of Class A common stock offered by the selling stockholders		shares

Total		shares

Shares of Class A common stock to be outstanding after this offering		shares. If, immediately after the completion of this offering and the application of the net proceeds that we will receive from this offering, all of the Aurora Holdings Continuing Members elected to exchange their Aurora Holdings Units for shares of our Class A common stock, shares of Class A common stock would be outstanding.

Shares of Class B common stock to be outstanding after this offering		shares. Shares of our Class B common stock have voting but no economic rights (including rights to dividends and distributions upon liquidation, but excluding the return of par value upon liquidation) and will be issued in an amount equal to the number of Aurora Holdings Units held by the Aurora Holdings Continuing Members. When an Aurora Holdings Unit is exchanged by an Aurora Holdings Continuing Member for a share of Class A common stock, a share of our Class B common stock will be cancelled.

Over-allotment option to be offered by us		shares. All of the net proceeds we receive from any over-allotment option to be offered by us will be used to acquire additional Aurora Holdings Units and shares of Class B common stock from the Aurora Holdings Continuing Members.

Over-allotment option to be offered by the selling stockholders		shares

Voting Rights		Each share of our Class A common stock entitles its holder to one vote per share, representing an aggregate of percent of the combined voting power of our common stock upon completion of this offering and the application of the net proceeds that we will receive from this offering.

		Each share of our Class B common stock entitles its holder to one vote per share, representing an aggregate of percent of the combined voting power of our common stock upon completion of this offering and the application of the net proceeds that we will receive from this offering.

		All classes of our common stock generally vote together as a single class on all matters submitted to a vote of our stockholders. Upon completion of this offering, our Class B common stock will be held exclusively by the Aurora Holdings Continuing Members.

		See “Description of Capital Stock.”


Exchange		Aurora Holdings Units held by the Aurora Holdings Continuing Members (along with a corresponding number of shares of our Class B common stock) may be exchanged with us for shares of our Class A common stock on a one-for-one basis or, in certain circumstances, an equivalent amount of cash. The Aurora Holdings Continuing Members will hold Aurora Holdings Units, or percent of the outstanding Aurora Holdings Units, following the completion of this offering and the application of the net proceeds that we will receive from this offering.

Use of proceeds		We expect the net proceeds that we will receive from this offering will be approximately $ million based on an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and after giving effect to estimates of certain expenses that we expect to be reimbursed.

		Based on an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, we intend to use $ of the proceeds from this offering, along with TRA Rights, to purchase Aurora Holdings Units and shares of our Class B common stock held by the Aurora Holdings Continuing Members (or $ and Aurora Holdings Units and shares of our Class B common stock if the underwriters exercise their over-allotment option in full).

		We intend to use the remaining proceeds from this offering for working capital and general corporate purposes, which may include future acquisitions.

		We will not receive any of the proceeds from the sale of shares of Class A common stock by the selling stockholders in this offering.

		See “Use of Proceeds.”

Risk Factors		You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our Class A common stock.

Proposed NASDAQ Global Market Symbol		‘‘ARDX”

The number of shares of our Class A common stock that will be outstanding after this offering excludes shares of our Class A common stock reserved for issuance upon the exchange of our Class B common stock and Aurora Holdings Units into Class A common stock.

Unless we indicate otherwise, all information in this prospectus assumes:


	•	consummation of the Reorganization Transactions described under “Prospectus Summary — Reorganization Transactions” and “Organizational Structure;”

	•	that the underwriters do not exercise their option to purchase up to shares of our Class A common stock from us and the selling stockholders to cover over-allotments; and

	•	an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

Summary Historical and Pro Forma
Consolidated Financial and Operating Data

The following table sets forth our summary historical and pro forma consolidated financial data, at the dates and for the periods indicated.

The historical financial data for each of the three years in the period ended December 31, 2009, has been derived from our audited historical consolidated financial statements included elsewhere in this prospectus. The historical financial data for the three months ended March 31, 2009 and 2010 and balance sheet data as of March 31, 2010 have been derived from our unaudited historical condensed consolidated financial statements included elsewhere in this prospectus and include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, that management considers necessary for the fair presentation of the financial information set forth in those statements.

The summary unaudited pro forma condensed consolidated financial data have been derived by the application of pro forma adjustments to our historical consolidated financial statements included elsewhere in this prospectus. The unaudited pro forma condensed consolidated statements of operations data for the year ended December 31, 2009 and the three months ended March 31, 2010 and balance sheet data as of March 31, 2010 give effect to:


	•	our 2009 acquisition of South Texas Dermatopathology Lab, P.A., as if that acquisition occurred January 1, 2009;

	•	our 2010 acquisitions of Bernhardt Laboratories, Inc., Pinkus Dermatopathology Laboratory, P.C., and Pathology Solutions, LLC as if those acquisitions had occurred as of January 1, 2009;

	•	the execution of our new credit facilities;

	•	consummation of the Reorganization Transactions as if they occurred as of March 31, 2010; and

	•	this offering and the use of the net proceeds that we will receive from this offering, as if effective on March 31, 2010 for the unaudited pro forma consolidated balance sheet and January 1, 2009 for the unaudited pro forma consolidated statement of operations.

The summary pro forma financial information is included for illustrative purposes only and may not accurately reflect our results of operations or financial position for the periods and as of the dates described above had the relevant transactions occurred as of these dates. In addition, the summary pro forma financial information is based on certain preliminary estimates which may change materially upon completion of further analysis and is not necessarily indicative of future results.

You should read this summary historical and pro forma consolidated financial data together with our consolidated historical financial statements and the related notes, “Unaudited Pro Forma Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case, included elsewhere in this prospectus.

Aurora Diagnostics Holdings LLC

Summary Consolidated Financial and Operating Data⁽¹⁾


	Year Ended December 31,												Three Months Ended March 31,
										Pro Forma,									Pro Forma,
										As Adjusted									As Adjusted
	2007⁽¹⁾			2008⁽¹⁾			2009⁽¹⁾			2009⁽²⁾			2009⁽¹⁾			2010⁽¹⁾			2010⁽²⁾
	(in thousands, except per share data)

Consolidated Income Statement Data:
Net Revenues	$	63,451		$	157,850		$	171,565		$	213,643		$	40,947		$	46,419		$	49,617

Operating costs and expenses:
Cost of services		27,480			66,382			71,778			90,095			17,186			22,342			23,708
Selling, general and administrative expenses		15,172			33,194			36,854			43,543			9,177			10,820			11,119
Provision for doubtful accounts		2,378			8,037			9,488			10,220			2,305			2,610			2,610
Intangible asset amortization expense		5,721			14,308			14,574			16,018			3,628			3,891			4,001
Management fees		644			1,559			1,778			—			410			476			—
Impairment of goodwill and other intangible assets		—			—			8,031	⁽⁴⁾		8,031	⁽⁴⁾		—			—			—
Acquisition and business development costs		374			676			1,074			1,074			130			298			298
Equity based compensation expense		—			1,164	⁽³⁾		—			—			—			—			—

Total operating costs and expenses		51,769			125,320			143,577			168,981			32,836			40,437			41,736

Income from operations		11,682			32,530			27,988			44,662			8,111			5,982			7,881

Other income (expense):
Interest expense		(7,114	)		(21,577	)		(18,969	)		(17,010	)		(4,791	)		(3,721	)		(4,229	)
Write-off of deferred debt issue costs⁽⁵⁾		(3,451	)		—			—			—			—			—			—
Other income		124			125			28			356			29			(12	)		—

Total other expense, net		(10,441	)		(21,452	)		(18,941	)		(16,654	)		(4,762	)		(3,733	)		(4,229	)

Income before income taxes		1,241			11,078			9,047			28,008			3,349			2,249			3,652
Provision for income taxes⁽⁶⁾		762			408			45			11,203			17			10			1,461

Net income	$	479		$	10,670		$	9,002			16,805		$	3,332		$	2,239			2,191

Income available to noncontrolling interest

Income available to common stockholders										$									$

Income available to common stockholders per common share:
Basic net income per common share										$									$

Diluted net income per common share										$									$

Consolidated operating data:
Number of accessions		619			1,472			1,557			1,903			376			443			460

Other financial data:
Adjusted EBITDA⁽⁸⁾	$	19,086		$	52,066		$	55,931		$	72,271		$	12,847		$	11,449		$	12,983

Aurora Diagnostics Holdings LLC

Summary Consolidated Financial and Operating Data


	March 31, 2010
			Pro Forma,
	Actual⁽¹⁾		As Adjusted⁽⁷⁾
	(in thousands)

Consolidated balance sheet data:
Cash and cash equivalents	$	3,222	$
Total assets		490,999
Working capital, excluding deferred tax items		10,785
Long term debt, including current portion		235,188
Total equity		227,313
Tax receivable arrangement		—


(1)		The summary consolidated financial data for the years ended December 31, 2007, 2008 and 2009 and the three months ended March 31, 2009 and 2010 are that of Aurora Holdings prior to the completion of the Reorganization Transactions, this offering and our recently completed refinancing.
(2)		The pro forma, as adjusted, consolidated income statement data for the year ended December 31, 2009 and the three months ended March 31, 2010 gives effect to the following as if they had occurred January 1, 2009:


	•	our 2009 acquisition of South Texas Dermatopathology Lab, P.A.;

	•	our 2010 acquisitions of Bernhardt Laboratories, Inc., Pinkus Dermatopathology Laboratory, P.C. and Pathology Solutions, LLC;

	•	the execution of our new credit facilities;

	•	the consummation of the Reorganization Transactions; and

	•	the use of the net proceeds that we will receive from this offering.


(3)		During 2008, we adopted a new equity incentive plan, which we refer to as the New Plan, to replace our original equity incentive plan. The New Plan provides awards of membership interest units in Aurora Holdings. These interests are denominated as Class D-1, Class D-2, and Class D-3 units of Aurora Holdings. During 2008, we authorized and issued 4,000 D-1 units, 3,000 D-2 units and 3,000 D-3 units of Aurora Holdings under the New Plan. All membership interest units in Aurora Holdings issued in 2008 were fully vested as of December 31, 2008. We recorded compensation expense of $1.2 million for these awards. There were no other grants under the New Plan. In connection with the Reorganization Transactions, the Class D Units of Aurora Holdings issued under the New Plan will be either exchanged for shares of our Class A common stock or cancelled without consideration.
(4)		As of September 30, 2009, we tested goodwill and intangible assets for potential impairment and recorded a non-cash impairment expense of $8.0 million resulting from a write down of $6.6 million in the carrying value of goodwill and a write down of $1.4 million in the carrying value of other intangible assets. The write-down of the goodwill and other intangible assets related to one reporting unit. Regarding this reporting unit, we believe events occurred and circumstances changed that more likely than not reduced the fair value of the intangible assets and goodwill below their carrying amounts. These events during 2009 consisted primarily of the loss of significant customers present at the acquisition date, which adversely affected the current year and expected future revenues and operating profit of the reporting unit.
(5)		In December 2007, we refinanced our previous credit facilities. As a result, we wrote off $3.5 million of unamortized deferred debt issue costs.
(6)		Aurora Holdings is a Delaware limited liability company taxed as a partnership for federal and state income tax purposes, in accordance with the applicable provisions of the Internal Revenue Code. Accordingly, Aurora Holdings was not generally subject to income taxes. The income attributable to Aurora Holdings was allocated to the members of Aurora Holdings in accordance with the terms of the existing Aurora Holdings limited liability company agreement, which we refer to as the Aurora Holdings LLC Agreement. However, certain of our subsidiaries are corporations, file separate returns and are subject to federal and state income taxes. The historical provision for income taxes for these subsidiaries is reflected in our consolidated financial statements and includes federal and state taxes currently payable and changes in deferred tax assets and liabilities excluding the establishment of deferred tax assets and liabilities related to the acquisitions. The pro forma, as adjusted, estimated provision for income taxes assumes a blended 40 percent effective tax rate, after giving effect to the Reorganization Transactions and was based on the federal and state statutory income tax rates in effect during the respective periods.
(7)		The pro forma, as adjusted, consolidated balance sheet data as of March 31, 2010 gives effect to the following, as if they were effective as of March 31, 2010:


	•	the execution of our new credit facilities;

	•	the consummation of the Reorganization Transactions; and

	•	the use of the net proceeds that we will receive from this offering.


(8)		The following is a reconciliation of net income to Adjusted EBITDA:


													Three Months Ended
	Year Ended December 31,												March 31,
										Pro Forma,								Pro Forma,
										As Adjusted								As Adjusted
	2007			2008			2009			2009			2009			2010		2010
	(in thousands)

Net Income	$	479		$	10,670		$	9,002		$	16,805		$	3,332		$	2,239	$	2,192
Interest expense		7,114			21,577			18,969			17,010			4,791			3,721		4,229
Income taxes		762			408			45			11,203			17			10		1,461
Depreciation and amortization		6,386			16,137			17,060			18,504			4,196			4,693		4,803

EBITDA		14,741			48,792			45,076			63,522			12,336			10,663		12,685
Management fees^(A)		644			1,559			1,778			—			410			476		—
Stock-based compensation		—			1,164			—			—			—			—		—
Unusual charges^(B)(C)(D)		3,825			676			9,105			9,105			130			298		298
Other		(124	)		(125	)		(28	)		(356	)		(29	)		12		—

Adjusted EBITDA, as defined	$	19,086		$	52,066		$	55,931		$	72,271		$	12,847		$	11,449	$	12,983


		Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization (EBITDA), further adjusted to exclude unusual items and other cash or non-cash adjustments permitted by our new credit facilities. We believe that disclosing Adjusted EBITDA provides additional information to investors and lenders, enhancing their understanding of our financial performance and providing them an important financial metric used to evaluate performance in the health care industry and assess compliance with our financial covenants.


		Adjusted EBITDA does not represent net income or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Further, our new credit facilities require that Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

		Adjusted EBITDA is not a recognized measurement under GAAP, and investors should not consider Adjusted EBITDA as a substitute for measures of our financial performance as determined in accordance with GAAP, such as net income and operating income. Because other companies may calculate Adjusted EBITDA differently than we do, Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA has other limitations as an analytical tool when compared to the use of net income, which we believe is the most directly comparable GAAP financial measure, including:


	•	Adjusted EBITDA does not reflect the provision of income tax expense in our various jurisdictions;

	•	Adjusted EBITDA does not reflect the interest expense we incur;

	•	Adjusted EBITDA does not reflect any attribution of costs to our operations related to our investments and capital expenditures through depreciation and amortization charges;

	•	Adjusted EBITDA does not reflect the cost of compensation we provide to our employees in the form of stock option awards; and

	•	Adjusted EBITDA excludes expenses that we believe are unusual or non-recurring, but which others may believe are normal expenses for the operation of a business.


(A)		Management fees related to expenses payable to affiliates. These management fees will terminate along with our management services agreement upon the completion of this offering.


(B)		During 2007, net income included the write-off of previously deferred debt issue costs in connection with the refinancing of our previous credit facilities.


(C)		During 2009, we recorded a non-cash impairment charge of $8.0 million related to goodwill and other intangible assets.
(D)		Unusual charges also includes an add back for acquisition and business development costs as reported in our consolidated statements of operations.

RISK FACTORS

Buying shares of our Class A common stock involves risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the financial statements and the related notes appearing in the back of this prospectus, before deciding to purchase shares of our Class A common stock.

Risks Relating to Our Business

Changes in regulation and policies may adversely affect reimbursement for diagnostic services and could have a material adverse impact on our business.

Reimbursement levels for health care services are subject to continuous and often unexpected changes in policies, and we face a variety of efforts by government payors to reduce utilization and reimbursement for diagnostic testing services. Changes in governmental reimbursement may result from statutory and regulatory changes, retroactive rate adjustments, administrative rulings, competitive bidding initiatives, and other policy changes.

In 2010, the U.S. Congress passed legislation relating to health care reform, including the Patient Protection and Affordable Care Act, or PPACA, and the Health Care and Education Affordability Reconciliation Act of 2010, or HCEARA. While the comprehensive health reform legislation passed by the U.S. Congress and signed into law by the President in 2010 did not adversely affect reimbursement for our anatomic pathology services, this legislation provides for two separate reductions in the reimbursement rates for our clinical laboratory services: a “productive adjustment” (currently estimated to be between 1.1 and 1.4 percent), and an additional 1.75 percent reduction. Each of these would reduce the annual Consumer Price Index-based update that would otherwise determine our reimbursement for clinical laboratory services. The U.S. Congress has considered, at least yearly in conjunction with budgetary legislation, changes to one or both of the Medicare fee schedules under which we receive reimbursement, which include the physician fee schedule and the clinical laboratory fee schedule. Further reductions in reimbursement for Medicare services or changes in policy regarding coverage of tests may be implemented from time to time. A substantial portion of our anatomic pathology services are billed under a single code (CPT 88305) and our revenue and business may be adversely affected if the reimbursement rate associated with that code is reduced. Even when reimbursement rates are not reduced, policy changes add to our costs by increasing the complexity and volume of administrative requirements. Medicaid reimbursement, which varies by state, is also subject to administrative and billing requirements and budget pressures. Recently, state budget pressures have caused states to consider several policy changes that may impact our financial condition and results of operations, such as delaying payments, reducing reimbursement, restricting coverage eligibility and service coverage, and imposing taxes on our services.

Increased internalization of diagnostic testing by our clients or patients, including the use of new testing technologies by our clients or patients, could adversely affect our business.

Our clients, such as referring physicians and hospitals, may internalize diagnostic testing or technologies that have historically been performed by diagnostic laboratory companies like us. Our industry has experienced a recent market trend in which physicians and hospitals perform the technical and/or professional components of their laboratory testing needs in their own offices. If this trend continues or becomes more pronounced and our clients internalize diagnostic testing functions or technologies that we currently perform or use, and we do not develop new or alternative functions or technologies that are attractive to our clients, it may reduce the demand for our diagnostic testing services and adversely affect our business.

In addition, advances in technology may lead to the development of more cost-effective tests that can be performed outside of a commercial laboratory such as:


	•	point-of-care tests that can be performed by physicians in their offices;

	•	tests that can be performed by hospitals in their own laboratories; or

	•	home testing that can be performed by patients in their homes.

Any advance in technology could reduce demand for our services or render them obsolete.

Compliance costs associated with the Clinical Laboratory Improvement Amendments of 1988, or CLIA, make it cost-prohibitive for many physicians to operate clinical laboratories in their offices. However, diagnostic tests approved or cleared by the U.S. Food and Drug Administration, or FDA, for home use are automatically deemed to be “waived” tests under CLIA and may be performed by our referring physicians and their patients with minimal regulatory oversight under CLIA. Test kit manufacturers could seek to increase sales to both our referring physicians and their patients of test kits approved by the FDA for point-of-care testing or home use. Development of such technology and its use by our clients would reduce the demand for our laboratory-based testing services and adversely affect our business.

Failure to timely or accurately bill for our services or collect outstanding payments could have a material adverse effect on our business.

Billing for diagnostic services is complex. We bill numerous payors, including physicians, patients, insurance companies, Medicare, and Medicaid, according to applicable law, billing requirements and, as applicable, contractual arrangements. This complexity is further compounded by the fact that we currently generate bills using multiple billing systems and are subject to rapidly changing requirements for auditing, external compliance, and internal compliance policies and procedures. Furthermore, in the future, we may convert the legacy billing systems of businesses we have acquired to one or more common platforms.

Most of our bad debt expense in 2009, which totaled 5.5 percent of revenues, resulted from the failure of patients to pay their bills, including copayments and deductibles. Failure to timely or correctly bill could lead to lack of reimbursement for services or an increase in the aging of our accounts receivable, which could adversely affect our results of operations. Increases in write-offs of doubtful accounts, delays in receiving payments, potential retroactive adjustments, and penalties resulting from audits by payors would also adversely affect our financial condition. Failure to comply with applicable laws relating to billing governmental health care programs could also lead to various penalties, including exclusion from participation in Medicare or Medicaid programs, asset forfeitures, civil and criminal fines and penalties, and the loss of various licenses, certificates, and authorizations necessary to operate our business, any of which could have a material adverse effect on our business.

Our use of multiple billing systems and the potential conversion of legacy systems of businesses we have acquired may result in inconsistent data, slower collections, exposure to billing compliance violations and unexpected down times for releasing bills for payment.

Non-governmental third-party payors have taken steps to control the utilization and reimbursement of diagnostic services.

We face efforts by non-governmental third-party payors, including health plans, to reduce utilization of diagnostic testing services and reimbursement for diagnostic services. For instance, third-party payors often use the payment amounts under the Medicare fee schedules as a reference in negotiating their payment amounts. As a result, a reduction in Medicare reimbursement rates could result in a reduction in the reimbursements we receive from such third-party payors. Changes in test coverage policies of and reimbursement from other third-party payors may also occur independently from changes in Medicare. Such reimbursement and coverage changes in the past have resulted in reduced prices, added costs and reduced accession volume and have added more complex and new regulatory and administrative requirements.

The health care industry has also experienced a trend of consolidation among health insurance plans, resulting in fewer, larger health plans with significant bargaining power to negotiate fee arrangements with health care providers like us. Some of these health plans, as well as independent physician associations, have demanded that laboratories accept discounted fee structures or assume a portion or all of the financial risk associated with providing diagnostic testing services to their members through capitated payment arrangements. In addition, some health plans have limited the preferred provider organization or point-of-service laboratory network to only a single national laboratory to obtain improved fee-for-service pricing. The increased consolidation among health plans also has increased the potential adverse impact of ceasing to be a contracted provider with any such insurer. See “— Failure to participate as a provider with payors or operating as a non-contracted provider could have a material adverse effect on our business.”

We expect that efforts to reduce reimbursements, impose more stringent cost controls and reduce utilization of diagnostic testing services will continue. These efforts may have a material adverse effect on our business and results of operations.

Changes in payor mix may adversely affect reimbursement for diagnostic services and could have a material adverse impact on our business.

Most of our services are billed to a party other than the physician that ordered the test. In 2007, 2008 and 2009, based on cash collections, we estimate that we received 28 percent, 28 percent and 25 percent, respectively, of our revenues from Medicare and Medicaid. In 2009, based on cash collections, we estimate that 61 percent of our revenues were paid by non-governmental third-party payors, including health plans. If we bill a higher percentage of our services to payors who reimburse at rates lower than our current payors, our results of operations and financial condition would suffer.

Changes in the mix of diagnostic testing services that we provide could negatively impact our net revenue per accession and our profitability.

We provide diagnostic testing services for various anatomic pathology subspecialities. Diagnostic testing services that we perform in certain subspecialties involving clinical lab services, such as women’s health pathology, have lower average net revenue per accession and gross profit percentage than those in other subspecialties. A change in our service mix that resulted in an increase in the percentage of services we perform in women’s health pathology could result in a decrease in our average net revenue per accession and gross profit percentage.

We typically provide both the technical component and the professional component of our diagnostic testing services. If the volume or percentage of accessions for which we perform both the technical component and the professional component of our diagnostic testing services decreases, due to clients choosing to internalize such technical or professional diagnostic services functions or otherwise, it may decrease our average net revenue per accession and gross profit percentage.

Integration of our operations with newly acquired businesses may be difficult and costly.

Since our inception, we have acquired 17 existing diagnostic services businesses. We expect to evaluate potential strategic acquisitions of diagnostic services and other businesses that might augment our existing specialized diagnostic testing services. These acquisitions have involved and could continue to involve the integration of a separate company that previously operated independently and had different systems, processes and cultures. As such, we have not yet completed the integration of several of our past acquisitions. In particular, many of our operations, such as our laboratory information systems and billing systems, are not yet standardized and some aspects of the day-to-day operations of our laboratories continue to be conducted on a decentralized basis.

The process of integrating businesses we acquire may substantially disrupt both our existing businesses and the businesses we acquire. This disruption may divert management from the operation of our business or may cause us to lose key employees or clients. Additionally, we may have difficulty consolidating facilities and infrastructure, standardizing information and other systems and coordinating geographically-separated facilities and workforces, resulting in a decline in the quality of services.

Any past or future acquisitions, and the related integration efforts, may be difficult, costly or unsuccessful. In each case, our existing business and the businesses we acquire may be adversely affected. Even if we are able to successfully integrate businesses we have acquired, we may not be able to realize the benefits that we expect from them.

Businesses we acquire may have significant unknown or contingent liabilities that could adversely impact our operating results.

Businesses we acquire may have unknown or contingent liabilities or liabilities that are in excess of the amounts that we originally estimated. Although we generally seek indemnification from the sellers of businesses we

acquire for matters that are not properly disclosed to us, we may not successfully obtain indemnification. Even in cases where we are able to obtain indemnification, we may be subject to liabilities greater than the contractual limits of our indemnification or the financial resources of the indemnifying party. In the event that we are responsible for liabilities substantially in excess of any amounts recovered through rights to indemnification, this could adversely impact our operating results.

Failure of our IT or communication systems, or the failure of these systems to keep pace with technological advances or changes in regulation and policies related to our IT or communication systems, could adversely impact our business.

Our laboratory operations depend significantly on the uninterrupted performance of our IT and communication systems. Sustained system failures or interruption of our systems in one or more of our laboratories could disrupt our ability to process laboratory requisitions, handle client service, perform testing, provide our reports or test results in a timely manner, or bill the appropriate party for our services.

Our efforts to invest in new or improved IT systems and billing systems may be costly, and require time and resources for implementation. While we have begun implementing a plan to standardize and improve our laboratory information systems and billing systems, we expect that it will take several years to complete full implementation. Our efforts to invest in new or improved IT systems and billing systems may not ultimately be successful, and our failure to properly implement our plan to standardize and improve our laboratory information systems and billing systems could adversely impact our business.

Public and private initiatives to create electronic medical record standards and to mandate standardized coding systems for the electronic exchange of information, including test orders and test results, could require costly modifications to our existing IT systems. We expect that any standards that might be adopted or implemented would allow us adequate time to comply with such standards. However, any failure or delay in implementing standards may result in a loss of clients and business opportunities, which could adversely impact our business.

Failure to adequately safeguard data, including patient data that is subject to regulations related to patient privacy, could adversely impact our business.

The success of our business depends on our ability to obtain, process, analyze, maintain and manage data, including sensitive information such as patient data. If we do not adequately safeguard that information and it were to become available to persons or entities that should not have access to it, our business could be impaired, our reputation could suffer and we could be subject to fines, penalties and litigation. Although we have implemented security measures, our infrastructure is vulnerable to computer viruses, break-ins and similar disruptive problems caused by our clients or others that could result in interruption, delay or cessation of service. Break-ins, whether electronic or physical, could potentially jeopardize the security of confidential client and supplier information stored physically at our locations or electronically in our computer systems. Such an event could damage our reputation, cause us to lose existing clients and deter potential clients. It could also expose us to liability to parties whose security or privacy has been infringed, to regulatory actions by the Centers for Medicare & Medicaid Services, or CMS, part of the United States Department of Health and Human Services, or HHS, or to civil or criminal sanctions. The occurrence of any of the foregoing events could adversely impact our business.

The American Recovery and Reinvestment Act of 2009 imposed additional obligations on health care entities with respect to data privacy and security, including new notifications in case of a breach of privacy and security standards. We are unable to predict the extent to which these new obligations may prove technically difficult, time-consuming or expensive to implement.

Failure to attract and retain experienced and qualified personnel could adversely affect our business.

Our success depends on our ability to attract, retain and motivate experienced anatomic pathologists, histotechnologists, cytotechnologists, skilled laboratory and IT staff, experienced sales representatives and other personnel. Competition for these employees is strong, and if we are not able to attract and retain qualified personnel it would have a material adverse effect on our business.

We are dependent on the expertise of our local medical directors and our executive officers. The loss of these individuals could have a material adverse effect on our business.

Our sales representatives have developed and maintain close relationships with a number of health care professionals, and our specialized approach to marketing our services positions our sales representatives to have a deep knowledge of the needs of the referring physicians they serve. Given the nature of the relationships we seek to develop with our clients, losses of sales representatives may cause us to lose clients.

Changes in medical treatment, reimbursement rates and other market conditions in the dermatopathology market could adversely affect our business.

We derive a significant portion of our revenues from our dermatopathology subspecialty, which makes us particularly sensitive to changes in medical treatment, reimbursement rates and other market conditions in the dermatopathology market. Our revenues are particularly sensitive to changes that affect the number of or reimbursement for dermatopathology-related services. In 2009, we derived approximately 47 percent of our revenues from our dermatopathology subspecialty services, primarily from biopsies of the skin. If there is a significant development in the prevention of skin cancer, or an adverse development in the reimbursement rate for skin biopsies, it could have a material adverse effect on our business.

Failure to adequately scale our infrastructure to meet demand for our diagnostic services or to support our growth could create capacity constraints and divert resources, resulting in a material adverse effect on our business.

Increases in demand for our diagnostic services, including unforeseen or significant increases in demand due to client or accession volume, could strain the capacity of our personnel and infrastructure. Any strain on our personnel or infrastructure could lead to inaccurate test results, unacceptable turn-around times or client service failures. Furthermore, although we are not currently subject to these capacity constraints, if demand increases for our diagnostic services, we may not be able to scale our personnel or infrastructure accordingly. Any failure to handle increases in demand, including increases due to client or accession volumes, could lead to the loss of established clients and have a material adverse effect on our business.

We intend to expand by establishing laboratories in additional geographic markets. In addition to acquisition or development costs, this will require us to spend considerable time and money to expand our infrastructure and to hire and retain experienced anatomic pathologists, histotechnologists, cytotechnologists, skilled laboratory and IT staff, experienced sales representatives, client service associates and other personnel for our additional laboratories. We will also need federal, state and local certifications, as well as supporting operational, logistical and administrative infrastructure. Even after new laboratories are operational, it may take time for us to derive the same economies of scale we have in our existing laboratories. Moreover, we may suffer reduced economies of scale in our existing laboratories as we seek to balance the amount of work allocated to each facility and expand those laboratories. An expansion of our laboratories or systems could divert resources, including the focus of our management, away from our current business.

Failure to effectively continue or manage our strategic and organic growth could cause our growth rate to decline.

Our business strategy includes continuing to selectively acquire existing diagnostic services businesses. Since our inception, we have acquired 17 existing diagnostic services businesses. To continue this strategic growth, we will need to continue to identify appropriate businesses to acquire and successfully undertake the acquisition of these businesses on reasonable terms. Consolidation and competition within our industry, among other factors, may make it difficult or impossible to identify businesses to acquire on a timely basis, or at all. In particular, the competition to acquire independent private labs and pathology groups has increased. In addition to historical competitors such as national lab companies, regional hospital centers and specialty lab companies, a number of private equity firms have recently made initial investments in the laboratory industry and may become potential competitors to our efforts to source new acquisitions. Our inability to continue our strategic growth would cause our growth rate to decline and could have a material adverse effect on our business.

We also seek to continue our organic growth through the expansion of our sales force, the development of de novo laboratories, strategic extension of our operations into markets such as long-term care, and the inclusion of new clinical and molecular tests in our testing menu. Because of limitations in available capital and competition within our industry, among other factors, we may not be able to implement any or all of these organic growth strategies on a reasonable schedule, or at all. Our failure to continue our organic growth would cause our growth rate to decline and could have a material adverse effect on our business.

Our revenues have grown from $3.5 million in 2006 to $171.6 million in 2009. To manage our growth, we must continue to implement and improve our operational and financial systems and to expand, train, manage and motivate our employees. We may not be able to effectively manage the expansion of our operations, and our systems, procedures or controls may not be adequate to support our operations. Our management may not be able to rapidly scale the infrastructure necessary to exploit the market opportunity for our services. Our inability to manage growth could have a material adverse effect on our business.

Failure to participate as a provider with payors or operating as a non-contracted provider could have a material adverse effect on our business.

The health care industry has experienced a trend of consolidation among health care insurers, resulting in fewer, larger insurers with significant bargaining power in negotiating fee arrangements with health care providers like us. Managed care providers often restrict their contracts to a small number of laboratories that may be used for tests ordered by physicians in the managed care provider’s network. If we do not have a contract with a managed care provider, we may be unable to gain those physicians as clients, and it could adversely affect our business.

In cases in which we do contract with a specified insurance company as a participating provider, we are considered “in-network,” and the reimbursement of third-party payments is governed by contractual relationships.

In cases in which we do not have a contractual relationship with an insurance company or we are not an approved provider for a government program, we have no contractual right to collect for our services and such payors may refuse to reimburse us for our services. This could lead to a decrease in accession volume and a corresponding decrease in our revenues. In instances where we are an out-of-network provider, reductions in reimbursement rates for non-participating providers could also adversely affect us. Third-party payors with whom we do not participate as a contracted provider may also require that we enter into contracts, which may have pricing and other terms that are materially less favorable to us than the terms under which we currently operate. While accession volume may increase as a result of these contracts, our revenues per accession may decrease.

Use of our diagnostic services as a non-participating provider also typically results in greater copayments for the patient unless we elect to treat them as if we were a participating provider in accordance with applicable law. Treating such patients as if we were a participating provider may adversely impact results of operations because we may be unable to collect patient copayments and deductibles. In some states, applicable law prohibits us from treating these patients as if we were a participating provider. As a result, referring physicians may avoid use of our services, which could result in a decrease in accession volume and adversely affect revenues.

Our revenues are dependent on us receiving reimbursements from third-party payors and our failure to qualify for or obtain reimbursements from third-party payors could have a material adverse effect on our business.

We receive most of our revenues in the form of reimbursement from third-party payors. For the year ended December 31, 2009, based on cash collections, we derived approximately 61 percent of our revenues from private insurance, including managed care organizations and other healthcare insurance providers. Our reimbursements from private insurance sources are material to our business in the aggregate.

For the year ended December 31, 2009, based on cash collections, we derived approximately 25 percent of our revenues from government payor programs including Medicare and Medicaid. Our reimbursements from government payor programs are material to us. Our business is dependent on our ability to participate in the Medicare program and on the reimbursement rates we receive under the Medicare program. See “Business — Arrangements with Clients and Third-Party Payors” and “— Billing and Reimbursement — Reimbursement.”

Our ability to qualify for or obtain reimbursement from third-party payors is dependent on factors that may include, among other things, our compliance with the terms of applicable agreements with such third-party payors, our compliance with applicable laws, our participation in government payor programs and our satisfaction of necessary billing standards. See “Business — Arrangements with Clients and Third-Party Payors.” Our failure to qualify for or obtain reimbursements from third-party payors could undermine our ability to generate revenues and have a material adverse effect on our business.

Failure to raise additional capital or generate the significant capital necessary to continue our growth could reduce our ability to compete and could harm our business.

We expect that our existing cash and cash equivalents, together with the net proceeds that we will retain from this offering and availability under our new credit facilities, will be sufficient to meet our anticipated cash needs until 2012. After that, we may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests, and the per share value of our Class A common stock could decline. Furthermore, if we engage in debt financing, the holders of debt would have priority over the holders of common stock, and we may be required to accept terms that restrict our ability to incur additional indebtedness, and take other actions that would otherwise be in the interests of our stockholders and force us to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition. If we need additional capital and cannot raise it on acceptable terms, we may not, among other things, be able to:


	•	continue to expand our sales and marketing and research and development organizations;

	•	develop or acquire complementary technologies, services, products or businesses;

	•	expand operations both organically and through acquisitions;

	•	hire, train and retain employees; or

	•	respond to competitive pressures or unanticipated working capital requirements.

Our failure to do any of these things could seriously harm our business, financial condition and results of operations.

The agreement governing our new credit facilities contains, and future debt agreements may contain, various covenants that limit our discretion in the operation of our business.

Our agreement and the related instruments governing borrowings under our new credit facilities contain, and the agreements and instruments governing any future debt agreements of ours may contain, various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios and restrict our ability to:


	•	incur more debt;

	•	redeem or repurchase stock, pay dividends or make other distributions;

	•	make certain investments;

	•	create liens;

	•	enter into transactions with affiliates;

	•	make acquisitions;

	•	merge or consolidate;

	•	transfer or sell assets; and

	•	make fundamental changes in our corporate existence and principal business.

In addition, events beyond our control could affect our ability to comply with and maintain the financial tests and ratios contained in these documents. Any failure by us to comply with or maintain all applicable financial tests

and ratios and to comply with all applicable covenants could result in an event of default with respect to our new term loan and revolving credit facility or future debt agreements. This could lead to the acceleration of the maturity of our outstanding loans and the termination of the commitments to make further extensions of credit. Even if we are able to comply with all applicable covenants, the restrictions on our ability to operate our business at our sole discretion could harm our business by, among other things, limiting our ability to take advantage of financing, mergers, acquisitions and other corporate opportunities.

We may be unable to obtain, maintain or enforce our intellectual property rights and may be subject to intellectual property litigation that could adversely impact our business.

We may be unable to obtain or maintain adequate proprietary rights for our products and services or to successfully enforce our proprietary rights, and we cannot assure you that our products or methods do not infringe the patents or other intellectual property rights of third parties. Infringement and other intellectual property claims and proceedings brought against us, whether successful or not, could result in substantial costs and harm our reputation. Such claims and proceedings can also distract and divert management and key personnel from other tasks important to the success of our business. In addition, intellectual property litigation or claims could force us to do one or more of the following:


	•	cease developing, performing or selling products or services that incorporate the challenged intellectual property;

	•	obtain and pay for licenses from the holder of the infringed intellectual property right, which licenses may not be available on reasonable terms, or at all;

	•	redesign or reengineer our tests;

	•	change our business processes; and

	•	pay substantial damages, court costs and attorneys’ fees, including potentially increased damages for any infringement held to be willful.

In the event of an adverse determination in an intellectual property suit or proceeding, or our failure to license essential technology, our sales could be harmed and/or our costs could increase, which would harm our financial condition.

We have a limited operating history, which may make it difficult to accurately evaluate our business and prospects.

We commenced operations in June 2006. As a result, we have a limited operating history upon which to accurately predict our potential revenue. Our revenues and income potential and our ability to expand our business into additional anatomic pathology specialties and markets is still unproven. As a result of these factors, the future revenues and income potential of our business is uncertain. Although we have experienced significant revenue growth since our inception, we may not be able to sustain this growth. Any evaluation of our business and our prospects must be considered in light of these factors and the risks and uncertainties often encountered by companies in our stage of development. Our profitability may be adversely affected as we expand our infrastructure or if we incur increased selling expenses or other general and administrative expenses. Some of these risks and uncertainties include our ability to:


	•	execute our business model;

	•	create brand recognition;

	•	respond effectively to competition;

	•	manage growth in our operations;

	•	respond to changes in applicable government regulations and legislation;

	•	access additional capital when required; and


	•	attract and retain key personnel.

Current economic conditions, including the current recession in the United States and the worldwide economic slowdown, as well as further disruptions in the financial markets, could adversely impact our operating results and financial condition.

The current economic recession in the United States and worldwide economic slowdown could adversely affect our operating results and financial condition. Among other things, the potential decline in federal and state revenues that may result from these conditions may create additional pressures to contain or reduce reimbursements for our services from Medicare, Medicaid and other government sponsored programs. The increased job losses and elevated unemployment rates in the United States resulting from the recession could result in a smaller percentage of our patients being covered by commercial payors and a larger percentage being covered by lower-paying Medicaid programs. Employers may also begin to select more restrictive commercial plans with lower reimbursement rates. To the extent that payors are adversely affected by a decline in the economy, we may experience further pressure on commercial rates, delays in fee collections and a reduction in the amounts we are able to collect. In addition, if the current turmoil in the financial markets continues, interest rates may increase and it could be more difficult to obtain credit in the future. Any or all of these factors, as well as other consequences of the current economic conditions which currently cannot be anticipated, could adversely impact our operating results and financial condition.

Competition in our industry from existing or new companies and failure to obtain and retain clients could have a material adverse impact on our business.

Our success depends on our ability to obtain and retain clients and maintain accession volume. A reduction in the number of our clients, or in the tests ordered or specimens submitted by our clients, without offsetting increases or growth, could impact our ability to maintain or grow our business and could have a material adverse effect on our business.

While there has been significant consolidation in recent years in the diagnostic testing industry, the industry remains fragmented and highly-competitive both in terms of price and service. We primarily compete with various clinical test providers, anatomic pathology practices, hospital-affiliated laboratories, commercial clinical laboratories and physician-office laboratories. This competition is based primarily on price, clinical expertise, quality of service, client relationships, breadth of testing menu, speed of turnaround of test results, reporting and IT systems, reputation in the medical community and ability to employ qualified personnel. Some of our competitors may have greater technical, financial and other resources than we do. Our failure to successfully compete on any of these factors could result in a loss of clients and adversely affect our ability to grow.

Replication of our business model by competitors may adversely affect growth and profitability. Barriers to entry in anatomic pathology markets include the need to form strong relationships with referring physicians, hire experienced pathologists, make capital investments and acquire IT. These barriers may not be sufficient to prevent or deter new entrants to our market, and competitors could replicate or improve some or all aspects of our business model and cause us to lose market share in the areas where we compete or inhibit our growth, which could have a material adverse effect on our business.

Failure to acquire rights to new technologies, products or tests, or discontinuations or recalls of existing technologies, products or test, could negatively impact our testing volume and net revenues.

The diagnostic testing industry is characterized by rapid changes in technology, frequent introductions of new products and diagnostics tests and evolving industry standards and client demands for new diagnostic technologies. Other companies or individuals, including our competitors, may obtain patents or other property rights that would prevent, limit or interfere with our ability to develop, perform or sell our tests or operate our business or increase our costs. Advances in technology may result in the creation of enhanced diagnostic tools that enable other laboratories, hospitals, physicians, patients or third parties to provide specialized diagnostic services that are superior to ours or more patient-friendly, efficient or cost-effective. These developments may result in a decrease in the demand for our tests or cause us to reduce the prices for our tests. We may be unable to develop or introduce new tests on our own,

which means that our success may depend, in part, on our ability to license new and improved technologies on favorable terms. We may be unable to continue to negotiate acceptable licensing arrangements, and arrangements that we do conclude may not yield commercially successful diagnostic tests. If we are unable to acquire rights to these testing methods at competitive rates, our research and development costs may increase as a result. In addition, if we are unable to develop and introduce, or acquire rights to, new tests, technology and services to expand our testing business, our testing methods may become outdated when compared with our competition and our testing volume and revenues may be materially and adversely affected.

From time to time, manufacturers discontinue or recall reagents, test kits or instruments we use to perform diagnostic services. Such discontinuations or recalls could adversely affect our costs, testing volume and revenues.

Regulatory Risks

New and proposed federal or state health care reform measures could adversely affect our operating results and financial condition.

The U.S. Congress and state legislatures continue to focus on health care reform. Together, the recently-enacted PPACA and HCEARA comprise a broad health care reform initiative. While this legislation does not adversely affect reimbursement for our anatomic pathology services, it provides for two separate reductions in the reimbursement rates for our clinical laboratory services: a “productive adjustment” (currently estimated to be between 1.1 and 1.4 percent) and an additional 1.75 percent reduction. Each of these would reduce the annual Consumer Price Index-based update that would otherwise determine our reimbursement for clinical laboratory services. The effect of the new legislation on the extent of coverage and reimbursement for new services is uncertain. This legislation also provides for increases in the number of persons covered by public and private insurance programs in the U.S.

In addition, several key legislators and appointed and elected officials have proposed significant reform to the federal health care system. Some of the reforms call for universal health care coverage, including the availability of a new government-sponsored health plan, and tax levies on laboratories. A number of states, including California, Colorado, Connecticut, Massachusetts, New York and Pennsylvania, are contemplating significant reform of their health insurance markets. These federal and state proposals are still being debated in the U.S. Congress and various legislatures.

We cannot predict whether the federal and state health care reform legislation that has been enacted will have a material impact on us. Further, we cannot predict whether federal or state governments will enact any additional laws to effect health care reform and, if any such new laws were enacted, what their terms would be and whether or in what ways any new laws would affect us. However, it is possible that new laws could increase our costs, decrease our revenues, expose us to expanded liability or require us to revise the ways in which we conduct our business, any of which could adversely affect our operating results and financial condition.

If we fail to comply with the complex federal, state and local government laws and regulations that apply to our business, we could suffer severe consequences that could adversely affect our operating results and financial condition.

Our operations are subject to extensive federal, state and local government regulations, all of which are subject to change. These government laws and regulations currently include, among other things:


	•	the federal Anti-Kickback Statute, which prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any goods or service for which payment may be made under governmental payor programs such as Medicare and Medicaid;

	•	the federal False Claims Act, which prohibits individuals or entities from knowingly presenting to, or causing to be presented to, the federal government, claims for payment that are false or fraudulent;


	•	the Health Insurance Portability and Accountability Act, or HIPAA, which established comprehensive federal standards with respect to the use and disclosure of protected health information;

	•	the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, which was passed as part of the American Recovery and Reinvestment Act and which strengthens many of the requirements applicable to privacy and security, among other things;

	•	the Stark Law, which prohibits a physician from making a referral to an entity for certain designated health services reimbursed by Medicare or Medicaid if the physician (or a member of the physician’s family) has a financial relationship with the entity and which also prohibits the submission of any claim for reimbursement for designated health services furnished pursuant to a prohibited referral;

	•	the federal Civil Monetary Penalty Law, which prohibits the offering of remuneration or other inducements to beneficiaries of federal health care programs to influence the beneficiaries’ decisions to seek specific governmentally reimbursable items or services or to choose particular providers;

	•	the Clinical Laboratory Improvement Amendments, which requires that laboratories be certified by the federal government or by a federally-approved accreditation agency;

	•	the anti-markup rule, which prohibits a physician or supplier billing the Medicare program from marking up the price of a purchased diagnostic service performed by another physician or supplier who does not “share a practice” with the billing physician or supplier;

	•	state law equivalents of the above, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers;

	•	state laws that prohibit the splitting or sharing of fees between physicians and non-physicians;

	•	state laws that govern the manner in which licensed physicians can be organized to perform and bill for medical services;

	•	the reassignment rules, which preclude Medicare payment for covered services to anyone other than the patient, physician, or other person who provided the service, with limited exceptions; and

	•	state laws that prohibit other specified practices, such as billing an entity that does not have ultimate financial responsibility for the service, waiving coinsurance or deductibles, billing Medicaid a higher charge than the lowest charge offered to another payor, and placing professionals who draw blood, or phlebotomists, in the offices of referring physicians.

We believe that we operate in material compliance with these laws and regulations. However, these laws and regulations are complex and, among other things, practices that are permissible under federal law may not be permissible in all states. In addition, these laws and regulations are subject to interpretation by courts and enforcement agencies. Our failure to comply could lead to civil and criminal penalties, exclusion from participation in Medicare and Medicaid, and possible prohibitions or restrictions on our laboratories’ ability to provide diagnostic services, and any such penalties, exclusions, prohibitions or restrictions could have a material adverse effect on our arrangements with managed care organizations and private payors.


	*If we fail to comply with state corporate practice of medicine laws, we could suffer severe consequences.*

The laws of many states prohibit business corporations, including us and our subsidiaries, from owning corporations that employ physicians, or from exercising control over the medical judgements or decisions of physicians. These laws and their interpretations vary from state to state and are enforced by both the courts and regulatory authorities, each with broad discretion. The manner in which we operate each practice is determined primarily by the corporate practice of medicine restrictions of the state in which the practice is located, other applicable regulations and commercial considerations.

We believe that we are currently in material compliance with the corporate practice of medicine laws in each of the states in which we operate. Nevertheless, it is possible that regulatory authorities or other parties may assert that

we are engaged in the unauthorized corporate practice of medicine. If such a claim were successfully asserted in any jurisdiction, we could be subject to civil and criminal penalties, which could exclude us from participating in Medicare, Medicaid and other governmental health care programs, or we could be required to restructure our contractual and other arrangements.

Failure to comply with complex federal and state laws and regulations related to submission of claims for our services could result in significant monetary damages and penalties and exclusion from the Medicare and Medicaid programs.

We are subject to extensive federal and state laws and regulations relating to the submission of claims for payment for our services, including those that relate to coverage of our services under Medicare, Medicaid and other governmental health care programs, the amounts that may be billed for our services and to whom claims for services may be submitted. Submission of our claims is particularly complex because we provide both anatomic pathology services and clinical laboratory tests, which generally are paid using different reimbursement principles. Our failure to comply with applicable laws and regulations could result in our inability to receive payment for our services or result in attempts by third-party payors, such as Medicare and Medicaid, to recover payments from us that have already been made. Submission of claims in violation of certain statutory or regulatory requirements can result in penalties, including civil money penalties of up to $10,000 for each item or service billed to Medicare in violation of the legal requirement, and exclusion from participation in Medicare and Medicaid. Government authorities may also assert that violations of laws and regulations related to submission of claims violate the federal False Claims Act or other laws related to fraud and abuse, including submission of claims for services that were not medically necessary. We could be adversely affected if it was determined that the services we provided were not medically necessary and not reimbursable, particularly if it were asserted that we contributed to the physician’s referrals of unnecessary services to us. It is also possible that the government could attempt to hold us liable under fraud and abuse laws for improper claims submitted by an entity for services that we performed if we were found to have knowingly participated in the arrangement that resulted in submission of the improper claims.

Our business could be harmed by the loss or suspension of a license or imposition of a fine or penalties under, or future changes in, the law or regulations of the Clinical Laboratory Improvement Amendments or those of Medicare, Medicaid or other federal, state or local agencies.

The diagnostic testing industry is subject to extensive regulation, and many of these statutes and regulations have not been interpreted by the courts. CLIA requires that laboratories be certified by the federal government or by a federally-approved accreditation agency every two years. CLIA mandates specific standards in the areas of personnel qualifications, administration, proficiency testing, patient test management, quality control, quality assurance and inspections. CLIA regulations include special rules applicable to cytology testing, such as pap smears, including workload limits, specialized proficiency testing requirements that apply not just to the laboratory, but also to the individuals performing the tests, specialized personnel standards and quality control procedures. A laboratory may be sanctioned based on its failure to participate in an acceptable proficiency testing program, unsatisfactory performance in proficiency testing or for prohibited activities related to proficiency testing, such as failing to test the proficiency testing samples in the same manner as patient specimens or communicating with other laboratories regarding proficiency testing results. The sanction for failure to comply with CLIA requirements, including proficiency testing violations, may be suspension, revocation or limitation of a laboratory’s CLIA certificate, as well as the imposition of significant fines and criminal penalties. While imposition of certain CLIA sanctions may be subject to appeal, few, if any, such appeals have been successful. A CLIA certificate is necessary to conduct business. As a result, any CLIA sanction or our failure to renew a CLIA certificate could have a material adverse effect on our business. Although each laboratory facility is separately certified by CLIA, if the CLIA certificate of any our laboratories is revoked, CMS could seek revocation of our other laboratories’ CLIA certificates based on their common ownership or operation with the laboratory facility whose certificate was revoked. Some states have enacted analogous state laws that are more strict than CLIA.

Changes in laws and regulations that address billing arrangements for our services could have a material adverse effect on our revenues.

While we do not bill referring physicians for our services when those services are covered under a government program, in some cases, we do, where permissible, bill referring physicians for services that are not covered under a government program. Laws and regulations in several states currently preclude us from billing referring physicians, either by requiring us to bill directly the third-party payor or other person ultimately responsible for payment for the service, or by prohibiting or limiting the referring physician’s or other purchaser’s ability to bill a greater amount than the amount paid for the service. An increase in the number of states whose laws prevent such arrangements could adversely affect us by encouraging physicians to furnish such services directly or by causing physicians to refer services to another laboratory for testing. Currently, Medicare does not require beneficiaries to pay coinsurance for clinical laboratory testing or subject such tests to a deductible. From time to time, legislation has been proposed that would subject diagnostic services to coinsurance and deductibles. Such legislation could be enacted in the future. Legislation subjecting diagnostic services to coinsurance or deductibles could adversely affect our revenues given the anticipated difficulty in collecting such amounts from Medicare beneficiaries. In addition, we could be subject to potential fraud and abuse violations if adequate procedures to bill and collect copayments were not established and followed.

We are increasingly subject to initiatives to recover improper payments and overpayments and such initiatives could result in significant monetary damages and penalties and exclusion from the Medicare and Medicaid programs.

Government payors have increased initiatives to recover improper payments and overpayments. For example, in March 2005, CMS initiated a demonstration project using Recovery Audit Contractors, or RACs, who are paid a contingent fee to detect and correct improper Medicare payments. As part of their duties, RACs collect overpayments from Medicare providers, including those providers who were paid for services that were not medically necessary or were incorrectly coded. Effective January 1, 2010, the RAC program will be operated throughout the United States on a permanent basis, and RACs will then have authority to pursue improper payments made on or after October 1, 2007.


	*Governmental investigations to which we may become subject could have a material adverse effect on our business.*

Governmental investigations of laboratories have been ongoing for a number of years and are expected to continue. In fact, a substantial increase in funding of Medicare and Medicaid program integrity and anti-fraud efforts has been proposed. Investigations of our laboratories, regardless of their outcome, could damage our reputation and adversely affect important business relationships that we have with third parties, as well as have a material adverse effect on our business.

Failure to comply with environmental, health and safety laws and regulations could adversely affect our ability to operate and result in fines, litigation or other consequences.

We are subject to licensing and regulation under numerous federal, state and local laws and regulations relating to the protection of the environment and human health and safety. Our use, generation, manufacture, handling, transportation, storage and disposal of medical specimens, such as human tissue, infectious and hazardous waste, and radioactive materials, as well as the health and safety of our laboratory employees, are covered under these laws and regulations.

In particular, the federal Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for health care employers, including certain laboratories, whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These requirements, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to, and the transmission of, blood-borne pathogens. In addition, the Needlestick Safety and Prevention Act requires, among other things, that we include in our safety programs the evaluation and use of engineering controls such as safety needles if found to be effective at reducing the risk of needlestick injuries in the workplace.

We cannot entirely eliminate the risk of accidental injury, contamination or sabotage from working with hazardous materials or wastes. Our general liability insurance or workers’ compensation insurance policies may not cover damages and fines arising from biological or hazardous waste exposure or contamination. In the event of contamination or injury, we could be held liable for damages or subject to fines in an amount exceeding our resources, and our operations could be suspended or otherwise adversely affected.

Failure to comply with federal, state and local laws and regulations could subject us to denial of the right to conduct business, fines, criminal penalties and/or other enforcement actions which would have a material adverse effect on our business. In addition, the current environmental, health and safety requirements applicable to our business, facilities and employees could be revised to become more stringent, and new laws and requirements could be adopted in the future. Thus, compliance with applicable environmental, health and safety laws and regulations could become both more costly and more difficult in the future.

Failure to comply with the Health Insurance Portability and Accountability Act security and privacy regulations may increase our costs.

HIPAA and related regulations establish comprehensive federal standards with respect to the use and disclosure of protected health information by health plans, health care providers and health care clearinghouses. Additionally, HIPAA establishes standards to protect the confidentiality, integrity and availability of protected health information.

Federal privacy regulations restrict our ability to use or disclose patient identifiable laboratory data, without patient authorization for purposes other than payment, treatment or health care operations, as defined by HIPAA. These privacy and security regulations provide for significant fines and other penalties for wrongful use or disclosure of protected health information, including civil and criminal fines and penalties. We believe we are in substantial compliance with the privacy regulations. However, the documentation and process requirements of the privacy regulations are complex and subject to interpretation and our efforts in this respect are ongoing. Our failure to comply with the privacy regulations could subject us to sanctions or penalties. Although the HIPAA statute and regulations do not expressly provide for a private right of damages, we could also incur damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private information. We have policies and procedures to comply with the HIPAA regulations and state laws. In addition, we must also comply with non-U.S. laws governing the transfer of health care data relating to citizens of other countries.

Changes in regulations or failure to follow regulations requiring the use of “standard transactions” for health care services issued under the Health Insurance Portability and Accountability Act could adversely affect our profitability and cash flows.

Pursuant to HIPAA, the Secretary of HHS has issued final regulations designed to facilitate the electronic exchange of information in certain financial and administrative transactions. HIPAA transaction standards are complex and subject to differences in interpretation by payors. For instance, some payors may interpret the standards to require us to provide certain types of information, including demographic information not usually provided to us by physicians. As a result of inconsistent application of transaction standards by payors or our inability to obtain certain billing information not usually provided to us by physicians, we could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and revenues. Any future requirements for additional standard transactions, such as claims attachments or use of a national provider identifier, could prove technically difficult, time-consuming or expensive to implement.

Our business could be adversely impacted by the Centers for Medicare & Medicaid Services’ adoption of the new coding set for diagnoses.

CMS has adopted a new coding set for diagnosis, commonly known as ICD-10, which significantly expands the coding set for diagnoses. The new coding set is currently required to be implemented by October 1, 2013. We may be required to incur significant expense in implementing the new coding set, and if we do not adequately implement it, our business could be adversely impacted. In addition, if as a result of the new coding set physicians fail to provide appropriate codes for desired tests, we may not be reimbursed for tests we perform.

We may be subject to liability claims for damages and other expenses not covered by insurance that could adversely impact our operating results.

The provision of diagnostic testing services to patients may subject us to litigation and liability for damages based on an allegation of malpractice, professional negligence in the performance of our treatment and related services, the acts or omissions of our employees, or other matters. Our exposure to this litigation and liability for damages increases with growth in the number of our laboratories and tests performed. Potential judgments, settlements or costs relating to potential future claims, complaints or lawsuits could result in substantial damages and could subject us to the incurrence of significant fees and costs. Our insurance may not be sufficient or available to cover these damages, costs or expenses. Our business, profitability and growth prospects could suffer if we face negative publicity or if we pay damages or defense costs in connection with a claim that is outside the scope of any applicable insurance coverage, including claims related to contractual disputes and professional and general liability claims.

Our insurance costs may increase over the next several years, and our coverage may not be sufficient to cover claims and losses.

We maintain a program of insurance coverage against a broad range of risks in our business. In particular, we maintain professional liability insurance, subject to deductibles. The premiums and deductibles under our insurance may increase over the next several years as a result of general business rate increases, coupled with our continued growth. We are unable to predict whether such increases in premiums and deductibles will occur and the amount of any such increases, but such increases could adversely impact our earnings. The liability exposure of operations in the health care services industry has increased, resulting not only in increased premiums, but also in limited liability on behalf of the insurance carriers. Our ability to obtain the necessary and sufficient insurance coverage for our operations upon expiration of our insurance policies may be limited, and sufficient insurance may not be available on favorable terms, if at all. We could be materially and adversely affected by any of the following:


	•	our inability to obtain sufficient insurance for our operations;

	•	the collapse or insolvency of one or more of our insurance carriers;

	•	further increases in premiums and deductibles; and

	•	an inability to obtain one or more types of insurance on acceptable terms.

Risks Related to Our Organization and Structure

We are a holding company and our principal asset after completion of this offering will be our equity interests in Aurora Holdings, and we are accordingly dependent upon distributions from Aurora Holdings to pay dividends, if any, taxes and other expenses.

We are a holding company and, upon completion of the Reorganization Transactions and this offering, our principal asset will be our indirect ownership of equity interests in Aurora Holdings. See “Prospectus Summary — Reorganization Transactions” and “Organizational Structure — Reorganization Transactions.” We have no independent means of generating revenue. We intend to cause Aurora Holdings to make pro rata distributions to its unitholders, including us, in an amount sufficient to cover all applicable taxes payable. We also intend to cause Aurora Holdings to make distributions to us, including for purposes of paying corporate and other overhead expenses and payments under the Tax Receivable Agreement, but our ability to make these distributions will be limited by restrictions in our debt agreements. To the extent that we need funds and Aurora Holdings is restricted from making such distributions under applicable law or regulation or as a result of the terms in our debt agreements, or is otherwise unable to provide such funds, it could adversely affect our liquidity and financial condition.

In addition, we are dependent on our ability to generate revenues through contractual arrangements with our affiliated physician practices. Any restructuring of our contractual and other arrangements with physician practices could result in lower revenues from such practices, increased expenses in the operation of such practices and reduced influence over the business decisions of such practices. Alternatively, some of our existing contracts may not comply with applicable regulations or be unenforceable, which could result in the termination of those contracts and an associated loss of revenue.

We are controlled by our Principal Equityholders whose interest in our business may be different than yours, and certain statutory provisions afforded to stockholders are not applicable to us.

When this offering is completed, our Principal Equityholders will beneficially own shares representing, in aggregate, percent of the combined voting power of our Class A common stock and Class B common stock (or percent if the underwriters exercise their over-allotment option in full) after the completion of this offering and the application of the net proceeds that we will receive from this offering. Specifically, the Summit Partners Equityholders will, in aggregate, beneficially own percent of our common stock immediately following the completion of this offering, the KRG Equityholders will, in aggregate, beneficially own approximately percent of our common stock immediately following the completion of this offering, and our Managing Equityholders will, in aggregate, beneficially own approximately percent of our common stock immediately following the completion of this offering.

Accordingly, our Principal Equityholders can exercise significant influence over our business policies and affairs, including the power to nominate our Board of Directors. In addition, our Principal Equityholders can control any action requiring the general approval of our stockholders, including the adoption of amendments to our certificate of incorporation and bylaws and the approval of mergers or sales of substantially all of our assets. The concentration of ownership and voting power of our Principal Equityholders may also delay, defer or even prevent an acquisition by a third party or other change of control of our company and may make some transactions more difficult or impossible without the support of our Principal Equityholders, even if such events are in the best interests of noncontrolling stockholders. Moreover, this concentration of ownership may make it difficult for stockholders other than our Principal Equityholders to replace management. The concentration of voting power among our Principal Equityholders may have an adverse effect on the price of our Class A common stock.

We have opted out of section 203 of the General Corporation Law of the State of Delaware, or the Delaware General Corporation Law, which, subject to certain exceptions, prohibits a publicly-held Delaware corporation from engaging in a business combination transaction with an interested stockholder for a period of three years after the interested stockholder became such. Therefore, after the lock-up period expires, our Principal Equityholders are able to transfer control of us to a third party by transferring their Class A common stock, which would not require the approval of our Board of Directors or our other stockholders.

Our certificate of incorporation will provide that the doctrine of “corporate opportunity” will not apply against our Principal Equityholders and their respective affiliates in a manner that would prohibit them from investing in competing businesses or doing business with our clients. To the extent they invest in such other businesses, our Principal Equityholders may have differing interests than our other stockholders.

We are party to a Registration Rights Agreement with certain of our Principal Equityholders. Under the Registration Rights Agreement, our Principal Equityholders have certain registration rights with respect to our Class A common stock. See “Certain Relationships and Related Party Transactions — Registration Rights Agreement.”

See “Principal and Selling Stockholders” and “Certain Relationships and Related Party Transactions.”

The U.S. Congress has enacted new legislation that affects the taxation of our Class A common stock held by or through foreign entities.

Recently enacted legislation generally will impose a withholding tax of 30 percent on dividend income from our Class A common stock and the gross proceeds of a disposition of our Class A common stock paid to certain foreign entities after December 31, 2012, unless the foreign entity complies with certain conditions or an exception applies. See “Certain U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders of Common Stock — Recently-Enacted Federal Tax Legislation.”

We will be required to pay an affiliate of our Principal Equityholders for certain tax benefits we may claim (but may never fully realize) as a result of transactions before and after this offering.

Beginning in 2006, certain acquisitions by Aurora Holdings have resulted in an increase in the tax basis of intangible assets, primarily goodwill, which results in tax amortization deductions that would not have been

available in the absence of those acquisitions. The Aurora Holdings Units held by the Aurora Holdings Continuing Members (along with shares of our Class B common stock) will be exchangeable in the future for cash or shares of our Class A common stock. These future exchanges are likely to result in tax basis adjustments to the assets of Aurora Holdings, which adjustments would also be allocated to us. The existing tax basis and the anticipated tax basis adjustments are expected to reduce the amount of tax that we would otherwise be required to pay in the future.

In connection with this offering, Aurora Diagnostics, Inc. will enter into the Tax Receivable Agreement with ARDX Sub, Aurora Holdings and the Tax Receivable Entity that will provide for the payment by Aurora Diagnostics Inc. to the Tax Receivable Entity of 85 percent of certain cash tax savings, if any, in U.S. federal, state, local and foreign income tax realized by Aurora Diagnostics Inc. after the completion of this offering as a result of:


	•	favorable tax attributes associated with amortizable goodwill and other intangibles held by Aurora Holdings and created by its previous acquisitions;

	•	any step-up in tax basis in our share of Aurora Holdings’ assets resulting from:


	•	the acquisition by us of Aurora Holdings Units from the Aurora Holdings Continuing Members in exchange for shares of our Class A common stock or cash, or

	•	payments under the Tax Receivable Agreement to the Tax Receivable Entity; and


	•	tax benefits related to imputed interest deemed to be paid by us as a result of the Tax Receivable Agreement.

The actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of exchanges by the Aurora Holdings Continuing Members, the price of our Class A common stock at the time of the exchange, the extent to which such exchanges are taxable, the amount and timing of the taxable income we generate in the future and the tax rate then applicable and the portion of our payments under the Tax Receivable Agreement constituting imputed interest or amortizable basis.

The payments we are required to make under the Tax Receivable Agreement could be substantial. We expect that, as a result of the amount of the increases in the tax basis of the tangible and intangible assets of Aurora Holdings, assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize in full the potential tax benefit described above, future payments under the Tax Receivable Agreement in respect of the existing tax attributes will aggregate $ and range from approximately $ to $ per year over the next years. These amounts reflect only the cash tax savings attributable to current tax attributes resulting from past acquisitions described above as well as from the Reorganization Transactions. Future payments under the Tax Receivable Agreement in respect of subsequent acquisitions of Aurora Holdings Units would be in addition to these amounts and would, if such exchanges took place at $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, be of substantial magnitude.

In addition, although we do not believe that the Internal Revenue Service, or IRS, would challenge the tax basis increases or other benefits arising under the Tax Receivable Agreement, the Tax Receivable Entity will not reimburse or indemnify us for any payments previously made if such tax basis increases or other tax benefits are subsequently disallowed or for any other claims made by the IRS, except that excess payments made to the Tax Receivable Entity will be netted against payments otherwise to be made, if any, after our determination of such excess. As a result, in such circumstances, we could make payments under the Tax Receivable Agreement that are greater than our cash tax savings.

Because we are a holding company with no operations of our own, our ability to make payments under the Tax Receivable Agreement is dependent on the ability of Aurora Holdings and its subsidiaries to make distributions to us. Our debt agreements will restrict the ability of our subsidiaries to make distributions to us under some circumstances, which could affect our ability to make payments under the Tax Receivable Agreement. More specifically, we will be able to receive distributions to make payments under the Tax Receivable Agreement with respect to current year cash tax savings, but such distributions will not be increased on account of any lump sum payment arising under the Tax Receivable Agreement. To the extent that we are unable to make payments under the Tax Receivable Agreement because of such restrictions, such payments will be deferred and will accrue interest until paid.

Under the terms of the Tax Receivable Agreement, certain events may cause the acceleration or modification of our obligation to make payments to the Tax Receivable Entity. In the event of an adverse change in tax law or if we choose to terminate the Tax Receivable Agreement (with the consent of our independent directors), we would be required to pay a lump sum amount in lieu of the estimated future payments otherwise provided for in the Tax Receivable Agreement. The lump sum amount would be based on assumptions regarding tax rates and would be calculated based on a present value of the total amount otherwise payable under the Tax Receivable Agreement. If the assumptions used turn out to be false, we may pay more or less than the 85 percent of the cash tax savings that would have been realized by us. Furthermore, in the event of a change of control, our successor’s obligations under the Tax Receivable Agreement would be based on the assumption that the cash tax savings to us were realized in full. See “Certain Relationships and Related Party Transactions — Tax Receivable Agreement.”

Risks Related to This Offering

We have broad discretion in the use of the net proceeds that we will receive from this offering and may not use them in a manner in which our stockholders would consider appropriate.

A portion of the net proceeds that we will receive from this offering will be used to acquire Aurora Holdings Units (and accompanying shares of our Class B common stock) from the Aurora Holdings Continuing Members, but we cannot specify with certainty the particular uses of the remaining net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the remaining net proceeds that we will receive from this offering, including for any of the purposes described under the heading “Use of Proceeds” included elsewhere in this prospectus. Our stockholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds that we will receive from this offering. The failure by our management to apply these funds effectively could have a material adverse effect on our business. Pending their use, we may invest the net proceeds that we will receive from this offering in a manner that does not produce income or that loses value.

We may become involved in securities class action litigation that could harm our reputation and business.

The public equities markets intermittently experience significant price and volume fluctuations that have affected the market prices of shares of diagnostic services companies like ours. Market fluctuations may cause the price of our stock to decline. In the past, public companies have often been subject to securities class action litigation following a broad decline in the market price of their securities. This risk is especially relevant for us because diagnostic services companies have experienced significant stock price volatility in recent years. We may become involved in this type of litigation in the future. Litigation often is lengthy and costly and may divert management’s attention and resources, which could adversely affect our business.

Failure to manage increased costs, including those related to company compliance programs, as a result of operating as a public company may have an adverse effect on our business.

As a public company, we will incur significant additional administrative, legal, accounting and other expenses beyond those of a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and the NASDAQ Global Market in the past several years have imposed numerous additional requirements on public companies. These requirements have included the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We will need to devote significant resources to deal with these public company-associated requirements, including compliance programs, investor relations and financial reporting obligations. These rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. As a public company, it will be more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. If we are not able to comply with the requirements of the Sarbanes-Oxley Act of 2002 or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be significant deficiencies or material weaknesses, the market price of our Class A common stock could decline. We could also be subject to sanctions or

investigations by the NASDAQ Global Market, the SEC or other regulatory authorities, which could adversely affect our reputation, results of operations, and financial condition.

Failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business.

As a public company, we will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which will require annual management assessments of the effectiveness of our internal control over financial reporting. Our independent registered public accounting firm will also be required to deliver a report providing its own assessment of the effectiveness of our internal control over financial reporting. During the course of our testing, we may identify deficiencies that we may not be able to remediate in time to meet our deadline for compliance with Section 404. We will first be required to comply with the requirements of Section 404 for our fiscal year ended December 31, 2011. We also may not be able to conclude on an ongoing basis that our internal control over financial reporting is effective in accordance with Section 404, and our independent registered public accounting firm may not be able to or willing to agree with our assessment of the effectiveness of our internal control over financial reporting. Failure to achieve and maintain an effective internal control environment could harm our operating results, cause us to fail to meet our reporting obligations or require that we restate our financial statements for prior periods, any of which could cause a decline in the market price of our Class A common stock. Testing and maintaining internal control over financial reporting will also involve significant costs and could divert management’s attention from other matters that are important to our business.

Provisions in our certificate of incorporation and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:


	•	a classified board of directors;

	•	limitations on the removal of directors;

	•	advance notice requirements for stockholder proposals and nominations;

	•	the inability of stockholders to act by written consent or to call special meetings; and

	•	the ability of our Board of Directors to designate the terms of and issue new series of preferred stock without stockholder approval.

The affirmative vote of the holders of at least two-thirds of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our Board of Directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least two-thirds of our shares of capital stock entitled to vote.

If an active, liquid trading market for our Class A common stock does not develop, you may not be able to sell your shares quickly or at or above the initial offering price.

Prior to this offering, there has not been a public market for our Class A common stock. An active and liquid trading market for our Class A common stock may not develop or be sustained following the completion of this offering. You may not be able to sell your shares quickly, at or above the initial offering price or at all if trading in our stock is not active. The initial public offering price may not be indicative of prices that will prevail in the trading market. See “Underwriters” for more information regarding the factors that will be considered in determining the initial public offering price.

If you purchase shares of our Class A common stock in this offering, you will suffer immediate and substantial dilution of your investment and may suffer dilution in the future.

Purchasers of our Class A common stock in this offering will pay a price per share that substantially exceeds the per share value of our tangible assets after subtracting our liabilities and the per share price paid by our existing stockholders. Accordingly, if you purchase shares at an assumed initial public offering price of $ per share, you will experience immediate and substantial dilution of $ per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering at the assumed initial public offering price and the public offering price of $ per share. In addition, purchasers of our Class A common stock in this offering will have contributed approximately percent of the aggregate price paid by all purchasers of our stock but will own only approximately percent of our Class A common stock outstanding after this offering. In the future, we may also acquire other companies or assets, raise additional needed capital or finance strategic alliances by issuing equity, which may result in additional dilution to you.

If equity research analysts do not publish research or reports about our business, or if they issue unfavorable commentary or downgrade our Class A common stock, the price of our Class A common stock could decline.

The trading market for our Class A common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts or the content and opinions included in their reports. Securities analysts may elect not to provide research coverage of our Class A common stock after the completion of this offering, and such lack of research coverage may adversely affect the market price of our Class A common stock. The price of our stock could decline if one or more equity research analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more equity research analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

Purchasers of our Class A common stock could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. Investors may not be able to sell their Class A common stock at or above the initial public offering price. The market price for our Class A common stock may be influenced by many factors, including:


	•	changes in health care coverage or reimbursement guidelines and amounts, including health care reimbursement reform and cost-containment measures implemented by government agencies;

	•	changes in the structure of health care payment systems;

	•	variations in deductible and coinsurance amounts;

	•	regulatory developments affecting the health care or diagnostic services industry;

	•	our failure to comply with applicable regulations or increased investigative or enforcement initiatives by governmental and other third-party payors;

	•	changes in the payor mix or the mix or cost of our specialized diagnostic services;

	•	the timing and volume of patient orders and seasonality of our business;

	•	the timing and cost of our sales and marketing efforts;

	•	litigation involving our company, our industry, or both;

	•	the departure of key personnel;

	•	our ability to continue to add new laboratories;

	•	future sales of our Class A common stock;

	•	variations in our financial results or those of companies that are perceived to be similar to us;


	•	changes in market valuations of companies similar to ours;

	•	changes in recommendations by securities analysts and investors’ perceptions of us;

	•	changes in our capitalization, including future issuances of our Class A common stock or the incurrence of additional indebtedness; and

	•	general economic, industry and market conditions.

Shares eligible for future sale by existing stockholders may adversely affect our stock price.

Sales of a substantial number of shares of our Class A common stock in the public market could occur at any time, particularly after the expiration of the lock-up agreements described in the “Underwriters” section of this prospectus. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our Class A common stock.

After the closing of this offering, we will have outstanding shares of our Class A common stock, after giving effect to the sale of shares of our Class A common stock offered by us and the selling stockholders in this offering at a purchase price equal to the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discount and commissions and offering expenses payable by us.

This also includes the shares that we are selling in this offering, which may be resold in the public market immediately. Of the remaining shares, shares are currently restricted as a result of securities laws or lock-up agreements but will be available for resale in the public market as described in the “Shares Eligible for Future Sale” section of this prospectus.

Our Principal Equityholders own approximately shares of our Class A common stock or approximately percent of our outstanding Class A common stock. If the Aurora Holdings Continuing Members exchanged all of their Aurora Holdings Units (and accompanying shares of our Class B common stock) for shares of our Class A common stock, the Aurora Holdings Continuing Members would hold an additional shares of our Class A common stock, or approximately percent of our outstanding Class A common stock in the aggregate. All of the shares held by our Principal Equityholders may be sold without complying with the registration provisions of the Securities Act, as amended, or the Securities Act, upon satisfying the conditions of Rule 144 of the Securities Act. The sale of shares by these Principal Equityholders under Rule 144 may have an adverse affect on the market price of our Class A common stock and may inhibit our ability to manage subsequent equity or debt financing.

If a large number of shares of our Class A common stock or securities convertible into our Class A common stock are sold in the public market after they become eligible for sale, the sales could reduce the trading price of our Class A common stock and impede our ability to raise future capital.

We have not paid cash dividends and do not expect to pay dividends in the future, which means that you may not be able to realize the value of our shares except through sale.

Although Aurora Holdings has made tax and other distributions to its members in accordance with the Aurora Holdings LLC Agreement, we have never declared or paid cash dividends. We currently expect to retain earnings for our business and do not anticipate paying dividends on our Class A common stock at any time in the foreseeable future. Our Board of Directors will decide whether to pay dividends on our Class A common stock from time to time in the exercise of its business judgment. Because we do not anticipate paying dividends in the future, the only opportunity to realize the value of our Class A common stock will likely be through an appreciation in value and a sale of those shares. There is no guarantee that shares of our Class A common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives for future operations, are forward-looking statements. The words “believe,” “may,” “might,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan,” “could,” “would” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. We caution the forward-looking statements in this prospectus are subject to a number of known and unknown risks, uncertainties and assumptions that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In addition to the risks described in “Risk Factors,” factors that could contribute to these differences include, among other things:


	•	changes in medical treatment or reimbursement rates or utilization for our anatomic pathology markets;

	•	competition for our diagnostic services, including the internalization of testing functions and technologies by our clients;

	•	changes in payor regulations, policies or payor mix;

	•	the anticipated benefits from acquisitions not being fully realized or not being realized within the expected time frames;

	•	disruptions or failures of our IT solutions or infrastructure;

	•	loss of key executives and technical personnel;

	•	the failure to maintain relationships with clients, including referring physicians and hospitals, and with payors;

	•	covenants in our debt agreements;

	•	our substantial amount of indebtedness;

	•	the protection of our intellectual property;

	•	general economic, business or regulatory conditions affecting the health care and diagnostic testing services industries;

	•	federal or state health care reform initiatives;

	•	violation of, failure to comply with, or changes in federal and state laws and regulations related to, submission of claims for our services, fraud and abuse, patient privacy, and billing arrangements for our services;

	•	attainment of licenses required to test patient specimens from certain states or the loss or suspension of licenses;

	•	control by our Principal Equityholders;

	•	payments under the Tax Receivable Agreement;

	•	compliance with certain corporate governance requirements and costs incurred in connection with becoming a public company;

	•	failure to establish and maintain internal controls over financial reporting; and

	•	the other factors discussed under the heading “Risk Factors” and elsewhere in this prospectus.

Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time-to-time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on

our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or changes in our expectations.

The forward-looking statements in this prospectus speak only as of the date of this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations, or prospects may have changed since that date. Neither the delivery of this prospectus nor the sale of the common shares means that information contained in this prospectus is correct after the date of this prospectus. Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements, the risk factors or other information described in this prospectus, whether as a result of new information, future events, changed circumstances or any other reason after the date of this prospectus.

The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act do not protect any statements we make in connection with this offering.

This prospectus also contains market data related to our business and industry. These market data include projections that are based on a number of assumptions. While we believe these assumptions to be reasonable and sound as of the date of this prospectus, if these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial condition and the market price of our Class A common stock.

ORGANIZATIONAL STRUCTURE

Structure Prior to the Reorganization Transactions

We were incorporated in Delaware on April 23, 2010. We are a holding company, and our principal asset after the completion of this offering will be our indirect equity interest in Aurora Holdings. We have not engaged in any business or other activities except for activities in contemplation of this offering. We currently expect that our only business or other activities will be our indirect investment in Aurora Holdings and our participation in the Reorganization Transactions. Aurora Holdings and its subsidiaries have historically conducted the business described in this prospectus. Following the completion of this offering and the Reorganization Transactions, we expect to conduct our business through Aurora Holdings and its subsidiaries.

Aurora Holdings was organized in 2006 as a limited liability company to act as a holding company for Aurora Diagnostics, LLC and our other operating subsidiaries. Aurora Holdings was initially capitalized by affiliates of Summit Partners, affiliates of GSO Capital Partners and members of our senior management team. In June 2009, GSO Capital Partners’ equity interest in Aurora Holdings was purchased by an affiliate of KRG Capital Partners.

We are authorized to issue two classes of common stock: Class A common stock and Class B common stock. Each share of the Class A common stock and Class B common stock provides the holder with one vote on all matters submitted to a vote of stockholders; however, the holders of Class B common stock do not have any of the economic rights (including rights to dividends and distributions upon liquidation, but excluding the return of the par value on liquidation) provided to holders of Class A common stock. All shares of our common stock generally vote together, as a single class, on all matters submitted to a vote of stockholders. Prior to giving effect to the Reorganization Transactions, all of our outstanding common stock is and will be held by James C. New, our Chairman, Chief Executive Officer and President.

Prior to the Reorganization Transactions, Aurora Holdings had 131,382 outstanding membership interests in eight classes, including 21,382 Class A-1 Units, 85,000 Class A Units, 10,000 Class B Units, 5,000 Class C Units, 4,000 Class D-1 Units, 3,000 Class D-2 Units, 3,000 Class D-3 Units and Class X capital of $7.1 million. Prior to giving effect to the Reorganization Transactions, the Aurora Holdings Units are owned as follows:


	•	the Summit Partners Equityholders currently own 51 percent of the economic interest in Aurora Holdings;

	•	the KRG Equityholders currently own 34 percent of the economic interest in Aurora Holdings; and

	•	the Management Equityholders currently own 15 percent of the economic interest in Aurora Holdings.

The diagram below depicts the organizational structure of Aurora Holdings prior to the Reorganization Transactions.

Reorganization Transactions

In connection with this offering, we will enter into the Reorganization Transactions. As part of the Reorganization Transactions:


	•	We will form ARDX Sub and certain entities organized and controlled, respectively, by the Summit Partners Equityholders and the KRG Equityholders will merge with and into ARDX Sub, and ARDX Sub will be the surviving entity in the merger and will hold all of the Aurora Holdings Units previously owned by those entities; the stockholders of each of those entities will receive in the merger an aggregate of shares of our Class A common stock and TRA Rights;

	•	ARDX Sub will acquire additional Aurora Holdings Units from entities organized and controlled by the Summit Partners Equityholders in exchange for shares of our Class A common stock and TRA Rights;

	•	Aurora Holdings will enter into the Second Amended and Restated Aurora Holdings LLC Agreement such that all of its outstanding Class A-1 Units, Class A Units, Class B Units, Class C Units, Class D-1 Units, Class D-2 Units, Class D-3 Units and Class X capital will be reclassified as Aurora Holdings Units (all of which will be of a single class), and the Aurora Holdings Continuing Members will also receive rights to distributions that are calculated in a manner that is similar to the TRA Rights under the Second Amended and Restated Aurora Holdings LLC Agreement;

	•	ARDX Sub will acquire all business and operational control of Aurora Holdings, and an immaterial amount of cash, from the Aurora Holdings Continuing Members in exchange for newly-issued shares of our Class B common stock;

	•	Certain of the Summit Partners Equityholders and the KRG Equityholders and all of the Management Equityholders will form the Tax Receivable Entity;

	•	Certain of the Summit Partners Equityholders and the KRG Equityholders and all of the Management Equityholders will contribute TRA Rights for interests in the Tax Receivable Entity, and we, ARDX Sub and Aurora Holdings will enter into the Tax Receivable Agreement with the Tax Receivable Entity; and

	•	We will use a portion of the net proceeds that we will receive from this offering to acquire, through ARDX Sub, a portion of the Aurora Holdings Units (and a corresponding number of shares of Class B common stock) held by the Aurora Holdings Continuing Members in exchange for cash and TRA Rights.

All of the Reorganization Transactions will be consummated immediately prior to the closing of this offering.

The diagram below depicts our organizational structure immediately prior to this offering after giving effect to the Reorganization Transactions.


(1)		The Summit Partners Equityholders will hold percent of the Aurora Holdings Units.

(2)		The Summit Partners Equityholders will hold percent of our Class A common stock.

(3)		The Summit Partners Equityholders will hold percent of our Class B common Stock.

(4)		The KRG Equityholders will hold percent of our Class A common stock.

(5)		The Management Equityholders will hold percent of our Class B common stock.

(6)		The Management Equityholders will hold percent of the Aurora Holdings Units.

(7)		We will hold 100 percent of ARDX Sub common stock.

(8)		ARDX Sub will hold percent of the Aurora Holdings Units.

See “— Holding Company Structure and Tax Receivable Agreement” and “Certain Relationships and Related Party Transactions.”

Effect of the Reorganization Transactions and this Offering

The Reorganization Transactions are intended to create a corporate holding company that will facilitate public ownership of, and investment in, us.

As part of this offering, the Summit Partners Equityholders and KRG Equityholders will sell shares of our Class A common stock. We will not receive any of the proceeds from the sale of shares of our Class A common stock in this offering by the selling stockholders. Immediately following the completion of this offering, we will use a portion of the net proceeds that we will receive from this offering, along with TRA Rights, to purchase shares of our

Class B common stock and an equal number of Aurora Holdings Units from the Aurora Holdings Continuing Members. This will further reduce the interest of the Aurora Holdings Continuing Members in us.

Upon completion of the Reorganization Transactions, this offering and the application of the net proceeds that we will receive from this offering, our Class A common stock will be held as follows:


	•	Our public stockholders will hold an aggregate of shares of our Class A common stock (or shares if the underwriters exercise their over-allotment option in full), representing percent of the combined voting power in us (or percent if the underwriters exercise their over-allotment option in full) and percent of the economic interest in us (or percent if the underwriters exercise their over-allotment option in full);

	•	Certain Summit Partners Equityholders will hold an aggregate of shares of our Class A common stock (or shares if the underwriters exercise their over-allotment option in full), representing percent of the combined voting power in us (or percent if the underwriters exercise their over-allotment option in full) and percent of the economic interest in us (or percent if the underwriters exercise their over-allotment option in full);

	•	The KRG Equityholders will hold an aggregate of shares of our Class A common stock (or shares if the underwriters exercise their over-allotment option in full), representing percent of the combined voting power in us (or percent if the underwriters exercise their over-allotment option in full) and percent of the economic interest in us (or percent if the underwriters exercise their over-allotment option in full); and

	•	The Management Equityholders will hold no shares of our Class A common stock.

Upon completion of the Reorganization Transactions, this offering and the application of the net proceeds that we will receive from this offering, our Class B common stock will be held as follows:


	•	Certain of the Summit Partners Equityholders will hold an aggregate of shares of our Class B common stock (or shares if the underwriters exercise their over-allotment in full), representing percent of the combined voting power in us (or percent if the underwriters exercise their over-allotment in full) and none of the economic interest in us; and

	•	The KRG Equityholders will hold no shares of our Class B common stock; and

	•	The Management Equityholders will hold an aggregate of shares of our Class B common stock (or shares if the underwriters exercise their over-allotment in full), representing percent of the combined voting power in us (or percent if the underwriters exercise their over-allotment in full) and none of the economic interest in us.

Upon completion of the Reorganization Transactions, this offering and the application of the net proceeds that we will receive from this offering, the Aurora Holdings Units will be held as follows:


	•	We will indirectly, through ARDX Sub, be the sole managing member of Aurora Holdings, will have all business and operational control of Aurora Holdings, and will indirectly hold an aggregate of Aurora Holdings Units (or Aurora Holdings Units if the Underwriters exercise their over-allotment in full), representing 100 percent of the voting power in Aurora Holdings and percent of the economic interest in Aurora Holdings (or percent if the Underwriters exercise their over-allotment in full). We will consolidate the financial results of Aurora Holdings, and our net income (loss) will be reduced by a noncontrolling interest expense to reflect the entitlement of the Aurora Holdings Continuing Members to a portion of Aurora Holdings’ net income (loss);

	•	Certain of the Summit Partners Equityholders, will hold an aggregate of Aurora Holdings Units (or Aurora Holdings Units if the underwriters exercise their over-allotment in full), representing none of the voting power in Aurora Holdings and percent of the economic interest in Aurora Holdings (or percent if the underwriters exercise their over-allotment in full);

	•	The KRG Equityholders will hold no Aurora Holdings Units; and

	•	The Management Equityholders will hold an aggregate of Aurora Holdings Units (or Aurora Holdings Units if the underwriters exercise their over-allotment in full), representing none of the voting


		power in Aurora Holdings and percent of the economic interest in Aurora Holdings (or percent if the underwriters exercise their over-allotment in full).

The diagram below depicts our organizational structure after giving effect to the Reorganization Transactions and after giving effect to this offering and the application of the net proceeds that we will receive from this offering.


(1)		The Summit Partners Equityholders will hold percent of the Aurora Holdings Units.

(2)		The Summit Partners Equityholders will hold percent of our Class A common stock.

(3)		The Summit Partners Equityholders will hold percent of our Class B common stock.

(4)		Public stockholders will hold percent of our Class A common stock.

(5)		The KRG Equityholders will hold percent of our Class A common stock.

(6)		The Management Equityholders will hold percent of our Class B common stock.

(7)		The Management Equityholders will hold percent of the Aurora Holdings Units.

(8)		We will hold 100 percent of ARDX Sub common stock.

(9)		ARDX Sub will hold percent of the Aurora Holdings Units.

Holding Company Structure and Tax Receivable Agreement

We are a holding company and, immediately after the consummation of the Reorganization Transactions and the completion of this offering, our principal asset will be our indirect interest in Aurora Holdings. We do not intend to list our Class B common stock on any stock exchange.

The Tax Receivable Entity will be formed with our Principal Equityholders holding its equity interests. Aurora Diagnostics, Inc. will enter into the Tax Receivable Agreement with ARDX Sub, Aurora Holdings and the Tax Receivable Entity that will provide for the payment by Aurora Diagnostics, Inc. to the Tax Receivable Entity of

85 percent of certain cash tax savings, if any, in U.S. federal, state, local and foreign income tax realized by Aurora Diagnostics, Inc. after the completion of this offering as a result of:


	•	favorable tax attributes associated with amortizable goodwill and other intangibles held by Aurora Holdings and created by its previous acquisitions;

	•	any step-up in tax basis in our share of Aurora Holdings’ assets resulting from:


	•	the acquisition by us of Aurora Holdings Units from the Aurora Holdings Continuing Members in exchange for shares of our Class A common stock or cash, or

	•	payments under the Tax Receivable Agreement to the Tax Receivable Entity; and


	•	tax benefits related to imputed interest deemed to be paid by us as a result of the Tax Receivable Agreement.

We are entering into the Tax Receivable Agreement because favorable tax attributes have been or will be made available to us as a result of transactions before and after the offering. Our Principal Equityholders believe that the value of these tax attributes should be considered in determining the value of their contribution to us. As it may be difficult to determine the present value of these tax attributes with a reasonable level of certainty, the Tax Receivable Agreement with the Tax Receivable Entity will obligate Aurora Diagnostics, Inc. to make payments to the Tax Receivable Entity of 85 percent of certain cash tax savings, if any, in U.S. federal, state, local and foreign income tax realized by Aurora Diagnostics, Inc. as a result of these attributes. Aurora Diagnostics, Inc. will retain the benefit of the remaining 15 percent of these certain cash tax savings.

In addition, future exchanges of Aurora Holdings Units for shares of our Class A common stock or cash, as well as payments under the Tax Receivable Agreement, will produce additional favorable tax attributes to us, which would not be available in the absence of such exchanges. The Tax Receivable Agreement therefore will obligate Aurora Diagnostics, Inc. to make payments to the Tax Receivable Entity of 85 percent of certain cash tax savings, if any, realized by Aurora Diagnostics, Inc. as a result of those additional tax attributes. Aurora Diagnostics, Inc. will also retain the benefit of the remaining 15 percent of these additional certain cash tax savings.

Although we do not believe that the IRS would challenge the tax basis increases or other benefits arising under the Tax Receivable Agreement, the Tax Receivable Entity will not reimburse or indemnify us for any payments previously made if such tax basis increases or other tax benefits are subsequently disallowed or for any other claims made by the IRS, except that excess payments made to the Tax Receivable Entity will be netted against payments otherwise to be made, if any, after our determination of such excess. As a result, in such circumstances, we could make payments to the Tax Receivable Entity under the Tax Receivable Agreement that are greater than our cash tax savings. See “Certain Relationships and Related Party Transactions — Tax Receivable Agreement.”

As a member of Aurora Holdings, ARDX Sub will incur U.S. federal, state, local and foreign income taxes on its allocable share of any net taxable income of Aurora Holdings. As will be authorized by the Second Amended and Restated Aurora Holdings LLC Agreement and to the extent permitted under our debt agreements, we intend for our subsidiary to cause Aurora Holdings to continue to distribute cash to its members (which, after consummation of the Reorganization Transactions and the completion of this offering, will consist of ARDX Sub and the Aurora Holdings Continuing Members) at least to the extent necessary to provide sufficient funds to each member to pay its tax liabilities, if any, with respect to the taxable income of Aurora Holdings.

In addition, the Second Amended and Restated Aurora Holdings LLC Agreement will permit Aurora Holdings to make cash distributions to its members (which, after consummation of the Reorganization Transactions and the completion of this offering, will consist of ARDX Sub and the Aurora Holdings Continuing Members) that are calculated in a manner similar to the TRA Rights, which we refer to as TRA Distributions. These TRA Distributions will enable us to make payments under the Tax Receivable Agreement. In the event of a termination or change in law giving rise to a lump sum payment obligation under the Tax Receivable Agreement (discussed below), the TRA Distributions will be limited to amounts that otherwise would have been distributed absent such event. If such lump sum payment obligation arises, then we alone will be entitled to receive further TRA Distributions, which we will use to pay down the lump sum payment obligation.

See “Certain Relationships and Related Party Transactions — Second Amended and Restated Aurora Holdings Limited Liability Company Agreement” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

The obligations resulting from the Tax Receivable Agreement that will be entered into are expected to be more than offset by the tax benefits that we will receive in connection with the Reorganization Transactions and

subsequent exchanges. Although not assured, we expect that the consideration that we will remit under the Tax Receivable Agreement will not exceed the tax liability that we otherwise would have been required to pay absent the transfers of tax attributes indirectly to us as a result of the Reorganization Transactions and subsequent exchanges.

Rights to receive payments under the Tax Receivable Agreement may be terminated by the Tax Receivable Entity if, as the result of an actual or proposed change in law, the existence of the agreement would cause recognition of ordinary income (instead of capital gain) in connection with future exchanges of Aurora Holdings Units for cash or shares of Class A common stock or would otherwise have material adverse tax consequences to the Tax Receivable Entity or its owners. There have been legislative proposals in the U.S. Congress that, if enacted, may result in such ordinary income recognition. Further, in the event of such a termination, the Tax Receivable Entity would have the right, subject to the delivery of an appropriate tax opinion, to require us to pay a lump sum amount in lieu of the payments otherwise provided under the agreement. That lump sum amount would be calculated by increasing the portion of the tax savings retained by us to 30 percent (from 15 percent) and by calculating a present value for the total amount that would otherwise be payable under the agreement, using a discount rate and assumptions as to income tax rates and as to our ability to utilize the tax benefits (including the assumption that we will have sufficient taxable income to fully utilize the tax benefits and the assumption that all exchanges that have not taken place will take place as of the effective date of the acceleration, which will increase the amount of the lump sum payment). If the assumptions used in this calculation turn out not to be true, we may pay more or less than the specified percentage of our actual cash tax savings. This lump sum amount is subordinate to amounts payable under our new credit facilities and may be paid in cash or be deferred until all amounts payable under our credit facilities in existence as of the date of termination of the Tax Receivable Agreement have been paid, and the deferred amount will bear interest at a rate of the lesser of 6.5 percent or 1-year LIBOR plus 2.0 percent per annum. In view of the foregoing changes in the calculation of our obligations, we do not expect that the net impact of any such acceleration upon our overall financial condition would be materially adverse as compared to our obligations if laws do not change and the obligations are not accelerated. It is also possible that the net impact of such an acceleration would be beneficial to our overall financial condition. The ultimate impact of a decision by the Tax Receivable Entity to accelerate will depend on what the ongoing payments would have been under the Tax Receivable Agreement absent acceleration, which will depend on various factors.

We also have the right (with the consent of our independent directors) to terminate the Tax Receivable Agreement. If we exercise this right, then the Tax Receivable Entity would be entitled to a lump sum amount in lieu of the payments otherwise provided under the agreement. That lump sum amount would be calculated by determining a present value for the total amount that would otherwise be payable under the agreement, using a discount rate and assumptions as to income tax rates and as to our ability to utilize the tax benefits (including the assumption that we will have sufficient taxable income to fully utilize the tax benefits and the assumption that all exchanges that have not taken place will take place as of the date of the termination, which will increase the amount of the lump sum payment). If the assumptions used in this calculation turn out not to be true, we may pay more or less than the specified percentage of certain cash tax savings realized by us after the completion of this offering. This lump sum amount must be paid in cash or be deferred until all amounts payable under our credit facilities in existence as of the date of termination of the Tax Receivable Agreement have been paid. Any such acceleration can occur only at our election. Should we elect to terminate the Tax Receivable Agreement, we do not expect that the net impact of any such acceleration upon our overall financial condition would be materially adverse as compared to our existing obligations. The ultimate impact of a decision by the Tax Receivable Entity to accelerate will depend on what the ongoing payments would have been under the Tax Receivable Agreement absent acceleration, which will in turn depend on the various factors mentioned above.

If we default on any of our material obligations under the Tax Receivable Agreement, then, unless the Tax Receivable Entity seeks specific performance of the Tax Receivable Agreement, the Tax Receivable Entity has the option to accelerate payments due under the Tax Receivable Agreement and require us to make a lump sum payment representing all past due and future payments under the Tax Receivable Agreement, discounted to present value.

In addition, the Tax Receivable Agreement provides that, upon certain mergers, asset sales or other forms of business combination or certain other changes of control, our or our successor’s obligations with respect to tax benefits would be based on certain assumptions, including that we or our successor would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits covered by the Tax Receivable Agreement. As a result, upon a change of control, we could be required to make payments under the Tax Receivable Agreement that are greater than the specified percentage of our cash tax savings.

USE OF PROCEEDS

We estimate that the net proceeds that we will receive from the sale of the Class A common stock offered by us will be approximately $ million, assuming an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and after giving effect to estimates of certain expenses that we expect to be reimbursed. We will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders, including any proceeds resulting from the underwriters’ exercise of their option to purchase additional shares from the selling stockholders. A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the amount of proceeds that we will receive from this offering by $ million, assuming the number of shares offered by us, which is set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to raise capital to acquire Aurora Holdings Units in connection with this offering and to increase our capitalization and financial flexibility, fund our growth, provide a public market for our Class A common stock and facilitate access to public capital markets. A portion of the net proceeds that we receive from this offering will be used to acquire Aurora Holdings Units or shares of our Class B common stock held by the Aurora Holdings Continuing Members. We intend to use the remainder of the net proceeds that we will receive from this offering for working capital and other general corporate purposes, which may include general and administrative expenditures, sales and marketing expenditures, developing new products and funding acquisitions and capital expenditures. Accordingly, we may use a portion of the net proceeds that we will receive from this offering to acquire businesses, products, services or technologies. While we do not have commitments for any specific acquisitions at this time, we would expect such acquisitions to primarily include businesses that provide pathology diagnostic testing services or services that we deem complementary to our existing businesses. Except as described in this paragraph, we currently have no specific plans or commitments with respect to the use of the net proceeds that we will receive from this offering.

A tabular breakdown of our expected use of the net proceeds that we receive from this offering is presented below:


		Amount
		(in thousands)

Acquisition of Aurora Holdings Units or shares of Class B common stock from Aurora Holdings Continuing Members⁽¹⁾		$
Working capital and general corporate purposes (excluding acquisition costs)⁽²⁾		$
Acquisition costs⁽³⁾		$

Total		$


(1)		Based on an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, we intend to use $ of the proceeds from this offering to purchase Aurora Holdings Units held by the Aurora Holdings Continuing Members or shares of Class B common stock (or $ or to purchase Aurora Holdings Units or shares of Class B common stock if the underwriters exercise their over-allotment option in full). As a result of this purchase, certain Aurora Holdings Continuing Members may be obligated to make filings under Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, reporting a change in beneficial ownership.


(2)		Amount reflects management’s current expectations and may include general and administrative expenditures, sales and marketing expenditures, developing new products and funding for capital expenditures.


(3)		Amount reflects management’s current expectations and may include costs payable to acquisition targets, fees and expenses payable to third-parties and incidental transaction expenses such as taxes. We do not have commitments for any specific acquisitions at this time, but we would expect such acquisitions to primarily include businesses that provide pathology diagnostic testing services or services that we deem complementary to our existing businesses.

The amount of net proceeds from this offering that will be used to acquire Aurora Holdings Units and shares of our Class B common stock will be directly related to the number of shares of Class A common stock that we issue in this offering. However, the amounts that we actually expend for the other purposes specified above such as growth, working capital and general corporate purposes may vary significantly depending on a number of factors, including changes in our growth strategy, the amount of our future revenues and expenses and our future cash flow. As a result, we will retain broad discretion in the use and allocation of the net proceeds that we will receive from this offering among these specified purposes. You will not have an opportunity to evaluate the economic, financial or other information on which we base our decisions regarding the use of the net proceeds that we will receive from this offering.

Pending the uses described above, we may invest the net proceeds that we receive from this offering in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

Although Aurora Holdings has made tax and other distributions to its members in accordance with the Aurora Holdings LLC Agreement, we have never declared or paid cash dividends on our common or preferred stock. We currently do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings to finance the development and expansion of our business. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors, subject to applicable laws, and will depend on our financial condition, results of operations, contractual restrictions, capital requirements, general business conditions and other then-existing factors that our Board of Directors may deem relevant.

CAPITALIZATION

The following table sets forth our actual capitalization as of March 31, 2010 and on a pro forma, as adjusted, basis to reflect:


	•	the Reorganization Transactions described under “Prospectus Summary — Reorganization Transactions” and “Organizational Structure;”

	•	the sale of shares of our Class A common stock by us in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriters’ discounts and commissions and the estimated offering expenses;

	•	the execution of our new credit facilities; and

	•	the application of the net proceeds that we will receive from this offering as described under “Use of Proceeds.”

The information below is illustrative only and our cash, cash equivalents and short-term investments and capitalization following the completion of this offering will be based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.


	March 31, 2010
			Pro Forma,
	Actual⁽¹⁾		as Adjusted⁽³⁾
	(unaudited)
	(in thousands except share data)

Cash, cash equivalents and short-term investments	$	3,222	$

Current and long-term debt⁽²⁾	$	235,188

Aurora Holdings Members’ equity		227,313
Stockholders’ Equity:
Class A common stock, $0.01 par value per share; shares authorized (actual), shares issued and outstanding (actual); and shares authorized (pro forma as adjusted), shares issued and outstanding (pro forma as adjusted)		—
Class B common stock, $0.01 par value per share; shares authorized (actual), shares issued and shares outstanding (actual); shares authorized (pro forma as adjusted), shares issued and shares outstanding (pro forma as adjusted)		—
Additional paid-in capital		—
Accumulated other comprehensive (loss)		—
Retained earnings		—

Total stockholders’ equity of Aurora Diagnostics, Inc.		—
Noncontrolling interest		—

Total stockholders’ equity		—

Total capitalization	$	462,501	$


(1)		The actual capitalization represents Aurora Holdings’ capitalization before giving effect to the Reorganization Transactions, the refinancing of our previous credit facilities or the completion of this offering.


(2)		Actual as of March 31, 2010, includes the current and long term portions of our previous credit facilities, net of original issue discount, and the fair value of contingent consideration.


(3)		Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriters’ discounts and commissions and the estimated offering expenses, would increase (decrease) the amount of pro forma as adjusted cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity, total capitalization and net proceeds that we will receive from this offering by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses that we must pay and after giving effect to estimates of certain expenses that we expect to be reimbursed.

The above share data excludes shares of our Class A common stock reserved for issuance upon the exchange of our Class B common stock into Class A common stock.

DILUTION

If you invest in our Class A common stock, your investment will be diluted immediately to the extent of the difference between the public offering price per share of our Class A common stock and the pro forma net tangible book value per share of our Class A common stock after this offering. Our pro forma net tangible book value as of March 31, 2010 was approximately $ million, or $ per share of Class A common stock. Pro forma net tangible book value per share represents the amount of stockholders’ equity less the net book value of intangible assets, divided by the number of shares of our Class A common stock outstanding at that date, after giving effect to the Reorganization Transactions described under “Prospectus Summary — Reorganization Transactions” and “Organizational Structure — Reorganization Transactions.”

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of Class A common stock in this offering and the pro forma net tangible book value per share of Class A common stock immediately after the completion of this offering. After giving effect to our sale of shares of Class A common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and after giving effect to estimates of certain expenses that we expect to be reimbursed, our pro forma as adjusted net tangible book value as of March 31, 2010 would have been $ million, or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to investors purchasing Class A common stock in this offering. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the assumed initial public offering price per share paid by a new investor. The following table illustrates the per share dilution:


Assumed initial public offering price per share		$
Pro forma net tangible book value (deficit) per share as of March 31, 2010 before giving effect to the Tax Receivable Agreement
Pro forma net tangible book value (deficit) per share before the change attributable to new investors
Increase in pro forma net tangible book value per share attributable to new investors
Pro Forma adjusted net tangible book value (deficit) per share after this offering
Dilution per share to new investors		$

A $1.00 increase or decrease in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted net tangible book value as of March 31, 2010, by approximately $ million, the pro forma as adjusted net tangible book value per share after this offering by $ per share and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

The sale of shares of Class A common stock to be sold by the selling stockholders in this offering will reduce the number of shares held by our Principal Equityholders to shares, or percent of the total shares outstanding, and will increase the number of shares held by new investors participating in this offering to shares, or percent of the total shares outstanding. In addition, if the underwriters exercise their over-allotment option in full, the number of shares held by our Principal Equityholders will be further reduced to shares, or percent of the total shares outstanding after this offering, and the number of shares held by new investors participating in this offering will be further increased to shares, or percent of the total shares outstanding after this offering.

The following table summarizes, on the same pro forma basis as of March 31, 2010, the total number of shares of Class A common stock and Class B common stock purchased from us, the total consideration paid to us and the average price per share paid by the Principal Equityholders, and by new investors purchasing shares in this offering (amounts in thousands, except percentages and per share data), after giving effect to the sale by us and the selling stockholders of shares of our Class A common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and offering expenses payable by us:

Shares of Class A

Common Stock and

Total Consideration

Class B Common Stock Purchased

to Us

Average Price

Number

Percent

Amount

Percent

per Share

Principal Equityholders

New investors

Total

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The unaudited pro forma consolidated balance sheet at March 31, 2010 and the unaudited pro forma consolidated statement of operations for the twelve months ended December 31, 2009 and the three months ended March 31, 2010 give effect to:


	•	our 2009 acquisition of South Texas Dermatopathology Lab, P.A., as if that acquisition had occurred January 1, 2009;

	•	our 2010 acquisitions of Bernhardt Laboratories, Inc., Pinkus Dermatopathology Laboratory, P.C. and Pathology Solutions, LLC, as if those acquisitions had occurred as of January 1, 2009;

	•	the execution of our new credit facilities;

	•	consummation of the Reorganization Transactions as if they were effective as of March 31, 2010; and

	•	this offering and the use of the net proceeds that we will receive from this offering, as if effective on March 31, 2010 for the unaudited pro forma consolidated balance sheet and January 1, 2009 for the unaudited pro forma consolidated statements of operations.

The unaudited pro forma financial information has been prepared by our management and is based on our historical financial statements and the assumptions and adjustments described herein and in the notes to the unaudited pro forma financial information below. We believe the presentation of the unaudited pro forma financial information is prepared in conformity with Article 11 of Regulation S-X of the Exchange Act.

Our historical financial information for the year ended December 31, 2009 has been derived from our audited consolidated financial statements and accompanying notes included elsewhere in this prospectus. The historical financial data for the three months ended March 31, 2010 and balance sheet as of March 31, 2010 have been derived from our unaudited historical condensed consolidated financial statements included elsewhere in this prospectus.

We based the pro forma adjustments on available information and on assumptions that we believe are reasonable under the circumstances. See the notes to unaudited pro forma financial information for a discussion of assumptions made. The unaudited pro forma financial information is presented for informational purposes and is based on management’s preliminary estimates, including the preliminary application of our acquisition accounting. Our final estimates and related accounting may differ materially from the preliminary estimates. The unaudited pro forma consolidated statements of operations do not purport to represent what our results of operations actually would have been if the transactions set forth above had occurred on the dates indicated or what our results of operations will be for future periods.

Aurora Diagnostics Inc.

Unaudited Pro Forma Consolidated Balance Sheet

March 31, 2010


	March 31, 2010
			Refinancing			Reorganization			Offering			Pro Forma,
	Historical⁽¹⁾		Adjustments			Adjustments⁽⁶⁾			Adjustments			As Adjusted
	(in thousands)

Assets
Current Assets
Cash	$	3,222	$	226,625	⁽²⁾	$			$	—⁽⁸	⁾	$
				(227,549	)⁽²⁾

Accounts receivable, net		21,325		—			—
Prepaid expenses and other assets		2,877		—			—
Prepaid income taxes		—		—			—
Deferred tax assets		2,220		—				⁽³⁾

Total current assets		29,644		(924	)

Property and Equipment, net		8,868		—			—

Other Assets:
Deferred debt issue costs, net		3,640		7,971	⁽²⁾
				(3,640	)⁽²⁾
Deposits and other noncurrent assets		131		—			—
Goodwill		328,442		—			—
Intangible assets, net		120,274		—			—

		452,487		4,331			—

	$	490,999	$	3,407		$			$	—		$

Liabilities and Members’ Equity
Current Liabilities
Current portion of long-term debt	$	11,597	$	5,000	⁽²⁾	$	—		$			$
				2,250	⁽²⁾
				(8,691	)⁽²⁾
Current portion of fair value of contingent consideration		6,227		—			—
Accounts payable and accrued expenses		6,577					—

Accrued compensation		7,264		—			—
Accrued interest and other current liabilities		2,798		(58	)⁽²⁾		—
				(1,824	)⁽²⁾

Total current liabilities		34,463		(3,323	)		—
Tax receivable arrangement		—		—				⁽³⁾
Deferred tax liabilities, net		11,859		—			—
Long-term debt, net of current portion		202,925		222,750	⁽²⁾		—
				(3,375	)⁽²⁾
				(198,209	)⁽²⁾
				1,018	⁽²⁾
Fair value of contingent consideration, net of current portion		14,439		—			—
Commitments and contingencies
Equity
Members’ equity		227,313		(2,296	)⁽²⁾		⁽⁴	⁾		⁽⁸	⁾
				(8,500	)⁽²⁾		⁽⁷	⁾
				(1,018	)⁽²⁾
				(3,640	)⁽²⁾

Common stockholders’ equity		—						⁽³⁾
								⁽⁴⁾
								⁽⁵⁾

Additional paid in capital								⁽⁷⁾
Noncontrolling interest		—		—				⁽⁵⁾

	$	490,999	$	3,407		$			$			$


(1)		Amounts represent our historical balance sheet as of March 31, 2010 which was derived from the unaudited condensed consolidated financial statements contained elsewhere in the prospectus.
(2)		These pro forma adjustments reflect the application of the net proceeds from our recently completed refinancing in accordance with the sources and uses below (dollars in thousands).


Sources

Cash	$	924
Revolver		5,000
New credit facilities
Term loan, long term portion		222,750
Term loan, current portion		2,250
Original issue discount - term loan (1.5%)		(3,375	)

Total Proceeds	$	227,549


Uses

Repayment of existing term loan, long term portion	$	198,209
Repayment of existing term loan, current portion		8,691
Repayment of accrued interest		1,824
Repayment of Aurora Holdings Class Z capital		8,558
Estimated fees and expenses		10,267

Total Outflows	$	227,549


		The repayment of Class Z capital includes $58,000 of accrued dividends at a rate of 12 percent as of March 31, 2010.

		Our approximate fees and expenses are summarized as follows:


Commitment fees	$	6,625
Expenses (legal, accounting, etc)		1,346

Total deferred debt issue costs, capitalized		7,971
Prepayment penalty		2,296

Total approximate fees and expenses	$	10,267


		In addition to the prepayment penalty, as of March 31, 2010 in connection with our recently completed refinancing we would have written off previously deferred debt issues costs of $3.6 million and unamortized original issue discount of $1.1 million.


(3)		A number of acquisitions by Aurora Holdings have resulted in an increase in the tax basis of intangible assets, primarily goodwill, which results in higher tax amortization expense compared to book amortization. In addition, the Reorganization Transactions and future exchanges of Aurora Holdings Units for our Class A common stock or cash will result in an increase in our tax basis of intangible assets. These tax attributes would not have been available to us in the absence of those transactions. Amortization from the increase in tax basis will be available, subject to limitations, to reduce the amount of tax we may be required to pay in the future. Under the Tax Receivable Agreement, Aurora Diagnostics, Inc. will agree to pay to the Tax Receivable Entity 85 percent of certain cash tax savings, if any, in U.S. federal, state, local and foreign income tax realized by Aurora Diagnostics, Inc. after the completion of this offering as a result of:


	•	favorable tax attributes associated with amortizable goodwill and other intangibles held by Aurora Holdings and created by previous acquisitions;

	•	any step-up in tax basis in our share of Aurora Holdings’ assets resulting from:


	•	the acquisition by us of Aurora Holdings Units from the Aurora Holdings Continuing Members in exchange for shares of our Class A common stock or cash, or

	•	payments under the Tax Receivable Agreement to the Tax Receivable Entity; and


	•	tax benefits related to imputed interest deemed to be paid by us as a result of the Tax Receivable Agreement.


		On a pro forma basis we estimated the total realizable tax benefit, excluding future exchanges, as the result of existing step up in basis to be million. Therefore we have recorded a deferred tax asset of million and a liability related to the Tax Receivable Agreement of million representing our obligation to the Tax Receivable Entity. The remaining 15 percent, or million, has been recorded as an increase of additional paid-in capital, a component of common stockholders’ equity.

		In consideration of the Reorganization Transactions, the Tax Receivable Agreement further provides that Aurora Diagnostics, Inc. will pay to the Tax Receivable Entity 85 percent of Aurora Diagnostics, Inc.’s actual reduction in income taxes that we realize related to future exchanges for which we have not included a pro forma adjustment as we cannot predict the amounts and timing of such future exchanges, or if these exchanges will occur. In addition, future exchanges are not a part of the Reorganization Transactions or this offering.


(4)		Reflects the reclassification of the remaining pro forma Aurora Holdings members’ equity to our common stockholders’ equity.
(5)		Following the Reorganization Transactions and the completion of this offering, we will record a noncontrolling interest relating to the economic interests of the Aurora Holdings Continuing Members in Aurora Holdings. This adjustment reflects our pro forma equity in the economic interest after giving effect to the noncontrolling interest of our Principal Equityholders. As discussed under “Prospectus Summary— Reorganization Transactions” and “Organizational Structure — Reorganization Transactions,” we will have all of the business and operational control of Aurora Holdings.
(6)		For purposes of supplemental disclosure, if 100 percent of the noncontrolling interest of Aurora Holdings had been exchanged in connection with this offering, the Tax Receivable Agreement would have increased $ million for a total of $ .

(7)		Represents the transfer of Aurora Diagnostics Holdings, LLC retained earnings to additional paid in capital for Aurora Diagnostics, Inc.

(8)		Reflects the application of the primary proceeds of $ million from this offering net of estimated fees and expenses of $ million. The resulting net cash will be used as described under the heading “Use of Proceeds.”

Aurora Diagnostics Inc.

Unaudited Pro Forma Consolidated Statement of Operations

Year ended December 31, 2009


	December 31, 2009
									Pro			Pro												Pro
									Forma			Forma												Forma,
				2009			2010		Acquisition			for			Refinancing			Reorganization			Offering			As
	Historical⁽¹⁾			Acquisitions⁽²⁾			Acquisitions⁽³⁾		Adjustments⁽²⁾⁽³⁾			Acquisitions			Adjustments			Adjustments			Adjustments			Adjusted
	(in thousands)

Net Revenues	$	171,565		$	7,328		$	34,750	$	—		$	213,643		$	—		$	—		$	—		$	213,643
Operating costs and expenses:
Cost of services		71,778			5,200			18,956		(5,839	)⁽⁴⁾		90,095			—			—			—			90,095
Selling, general and administrative expenses		36,854			1,482			7,173		(1,966	)⁽⁴⁾		43,543			—			—			—			43,543
Provision for doubtful accounts		9,488			—			732		—			10,220			—			—			—			10,220
Intangible asset amortization expense		14,574			—			—		1,444	⁽⁵⁾		16,018			—			—						16,018
Management fees		1,778			—			—		422	⁽⁶⁾		2,200			—			—			(2,200	)⁽¹⁰⁾		—
Impairment of goodwill and other intangible assets		8,031			—			—		—			8,031			—			—			—			8,031
Acquisition and business development costs		1,074			—			—		—			1,074			—			—			—			1,074

Total operating costs and expenses		143,577			6,682			26,861		(5,939	)		171,181			—			—			(2,200	)		168,981

Income from operations		27,988			646			7,889		5,939			42,462			—			—			2,200			44,662

Other income (expense):
Interest expense		(18,969	)		(52	)		29		—			(18,992	)		1,982	⁽⁸⁾		—			—			(17,010	)
Write-off of deferred debt issue costs		—			—			—		—			—			—			—			—			—
Other income		28			—			328		—			356			—			—			—			356

Total other expense, net		(18,941	)		(52	)		357		—			(18,636	)		1,982			—			—			(16,654	)

Income before income taxes		9,047			594			8,246		5,939			23,826			1,982			—			2,200			28,008
Provision for income taxes		45			215			434		2,376	⁽⁷⁾		3,069			793	⁽⁷⁾		6,461	⁽⁹⁾		880	⁽⁷⁾		11,203

Net income	$	9,002		$	379		$	7,812	$	3,563		$	20,757		$	1,189		$	(6,461	)	$	1,320			16,805


Income available to non-controlling interest

Income available to common stockholders																								$

Income available to common stockholders per common share:

Basic net income per common share																								$

Diluted net income per common share																								$

Aurora Diagnostics Holdings, Inc.

Unaudited Pro Forma Consolidated Statement of Operations

For the Three Months Ended March 31, 2010


	March 31, 2010
						Pro			Pro												Pro
						Forma			Forma												Forma,
				2010		Acquisition			for			Refinancing			Reorganization			Offering			As
	Historical⁽¹⁾			Acquisitions⁽³⁾		Adjustments			Acquisitions			Adjustments			Adjustments			Adjustments			Adjusted
	(in thousands)

Net Revenues	$	46,419		$	3,198	$	—		$	49,617		$	—		$	—		$	—		$	49,617
Operating costs and expenses:
Cost of services		22,342			1,230		136	⁽⁴⁾		23,708			—			—			—			23,708
Selling, general and administrative expenses		10,820			299		—			11,119			—			—			—			11,119
Provision for doubtful accounts		2,610			—		—			2,610			—			—			—			2,610
Intangible asset amortization expense		3,891			—		110	⁽⁵⁾		4,001			—			—			—			4,001
Management fees		476			—		32	⁽⁶⁾		508			—			—			(508	)⁽¹⁰⁾		—
Impairment of goodwill and other intangible assets		—			—		—			—			—			—			—			—
Acquisition and business development costs		298			—		—			298			—			—			—			298

Total operating costs and expenses		40,437			1,529		278			42,244			—			—			(508	)		41,736

Income from operations		5,982			1,669		(278	)		7,373			—			—			508			7,881

Other income (expense):
Interest expense		(3,721	)		—		—			(3,721	)		(508	)⁽⁸⁾		—			—			(4,229	)
Write-off of deferred debt issue costs		—			—		—			—			—			—			—			—
Other income		(12	)		12		—			—			—			—			—			—

Total other expense, net		(3,733	)		12		—			(3,721	)		(508	)		—			—			—

Income before income taxes		2,249			1,681		(278	)		3,652			(508	)		—			508			3,652
Provision (benefit) for income taxes		10			—		(111	)⁽⁷⁾		(101	)		(203	)⁽⁷⁾		1,592	⁽⁹⁾		203	⁽⁷⁾		1,461

Net income	$	2,239		$	1,681	$	(167	)	$	3,753		$	(305	)	$	(1,592	)	$	305			2,191


Income available to non-controlling interest

Income available to common stockholders																					$

Income available to common stockholders per common share:

Basic net income per common share																					$

Diluted net income per common share																					$


(1)		Amounts represent our historical statements of operations for the year ended December 31, 2009 (audited) and the three months ended March 31, 2010 (unaudited) which were derived from the financial statements of Aurora Holdings contained elsewhere in the prospectus.
(2)		Amounts represent the historical audited statement of operations of South Texas Dermatopathology Lab, P.A. prior to our acquisition on November 21, 2009, which we refer to as the 2009 Acquisition.
(3)		For the year ended December 31, 2009, amounts represent the historical unaudited statements of operations of the 2010 Acquisitions which were funded on December 31, 2009 and were consummated January 1, 2010 and the historical audited statement of operations of our acquisition of Pathology Solutions, LLC completed March 12, 2010. For the three months ended March 31, 2010, the amounts represent the historical unaudited statement of operations, prior to our acquisition on March 12, 2010, of Pathology Solutions, LLC.


(4)		The pro forma adjustment reflects the reduction in compensation expense of physicians and former owners of acquired practices, including salary, bonus and other compensation, to the amounts that will be paid to these physicians and former owners in accordance with their post acquisition employment agreements.
(5)		Represents the additional amortization expense for the identifiable intangible assets, based on our preliminary acquisition accounting, as if the 2009 and 2010 Acquisitions had occurred on the January 1, 2009. The identifiable intangible assets related to the 2009 and 2010 Acquisitions total approximately $73.8 million and are being amortized over periods ranging from 5 to 10 years. The majority of the identifiable intangible assets relate to customer relationships. In determining the estimated amortization periods, we considered the operating history and customer stability of the acquired practice and industry information related to customary amortization periods.
(6)		Reflects the management fees payable under a management services agreement with certain of our Principal Equityholders. In accordance with the management services agreement, these fees are calculated as 1 percent of the net revenue of our 2009 and 2010 acquisitions.
(7)		Represents the tax effect of the pro forma adjustments at an effective tax rate of 40 percent and was based on the federal and state statutory income tax rates in effect during the respective periods.
(8)		Represents the difference in interest expense related to the rates and balances outstanding under the new credit facilities compared to our term loans outstanding during the year ended December 31, 2009 and the three months ended March 31, 2010. Under the new credit facilities the base interest rate is subject to a LIBOR (London Interbank Offering Rate) of 2.0 percent. Therefore, we assumed the London Interbank Offering Rate, or LIBOR, floor of 2 percent plus the credit spread of 4.25 percent or a total interest rate of 6.25 percent on a combined $230 million term loan and revolver balance. The adjustments also reflect the difference in the amortization of the deferred debt issue cost and original issue discount. The following summarizes the components of the interest expense adjustments.


				Three Months
	Year Ended			Ended
	December 31,			March 31,
	2009			2010

Elimination of amortization of original issue discount	$	305		$	81
Amortization of new original issue discount		(563	)		(141	)
Elimination of amortization of deferred debt issue costs		1,090			291
Amortization of new debt issue costs		(1,329	)		(332	)
Elimination of term loan interest expense		16,853			3,187
Interest expense related to the new credit facilities		(14,375	)		(3,594	)

Net reduction (increase) in interest expense	$	1,982			(508	)


		Our new credit facilities are subject to a LIBOR floor of 2.0 percent. At the time LIBOR rates exceed the 2.0 percent floor, every .125 percent increase in LIBOR would increase our interest expense approximately $0.3 million.


(9)		Reflects the necessary adjustment to record our income tax provision at a 40 percent rate due to our transition to being taxed as a corporation following completion of the Reorganization Transactions. The 40 percent rate was based on the federal and state statutory income tax rates in effect during the respective periods.
(10)		Represents the elimination of the management fees payable under a management services agreement with certain of our Principal Equityholders. The management services agreement will be terminated following the completion of this offering.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following selected historical consolidated financial data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included in this prospectus. The selected historical consolidated financial data included in this section are not intended to replace the consolidated financial statements and the related notes included in this prospectus.

The consolidated statements of operations data for the fiscal years 2007, 2008 and 2009, and consolidated balance sheets data as of fiscal year end 2008 and 2009, were derived from Aurora Holdings’ audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the period from our inception in June 2006 through December 31, 2006, and consolidated balance sheet data as of December 31, 2006 and December 31, 2007, were derived from Aurora Holdings’ audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2009 and 2010 and consolidated balance sheet data as of March 31, 2010 were derived from Aurora Holdings’ unaudited condensed consolidated financial statements included elsewhere in this prospectus and include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, that management considers necessary for the fair presentation of the financial information set forth in those statements. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.

The selected historical consolidated financial data does not give effect to:


	•	the results of operations of our 2009 acquisition of South Texas Dermatopathology Lab, P.A. prior to our acquisition on November 21, 2009;

	•	the results of operations or balance sheet data of our 2010 acquisitions of Bernhardt Laboratories, Inc. and Pinkus Dermatopathology Laboratory, P.C. prior to our acquisitions on January 1, 2010 and Pathology Solutions, LLC prior to our acquisition on March 12, 2010;

	•	the execution of our new credit facilities;

	•	consummation of the Reorganization Transactions; or

	•	this offering and the use of the net proceeds that we will receive from this offering.

Aurora Diagnostics Holdings, LLC

Selected Consolidated Statements of Operations⁽¹⁾Period from June 2006 (inception) to December 31, 2006,
Years ended December 31, 2007, 2008 and 2009 and
Three months ended March 31, 2009 and 2010


	Period from
	June 2006
	(Inception) to												Three Months
	December 31,			Year Ended December 31,									Ended March 31,
	2006			2007			2008			2009			2009			2010
	(in thousands)

Net Revenues	$	3,487		$	63,451		$	157,850		$	171,565		$	40,947		$	46,419

Operating costs and expenses:
Cost of services		1,045			27,480			66,382			71,778			17,186			22,342
Selling, general and administrative expenses		3,035			15,172			33,194			36,854			9,177			10,820
Provision for doubtful accounts		69			2,378			8,037			9,488			2,305			2,610
Intangible asset amortization expense		470			5,721			14,308			14,574			3,628			3,891
Management fees		35			644			1,559			1,778			410			476
Impairment of goodwill and other intangible assets		—			—			—			8,031	⁽³⁾		—			—
Acquisition and business development costs		—			374			676			1,074			130			298
Equity based compensation expense		—			—			1,164	⁽²⁾		—			—			—

Total operating costs and expenses		4,654			51,769			125,320			143,577			32,836			40,437

Income (loss) from operations		(1,166	)		11,682			32,530			27,988			8,111			5,982

Other income (expense):
Interest expense		(94	)		(7,114	)		(21,577	)		(18,969	)		(4,791	)		(3,721	)
Write-off of deferred debt issue costs		—			(3,451	)⁽⁴⁾		—			—			—			—
Other income		25			124			125			28			29			(12	)

Total other expense, net		(69	)		(10,441	)		(21,452	)		(18,941	)		(4,762	)		(3,773	)

Income (loss) before income taxes		(1,236	)		1,241			11,078			9,047			3,349			2,249
Provision for income taxes⁽⁵⁾		—			762			408			45			17			10

Net income (loss)	$	(1,236	)	$	479		$	10,670		$	9,002		$	3,332		$	2,239

Aurora Diagnostics Holdings, LLC

Selected Consolidated Balance Sheet Data

December 31, 2006, 2007, 2008 and 2009 and March 31, 2010


	December 31,								March 31,
	2006		2007		2008		2009		2010
			(in thousands)

Consolidated Balance Sheet Data
Cash and equivalents	$	1,744	$	8,558	$	7,278	$	27,424	$	3,222
Total assets		40,180		388,339		415,516		462,744		490,999
Working capital, excluding deferred tax items		1,892		10,161		11,005		30,081		10,785
Long term debt, including current portion		7,550		215,678		227,313		219,752		235,188
Members’ equity		31,334		145,077		161,176		217,064		227,313


(1)		The summary consolidated financial data for the period from June 2006 (inception) to December 31, 2006 and the years ended December 31, 2007, 2008 and 2009 and for the three months ended March 31, 2009 and 2010 is that of Aurora Holdings prior to the Reorganization Transactions described under “Prospectus Summary — Reorganization Transactions” and “Organizational Structure — Reorganization Transactions.”
(2)		During 2008, we adopted the New Plan to replace our original equity incentive plan. This New Plan provides awards of membership interest units in Aurora Holdings. These interests are denominated as Class D-1, Class D-2, and Class D-3 units in Aurora Holdings. During 2008, Aurora Holdings authorized and issued 4,000 D-1 units, 3,000 D-2 units and 3,000 D-3 units of Aurora Holdings. All membership interest units of Aurora Holdings issued in 2008 were fully vested as of December 31, 2008. We recorded a compensation expense of $1.2 million for these awards. There were no other grants under the New Plan. In connection with the Reorganization Transactions, the Class D Units of Aurora Holdings issued under the New Plan will either be exchanged for shares of our Class A common stock or cancelled without consideration.
(3)		As of September 30, 2009, we tested goodwill and intangible assets for potential impairment and recorded a non-cash impairment expense of $8.0 million resulting from a write-down of $6.6 million in the carrying value of goodwill and a write down of $1.4 million in the carrying value of other intangible assets. The write-down of the goodwill and other intangible assets related to one reporting unit. Regarding this reporting unit, we believe events occurred and circumstances changed that more likely than not reduced the fair value of the intangible assets and goodwill below their carrying amounts. These events during 2009 consisted primarily of the loss of significant customers present at the acquisition date, which adversely affected the current year and expected future revenues and operating profit of the reporting unit.
(4)		In December 2007, we refinanced our previous credit facilities. As a result, we wrote off $3.5 million of unamortized deferred debt issue costs.
(5)		Aurora Holdings is a Delaware limited liability company taxed as a partnership for federal and state income tax purposes, in accordance with the applicable provisions of the Internal Revenue Code. Accordingly, Aurora Holdings was generally not subject to income taxes. The income attributable to Aurora Holdings was allocated to the members of Aurora Holdings in accordance with the terms of the Aurora Holdings LLC Agreement. However, certain of our subsidiaries are structured as corporations, file separate returns and are subject to federal and state income taxes. The historical provision for income taxes for these subsidiaries is reflected in our consolidated financial statements and includes federal and state taxes currently payable and changes in deferred tax assets and liabilities excluding the establishment of deferred tax assets and liabilities related to the acquisitions. The pro forma, as adjusted, provision for income taxes assumes a 40 percent effective tax rate, after giving effect to the Reorganization Transactions.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The historical consolidated financial data discussed below reflect the historical results of operations and financial condition of our subsidiary Aurora Holdings.

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in the back of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the section entitled “Risk Factors” contained in this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

General

We are a specialized diagnostics company providing services that play a key role in the diagnosis of cancer and other diseases. Our experienced pathologists deliver comprehensive diagnostic reports of a patient’s condition and consult frequently with referring physicians to help determine the appropriate treatment. Our diagnostic reports often enable the early detection of disease, allowing referring physicians to make informed and timely treatment decisions that improve their patients’ health in a cost-effective manner. Through our pathologist-operated laboratory practices, we provide physician-based general anatomic and clinical pathology, dermatopathology, molecular diagnostic services and other esoteric testing services to physicians, hospitals, clinical laboratories and surgery centers. Our operations consist of one reportable segment.

The U.S. diagnostic testing industry had revenues of approximately $55 billion in 2008 and, according to the Washington G-2 Report, grew at a rate of 7 percent compounded annually from 2000 to 2008. According to the Laboratory Economics Report, within the overall industry, the anatomic pathology market totaled approximately $13 billion in revenues, or 24 percent of total industry revenues, in 2008. Anatomic pathology services involve the diagnosis of cancer and other medical conditions through the examination of tissues (histology) and the analysis of cells (cytology) and generally command higher reimbursement rates, on a per specimen basis, than clinical pathology services.

According to the Washington G-2 Report, the anatomic pathology market has expanded more rapidly than the overall industry, with revenues growing 4.8 percent on a compound annual basis between 2006 and 2009, compared to 4.5 percent for the rest of the industry. Excluding growth in esoteric testing, the remainder of the industry grew at a compound annual rate of only 0.1 percent over the same period. Substantially all of the revenues for anatomic pathology businesses consist of payments or reimbursements for specialized diagnostic services rendered to referring physicians, and these revenues are affected primarily by changes in case volume, which we refer to as accession volume, payor mix and reimbursement rates. Accessions are measured as the number of patient cases, and each accession may include multiple specimens. Accession volume varies from period to period based on the number of referring physicians and the frequency of their ordering, the relative mix of the referring physicians’ anatomic pathology specialties, and the type and number of tests ordered.

For the year ended December 31, 2009 we processed approximately 1.6 million accessions.

Corporate History

We were incorporated in the State of Delaware on April 23, 2010 for purposes of this offering. As described under “Prospectus Summary — Reorganization Transactions” and “Organizational Structure,” we are a holding company and our principal asset after completion of this offering will be our indirect equity interests in our subsidiary, Aurora Holdings. Our subsidiary was organized in the State of Delaware as a limited liability company on June 2, 2006 to develop and operate as a diagnostic services company. We have grown our business significantly over the last three years, driven largely by the acquisition of local and regional pathology laboratories throughout the United States and organic growth within these acquired operations. We have completed 17 acquisitions of diagnostic services companies and opened two de novo laboratories, and our revenues have increased from $3.5 million in 2006 to $171.6 million in 2009.

Statement of Operations Overview

Net Revenues

Substantially all of our revenues consist of payments or reimbursements for specialized diagnostic services rendered to patients of our referring physicians. Net revenue per accession is impacted mainly by changes in reimbursement rates and test and payor mix. Accession volume varies from period to period based on the referral patterns of our referring physicians and the frequency of their ordering, the relative mix of the referring physicians’ anatomic pathology specialties, and the type and number of tests ordered. Accession volume is also affected by seasonal trends and generally declines during the summer and holiday periods. Furthermore, accession volume is also subject to declines due to weather conditions, such as severe snow storms and flooding or excessively hot or cold spells, which can deter patients from visiting our referring physicians. More recently, we believe the slowdown in the general economy and increase in unemployment has reduced the number of patients visiting our referring physician offices, resulting in a reduction of referrals.

Our billings for services reimbursed by third-party payors, including Medicare, and patients are based on a company-generated fee schedule that is generally set at higher rates than our anticipated reimbursement rates. Our billings to physicians, which are not reimbursed by third-party payors, represent less than 10 percent of net revenues and are billed based on negotiated fee schedules that set forth what we charge for our services. Reimbursement under Medicare for specialized diagnostic services is subject to a Medicare physician fee schedule and, to a lesser degree, a clinical laboratory fee schedule, both of which are updated annually. Our billings to insured patients include co-insurance and deductibles as dictated by the patient’s insurance coverage. Billings for services provided to uninsured patients are based on our company-generated fee schedule. Our revenues are recorded net of the estimated differences between the amount billed and the estimated payment to be received from third party payors, including Medicare. We do not have any capitated payment arrangements, which are arrangements under which we are paid a contracted per person rate regardless of the services we provide. We generally provide services on an in-network basis, where we perform services for persons within the networks of payors with which we have contracts. Services performed on an out-of-network basis, where we perform services for persons outside of the networks of payors with which we have contracts, comprised less than 15 percent of our 2009 revenues. We may face continuing pressure on reimbursement rates as government payors and private insurers have taken steps and may continue to take steps to control the cost, use, and delivery of health care services, including diagnostic testing services. Changes in payor mix could lead to corresponding changes in revenues based on the differences in reimbursement rates.

Compliance with applicable laws and regulations, as well as internal policies and procedures, adds further complexity and costs to our operations. Furthermore, we are generally obligated to bill in the specific manner prescribed by each governmental payor and private insurer, who may each have different billing requirements. Reimbursements for anatomic pathology services are received from governmental payors, such as Medicare and Medicaid; private insurance, including managed care organizations and commercial payors; and private payors, such as physicians and individual patients. For the year ended December 31, 2009, based on cash collections, we estimate approximately 61 percent of revenues were paid by private insurance, including managed care organizations and commercial payors; approximately 25 percent of revenues were paid by Medicare and Medicaid; and approximately 14 percent were paid by physicians and individual patients.

In most cases, we provide a global testing service which includes both the technical slide preparation and professional diagnosis. We also fulfill requests from physicians for only the technical component of our services, or TC, which principally includes technical slide preparation and the non-professional items associated with our diagnostic services, including equipment, supplies and technical personnel, or the professional component of our services, or PC, which principally includes review and diagnosis by a pathologist. If a physician requires only the TC services such as slide preparation, we prepare the slide and then return it to the referring physician for assessment and diagnosis.

Cost of Services

Cost of services consists of physician costs, including compensation, benefits and medical malpractice insurance and other physician related costs. In addition, cost of services includes costs related to the technical preparation of specimens and transcription of reports, depreciation, courier and distribution costs, and all other costs required to fulfill the diagnostic service requirements of our referring physicians and their patients.

Cost of services generally increases with accession volume and reflects the additional staffing, equipment, supplies and systems needed to process the increased volume and maintain client service levels. A major component of cost of services is physician costs which, for the year ended December 31, 2009, represented 36 percent of our total cost of services. In the future, we may experience increases in physician costs to retain existing physicians, to replace departing physicians or to hire new pathologists to support accession growth. Therefore, we expect our cost of revenues will continue to increase commensurate with revenue growth.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of general lab and corporate overhead, billing, information technology, accounting, human resources, and sales and marketing expenses. We expect sales and marketing and IT expenses to increase faster than revenue as we hire additional personnel and invest in lab and billing information systems to support continued same store revenue growth and retain existing customer relationships. In addition, we expect accounting expenses, which includes audit and Sarbanes-Oxley Act of 2002 costs, to increase substantially as a result of our contemplated initial public offering. As our business matures and we attain a sufficient size and scope, we expect selling, general and administrative expenses as a percent of revenue to reduce over time.

Provision for Doubtful Accounts

The provision for doubtful accounts and the related allowance are adjusted periodically, based upon an evaluation of historical collection experience with specific payors for particular services, anticipated collection levels with specific payors for new services, industry reimbursement trends, accounts receivable aging and other relevant factors. The majority of our provision for doubtful accounts relates to our estimate of uncollectible amounts from patients who are uninsured or fail to pay their coinsurance or deductible obligations. Changes in these factors in future periods could result in increases or decreases in our provision for doubtful accounts and impact our results of operations, financial position and cash flows.

In an effort to maximize our collections of accounts receivable, we take a number of steps to collect amounts, including coinsurance and deductibles, owed by third party payors, government payors, referring physicians and patients. The process generally includes:


	•	verification of complete insurance information and patient demographics,

	•	active management and follow up on denials,

	•	delivery of scheduled statements to patients, and/or

	•	forwarding significant past due accounts to outside collection agencies.

Due to the fact that we operate on multiple billing platforms, we evaluate collectibility and the related adequacy of our allowance for doubtful accounts using information from multiple sources. Not all of our systems produce the same level of information by payor or by aging classification and, therefore, we are unable to provide

consolidated accounts receivable agings by payor class. However, we believe that sufficient information exists in each respective billing system to make reasonable estimates of our provision for doubtful accounts. In the future, we may convert legacy billing systems from businesses we have acquired to one or more common billing platforms. This could allow for the consolidation of billing data and information on a consistent basis.

Recent Developments

Class Z Capital

On March 12, 2010, we issued Class Z capital of Aurora Holdings to then-existing members of Aurora Holdings for total consideration of $8.5 million. In the event that the Class Z capital was repaid within six months of that date, the holders of the Class Z capital of Aurora Holdings were to receive a preferred return equal to the initial contribution of the members holding such membership interests, plus dividends. Dividends were to accrue on the Class Z capital of Aurora Holdings at an annual rate of 12 percent for the first three months and 16 percent for the next three months. In the event we did not redeem the Class Z capital within six months from the date it was issued, the Class Z capital of Aurora Holdings would have converted to Class A-1 membership interests of Aurora Holdings at the same valuation as the original Class A-1 membership interests of Aurora Holdings. On May 26, 2010, in connection with our recently completed refinancing, we redeemed all of the outstanding Class Z membership interests of Aurora Holdings and paid approximately $0.2 million of accrued dividends.

New Credit Facilities

On May 26, 2010, we entered into a new credit and guaranty agreement, which we refer to as our credit agreement. Our credit agreement provides for credit facilities of $335.0 million with Barclays Bank PLC, as administrative agent and collateral agent, certain other financial institutions in various arranger and agent capacities, and the lenders from time to time party to the credit agreement. Our credit agreement includes a $225.0 million senior secured term loan facility and a $110.0 million senior secured revolving credit facility ($50.0 million of which became available upon the closing of our new credit facilities and $60.0 million of which will be available upon the completion of an offering of equity satisfying certain criteria under our credit agreement, as determined by each lender individually in respect of its commitment, including consummation of such offering of equity with certain lenders or their respective securities affiliates or investment banking institutions reasonably acceptable to such lenders and receipt by us and/or our sponsors, collectively, of not less than $125,000,000 of aggregate gross primary and secondary proceeds of such offering of equity prior to February 26, 2011). Upon completion of this offering, we expect the size of our revolving credit facility to increase to $110.0 million. We have the right to increase the commitments under our credit agreement by up to $50.0 million, in the event that certain conditions are satisfied, including absence of an event of default, pro forma compliance with our financial covenants and a maximum senior secured leverage ratio for the preceding four quarter period of 3.50:1.00. None of the lenders under our credit agreement has committed or is obligated to provide any such increase in the commitments.

A portion of the net proceeds of our credit agreement was used to repay all indebtedness outstanding under our previous first and second lien credit facilities and to terminate the agreements associated with such previous credit facilities. We have recorded a non-cash write-off of any remaining unamortized original issue discount and debt issue costs related to our previous credit facilities of approximately $4.4 million during the quarter ended June 30, 2010, and we were required to pay a $2.3 million prepayment premium to terminate our previous credit facilities.

Aurora Diagnostics, LLC, a direct, wholly-owned subsidiary of Aurora Holdings, is the borrower under our credit agreement. The obligations of the borrower under our credit agreement and any exposure under any interest rate agreement or other hedging arrangements entered into with any of the lenders are guaranteed by the guarantors party to our credit agreement, including Aurora Holdings, certain of its subsidiaries and, upon completion of the Reorganization Transactions and this offering, Aurora Diagnostics, Inc. and certain of its subsidiaries. Such obligations of the borrower and such guarantors are secured by a first-priority security interest in substantially all of the assets of the borrower and of each guarantor party thereto.

The loans under our credit agreement will bear interest, at the option of the borrower, at one of the following rates:


	•	Base Rate Loans, at a rate per annum equal to:


	•	the highest of:


	•	Barclays Bank PLC’s prime rate,

	•	0.50% plus Federal Funds Effective Rate, and

	•	the LIBOR rate, as adjusted for applicable reserve requirements (subject to a 2.00% floor) for an interest period of one month plus 1.00%; plus


	•	3.25%.

• LIBOR Rate Loans, at a rate per annum equal to:


	•	the LIBOR rate, as adjusted for applicable reserve requirements (subject to a 2.00% floor) determined for the applicable interest period; plus

	•	4.25%.

During the continuance of certain material events of default, including payment defaults, failure to comply with financial covenants or certain bankruptcy events, and at the request of the requisite lenders during the continuance of any other event of default, the loans under our credit agreement shall bear interest at the otherwise applicable rate plus an additional 2.00% per annum. An unused commitment fee equal to either 0.75% or 0.50% per annum (depending on the amount of the unused portion of the facility at such time) of the daily average unused portion of the revolving credit facility is also payable.

Our term loan facility will amortize during the period the loan is outstanding in quarterly installments that shall each be equal to 0.25% of the initial principal amount of the term loan with the balance payable on the maturity date which is the sixth anniversary date of our credit agreement. The revolving credit facility will mature, and the revolving commitments relating thereto will terminate, on the fourth anniversary date of our credit agreement.

Optional prepayments of borrowings under our credit agreement, and optional reductions of the unutilized portion of the revolving credit facility commitments, will be permitted at any time, in minimum principal amounts, without premium or penalty, subject to reimbursement of the lenders’ redeployment costs in the case of a prepayment of LIBOR Rate Loans other than a prepayment made on the last day of the relevant interest period. Our credit agreement requires, subject to certain exceptions, prepayments from excess cash flow and from the proceeds of certain asset sales, insurance or condemnation and issuances of certain debt and equity.

Our credit agreement requires us to satisfy specified financial covenants, including an interest coverage ratio, a total leverage ratio and a maximum capital expenditures covenant, as set forth in our credit agreement. Our interest coverage and total leverage ratio are determined based upon our Adjusted EBITDA, as defined in our credit agreement. In addition, our credit agreement contains certain representations and warranties and affirmative and negative covenants which, among other things, limit the incurrence of additional indebtedness, liens and encumbrances, distributions, prepayments of other indebtedness, guarantees, investments, acquisitions, asset sales, mergers and consolidations, transactions with affiliates, certain changes to the Reorganization Transactions, certain payments under the Tax Receivables Agreement, changes to organizational documents and to material agreements and certain other agreements and other matters customarily restricted in such agreements.

Our credit agreement contains certain events of default including payment defaults, cross defaults to certain other indebtedness in excess of specified amounts, covenant defaults, breaches of representations and warranties, certain events of bankruptcy and insolvency, certain ERISA events, judgment defaults in excess of specified amounts, failure of any guaranty or security document supporting our credit agreement to be in full force and effect, failure of certain indebtedness in excess of specified amounts to be subordinated to the obligations under our credit agreement, change in control, certain criminal proceedings, incurrence of indebtedness by affiliated practices in excess of specified amounts and certain other customary events of default.

Health Care Reform

In 2010, the U.S. Congress passed and the President signed into law the PPACA and HCEARA. Together, the PPACA and HCEARA comprise a broad health care reform initiative. While this legislation did not adversely affect reimbursement for our anatomic pathology services, this legislation provides for two separate reductions in the reimbursement rates for our clinical laboratory services: a “productive adjustment” (currently estimated to be between 1.1 and 1.4 percent), and an additional 1.75 percent reduction. Each of these would reduce the annual Consumer Price Index-based update that would otherwise determine our reimbursement for clinical laboratory services. For the year ended December 31, 2009, revenues from clinical lab services were less than 10 percent of our total revenues. Uncertainty also exists around the extent of coverage and reimbursement for new services. This legislation also provides for increases in the number of persons covered by public and private insurance programs in the U.S.

Reorganization Transactions

In connection with this offering, we will enter into the Reorganization Transactions described under “Organizational Structure,” including the creation or acquisition of amortizable tax assets in connection with this offering and the Reorganization Transactions and the creation of liabilities in connection with entering into the Tax Receivable Agreement, concurrent with the completion of this offering.

Acquisitions

Through March 31, 2010, we have acquired 17 diagnostic services companies throughout the United States. Our most recent acquisition was completed on March 12, 2010. The following summarizes the acquisitions we completed in 2007, 2008, 2009 and 2010.

2007 Acquisitions

During 2007, we acquired substantially all of the assets of three pathology practices and 100 percent of the equity of five pathology practices for an aggregate purchase price (including acquisition costs) of $319.8 million and additional consideration in the form of contingent notes. The aggregate purchase price included cash of $306.1 million and subordinated unsecured contingent notes payable of $13.7 million. The cash portion of the purchase price was funded primarily with proceeds from member contributions and drawings under our previous term loan facilities of $115.3 million and $190.8 million, respectively.

In connection with one acquisition in 2007, we agreed to assume up to $4.0 million to be paid to four retired physicians. The obligation is to be paid over three to five years. As of December 31, 2009, this acquisition related liability had a remaining balance of approximately $0.6 million. During 2008 and 2009, we paid $1.9 million and $1.5 million, respectively, related to this liability.

2008 Acquisition

During 2008, we acquired 100 percent of the equity of one pathology practice for an aggregate purchase price (including acquisition costs) of $27.3 million and additional consideration in the form of contingent notes. The purchase price was funded primarily with proceeds from the issuance of Aurora Holdings’ Class A, C, and X membership interests of $7.3 million and borrowings under our previous term loan facility of $20.0 million.

2009 Acquisition

In November 2009, we acquired 100 percent of the equity of one pathology practice for an aggregate cash purchase price of $15.3 million. In addition, we issued contingent consideration, payable over three years based on the acquired practice’s future performance. We have estimated the fair value of the contingent consideration and recorded a related liability as of December 31, 2009 of $3.1 million. The cash portion of the purchase price was funded primarily with proceeds from the issuance of Class A-1 membership interests in June 2009. The estimated fair value of the assets acquired and liabilities assumed in connection with the 2009 acquisition are preliminary and are expected to be finalized in 2010.

2010 Acquisitions

On January 1, 2010, we acquired 100 percent of the equity of two pathology practices for an aggregate cash purchase price of $17.0 million. These acquisitions were consummated on January 1, 2010 and, therefore, the cash paid totaling $17.0 million was included in deposits and other non-current assets as of December 31, 2009. On March 12, 2010, we acquired 100 percent of the equity of a pathology practice for an aggregate cash purchase price of $22.5 million. Each transaction included contingent consideration payable over three to five years based on the acquired practices’ future performance. We have estimated the fair value of the contingent consideration and recorded a related liability as of the date of each acquisition. The maximum amount of the contingent cash consideration, assuming the acquisition meets the maximum stipulated earnings level, is $39.9 million payable over three to five years. We funded the cash portion of the acquisitions using $31.0 million of cash primarily related to member contributions from the holders of Aurora Holdings Class A-1 Units and an additional $8.5 million related to the sale of Aurora Holdings Class Z membership interests.

The following table summarizes the consideration paid for the acquisitions completed in 2007, 2008, 2009 and 2010.


			Subordinated		Total
	Cash Paid		Notes Issued		Consideration
	(in thousands)

2007 Acquisitions	$	306,116	$	13,658	$	319,774
2008 Acquisition	$	27,301	$	—	$	27,301
2009 Acquisition	$	15,340	$	—	$	15,340
2010 Acquisitions	$	39,475	$	—	$	39,475

As a result of the significant number and size of the acquisitions completed over the last four years, many of the changes in our consolidated results of operations and financial position discussed below relate to the acquisitions completed in 2007, 2008, 2009 and 2010.

Results of Operations

The following table outlines, for the periods presented, our results of operations as a percentage of net revenues.


	Year Ended									Three Months Ended
	December 31,									March 31,
	2007			2008			2009			2009			2010

Net revenues		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Operating costs and expenses:
Cost of services		43.3			42.1			41.8			42.0			48.1
Selling, general and administrative expenses		23.9			21.0			21.5			22.4			23.3
Provision for doubtful accounts		3.7			5.1			5.5			5.6			5.6
Intangible asset amortization expense		9.0			9.1			8.5			8.9			8.4
Management fees		1.0			1.0			1.0			1.0			1.0
Impairment of goodwill and other intangible assets		—			—			4.7			—			—
Acquisition and business development costs		0.6			0.4			0.6			0.3			0.6
Equity-based compensation expense		—			0.7			—			—			—

Total operating costs and expenses		81.5			79.4			83.6			80.2			87.1

Income from operations		18.5			20.6			16.4			19.8			12.9

Other income (expense):
Interest expense		(11.2	)		(13.7	)		(11.1	)		(11.7	)		(8.0	)
Write-off of deferred debt issue costs		(5.4	)		—			—			—			—
Other income		0.2			0.1			—			0.1			—

Total other expense, net		(16.4	)		(13.6	)		(11.1	)		(11.6	)		(8.0	)

Income before income taxes		2.1			7.0			5.3			8.2			4.8
Provision for income taxes		1.2			0.3			—			—			—

Net income		0.9	%		6.7	%		5.3	%		8.2	%		4.8	%

Our historical consolidated operating results do not reflect:


	•	the Reorganization Transactions described under “Prospectus Summary — Reorganization Transactions” and “Organizational Structure;”

	•	the results of operations of our 2009 and 2010 acquisitions prior to the effective date of those acquisitions; and

	•	this offering and the application of the net proceeds that we will receive from this offering.

As a result, our historical consolidated operating results may not be indicative of what our results of operations will be for future periods.

Comparison of the Three Months Ended March 31, 2010 and 2009

Net Revenues

Net revenues increased $5.5 million or 13.4 percent to $46.4 million for the three months ended March 31, 2010 from $40.9 million for the three months ended March 31, 2009. Organic revenues decreased $1.3 million or

3.1 percent from $40.9 million to $39.7 million, and the remaining increase of $6.8 million reflects the impact of the 2010 and 2009 acquisitions.

Organic accessions grew to approximately 377,000 accessions compared to approximately 375,000 for the three months ended March 31, 2009. During the quarter a number of our labs and their related referral sources were negatively impacted by severe winter weather, which resulted in lower testing volumes for us. We estimate that the severe weather resulted in a reduction of approximately 19,000 accessions and net revenue of approximately $2.0 million during the quarter ended March 31, 2010. Excluding the weather impact, we estimate the organic accession volume would have increased 5.5 percent. The average revenue per accession decreased 3.5 percent from approximately $109 to approximately $105 primarily due to a change in service mix. This change in service mix resulted primarily from more referring physicians converting from global pathology services, where we provide both the TC and PC of the accession, to a TC or PC arrangement, where we receive only a portion of the revenue. In these cases, our net revenue per accession has declined due to the fact that we no longer receive the entire global fee for the service but instead only receive a portion of the revenue for the service.

We expect the average revenue per accession of our organic business to continue to decline primarily as the result of changes in service mix, including our growth in women’s health pathology services, including clinical tests, which tend to have lower revenue per accession and, therefore, decrease slightly our average revenue per accession. In addition, our growth rates and average revenue per accession may be positively or negatively impacted by the reimbursement market, service mix and average revenue per accession of acquisitions completed in the future.

Our pathology diagnostic testing services accounted for substantially all of our revenues for the three month periods ended March 31, 2010 and March 31, 2009.

Cost of Services

Cost of services for the three months ended March 31, 2010 increased $5.1 million or 29.5 percent to $22.3 million from $17.2 million for the three months ended March 31, 2009. Of the total increase, $3.1 million related to the acquisitions completed in 2010 and 2009 and the remaining $2.0 million related to our existing business. Of the $2.0 million increase in costs of services related to our existing business, approximately $600,000 related to severance costs associated with physician terminations and approximately $200,000 related to start-up costs of our clinical lab in North Carolina. The clinical lab became operational in March 2010 and will complement our existing anatomic pathology services, specifically for the women’s health pathology market. In addition, we hired additional pathologists to provide diagnostic services to our referring physicians in the Arizona, Massachusetts and Minnesota markets.

As a percentage of net revenues, cost of services was 48.1 percent and 42.0 percent for the three months ended 2010 and 2009, respectively. The major factors negatively impacting the percentage for 2010 compared to 2009 included the severance and clinical lab start up costs, as well as the $2.0 million shortfall in revenue related to the weather. As a result the gross margin was 51.9 percent and 58.0 percent for the three months ended March 31, 2010 and 2009, respectively. We currently anticipate that our gross margin will decline slightly due to a combination of lower average revenue per accession and increased costs related to pathologist retention and replacement and higher costs and lower gross margins in our women’s health pathology services, including clinical tests. Cost of services and our related gross profit percentages may be positively or negatively impacted by the market, service mix and unit price dynamics of acquisitions completed in the future.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $1.6 million, or 17.9 percent, to $10.8 million for the three months ended March 31, 2010 from $9.2 million for the three months ended March 31, 2009. Of the total increase, $1.4 million related to the 2010 and 2009 acquisitions and $0.2 million related to our existing business. Of the increase in our existing business, the majority relates to sales and marketing initiatives including the increase in the number of sales representatives and our introduction of doc2MD.

Selling, general and administrative expenses, as a percent of net revenue, increased to 23.3 percent from 22.4 percent for the three months ended March 31, 2009. Selling, general and administrative expenses as a percentage of revenue increased due to the lower than expected revenue for the first quarter and the expansion of sales and marketing activities during the second half of 2009 and the first quarter of 2010. We expect to make additional investments in selling, general and administrative expenses in 2010, including the addition of field sales representatives, marketing and IT personnel. In addition, we expect accounting, legal, compliance and other public company related costs to increase substantially following the completion of this offering.

Provision for doubtful accounts

Our provision for doubtful accounts increased $0.3 million or 13.2 percent to $2.6 million from $2.3 million for the three months ended March 31, 2009. The majority of the increase relates to the increase in the total net revenue of $5.5 million. As a percentage of net revenue, the provision for doubtful accounts was consistent from period to period at 5.6 percent of net revenue.

We expect our consolidated provision for doubtful accounts of our existing businesses to range between 5.5 percent and 6.0 percent in future. The future provision for doubtful accounts could be positively or negatively impacted by the bad debt experience of future acquired laboratories.

Intangible asset amortization expense (Amortization)

Amortization expense for the three months ended March 31, 2010 increased to $3.9 million from $3.6 million for the three months ended March 31, 2009 related to increases in our amortizable intangible assets associated with the 2010 and 2009 acquisitions. We amortize our intangible assets over a weighted average lives ranging from 4 to 18 years.

Management fees

Management fees increased $0.1 million to $0.5 million for the three months ended March 31, 2010 compared to $0.4 million for the three months ended March 31, 2009. Management fees are based on 1.0 percent of net revenue plus expenses. The majority of the increase relates to the increase in our net revenues. Following the completion of this offering, we will not be obligated to pay management fees.

Acquisition and business development costs

Interest Expense

Interest expense for the three months ended March 31, 2010 decreased to $3.7 million from $4.8 million for the three months ended March 31, 2009, partially due to lower outstanding borrowings under our previous term loan, as well as lower effective interest rates. For the three months ended March 31, 2010 our previous average term loan balance was $208.4 million at an effective rate of 7.2 percent compared to the prior quarter average term loan balance of $216.7 million and an effective rate of 9.0 percent.

Provision for Income Taxes

Prior to the completion of this offering, we were a Delaware limited liability company for federal and state income tax purposes, in accordance with the applicable provisions of the Internal Revenue Code. Accordingly, we were generally not subject to income taxes, and the income attributable to us was allocated to the members of Aurora Holdings in accordance with the terms of the Aurora Holdings LLC Agreement. We make tax distributions to the members in amounts designed to provide such members with sufficient cash to pay taxes on their allocated

income. However, certain of our subsidiaries are structured as corporations and therefore are subject to federal and state income taxes.

Upon the completion of this offering and the Restructuring Transactions, we expect our provision for income taxes to be more consistent with federal and state statutory rates, or 40 percent.

Comparison of the Years Ended December 31, 2009 and 2008

Net Revenues

Net revenues increased $13.7 million or 8.7 percent to $171.6 million for the year ended December 31, 2009 from $157.9 million for the year ended December 31, 2008. Organic revenues increased $11.5 million or 7.7 percent from $150.2 million to $161.8 million, and the remaining increase of $2.2 million reflects the impact of the 2009 and 2008 acquisitions.

Organic accessions grew by approximately 64,000, or 4.5 percent, to approximately 1.5 million for the year ended December 31, 2009 from approximately 1.4 million for the year ended December 31, 2008. The organic volume growth resulted from the expansion of our sales force in late 2008 and early 2009. The average revenue per accession increased 3.0 percent from approximately $106 to approximately $109 resulting from a combination of an increase in reimbursement (price) and the ordering of additional tests for accessions related to cervical screenings.

Our pathology diagnostic testing services accounted for substantially all of our 2009 and 2008 revenues.

Cost of Services

Cost of services for the year ended December 31, 2009 increased $5.4 million or 8.1 percent to $71.8 million from $66.4 million for the year ended December 31, 2008. Cost of services related to our organic revenue grew 7.2 percent or $4.6 million, primarily related to our organic growth in accessions of 4.5 percent. The increase in our cost of services also included approximately $0.3 million related to start-up costs of our clinical lab in North Carolina. The clinical lab became operational in March 2010 and will complement our existing anatomic pathology services, specifically for the women’s health pathology market. The remaining increase in cost of services was $0.5 million related to the 2009 and 2008 acquisitions.

As a percentage of revenues, cost of services for both periods was approximately 42.0, percent resulting in a gross margin of approximately 58.0 percent for both periods. We currently anticipate our gross margin to decline slightly due to a combination of lower average revenue per accession and increased costs related to pathologist retention and replacement and higher costs and lower gross margins in our women’s health pathology services, including clinical tests. Cost of services and our related profit percentages may be positively or negatively impacted by the market, service mix and unit price dynamics of acquisitions completed in the future.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $3.7 million, or 11.0 percent, to $36.9 million for the year ended December 31, 2009 from $33.2 million for the year ended December 31, 2008. Of the total increase, $0.4 million related to the 2009 and 2008 acquisitions and $3.3 million related to our existing business. Of the total increase of $3.7 million, approximately $1.8 million relates to sales and marketing initiatives including the increase in the number of sales representatives and our introduction of doc2MD. In addition, our billing costs increased $0.6 million primarily related to the 2009 and 2008 acquisitions. For both periods billing costs were approximately 4.4 percent of net revenue.

Selling, general and administrative expenses, as a percent of net revenue, increased slightly to 21.5 percent from 21.0 percent for the year ended December 31, 2008. The primary reason for this increase was the expansion of sales and marketing activities in the year ended December 31, 2009. We expect to make additional investments in selling, general and administrative expenses in 2010, including the addition of additional field sales representatives, marketing and IT personnel. In addition, we expect accounting, legal, compliance and other public company related costs to increase substantially following the completion of this offering.

Provision for doubtful accounts

Our provision for doubtful accounts increased $1.5 million or 18.1 percent to $9.5 million from $8.0 million for the year ended December 31, 2008. Approximately $0.7 million relates to the increase in the total net revenue of $13.7 million. The remainder of the increase of $0.8 million related to the increase in the overall provision as a percent of net revenue to 5.5 percent from 5.1 percent for the year ended December 31, 2008. A major factor contributing to this increase was slower payment patterns in certain markets such as Michigan and an increase in our historical write-offs related to uncollectible accounts, primarily patient accounts.

Intangible asset amortization expense (Amortization)

Amortization expense for the year ended December 31, 2009 increased to $14.6 million from $14.3 million for the year ended December 31, 2008 related to increases in our amortizable intangible assets associated with the 2009 and 2008 acquisitions. We amortize our intangible assets over a weighted average lives ranging from 4 to 18 years.

Management fees

Management fees increased $0.2 million to $1.8 million for the year ended December 31, 2009 compared to $1.6 million for the year ended December 31, 2008. Management fees are based on 1.0 percent of net revenue plus expenses. The majority of the increase relates to the increase in our net revenues. Following the completion of this offering, we will not be obligated to pay management fees.

Impairment of goodwill and other intangible assets

For purposes of testing goodwill for impairment, each of our acquired practices is considered a separate reporting unit. To estimate the fair value of the reporting units, we utilize a discounted cash flow model as the primary approach to value supported by a market approach guideline public company method, or the GPC Method, which is used as a reasonableness test. We believe that a discounted cash flow analysis is the most appropriate methodology to test the recorded value of long-term assets with a demonstrated long-lived value. The results of the discounted cash flow provide reasonable estimates of the fair value of the reporting units because this approach is based on each respective unit’s actual results and reasonable estimates of future performance, and also takes into consideration a number of other factors deemed relevant by management, including but not limited to, expected future market revenue growth and operating profit margins. We have consistently used these approaches in determining the value of goodwill. We consider the GPC Method to be an adequate reasonableness test which utilizes market multiples of industry participants to corroborate the discounted cash flow analysis. We believe this methodology is consistent with the approach that any strategic market participant would utilize if they were to value one of our reporting units.

The following assumptions were made by management in determining the fair value of the reporting units and related intangibles as of September 30, 2009: (a) the discount rates ranged between 13.0 percent and 15.0 percent, based on relative size and perceived risk of the reporting unit; (b) an average compound annual growth rate of 7.5 percent during the five year forecast period; and (c) earnings before interest, taxes, depreciation, and amortization with an average reporting unit level margin of 38.9 percent. These assumptions are based on: (a) the actual historical performance of the reporting units and (b) management’s estimates of future performance of the reporting units.

We also consider the economic outlook for the health care services industry and various other factors during the testing process, including hospital and physician contract changes, local market developments, changes in third-party payor payments, and other publicly available information.

As of September 30, 2009, we tested goodwill and intangible assets for potential impairment and recorded a non-cash impairment charge of $8.0 million resulting from a write down of $6.6 million in the carrying value of goodwill and a write down of $1.4 million in the carrying value of other intangible assets. The write down of the goodwill and intangible assets related to one reporting unit. Regarding this reporting unit, we believe events

occurred and circumstances changed that more likely than not reduced the fair value of the intangible assets and goodwill below their carrying amounts. These events during 2009 consisted primarily of the loss of significant customers present at the acquisition date, which adversely affected the current year and expected future revenues and operating profit of the reporting unit.

As of December 31, 2009, we had goodwill and net intangible assets of $386.4 million. Many factors, including competition, general economic conditions, health care reform, third party payment patterns and industry consolidation, could have a negative impact on one or more of our reporting units used in evaluating for impairment. Therefore, we may experience additional impairment charges in future periods.

Acquisition and business development costs

On January 1, 2009, we adopted a new accounting standard related to accounting for business combinations using the acquisition method of accounting (previously referred to as the purchase method). In connection with this adoption, during 2009, we expensed $0.6 million of transaction costs associated with our completed acquisitions, which under the prior accounting would have been capitalized as part of the purchase price. In addition, we expensed $0.5 million of business development costs related to our prospecting and unsuccessful acquisition activity. Prior year amounts related to unsuccessful acquisitions and business development activities were reclassified to acquisition and business development costs from selling, general and administrative expenses for comparative purposes.

Equity based compensation expense

There was no equity based compensation expense recorded for the year ended December 31, 2009 because no equity awards were granted during 2009. The prior year amount of $1.2 million related to equity incentive awards granted in July 2008.

Interest Expense

Interest expense for the year ended December 31, 2009 decreased to $19.0 million from $21.6 million for the year ended December 31, 2008, partially due to lower outstanding borrowings under our previous term loan, as well as lower effective interest rates. During 2009, we paid down $8.2 million of our existing term loan facility. In addition, $125.0 million of the balance outstanding on the term loan facility had a fixed interest rate, through our interest rate swap, at an effective interest rate of 9.9 percent, while the remaining average balance of $88.2 million had interest based on a floating LIBOR rate. For the year ended December 31, 2009, the average 30 day LIBOR was 0.33 percent compared to 2.66 percent for the year ended December 31, 2008. Therefore, the majority of the reduction in interest expense related to the lower effective interest rate on our floating rate debt.

Other Income

Other income primarily consists of interest earned on our cash and cash equivalents.

Provision for Income Taxes

Prior to the completion of this offering, we were a Delaware limited liability company for federal and state income tax purposes, in accordance with the applicable provisions of the Internal Revenue Code. Accordingly, we were generally not subject to income taxes and the income attributable to us was allocated to the members of Aurora Holdings in accordance with the terms of the Aurora Holdings LLC Agreement. We make tax distributions to the members in amounts designed to provide such members with sufficient cash to pay taxes on their allocated income. However, certain of our subsidiaries are structured as corporations, and therefore are subject to federal and state income taxes.

Upon the completion of this offering and the Restructuring Transactions, we expect our provision for income taxes to be more consistent with federal and state statutory rates, or 40 percent.

Comparison of the Years Ended December 31, 2008 and 2007

Net Revenues

Net revenues increased $94.4 million or 148.8 percent to $157.9 million for the year ended December 31, 2008 from $63.5 million for the year ended December 31, 2007. Organic revenues increased $2.5 million or 11.3 percent from $22.4 million to $25.0 million and the remaining increase of $91.9 million related to the 2008 and 2007 acquisitions.

Our organic revenue growth of $2.5 million resulted from a 20.0 percent increase in the volume of accessions and a 7.2 percent decrease in the average revenue per accession. Organic accessions grew approximately 46,000 to approximately 274,000 accessions for the year ended December 31, 2009 compared to 228,000 for the year ended December 31, 2007. The organic volume growth resulted from the expansion of our sales force in late 2007 and 2008. The average organic unit price per accession decreased from $98 to $91 resulting from certain referring physicians converting from global billing to PC-only arrangements which have a lower average revenue per accession.

Our pathology diagnostic testing services accounted for substantially all of our 2008 and 2007 revenues.

Cost of Services

Cost of services for the year ended December 31, 2008 increased $38.9 million or 141.6 percent to $66.4 million from $27.5 million for the year ended December 31, 2007. Cost of services related to our organic revenue grew 22.1 percent or $2.1 million, primarily related to our organic accession growth of 20.0 percent. Our pathologist costs accounted for $1.0 million of the increase, which resulted primarily from the addition of a pathologist to service increased accession volume in certain growing markets and the replacement of two retiring pathologists with higher-cost pathologists. The remaining increase in cost of services of $36.8 million related to the 2008 and 2007 acquisitions.

As a percentage of revenues, cost of services was 42.1 percent for the year ended December 31, 2008 compared to 43.3 percent for the year ended December 31, 2007, resulting in an increase in gross margin from 57.0 percent to 58.0 percent between periods.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $18.0 million, or 118.8 percent, to $33.2 million for the year ended December 31, 2008 from $15.2 million for the comparable period in 2007. Of the total increase, $16.7 million related to the 2008 and 2007 acquisitions and $1.3 million related to our existing business.

Of the total increase of $18.0 million, approximately $4.0 million related to sales and marketing initiatives including the increase in the number of sales representatives. In addition, our billing costs increased $4.4 million as a result of higher revenues in 2008 and increased billing cost as a percentage of revenues. Billing costs were 4.4 percent and 4.0 percent of our net revenues for the year ended December 31, 2008 and 2007, respectively.

As a percent of net revenue, total selling, general and administrative expenses decreased to 21.0 percent from 23.9 percent in 2007.

Provision for doubtful accounts

Our provision for doubtful accounts increased $5.7 million or 238.0 percent to $8.0 million from $2.4 million for the year ended December 31, 2007. Approximately $3.5 million relates to the increase in the total net revenue of $94.4 million. The remainder of the increase of $2.2 million related to the increase in the overall provision as a percent of net revenue to 5.0 percent from 3.8 percent for the year ended December 31, 2007. A major factor contributing to this increase was the fact that the blended provision for doubtful accounts as a percent of revenue for the 2008 and 2007 acquisitions was higher than the base business due to their mix of services and geographic location in which they operate. This increased our blended company average in 2008.

Intangible asset amortization expense (Amortization)

Amortization expense for the year ended December 31, 2008 increased to $14.3 million from $5.7 million for the year ended December 31, 2007 due primarily to the amortization expense related to the identifiable intangible assets acquired in connection with the 2008 and 2007 acquisitions.

Management fees

Management fees increased $0.9 million to $1.6 million for the year ended December 31, 2008 compared to $0.6 million for the year ended December 31, 2007. The majority of the increase relates to the increase in our net revenues.

Acquisition and business development costs

We expensed $0.7 million and $0.4 million for 2008 and 2007, respectively, of business development costs related to our prospecting and unsuccessful acquisition activity. Prior year amounts related to unsuccessful acquisitions and business development activities were reclassified to acquisition and business development costs from selling, general and administrative expenses for comparative purposes.

Equity based compensation expense

During 2008, we adopted the New Plan to replace our original equity incentive plan. The New Plan provides awards of Aurora Holdings membership interest units. These interest units are designated as Class D-1, Class D-2 and Class D-2 membership interest units of Aurora Holdings. During 2008, the Company authorized and issued 4,000 D-1 units, 3,000 D-2 units and 3,000 D-3 units. All membership interest units issued in 2008 were fully vested as of December 31, 2008. Compensation expense of $1.2 million was recorded for these awards.

The fair value of each Aurora Holdings’ membership interest unit granted in 2008 was estimated using the following assumptions:


	2008

Expected life		3 years
Volatility percentage		20.2	%
Interest rate		3.1	%
Dividends		—
Forfeiture rate		—

There were no Aurora Holdings’ membership units granted in 2007.

Interest Expense

Interest expense for the year ended December 31, 2008 increased to $21.6 million from $7.1 million for the year ended December 31, 2007, primarily due to higher outstanding balances under our previous term loan, resulting from borrowings related to our 2007 and 2008 acquisitions. During 2008, we paid down $7.8 million of our previous term loan facility. Our average outstanding interest bearing debt increased to $218.8 million during 2008 from $70.4 million in 2007.

Other Income

Other income primarily consists of primarily of interest earned on cash and cash equivalents.

Provision for Income Taxes

Holdings in accordance with the terms of the Aurora Holdings LLC Agreement. We make tax distributions to the members in amounts designed to provide such members with sufficient cash to pay taxes on their allocated income. However, certain of our subsidiaries are structured as corporations, and therefore are subject to federal and state income taxes.

Upon the completion of this offering and the Restructuring Transactions, we expect our provision for income taxes to be more consistent with federal and state statutory rates, or 40 percent.

Liquidity and Capital Resources

We are a holding company with no material business operations. Our principal asset is the equity interests we own in Aurora Holdings. We conduct all of our business operations through the direct and indirect subsidiaries of Aurora Holdings. Accordingly, our only material sources of cash are dividends or other distributions or payments that are derived from earnings and cash flow generated by the subsidiaries of Aurora Holdings.

Since inception, we have primarily financed operations through capital contributions from our Principal Equityholders, long term debt financings and cash flow from operations.

On May 26, 2010, we entered into credit facilities of $335.0 million with Barclays Bank PLC and certain other lenders. The new credit facilities include a 6 year $225.0 million senior secured first lien term loan credit facility and a $110.0 million senior secured revolving credit facility ($50.0 million of which became available upon the closing of our new credit facilities and $60.0 million of which will be available upon the completion of an offering of equity satisfying certain criteria under our credit agreement). Upon completion of this offering, we expect the size of our revolving credit facility to increase to $110.0 million. See “— Recent Developments.” In connection with our new credit facilities, we repaid all amounts outstanding under the credit facilities we entered into in December 2007 with a syndicate of lenders. Our previous credit facilities provided for loan commitments of up to $255.0 million and for the lenders thereunder to provide financing for us to repay the outstanding balance of our former term loan facility, fund working capital and acquire certain businesses. Our previous credit facilities, which we entered in December 2007, included:


	•	a revolver loan, not in excess of $5.0 million and

	•	term loans, with a first and second lien, not in excess of $165.0 million and $85.0 million, respectively.

For our previous credit facilities, the lenders’ unfunded term loan commitment expired on April 30, 2008. As of March 31, 2010, we had $130.4 million and $76.5 million outstanding under the first lien and second lien term loans, respectively. The funded, first lien term loan was subject to quarterly principal payments beginning on September 30, 2008 through September 30, 2012. Total principal paid for the years ended December 31, 2009 and 2008 and the three months ended March 31, 2010 was $8.2, $7.8 and $2.2 million, respectively, including mandatory and voluntary payments. All loans under our previous term loan facilities would have matured in December 2012. Our previous term loan facilities were collateralized by substantially all of our assets and guaranteed by all of our subsidiaries. For the revolver and first lien term loan, interest was at the prime rate plus 3.25 percent or LIBOR plus 4.25 percent. For the second lien term loan, interest was at the prime rate plus 6.75 percent or LIBOR plus 7.75 percent. As of March 31, 2010, the effective interest rates were 4.5 percent and 8.0 percent for the first lien and second lien, respectively. Other principal payments on the previous term loans were due from time to time from annual excess cash flow and net cash proceeds from either the sale of assets or equity. The proceeds from our previous term loan facilities were used to refinance our former term loan facility and acquire two businesses in December 2007 and one business in March 2008.

On March 21, 2007 in conjunction with an acquisition transaction, we entered into a subordinated, unsecured contingent note with a prior owner of one of our acquired practices. The payment amount is determined by the practice’s cumulative EBITDA over a three-year period, with a minimum payment not to be less than $1.0 million and a maximum payment not to exceed $2.0 million. Payment amounts include a 5.5 percent interest rate factor, thus we have recorded the contingent note in the original purchase price at its minimum payment amount, discounted by the interest rate factor of 5.5 percent. The original discount of $0.1 million is being amortized into interest expense over the term of the contingent note using the interest method.

On April 30, 2007 in conjunction with an acquisition transaction, we entered into a subordinated, unsecured contingent note with prior owners of one of our acquired practices. The payment amount is determined by the practice’s cumulative EBITDA over a five-year period, with a minimum payment not to be less than $15.0 million and a maximum payment not to exceed $30.0 million. Payment amounts include a 5.5 percent interest rate factor, thus we recorded the contingent note in the original purchase price at its minimum payment amount, discounted by the interest rate factor of 5.5 percent. The original discount of $2.2 million will be amortized into interest expense over the term of the contingent note using the interest method.

On November 17, 2006, we entered into a subordinated, unsecured note payable with a prior owner of one of our acquired practices with the principal amount of $1.0 million to assist in the financing of an acquisition. The note had a three-year term and principal payments were due in equal quarterly installments of $0.08 million. Interest was paid quarterly at the prime rate.

Long-term debt consists of the following (in thousands):


	December 31						March 31
	2008			2009			2010

Term loan, first lien⁽¹⁾	$	140,766		$	132,566		$	130,366
Term loan, second lien⁽¹⁾		76,534			76,534			76,534
Revolver loan⁽¹⁾		1			—			—
Subordinated unsecured contingent note, dated March 21, 2007		614			316			316
Subordinated unsecured contingent note, dated April 30, 2007		10,481			8,072			8,072
Subordinated unsecured contingent note, dated November 17, 2006		320			—			—
Capital lease obligations		—			262			252

		228,716			217,750			215,540
Less:
Original issue discount, net		(1,403	)		(1,098	)		(1,018	)
Current portion		(10,010	)		(11,596	)		11,597

Long-term debt, net of current portion	$	217,303		$	205,056		$	202,925


(1)		Reflects the previous credit facilities we entered into during December 2007 with a syndicate of lenders which were repaid using borrowings under our new credit facilities dated May 26, 2010.

As of March 31, 2010, future maturities of long-term debt are as follows (in thousands):


Years ending December 31,

2010, Remainder	$	9,412
2011		13,144
2012		192,871
2013		64
2014		48

	$	215,540

In connection with the majority of our acquisitions, we have agreed to pay additional consideration in future periods based upon the attainment of stipulated levels of operating earnings by each of the acquired entities, as defined in their respective agreements. Generally the contingent consideration is payable over periods ranging from

3 to 5 years. For all acquisitions prior to January 1, 2009, we do not accrue contingent consideration obligations prior to the attainment of the objectives, and the amount owed becomes fixed and determinable. For the years ended December 31, 2007, 2008 and 2009 and for the three months ended March 31, 2010, we paid contingent consideration related to acquisitions completed prior to 2009 of $1.9 million, $12.5 million, $12.7 million and $11.7 million, respectively.

For acquisitions completed after January 1, 2009, we estimate the fair value of the contingent consideration and record a related liability on our balance sheet. As of March 31, 2010 we have recorded a $20.7 million liability related to the fair value of the contingent consideration related to our 2010 and 2009 acquisitions.

As of March 31, 2010, assuming the practices achieve the maximum level of stipulated operating earnings, as defined in the agreements, the maximum principal amount of contingent consideration payable over the next three to five years is approximately $126.6 million. A lesser amount will be paid for earnings below the maximum level of stipulated earnings, and no payments will be made if the practices do not achieve the minimum level of stipulated earnings as outlined in their respective agreements. Any such payments in the future for acquisitions completed prior to January 1, 2009 would be accounted for as additional purchase price and increase goodwill. For acquisitions completed during 2009 and 2010, future payments will be reflected in the change in the fair value of the contingent consideration.

As of March 31, 2010, we had $3.2 million in cash and cash equivalents deposited at high quality financial institutions. Our primary uses of cash are to fund our operations, service debt, including contingent notes, and acquire property and equipment. Cash used to fund our operations excludes the impact of non-cash items, such as the allowance for doubtful accounts, depreciation, and non-cash stock-based compensation, and is impacted by the timing of our payments of accounts payable and accrued expenses and collections of accounts receivable.

As of March 31, 2010, we had working capital of $10.8 million. We expect to continue to spend substantial amounts of capital to grow our business and acquire diagnostics businesses. We believe the net proceeds that we will receive from this offering, together with cash from operations and our current and future debt financings, will be sufficient to fund our capital requirements through 2012.

After the Reorganization Transactions and the completion of this offering, we will enter into the Tax Receivable Agreement which will obligate Aurora Diagnostics, Inc. to pay to the Tax Receivable Entity 85 percent of certain cash tax savings, if any, in U.S. federal, state, local and foreign income tax realized by Aurora Diagnostics, Inc. from existing and future tax attributes.

The actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors. We expect that future payments under the Tax Receivable Agreement in respect of tax attributes resulting from past acquisitions, as well as from the Reorganization Transactions, will aggregate $ million and range from approximately $ million to $ million per year over the next years. These amounts reflect only certain cash tax savings attributable to current tax attributes resulting from past acquisitions described above, as well as from the Reorganization Transactions. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding Tax Receivable Agreement payments from these tax attributes. Future payments under the Tax Receivable Agreement in respect of subsequent acquisitions of Aurora Holdings Units would be in addition to these amounts and would, if such exchanges took place at the initial public offering price, be of comparable magnitude.

In connection with the Reorganization Transactions, this offering and the related Tax Receivable Agreement, we recorded a deferred tax asset of million and a liability related to the Tax Receivable Agreement of million, which represents our obligations to the Tax Receivable Entity. The remaining 15% or million was recorded as an increase to additional paid in capital, a component of stockholders’ equity.

Cash flows from operating activities

Net cash provided by operating activities during the three months ended March 31, 2010 was $4.0 million compared to $5.8 million during the three months ended March 31, 2009. The decrease related primarily to a decrease in net income of $1.1 million and an increase in the change in net accounts receivable of $1.1 million compared to the prior quarter. Net accounts receivable increased due to a billing conversion at one of our labs, which resulted in a delay in collections, and due to the withholding of payments by Medicare intermediaries for certain periods while legislative changes were put in place. As of March 31, 2010 our DSO (Days Sales Outstanding) averaged 37 days, up slightly from 36 days for the prior quarter.

Net cash provided by operating activities during the year ended December 31, 2009 was $36.4 million compared to $29.0 million during the year ended December 31, 2008. The increase related primarily to an increase in net income after giving effect to the non cash charge for the impairment of goodwill and intangible assets. As of December 31, 2009 our DSO averaged 34 days compared to 32 days in 2008.

Net cash provided by operating activities during the year ended December 31, 2008 was $29.0 million compared to $9.8 million during the year ended December 31, 2007. The increase related primarily to an increase in net income, adjusted for depreciation and amortization related to our 2007 and 2008 acquisitions. As of December 31, 2008 our DSO averaged 32 days compared to 39 days in 2007. Our DSO improved in 2008 as the result of a focused effort on improving our collection efforts at certain billing locations.

Cash flow used in investing activities

Net cash used in investing activities during the three months ended March 31, 2010 was $33.5 million compared to $6.2 million during the three months ended March 31, 2009. Net cash used in investing activities during the three months ended March 31, 2010 consisted of $0.9 million of purchases of property and equipment, $11.7 million for the payment of contingent notes and $20.9 million for our acquisition completed March 12, 2010, net of cash acquired. Contingent note payments were higher due to the timing of payments compared to the quarter ended March 31, 2010. A number of the practices contingent note payments were determined and paid in the fourth quarter of 2008 as opposed to the first quarter of 2009.

Net cash used in investing activities during the year ended December 31, 2009 was $49.3 million compared to $46.3 million during the year ended December 31, 2008. Net cash used in investing activities during the year ended December 31, 2009 consisted of $3.0 million of purchases of property and equipment, $16.9 million for deposits (primarily for acquisitions completed January 1, 2010), $12.7 million for the payment of contingent notes and $16.7 million for acquisitions, net of cash acquired.

The purchases of equipment during 2009 primarily consist of $1.0 million related to computer equipment and software, $1.3 million related to laboratory equipment, and $0.7 million related to automobiles, furniture and leasehold improvements. The computer equipment and software primarily consisted of servers, desktops, laptops, and related software in support of our headcount growth across all functional areas. The laboratory equipment primarily consisted of microscopes and other analysis equipment for our existing laboratories.

The increase in deposits relates to our payment on December 31, 2009 of approximately $17.0 million in cash to acquire 100 percent of the equity of two pathology practices. These acquisitions were consummated on January 1, 2010 and therefore included in deposits as of December 31, 2009.

In connection with the acquisitions, we have agreed to pay additional consideration in future periods based upon the attainment of stipulated levels of operating earnings by each of the acquired entities, as defined in their respective acquisition agreements. For all acquisitions prior to January 1, 2009, we do not accrue contingent consideration obligations prior to the attainment of the objectives, and the amount owed becomes fixed and determinable. For the year ended December 31, 2009, we paid contingent consideration of $12.7 million.

The majority of the cash used for acquisitions for the year ended December 31, 2009 related to our November 2009 acquisition of 100 percent of the equity of one pathology practice for an aggregate cash purchase price of $15.3 million. The cash portion of the purchase price was funded primarily with proceeds from the June 2009 issuance of Class A-1 membership interests.

Net cash used in investing activities was $46.3 million during the year ended December 31, 2008 compared to $303.5 million during the year ended December 31, 2007. Net cash used in investing activities during the year ended December 31, 2008 consisted of $2.7 million of purchases of property and equipment, $12.5 million for the payment of contingent notes and $31.0 million for acquisitions, net of cash acquired.

The purchases of equipment during 2008 primarily consist of $1.3 million related to computer equipment and software, $0.5 million related to laboratory equipment and $0.9 million related to furniture and leasehold improvements. The computer equipment and software primarily consisted of servers, desktops, laptops, and related software in support of our headcount growth across all functional areas. The laboratory equipment primarily consisted of microscopes and other analysis equipment for our existing laboratories.

The majority of the cash used for acquisitions for the year ended December 31, 2008 related to our 2008 acquisition. During 2008, we acquired substantially all of the assets of one pathology practice, for an aggregate purchase price (including acquisition costs) of $27.3 million and additional consideration in the form of contingent notes. The purchase price was funded primarily with proceeds from capital calls on Aurora Holdings’ Class A, C, and X membership interests of $7.3 million and our previous term loan facility of $20.0 million.

The majority of the cash used for acquisitions for the year ended December 31, 2007 related to the acquisition of eight pathology practices for an aggregate cash purchase price of $306.1 million. The cash portion of the purchase price was funded primarily with contributions from members of Aurora Holdings and borrowings under our previous term loan facility of $115.3 million and $190.8 million, respectively.

Cash flows from financing activities

Net cash provided by financing activities for the three months ended March 31, 2010 was $5.2 million compared to net cash used in financing activities of $2.4 million for the three months ended March 31, 2009.

For the three months ended March 31, 2010, we made mandatory repayments under our previous term loan of $2.2 million compared to $1.8 million for the same quarter of the prior year. For the three months ended March 31, 2010, we received proceeds from the sale of Aurora Holdings’ Class Z capital of $8.5 million, which was offset by tax distributions to the members of the Aurora Holdings of $0.6 million compared to the prior quarter, in which we made tax distributions to the members of Aurora Holdings of $0.5 million.

Net cash provided by financing activities for the year ended December 31, 2009 was $33.0 million compared to $16.0 million for the year ended December 31, 2008.

For the year ended December 31, 2009, we received proceeds of $50.3 million in connection with the issuance of 21,382 Aurora Holdings Class A-1 membership interests. In connection with the Class A-1 issuance, we incurred $3.1 million of costs which were recorded as a reduction in members’ equity. In addition, during 2009 we made repayments of $8.2 million and $3.0 million under our previous term loan facilities and subordinated notes payable, respectively. Also during 2009, in accordance with the Aurora Holdings LLC Agreement, we made tax distributions to certain members totaling $2.8 million.

Net cash provided by financing activities for the year ended December 31, 2008 was $16.0 million compared to $300.5 million for the year ended December 31, 2007.

For the year ended December 31, 2008, we borrowed $22.1 million under our previous term loan facility of which $20.0 million, along with $7.3 million of contributions from members of Aurora Holdings, was used to complete the 2008 acquisition. In addition, during 2008 we made repayments of $7.8 million and $2.9 million under our previous term loan facilities and subordinated notes payable, respectively. Also during 2008, in accordance with the Aurora Holdings LLC Agreement, we made tax distributions to certain Aurora Holdings’ members totaling $0.4 million. During 2008, we paid $1.8 million of costs related to Aurora Holdings’ original member investments.

Contractual Obligations and Commitments

The following table sets forth our long-term contractual obligations and commitments as of March 31, 2010 (in thousands):


	Payments Due by Period
Contractual obligations	2010, Remainder		2011		2012		2013		2014		After 2014		Total

Term loans	$	6,518	$	10,406	$	189,975	$	—	$	—	$	—	$	206,900
Capital lease obligations		34		50		56		64		48		—		252
Estimated interest on term loans⁽¹⁾		8,908		11,484		8,303		—		—		—		28,695
Subordinated unsecured contingent notes		2,860		2,688		2,840		—		—		—		8,388
Real estate leases		2,090		2,716		2,213		1,895		1,475		6,270		16,659

Total	$	20,411	$	27,344	$	203,387	$	1,959	$	1,523	$	6,270	$	260,894


(1)		Estimated interest payments on our previous term loan facilities represent the majority of future interest payments, and have been calculated using the effective interest rates (three month LIBOR, plus credit spread) multiplied by the outstanding balances as of March 31, 2010, less mandatory repayments, through their maturity dates. As disclosed elsewhere in this prospectus, our previous term and revolving loans have been refinanced by our new credit facilities on May 26, 2010. See “— Recent Developments.”

From time to time, we may enter into contracts with suppliers, manufacturers, and other third parties under which we may be required to make minimum payments. The table above does not reflect any future obligations that may arise due to the establishment of additional laboratory facilities, including facility leasing costs, tenant improvements, and other facility startup and infrastructure costs.

Off Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. We have provided a description of all our significant accounting policies in Note 1 to our audited consolidated financial statements included in the back of this prospectus. We believe that of these significant accounting policies, the following may involve a higher degree of judgment or complexity.

Net Revenue and Accounts Receivable

Substantially all of our revenues consist of payments or reimbursements for specialized diagnostic services rendered to patients of our referring physicians. Our billings for services reimbursed by third-party payors, including Medicare, and patients are based on a company-generated fee schedule that is generally set at higher rates than our anticipated reimbursement rates. Our billings to physicians are billed based on negotiated fee schedules that set forth what we charge for our services. Reimbursement under Medicare for our services is subject to a

Medicare physician fee schedule and, to a lesser degree, a clinical laboratory fee schedule, both of which are updated annually. Our billings to patients include co-insurance and deductibles as dictated by the patient’s insurance coverage. Billings for services provided to uninsured patients are based on our company-generated fee schedule. We do not have any capitated payment arrangements, which are arrangements under which we are paid a contracted per person rate regardless of the services we provide.

Our net revenues are recorded net of contractual allowances which represent the estimated differences between the amount billed and the estimated payment to be received from third party payors, including Medicare. Adjustments to the estimated contractual allowances, based on actual receipts from third-party payors, including Medicare, are recorded upon settlement. Our billing is currently processed through multiple systems. We have an ongoing process to evaluate and record our estimates for contractual allowances based on information obtained from each of these billing systems. This information includes aggregate historical billing and contractual adjustments, billings and contractual adjustments by payor class, accounts receivable by payor class, aging of accounts receivable, historical cash collections and related cash collection percentages by payor and/or aggregate cash collections compared to gross charges. In addition, we may take into account the terms and reimbursement rates of our larger third party payor contracts and allowables under government programs in determining our estimates. The degree of information used in making these estimates varies based on the capabilities and information provided by each of our billing systems.

The process for estimating the ultimate collection of accounts receivable associated with our services involves significant assumptions and judgment. The provision for doubtful accounts and the related allowance are adjusted periodically, based upon an evaluation of historical collection experience with specific payors for particular services, anticipated collection levels with specific payors for new services, industry reimbursement trends, accounts receivable aging and other relevant factors. The majority of our provision for doubtful accounts relates to our estimate of uncollectible amounts from patients who are uninsured and may fail to pay their coinsurance or deductible obligations. Changes in these factors in future periods could result in increases or decreases in our provision for doubtful accounts and impact our results of operations, financial position and cash flows.

As of March 31, 2010, for each 1.0 percent change in our estimate for the allowance for contractual adjustments, net revenue could increase or decrease approximately $0.5 million. As of March 31, 2010, for each 1.0 percent change in our estimate for the allowance for doubtful accounts, our provision for doubtful accounts could increase or decrease $0.2 million.

Annual Impairment Testing of Goodwill and Intangibles

Goodwill is our single largest asset. We evaluate the recoverability and measure the potential impairment of our goodwill annually. The annual impairment test is a two-step process that begins with the estimation of the fair value of the reporting unit. For purposes of testing goodwill for impairment, each of our acquired practices is considered a separate reporting unit. To estimate the fair value of the reporting units, we utilize a discounted cash flow model as the primary approach to value supported by a market approach guideline public company method, or the GPC Method, which is used as a reasonableness test. We believe that a discounted cash flow analysis is the most appropriate methodology to test the recorded value of long-term assets with a demonstrated long-lived value. The results of the discounted cash flow provide reasonable estimates of the fair value of the reporting units because this approach is based on each respective unit’s actual results and reasonable estimates of future performance, and also takes into consideration a number of other factors deemed relevant by management, including but not limited to, expected future market revenue growth and operating profit margins. We have consistently used these approaches in determining the value of goodwill. We consider the GPC Method as an adequate reasonableness test which utilizes market multiples of industry participants to corroborate the discounted cash flow analysis. We believe this methodology is consistent with the approach that any strategic market participant would utilize if they were to value one of our reporting units.

The first step of the goodwill impairment process screens for potential impairment and the second step measures the amount of the impairment, if any. Our estimate of fair value considers (i) the financial projections and future prospects of our business, including its growth opportunities and likely operational improvements, and

(ii) comparable sales prices, if available. As part of the first step to assess potential impairment, we compare our estimate of fair value for the reporting unit to the book value of the reporting unit. If the book value is greater than our estimate of fair value, we would then proceed to the second step to measure the impairment, if any. The second step compares the implied fair value of goodwill with its carrying value. The implied fair value is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of the reporting unit’s goodwill is greater than its implied fair value, an impairment loss will be recognized in the amount of the excess.

On a quarterly basis, we perform a review of our business to determine if events or changes in circumstances have occurred which could have a material adverse effect on our fair value and the fair value of our goodwill. If such events or changes in circumstances were deemed to have occurred, we would perform an impairment test of goodwill as of the end of the quarter, consistent with the annual impairment test performed on September 30, and record any noted impairment loss.

The following assumptions were made by management in determining the fair value of the reporting units and related intangibles as of September 30, 2009: (a) the discount rates ranged between 13.0 percent and 15.0 percent, based on relative size and perceived risk of the reporting unit; (b) an average compound annual growth rate of 7.5 percent during the five year forecast period; and (c) earnings before interest, taxes, depreciation, and amortization, with an average reporting unit level margin of 38.9 percent. These assumptions are based on (a) the actual historical performance of the reporting units and (b) management’s estimates of future performance of the reporting units.

We also consider the economic outlook for the healthcare services industry and various other factors during the testing process, including hospital and physician contract changes, local market developments, changes in third-party payor payments, and other publicly available information.

Intangible assets, acquired as the result of a business combination, are recognized at fair value, as an asset apart from goodwill if the asset arises from contractual or other legal rights, or if it is separable. Intangible assets, principally representing the fair value of customer relationships, health care facility agreements and non-competition agreements acquired, are capitalized and amortized on the straight-line method over their expected useful life, which generally ranges from 4 to 18 years.

We recognize impairment losses for intangible assets when events or changes in circumstances indicate the carrying amount may not be recoverable. We continually assesses whether an impairment in the carrying value of the intangible assets has occurred. If the undiscounted future cash flows over the remaining amortization period of an intangible asset indicate the value assigned to the intangible asset may not be recoverable, we reduce the carrying value of the intangible asset. We would determine the amount of any such impairment by comparing anticipated discounted future cash flows from acquired businesses with the carrying value of the related assets. In performing this analysis, we consider such factors as current results, trends and future prospects, in addition to other relevant factors.

As of September 30, 2009, we tested goodwill and intangible assets for potential impairment and recorded a non-cash impairment expense of $8.0 million resulting from a write down of $6.6 million in the carrying value of goodwill and a write down of $1.4 million in the carrying value of intangible assets. The write down of the goodwill and intangible assets related to one reporting unit. Regarding this reporting unit, we believe events occurred and circumstances changed that more likely than not reduced the fair value of the intangible assets and goodwill below their carrying amounts. These events during 2009 consisted primarily of the loss of significant customers present at the acquisition date, which adversely affected the current year and expected future revenues and operating profit of the reporting unit.

Quantitative and Qualitative Disclosures about Market Risk

We maintain our cash balances at high quality financial institutions. The balances in our accounts may periodically exceed amounts insured by the Federal Deposit Insurance Corporation, of up to $250,000 at

December 31, 2009 and 2008. We do not believe we are exposed to any significant credit risk and have not experienced any losses.

Our primary exposure to market risk is interest expense sensitivity due to changes in the underlying prime rate or LIBOR which determines the all in cost of our interest expense on our previous term loan facilities. As of December 31, 2009, we had an interest rate swap agreement that expired January 10, 2010. Therefore subsequent to that date the majority of our debt will be variable rate debt and our earnings could be impacted by changes in variable interest rates. We do not enter into interest rate swap agreements, or other derivative financial instruments, for trading or speculative purposes. We plan to periodically review our exposure to interest rate fluctuations and access strategies to manage our exposure.

Recent Accounting Pronouncements

On January 1, 2009, we adopted a new accounting standard issued by the FASB related to accounting for business combinations using the acquisition method of accounting (previously referred to as the purchase method). Among the significant changes, this standard requires a redefining of the measurement date of a business combination, expensing direct transaction costs as incurred, capitalizing in-process research and development costs as an intangible asset and recording a liability for contingent consideration at the measurement date with subsequent re-measurements recorded in the results of operations. This standard also requires costs for business restructuring and exit activities related to the acquired company to be included in the post-combination financial results of operations and also provides new guidance for the recognition and measurement of contingent assets and liabilities in a business combination. In addition, this standard requires several new disclosures, including the reasons for the business combination, the factors that contribute to the recognition of goodwill, the amount of acquisition related third-party expenses incurred, the nature and amount of contingent consideration, and a discussion of pre-existing relationships between the parties. The application of this standard was material for business combinations completed in 2009. The standard is likely to have a significant effect on the way we allocate the purchase price of certain future business combinations, including the recognition and measurement of assets acquired and liabilities assumed and the expensing of direct transaction costs and costs to integrate the acquired business.

On January 1, 2009, we adopted a new accounting standard issued by the FASB related to the disclosure of derivative instruments and hedging activities. This standard expanded the disclosure requirements about an entity’s derivative financial instruments and hedging activities, including qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

Effective June 30, 2009, we adopted a newly issued accounting standard related to accounting for and disclosure of subsequent events in our consolidated financial statements. This standard provides the authoritative guidance for subsequent events that was previously addressed only in United States auditing standards. This standard establishes general accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and requires us to disclose that we have evaluated subsequent events through the date of the filing or issue date. This standard does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. The adoption of this standard did not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued the FASB Accounting Standards Codification, or ASC. The ASC has become the single source of non-governmental accounting principles generally accepted in the United States of America, or GAAP, recognized by the FASB in the preparation of financial statements. We adopted the ASC as of July 1, 2009. The ASC does not change GAAP and did not have an effect on our financial position, results of operations or cash flows.

In June 2009, the FASB issued new accounting guidance on when an entity should be included in consolidated financial statements. The new guidance amends the evaluation criteria to identify the primary beneficiary of a variable interest entity, or VIE, and requires ongoing reassessment of whether an enterprise is the primary

beneficiary of the VIE. The new guidance significantly changes the consolidation rules for VIEs including the consolidation of common structures, such as joint ventures, equity-method investments, and collaboration arrangements. The guidance is applicable to all new and existing VIEs. This standard is effective for us as of January 1, 2010 and we do not expect the impact of its adoption to be material to our consolidated financial statements.

In January 2010, the FASB issued an amendment to the accounting standards related to the disclosures about an entity’s use of fair value measurements. Among these amendments, entities will be required to provide enhanced disclosures about transfers into and out of the Level 1(fair value determined based on quoted prices in active markets for identical assets and liabilities) and Level 2 (fair value determined based on significant other observable inputs) classifications, provide separate disclosures about purchases, sales, issuances and settlements relating to the tabular reconciliation of beginning and ending balances of the Level 3 (fair value determined based on significant unobservable inputs) classification and provide greater disaggregation for each class of assets and liabilities that use fair value measurements. Except for the detailed Level 3 roll-forward disclosures, the new standard is effective for us for interim and annual reporting periods beginning after December 31, 2009. The requirement to provide detailed disclosures about the purchases, sales, issuances and settlements in the roll-forward activity for Level 3 fair value measurements is effective for us for interim and annual reporting periods beginning after December 31, 2010. We do not expect that the adoption of this new standard will have a material impact on our consolidated financial statements.

INDUSTRY

Our Market

The U.S. diagnostic testing industry had revenues of approximately $55 billion in 2008 and grew at a rate of 7 percent compounded annually from 2000 to 2008, according to the Washington G-2 Report.

Testing Markets

The markets within the broader diagnostic testing industry are defined as anatomic pathology, clinical pathology, and gene based and other esoteric testing. Anatomic pathology represents our core focus and, in 2009, we derived approximately 94 percent of our revenues from anatomic pathology services, approximately 5 percent of our revenues from clinical pathology services and approximately 1 percent of our revenues from gene based and other esoteric testing.


	•	Anatomic Pathology. Anatomic pathology services involve the diagnosis of cancer and other medical conditions through the examination of tissues (histology) and the analysis of cells (cytology). Volume is measured by the number of accessions, or the number of patient cases, where each accession may then include multiple specimens. Generally, the anatomic pathology process involves the preparation of slides by trained histotechnologists or cytotechnologists and the review of those slides by anatomic pathologists. Although anatomic pathologists do not treat patients, they establish a definitive diagnosis and may also consult with the referring physician. The anatomic pathology market was $13 billion, or 24 percent, of 2008 total diagnostic testing industry revenues according to the Laboratory Economics Report with $7.6 billion derived from the outpatient anatomic pathology channel. Generally, anatomic pathology services command higher reimbursement rates, on a per specimen basis, than clinical pathology services. According to the Washington G-2 Report the anatomic pathology market has expanded more rapidly than the overall industry, with revenues growing 4.8 percent on a compound annual basis between 2006 and 2009, compared to 4.5 percent for the rest of the industry. Excluding growth in esoteric testing, the remainder of the industry grew at a compound annual rate of only 0.1 percent over the same period.

	•	Clinical Pathology. Clinical pathology services generally involve chemical testing and analysis of body fluids using standardized laboratory tests. These tests usually do not require the expertise of a pathologist and are frequently routine, automated and performed by large national or regional clinical laboratory companies and hospital laboratories. This is the largest diagnostic testing market representing $34 billion, or 62 percent, of 2008 total industry revenues according to the Laboratory Economics Report. The clinical pathology market grew at a rate of 0.2 percent compounded annually from 2006 to 2008, according to the Washington G-2 Report. Quest Diagnostics Incorporated and Laboratory Corporation of America are the largest providers to the clinical laboratory market.

	•	Gene-Based and Other Esoteric Testing. Esoteric testing services typically involve unique and complex genetic and molecular diagnostics performed by skilled personnel using sophisticated instruments. As a result, the esoteric testing market is dominated by a limited number of commercial laboratories. Compound annual growth rate for the total esoteric testing market was 19.5 percent from 2006 to 2008, according to the Washington G-2 Report. We believe the esoteric testing market will continue to demonstrate the fastest growth of any market in the U.S. diagnostic testing industry.

The following chart depicts the relative and total size of the U.S. laboratory testing markets in 2008:

2008 U.S. Laboratory Testing Markets

Source: Washington G-2 Report

Patient Channels

The anatomic pathology market on which we focus includes both inpatient and outpatient channels. We are primarily focused on the non-hospital outpatient channel of the anatomic pathology market.


	•	Outpatient Channel. The outpatient channel of the anatomic pathology market involves diagnostic testing performed on tissues and cells of patients who do not reside in a medical facility during their diagnosis and treatment. The outpatient channel is divided into the hospital outpatient channel, which involves patients diagnosed and treated at hospitals on an outpatient basis, and the non-hospital outpatient channel, which involves patients diagnosed and treated at medical facilities other than hospitals on an outpatient basis. The non-hospital outpatient channel is the largest component of the anatomic pathology market and has grown more rapidly than other channels. This channel accounted for $7.6 billion, or 57 percent, of anatomic pathology revenues for the year ended December 31, 2008, representing 10 percent growth according to the Laboratory Economics Report, and is expected to grow at a higher rate than the overall industry from 2008 to 2012. The hospital outpatient channel accounted for $1.9 billion, or 15 percent, of anatomic pathology revenues, representing 4 percent growth in 2008.

	•	Inpatient Channel. The inpatient channel of the anatomic pathology market involves diagnostic testing performed on tissues and cells of patients who reside in a hospital during their diagnosis and treatment. Typically, the hospital operates its own clinical and histology laboratories, but contracts on an exclusive basis with an independent pathology group. In 2008, according to the Laboratory Economics Report, the hospital inpatient channel accounted for $3.7 billion, or 28 percent, of the anatomic pathology revenues.

The following chart depicts the relative and total size of the outpatient and inpatient channels in 2008:

2008 Anatomic Pathology Laboratory Testing by Channel

Total: $13 billion

Source: Laboratory Economics Report

Anatomic Pathology Subspecialties

The non-hospital outpatient channel of the anatomic pathology market also includes a number of subspecialties, including primarily women’s health pathology, urologic pathology and dermatopathology. All three of these subspecialty testing areas are among our core competencies, and we derived approximately 80 percent of our revenues, in aggregate, from these three subspecialties in 2009.


	•	Women’s Health Pathology. The women’s health pathology subspecialty, which includes gynecological pathology and cytopathology, principally involves diagnostic tests performed on samples such as Pap smears and cervical biopsies that are primarily provided by referring physicians in the obstetrics and gynecology areas. In 2008, according to the Laboratory Economics Report, the women’s health pathology subspecialty accounted for $2.6 billion, or 34 percent, of the broader non-hospital outpatient channel. In particular, the cervical cancer screening market in the U.S. has tripled over the past 10 years to $2 billion in 2008, driven by the adoption of more expensive monolayer liquid-based testing technologies, favorable changes in Medicare reimbursement and the introduction of DNA-based human papillomavirus testing for indeterminate Pap tests. From 1998 to 2007, monolayer technology grew from 10 percent to 92 percent of the women’s health pathology subspecialty, according to the Washington G-2 Report.

	•	Urologic Pathology. The urologic pathology subspecialty involves diagnostic tests performed on tissue specimens such as prostate biopsies that are provided by referring physicians in the urology area. In particular, the prostate cancer screening market is large and growing and in 2008, according to the Laboratory Economics Report, represented $1.7 billion, or 22 percent, of the broader non-hospital outpatient channel.

	•	Dermatopathology. The dermatopathology subspecialty primarily involves diagnostic tests performed on samples such as skin biopsies that are primarily provided by referring physicians in the dermatology or plastic surgery areas. In 2008, according to the Laboratory Economics Report, dermatopathology accounted for $1 billion, or 13 percent, of the broader non-hospital outpatient channel, and the number of new skin cancer cases grew 15 percent between 2007 and 2009, according to the Laboratory Economics Report.

	•	Other. The non-hospital outpatient channel includes other subspecialty areas such as gastrointestinal pathology, which involves diagnostic tests performed on samples such as endoscopic biopsies that are primarily provided by gastroenterologists, and hematopathology, which involves diagnostic tests performed on samples such as blood, bone marrow and lymph node biopsies that are primarily provided by referring physicians in the hematology and oncology areas. In 2008, according to the Laboratory Economics Report, these other subspecialties accounted for $2.3 billion, or 30 percent, in aggregate, of the broader non-hospital outpatient channel.

The following chart depicts the relative and total size of the U.S. non-hospital outpatient anatomic pathology subspecialty testing markets in 2008:

Anatomic Pathology Outpatient Subspecialties

Source: Laboratory Economics Report

Our Opportunity

We believe that demand for diagnostic services in the non-hospital outpatient channel of the anatomic pathology market, including those in the women’s health pathology, urologic pathology and dermatopathology subspecialties, will continue to expand.

Aging of the U.S. population

The number of individuals 65-years-old and older will increase to 55 million, or by 36 percent, over the next decade, a percentage rate that is nearly four times faster than that of the overall population, according to the U.S. Census Bureau Report. According to the American Cancer Society Report, the risk of being diagnosed with cancer increases as individuals age, with an estimated 52 percent of all new cancer cases diagnosed in persons 65-years-old and older in 2009.

Increasing Incidence of Cancer

The number of new cancer cases per year grew by 2 percent between 2007 and 2009 to approximately 1.5 million new cases according to the American Cancer Society Report. Within that total growth, new skin cancer cases per year grew by 15 percent between 2007 and 2009, representing the highest percentage increase among all diagnosed cancer types and the largest number of new cases per year of any type of cancer. With a high cure rate of greater than 99 percent for certain types of skin cancer, according to American Academy of Dermatology, the benefits of preventive skin cancer screening are significant. Screening for cervical cancer within the women’s health pathology subspecialty grew at a 12 percent compounded annual rate between 1998 and 2008, and we expect continued innovation in testing techniques to drive continued rapid growth. Cancers that can be prevented or detected earlier by screening account for approximately half of new cancer cases per year. In 2008, approximately $228 billion was spent in the U.S. for the diagnosis and treatment of cancer, including $93 billion for direct medical costs.

Expanding Demand for Non-Hospital Outpatient Services

The non-hospital outpatient channel of the anatomic pathology market is expected to continue growing at a higher percentage rate than the overall industry, principally driven by patient preference and the cost-effectiveness of outpatient treatment settings like ambulatory surgery centers compared to inpatient hospital-based services. In the year ended December 31, 2008, the number of outpatient surgical procedures represented 62 percent of all surgical procedures performed in the U.S., as compared to 17 percent in 1980, according to the AHA Reports.

Medical Advancements Allowing for Earlier Diagnosis and Treatment of Disease

Physicians are increasingly relying on diagnostic testing to help identify the risk of disease, to detect the symptoms of disease earlier, to aid in the choice of therapeutic regimen, to monitor patient compliance and to evaluate treatment results. We believe physicians, patients and payors increasingly recognize the value of diagnostic testing as a means to improve health and reduce the overall cost of health care through early detection.

Nursing Home and Home Health Markets

We believe that the aging of the U.S. population is a natural driver for the demand for long-term care facilities and home health and that clinical laboratory testing is a critical service offered by nursing homes. According to the Washington G-2 Report, this market has grown from $168.7 billion in 2005 to $198.5 billion in 2008, and projected growth is estimated at 6.0 percent.

BUSINESS

Overview

Approximately 100 percent of our consolidated net revenue for each of the years ended December 31, 2007, 2008 and 2009 resulted from physicians providing diagnostic services to our clients. The majority of our revenues in 2009 were derived from physicians providing diagnostic services in the non-hospital outpatient channel of the anatomic pathology market, which in 2008 was one of the fastest-growing and largest channels of that market. We also maintain 36 exclusive contracts with hospitals under which we provide inpatient and outpatient professional anatomic pathology services. We also provide medical director services and, for some hospitals, technical slide preparation services.

Our Competitive Strengths

We believe that we are distinguished by the following competitive strengths:


	•	Leading Market Position in Higher-Growth Subspecialties of Expanding Industry. We are a leading specialized diagnostics company, focused on the faster-growing non-hospital outpatient channel within the anatomic pathology market with leading market positions in two of the three higher-growth subspecialties of the market: dermatopathology and women’s health pathology.

	•	Locally-Focused Business Model with National Scale. Our business model centers on achieving significant local market share, which yields operating efficiencies and national scale when consolidated across all of our operations. The diagnostic services we provide are designed specifically to meet the needs of the local markets we serve. Our national infrastructure enables us to more efficiently manage our operations, improve productivity and deliver a more extensive menu of diagnostic services to our local clients. As a result of our strong local presence and high-quality diagnostic services, we have established significant loyalty with


		referring physicians and key payors in our local markets. In 2009, we derived more than 85 percent of our revenues from locally-focused, in-network payor contracts.


	•	Experienced, Specialized Pathologists Focused on Client Service. We believe our pathologists have long-standing client relationships and provide high-quality service within their respective local communities. Over one-third of our pathologists are specialized in dermatopathology, with the remainder focused on women’s health pathology, urologic pathology, hematopathology and general surgical pathology. This alignment of our pathologists’ specialties with those of the referring physicians is critical to our ability to retain existing and attract new clients. Our clinical expertise and frequent interactions with clients on patient diagnoses enables us to establish effective consultative and long-term relationships with referring physicians.

	•	Professional Sales, Marketing and Client Service Team. We maintain a sales, marketing and client service team of over 100 professionals who are highly-trained and organized by subspecialty to better meet the needs of our referring physicians and their patients. Our sales representatives are incentivized through compensation plans to not only secure new physician clients, but also to maintain and enhance relationships with existing physician clients. As a result, they have enabled us to expand our geographic market presence to 30 states and increase market penetration and market share in our local markets.

	•	Proprietary IT Solutions. Delivery of clinical information is essential to our business and a critical aspect of the differentiated service that we provide to our clients. We have developed scalable IT solutions that maximize the flexibility, ease-of-use and speed of delivery of our diagnostic reports, which has enabled us to rapidly grow our accession volume and meet the increasing physician demand for our diagnostic services. We also monitor referral patterns on a daily basis using our IT infrastructure, which allows us to respond quickly to referring physicians through our sales and marketing teams. We achieved this through the development of a proprietary suite of IT solutions called ConnectDX that is compatible with most electronic medical record, or EMR, systems. ConnectDX incorporates customized interface solutions, low cost and efficient printer capabilities, compliant web portal capacities, and proprietary software, all resulting in efficient and reliable onsite client connections.

	•	Proven Acquisition, Integration and Development Capabilities. We have significant expertise and a proven track record of identifying, acquiring and integrating pathology practices into our diagnostic laboratory network. Our management team successfully expanded our operations through the acquisition of 16 anatomic pathology laboratories and one clinical laboratory and through the development of two de novo diagnostic laboratories. We have improved the performance of the laboratories we have acquired by applying our standard operating procedures, enhancing sales and marketing capabilities, implementing our IT platform and realizing efficiencies from our national operations and management. We believe our operational platform, expertise and value proposition enable us to capitalize on the considerable consolidation opportunities in the highly-fragmented anatomic pathology market.

	•	Experienced Senior Leadership. Our senior management team has approximately 80 years of combined experience in the health care industry, including senior management positions with leading diagnostic companies including AmeriPath, DIANON Systems and Laboratory Corporation of America, and, collectively, have successfully completed over 65 acquisitions and built a number of de novo specialized diagnostic laboratories. We believe that our management’s strong reputation, extensive network of industry relationships and experience in building and growing successful companies in the industry help us to drive operating performance, hire and retain talented pathologists and other employees and attract acquisition candidates.

Our Business Strategy

We intend to achieve growth by pursuing the following strategies:


	•	Continue to Drive Market Penetration through Sales and Marketing. We plan to drive organic growth through our professional sales and marketing organization. Our 63-person sales and marketing team provides us with broad coverage to augment and further penetrate existing physician relationships and


		to develop new referral relationships. We plan to strategically add sales professionals to laboratories in markets that will most benefit from enhanced outreach, increasing our presence in existing and new markets.


	•	Leverage our IT Platform to Increase Operating Efficiencies. We believe our IT platform will allow us to gain market share in our existing subspecialties by improving productivity and reducing turnaround times. We have recently introduced an IT solution called doc2MD, a leading EMR system for dermatology practices for which we have an exclusive, long-term license. We intend to continue to develop our internal IT operations into a better-integrated diagnostic platform, which will improve national coordination and provide real time visibility into key performance metrics. In addition, we plan to continue to introduce innovative IT solutions, interface capabilities and market-specific IT solutions that enhance our value proposition to referring physicians.

	•	Expand through Targeted Acquisitions. We plan to identify and acquire leading laboratories to augment our organic growth, broaden our geographic presence and enhance our service offering. We intend to continue to build our business and enhance our reputation as a preferred acquiror for independent laboratories. We believe that our recognizable identity and strong reputation make us a preferred partner for independent laboratories.

	•	Expand Diagnostic Services Capabilities. We intend to expand our services in the areas of clinical and molecular diagnostics to complement our existing anatomic pathology businesses. We believe we can leverage our depth of experience and physician relationships to sell these new diagnostic services in conjunction with our existing testing services as a comprehensive offering. As a “one-stop” diagnostic services provider, we would not only better serve our current clients, but also position ourselves to attract new business under a more diverse service model.

	•	Develop De Novo Diagnostics Laboratories. We plan to continue to selectively develop diagnostic laboratories on a de novo basis, as we have done in certain markets, to expand our market presence, broaden our service offering and leverage the capabilities of our existing laboratories and pathologists.

	•	Expand Contracts with Hospitals in Target Markets. We intend to continue to develop additional contracts with hospitals in target markets as part of a broader strategy to strengthen and grow our outpatient business and expand our local market share.

	•	Further Expand into Growing Long-Term Care Market. We have a growing presence providing clinical diagnostic services to the long-term care markets in Central and Northern Florida. We intend to expand this regional coverage into the large South Florida market and replicate our success in other states with growing long-term care markets. We believe that our IT solutions, and our ability to meet the rapid service requirements for the long term care market, provide us with a significant competitive advantage in these markets.

Our Services

Anatomic pathology typically requires a pathologist to make a specific diagnosis. Anatomic pathologists are medical doctors who specialize in the study of disease. Anatomic pathologists do not treat patients, but rather assist other physicians in determining the correct diagnosis of their patient’s ailments. A pathologist’s diagnosis represents a critical factor in determining a patient’s future care. In addition, anatomic pathologists may consult with attending physicians regarding treatment plans. In these capacities, the anatomic pathologist often serves as the “physician’s physician,” thereby creating long-term relationships.

Anatomic pathologists perform their duties in laboratories, including independent free-standing local laboratories, hospital laboratories, regional and national laboratories, in ambulatory surgery centers and in a variety of other settings. Referring physicians take specimens from patients, and those specimens are transported to a laboratory by courier or an overnight delivery service. Once received at the laboratory, a specimen is processed and mounted onto a slide by laboratory technologists for examination by a pathologist. Once the pathologist examines a specimen, the pathologist typically records the results of testing performed in the form of a report to be transmitted to the referring physician. Since specimens are transportable and technology facilitates communication, samples can be diagnosed by a pathologist from a remote location. Therefore, pathologists are generally not needed

“on-site” to make a diagnosis. This enhances utilization of available capacity in outpatient and inpatient laboratories and allows the practice to service a wider geographic area.

An anatomic pathologist must have an understanding of a broad range of medicine. An anatomic pathologist may perform diagnostic testing services for a number of subspecialty testing markets such as dermatopathology, urologic pathology, women’s health pathology, gastrointestinal pathology, hematopathology or surgical pathology. While physical examination or radiology procedures may suggest a diagnosis for many diseases, the definitive diagnosis is generally established by the anatomic pathologist.

Sales and Marketing; Client Service

The selection of a pathologist to perform diagnostic testing services is primarily made by individual referring physicians. We maintain a sales and marketing team of 63 professionals who are highly-trained and organized by subspecialty to better meet the needs of our referring physicians. We have designed our compensation structure to incentivize our sales representatives to not only secure new physician clients, but also to maintain and enhance relationships with existing physician clients. As a result, our sales and marketing team has enabled us to expand our geographic market presence to 30 states by leveraging our extensive offering of diagnostic services across our markets.

We currently focus our marketing and sales efforts primarily on dermatologists, urologists and gynecologists, as well as gastroenterologists, hematologists and oncologists and their office staff. The physicians on which our marketing and sales efforts are focused include both non-hospital-based and hospital-based physicians. Our sales representatives concentrate on a geographic area based on the number of existing clients and client prospects, which we identify using several national physician databases that provide physician address information, patient demographic information and other data.

At the beginning of a new client relationship, one of our sales representatives visits a prospective physician client and describes in detail our differentiated service offerings, focusing on our experienced pathologists, local presence, rapid turn-around times, comprehensive diagnostic reports, client service and IT solutions. Our sales representatives focus on the specialties offered by their respective divisions, which allows them not only to discuss our specialized diagnostic services, but also to describe diagnostic developments and new products and technologies in their practice areas.

We also maintain a client service team of over 40 professionals who are highly-trained and organized by subspecialty. Our dedicated client service team provides ongoing support to our clients and, in particular, the office staff of our referring physicians. Our client service team enables us to augment the long-standing relationships between our pathologists and their clients to maintain a more stable base of referrals. These service teams provide our clients with a personal, knowledgeable and consistent point of contact within our company. Client service team members coordinate the provision of services, ensure testing supplies are replenished, answer administrative and billing questions, and resolve service issues. We believe these additional client contacts greatly enhance client satisfaction and strengthen overall client relationships.

Once a client relationship is established, our sales representatives and client service team provide frequent follow-up sales and service calls to ensure we are continuing to meet physician needs and expectations and to explore other opportunities for the physician to use our diagnostic services. For example, once a client relationship is established, our sales representatives and client service team frequently contact the client to track testing volume and monitor satisfaction. In addition, our sales representatives and client service team frequently conduct client surveys, and our pathologists dialogue with clients to develop relationships and identify areas in which our relationships and service levels may be improved or expanded. We believe that the frequency of these sales calls allows our sales representatives and client service team to build and enhance strong relationships with our clients, helping us to better understand their needs and develop new service offerings.

We currently focus our marketing and sales efforts by subspecialty. Our representatives are extensively trained in the specific subspecialty they service and they are knowledgeable about our test offerings and new diagnostic technologies available in the market by subspecialty. This provides additional value to our physician clients and

staff, as our representatives become a resource to our client’s practice. Our product offerings which have been developed to meet the unique needs of each subspecialty are branded under the following names:


	•	DermDX (dermatopathology services for the dermatology market);

	•	WomensDX (Womens Health Services for the OB/GYN market);

	•	UroDX (for the Urology market);

	•	GastroDX (for the Gastroenterology market);

	•	HemaDX (for the Hematology and Oncology market);

	•	TreatmentDX (drug treatment market); and

	•	CareDX (long term and assisted care markets).

The offerings provide a comprehensive test menu so each physician specialist can order the best test available to make a accurate diagnosis and appropriate treatment decisions.

Relationships with Referring Physicians and Third-Party Payors

Substantially all of our revenues consist of payments or reimbursements for specialized diagnostic services rendered to referring physicians.

Our referring physicians, whom we refer to as our clients, are our primary customers. See “— Our Services.” We received patient referrals from over 10,000 physicians during 2009. No single or small group of our clients accounted for a number of referrals in 2009 that was material to us. Accordingly, we are not dependant on any single or small group of our clients for referrals, revenues or otherwise. We receive referrals at the discretion of our clients and our clients are under no obligation to make referrals to us. Furthermore, we generally have no contractual or other formalized legal arrangements with our clients.

We receive most of our revenues in the form of reimbursement from third-party payors. While third-party payors are not our clients or customers, our contractual arrangements with third-party payors generate most of our revenues. Accordingly, such arrangements are, in aggregate, material to us.

For the year ended December 31, 2009, based on cash collections, we derived approximately 61 percent of our revenues from private insurance, including managed care organizations and other healthcare insurance providers. See “— Billing and Reimbursement — Reimbursement.” For the year ended December 31, 2009, none of these sources accounted for more than 10 percent of our revenues for the same period. While our reimbursements from private insurance sources are material to our business in the aggregate, we do not consider any individual private insurance source to be material to us.

We generally receive reimbursements from private third-party payors on a laboratory-by-laboratory basis. Our laboratories typically enter contracts with third-party payors that provide for us to be reimbursed at agreed-upon rates based on the services we perform. Our laboratories’ contracts with private insurers are typically subject to termination by the insurers for cause, including, among other things, upon our laboratories’ exclusion from government payor programs, and, in some cases, without cause. The insurers under such contracts typically have a right to change the applicable reimbursement rates we receive under the contract. In cases where our laboratories do not have contracts with particular private third-party payors, we receive reimbursements for services we perform at rates and on terms applicable to such payors’ out-of-network providers.

For the year ended December 31, 2009, based on cash collections, we derived approximately 25 percent of our revenues from government payor programs including Medicare and Medicaid. Accordingly, reimbursements from government payor programs are material to our business. This makes our business dependent on our ability to participate in the government programs and on the reimbursement rates we receive under such programs. See “— Billing and Reimbursement — Reimbursement.”

We generally receive reimbursements from government third-party payors on a laboratory-by-laboratory basis. Our laboratories typically enter contracts with government third-party payors that provide for us to be reimbursed at applicable rates based on the services we perform and other factors. Our laboratories’ contracts with governmental payors are typically subject to termination by the government for cause, and our governmental payors have a right to change the applicable reimbursement rates we receive under the contract.

Competition

The anatomic pathology market is highly competitive. Competition in our industry is based on several factors, including price, clinical expertise, quality of service, client relationships, breadth of testing menu, speed of turnaround of test results, reporting and IT systems, reputation in the medical community and ability to employ qualified personnel. Our competitors include local and regional pathology groups, national laboratories, hospital-based pathology groups and specialty physician groups.


	•	Local and Regional Pathology Groups. Local and regional pathology groups typically provide a relatively narrow menu of test services to community physicians and, in certain cases, to hospital-based pathologists.

	•	National Laboratory Companies. National laboratories typically offer a full suite of tests for a variety of medical professionals, including general practitioners, hospitals and pathologists. National laboratories have identified anatomic pathology as a focus area for future growth and will continue to be a competitive challenge going forward.

	•	Hospital Pathologists. Pathologists working in hospitals typically provide most of the diagnostic services required for hospital in-patients and, sometimes, hospital outpatients. Hospital pathologists act as medical directors for the hospital’s clinical and histology laboratories. Typically, hospital pathologists provide these services to hospitals under exclusive and long-term contractual arrangements.

	•	Specialty Physician Groups. An increasing number of specialty physician groups (urologists and gastroenterologists in particular) are building their own laboratories and in-sourcing pathology services. This trend represents a significant source of competition, and it could impact the anatomic pathology landscape in the future. According to the Laboratory Economics Report, at least 500 specialty physician groups have set up laboratories between 2005 and 2009.

The anatomic pathology market remains highly-fragmented, with the two largest clinical laboratory companies accounting for only 14 percent of annual revenues for the market in 2008. We are one of approximately ten similarly-sized anatomic pathology companies (in terms of revenues) that comprised, in aggregate, approximately 14 percent of annual revenues for the market in 2008. The remaining 72 percent of annual revenues for the market was comprised of over 13,000 pathologists and numerous specialized testing companies that offer a relatively narrow menu of diagnostic services. In 2008, approximately 70 percent of pathologists licensed in the U.S. were in private practices according to the Washington G-2 Report. There is an evolving trend among pathologists to form larger practices to provide a broader range of outpatient and inpatient services and enhance the utilization of the practices’ pathologists. We believe this trend can be attributed to several factors, including cost containment pressures by governmental and other third-party payors, increased competition, managed care and the increased costs and complexities associated with operating a medical practice. Moreover, given the current trends of increasing outpatient services, outsourcing and the consolidation of hospitals, pathologists are seeking to align themselves with larger practices that can assist providers in the evolving health care environment. Larger practices can offer pathologists certain advantages, such as obtaining and negotiating contracts with hospitals and other providers, managed care providers and national clinical laboratories; marketing and selling of professional services; providing continuing education and career advancement opportunities; making available a broad range of specialists with whom to consult; providing access to capital and business and management experience; establishing and implementing more efficient and cost effective billing and collection procedures; and expanding the practice’s geographic coverage area. Each of these factors support the pathologists in the efficient management of the complex and time-consuming non-medical aspects of their practice. As a result, we believe that there are substantial consolidation opportunities in the anatomic pathology market as smaller pathology providers seek access to the resources of diagnostics companies with a more comprehensive selection of services for referring physicians.

Seasonality

Our business is affected by seasonal trends and generally declines during the winter months, the year-end holiday period and other major holidays. Adverse weather conditions can also influence our business.

Quality Assurance

We consider the quality of our diagnostic services to be of critical importance, and we have established a comprehensive quality assurance program for our laboratories designed to drive accurate and timely test results and to ensure the consistent high quality of our testing services. In addition to the compulsory proficiency programs and external inspections required by the Centers for Medicare & Medicaid Services, or CMS, and other regulatory agencies, we have developed a variety of internal systems and procedures to emphasize, monitor, and continuously improve the quality of our operations.

We also participate in numerous externally-administered quality surveillance programs, and our laboratories are accredited by the College of American Pathologists, or CAP. CAP is an independent, non-governmental organization of board-certified pathologists that accredits laboratories nationwide on a voluntary basis and that has been accredited by CMS to inspect laboratories to determine adherence to the CLIA standards. The CAP accreditation program involves both unannounced on-site inspections of our laboratories and our participation in CAP’s ongoing proficiency testing program. A laboratory’s receipt of accreditation by CAP satisfies the Medicare requirement for participation in proficiency testing programs administered by an external source, one of Medicare’s primary requirements for reimbursement eligibility.

Information Systems

We are focused on implementing IT systems that streamline internal operations and provide customized IT solutions to meet the needs of our clients. We offer our IT solutions primarily through the proprietary system ConnectDx and increasingly through the doc2MD system for which we have an exclusive, long-term license.

We developed ConnectDx, a customizable application platform to provide a gateway for delivering and printing our reports and communicating with many of our clients. A number of our IT solutions provide an immediate impact to referring physicians and their offices. The most common connectivity tools include:


	•	Electronic interfaces;

	•	Client EMR interfacing;

	•	Internet report delivery (web portal);

	•	Printed reports;

	•	Patient education document;

	•	Auto fax;

	•	Patient data from clients office system requisitions;

	•	Color remote printing hardware; and

	•	Secure remote printing software.

Electronic interfaces provide a means through which we and our clients can share data efficiently and accurately. These customized interfaces can transfer patient information like demographics, requisitions and diagnostic results between our IT system and the IT system of our referring physicians. It takes us an average of eight weeks to build and implement a new interface tailored to the client, whereas it may take our competitors up to eight months to implement a standard interface.

Two key elements that we believe differentiate ConnectDx from our competitors’ electronic interfaces are the relative speed with which we can create and implement customized solutions for clients and the reduced overhead costs associated with doing so. Since ConnectDx was created to accommodate flexibility, customizations such as delivering reports to specified client system directories or printing multiple copies of reports at physician offices

during particular times each day are easy to implement. This functional flexibility is achieved with relatively low cost to us as a result of our IT solution’s layered and adaptable design. We expect the number of ConnectDx installations to grow and provide additional value to our customers. We plan to expand the products offered through ConnectDx to include utilization and patient education reports as well as practice-specific solutions.

We recently acquired an exclusive, long-term license to doc2MD, an EMR and practice management software that was specifically designed for dermatology practices, and we have begun installing this software at select client locations. We believe that the doc2MD software is a simple, cost-effective program that allows dermatologists to quickly and accurately document patient encounters. During 2009, we conducted a market test for doc2MD with a number of our dermatology practices and received positive feedback. We believe that doc2MD will provide us with the platform to drive our organic growth in the dermatopathology space, further enabling us to maintain stable relationships with existing dermatology clients and build relationships with new dermatology clients.

Most of our IT solutions are implemented on a laboratory by laboratory basis in connection with our efforts to integrate acquired laboratories. We have developed, and will continue to develop, faster integration times of our laboratory information system, or LIS, offering. After an acquisition, we generally transition our acquired laboratories to a common accounting system and software package for financial processing and reporting within 60 days of closing. Generally, the LIS and billing platforms of our acquired laboratories, as well as all their day-to-day laboratory operations, continue to operate as they did pre-acquisition. We bill for our services using the existing billing systems of the acquired laboratories or, in some locations, we use an outsourced vendor to provide billing services.

A significant benefit for acquired laboratories is the linkage of data between our central database and our laboratories via a private network. Information feeds from our laboratory systems to our centralized backend database tally accession details, client delivery products, practice management interfacing and sales data. Daily sales volumes are monitored and can be categorized by channel including product line, or territory. The centralized client contact system’s ability to alert sales representatives to changes in client trends within a single day further enables our sales and client service teams to monitor existing client retention and grow our client base.

Corporate Structure

We derive our revenues from our laboratory practices, which we own either directly through our wholly owned subsidiaries or through contractual arrangements with our affiliated practices. The manner in which we acquire and operate a particular practice is determined primarily by the corporate practice of medicine restrictions of the state in which the practice is located and other applicable regulations. We exercise diligence and care in structuring our practices and arrangements with providers in an effort to comply with applicable federal and state laws and regulations, and we believe that our current practices and arrangements do comply in all material respects with applicable laws and regulations. However, due to uncertainties in the law, there can be no assurance that our practices and arrangements would be deemed to be in compliance with applicable laws and regulations, and any noncompliance could result in a material adverse effect on us. See “— Government Regulation.”

In 2009, we derived 68% of our revenues from our affiliated practices. Through our contractual arrangements described below, our Board of Directors and management formulate strategies and policies which are implemented locally on a day-to-day basis by each of our affiliated practices. The following descriptions of our contractual arrangements with our affiliated practices are only summaries, which do not contain all of the information that may be important to you. For additional information, you should refer to the forms of our management and nominee agreements, copies of which have been filed with the SEC as exhibits to our registration statement.

We have entered into long-term management agreements with each of our ten affiliated practices, which are located in Michigan, Minnesota, Nevada, Texas, North Carolina, Florida and Georgia. Pursuant to these management agreements, we manage and control the non-medical functions of our affiliated practices, including:


	•	recruiting, training, employing and managing the technical and support staff;


	•	developing and equipping laboratory facilities;


	•	establishing and maintaining courier services to transport specimens;


	•	negotiating and maintaining contracts with hospitals, managed care organizations and other payors;


	•	providing financial reporting and administration, clerical, purchasing, payroll, billing and collection, information systems, sales and marketing, risk management, employee benefits, legal, tax and accounting services; and


	•	monitoring compliance with applicable laws and regulations.

Accordingly, our management agreements effectively give us total control over the operations of our affiliated practices, except with respect to decisions involving the medical judgment of our affiliated practices’ physicians. We do not control the medical diagnoses, medical treatments or other activities involving exercise medical judgment by our affiliated practices’ physicians.

From an operational standpoint, we typically prepare an annual operating plan for each of our affiliated practices pursuant to which the practice’s capital and operating budgets, scope and pricing of services, staffing and compensation of employees, support services, billing and collection procedures, patient acceptance policies and procedures, quality assurance and utilization assessment programs, compliance policies and risk management programs, and financial and strategic growth planning are established.

The scope of services for each affiliated practice is established in connection with the preparation of the practice’s annual operating plan, which we establish in consultation with and with the assistance of the practice’s laboratory director, who implements the practice’s operating plan and performs such other duties or requirements assigned by us.

The compensation of each affiliated practice’s licensed medical professionals is a component of the respective practice’s annual operating plan, which we prepare with the practice’s laboratory director as set forth above. The practice’s policies with respect to the retention of employees are also established by us and the practice’s laboratory director, provided that additional affiliated practice professionals may only be retained with our consent.

Each of our management agreements has an initial term of 50 years and cannot be terminated by our affiliated practice without cause. We receive a management fee from each of our affiliated practices for the services we provide pursuant to the management agreements. For eight of our affiliated practices, our management fee is equal to the practice’s net revenue less its expenses, which include physician salaries and other professional expenses. For the remaining two affiliated practices, our management fee is determined annually based on our estimate of each practice’s demand for management services during the upcoming year. For these practices, we may adjust the fee in the event that the services we provided were greater or less than the services that were anticipated. Subject to the requirements of applicable law, the adjustment of our management fees is entirely at our discretion.

We bear the economic risk associated with our affiliated practices. Under the provisions of our management agreements, we are generally obligated to pay all expenses of our affiliated practices expenses, including any management fees, a portion of corporate overhead or other costs. We must absorb all losses of our affiliated practice entities. We are not entitled to recover, from the affiliated practices’ nominee owners, physicians or other parties, any losses incurred by our affiliated practices.

In addition, we have entered into contractual arrangements with the licensed physicians that own our affiliated practices. These contractual arrangements, which consist of nominee agreements and non-alienation agreements, govern the ownership of our affiliated practices by our physicians. These physicians may not vote or transfer their ownership interests in our affiliated practices or distribute or encumber the assets of our affiliated practices without our prior authorization. In addition, we have the irrevocable and unconditional right to cause the physicians to transfer their ownership interests in our affiliated practices to our designee for nominal consideration. Through these contractual arrangements, we maintain controlling voting and financial interests in our affiliated practices. Each of our affiliated practices is owned by physicians pursuant to these agreements with the exception of our laboratory in Nevada, where our affiliated practice is owned by a trust of which one of our wholly owned subsidiaries is the sole beneficiary.

We have acquired four practices in Michigan and one practice in Texas, where the corporate practice of medicine is restricted by state law. In each case, we entered into a nominee agreement with one of the selling physicians, pursuant to which such physician holds the practice’s equity interest as our designated nominee on our

behalf. We also, either directly or through one of our wholly owned subsidiaries, entered into a long-term management agreement on the terms described above with each of the affiliated practices, pursuant to which we manage and control the non-medical functions of the practices.

In Florida and Georgia, which do not prohibit the corporate practice of medicine, we, through our wholly owned subsidiaries, directly purchased substantially all of the assets of one practice in each state, including the fixed assets, customer lists, contract rights and goodwill and other intangibles of each practice. In each case, after consummation of the acquisitions, we determined to enter into a non-alienation agreement with the shareholders of each professional entity from which we previously purchased assets, pursuant to which we acquired controlling voting and financial interests in the professional entities on terms substantially the same as our nominee agreements in Michigan and Texas. We also, through our wholly owned subsidiaries, entered into a long-term management agreement with each affiliated practice on terms substantially the same as our management agreements in Michigan and Texas.

We have also acquired one practice in each of North Carolina and Minnesota, each of which restricts the corporate practice of medicine. In each case, we, through a wholly owned subsidiary, directly acquired the laboratory. Because we cannot directly employ physicians in these states, in each case the selling physicians formed a de novo physician group that employs our pathologists. Similar to our contractual arrangements with our affiliated practices in Michigan and Texas, we entered into nominee agreements with the physicians who hold the equity interests in the physician groups on our behalf, and we entered into long-term management agreements with the physician groups. In addition, each laboratory that we acquired entered into a long-term services agreement with the physician group, pursuant to which the physician group provides professional pathology services to our laboratory on an exclusive basis. Each of our services agreements has an initial term of 50 years and cannot be terminated by the physician group without cause. Under these services agreements, we pay each physician group a service fee approximately equal to the compensation and professional expenses attributable to our pathologists employed by the group.

In Nevada, where the corporate practice of medicine is restricted, we acquired all of the common stock of our affiliated practice through a trust. We, through one of our wholly owned subsidiaries, are the sole beneficiary of the trust and receive all income from the trust. We generally have the right, at our sole discretion, to replace the trustees, withdraw assets from the trust, modify the terms of the trust agreement, or terminate the trust and direct the trustee to distribute the income and any asset from the trust. No assets of the trust can be sold or otherwise disposed of without our consent. In addition, we entered into a long-term management agreement with our affiliated practice that is owned directly by the trust. This agreement is substantially the same as our management agreements in other states.

In addition to the foregoing affiliated practices, in Alabama, which does not prohibit the corporate practice of medicine, we, through a wholly owned subsidiary, directly acquired a laboratory. Although we can directly employ physicians in Alabama, we contract with an unaffiliated de novo entity formed by the selling physicians that employs our pathologists. Similar to our practices in North Carolina and Minnesota, our laboratory entered into a long-term services agreement with the unaffiliated physician group, pursuant to which the physician group provides professional pathology services to our laboratory on an exclusive basis. In contrast to our practices in North Carolina and Minnesota, however, we did not enter into a nominee or management agreement with the physician group. While we do not have a controlling voting or financial interest in the physician group, we have the right to consult with the physician group regarding business decisions and to approve or disapprove the retention or discharge of all employees by the physician group. The services agreement has an initial term of 25 years and cannot be terminated by the physician group without cause. We currently pay the physician group a base service fee and a bonus calculated as a percentage of our laboratory’s earnings.

Our affiliated practice entities are included in the consolidated financial statements of Aurora Diagnostics Holdings, LLC. See “Summary Historical and Pro Forma Consolidated Financial and Operating Data,” “Unaudited Pro Forma Financial Data,” “Selected Historical Consolidated Financial Data” and our consolidated financial statements in the back of this prospectus.

Contracts and Relationships with Providers

We employ our pathologists, control the practice entities that employ our pathologists or contract with pathologists on an independent contractor basis to provide diagnostic services in our laboratories. While we exercise legal control over our practices, we do not exercise control over, or otherwise influence, the medical judgment or professional decisions of any pathologist associated with our practices.

Our pathologist employment agreements typically have terms of between 3 and 5 years and generally can be terminated by either party without cause upon between 90 and 180 days notice. Our pathologists generally receive a base compensation, health and welfare benefits generally available to our employees and, in some cases, annual performance bonuses. Our pathologists are required to hold a valid license to practice medicine in the jurisdiction in which they practice. We are responsible for billing patients, physicians and payors for services rendered by our pathologists. Most of our pathologist employment agreements contain restrictive covenants, including non-competition, non-solicitation and confidentiality covenants.

Our business is dependent on the recruitment and retention of pathologists, particularly those with subspecialties like dermatopathology. While we have generally been able to recruit and retain pathologists in the past, no assurance can be given that we will be able to continue to do so successfully or on terms similar to our current arrangements. The relationship between our pathologists and their respective local medical communities is important to the operation and continued profitability of our practices. In the event that a significant number of pathologists terminate their relationships with us or become unable or unwilling to continue their employment, our business could be materially harmed.

We manage and control all of the non-medical functions of our practices. We are not licensed to practice medicine. The practice of medicine is conducted solely by the physicians in our practices.

Billing and Reimbursement

Billing

Billing for diagnostic services is generally highly complex. Laboratories must bill various payors, such as private insurance companies, managed care companies, governmental payors such as Medicare and Medicaid, physicians, hospitals and employer groups, each of which may have different billing requirements. Additionally, the audit requirements we must meet to ensure compliance with applicable laws and regulations, as well as our internal compliance policies and procedures, add further complexity to the billing process. Other factors that complicate billing include:


	•	variability in coverage and information requirements among various payors;

	•	missing, incomplete or inaccurate billing information provided by ordering physicians;

	•	billings to payors with whom we do not have contracts;

	•	disputes with payors as to which party is responsible for payment; and

	•	disputes with payors as to the appropriate level of reimbursement.

Billing for diagnostic services in connection with governmental payor programs is subject to numerous federal and state regulations and other requirements, resulting in additional costs to us. These additional costs include those related to:


	•	variability in coverage and information requirements among various payors;

	•	increased complexity in our billing due to the additional procedures and processes required by governmental payor programs;

	•	training and education of our employees and customers;

	•	compliance and legal costs; and

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	•	costs related to, among other factors, medical necessity denials and the absence of advance beneficiary notices.

Reimbursement

Depending on the billing arrangement and applicable law, the party that reimburses us for our services may be:


	•	a third party who provides coverage to the patient, such as an insurance company, managed care organization or a governmental payor program;

	•	the physician or other authorized party (such as a hospital or another laboratory) who ordered the testing service or otherwise referred the services to us; or

	•	the patient.

For the year ended December 31, 2009, we derived approximately 61 percent of our revenues from private insurance, including managed care organizations and other healthcare insurance providers, 25 percent from governmental payor programs and 14 percent from other sources.

In 2009, approximately 22 percent of our annual revenues were derived from the Medicare program, which is overseen by CMS. Because a large percentage of our revenues are derived from the Medicare program, the Medicare coverage and reimbursement rules are significant to our operations. Reimbursement under the Medicare program for the diagnostic services that we offer is subject to either the national Medicare clinical laboratory fee schedule or the national Medicare physician fee schedule, each of which is subject to geographic adjustments and is updated annually. The physician fee schedule is designed to set compensation rates for those medical services provided to Medicare beneficiaries that require a degree of physician supervision. Clinical diagnostic laboratory tests furnished to non-hospital patients are paid according to the clinical laboratory fee schedule.

Most of the services that we provide are anatomic pathology services, which are reimbursed separately under the Medicare physician fee schedule, and beneficiaries are responsible for applicable coinsurance and deductible amounts. The physician fee schedule is based on assigned relative value units for each procedure or service, and an annually determined conversion factor is applied to the relative value units to calculate the reimbursement. The Sustainable Growth Rate formula used to calculate the fee schedule conversion factor resulted in significant decreases in payment levels in recent years, including a decrease in physician fee schedule payments for 2010 of approximately 21 percent. On December 19, 2009, the President signed into law a provision that delayed the cut for two months until March 1, 2010. The reimbursement cut was delayed until June 17, 2010 and Congress is currently evaluating a further delay. It is not clear when, or if, the cut will be enacted and, if so, for how long the cut will be effective.

Future decreases in the Medicare physician fee schedule are possible unless the U.S. Congress acts to change the Sustainable Growth Rate formula used to calculate the fee schedule payment amounts or continues to mandate freezes or increases each year. Because the vast majority of our diagnostic services currently are reimbursed under the physician fee schedule, changes to the physician fee schedule could result in a greater impact on our revenues than changes to the Medicare clinical laboratory fee schedule.

The clinical laboratory fee schedule assigns amounts to specific procedure billing codes, and each Medicare contractor jurisdiction has a fee schedule that establishes the price for each specific laboratory billing code. In addition, Medicare also sets a cap on the amount that it will pay for any individual test. Currently, this cap, usually referred to as the National Limitation Amount, or NLA, is set at a percentage of the median of all the contractor fee schedule amounts for each test code. In the past, the U.S. Congress has frequently lowered the percentage of the median used to calculate the NLA in order to achieve budget savings. Currently, the NLA ceiling is set at 74 percent of the medians for established tests and 100 percent of the median for certain new tests that were not previously reimbursed. In billing Medicare for clinical laboratory services, we are required to accept, as payment in full, the lowest of our actual charge, the fee schedule amount for the state or local geographical area, or the NLA.

Because we must accept Medicare payment for clinical laboratory services as payment in full, Medicare beneficiaries have no coinsurance or deductible amount for clinical laboratory services, although they do for anatomic pathology services. However, on several occasions, in recent years, the U.S. Congress has considered also imposing a 20 percent coinsurance on clinical laboratory fees, which would require us to bill patients for their

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portion of these services. To date, the U.S. Congress has never enacted such a provision. However, because of the relatively low payment for many clinical laboratory tests, the cost of billing and collecting for these services would often exceed the amount actually received from the patient. Therefore, the imposition of such a requirement by the U.S. Congress would have the effect of increasing our costs of billing and collecting.

The federal Social Security Act establishes that these clinical laboratory fee schedule amounts are to be increased annually based on the Consumer Price Index for All Urban Consumers, or the CPI-U, as of June 30 for the previous 12-month period. The U.S. Congress has frequently legislated that the CPI-U increase not be implemented. For instance, the U.S. Congress eliminated the CPI-U update through 2008 in the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or MMA. For 2009, the CPI-U update would have been 5.0 percent. However, the Medicare Improvements for Patients and Providers Act of 2008, or MIPPA, mandated a 0.5 percent cut to the CPI-U for years 2009 through 2013. Accordingly, the update for 2009 was reduced to 4.5 percent. Because of the falling CPI-U and the 0.5 percent mandatory reduction, the clinical laboratory fee schedule update for 2010 was -1.9 percent.

The U.S. Congress recently passed, and the President recently signed into law, comprehensive health care reform legislation that consisted of the PPACA and the HCEARA. This legislation imposed additional cuts on the Medicare reimbursement for clinical laboratories and repealed the 0.5 percent cut that was enacted by MIPPA and replaced it with a “productivity adjustment” that will reduce the update in payments for clinical laboratory tests by between 1.1 and 1.4 percent. In addition, this legislation includes a 1.75 percent reduction in reimbursement rates for clinical laboratories for the years 2011 through 2015.

The payment amounts under the Medicare clinical laboratory fee schedule are important not only for our reimbursement under Medicare, but also because the schedule often establishes the payment amounts set by other third party payors. For example, state Medicaid programs are prohibited from paying more than the Medicare fee schedule limit for clinical laboratory services furnished to Medicaid recipients.

The MMA required CMS to conduct a competitive bidding demonstration project for clinical laboratory tests, with some exclusions, to determine whether competitive bidding could be used to provide laboratory services at reduced cost to Medicare, while continuing to maintain quality and access to care. Anatomic physician services were not, however, covered by the demonstration. The initial demonstration project in the San Diego — Carlsbad — San Marcos, California area was scheduled to begin on July 1, 2008. However, the demonstration project was enjoined by an April 2008 preliminary injunction in a lawsuit filed by laboratory plaintiffs against the Secretary HHS, and the demonstration was later repealed in July 2008 by the U.S. Congress under MIPPA. Currently, the court in the lawsuit is considering the request by laboratories that CMS either return the bid information or agree not to use it in any rate-setting activities. The court recently denied the government’s request to dismiss the lawsuit as moot. Despite the repeal of the demonstration project, the HHS Secretary could retain the bid application information to set lower future payment rates for laboratory services if the court decides against the laboratory plaintiffs. In addition, the U.S. Congress could revisit competitive bidding for clinical laboratory services in light of the current Administration’s efforts to reform the healthcare system and generate healthcare savings. If competitive bidding for clinical laboratory services is implemented at a future time, we could be precluded from billing the Medicare program for certain clinical laboratory services furnished to Medicare beneficiaries if we are not a winning bidder, or, as part of the competitive bidding process, we could be required to offer reduced payment amounts in order to participate in the arrangement.

When we provide clinical diagnostic laboratory services to patients who reside in skilled nursing facilities, we must comply with special billing rules for Medicare. For skilled nursing facilities patients who are covered by Part A of Medicare, which typically applies to patients who have been discharged from a hospital into the skilled nursing facility, we must bill, and be paid by, the skilled nursing facility itself. For other Medicare patients, covered by Part B, we must bill Medicare directly for the testing services requested. Because skilled nursing facilities sometimes move between Part A and Part B coverage, billing appropriately for these services may be complex and time-consuming.

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Government Regulation

The services that we provide are heavily regulated by both federal and state governmental authorities. Failure to comply with the applicable regulations can subject us to significant civil and criminal penalties, loss of license, or the requirement that we repay amounts previously paid to us. The significant areas of regulation are set out below.

Clinical Laboratory Improvement Amendments of 1988 and State Regulation

As a diagnostic service provider, each of our laboratory entities is required to hold certain federal, state and local licenses, certifications and permits to conduct our business. Under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, each laboratory is required to hold a certificate applicable to the type of work we perform at the laboratory and to comply with certain CLIA-imposed standards. CLIA regulates virtually all clinical laboratories by requiring they be certified by the federal government and comply with various operational, personnel, facilities administration, quality and proficiency requirements intended to ensure that their clinical laboratory testing services are accurate, reliable and timely. CLIA does not preempt state laws that are more stringent than federal law.

As part of the renewal process, our laboratories are subject to survey and inspection every two years to assess compliance with program standards and may be subject to additional random inspections. Standards for testing under CLIA are based on the level of complexity of the tests performed by the laboratory. Laboratories performing high complexity testing are required to meet more stringent requirements than laboratories performing less complex tests. Each of our laboratories holds a CLIA certificate to perform high complexity testing. CLIA compliance and certification is also a prerequisite to be eligible to bill for services provided to governmental payor program beneficiaries. In addition, each laboratory must also enroll with an approved proficiency testing program by which it periodically tests specimens submitted from an outside proficiency testing organization and then submits its results back to the organization for grading. Failure to achieve a passing score on a proficiency test can result in the laboratory losing its right to perform the test at issue. Failure to comply with other proficiency testing regulations, such as referring a proficiency testing specimen to another laboratory for analysis, can result in the revocation of the laboratory’s license and of the licenses of other laboratories owned by us.

In addition to CLIA requirements, we are subject to various state laws. CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law. In some cases, the state programs actually substitute for the federal CLIA program. In other instances the state’s regulations may be in addition to the CLIA program. State laws may require that laboratory personnel meet certain qualifications, specify certain quality controls or prescribe record maintenance requirements. Our laboratories are licensed and accredited by the appropriate state agencies in the states in which they operate.

Health Insurance Portability and Accountability Act

Under the administrative simplification provisions of the Health Insurance Portability and Accountability Act, or HIPAA, HHS has issued regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the privacy and security of protected health information, referred to as PHI, used or disclosed by healthcare providers and other covered entities. Four principal regulations with which we are currently required to comply have been issued in final form under HIPAA: privacy regulations; security regulations; standards for electronic transactions; and the national provider identifier, or NPI, regulations. We must also comply with regulations that require covered entities and business associates to provide notification after a breach of unsecured PHI.

The privacy regulations cover the use and disclosure of PHI by healthcare providers. They also set forth certain rights that an individual has with respect to his or her PHI maintained by a healthcare provider, including the right to access or amend certain records containing PHI or to request restrictions on the use or disclosure of PHI. The HIPAA privacy regulations, among other things, restrict our ability to use or disclose PHI in the form of patient-identifiable laboratory data without written patient authorization for purposes other than payment, treatment, or healthcare operations, except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations. The privacy regulations provide for significant fines and other penalties for wrongful use or disclosure of PHI. In addition, the American Recovery and Reinvestment Act of 2009, or ARRA,

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increases the civil monetary penalty amounts for violations of the HIPAA regulations. Although the HIPAA statute and regulations do not expressly provide for a private right of damages, laws in certain states provide for damages to private parties for the wrongful use or disclosure of confidential health information or other private personal information. Moreover, ARRA has created a new right of action for state attorneys general to sue on behalf of individuals who are harmed under the HIPAA regulations.

The security regulations establish requirements for safeguarding the confidentiality, integrity and availability of PHI which is electronically transmitted or electronically stored. The security regulations provide for sanctions and penalties for violations. In addition, ARRA increases the civil monetary penalty amounts for violations of the HIPAA regulations and creates a new right of action for state attorneys general. The HIPAA privacy and security regulations establish a uniform federal minimum standard and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing PHI. As a result, we are required to comply with both HIPAA privacy and security regulations and varying state privacy and security laws. ARRA also applies the HIPAA privacy and security provisions and the civil and criminal penalties associated with violating these provisions to business associates in the same manner as they apply to covered entities.

In addition, HIPAA imposes standards for electronic transactions, which establish standards for common healthcare transactions. In particular, we utilize these standard transaction sets where required by HIPAA.

Finally, HIPAA also established a new NPI as the standard unique health identifier for healthcare providers to use in filing and processing healthcare claims and other transactions.

As part of the HIPAA requirements, certain specified coding sets are established that must be used for all billing transactions. Currently, all healthcare providers use a system of diagnosis coding referred to as the International Classification of Diseases, 9th edition, or ICD-9. However, HHS, which oversees HIPAA, has recently established a new requirement that will require all healthcare entities, including ours, to move to a new system of diagnosis codes, ICD-10, by October 1, 2013. ICD-10 utilizes more codes and is considered more complex than the current system. Because we must often rely on referring physicians to supply us with the appropriate diagnosis codes, the movement to the new system may increase billing difficulties if physicians or payors have difficulty in making the transition to the new codes.

In addition to PHI, the healthcare information of patients often includes social security numbers and other personal information that is not of an exclusively medical nature. The consumer protection laws of a majority of states now require organizations that maintain such personal information to notify each individual if their personal information is accessed by unauthorized persons or organizations so that the individuals can, among other things, take steps to protect themselves from identity theft. Penalties imposed by these state consumer protection laws vary from state to state but may include significant civil monetary penalties, private litigation and adverse publicity. In addition, the Federal Trade Commission, or FTC, has established new Red Flag Rules relating to identity theft prevention programs, which are considered applicable to healthcare companies. The compliance date for the Red Flag Rules has repeatedly been delayed and is currently June 1, 2010. Under the Red Flag Rules, the FTC is authorized to bring enforcement actions in federal court for violations and could impose a $2,500 penalty for each violation of the Red Flag Rules. Noncompliance could also be penalized through state enforcement or other civil liability.

Federal and State Fraud and Abuse Laws

There are a variety of federal laws prohibiting fraud and abuse involving federal government payment programs, such as Medicare and Medicaid. These laws are enforced by the federal U.S. Attorneys and the HHS Office of the Inspector General, or OIG. In addition, the Medicare program increasingly uses a variety of contractors to review billings submitted by providers to the Medicare program. These contractors include Recovery Audit Contractors, or RACs, and Carrier Error Rate Test, or CERT, contractors. The RAC program began as a demonstration program in a limited number of states that was designed to detect improper Medicare payments to providers and suppliers. It was expanded to cover all 50 states by Section 302 of the Tax Relief and Health Care Act of 2006, which makes the RAC program permanent and requires the HHS Secretary to expand the program to all 50 states by no later than 2010. In addition, CMS conducts CERT audits, which also monitor the accuracy of

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payments made by Medicare payment contractors. In either case, any overpayments found by the RAC or CERT contractors must be repaid to the Medicare program. In some cases, these overpayments can be used as the basis for an extrapolation, by which the error rate is applied to a larger universe of claims, which can result in even higher repayments.

The federal healthcare Anti-Kickback Law prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration as an inducement for, or in return for, the purchase, lease or order of any healthcare item or service reimbursable under a governmental payor program. The definition of “remuneration” has been broadly interpreted to include anything of value, including, for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests and providing anything at less than its fair market value. The Anti-Kickback Law is broad, and it prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry.

Recognizing that the Anti-Kickback Law is broad and may technically prohibit many innocuous or beneficial arrangements within the healthcare industry, HHS has issued a series of regulatory “safe harbors.” These safe harbor regulations set forth certain provisions which, if met, will assure healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback Law. Although full compliance with these provisions ensures against prosecution under the federal Anti-Kickback Law, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Law will be pursued. Still, in the absence of an applicable safe harbor, a violation of the Anti-Kickback Law may occur even if only one purpose of an arrangement is to induce patient referrals or purchases or to induce the provision of a laboratory service reimbursable by a federal healthcare program. The penalties for violating the Anti-Kickback Law can be severe. These sanctions include criminal penalties and civil sanctions, including fines, imprisonment and possible exclusion from the Medicare and Medicaid programs. Many states have also adopted laws similar to the federal Anti-Kickback Law, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only governmental payor programs.

Generally, arrangements that would be considered suspect and possible violations under the Anti-Kickback Law include arrangements between a laboratory and a physician (or related organizations or individuals) in which the laboratory would:


	•	provide items or services to the physician or other referral source without charge or for amounts that are less than their fair market value;

	•	pay the physician or other referral source amounts that are in excess of the fair market value of items or services that were provided; or

	•	enter into an arrangement with a physician or other entity because it is a current or potential referral source.

In 2006, the OIG adopted a new safe harbor (and an exception under the Physician Self-Referral Law, discussed below) that permitted health care entities, including laboratories, to provide electronic prescribing and electronic health records, or EHR, technology to referring physicians. Compliance with the provisions of these provisions allows us to donate EHR to physicians without being found to be in violation of either the Anti-Kickback Law or the Physician Self-Referral Law. Under these provisions, we are permitted to donate software, information technology and training services (but not hardware) that is necessary and used predominately to create, maintain, transmit or receive EHR, so long as the recipient of the donation meets certain established criteria. Such technology must be considered “interoperable” and must have certain other capabilities established in the regulations. In addition, the recipient of the donation must pay at least 15 percent of the cost of the service.

From time to time, the OIG issues alerts and other guidance on certain practices in the healthcare industry. In October 1994, the OIG issued a Special Fraud Alert on arrangements for the provision of laboratory services. The Fraud Alert set forth a number of practices allegedly engaged in by some laboratories and healthcare providers that raise issues under the Anti-Kickback Law. These practices include laboratories providing:


	•	employees to furnish valuable services for physicians (other than collecting patient specimens for testing for the laboratory) that are typically the responsibility of the physicians’ staff;

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	•	free testing to physicians’ managed care patients in situations where the referring physician benefits from the free laboratory tests;

	•	free pick-up and disposal of biohazardous waste for physicians for items unrelated to a laboratory’s testing services;

	•	general-use facsimile machines or computers to physicians that are not exclusively used in connection with the laboratory services; and

	•	free testing for healthcare providers, their families and their employees, known as professional courtesy testing.

The OIG emphasized in the Special Fraud Alert that when one purpose of an arrangement is to induce referrals of program-reimbursed laboratory testing, both the laboratory and the healthcare provider or physician may be liable under the Anti-Kickback Law and may be subject to criminal prosecution and exclusion from participation in the Medicare and Medicaid programs.

The OIG has also expressed concern about the provision of discounts on laboratory services billed to customers in return for the referral of more lucrative federal healthcare program business. In a 1999 Advisory Opinion, the OIG concluded that a proposed arrangement whereby a laboratory would offer physicians significant discounts on non-federal healthcare program laboratory tests might violate the Anti-Kickback Law. The OIG reasoned that the laboratory could be viewed as providing such discounts to the physician in exchange for referrals by the physician of business to be billed by the laboratory to Medicare at non-discounted rates. The OIG indicated that the arrangement would not qualify for protection under the discount safe harbor because Medicare and Medicaid would not get the benefit of the discount. Subsequently, in 2000 correspondence, the OIG stated that the Anti-Kickback Law could be violated if there were linkage between the discount offered to the physician and the physician’s referrals of tests covered under a federal healthcare program that would be billed by the laboratory directly. Where there was evidence of such linkage, the arrangement would be considered suspect if the charge to the physician was below the laboratory’s “average fully loaded costs” of the test.

As discussed above, discounts to referral sources raise issues under the Anti-Kickback Law. In addition, any discounted charge below the amount that Medicare or Medicaid would pay for a service also raises issues under Medicare’s “substantially in excess” provision. The Medicare statute permits the government to exclude a laboratory from participation in federal healthcare programs if it charges Medicare or Medicaid substantially in excess of its usual charges in the absence of good cause. In 2000, the OIG stated in informal correspondence that the prohibition was violated only if the laboratory’s charge to Medicare was substantially more than the “median non-Medicare/-Medicaid charge.” On September 15, 2003, the OIG issued a notice of proposed rulemaking addressing the statutory prohibition. Under the proposed rule, a provider’s charge to Medicare or Medicaid would be considered “substantially in excess of [its] usual charges” if it was more than 120 percent of the provider’s mean or median charge for the service. The proposed rule was withdrawn in June 2007. At that time, the OIG stated that it would continue to evaluate billing patterns of individuals and entities on a case-by-case basis.

In addition to the administrative simplification regulations discussed above, HIPAA created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from governmental payor programs such as the Medicare and Medicaid programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of either of these two statutes is a felony and may result in fines or imprisonment or exclusion from governmental payor programs.

Finally, another development affecting the healthcare industry is the increased use of the False Claims Act and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal governmental payor program. Under the False Claims Act, a person acts knowingly if he has actual knowledge of the information, acts in deliberate ignorance of

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the truth or falsity of the information, or acts in reckless disregard of the truth or falsity of the information, A claim may be considered false if any information included on the claim is inaccurate, including the code reflecting the patient’s diagnosis or the procedure performed. Similarly, if the service for which the claim was submitted does not reflect the service that was ordered and performed, the claim could be considered a false claim. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government, alleging that the defendant has defrauded the federal government by submitting a false claim to the federal government, and they permit such individuals to share in any amounts paid by the entity to the government in fines or settlement. In addition, various states have enacted false claim laws analogous to the federal False Claims Act, although many of these state laws apply where a claim is submitted to any third party payor and not merely a governmental payor program. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of between $5,500 and $11,000 for each separate false claim. Conduct that violates the False Claims Act may also lead to exclusion from the Medicare and Medicaid programs. Given the number of claims likely to be at issue in connection with any billing practice on which liability might be based, potential damages under the False Claims Act for even a single inappropriate billing arrangement could be significant.

On May 20, 2009, the Federal Enforcement and Recovery Act of 2009, or FERA, became law, significantly amending the federal False Claims Act. FERA subjects entities to False Claims Act liability if they knowingly make a false statement in an attempt to obtain money or property that is to be spent or used on the government’s behalf or to advance a government program or interest. Previously, the False Claims Act allowed entities to be held liable for making false statements only if such statements were made to “get” a false claim paid or approved “by the Government.” Because no guidance exists as to the meaning of the language contained in FERA, the full scope of this provision will likely be resolved in case-by-case litigation. The False Claims Act amendments under FERA also extend liability for the knowing retention of overpayments. The overpayment provision imposes liability if an entity “knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” This provision has been interpreted to require recipients of government funds to immediately determine whether they have received “overpayments” and whether the funds received should be retained or returned to the government. Under the False Claims Act amendments, recipients of government funds may also now face False Claims Act liability for failure to repay, or at least to reassess, historical overpayments of which they are currently aware. The enactment of FERA will likely result in heightened scrutiny and enforcement.

Physician Referral Prohibitions

Under a federal law directed at “self-referral,” commonly known as the “Stark Law,” there are prohibitions, with certain exceptions, on Medicare and Medicaid payments for laboratory tests referred by physicians who personally, or through a family member, have an investment interest in, or a compensation arrangement with, the laboratory performing the tests. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $100,000 for each such arrangement or scheme. In addition, any person who presents or causes to be presented a claim to the Medicare or Medicaid program in violation of the Stark Law is subject to civil monetary penalties of up to $15,000 per bill submission, an assessment of up to three times the amount claimed, and possible exclusion from participation in federal governmental payor programs. Bills submitted in violation of the Stark Law may not be paid by Medicare or Medicaid, and any person collecting any amounts with respect to any such prohibited bill is obligated to refund such amounts. Many states also have anti-“self-referral” and other laws that are not limited to Medicare and Medicaid referrals.

The Stark Law prohibits a laboratory from obtaining payment for services resulting from a physician’s referrals if there is any arrangement between the laboratory and the physician or the physicians’ practice that involves remuneration, unless the arrangement is protected by an exception to the Stark Law’s self-referral prohibition or a provision of the Stark Law stating that the particular arrangement would not result in “remuneration,” as defined for purposes of the Stark Law. In addition, under the Stark Law’s provisions, a request by a pathologist for laboratory and pathology testing services is not considered a “referral” covered by the Stark Law, so long as the request meets certain other requirements.

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Other Government Billing and Payment Policies

Many payors establish specific rules and requirements that affect how we bill for our services. The most significant of those payors is the federal Medicare program, because it accounts for a substantial percentage of our revenues. Therefore, we must closely follow the policies that are imposed by Medicare with regard to billing and payment.

Medicare has several ways in which it can limit how it pays for our services. For example, Medicare can impose either National Coverage Decisions (NCD) or Local Coverage Decisions (LCD) for the services that we provide. Under NCDs and LCDs, Medicare can impose imitations on when it will pay for certain services, such as requiring particular diagnosis codes to be submitted from the physician or limiting the number of units of any particular service. Recently, the Medicare Administrative Contractors, or MACs, which process and pay Medicare claims, have considered some LCDs that could limit how we bill for our services. For example, Palmetto GBA, which processes Medicare claims in several jurisdictions, has limited how it reimburses for flow cytometry services, which constitute a commonly performed pathology service. If that policy is implemented, or if other MACs adopt a similar policy, then it could limit the payment we receive for these services.

In addition, Medicare has implemented a policy referred to as Medically Unbelievable Edits, which limit the number of units of a service that can be billed at any one time. Some Medically Unbelievable Edits have already been established for the services that we offer, and Medicare is considering adding Medically Unbelievable Edits for some other services that we offer. Under these edits, Medicare will not pay us for any services, if we bill for more units of service than are permitted under the Medically Unbelievable Edits limit established by Medicare. This could affect the amount that we are paid for services that we bill to the Medicare Program.

Medicare also regulates who we are permitted to bill for our services. In most instances, we must bill directly to, and are paid by, Medicare or its contractors for the services that we furnish to Medicare beneficiaries. However, because of recent interpretations by Medicare, ordering physicians are permitted to order diagnostic services, such as those that we provide, which the service provider then bills to the physician or his group practice. The ordering physician, in turn, then bills and is paid by the Medicare Program. In response to these arrangements, Medicare has enacted an “anti-markup” provision that requires physicians to bill Medicare at their acquisition price for the services, rather than at the higher Medicare fee schedule amount. However, even under the anti-markup provision, physicians are permitted to bill Medicare at the full fee schedule amount if the services were performed by a physician who “shares a practice” with the ordering physician. The services will be considered to have been done by a physician who shares a practice with the ordering physician, so long as they were done in the same building where the ordering physician maintains a practice. This interpretation of the anti-markup provision, as well as other provisions, may lead more physicians to decide to provide these services “in house,” which could affect our revenues.

Under Medicare regulations, we are also sometimes required to bill other entities for the services that we provide. In 1999, Medicare announced a policy that applies to anatomic pathology specimens for hospital patients. This policy would require us to bill the technical component to the hospital and the professional component to Medicare for all anatomic pathology services that we provide to hospital patients. However, in 2000, the U.S. Congress prevented this policy from going into effect for all “covered hospitals,” which were those hospitals that had arrangements with independent laboratories in effect as of July 22, 1999, the date that CMS had first announced the policy. That “grandfather provision” was originally scheduled to be effective for two years, but it has been extended repeatedly by the U.S. Congress and remains in effect. The “grandfather provision” is currently scheduled to expire on December 31, 2010.

Education Requirements of the Deficit Reduction Act of 2005

The federal Deficit Reduction Act of 2005, or DRA, contains, among other things, requirements concerning False Claims Act education that state Medicaid programs must impose on participating providers as well as other entities. The DRA requires organizations that make or receive Medicaid payments of at least $5 million annually in a state to establish an education plan for their employees, managers, contractors and agents, which must include written policies and detailed guidance on the federal False Claims Act, state false claims laws, and the rights and protections afforded whistleblowers under the False Claims Act and its state counterparts.

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Food and Drug Administration Regulation

Pursuant to its authority under the federal Food, Drug and Cosmetic Act, or FDCA, the Food and Drug Administration, or FDA, has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by laboratories such as ours. Specifically, the manufacturers and suppliers of reagents, which we obtain for use in diagnostic tests, are subject to regulation by the FDA and are required to, among other things, register their establishments with the FDA, to conform manufacturing operations to the FDA’s quality system regulation, or QSR, and to comply with certain reporting and other record-keeping requirements. The FDA also regulates the sale or distribution, in interstate commerce, of products classified as medical devices under the FDCA, including in vitro diagnostic test kits. Such devices must undergo premarket review by the FDA prior to commercialization unless the device is of a type exempted from such review by statute or pursuant to the FDA’s exercise of enforcement discretion.

The FDA has not usually attempted to regulate standard laboratory diagnostic tests developed and validated by laboratories for their own use, known as laboratory-developed tests or LDTs; rather, it has stated it will exercise its enforcement discretion over such tests. However, more recently, the FDA has expressed some concern about the use of certain LDTs, including new, sophisticated molecular diagnostics or genetic testing, and has suggested greater FDA oversight of such tests may be appropriate. One of our laboratories uses some LDTs and, therefore, some of the tests that we offer could be subject to the FDA requirements if the FDA were to act in this area. The FDA regularly considers the application of additional regulatory controls over the development and use of LDTs by laboratories such as ours, and with the recent change in political administration at the FDA, more robust enforcement, (including inspections, warning letters, and other agency inquiries) of the applicable pre- and post-market requirements for LDTs is possible.

The comprehensive health care reform legislation enacted in 2010 contains a provision that creates a new 2.3 percent excise tax applicable to the sale of medical devices. Because we purchase and utilize certain products in our laboratory that could be considered medical devices, it is possible that some of these products could be subject to this excise tax. Because this legislation is new and insufficient guidance exists as to its applicability, we are currently unable to determine the impact this provision will have on our business.

State Requirements

Corporate Practice of Medicine

Numerous states have enacted laws prohibiting business corporations, such as us, from practicing medicine and employing or engaging physicians to practice medicine. These laws are designed to prevent interference in the medical decision-making process by anyone who is not a licensed physician. This prohibition is generally referred to as the prohibition against the corporate practice of medicine. Violation of this prohibition may result in civil or criminal fines, as well as sanctions imposed against us and/or the professional through licensing proceedings. We do not employ physicians in any states where the prohibition against the corporate practice of medicine applies to our laboratories. Our arrangements with providers in corporate practice of medicine states are described above under “— Corporate Structure” and “— Contracts and Relationships with Providers.”

Direct Billing Laws

While we often cannot bill physicians for our services when those services are covered under a government program, where permissible, we do in some cases bill referring physicians for services that are not covered under a government program. Laws and regulations in several states currently preclude us from billing referring physicians, either by requiring us to bill directly the third-party payor or other person ultimately responsible for the service or by prohibiting or limiting the referring physician’s or other purchaser’s ability to “markup” its acquisition cost for that service. An increase in the number of states that impose similar restrictions could adversely affect us by encouraging physicians to furnish such services directly or by causing physicians to refer services to another laboratory for testing.

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State Laboratory Licensing

In addition to CLIA requirements, we are subject to various state laws regulating the operation of our laboratories, as well as the receipt by our laboratories of out-of-state specimens. If a laboratory is out of compliance with a state’s statutory or regulatory standards, the applicable state agency may suspend, limit, revoke or annul the laboratory’s license, censure the holder of the license or assess civil money penalties. In certain instances, statutory or regulatory noncompliance may also result in a laboratory’s being found guilty of a misdemeanor.

Each of Florida, New York, Alabama, New Hampshire, Nevada, Massachusetts and Georgia require in-state laboratories to be licensed under the laws and regulations of such states. Because New York State’s regulation of laboratories is more stringent than the federal CLIA standards, New York State is exempt from CLIA. However, New York State maintains its own regulatory framework, which establishes standards for day-to-day operation of a clinical laboratory, physical facilities requirements, equipment and quality control. New York law also mandates proficiency testing for laboratories licensed under New York state law, regardless of whether or not such laboratories are located in New York. Each of our laboratories is licensed and accredited by the appropriate state agency in the state in which it operates.

Other States’ Laboratory Testing

Florida, New York, Pennsylvania, California and Maryland each require out-of-state laboratories that accept specimens from those states to be licensed. We have obtained licenses in these states and believe we are in material compliance with applicable licensing laws.

We may become aware from time to time of other states that require out-of-state laboratories to obtain licensure in order to accept specimens from the state, and it is possible that other states do have such requirements or will have such requirements in the future. If we identify any other state with such requirements or if we are contacted by any other state advising us of such requirements, we intend to follow instructions from the state regulators as to how we should comply with such requirements.

Physician Licensing

Many of the states from which we solicit specimens require that a physician interpreting specimens from that state be licensed by that particular state, irrespective of where the services are provided. If our pathologists read specimens from states for which they are not properly licensed, our pathologists could be considered to be engaged in the unlicensed practice of medicine and could face fines or other penalties, which we could be required to pay on behalf of our pathologists. We are not aware of any states from which we do not have required pathologist licenses.

Other Regulatory Requirements

Our laboratory is subject to federal, state and local regulations relating to the handling and disposal of regulated medical waste, hazardous waste and biohazardous waste, including chemical and biological agents and compounds, blood and bone marrow samples and other human tissue. Typically, we use outside vendors who are contractually obligated to comply with applicable laws and regulations to dispose of such waste. These vendors are licensed or otherwise qualified to handle and dispose of such waste. Historically, our costs associated with handling and disposal of such wastes have not been material.

The Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for healthcare employers, including requirements to develop and implement programs to protect workers from exposure to blood-borne pathogens by preventing or minimizing any exposure through needle stick or similar penetrating injuries. We have instituted policies and procedures to comply with the OSHA requirements, and we regularly monitor the implementation of our safety programs.

Compliance Infrastructure

Compliance with government rules and regulations is a significant concern throughout our industry, in part due to evolving interpretations of these rules and regulations. We seek to conduct our business in compliance with all statutes and regulations applicable to our operations. To this end, we have created a Compliance Committee and

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have designated a Compliance Officer to assist with reviews of regulatory compliance procedures and policies throughout our business. Our executive management team is responsible for the oversight and operation of our compliance efforts. The Compliance Officer is responsible for administering and monitoring compliance with our Standards of Conduct. We provide periodic training programs to our personnel to promote the observance of our policies, which are designed to ensure compliance with the statutes and regulations applicable to us.

Intellectual Property

Our intellectual property consists primarily of trademarks and trade secrets. The marks AURORA DIAGNOSTICS and CONNECTDX THE INFORMATION GATEWAY and Design are our most recognizable trademarks. Those trademarks are registered with the U.S. Patent and Trademark Office, or USPTO, along with the mark CUNNINGHAM PATHOLOGY ASSOCIATES P.A. and Design. We have submitted applications to the USPTO for registration of the marks DERMDX, GASTRODX, TREATMENTDX, URODX and WOMEN’SDX. We maintain a program to protect our trademarks and will institute legal action where necessary to prevent others from using or registering confusingly similar trademarks. Our intellectual property also includes the copyright in and to our Tiger TCPC software, which is registered with the U.S. Copyright Office.

Properties and Facilities

We lease our corporate headquarters at 11025 RCA Center Drive, Suite 300, Palm Beach Gardens, FL 33410 (approximately 8,500 square feet), and we lease 32 other facilities: 12 in Florida, one in New York, two in Nevada, one in New Jersey, two in Arizona, four in Michigan, one in New Hampshire, one in Massachusetts, one in Minnesota, one in Texas, one in Georgia, four in Alabama and one in North Carolina. These facilities are used for laboratory operations, administrative, billing and collections operations and storage space. The 32 facilities have lease terms expiring from 2010 to 2019. We also own one commercial condominium in Florida, which is used as a draw station and satellite laboratory.

Insurance

We maintain liability insurance for our services. As a general matter, providers of diagnostic services may be subject to lawsuits alleging medical malpractice or other similar legal claims. Some of these suits may involve claims for substantial damages, and the results may be material to our results of operations and cash flows in the period in which the impact of such claims is determined or the claims are paid. We believe our insurance coverage is sufficient to protect us from material liability for such claims, and we believe that we will be able to obtain adequate insurance coverage in the future at acceptable costs. However, we must renew our insurance policies annually, and we may not be able to maintain adequate liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities or at all.

Employees

As of March 31, 2010, we had 986 employees. We employ 73 pathologists, 764 laboratory technicians and staff, 30 corporate office personnel and 103 sales, marketing and client service personnel. In addition to our 73 employed pathologists, we have contractual arrangements with a physician practice under which 16 pathologists exclusively practice medicine as independent contractors at our Alabama laboratory. None of our employees are subject to collective bargaining agreements. We consider our relationships with our employees to be good.

Legal Proceedings

We are not currently a party to any material legal proceedings. We may be named in other various claims, disputes, legal actions and other proceedings involving malpractice, employment and other matters. A negative outcome in certain of the ongoing litigation could harm our business, financial condition, liquidity or results of operations. Further, prolonged litigation, regardless of which party prevails, could be costly, divert management’s attention or result in increased costs of doing business.

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MANAGEMENT AND BOARD OF DIRECTORS

The following table sets forth the name, age and position of each of our executive officers and directors as of June 18, 2010.


Name	Age	Position(s)

James C. New	65	Chairman of our Board of Directors, Chief Executive Officer and President
Martin J. Stefanelli	49	Chief Operating Officer, Vice President and Secretary
Gregory A. Marsh	49	Chief Financial Officer, Vice President and Treasurer
Fred Ferrara	42	Chief Information Officer
Michael J. Null	40	Vice President, Sales and Marketing
Thomas S. Roberts⁽¹⁾	46	Director
Christopher Dean⁽²⁾	36	Director
Peter J. Connolly⁽³⁾	37	Director
Mark M. King⁽²⁾	49	Director
Christopher J. Bock⁽³⁾	40	Director
Blair Tikker⁽¹⁾	53	Director
James M. Emanuel⁽⁴⁾	61	Director


(1)		Member of our Compensation Committee.
(2)		Member of our Nominating and Corporate Governance Committee.
(3)		Member of our Audit Committee.
(4)		Member of our Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee.


James C. New Chairman, Chief Executive Officer and President		Mr. New has served as our Chairman, Chief Executive Officer and President since 2006. Prior to joining us, Mr. New was a private investor from 2003 to 2006. Mr. New served as the President, Chief Executive Officer and Chairman of AmeriPath, an anatomic pathology laboratory company, from January 1996 through 2003. Prior to joining AmeriPath, Mr. New served as the President, Chief Executive Officer, and a director of RehabClinics, an outpatient rehabilitation company. The Board has concluded that Mr. New should serve as a director and our Chairman because he is our Chief Executive Officer and President. We and the Board benefit from his extensive experience in managing anatomic pathology companies. In addition, Mr. New’s substantial ownership interest in us aligns his interests with those of our other shareholders.
Martin J. Stefanelli Chief Operating Officer, Vice President and Secretary		Mr. Stefanelli has served as our Chief Operating Officer, Vice President and Secretary since 2006. Prior to joining us, Mr. Stefanelli served as the President and Chief Operating Officer of Asterand, a tissue-based research services provider for the pharmaceutical and biotechnology industry, from 2004 to 2006. Mr. Stefanelli served as the Executive Vice President and Chief Operating Officer of AmeriPath, an anatomic pathology laboratory company, from June 2003 to November 2004, and prior to joining AmeriPath, Mr. Stefanelli was employed for thirteen years by DIANON Systems, an anatomic and clinical pathology laboratory company.

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Gregory A. Marsh Chief Financial Officer, Vice President and Treasurer		Mr. Marsh has served as our Chief Financial Officer, Vice President and Treasurer since November 2007. Prior to joining us, Mr. Marsh served as an executive officer at CardioNet and PDSHeart, each a cardiovascular diagnostic healthcare provider. He served as the Chief Financial Officer of PDSHeart from 2003 to 2005 and then Chief Operating Officer from 2005 until March 2007, when the company was acquired by CardioNet. Mr. Marsh then served as the Chief Financial Officer of CardioNet until November 2007. From 1996 until 2003, Mr. Marsh was employed by AmeriPath, an anatomic pathology laboratory company, serving as Vice President, Chief Financial Officer and Secretary from 2001 to 2003 and Vice President, Corporate Controller from 1996 to 2001.

Fred Ferrara Chief Information Officer		Mr. Ferrara has served as our Chief Information Officer since 2006. Mr. Ferrara served as the Director of Information Technology at LabCorp Inc., an anatomic pathology laboratory company, from 2003 until he joined Aurora in 2006. Mr. Ferrara joined LabCorp upon its acquisition of DIANON Systems, where Mr. Ferrara had been employed since 1997.

Michael J. Null Vice President, Sales and Marketing		Mr. Null has served as our Vice President, Sales & Marketing since April 2007. Prior to joining us, Mr. Null served as the Vice President of Sales and Marketing at Asterand, a tissue-based research services provider for the pharmaceutical and biotechnology industry, from 2001 to 2007. He served as a senior account manager and business development manager at Renaissance, a global IT consulting and staffing company, from 1997 to 2002. Prior to joining Renaissance, Mr. Null was employed for five years by DIANON Systems, an anatomic and clinical pathology laboratory company.

Thomas S. Roberts Director		Mr. Roberts has served as one of our directors since 2006 and currently serves as a Managing Director of Summit Partners, a growth equity firm. Mr. Roberts joined Summit Partners in 1989. Mr. Roberts also served in the past as the Chairman and Director of AmeriPath, an anatomic pathology laboratory company. The Board has concluded that Mr. Roberts should serve as a director because of his significant executive experience as well as the fact that his relationship with Summit Partners, which has a substantial ownership interest in us, aligns his interests with those of our other shareholders.

Christopher Dean Director		Mr. Dean has served as one of our directors since 2006 and currently serves as a Managing Director of Summit Partners, a growth equity firm. Mr. Dean joined Summit Partners in 2001. The Board has concluded that Mr. Dean should serve as a director because of his significant executive experience as well as the fact that his relationship with Summit Partners, which has a substantial ownership interest in us, aligns his interests with those of our other shareholders.

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Peter J. Connolly Director		Mr. Connolly has served as one of our directors since 2006 and currently serves as a Principal at Summit Partners, a growth equity firm. Prior to joining Summit Partners in 2004, Mr. Connolly was employed by Goldman, Sachs & Co., an investment banking firm and Deloitte LLP, an accounting and consulting firm. The Board has concluded that Mr. Connolly should serve as a director because of his significant executive experience as well as the fact that his relationship with Summit Partners, which has a substantial ownership interest in us, aligns his interests with those of our other shareholders.
Mark M. King Director		Mr. King has served as one of our directors since June 2009 and is a Co-Founder and Managing Director of KRG Capital Partners, a private equity investment firm. Prior to forming KRG Capital Partners in 1996, Mr. King led many industry consolidating transactions and co-founded and was President and Vice Chairman of Industrial Services Technologies, Inc., a provider of maintenance services in the refinery, fertilizer and chemicals industries. The Board has concluded that Mr. King should serve as a director because of his significant executive experience as well as the fact that his relationship with KRG Capital Partners, which has a substantial ownership interest in us, aligns his interests with those of our other shareholders.
Christopher J. Bock Director		Mr. Bock has served as one of our directors since June 2009 and is a Managing Director of KRG Capital Partners, a private equity investment firm. Mr. Bock joined KRG Capital Partners in 1997. The Board has concluded that Mr. Bock should serve as a director because of his significant executive experience as well as the fact that his relationship with KRG Capital Partners, which has a substantial ownership interest in us, aligns his interests with those of our other shareholders.
Blair Tikker Director		Mr. Tikker has served as one of our directors since June 2009 and is a Managing Director of KRG Capital Partners, a private equity investment firm. Mr. Tikker joined KRG Capital Partners in 2007. Prior to joining KRG Capital Partners, Mr. Tikker was employed by a number of hospital systems, physician groups and managed care companies. Mr. Tikker served as the CEO of HMS Healthcare, a hospital information systems provider, from 2001 until 2005. The Board has concluded that Mr. Tikker should serve as a director because of his significant executive experience as well as the fact that his relationship with KRG Capital Partners, which has a substantial ownership interest in us, aligns his interests with those of our other shareholders.
James M. Emanuel Director		Mr. Emanuel has served as one of our directors since May 2010. Mr. Emanuel has engaged in consulting and private investment activities since his retirement from Lincare, Inc., a national provider of respiratory therapy services for patients with pulmonary disorders, where he served as Chief Financial Officer from January 1984 to June 1997. Mr. Emanuel also served as Chief Financial Officer and a director of Lincare Holdings Inc. from November 1990 to June 1997. Mr. Emanuel has served as a director of SRI/Surgical Express Inc. since 1996 in addition to serving on private company boards. The Board has concluded that Mr. Emanuel should serve as a director because of his significant executive experience.

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Board Composition and Election of Directors

Board Composition

Our Board of Directors is currently composed of 8 members, consisting of seven non-employee members and our current Chairman, Chief Executive Officer and President, James C. New. The number of directors on our Board of Directors will be determined from time to time by resolution of our Board of Directors.

To supplement the recent election of our sole independent director Mr. Emanuel, we expect to elect one or more additional independent directors not more than 90 days after the completion of this offering and to elect additional independent directors not more than one year after the completion of this offering.

Under the NASDAQ Global Market standards, a director will only qualify as an “independent director” if, in the opinion of our Board of Directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

Our Board of Directors has determined that Mr. Emanuel is an “independent director” as defined under the NASDAQ Global Market standards.

There are no family relationships among any of our directors or executive officers.

Election and Classification of Directors

In accordance with the terms of our certificate of incorporation and bylaws, our Board of Directors will be divided into three classes, Class I, Class II and Class III, with each class serving staggered three-year terms. Upon the closing of this offering, the members of the classes will be divided as follows:


	•	the Class I directors will be Mr. King, Mr. Connolly and Mr. New, and their term will expire at the annual meeting of stockholders to be held in 2011;

	•	the Class II directors will be Mr. Tikker, Mr. Dean and Mr. Emanuel, and their term will expire at the annual meeting of stockholders to be held in 2012; and

	•	the Class III directors will be Mr. Bock and Mr. Roberts, and their term will expire at the annual meeting of stockholders to be held in fiscal year 2013.

At each annual meeting of stockholders, or special meeting in lieu thereof, upon the expiration of the term of a class of directors, the successors to such directors will be elected to serve from the time of his or her election and qualification until the third annual meeting following his or her election or special meeting held in lieu thereof. The number of directors may be changed only by resolution of our Board of Directors or a 66.67 percent vote of the stockholders. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our Board of Directors may have the effect of delaying or preventing changes in control of management.

Board Committees

Committees of our Board of Directors

Our Board of Directors has established three committees prior to the effectiveness of our registration statement:


	•	the audit committee;

	•	the nominating and corporate governance committee; and

	•	the compensation committee.

Although the NASDAQ Global Market standards require that all members of our board committees and a majority our Board of Directors be independent, under special phase-in rules applicable to initial public offerings, we have twelve months from the date of listing to comply with these requirements. We currently expect to achieve compliance with the NASDAQ Global Market majority board independence and committee independence

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requirements by electing a new independent director prior to completion of this offering and adding additional independent directors to our Board of Directors before the expiration of the phase-in period and, for affected committees, replacing directors who are not independent with one or more of the new independent directors we expect to elect. If we do not comply with these requirements before the expiration of the phase-in period, we will be subject to disciplinary sanctions by the NASDAQ Global Market, which may include suspension of trading in the common stock or delisting of the common stock from the NASDAQ Global Market.

We believe that our audit and compensation committees will meet the current requirements of the Sarbanes-Oxley Act of 2002 and the NASDAQ Global Market standards as they become applicable to us and that our nominating and corporate governance committee will meet the current requirements of the NASDAQ Global Market standards as they become applicable to us. The audit committee, compensation committee and nominating and corporate governance committee will adopt written charters that will be available on our website prior to completion of the offering.

Audit Committee. Our audit committee’s responsibilities include:


	•	selecting and engaging our independent registered public accounting firm;

	•	evaluating the qualifications, independence and performance of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm;

	•	approving (or, as permitted, pre-approving) the audit and non-audit services to be performed by our independent registered public accounting firm;

	•	establishing policies regarding hiring employees from our independent registered public accounting firm and procedures for the receipt and retention of accounting related complaints and concerns;

	•	meeting independently with our independent registered public accounting firm and management;

	•	reviewing the design, implementation, adequacy and effectiveness of our internal controls over financial reporting, our disclosure controls and procedures and our critical accounting policies;

	•	reviewing and discussing with management and the independent registered public accounting firm the results of our annual audit and the review of our quarterly unaudited financial statements;

	•	reviewing, overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;

	•	reviewing with management and our auditors any earnings announcements and other public announcements regarding our results of operations;

	•	preparing the audit committee report that the SEC requires in our annual proxy statement;

	•	reviewing and approving any related party transactions and reviewing and monitoring compliance with our code of business conduct and ethics; and

	•	reviewing and evaluating, at least annually, the performance of the audit committee and its members including compliance of the audit committee with its charter.

The audit committee has the sole and direct responsibility for appointing, evaluating and retaining our independent auditors and for overseeing their work. All audit services and all non-audit services, other than de minimis non-audit services, to be provided to us by our independent auditors must be approved in advance by our audit committee.

Our audit committee is comprised of Messrs. Emanuel, Connolly and Bock. Mr. Emanuel is the chairperson of the audit committee. Our Board of Directors has determined that Mr. Emanuel is an independent director for audit committee service as defined in Rule 10A-3 under the Exchange Act. Mr. Emanuel has been designated as the audit committee financial expert, as defined in Item 407(d) of Regulation S-K under the Securities Act. Although the NASDAQ Global Market standards require that the audit committee be comprised solely of independent directors, under special phase-in rules applicable to initial public offerings, we have twelve months from the date of listing to

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comply with this requirement. As described more fully under “Committees of our Board of Directors” above, we expect to be in compliance before the expiration of the phase-in period.

Compensation Committee. Our compensation committee’s responsibilities include:


	•	reviewing and recommending to our Board of Directors compensation and benefit plans for our executive officers and compensation policies for members of our Board of Directors and Board committees;

	•	reviewing the terms of offer letters and employment agreements and arrangements with our officers;

	•	setting performance goals for our officers and reviewing their performance against these goals and setting compensation based on such review;

	•	evaluating the competitiveness of our executive compensation plans and periodically reviewing executive succession plans;

	•	administering our benefit plans and the issuance of stock options and other awards under our equity incentive plans;

	•	preparing the compensation committee report that the SEC requires in our annual proxy statement;

	•	reviewing and discussing annually with management our “Compensation Discussion and Analysis” disclosure required by SEC rules; and

	•	reviewing and evaluating, at least annually, the performance of the compensation committee and its members including compliance of the compensation committee with its charter.

Our compensation committee is comprised of Messrs. Emanuel Roberts and Tikker. Mr. Roberts is the chairperson of the compensation committee. Although the NASDAQ Global Market standards require that the compensation committee be comprised solely of independent directors, under special phase-in rules applicable to initial public offerings, we have twelve months from the date of listing to comply with this requirement. As described more fully under “Committees of our Board of Directors” above, we expect to be in compliance before the expiration of the phase-in period.

Nominating and Corporate Governance Committee. Our nominating and corporate governance committee responsibilities include:


	•	evaluating the composition, size and governance of our Board of Directors and its committees and making recommendations regarding future planning and the appointment of directors to our committees;

	•	overseeing an annual evaluation of management succession planning;

	•	administering a policy for considering stockholder nominees for election to our Board of Directors;

	•	evaluating and recommending candidates for election to our Board of Directors;

	•	overseeing our Board of Directors’ performance and self-evaluation process;

	•	reviewing our corporate governance principles and providing recommendations to our Board of Directors regarding possible changes; and

	•	reviewing and evaluating, at least annually, the performance of the nominating/corporate governance committee and its members including compliance of the nominating/corporate governance committee with its charter.

The nominating and corporate governance committee is also responsible for reviewing developments in corporate governance practices, evaluating the adequacy of our corporate governance practices and reporting and making recommendations to our Board of Directors concerning corporate governance matters.

Our nominating and corporate governance committee is comprised of Messrs. Emanuel, Dean and King. Mr. Dean is the chairperson of the nominating and corporate governance committee. Although the NASDAQ Global Market standards require that the nominating and corporate governance committee be comprised solely of independent directors, under special phase-in rules applicable to initial public offerings, we have twelve months

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from the date of listing to comply with this requirement. As described more fully under “Committees of our Board of Directors” above, we expect to be in compliance before the expiration of the phase-in period.

Compensation Committee Interlocks and Insider Participation

During 2008 and 2009, we did not have a compensation committee. Following the completion of this offering, none of our compensation committee members will be an officer or employed by us.

Code of Business Conduct and Ethics

Our Board of Directors has adopted procedures and policies to comply with the Sarbanes-Oxley Act of 2002 and the rules adopted by the SEC and the NASDAQ Global Market, including a code of business conduct and ethics applicable to our officers, directors and employees. Upon completion of this offering, our code of conduct and ethics will be available on our website.

Indemnification of Officers and Directors and Limitation of Liability

Our certificate of incorporation and bylaws limit the liability of our directors for monetary damages for breach of their fiduciary duties, except for liability that cannot be eliminated under the Delaware General Corporation Law. Delaware law provides that directors of a corporation will not be personally liable to the corporation or its stockholders for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following:


	•	any breach of their duty of loyalty to the corporation or its stockholders;

	•	acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

	•	voting or assenting to unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or

	•	any transaction from which the director derived an improper personal benefit.

This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission.

Our certificate of incorporation and our bylaws provide that we shall indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law, as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with their service for or on behalf of us. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. If the Delaware General Corporation Law is amended to provide for further limitations on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the Delaware General Corporation Law. Any amendment to or repeal of the provisions of our bylaws or certificate of incorporation will not eliminate or reduce the effect of these provisions in respect of any act or failure to act, or any cause of action, suit or claim that would accrue or arise, prior to any amendment or repeal or adoption of an inconsistent provision.

Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether our bylaws would permit indemnification. We maintain liability insurance that insures our directors and officers against losses and that insures us against our obligations to indemnify our directors and officers.

In connection with this offering, we expect to enter into separate indemnification agreements with our directors and executive officers, in addition to indemnification provided for in our certificate of incorporation and bylaws. These agreements, among other things, will provide for indemnification of our directors and executive officers for expenses, judgments, fines and settlement amounts incurred by this person in any action or proceeding arising out of this person’s services as a director or executive officer or at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.

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EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

In the paragraphs that follow, we provide an overview and analysis of our compensation program and policies, the material compensation decisions we have made under those programs and policies with respect to our named executive officers, and the material factors that we considered in making those decisions. Following this Compensation Discussion and Analysis, you will find a series of tables containing specific data about the compensation earned or paid in fiscal year 2009 to the following individuals, whom we refer to as our named executive officers:


	•	James C. New, Chairman of our Board of Directors, and our Chief Executive Officer and President;

	•	Gregory A. Marsh, our Chief Financial Officer, Vice President and Treasurer;

	•	Fred Ferrara, our Chief Information Officer;

	•	Michael J. Null, our Vice President, Sales and Marketing; and

	•	Martin J. Stefanelli, our Chief Operating Officer, Vice President and Secretary.

Objectives of our Compensation Program; How We Set Compensation

Our compensation objectives as a privately-held company were to recruit and retain a talented team of employees to grow and develop our business and to reward those employees for accomplishments related to our growth and development.

Historically, we did not have a compensation committee and our Board of Directors determined the compensation for our Chief Executive Officer and, based on the recommendations of our Chief Executive Officer, the rest of our management team. In setting compensation, Mr. New and our Board of Directors did not seek to allocate long-term and current compensation, or cash and non-cash compensation, in any particular percentage. Instead, they reviewed each element of compensation independently and determined the appropriate amount for each element, as discussed below. Neither management nor our Board of Directors engaged a compensation consultant during fiscal year 2009. Our historical compensation-setting processes have been effective for a privately-held company. As we transition to a public company, we intend to adjust some of our practices to further align the interests of our management team with our stockholders.

In anticipation of our initial public offering, we have established a compensation committee. The compensation committee, with input from our Chief Executive Officer, will set and determine the compensation of our executive officers in later years. In this regard, our compensation committee will, among other things, review and recommend to our Board of Directors compensation and benefit plans for our executive officers, review the terms of employment agreements and arrangements with our officers, set performance goals for our officers, review their performance against these goals and set compensation based on such review, evaluate the competitiveness of our executive compensation plans, periodically review executive succession plans, and administer our benefit plans and the issuance of stock options and other awards under our equity incentive plans. The compensation committee will have sole authority to evaluate our Chief Executive Officer’s performance in light of corporate objectives and to set our Chief Executive Officer’s compensation based on the achievement of corporate objectives. Within twelve months from the date of our listing on the NASDAQ Global Market, each member of the compensation committee will be “independent” for purposes of the NASDAQ Global Market standards, a “non-employee director” for purposes of Rule 16b-3 of the Exchange Act, and an “outside director” for purposes of Section 162(m) of the Internal Revenue Code.

2009 Elements of Compensation

The key elements of compensation for our named executive officers in fiscal year 2009 were base salary and annual cash bonuses. We also are party to an employment agreement with each of Messrs. New, Marsh, Ferrara, Null and Stefanelli. These agreements provide the executive with certain benefits as described in greater detail below.

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Base Salaries. We intend for base salaries to reward core competence in the executive role relative to skill, experience and contributions to us. We negotiated the base salaries individually with each executive, with a focus on the executive’s experience in his respective field and expected contribution to us. In general, we adjust base salaries in connection with performance reviews and/or changes to the scope of a named executive officer’s responsibilities. In 2009, none of our named executive officers received salary increases over 2008 levels. The 2009 annual base salaries for our named executive officers were as follows: Mr. New, $400,000; Mr. Marsh, $294,000; Mr. Ferrara, $222,600; Mr. Null, $225,750; and Mr. Stefanelli, $315,000. The named executive officers have not received base salary increases in 2010.

Annual Cash Bonuses. Annual bonuses reward our named executive officers for their contribution to our financial goals and focus our named executive officers on both short- and long-term objectives. Annual bonuses are earned based on the achievement of certain pre-determined performance goals. On an annual basis, or at the commencement of an executive officer’s employment with us, our Board of Directors set a target level of bonus compensation that is structured as a percentage of such executive officer’s annual base salary. The target bonuses for each of our executive officers are as follows, reflected as a percentage of base salary: Mr. New, 100 percent; Mr. Marsh; 50 percent; Mr. Ferrara, 40 percent; Mr. Null, 35 percent; and Mr. Stefanelli,75 percent. Our Board of Directors set such target bonuses after negotiation with each individual and consideration of Mr. New’s recommendation and the expected role of each of our executives. The actual amount of the bonus is based on the extent to which we and the executive meet or exceed predetermined goals under the performance metrics, which goals are set by our Board of Directors prior to the beginning of the performance year in connection with the annual budgetary process, as discussed below.

For 2009, annual cash incentive bonus opportunities for our named executive officers were based on achieving pre-established performance goals relating to net revenue, EBITDA, cash flow from operations, management of acquisition programs (measured by the acquisition of companies with annualized EBITDA at pre-determined levels), and management of our covenants in connection with our credit facilities. Each of these performance metrics is an important driver of our business and our rationale for selecting these performance metrics is as follows:


	•	We select net revenue and EBITDA to focus the executive on supporting, improving and growing our business;

	•	Cash from operations is a direct measure of our profitability and financial performance;

	•	Acquisitions of companies with annualized EBITDA at pre-determined levels focuses the executive on identifying acquisitions which meet our financial goals and positively affect our covenant position; and

	•	As discussed elsewhere in this prospectus, our agreement and the related instruments governing borrowings under our new credit facilities contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios, as well as certain additional restrictions. Any breach of covenants in our new credit facilities could result in a default under our new credit agreement. Accordingly, maintenance of these covenants is important to us.

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From the above list, our Board of Directors assigned certain objectives to each named executive officer based on his role with us, and assigned a weight to each metric, as reflected in the table below.


Name		Performance Objective and Weight

Mr. New		• Net revenue (15%)
		• EBITDA (50%)
		• Acquisition Management (10%)
		• Management of Bank Covenants (25%)
Mr. Stefanelli		• Net revenue (15%)
		• EBITDA (50%)
		• Acquisition Management (10%)
		• Management of Bank Covenants (25%)
Mr. Marsh		• Net revenue (10%)
		• Cash flow from Operations (60%)
		• Acquisition Management (5%)
		• Management of Bank Covenants (25%)
Mr. Ferrara		• Net revenue (50%)
		• EBITDA (40%)
		• Cash flow from Operations (10%)
Mr. Null		• Net revenue (50%)
		• EBITDA (40%)
		• Cash flow from Operations (10%)

The following table provides the targets (in millions) for each of the performance objectives and actual performance in fiscal year 2009.


Objective	Target Goal	FY 2009 Actual

Net Revenue	$173.8	$170.9
EBITDA	$57.2	$55.8
Cash flow from Operations	$30.6	$33.4
Acquisition Management	Targets’ Annualized EBITDA of $4.0	Targets’ Annualized EBITDA of $6.4
Management of covenants⁽¹⁾	N/A	100%


(1)		The achievement of the “Management of Covenants” objective is generally measured by whether or not we breached any of the covenants under our credit facilities.

With the exception of the “Management of Covenants” objective, the achievement of which is either zero percent or one hundred percent, for each increment of one percent that actual performance falls below our target goal, the executive’s target bonus would be reduced by ten percent. Likewise, for each increment of one percent that actual performance exceeds our target goal, the executive’s target bonus would be increased by ten percent, with a maximum of 110 percent. For example, if we had achieved 90 percent of our target goal, then the executive would have received zero percent of his target bonus, and if we had achieved 110 percent of our target goal, then the executive would have received two hundred percent of his target bonus. Linear interpolation is used to determine

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payouts between the ranges. The following table provides details regarding the awards earned by named executive officers in 2009.


	Target		Target Bonus			Actual Bonus Earned		Actual Bonus Earned
Name	Bonus ($)		(% of Base Salary)			($)		(% of Base Salary)

Mr. New	$	400,000		100	%	$	381,000		95	%
Mr. Stefanelli	$	236,250		75	%	$	225,000		71	%
Mr. Marsh	$	147,000		50	%	$	233,000		79	%
Mr. Ferrara	$	89,040		40	%	$	81,000		36	%
Mr. Null	$	79,013		35	%	$	72,000		32	%

In addition to the bonus described above, in June 2009, Mr. Marsh received a $10,000 cash bonus in recognition of his role in connection with KRG Capital Partners’ investment in Aurora Holdings and their acquisition of GSO Capital Partners’ equity interest in Aurora Holdings. This bonus was not based on any pre-established performance metrics. Instead, the cash award was determined by our Board of Directors on a discretionary basis after the closing of the transaction, based on Mr. Marsh’s performance in connection with, and the success of, the transaction.

Long-Term Equity Incentives. In prior years (most recently 2008), our Board of Directors granted certain equity interests in Aurora Holdings to our named executive officers pursuant to our New Plan. The New Plan provided for grants of Class D-1, Class D-2 and Class D-3 Units, which we refer to collectively as the Class D Units, to our employees. The terms of the Class D Units were governed by the Aurora Holdings LLC Agreement, and, generally, the Class D Units represent the right of the holder to receive a portion of the proceeds in the event of liquidation of Aurora Holdings. The Class D units generally vested over a period of time, subject to the named executive officer’s continued employment with us. All of such units held by our named executive officers were fully-vested by December 31, 2008. None of our named executive officers received Class D units, or any other equity grants, in 2009. In connection with the Reorganization Transactions discussed elsewhere in this prospectus, the Class D Units held by our named executive officers will be exchanged for shares of our Class A common stock or cancelled without consideration.

Other Benefits. Our named executive officers participate in various health and welfare programs that are generally made available to all salaried employees. Our named executive officers also participate in our executive-level life insurance program. Mr. New receives reimbursements related to his country club memberships, as well as Company-paid premiums for an individual life insurance policy.

Employment Arrangements

We maintain employment agreements with each of Messrs. New, Marsh, Ferrara, Null and Stefanelli. The employment agreements guarantee certain benefits, such as bonus and benefit plans, to the executives during their employment with us. In addition, the employment agreements provide certain benefits to the executives upon their termination of employment by us without cause, by the executive for good reason, or by reason of their death or disability. For a description of the employment agreements, see the narrative following the Summary Compensation table and “Potential Payments upon Termination of Employment” and “Potential Payments upon Change in Control” later in this prospectus.

Tax Treatment of our Compensation Program

Section 162(m) of the Internal Revenue Code places a limit of $1 million on the amount of compensation that public companies may deduct in any one year with respect to its named executive officers. In fiscal year 2009, as a privately-held company, Section 162(m) of the Internal Revenue Code did not apply to us. To the extent that we compensate our named executive officers in excess of the $1 million limit in the future, our compensation committee will consider whether we should design our compensation programs to meet the qualified performance-based requirements. To maintain flexibility in compensating our executives, we expect that the compensation committee will reserve the right to use its judgment to authorize compensation payments that may be subject to the limit when the compensation committee believes that such payments are appropriate.

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Summary Compensation

The following table sets forth the cash and other compensation that we paid to our named executive officers, or that was otherwise earned by our named executive officers, for their services in all capacities during the last fiscal year.

Summary Compensation Table


								Non-Equity
								Incentive Plan		All Other
Name and Principal Position	Year		Salary ($)		Bonus($)			Compensation ($)⁽¹⁾		Compensation ($)⁽²⁾		Total ($)

James C. New		2009		400,000		—			381,000		45,154		826,154
Chairman of our Board of Directors, Chief Executive Officer and President
Martin J. Stefanelli		2009		315,000		—			225,000		630		540,630
Chief Operating Officer, Vice President and Secretary
Gregory A. Marsh		2009		294,000		10,000⁽³	⁾		233,000		630		537,630
Chief Financial Officer, Vice President and Treasurer
Fred Ferrara		2009		222,600		—			81,000		287		303,887

Aurora Diagnostics, Inc. S-1/A