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As filed with the Securities and Exchange Commission on June 18, 2010.
Registration No. 333-166400
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Amendment No. 1
to
 
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.
 


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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 June 18, 2010
           Shares
 
(AURORA LOGO
 
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   Us   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


 

 
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 EX-23.1
 EX-23.2
 
 
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;
 
  •  “The U.S. Anatomic Pathology Market Forecast & Trends 2010” prepared by Laboratory Economics, or the Laboratory Economics Report;
 
  •  “Cancer Facts & Figures 2009” prepared by the American Cancer Society, or the American Cancer Society Report;


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  •  “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; 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.
 
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.


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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 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.
 
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.


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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.
 
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.
 
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


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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


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  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.


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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


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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.


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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.
 
(CHART)
 
 
(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.


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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.


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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.”


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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.


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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.


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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  
                                                         


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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.


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(8) The following is a reconciliation of net income to Adjusted EBITDA:
 
                                         
          Three Months
 
    Year Ended December 31,     Ended March 31,  
                      Pro Forma,
    Pro Forma,
 
                      As Adjusted
    As Adjusted
 
    2007     2008     2009     2009     2010  
    (in thousands)  
 
Net Income
  $ 479     $ 10,670     $ 9,002     $ 16,805     $ 2,192  
Interest expense
    7,114       21,577       18,969       17,010       4,229  
Income taxes
    762       408       45       11,203       1,461  
Depreciation and amortization
    6,386       16,137       17,060       18,504       4,803  
                                         
EBITDA
    14,741       48,792       45,076       63,522       12,685  
Management fees(A)
    644       1,559       1,778              
Stock-based compensation
          1,164                    
Unusual charges(B)(C)(D)
    3,825       676       9,105       9,105       298  
Other
    (124 )     (125 )     (28 )     (356 )      
                                         
Adjusted EBITDA, as defined
  $ 19,086     $ 52,066     $ 55,931     $ 72,271     $ 12,983  
                                         
 
 
Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization (EBITDA), further adjusted to exclude unusual items and other adjustments which we believe are appropriate to provide additional information to investors, enhancing their understanding of our financial performance and providing them an important financial metric used to evaluate performance in the health care industry. We further believe that providing this information allows our investors greater transparency and a better understanding of our ability to meet our debt service obligations and make capital expenditures.
 
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 facility.
(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.


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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.


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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 rapidly changing requirements for auditing, external compliance, and internal compliance policies and procedures.
 
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.
 
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.


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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 2009, we received 25 percent of our revenues from Medicare and Medicaid and 61 percent of our revenues from 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.
 
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.


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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.


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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


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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.
 
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;


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  •  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


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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


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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.


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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


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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.
 
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.
 
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,


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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.
 
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


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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


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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


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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.”


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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


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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


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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


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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;


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  •  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.


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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


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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.


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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.


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


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


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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


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  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.
 
chart
 
 
(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


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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


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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.


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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. 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. 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. 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           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. We will have broad discretion in the way we use the net proceeds that we will receive from this offering.
 
The amount of net proceeds from this offering that will be used to acquire Aurora Holdings Units 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 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.


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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     $        
                 


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(1) The actual capitalization represents Aurora Holdings’ capitalization before giving effect to the Reorganization Transactions, the refinancing of our pre-existing credit facilities or the completion of this offering.
(2) Actual as of March 31, 2010, includes the current and long term portions of our pre-existing 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.


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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.


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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
                                       


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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.


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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     $       $       $  
                                         


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(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.


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(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.”


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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
                                                                  $    
                                                                         


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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.


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(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 facility is 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.


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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.


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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  
                                                 


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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.


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


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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, we derived approximately 61 percent of revenues from private insurance, including managed care organizations and commercial payors; approximately 25 percent of revenues from Medicare and Medicaid; and approximately 14 percent from physicians and individual patients.


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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. However, we believe that sufficient


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information exists in each respective billing system to make reasonable estimates of our provision for doubtful accounts.
 
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 a $335.0 million credit facility 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 facility 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. We have the right to increase the commitments under our credit agreement by up to $50.0 million, provided certain conditions are met. 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


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  •  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, 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. 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.


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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


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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.


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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


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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.


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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
 
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 2010 and 2009 we expensed $0.3 million and $0.1 million, respectively, of transaction costs associated with our completed acquisitions and business development costs related to our prospecting and unsuccessful acquisition activity.
 
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


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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 addit