As filed with the Securities and Exchange Commission on ~~September~~November 2919, ~~2000~~2001

Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

AMERICAN MEDICAL LABORATORIES, INCORPORATED

(Exact name of registrant as specified in its charter)






Delaware	8071	54-1983356




(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

14225 Newbrook Drive

Chantilly, VA 20153

Telephone: (703) 802-6900

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive offices)

Timothy J. Brodnik

Chairman, President and Chief Executive Officer

14225 Newbrook Drive

Chantilly, VA 20153

Telephone: (703) 802-6900

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

Copies to:

Sanford E. Perl, Esq. Gerald T. Nowak, Esq. Kirkland & Ellis 200 E. Randolph Drive Chicago, IL 60601 Telephone: (312) 861-2000 ~~John~~Scott DC. ~~Watson~~Herlihy, ~~Jr.,~~ Esq. Stuart S. Kurlander, Esq. Latham & Watkins ~~1001~~555 ~~Pennsylvania~~Eleventh ~~Avenue~~Street, N.W., Suite ~~1300~~1000 Washington, D.C. 20004 Telephone: (202) 637-2200

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 of 1933 (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~~ 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

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ~~[ ]~~o

CALCULATION OF REGISTRATION FEE

Title of each class of	Proposed Maximum Aggregate	Amount of
securities to be registered	Offering Price(1)	Registration Fee(2)
Common Stock, par value $.01 per share	$115,000,000	$3028,~~360~~750

(1)

~~Includes~~Estimated ~~shares~~solely offor ~~common~~the ~~stock~~purpose ~~that~~of calculating the ~~underwriters~~registration ~~have~~fee ~~the~~pursuant ~~option~~ to ~~purchase~~Rule ~~from~~457(o) under the ~~registrant~~Securities toAct ~~cover~~of ~~over-allotments~~1933, ifas ~~any~~amended.

(2)

~~Estimated~~The ~~solely~~registrant ~~for~~paid ~~the~~a ~~purpose~~filing fee of ~~calculating~~$30,360 ~~the~~in ~~registration~~connection ~~fee~~with ~~pursuant~~its Registration Statement on Form S-1 (File No. 333-46992) initially filed on September 29, 2000. That Registration Statement was subsequently withdrawn. Pursuant to Rule 457(op), ~~under~~ the ~~Securities~~registrant ~~Act~~is ofapplying ~~1933~~$28,750 asof ~~amended~~such amount to the fee associated with this Registration Statement.

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 this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not 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 it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED ~~SEPTEMBER~~ NOVEMBER 2919, ~~2000~~2001

(AMERICAN MEDICAL LABS, INC. LOGO)

Common Stock

Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $ and $ per share. We are applying to ~~list~~ list our common stock on ~~The~~the ~~Nasdaq~~New ~~National~~York ~~Market~~Stock Exchange under the ~~symbol~~ symbol “~~AMLS~~AMJ.”

The underwriters have an option to purchase a maximum of additional shares from us to cover over-allotments of shares.

Investing in ~~the~~our common stock involves risks. See “Risk Factors” on page 4 5.

Underwriting

Price to

Discounts and

Proceeds to

Public

Commissions

AML

Per Share

Total

Delivery of the shares of common stock will be made on or ~~about~~ about , ~~2000~~ .

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Credit Suisse First Boston


	Banc of America Securities LLC

~~First~~U.S. ~~Union~~Bancorp ~~Securities,~~Piper ~~Inc.~~Jaffray

~~The~~Wachovia ~~date of this prospectus is , 2000.~~ Securities

The date of this prospectus is , .

TABLE OF CONTENTS


PROSPECTUS SUMMARY
RISK FACTORS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
PRINCIPAL STOCKHOLDERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DESCRIPTION OF CAPITAL STOCK
SHARES ELIGIBLE FOR FUTURE SALE
MATERIAL UNITED STATES TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
UNDERWRITING
NOTICE TO CANADIAN RESIDENTS
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO FINANCIAL STATEMENTS
Ex. 23.1 Consent of KPMG LLP

[Description of cover art:

Graphics — pictures of medical technicians performing various tasks and a picture of our headquarters building.

Captions — American Medical Laboratories

— The CLIENT is our reason for being here.]

TABLE OF CONTENTS

PROSPECTUS SUMMARY RISK FACTORS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS USE OF PROCEEDS DIVIDEND POLICY CAPITALIZATION DILUTION SELECTED CONSOLIDATED FINANCIAL DATA UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS MANAGEMENT PRINCIPAL STOCKHOLDERS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS DESCRIPTION OF CAPITAL STOCK SHARES ELIGIBLE FOR FUTURE SALE MATERIAL UNITED STATES TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS UNDERWRITING NOTICE TO CANADIAN RESIDENTS LEGAL MATTERS EXPERTS WHERE YOU CAN FIND MORE INFORMATION INDEX TO FINANCIAL STATEMENTS CONSENT OF KPMG FINANCIAL DATA SCHEDULE


	Page

PROSPECTUS SUMMARY		1




RISK FACTORS		5




CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		15




USE OF PROCEEDS		16




DIVIDEND POLICY		16




CAPITALIZATION		17




DILUTION		18




SELECTED CONSOLIDATED FINANCIAL DATA		19




MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		21




BUSINESS		30




MANAGEMENT		47




PRINCIPAL STOCKHOLDERS		58




CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		60




DESCRIPTION OF CAPITAL STOCK		64




SHARES ELIGIBLE FOR FUTURE SALE		67




MATERIAL UNITED STATES TAX CONSIDERATIONS FOR NON- UNITED STATES HOLDERS		69




UNDERWRITING		73




NOTICE TO CANADIAN RESIDENTS		77




LEGAL MATTERS		77




EXPERTS		78




WHERE YOU CAN FIND MORE INFORMATION		78




INDEX TO FINANCIAL STATEMENTS		F-1

TABLE OF CONTENTS

	Page
PROSPECTUS SUMMARY		1
RISK FACTORS		4
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		13
USE OF PROCEEDS		14
DIVIDEND POLICY		14
CAPITALIZATION		15
DILUTION		16
SELECTED CONSOLIDATED FINANCIAL DATA		17
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS		19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		22
BUSINESS		30
MANAGEMENT		44
PRINCIPAL STOCKHOLDERS		53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		55
DESCRIPTION OF CAPITAL STOCK		58
SHARES ELIGIBLE FOR FUTURE SALE		61
MATERIAL UNITED STATES TAX CONSIDERATIONS FOR NON- UNITED STATES HOLDERS		63
UNDERWRITING		67
NOTICE TO CANADIAN RESIDENTS		70
LEGAL MATTERS		71
EXPERTS		71
WHERE YOU CAN FIND MORE INFORMATION		71
INDEX TO FINANCIAL STATEMENTS		F-1

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

Dealer Prospectus Delivery Obligation

Until , ~~2000~~2002 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

PROSPECTUS SUMMARY

This summary may not contain all of the information that may be important to you. You should read the entire prospectus, including the financial ~~data~~statements and related notes, before making an investment decision. ~~Unless specifically indicated in this~~ ~~prospectus or the context otherwise requires, the terms~~ “we,” “us,” “our,” “AML” and “company” refer to American Medical Laboratories, Incorporated, a Delaware corporation, and its subsidiaries, and the term “offering” refers to the offering of common stock made pursuant to this prospectus.

AML

We are a leading ~~national~~ provider of esoteric ~~laboratory~~ testing services. ~~Esoteric~~to ~~tests~~a ~~are~~wide range ~~clinical~~of ~~laboratory~~healthcare ~~tests~~professionals ~~that~~nationwide ~~are more complex~~ and ~~typically~~are ~~priced~~the ~~higher than routine tests. We~~largest ~~market~~provider ~~our~~of esoteric ~~testing services to hospitals~~ and ~~independent~~ routine ~~clinical~~laboratory ~~laboratories~~testing ~~nationwide. As of September 15, 2000, we provided our~~ services ~~to over 380 hospitals and 160 independent clinical laboratories~~ in ~~31 states. Our two main~~ ~~laboratories~~our ~~are~~core ~~located~~geographic inmarkets of metropolitan Washington, D.C. and ~~Las Vegas,~~ Nevada. We ~~are~~operate ~~the~~a ~~leading~~full-service ~~provider~~laboratory ~~of comprehensive testing services~~ in each of ~~those~~our ~~markets. We seek~~core togeographic ~~achieve~~markets ~~the~~24 hours ~~highest~~a ~~levels~~day, of365 days ~~client~~a ~~satisfaction~~year through ~~and~~which ~~foster long-term~~we ~~relationships~~offer ~~through~~approximately ~~superior~~1,500 ~~customer~~different ~~service~~tests. WeAs ~~believe~~of ~~our~~September 30, ~~commitment~~2001, towe ~~customer~~provided ~~service~~our ~~has~~services ~~contributed~~ to ~~our~~ approximately ~~99%~~470 hospitals, ~~client~~150 independent ~~retention~~clinical laboratories, ~~rate~~7,900 physician ~~from~~offices ~~January~~and ~~1999~~14 managed care togroups ~~June~~in ~~2000~~40 states. We strengthen our offering byand foster ~~providing~~long ~~our~~term ~~clients~~customer ~~advanced information~~relationships ~~technology~~by ~~solutions,~~providing assuperior service ~~well~~and ~~as other~~ value-added laboratory services.

~~According~~In toour ~~Washington~~core ~~G-2~~geographic ~~Reports,~~markets we are the ~~U.S.~~leading ~~clinical~~provider ~~laboratory~~of both ~~industry~~esoteric ~~generated~~and ~~$31.8 billion~~routine oflaboratory ~~revenues~~testing inservices. ~~1999, which~~We attribute ~~represented~~our ~~approximately~~leadership 3%position ofto ~~total~~our ~~healthcare~~ability ~~expenditures.~~to Aoffer a full-range ~~growing market segment~~ of ~~the~~testing ~~industry~~services, isour ~~esoteric~~excellent ~~testing~~quality, our rapid ~~which~~turn inaround ~~1998~~time ~~represented~~and ~~approximately~~our $2commitment to customer service.~~0 billion~~ ofThese ~~revenues.~~attributes Wegive ~~believe~~us the ~~growth~~ability into ~~the~~attract ~~esoteric~~new ~~testing~~customers ~~market is~~while retaining ~~driven~~our existing customers, as evidenced by ~~general~~our ~~advances~~98% inclient retention ~~medical~~rate ~~technology~~from ~~and~~January 1999 to September 2001. Over the ~~accelerating~~past ~~pace~~40 years, ofwe ~~new~~have ~~genetic-based~~established ~~testing.~~a Wesignificant infrastructure ~~believe~~and ~~that~~an extensive service network, which includes ~~due~~two tofull-service ~~the~~laboratories, ~~high~~four ~~degree~~short ofturn ~~complexity~~around time laboratories and ~~costs~~51 patient ~~involved~~centers. ~~with~~Our infrastructure ~~esoteric~~enables ~~testing,~~us ~~many~~to ~~hospitals~~efficiently and ~~independent~~cost-effectively ~~clinical~~provide a broad ~~laboratories~~range ~~use~~of ~~laboratories~~testing ~~such~~services ason ~~AML~~a regional basis. We also leverage this infrastructure to ~~perform~~provide ~~these~~esoteric ~~tests~~testing services nationally.

~~Hospitals~~Nationwide, many hospitals, physicians and independent clinical laboratories cannot or do not perform their own esoteric tests because of the complexity and high cost of performing these tests. These organizations choose to outsource their esoteric testing needs to providers like us ~~because~~who possess the specialized personnel weand ~~offer~~equipment ~~them~~necessary ~~superior~~to ~~service,~~perform these tests. We believe that our customers choose us because we offer them excellent quality and ~~rapid turnaround~~timely ~~time~~service. In addition, unlike ~~the laboratories that~~many ~~provide~~of ~~comprehensive~~our ~~services~~larger ~~on a national basis~~competitors, we generally do not compete with our customers ~~clients~~ for routine testing business in their local markets. Our Westrategy ~~believe~~of ~~that~~addressing wethe ~~offer~~growing ~~our~~esoteric ~~clients~~testing ~~one~~needs of ~~the~~healthcare ~~most~~providers ~~complete~~nationally has contributed to our significant net revenue growth from esoteric testing ~~service~~and ~~offerings~~allowed us ~~available,~~to expand our business beyond our core geographic markets. asThis ~~well~~has ascontributed ~~access~~to our ability to ~~the~~grow ~~latest~~net inrevenue ~~innovative~~at ~~testing~~a compound ~~technology~~annual growth rate of 15.9% from the fiscal year ended 1997 Weuntil ~~obtain~~the ~~this~~fiscal ~~access~~year ~~through~~ended ~~acquisition~~2000 ~~and~~(pro ~~licensure~~forma offor ~~new~~the ~~testing~~acquisition ~~technologies,~~of ~~which~~APL ~~leverages~~Healthcare ~~external~~Group, ~~research~~Inc.). inWe believe our ~~esoteric~~strong scientific team, leading testing technology platform and comprehensive ~~reduces~~test ~~our~~offering ~~development~~have ~~time~~positioned ~~and~~us ~~costs~~to successfully meet the anticipated future growth in demand for esoteric testing.

InAccording ~~October~~to ~~1999,~~Lab weIndustry ~~acquired~~Strategic ~~APL~~Outlook ~~Healthcare Group~~2000, ~~the~~published ~~leading~~by ~~laboratory~~Washington ~~services~~G-2 ~~provider~~Reports, inthe ~~Nevada~~U.S. ~~With~~clinical ~~this~~laboratory ~~purchase, we~~industry ~~acquired~~generated a$31.8 billion ~~full~~of ~~service~~revenues ~~laboratory facility~~ in ~~Las Vegas~~1999, ~~Nevada~~which ~~that~~represented ~~complements~~approximately ~~the~~3% ~~geographic reach~~ of ~~our~~total ~~Chantilly,~~healthcare ~~Virginia facility and enhances our position as a nationwide provider of esoteric testing services~~expenditures. ~~We have been successful in attracting~~A agrowing ~~wide~~market ~~range~~segment of ~~clients~~the ~~for~~industry ~~our~~is esoteric testing ~~services~~, ~~including~~which ~~Kaiser~~in ~~Permanente,~~1998 ~~Consorta~~represented ~~Catholic~~approximately ~~Health~~$2.0 billion ~~Resource~~of ~~Partners, Health Trust Purchasing Group and Massachusetts General Hospital~~revenues. We ~~are~~believe ~~currently performing more than 330,000 total tests per week. For~~ the ~~six~~growth ~~months~~in ~~ended June 30, 2000 and for~~ the ~~year~~esoteric ~~ended~~testing ~~December 31, 1999 on a pro forma basis,~~market weis ~~had~~driven ~~net~~by ~~revenue~~general ofadvances ~~$129.9 million~~in ~~and $225.6 million,~~medical ~~respectively,~~technology and ~~Adjusted~~the accelerating ~~EBITDA~~pace of ~~$19.2 million~~ ~~and~~new ~~$27.3 million,~~genetic-based ~~respectively~~testing.

We have been successful in attracting a wide range of customers for our testing services, including Kaiser Permanente, Consorta Catholic Health Resource Partners, Healthtrust Purchasing Group and Massachusetts General Hospital. During the nine months ended September 30, 2001, we

performed, on average, more than 430,000 total tests per week. Our net revenue increased to $221.5 million for the nine months ended September 30, 2001 from $196.3 million for the nine months ended September 30, 2000. Our operating income increased to $17.3 million for the nine months ended September 30, 2001 from $16.1 million for the nine months ended September 30, 2000. Our Adjusted EBITDA, which we define as EBITDA adjusted to exclude stock-based compensation expense and non-recurring items, increased to $28.0 million for the nine months ended September 30, 2001 from $24.2 million for the nine months ended September 30, 2000.

Our Business Strategy

The principal elements of our business strategy include:

• ~~expanding~~Expanding ~~our~~Our ~~position~~Position as a ~~leading~~Leading ~~national~~National ~~provider~~Provider of Esoteric Clinical Laboratory Testing Services. We will continue to expand nationally by leveraging our infrastructure to provide esoteric and other testing services; to health care providers who wish to outsource their esoteric testing business. We believe demand for such services will continue to grow as testing technology advances. • ~~maintaining~~Maintaining and Expanding Our Comprehensive Offering of Laboratory Tests. We are committed to delivering to our customers a comprehensive offering of esoteric testing capabilities. We will use our market knowledge and strong professional relationships to continue to acquire and license new tests; to satisfy our customers’ needs. • ~~growing~~Growing Our Leadership Position in Our Core Geographic Markets. We will use our ~~leadership~~strong ~~position~~regional presence and reputation for superior quality and customer service to continue to expand our esoteric and routine testing operations in our core geographic markets;. • ~~enhancing~~Enhancing ~~our~~Our ~~competitive~~Competitive ~~position~~Position by ~~providing~~Providing the Highest Levels of Customer Service. We seek to achieve the highest levels of ~~client~~customer ~~service;~~satisfaction and •foster ~~strengthening~~long-term ~~our~~relationships through superior customer ~~relationships~~service. • Strengthening Customer Relationships with Value-Added Services. We will continue to leverage our long history of clinical laboratory experience and expertise to develop and strengthen the community outreach efforts of our hospital customers. Our value-added services enable our customers to more effectively manage their laboratory operations and serve to strengthen our customer relationships.

The legal name of our company is American Medical Laboratories, Incorporated. Our principal executive office is located at 14225 ~~Newbrook~~ Newbrook Drive, Chantilly, Virginia 20153 and our telephone number is (703) 802-6900. We maintain a world wide web site at at aml.com. Our website and the information it ~~contains~~ contains are not a part of this prospectus.

The Offering

Common stock offered shares Common stock to be outstanding after this offering shares Over-allotment option shares Use of proceeds Net proceeds from this offering will be approximately $ million. We intend to use the net proceeds to repay outstanding indebtedness and to repurchase our redeemable cumulative preferred stock. Proposed ~~Nasdaq~~New ~~National~~York ~~Market~~Stock Exchange symbol ~~AMLS~~AMJ

The common stock to be outstanding after this offering includes the issuance of shares of common stock upon the conversion of $ million aggregate principal amount of our subordinated notes at a conversion price equal to 80% of an assumed offering price of $ per share. The conversion will take place upon the closing of this offering.

The common stock to be outstanding after this offering does not include:

	•	shares issuable upon the exercise of outstanding options, with a weighted average exercise price of $ per share; and
	•	additional shares of common stock expected to be reserved for future grants, awards or sale under our 2000 Equity Incentive Plan or sale under the 2000 Employee Stock Purchase Plan.


	•	1,663,941 shares issuable upon the exercise of outstanding options, with a weighted average exercise price of $4.25 per share;

	•	options to purchase additional shares of common stock with an exercise price equal to the price to the public in this offering that are being granted in connection with this offering; and

	•	additional shares of common stock reserved for future grants, awards or sales under our 2001 Equity Incentive Plan or sale under the 2001 Employee Stock Purchase Plan.

Unless we indicate otherwise, the information in this prospectus does not reflect the exercise by the underwriters of their option to purchase up to additional shares of common stock from us to cover over-allotments.

Summary Historical and Pro Forma Condensed

Consolidated Financial Data

The following summary historical and pro forma condensed consolidated financial data should be read in conjunction with “Selected Consolidated Financial Data,” ~~“Unaudited~~ ~~Pro Forma Condensed Consolidated Statements of Operations,”~~ “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements of AML and APL Healthcare Group, Inc., or APL, included elsewhere in this prospectus. The consolidated statement of operations data ~~set forth below~~ for the years ended December 31, ~~1998~~1999 and ~~1999~~ 2000 are derived from our audited consolidated financial statements, which appear elsewhere in this prospectus.

The ~~summary~~shares ~~pro~~used ~~forma condensed consolidated financial data give effect~~ to ~~the~~compute ~~acquisition~~pro offorma ~~APL,~~unaudited ~~which~~basic ~~occurred on October 13, 1999,~~ and ~~related transactions, and assumes that~~ diluted ~~those~~net ~~transactions~~income ~~occurred~~per oncommon ~~January 1,~~share ~~1999.~~give ~~The~~effect ~~summary pro forma condensed financial data do not purport~~ to ~~represent~~the ~~what~~conversion ~~our~~of $ million aggregate ~~results~~principal ~~would~~amount ~~actually~~of ~~have~~our ~~been~~subordinated ~~if those transactions~~notes ~~had~~into shares of incommon ~~fact~~stock ~~occurred~~upon onthe ~~that~~closing ~~date,~~of ~~nor~~this ~~does~~offering ~~this~~at ~~data~~a conversion ~~purport~~price equal to ~~project~~ ~~our~~80% ~~results~~of ~~for~~an ~~any~~assumed ~~future~~offering ~~period~~price of $ per share.

											Six Months
								Nine Months
											Ended June 30,
								Ended September 30,
								Unaudited
		Year Ended
		Year Ended						Pro Forma
		December 31,
		December 31,						Year Ended						(unaudited)
								(unaudited)
								December 31,			Actual			Pro Forma			Actual
		1999			2000			2000			2001
		1998			1999			1999			1999			1999			2000
		(in thousands, except per share and percentage data)
		(in thousands, except per share data)
Consolidated Statement of Operations Data:
Consolidated Statement of Operations Data:
Net revenue		$	143,436		$	260,824		$	196,329		$	221,500
Net revenue		$	102,729		$	143,436		$	225,636		$	58,609		$	110,094		$	129,895
Operating income			8,991			17,541			16,119			17,289
Operating income			7,540			8,991			15,627			4,646			9,066			12,584
Net income (loss)			1,236			(1,617	)		933			1,054
Net income (loss)			3,959			1,236			(534	)		2,012			507			2,546
Net income (loss) to common shareholders before extraordinary item			1,216			(1,809	)		790			896
Net income (loss) to common shareholders before extraordinary item			3,036			1,216			(554	)		1,704			199			2,451
Net income (loss) to common shareholders			774			(1,809	)		790			896
Net income (loss) to common shareholders			3,036			774			(996	)		1,637			132			2,451
Net income (loss) per common share before extraordinary item:
Net income (loss) per common share:
	Basic	$	0.06		$	(0.09	)	$	0.04		$	0.04
	Basic	$			$			$			$			$			$
	Diluted	$	0.06		$	(0.09	)	$	0.04		$	0.04
	Diluted	$			$			$			$			$			$
Weighted average common shares outstanding:
Weighted average common shares outstanding:
	Basic		19,102			20,848			20,828			21,209
	Basic
	Diluted		19,813			20,848			21,697			21,676
	Diluted
Pro forma unaudited basic and diluted net income per common share
Other Financial Data:
Shares used to compute pro forma unaudited net income per common share:
Adjusted EBITDA(1)		$	9,696		$	13,694		$	27,293		$	6,015		$	15,079		$	19,181
	Basic
Adjusted EBITDA as a % of net revenue			9.4	%		9.5	%		12.1	%		10.3	%		13.7	%		14.8	%
	Diluted
Other Financial Data:
Adjusted EBITDA(1)		$	13,044		$	30,354		$	24,195		$	27,985
Adjusted EBITDA as a % of net revenue			9.1	%		11.6	%		12.3	%		12.6	%

As of

As of September 30, 2001

June 30, 2000

(unaudited, in thousands)

Actual

As Adjusted(2)

Pro Forma

Consolidated Balance Sheet Data:

Actual

Pro Forma(2)

As Adjusted(2)(3)

Cash and cash equivalents

1,008

Consolidated Balance Sheet Data:

Total assets

202,352

Cash and cash equivalents

3,522

Total debt

145,819

Total assets

203,909

Redeemable preferred stock

2,004

Total debt

146,357

Total stockholders’ equity

11,210

Redeemable preferred stock

2,259

Total stockholders’ equity

10,348

(1)	Adjusted EBITDA is defined as EBITDA adjusted to exclude stock-based compensation expense and non-recurring items. EBITDA consists of net income before interest expense, income taxes, share in loss of affiliates, depreciation and amortization and extraordinary items. Stock-based compensation expense was zero and $0.4 million for the ~~six-month~~years ~~period~~ ended ~~June~~December 3031, 1999 and 2000, ~~was~~respectively, and $~~172~~0.3 million and ~~zero~~$0.4 million for ~~all~~the ~~other~~nine-month periods ~~presented~~ended September 30, 2000 and 2001, respectively. Non-recurring items reduced Adjusted EBITDA ~~consists~~by of$0.7 ~~net~~million ~~income~~and ~~before~~$1.3 ~~interest~~million ~~expense,~~for ~~income~~the ~~taxes,~~years ~~equity~~ended inDecember ~~income~~31, ~~(loss)~~1999 ofand ~~affiliates~~2000, ~~depreciation~~respectively, and ~~amortization~~by $2.3 million and ~~extraordinary~~$0.7 ~~items~~million for the nine-month periods ended September 30, 2000 and 2001, respectively. EBITDA and Adjusted EBITDA should not be considered as measures of financial performance under GAAP. Items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial performance. We present Adjusted EBITDA, which is a non-GAAP measure, to enhance the understanding of our operating results. Adjusted EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated from operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.
(2)	AsPro ~~adjusted~~forma to give effect to the ~~sale~~conversion ~~by us~~ of ~~shares of common stock in this offering, assuming an offering price of~~ $ ~~per~~million share, the midpoint of the range set forth on the cover page of this prospectus and the application of the net proceeds of this offering, the redemption of shares of our redeemable preferred stock with an aggregate ~~liquidation value of $ ; and the conversion of $ aggregate~~ principal amount of ~~convertible~~our subordinated notes into shares of our common stock at $ per share, ~~and~~a ~~the~~conversion ~~payment~~price ofequal ~~all~~to ~~accrued~~80% ~~interest~~of onan ~~the~~assumed ~~convertible~~offering ~~subordinated~~price ~~notes and the repayment~~ of ~~the remaining principal of~~ $ ofper ~~convertible subordinated notes~~share.
(3)	As adjusted to give effect to this offering and the use of proceeds as described in “Use of Proceeds.”

RISK FACTORS

You should carefully consider the following factors in addition to the other information ~~set forth~~ in this prospectus, ~~including~~ including the financial statements and related notes, before investing in the common stock ~~offered hereby~~. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we do not presently know about or that we currently believe are immaterial may also impair our business. If any of the following risks actually occurs, our business, financial condition or results of operations will likely suffer. In such case, the trading price of our common stock could decline, and you ~~may~~could lose all or part of your investment.

Risks Related to Our Industry

We could incur significant fines and other penalties as a result of the extensive, complex and sometimes unpredictable, government regulation of our industry.

The clinical laboratory industry is subject to significant governmental regulation at the federal, state and local levels. Specifically, we are subject to a number of certification and licensing regulations as well as federal, state and local legislation and regulation regarding:

• ~~fraud and abuse; • billing for our services; • kickbacks; • referrals; • rebates and fee splitting; •~~ the handling and disposal of medical ~~specimens~~waste, hazardous waste and controlled substances; • consumer protection; • privacy and confidentiality; • health care plans; • various licensure and certification laws, such as managed care and third-party administrator laws; and • employee safety.

Although we believe that we are in compliance, in all material respects, with the statutes, regulations and other requirements applicable to our laboratory operations, the clinical laboratory industry is subject to complex and extensive ~~regulations~~regulation. ~~Many~~Courts have not interpreted many of these statutes and regulations ~~have not been interpreted by the courts~~. Congress Weor ~~are~~various ~~unable~~state toand ~~predict~~local ~~what~~legislatures ~~additional~~may ~~federal or state~~enact additional legislation or regulatory initiatives ~~may be enacted~~ in the ~~future~~ future relating to ~~our business or~~ the ~~health~~laboratory ~~care~~ industry in ~~general,~~ orparticular ~~what effect such legislation~~ or ~~regulations~~the ~~might~~health ~~have~~care onindustry usin general. WeFederal ~~also~~and ~~cannot provide any assurance that federal or~~ state governments ~~will~~may ~~not~~ also impose additional restrictions or adopt interpretations of existing laws that could have a material adverse effect on us. Therefore, weregulatory ~~cannot~~or ~~assure~~judicial ~~you~~authorities ~~that~~may interpret or apply applicable statutes and regulations ~~might not be interpreted or applied by a regulatory or judicial authority~~ in a manner that ~~would~~ would adversely affect us.

Potential sanctions for ~~violation~~violations of these statutes and regulations include significant fines and criminal penalties and the loss of various licenses, certificates and authorizations, which in turn can lead to denial of the right to conduct ~~business~~ business or an exclusion or debarment from participation in federal orand state health care programs. ~~The revocation or loss of one or more of our~~ ~~laboratory licenses would have a material adverse effect on us.~~

4 In addition, we are subject to licensing and regulation under federal, state and local laws and regulations relating to the protection of the environment and human health and safety, including those relating to the handling, transportation and disposal of medical waste, infectious and hazardous waste and radioactive materials, and the safety and health of laboratory employees. The sanctions for failure to comply with these regulations include denial of the right to conduct business, significant fines and criminal penalties. Future changes in these federal, state and local laws and regulations, or in the interpretation of current laws and regulations, could materially alter the way we conduct business.

InWe ~~addition,~~could weincur ~~are~~significant ~~subject~~fines ~~to licensing~~ and ~~regulation under federal~~penalties, ~~state~~be ~~and~~excluded or ~~local~~debarred ~~laws~~from ~~and~~participation ~~regulations~~in ~~relating~~federal ~~to the protection of the environment~~ and ~~human~~state health ~~and safety,~~care ~~including those relating to the handling~~programs, ~~transportation~~ and ~~disposal~~ ofbe ~~medical~~subjected ~~specimens, infectious and hazardous waste and radioactive materials, and the safety and health of laboratory employees. The sanctions for failure~~ to ~~comply~~“whistleblower” ~~with these~~lawsuits ~~regulations~~as ~~may include denial of the right to conduct business, significant fines and criminal penalties. The loss of~~ a ~~license, imposition~~result of aunpredictable ~~fine,~~application ~~incurrence~~ of ~~liability~~fraud ~~under, or future changes in, such federal, state~~ and ~~local laws and regulations,~~abuse ~~or in the interpretation of current~~ laws ~~and regulations, could have a material adverse effect on us~~.

The ~~independent~~Department ~~clinical~~of ~~laboratory~~Justice ~~industry~~and the Department of Health and Human Services’, or HHS, Office of Inspector General have elevated health care fraud and abuse to high priority and invest substantial resources in ~~the~~investigating ~~United~~and prosecuting these ~~States~~matters. isIn ~~highly~~addition, ~~competitive~~entities that are found to violate these laws are not only subject to applicable civil and criminal penalties, ~~which~~but ~~could~~also ~~adversely~~may ~~affect~~be ~~our~~excluded or debarred from ~~operations~~participation in federal and state health care programs. Health care entities that do business with federal and state health care programs are precluded from contracting with excluded or debarred entities. Consequently, exclusion or debarment can have a devastating impact on an entity’s viability.

The clinical laboratory industry is subject to an array of “fraud and abuse” laws that regulate the health care industry in general. These laws include:


	•	the federal Anti-kickback Statute, and similar state statutes, which impose civil and criminal penalties on laboratories that pay kickbacks or other remuneration as an inducement or reward for referrals of business that is paid for by federal and state health care programs;

	•	the federal self-referral prohibition, commonly called the “Stark” law, and similar state statutes, which prohibit, with limited exceptions, Medicare and Medicaid payments for laboratory tests referred by physicians who have, personally or through a business or immediate family member, an investment interest in, or a compensation arrangement with, the testing laboratory, and impose fines and other penalties on entities that violate the law;

	•	federal and state rebate and fee-splitting laws, which restrict laboratories from sharing in fees generated from services that they did not perform; and

	•	laws related to billing practices, including state and federal False Claims Acts, which permit the government, and in some cases private “whistleblowers,” to (i) sue laboratories that knowingly submit false or fraudulent claims to the government for health care services, and (ii) collect per claim fines and up to treble damages, as well as payments to the “whistleblower.”

These fraud and abuse laws are often subject to varying applications. Government agencies have provided little guidance with respect to their application, and courts have offered limited guidance with respect to health care business arrangements and practices. Similarly, safe harbors and exceptions to fraud and abuse laws often require compliance with specific, enumerated criteria that also have been subject to limited guidance or interpretation by regulators and the courts.

For example, our arrangements with our laboratory directors and our leases for laboratory space are likely subject to these laws and their safe harbors and exceptions, including requirements that we enter into written agreements, pay fair market value compensation and rent, and commit to arrangements for at least one year’s duration. In addition, to ensure proper billing, our billing practices and documentation must meet numerous, technical requirements, and in some instances we must rely on other providers for the information we need to properly bill. Although we believe we are in compliance, in all material respects, with fraud and abuse laws, we cannot assure you that regulatory or judicial authorities will not interpret or apply existing or future fraud and abuse laws in a manner that would adversely affect us. We also could incur substantial litigation costs defending lawsuits, and paying any resulting damages or settlements under such actions. In addition, we cannot assure you that we will not be excluded or debarred as a result of these actions.

The independent clinical laboratory industry in the United States is highly competitive. Loss of business to one of our competitors could cause our net revenue to decline.

The independent clinical laboratory industry in the United States is highly competitive and has experienced intense price competition over the past several years.

Independent clinical laboratories generally fall into one of four separate categories:


	•	larger laboratories that provide a broad range of tests and services nationwide;

	•	niche laboratories that typically offer fewer tests and services and generally focus on a segment of the clinical laboratory testing market;

	•	laboratories that are affiliated with large medical centers or universities; and

	•	smaller, generally local, laboratories with fewer resources than larger laboratories.

Our primary competitors include large independent laboratories, such as Quest Diagnostics and Laboratory Corporation of America. We also compete with niche laboratories such as Specialty Laboratories, Impath and Athena Diagnostics, as well as laboratories affiliated with educational institutions such as Mayo Medical Laboratories and Associated Regional University Pathologists, in the esoteric testing market. In the toxicology testing ~~business~~market, we compete with Quest Diagnostics, Laboratory Corporation of America, ~~Psychemedics~~Medtox ~~and~~Scientific, ~~PharmChem.~~LabOne ~~Many~~and ~~of our~~Kroll ~~competitors have significantly greater resources than we do~~Laboratories. In addition, in our core geographic markets where we provide a comprehensive service offering, hospitals compete with us by also providing routine testing services to physicians. Many of our competitors have significantly greater resources than us. We may not be able to compete successfully with our existing or potential new competitors and competitive pressures faced by us may materially ~~and~~ ~~adversely~~decrease ~~affect~~our ~~us.~~net revenue. For more details, see “Business — Competition.”

~~Changes~~ If ingovernment payors reduce the reimbursement ~~policies~~allowed for clinical laboratory services, ~~may~~our ~~reduce~~net ~~our~~revenue ~~revenues~~may decrease.

Government payors, such as Medicare and Medicaid, as well as private insurers and large employers, have taken steps and may continue to take steps to control the cost, use and delivery of health care services. For the ~~six~~nine months ended ~~June~~ September 30, ~~2000~~ 2001, approximately 5.96% of our total net revenue was received under Medicare and approximately 01.82% was received from Medicaid or other federal or state health care programs. Any efforts on the part of these or other payors to reduce reimbursement for our laboratory testing services could reduce our revenue and adversely affect our operating results.

Our business depends on continued participation in these ~~programs~~ programs and weapplicable ~~are~~laws generally ~~required~~require byus ~~law~~ to accept ~~reimbursement~~ reimbursement from Medicare and Medicaid as payment in full for covered tests performed for Medicare and Medicaid beneficiaries. In an effort to address increasing health care costs, ~~legislative and~~government ~~regulatory~~regulators ~~changes~~may continue to beintroduce ~~introduced~~legislative and regulatory changes with an objective of reducing amounts paid for laboratory services under the Medicare and Medicaid programs. Recent examples include:

• federal legislation or proposed legislation to reduce ceilings on Medicare reimbursement for laboratory testing services; • changes in the number of tests which physicians can concurrently order and bill for; • a proposal for a 20% co-payment from Medicare and Medicaid patients; • limits on the ability of laboratories to bill for tests unless the tests are considered to be medically necessary and properly documented by the ordering physician; and

• arequirements ~~presidential~~in ~~proposal~~the 1997 Balanced Budget Act that the U.S. Centers for Medicare and Medicaid Services, or CMS, formerly known as the Health Care Financing Administration, conduct and complete by 2002 five Medicare bidding demonstrations involving various types of medical services. CMS is expected to include a ~~30%~~laboratory ~~reduction~~demonstration project in a metropolitan statistical area as part of the ~~Medicare~~legislative ~~reimbursement~~mandate. ~~rates~~Competitive bidding for ~~certain~~laboratory ~~commonly~~tests ~~ordered~~is still under review. If competitive bidding were implemented on a regional or national basis for laboratory ~~tests;~~testing, our profit margins could decline.

• Due ~~changes~~to inthese ~~the~~legislative ~~number of tests which can be concurrently ordered~~ and ~~billed~~regulatory ~~for;~~changes, •we amay ~~presidential~~receive lower ~~proposal~~reimbursement ~~for a 20% co-payment~~ from Medicare ~~and~~or Medicaid patients; • limits on the ability of laboratories to bill for tests unless the tests are considered to be medically necessary and properly documented by the ordering physician; and • requirements in the 1997 Balanced Budget Act that the U.S. Health Care Finance Administration, or ~~HCFA,~~Medicare ~~conduct~~ and Medicaid ~~complete~~may bynot ~~2002~~reimburse ~~five~~us ~~Medicare~~for ~~bidding demonstrations involving various types of medical services. HCFA is expected to include~~ a ~~laboratory~~portion ~~demonstration project in a metropolitan statistical area as part~~ of ~~the~~our ~~legislative~~Medicare mandate. Competitive bidding for laboratory tests is still under review. If competitive bidding were implemented on a regional or national basis for laboratory testing, it could materially adversely affect the clinical laboratory industry and Medicaid ~~our~~related ~~business~~testing.

~~Due~~The toincreasing ~~these~~role ~~legislative~~ and ~~regulatory~~pricing ~~changes,~~structure weof ~~may~~managed ~~receive~~care ~~lower~~organizations ~~reimbursement from Medicare or Medicaid or we~~ may ~~not~~reduce ~~be reimbursed for a portion of~~ our ~~Medicare~~revenues and ~~Medicaid~~impair ~~related~~our ~~testing~~operations.

~~Our~~ We ~~operations~~ may beexperience ~~adversely~~declines ~~affected~~in byaverage ~~the~~revenue ~~increasing~~per test processed ~~role~~as ~~and~~managed ~~pricing~~care ~~structure~~organizations ofmaintain ~~managed-cost~~or strengthen their significant role in the health care insurance market. Managed care organizations typically attempt to negotiate capitated payment contracts. Under this type of contract, insurance companies pay laboratories a fixed monthly fee per covered individual, regardless of the number or cost of tests performed per covered individual and regardless of the total number or cost of tests performed during the month, excluding selected tests, such as esoteric tests.

WeLaboratory ~~may~~service ~~experience~~agreements ~~declines~~with inmanaged ~~average~~care ~~revenue~~organizations are ~~per~~typically ~~test~~competitively ~~processed~~priced due to the volume of testing asinvolved ~~managed~~and ~~care~~the ~~organizations~~expectation ~~maintain~~that ora ~~strengthen~~laboratory ~~their~~would capture not ~~significant~~only ~~role~~the involume of testing covered under the ~~health~~contract, ~~care~~but ~~insurance~~also the ~~market.~~additional ~~Managed~~fee-for-service business from participating ~~care~~physicians’ ~~organizations~~patients ~~typically~~who ~~negotiate~~the ~~capitated~~managed ~~payment~~care plan does not ~~contracts~~cover. ~~Under~~However, ~~this~~if ~~type~~the number of ~~contract,~~patients acovered ~~laboratory~~under ~~receives a~~managed ~~fixed~~care ~~monthly~~plans continues to increase, there will be less fee-for-service ~~per~~business ~~covered~~and, ~~individual~~accordingly, ~~regardless~~less ofhigh ~~the~~margin ~~number~~business orto ~~cost~~offset ofthe ~~tests~~lower ~~performed~~margin ~~per~~managed ~~covered~~care ~~individual and~~business. ~~regardless~~Furthermore, ofphysicians ~~the~~increasingly ~~number~~are oraffiliated ~~cost~~with ofmore than ~~tests~~one ~~performed~~managed ~~during~~care organization, which may decrease the ~~month,~~likelihood ~~excluding~~of ~~certain~~any ~~tests,~~particular ~~such~~independent aslaboratory ~~esoteric~~capturing their ~~tests~~fee-for-service business.

~~Traditionally,~~Managed ~~laboratory service agreements with managed~~ care ~~organizations~~ ~~have~~plans ~~been~~may ~~competitively~~require ~~priced~~participating ~~due~~physicians to ~~the volume of~~refer ~~testing involved and the expectation that a~~ laboratory ~~would capture~~tests ~~not only the volume of testing~~ to bespecific ~~covered under the contract~~laboratories, ~~but~~depending ~~also~~on the ~~additional fee-for-service business from~~plan ~~patients~~involved. ofIf ~~participating~~a ~~physicians~~given ~~who~~physician’s ~~are~~managed ~~not~~care ~~covered~~plan byor ~~the~~plans ~~managed~~do ~~care~~not ~~plan.~~authorize ~~However,~~that iflaboratory ~~the~~to ~~number~~perform oftests, ~~patients covered~~that ~~under~~laboratory ~~managed~~may ~~care~~also ~~plans~~fail ~~continues~~ to ~~increase,~~capture ~~there~~that ~~will be~~physician’s ~~less~~ fee-for-service business. ~~and,~~The ~~accordingly,~~increase ~~less~~in ~~high margin business to offset the lower margin~~ managed care ~~business. Furthermore,~~has ~~physicians increasingly are affiliated with more~~also ~~than~~slowed ~~one~~the ~~managed~~growth ~~care~~in ~~organization,~~utilization ~~which may decrease the likelihood~~ of ~~any~~routine ~~particular independent~~ laboratory ~~capturing~~testing ~~their fee-for-service business~~services.

AsThe acomplexities ~~participating~~of ~~provider~~billing ~~in managed care plans, a physician~~ may beaffect ~~required~~our tonet ~~refer~~revenue ~~laboratory tests to specific~~and ~~laboratories,~~cash ~~depending on the plan in which each covered patient is enrolled~~flow. ~~Laboratories that are not authorized to perform~~ ~~tests under a given physician’s managed care plan or plans~~ ~~may also fail to capture that physician’s fee-for-service business. The increase in managed care has also slowed the growth in utilization of routine laboratory testing services.~~

~~The~~ Billing ~~complexities~~for laboratory services is complicated. Laboratories have a mix of ~~billing~~payors, ~~may~~such ~~affect~~as ~~our~~individual ~~revenue~~patients, insurance companies, Medicare, Medicaid, doctors, hospitals, laboratories and ~~cash~~employer groups. All of these payors have different billing ~~flow~~requirements, which we must meet prior to receiving payment for our services.

Billing for laboratory services is complicated. Laboratories have a mix of various payors, such as individual patients, insurance companies, Medicare, Medicaid, doctors, hospitals, laboratories and employer groups. All of these payors have different billing requirements. Most of our bad debt expense is the result of the inability to collect from financially impaired clients and individual patients.

Billing complications include, but are not limited to, the following:

• disputes between payors as to ~~which~~responsibility ~~party~~for ispayment; ~~responsible~~• ~~for~~disparity in coverage and payment among various payors; • difficulty of assuring adherence to specific billing requirements; • disparity in information requirements among payors; and • high volume/low dollar claims.

• If ~~disparity~~we inexperience ~~coverage~~some ~~among~~or ~~various~~all ~~payors;~~of •these ~~assuring adherence to specific~~ billing ~~requirements;~~complications •they may ~~disparity~~reduce inour ~~information~~net ~~requirements~~revenue ~~among payors;~~ and •cash ~~high volume/low dollar claims~~flow.

We ~~may~~would ~~experience~~incur ~~some~~significant orfines ~~all~~and ofother ~~these~~penalties ~~billing complications and~~for dofailure ~~not~~to ~~know~~comply ~~what~~with ~~impact,~~federal ~~if any, they would have on our financial condition~~ and ~~results~~state ofmedical ~~operations~~privacy laws.

We The ~~must~~use ~~rapidly~~and ~~adapt~~disclosure of medical information is subject to regulation ~~technology~~by ~~changes~~both federal and ~~even~~state ifgovernments. weFor doexample, the ~~these~~federal ~~changes~~Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires us to comply with standards applicable to the use and disclosure of health information, including standards for common healthcare transactions, security and privacy. In addition, many stringent state laws and regulations regarding the use and disclosure of health information exist. We may ~~allow~~incur significant costs in our ~~customers~~efforts to comply with such federal and state laws and regulations. Moreover, if we are found to ~~perform~~have ~~their~~violated ~~own~~any ~~tests~~federal or state statute inor aregulation ~~cost-effective~~governing ~~manner~~the use or disclosure of health information, we could be subject to significant civil and criminal fines and penalties.

~~The~~We ~~clinical~~may ~~laboratory~~be ~~testing industry is~~ subject to ~~rapid~~professional ~~and significant~~liability ~~changes in technology. The effect of technological changes on our business cannot be predicted. We believe our future success will depend~~litigation, ~~in part, on our ability to anticipate~~which ~~or adapt to such changes and to offer, on a timely basis, services that meet customer demands. We~~ may ~~not~~ be ~~able~~costly to ~~obtain~~ defend ~~access~~and ~~to new technologies on a timely basis or on satisfactory terms. Any failure by us to obtain new technologies~~ could cause us to lose customers and market share. In addition, advancing technology may enable other clinical laboratories, hospitals, physicians or other medical providers to perform tests in their offices or hospitals in various departments without requiring the services of outside laboratories. If these or other advances in technology result in asignificant ~~decreased demand for our services, our~~monetary ~~testing volume and revenue would be impaired~~damages.

We Providers of laboratory testing services may from time to time be subject to ~~professional~~lawsuits ~~liability~~alleging ~~litigation,~~negligence ~~which~~or other similar ~~may~~legal claims. These lawsuits could involve claims for substantial damages and be costly to defend. We maintain liability insurance, subject to limits and ~~result~~deductibles, for professional liability claims. We believe that our levels of coverage are adequate to cover currently estimated exposures to professional liability claims. We may not be able to obtain adequate insurance coverage in ~~significant~~the ~~monetary~~future at acceptable costs or ~~damages~~we may incur liabilities in excess of policy limits. In addition, litigation could harm our reputation and therefore, our client base. We are currently subject to a number of ordinary course of business lawsuits, such as workers’ compensation, none of which, we believe, will have a material adverse effect on our operations.

Providers of laboratory testing services may from time to time be subject to lawsuits alleging negligence or other similar legal claims. These lawsuits could involve claims for substantial damages and be costly to defend. We maintain liability insurance, subject to limits and deductibles, for professional liability claims. While there can be no assurance, we believe that the levels of coverage are adequate to cover currently estimated exposures to professional liability claims. Although we believe that we will be able to obtain adequate insurance coverage in the future at acceptable costs, we may not be able to do so, or we may incur liabilities in excess of policy limits. In addition, litigation could also have an adverse impact on our reputation and therefore, our client base.

Risks Related to Our Business

Failure in our information technology systems could significantly increase ~~turnaround~~turn around time, reduce our production capacity, and otherwise disrupt our operations, which may reduce our customer base, make it difficult to attract new customers and result in lost net revenue.

Our success depends, in part, on the continued and uninterrupted performance of our information technology,. orWhile ~~IT,~~we ~~systems.~~have never ~~Sustained~~suffered a sustained or repeated IT system failure, these types of failures ~~that~~could interrupt our ability to process test orders, deliver test results or perform tests in a timely manner, which would, in turn, reduce significantly the attractiveness of ~~our~~ our services to our customers. Our business, results of ~~operations~~ operations and financial condition could be ~~materially and~~ adversely affected by any damage or failure that interrupts or delays our operations.

Our computer systems are vulnerable to damage from a variety of sources, including telecommunications failures, malicious human acts and natural disasters. Moreover, despite network security measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems, in part because they are located at a third-party’s facility and we cannot control the ~~maintenance~~ maintenance and operation of our third-party data centers. Despite the precautions we have taken, unanticipated problems affecting our systems could cause interruptions in our IT systems. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures in our systems.

~~insurance~~We ~~policies~~ may not ~~adequately~~be ~~compensate~~able usto ~~for~~maintain ~~any losses~~or ~~that~~grow ~~may~~our ~~occur~~market ~~due~~share if we fail to ~~any~~adapt ~~failures~~to advances in testing technologies or obtain licenses for such technologies, or if our ~~systems.~~customers ~~See~~use new ~~“Business — Information~~technologies ~~Technology~~to perform their own tests.”

If The weclinical ~~fail~~laboratory testing industry is subject to ~~acquire~~rapid ~~licenses~~and significant changes in technology, such as Roche’s polymerase chain reaction test for the sexually transmitted diseases chlamydia and gonorrhea. Our ability to grow our esoteric testing business will depend, in part, on our ability to adapt to or license new or improved testing technologies. We currently offer substantially all esoteric tests that are commercially available and have been successful in obtaining access to substantially all testing technology for which we have sought such access. We believe our current technologies are state-of-the-art; however, wenew technologies are developed regularly. We may not be able to ~~use~~negotiate ~~new~~acceptable licensing arrangements and we cannot be sure that such arrangements will yield commercially successful esoteric tests. If we are unable to license novel testing technologies at competitive rates, our research and development costs may increase as a result. In addition, if we are unable to license new or improved testing methods, ~~which~~our ~~could~~methods ~~impair~~may be outdated when compared with our competition ~~ability~~and our testing volume and revenue may materially decrease. Finally, advancing technology may enable other clinical laboratories, hospitals, physicians or other medical providers to ~~successfully~~perform ~~achieve~~tests in their offices or hospitals without requiring the services of outside laboratories. If these or other advances in technology result in a decreased demand for our ~~core~~services, ~~business~~our ~~strategy~~testing volume and revenue would decrease.

Our ~~ability~~revenues ~~to grow our esoteric testing business~~ will ~~depend,~~decrease in if ~~part, on~~ our ~~ability~~customers toreduce ~~license new~~ or ~~improved testing~~ ~~technologies~~discontinue onpurchasing ~~favorable~~our ~~terms.~~laboratory ~~We may not be able to negotiate acceptable licensing arrangements and we cannot be certain that such arrangements will yield commercially successful esoteric tests. If we are unable to license these~~ testing ~~technologies~~services atfor competitive ~~rates, our research and development costs may increase as a result~~reasons. ~~In addition, if we are unable to license~~ ~~new or improved testing methods, our methods may be outdated when~~ ~~compared with our competition and our testing volume and revenue may be materially and adversely affected.~~

We compete with some of our customers, such as Quest Diagnostics, Laboratory Corporation of America, Mayo Medical Laboratories and Associated Regional University Pathologists in the esoteric testing market. IfThese organizations often refer tests to us that they ~~reduce~~either cannot or elect not to perform ~~discontinue~~themselves. ~~purchasing~~These ~~our~~parties ~~laboratory~~may ~~testing~~no ~~services~~longer ~~for~~refer tests to us because they wish to develop and market tests similar to ours. If independent laboratories decide to reduce or discontinue purchases of our tests for competitive reasons, it will negatively ~~reduce~~affect our revenue. Revenues from customers who are also competitors ranged from 0.2% to 0.9% of our annual net revenue in the past three fiscal years.

We compete with some of our customers, such as Quest Diagnostics, Laboratory Corporation of America, Mayo Medical Laboratories and Associated Regional University Pathologists in the esoteric testing market. These organizations often refer tests to us that they either cannot or elect not to perform themselves. These parties may nolose ~~longer~~an ~~refer~~important ~~tests~~mechanism to usfurther ~~because~~penetrate ~~they wish to~~the ~~develop~~hospital ~~and~~customer ~~market~~base ~~tests~~if ~~similar~~group topurchasing ~~ours. If independent~~organizations ~~laboratories decide to reduce or~~ discontinue ~~purchases of~~ our ~~tests~~ ~~for competitive reasons, it will adversely affect our revenue~~contracts.

If Many of our existing and potential hospital customers are part of group purchasing organizations. doGroup ~~not~~purchasing organizations ~~continue~~typically ~~our~~pool independent hospitals together for ~~contracts~~the purpose of negotiating with providers of health care services for the price of those services to participating hospitals, weincluding ~~may~~prices ~~lose~~for anlaboratory ~~important~~testing. ~~mechanism~~These group purchasing organizations provide compliance incentives to ~~further~~their ~~penetrate~~participating ~~the~~hospitals ~~hospital~~to ~~customer~~utilize ~~base~~clinical laboratories, which have contracts with group purchasing organizations.

~~Many~~We ofare aggressively seeking to expand our ~~existing~~relationships ~~and~~with group ~~potential~~purchasing ~~hospital~~organizations. ~~customers~~We ~~are~~do ~~part~~not ofknow if we will be able to retain our accounts with group purchasing organization-affiliated ~~organizations,~~hospitals if a group purchasing organization terminates or ~~GPOs~~fails to renew an agreement. ~~GPOs~~If ~~typically~~any group ~~pool~~purchasing organization-affiliated hospital no longer uses ~~independent~~our ~~hospitals~~services, ~~together~~it ~~for~~will ~~the~~decrease ~~purpose~~our ofnet ~~negotiating~~revenue. In addition, if ~~with~~we ~~providers~~are ofunable ~~health~~to ~~care~~attract ~~services~~new ~~for~~hospital ~~the~~customers ~~price~~because ofa ~~those~~group ~~services~~purchasing toorganization ~~participating~~terminates ~~hospitals~~a contract, ~~including~~it ~~prices~~may ~~for~~impair our ~~laboratory~~ability ~~testing.~~to ~~These~~grow ~~GPOs~~our ~~provide~~business. ~~compliance~~Revenues ~~incentives~~from togroup purchasing ~~their~~organization-related ~~participating~~services ~~hospitals~~represented to6.2% ~~utilize~~of ~~clinical~~our ~~laboratories~~net ~~which~~revenue ~~have~~for ~~contracts~~the ~~with~~nine-month ~~GPOs~~period ended September 30, 2001.

10 ~~We are aggressively seeking to expand our relationships with~~ ~~GPOs. We do not know if we will be able to retain our accounts~~ with GPO-affiliated hospitals if an agreement with a GPO is terminated or not renewed. If any GPO-affiliated hospital no longer uses our services, it will adversely affect our net revenue. In addition, if we are unable to attract new hospital customers because a GPO contract is terminated, it may adversely affect our ability to grow our business.

Infringement on the intellectual property rights of others may give rise to costly litigation, which may cause us to pay substantial damages or prohibit us from performing certain tests.

Other companies or individuals, including our competitors, may obtain patents or other proprietary rights that would prevent, limit or interfere with our ability to develop, perform or sell our tests. As a result, we may be found to infringe on the proprietary rights of others. We could incur substantial costs in defending any litigation. An adverse result in an intellectual property litigation could force us to do any 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; • redesign or reengineer our tests; or • pay substantial damages.

In the event that there is a successful infringement claim against us and we fail to obtain the necessary licenses on commercially reasonable terms, we may be required to reengineer our tests. Any

~~efforts~~Infringement toon ~~reengineer~~the ~~our~~intellectual ~~tests~~property ~~could~~rights ~~substantially~~of ~~increase our~~others ~~costs~~may give rise to costly litigation, ~~force~~which may cause us to ~~interrupt~~pay substantial ~~product~~damages ~~sales~~ or ~~delay~~prohibit ~~new~~us ~~test~~from performing protected ~~releases~~tests.

We hold patents on only a few of our esoteric testing technologies. We use other patented technology under licenses with the holders of those patents, which are typically large pharmaceutical companies or other parties that develop the technology with a view toward licensing its use. Nonetheless, other companies or individuals, including our competitors, may obtain ~~have~~patents ~~difficulty~~or ~~integrating~~other ~~APL~~proprietary ~~into~~rights that would prevent, limit or interfere with our ~~company~~ability to develop, perform or sell our tests. As a result, we may be found to infringe on the proprietary rights of others. We could incur substantial costs in defending any litigation. An adverse result in an intellectual property litigation could force us to do any of the following:

On• ~~October 13,~~cease ~~1999~~developing, ~~we acquired APL~~performing, anor ~~independent laboratory~~selling inproducts ~~Nevada~~or ~~with~~services ~~approximately~~that ~~1,300 employees.~~incorporate ~~We are~~the ~~continuing~~challenged tointellectual ~~integrate~~property; ~~the~~• ~~business~~obtain ~~practices,~~and ~~financial reporting~~pay ~~systems~~for ~~and~~licenses ~~compliance~~from ~~programs~~the holder of ~~APL~~the ~~with~~infringed ~~our company.~~intellectual Ifproperty ~~this~~right; ~~integration~~• isredesign ~~not successful~~ or isreengineer ~~more expensive than we anticipate, it could result in inconsistent operating and financial practices throughout~~ our ~~organization. Our~~tests; ~~overall~~or ~~profitability~~• inpay ~~turn~~substantial ~~could be adversely affected~~damages.

Our ~~business~~success ~~could~~largely bedepends ~~adversely~~on ~~affected~~the asservices aof ~~result~~our senior management and senior technical management and the loss of ~~future~~any one ~~acquisitions~~of them could negatively affect our ability to conduct our business efficiently.

InOur ~~order~~success tois ~~remain~~largely ~~competitive,~~dependent weon ~~may~~the ~~find~~skills, itexperience ~~necessary to~~and ~~acquire~~efforts ~~additional~~of ~~businesses.~~our Atsenior ~~this~~management ~~time,~~and wesenior ~~have~~technical management. noThe ~~specific understanding,~~loss ~~commitments~~of orthe ~~agreements~~services ~~with~~of ~~respect~~our toChairman, ~~any~~President ~~acquisitions.~~and IfChief weExecutive ~~identify~~Officer, anTimothy ~~appropriate~~J. ~~acquisition candidate~~Brodnik, weor ~~may~~one ~~not~~or ~~be successful in negotiating acceptable~~more ~~terms~~members of ~~the~~our ~~acquisition,~~senior ~~financing~~management ~~the~~or ~~acquisition,~~senior ortechnical management, ~~integrating~~could ~~the~~have ~~acquired~~a ~~business~~material ~~into~~adverse ~~our~~effect ~~existing~~on ~~business and operations~~us. ~~Completing~~We anhave ~~acquisition~~entered ~~and integrating an acquired~~into employment ~~business~~contracts ~~will~~with ~~significantly~~some ~~divert~~of ~~management~~these ~~time~~persons, ~~and~~including ~~resources~~Timothy J. IfBrodnik weand ~~consummate~~John E. ~~any~~Bergstrom. ~~significant acquisitions using~~However, ~~stock~~these orcontracts ~~other~~cannot ~~securities~~ensure asthat ~~consideration,~~we ~~your~~will ~~equity~~continue into usenjoy the ~~could~~benefits beof ~~significantly~~the ~~diluted.~~services Ifof wethese ~~make~~individuals. ~~any~~We ~~significant acquisitions~~do ~~using~~not ~~cash~~know whether ~~consideration,~~ we ~~may~~will be ~~required~~able to ~~use a~~continue ~~substantial~~to ~~portion~~employ ofkey ~~our~~personnel. Failure ~~available~~to ~~cash~~retain or toattract ~~incur substantial~~key ~~indebtedness.~~personnel ~~Acquisition~~could ~~financing~~divert management’s ~~may~~time ~~not~~and ~~be available~~attention, onincrease ~~favorable~~our ~~terms,~~expenses ifand adversely ataffect ~~all.~~our Inability ~~addition,~~to weconduct ~~may~~our bebusiness ~~required~~efficiently. toWe ~~amortize~~do ~~significant~~not ~~amounts~~maintain of“key ~~goodwill~~man” ~~and other~~life ~~intangible~~insurance ~~assets~~policies inon ~~connection~~any ~~with~~of ~~future~~our ~~acquisitions,~~senior ~~which would~~management ~~harm~~or ~~our~~senior technical ~~operating~~management ~~results~~personnel.

Our success largely depends on the services of our senior management and senior technical management and the loss of any one of them could have a material adverse effect on our business.

Our success is largely dependent on the skills, experience and efforts of our senior management and senior technical management. The loss of services of our Chairman, President and Chief Executive Officer, Timothy J. Brodnik, or one or more members of our senior management or senior technical management could have a material adverse effect on us. We do not maintain “key man” life insurance policies on any of our senior management or senior technical management. We cannot assure you that we will be able to continue to employ key personnel. Failure to retain or attract key personnel could have an adverse affect on us.

The loss of our skilled personnel could have a material adverse effect on our research and development, marketing and sales efforts.

Our competitiveness will depend in large part upon whether we ~~can~~ can attract and retain skilled technical and marketing personnel. Competition for skilled personnel is intense in both Nevada and metropolitan Washington, D.C. We domay not ~~know~~be ifable ~~we will be~~to ~~successful~~attract ~~in attracting~~ and ~~retaining~~retain the technical and marketing personnel we require to develop and market new test services and to continue to grow and operate profitably. If we cannot attract skilled personnel, we may not be able to operate successfully in the future.

~~Our~~ Difficulties ~~principal~~with ~~stockholder~~the integration of any future acquisitions may ~~exercise~~impose ~~its~~substantial ~~control~~costs inand adelays ~~manner~~ and ~~adverse~~cause toother ~~your~~problems for ~~interests~~us.

~~Upon~~We ~~completion~~may ofengage ~~this~~in ~~offering,~~future ~~our~~acquisitions ~~principal~~which ~~stockholder, Golder,~~could ~~Thoma,~~present ~~Cressey,~~a number ~~Rauner~~of ~~Fund V, L~~risks.~~P.,~~ orThe ~~GTCR,~~process ~~and~~of ~~one~~integrating operations of ~~its~~acquired ~~affiliates~~businesses, ~~will~~including ~~own~~their ~~approximately~~personnel, could cause %interruptions ofto our ~~outstanding~~business, ~~common~~including ~~stock. By~~that ~~virtue~~ of ~~this~~the ~~stock~~acquired businesses ~~ownership,~~and ~~GTCR~~any ~~has~~resulting ~~the~~interruption ~~power~~or todeterioration ~~direct~~in ~~our~~service ~~affairs~~may ~~and~~result ~~will~~in ~~likely~~a becustomer’s ~~able~~decision to ~~determine~~stop ~~the outcome of~~using ~~all~~us ~~matters~~for ~~required~~clinical tolaboratory betesting. ~~submitted~~In toaddition, ~~stockholders~~employees ~~for~~who ~~approval,~~may ~~including~~be ~~the~~key ~~election~~to ofthe aintegration ~~majority~~effort ofor our ~~directors,~~ongoing operations ~~any~~may ~~merger,~~choose ~~consolidation~~not orto ~~sale~~continue to work for us following the closing of ~~all~~the oracquisitions. ~~substantially~~Further, ~~all~~the process of ~~our~~

911

~~assets~~integration ~~and~~may ~~amendment~~require ofa ~~our~~disproportionate ~~certificate~~amount of ~~incorporation.~~the time ~~Transactions~~and ~~could~~attention beof ~~difficult~~our ormanagement, ~~impossible~~which tomay ~~complete without~~distract management’s ~~the~~attention ~~support~~from ofits ~~GTCR,~~day-to-day responsibilities. ~~and~~For the ~~interests~~above ofreasons, ~~GTCR~~it is possible that we may not berealize ~~the same~~all asor ~~those~~any benefits of ~~our~~future ~~other~~acquisitions, either ~~stockholders.~~at Itall isor ~~possible~~in ~~that~~a ~~GTCR~~ timely ~~will~~manner ~~exercise~~and, ~~control~~if ~~over~~we usincur insignificant costs aduring ~~manner~~any ~~adverse~~future toacquisition ~~your~~process, it could have a ~~interests.~~material ~~See~~adverse ~~“Principal~~impact ~~Stockholders~~on our business.”

If our significant customers terminate or fail to renew their contracts with us our business, financial condition and results of operations could be materially and adversely affected.

No single customer or affiliated group of customers accounted for more than 6.0% of our total net revenues for the nine months ended September 30, 2001. It is possible that our revenue and earnings could fluctuate depending upon whether our current significant customers terminate or elect not to renew their agreements with us upon expiration. If we fail to obtain renewals on our major accounts and if we do not develop relationships with significant new customers, our business, financial condition and results of operations could be materially and adversely affected.

Our principal stockholder may exercise its control in a manner adverse to your interests.

Upon completion of this offering, our principal stockholder, Golder, Thoma, Cressey, Rauner Fund V, L.P., or GTCR, and two of its affiliates will own approximately % of our outstanding common stock. By virtue of this stock ownership, GTCR has the power to direct our affairs and will likely be able to determine the outcome of all matters submitted to stockholders for approval, including the election of a majority of our directors, any merger, consolidation or sale of all or substantially all of our assets and amendment of our certificate of incorporation. Transactions could be difficult or impossible to complete without the support of GTCR. The interests of GTCR may not be the same as those of our other stockholders. For example, GTCR may prefer the consummation of a transaction because it would result in earlier liquidity for their investment, when other stockholders may prefer to hold their investment. Conversely, GTCR may prefer to defer liquidity in favor of longer-term growth, while other stockholders may prefer earlier liquidity. It is possible that GTCR will exercise control over us in a manner adverse to your interests. See “Principal Stockholders.”

Recent or future terrorist attacks in the United States could adversely affect us.

On September 11, 2001, terrorist attacks were carried out in New York, Virginia and Pennsylvania. As a result, the United States securities markets were closed and air traffic was halted for several days. The impact which these terrorist attacks, or future events arising as a result of these terrorist attacks, including military or police activities in the United States or foreign countries, future terrorist activities or threats of such activities, biological or chemical weapons attacks, political unrest and instability, interruptions in transportation infrastructure, riots and protests, could have on the United States economy, the global economy, and global financial markets cannot presently be determined with any accuracy. These conditions could also adversely affect demand for certain of our services and our ability to deliver these services. It is possible that the above factors could have a material adverse effect on our business, our ability to finance our business and on our financial condition and results of operations as a whole.

Risks Related to This Offering

Provisions of our charter documents and Delaware law may make it difficult to acquire our company ~~and~~or ~~could~~change ~~adversely~~management ~~affect~~and could depress the price of our common stock.

Provisions of our certificate of incorporation and by-laws may have the effect of delaying, deferring or preventing a change in control of our company not approved by our board of directors. or ~~These~~delaying, ~~provisions~~deferring ~~would~~or ~~limit~~preventing ~~the circumstances in which~~ a ~~premium~~ change ~~may be paid for our common stock~~ in ~~proposed transactions or a~~company ~~proxy~~management. ~~contest~~These ~~for~~provisions ~~control~~would oflimit the ~~board may be initiated. These~~ ~~provisions provide for:~~

• a classified board of directors; • a prohibition on stockholder action through written consents; • a requirement that special meetings of stockholders be called only by our chief executive officer or the board of directors; • advance notice requirements for stockholder proposals and nominations; • limitations on the ability of stockholders to amend, alter or repeal the by-laws; and • the authority of the board to issue, without stockholder approval, preferred stock with such terms as the board may determine.12

WeTable will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects. See “Description of Capital Stock.” Contents

~~There~~ circumstances ~~may~~in ~~not~~which bepurchasers anmay ~~active~~pay ~~market~~a premium for our common stock, ~~making~~ in itproposed ~~difficult~~transactions or a proxy contest for control ~~you~~of tothe ~~sell~~board ~~your~~may ~~stock~~be initiated. These provisions provide for:

~~Prior~~• toa ~~this~~classified ~~offering,~~board ~~there~~of ~~has~~directors; ~~not~~• ~~been~~ a ~~public~~prohibition ~~market~~on ~~for our~~stockholder ~~common~~action ~~stock.~~through Wewritten ~~cannot~~consents; ~~predict~~• ~~the extent to which~~ a ~~trading~~ requirement ~~market~~that ~~will~~special ~~develop~~meetings ~~after~~of ~~this~~stockholders ~~offering~~may oronly ~~how~~be ~~liquid~~called ~~that market~~by ~~might become. An illiquid market for~~ our ~~stock~~chief ~~may~~executive ~~result in~~officer ~~price~~or ~~volatility~~the ~~and~~board ~~poor execution~~ of ~~buy~~directors; ~~and~~• ~~sell~~advance ~~orders~~notice requirements for ~~investors.~~stockholder ~~The~~proposals ~~initial~~and ~~public~~nominations; ~~offering~~• ~~price~~limitations ~~has~~on ~~been~~the ~~determined~~ ability ~~by negotiations between representatives~~ of ~~the~~stockholders ~~underwriters~~to ~~and us~~amend, ~~and~~alter ~~may~~or ~~not~~repeal ~~be indicative of prices that will prevail in~~ the ~~trading~~ ~~market.~~by-laws; ~~Historically, stock prices~~ and ~~trading~~• ~~volumes for~~the ~~newly~~authority ~~public companies fluctuate widely for a number~~ of ~~reasons,~~ ~~including~~the ~~some~~board ~~reasons that may be unrelated~~ to ~~their business~~issue, orwithout ~~results~~stockholder ofapproval, ~~operations.~~preferred ~~The price of our common~~ stock ~~that~~ ~~will~~with ~~prevail~~such interms ~~the~~as ~~market after~~ the ~~offering~~board may ~~be lower than the price you pay~~determine.

We will also be subject to Section 203 of the Delaware General Corporation Law, which could have similar effects. See “Description of Capital Stock.”

An active market for our common stock may not develop, making it difficult for you to sell your stock.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which a trading market will develop after this offering or how liquid that market might become. An illiquid market for our stock may result in price volatility and poor execution of buy and sell orders for investors. The initial public offering price will be determined by negotiations between representatives of the underwriters and us, and may not be indicative of prices that will prevail in the trading market. Historically, stock prices and trading volumes for new public companies fluctuate widely for a number of reasons, including some reasons that may be unrelated to their business or results of operations. The price of our common stock that will prevail in the market after the offering may be lower than the price you pay.

Future sales of our common stock could depress its market price.

The market price for our common stock could fall substantially if our stockholders who hold restricted securities sell large amounts of shares in the public market following this offering. Our directors, executive officers and existing shareholders and optionholders own shares of common stock and options to purchase shares of common stock that are subject to “lock-up” agreements. Those agreements prohibit them from selling shares of our common stock for 180 days after the date of this prospectus. When the 180-day “lock-up” period expires, or if Credit Suisse First Boston Corporation consents, in its sole discretion, to an earlier sale, our existing stockholders will be able to sell their shares in the public market, subject to legal restrictions on transfer.

10 Some of our existing stockholders are parties to a registration agreement with us that provides them with a right to cause us to register under the Securities Act all or part of the shares of our common stock. Registration of the sale of these shares of our common stock held by them would permit their sale into the market immediately. If our existing stockholders sell a large number of shares, the market price of our common stock could decline, as the public may view these sales as an indication of an upcoming or recently occurring shortfall in the financial performance of our company. Moreover, the perception in the public market that these stockholders might sell shares of our common stock could depress the market price of the common stock. See “Certain Relationships and Related Transactions — Registration Agreement” and “Shares Eligible for Future Sale.”

Some of our existing stockholders are parties to a registration agreement with us that provides for “demand” registration rights to cause us to register under the Securities Act all or part of the shares of our common stock, as well as “piggyback” registration rights. Registration of the sale of these shares of our common stock would permit their sale into the market immediately. If our existing stockholders sell a large number of shares, the market price of our common stock could decline, as these sales may be viewed by the public as an indication of an upcoming or recently occurring shortfall in the financial performance of our company. Moreover, the perception in the public market that these stockholders might sell shares of our common stock could depress the market price of the common stock. See “Certain Relationships and Related Transactions — Registration Agreement” and “Shares Eligible for Future Sale.”

Because you will pay more for your shares than existing stockholders, the value of your investment in our common stock will be diluted.

If you purchase our common stock in this offering, you will pay more for your shares than the amount paid by existing stockholders or payable by our employees upon exercise of ~~options~~ options granted before this offering. As a result, the ~~value~~amount you pay for shares of ~~your~~our common stock in this offering will be ~~investment,~~substantially ~~based~~greater onthan the value of our net tangible assets as as recorded on our books. In addition, ~~will~~investors bein ~~less~~this offering ~~than~~will have contributed % of the ~~amount~~total ~~you~~common ~~pay~~equity ~~for~~funding received from AML common ~~shares~~stockholders, but will own only % of ~~our~~the ~~common~~shares ~~stock~~outstanding inafter ~~this~~the offering. InAs ~~addition~~a result, the total amount of our capital will be less than what it would have been had you and all of the existing stockholders and optionees paid the same amount per share of our common stock as you will pay in this offering. You may experience further dilution to the extent that we issue additional shares of our common stock ~~are issued~~ upon the exercise of stock options or warrants. See “Dilution.”

Our quarterly operating results may ~~fluctuate~~not meet the expectations of security analysts or investors and this could cause our stock price to fluctuate or decline.

~~Our quarterly operating results have varied significantly in the past and may vary significantly in the future.~~ If our quarterly net revenue and operating results fall below the expectations of securities analysts and investors, the market price of our common stock could fall substantially. Operating results vary depending on a number of factors, many of which are outside our control, including:


	•	demand for our tests and ancillary services;

	•	loss of a significant customer or group purchasing organization contract;

	•	new test introductions by competitors;

	•	changes in our pricing policies or those of our competitors;

	•	the hiring and retention of key personnel;

	•	changes in healthcare laws and regulations;

	•	changes in fuel prices, which affect our cost of collecting specimens;

	•	costs related to acquisitions of technologies or businesses; and

	•	general economic factors.

~~Our~~Seasonal ~~quarterly~~factors ~~operating results~~ may also beaffect ~~affected~~our byquarterly ~~seasonal~~operating ~~factors~~results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality.”

Our stock price is likely to be volatile and could drop unexpectedly.

Following this offering, the price at which our common stock ~~will~~ will trade is likely to be volatile. The stock market has from ~~time~~ time to time experienced significant price and volume ~~fluctuations~~ fluctuations that have affected the market prices of securities, ~~particularly~~ particularly securities of clinical laboratory, biotechnology and other healthcare service companies. As a result, you may experience a material decline in the market price of our common stock, regardless of our operating performance. In the past, ~~following~~ following periods of volatility in the market price of a particular company’s securities, litigants have often brought class action lawsuits against that company. We may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts management’s attention and resources.

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the market price of a particular company’s securities, class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts management’s attention and resources.

The reliability of market data included in this prospectus is uncertain.

In this prospectus, we rely on and refer to information regarding the clinical laboratory testing industry and its segments and competitors derived from our internal estimates, industry publications, market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of the information and have not independently verified it. None of the sources that we rely on for information about the clinical laboratory testing industry has consented to the disclosure and use of their information in this prospectus.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this prospectus contain forward-looking information. These statements are found in the sections entitled, including, without limitation, “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” They include, but are not limited to, statements concerning:


	•	our business;

	•	our growth strategy;

	•	conditions in the clinical laboratory testing industry;

	•	our ability to compete in the intensely competitive clinical laboratory testing industry;

	•	our dependence on key personnel;

	•	our dependence on continuous introduction of new services based on the latest testing technology;

	•	liquidity and capital expenditures; and

	•	our future financial position and sources of revenue.

You can identify these statements by forward-looking words including “believe,” “expect,” “anticipate,” “intend” and other similar expressions. ~~Potential~~We ~~investors~~caution ~~are~~potential ~~cautioned~~investors not to place undue reliance on these forward-looking statements. ~~These~~We have based these forward-looking statements ~~are based~~ largely on our current expectations and are subject to a number of risks and uncertainties, including, without limitation, those identified under the “Risk Factors” section and elsewhere in this prospectus and other risks and uncertainties indicated from time to time in our filings with the SEC. Actual results could differ materially from these forward-looking statements. In addition, important factors to consider in evaluating such forward-looking statements include changes in external market factors, changes in in our business or growth strategy or an inability to execute ~~our~~ our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the uncertain effects upon the global and domestic economies and financial markets of the terrorist attacks in New York, Virginia and Pennsylvania on September 11, 2001 and their aftermaths; and various other competitive factors. In light of these risks and uncertainties, ~~there~~ ~~can be no assurance that~~ the matters referred to in the forward-looking statements contained in this prospectus ~~will~~may innot, in fact, occur.

Unless required by law, we do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.

1315

USE OF PROCEEDS

We estimate that the net proceeds from our sale of shares of common stock in this offering will be approximately $ million, assuming an initial public offering price of $ per share, the midpoint of the range ~~set~~listed ~~forth~~ on the cover page of this prospectus and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option is exercised in full, we estimate that the net proceeds from this offering will be approximately $ million.

We will use the net proceeds from this offering to ~~repay a portion of the Term A and Term B loans under our senior credit facility. This indebtedness carries the following terms~~:

	•	the Term A loan matures on October 13, 2004 and currently bears interest at a rate of 10.0%; and
	•	the Term B loan matures on April 13, 2006 and currently bears interest at a rate of 10.625%.


	•	repay $ million of the Term A and $ million of the Term B loans under our senior credit facility;

	•	repay $15.6 million of principal and accrued interest at September 30, 2001 of senior subordinated debt under our senior subordinated loan agreement;

	•	repay $ million of principal and accrued interest at September 30, 2001 of subordinated notes;

	•	repurchase all outstanding shares of our redeemable cumulative preferred stock with an aggregate net purchase price of $ million at September 30, 2001; and

	•	pay a $1.6 million success fee due under our professional services agreement with GTCR.

AsThe ofindebtedness ~~June 30, 2000, there was $112.7 million~~ outstanding under the Term A and Term B loans. ~~In connection~~was ~~with~~originally ~~this~~attributable ~~offering, we intend~~ to ~~amend~~our ~~or refinance~~acquisition ~~our~~by ~~existing~~GTCR ~~senior~~in ~~credit~~1997 ~~facility~~and onto ~~what~~the weAPL ~~believe~~acquisition. ~~will~~This beindebtedness ~~improved~~carries the following terms.:


	•	the Term A loan matures on October 13, 2004, has an outstanding balance of $38.0 million and bears interest at a rate of 7.25% at September 30, 2001; and

	•	the Term B loan matures on April 13, 2006, has an outstanding balance of $63.7 million and bears interest at a rate of 7.875% at September 30, 2001.

The senior subordinated debt has an outstanding principal balance of $15.0 million, recorded net of a $3.0 million discount, and bears interest at a rate of 14.0%.

The subordinated notes have an outstanding principal balance of $17.5 million and bear interest at a rate of 10.0%.

DIVIDEND POLICY

We have not in the past paid, and do not expect for the foreseeable future to pay, dividends on our common stock. Instead, we anticipate that we will use all of our earnings, if any, in the foreseeable future ~~will be used~~ for working capital and other general corporate purposes. ~~The~~Our current senior credit facility prohibits the payment of dividends by us to holders of our common stock ~~is prohibited by our current senior credit facility~~, and we expect any future credit facility would also contain a prohibition on our ability to pay dividends. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.

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CAPITALIZATION

The ~~following~~ table below sets forth ~~our~~the ~~total~~following ~~capitalization as of June 30, 2000 on an actual basis and on an as adjusted basis to reflect~~information:

• ~~the~~our ~~sale~~actual bycapitalization usas of ~~shares~~September ~~of common stock in this offering~~30, ~~assuming~~2001; an• ~~offering~~our ~~price~~pro offorma $capitalization ~~per~~after ~~share,~~giving ~~the~~effect ~~midpoint~~to of the ~~range~~conversion ~~set forth on the cover page~~ of ~~this~~$ ~~prospectus,~~million ~~and~~aggregate ~~the~~principal ~~application~~amount of ~~the~~subordinated ~~net~~notes ~~proceeds~~into ~~as described under “Use of Proceeds”; • the redemption of~~ shares of our ~~redeemable~~common ~~cumulative preferred~~ stock ~~with~~at ana ~~aggregate liquidation value of $ as described under “Certain Relationships and Related Transactions”; and • the~~ conversion ofprice $equal ~~aggregate~~to ~~principal~~80% ~~amount~~ of ~~convertible~~an ~~subordinated~~assumed ~~notes~~offering ~~into~~price ~~shares~~ of ~~our common stock at~~ $ per share,; and ~~the~~• ~~payment~~our ofpro ~~all~~forma ~~accrued~~as ~~interest~~adjusted oncapitalization ~~the~~after ~~convertible~~giving ~~subordinated~~effect ~~notes~~to this offering and the ~~repayment~~use of ~~the~~proceeds ~~remaining~~as ~~principal~~described ofin $“Use of ~~convertible subordinated notes~~Proceeds.”

This table should be read in conjunction with “Selected Consolidated Financial Data,” ~~“Unaudited Pro Forma Condensed Consolidated Statement of Operations,”~~ our consolidated financial statements, the notes to those consolidated financial statements and the other financial information appearing elsewhere in this prospectus.

				As of June 30, 2000
				September 30, 2001
				Actual			As Adjusted
				(unaudited, in thousands)
				(unaudited)
										Pro Forma
				(dollars in thousands)
				Actual			Pro Forma			As Adjusted
Long-term debt, including current maturities				$	~~145~~146,~~819~~357		$
Redeemable cumulative 10% preferred stock, $0.01 par value, 60,000 shares authorized and 1,491 shares issued and outstanding at liquidation value on an actual basis; no shares authorized, issued or outstanding on an as adjusted basis					2,004			—
Redeemable cumulative 10% preferred stock, $0.01 par value, 60,000 shares authorized and 1,491 shares issued and outstanding at liquidation value on an actual and pro forma basis; no shares authorized, issued or outstanding on a pro forma as adjusted basis					2,259			2,259			—
Stockholders’ equity:
	Preferred stock, $0.01 par value, no shares authorized, issued or outstanding on an actual basis; 5,000,000 shares authorized and no shares issued and outstanding on an as adjusted basis				—			—
	Preferred stock, $0.01 par value, no shares authorized, issued or outstanding on an actual basis; 5,000,000 shares authorized and no shares issued and outstanding on a pro forma or pro forma as adjusted basis				—			—			—
	Common stock, $0.01 par value, 25,000,000 shares authorized and 20,863,811 shares issued and outstanding on an actual basis; shares authorized and shares issued and outstanding on an as adjusted basis				209
	Common stock, $0.01 par value, 25,000,000 shares authorized, 22,190,344 shares issued and 22,001,049 shares outstanding on an actual basis; shares authorized, shares issued and shares outstanding on a pro forma basis; shares authorized, shares issued and shares outstanding on a pro forma as adjusted basis				222
	Additional paid-in capital				712,~~588~~649
	Stock-based deferred compensation				(1,~~613~~900	)		(1,900	)		(1,900	)
	Retained earnings				5,026
	Treasury stock, 189,295 common shares, at cost				(4	)		(4	)		(4	)
		Total stockholders’ equity			11,210
	Notes receivable from stockholders				(545	)		(545	)		(545	)
			Total capitalization	$	159,033		$
	Retained earnings				1,662			1,662			1,662
	Accumulated other comprehensive loss				(1,736	)		(1,736	)		(1,736	)
		Total stockholders’ equity			10,348
			Total capitalization	$	158,964		$			$

The common stock to be outstanding after this offering does not include:

	•	shares issuable upon the exercise of outstanding options, with a weighted average exercise price of $ per share; and
	•	additional shares of common stock expected to be reserved for future grants, awards or sale under our 2000 Equity Incentive Plan or sale under our 2000 Employee Stock Purchase Plan.


	•	1,663,941 shares issuable upon the exercise of outstanding options, with a weighted average exercise price of $4.25 per share;

	•	options to purchase additional shares of common stock with an exercise price equal to the price to the public in this offering that are being granted in connection with this offering; and

	•	additional shares of common stock expected to be reserved for future grants, awards or sale under our 2001 Equity Incentive Plan or sale under our 2001 Employee Stock Purchase Plan.

1517

DILUTION

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial ~~public~~ public offering price per share of our common stock and the ~~as adjusted~~ net tangible book ~~value~~deficit per share of common stock after this offering. ~~Our~~Dilution ~~net tangible book value as of June 30, 2000, as adjusted to reflect the conversion of convertible subordinated notes described under “Capitalization,” was $ million or $~~ per share. ~~Net tangible~~to ~~book~~new ~~value~~investors ~~per share~~ represents the ~~amount of our total~~ ~~tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Dilution in net tangible book value per share represents the~~ difference between the amount per share paid by purchasers of common stock in this offering and the net tangible book ~~value~~ deficit per share of common stock immediately after the completion of ~~this offering. After giving effect to~~ ~~the sale of the shares of common stock in~~ this offering at an assumed initial public offering price of $ per share less estimated underwriting discounts and commissions and estimated offering expenses, our as adjusted net tangible book value as of June 30, 2000 would have been $ million or approximately $ 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 new investors, or approximately % of the assumed initial public offering price of $ per share. The following table illustrates this per share dilution:

Assumed initial public offering price per share			$
	Tangible book value per share at June 30, 2000	$
	Increase in net tangible book value per share attributable to new investors
Net tangible book value per share after this offering
Dilution per share to new investors			$

Our pro forma net tangible book deficit as of September 30, 2001, after giving effect to the conversion of $ million aggregate principal amount of subordinated notes into a total of shares of common stock, was $ million or $ per share. Pro forma net tangible book deficit per share represents the amount of our total tangible assets less total liabilities, after giving effect to the conversion of $ million aggregate principal amount of subordinated notes into a total of shares of common stock, divided by the number of shares of common stock outstanding. After giving effect to the sale of the shares of common stock in this offering at an assumed initial public offering price of $ per share less estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book deficit as of September 30, 2001 would have been $ million or approximately $ 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 new investors. The following table illustrates this per share dilution:

The following table summarizes, on an as adjusted basis as of June 30, 2000, the number of shares purchased, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by the existing stockholders and the purchasers of common stock in the offering. The table assumes an offering price of $ per share before deducting the estimated offering expenses and underwriting discounts and commissions:






Assumed initial public offering price per share			$




	Pro forma net tangible book deficit per share at September 30, 2001	$




	Decrease in net tangible book deficit per share attributable to new investors

Net tangible book deficit per share after this offering

Dilution per share to new investors			$

		Shares Purchased				Total Consideration
										Average Price
		Number	Percent			Amount	Percent			Per Share
Existing stockholders					%	$			%	$
New investors										$
	Total			100.0	%	$		100.0	%

The following table summarizes, on an as adjusted basis as of September 30, 2001, the number of shares purchased, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by the existing stockholders and the purchasers of common stock in the offering. The table assumes an offering price of $ per share before deducting the estimated offering expenses and underwriting discounts and commissions:

The foregoing discussion and tables assume no exercise of any outstanding stock options. The exercise of all options outstanding as of June 30, 2000 having an exercise price less than the assumed initial public offering price would increase the dilutive effect to new investors to $ per share.



		Shares Purchased					Total Consideration
												Average Price
		Number		Percent			Amount		Percent			Per Share

Existing stockholders			22,190,344			%	$	9,712,859			%	$	0.44




New investors												$

	Total				100.0	%	$			100.0	%

The foregoing discussion and tables assume no exercise of any outstanding stock options. The exercise of all options outstanding as of September 30, 2001 having an exercise price less than the assumed initial public offering price would increase the dilutive effect to new investors to $ per share.

If the underwriters exercise their over-allotment in full, the following will occur:


	•	the number of shares of common stock held by existing stockholders will decrease to approximately % of the total number of shares of our common stock outstanding; and

	•	the number of shares held by new investors will increase to shares, or approximately % of the total number of shares of our common stock outstanding after this offering.

1618

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data of:

	•	Our predecessor, as of and for the ~~years~~year ended December 31, ~~1995 and~~ 1996, and for the period from January 1, 1997 to May 1, 1997; and
	•	Our company, as of December 31, 1997 and for the period from May 2, 1997 to December 31, 1997, as of and for the years ended December 31, 1998, 1999 and ~~1999~~2000, and as of and for the ~~six~~nine months ended ~~June~~September 30, ~~1999~~2000 and ~~2000~~2001.

Data as of and for the ~~six~~nine months ended ~~June~~September 30, ~~1999 and~~ 2000 and 2001 were derived from our unaudited ~~consolidated~~condensed ~~financial~~consolidated financial statements which, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the financial condition and results of operations for such periods.

The consolidated statement of operations data for the ~~periods~~years ~~from~~ended ~~January~~December 131, ~~1997~~1998, to1999 ~~May 1~~and 2000, ~~1997~~ and ~~from~~the ~~May 2,~~consolidated ~~1997~~balance tosheet data as of December 31, ~~1997~~1999 and 2000, are derived from consolidated financial statements, which have been audited by KPMG LLP, independent auditors, and which are included in this prospectus. The consolidated statement of operations data for the ~~years ended~~periods ~~December~~from January 311, ~~1998~~1997 to May 1, 1997 and ~~1999~~from May 2, 1997 to December 31, 1997 and the consolidated balance sheet data as of December 31, ~~1998~~1997 and ~~1999~~1998, are derived from consolidated financial statements, which have been audited by KPMG LLP, independent auditors, ~~and~~that ~~which~~do ~~are~~not ~~included~~ appear in this prospectus. The consolidated ~~income~~ statement of operations data for the ~~years~~year ended December 31, ~~1995 and~~ 1996, and the consolidated balance sheet data as of December 31, ~~1995 and~~ 1996 of our predecessor, are derived from audited financial statements which were audited by a predecessor auditor that do not appear in this prospectus.

The shares used to compute pro forma unaudited basic and diluted net income per common share give effect to the conversion of $ million aggregate principal amount of subordinated notes into shares of common stock at the closing of this offering at a conversion price equal to 80% of an assumed offering price of $ per share.

The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes appearing elsewhere in this prospectus.

SELECTED CONSOLIDATED FINANCIAL DATA

(in thousands, except per share data)

			Predecessor(1)(2)									American Medical Laboratories, Incorporated(1)(2)
									Period			Period
			Year Ended						January 1,			May 2,			Year Ended						Six Months
			December 31,						1997			1997 to			December 31,						Ended June 30,
									to May 1,			December 31,
			1995			1996			1997			1997			1998			1999			1999			2000
																					(unaudited)
Consolidated Statement of Operations Data:
Net revenue			$	67,336		$	77,975		$	28,340		$	59,234		$	102,729		$	143,436		$	58,609		$	129,895
Cost of services				28,658			32,468			20,055			41,748			69,888			96,067			38,530			83,816
Selling, general and administrative				34,195			37,756			6,151			13,071			23,131			33,575			14,077			27,070
Depreciation and amortization				3,255			2,974			524			1,073			2,170			4,803			1,356			6,425
Loss on impairment of assets				—			5,674			—			—			—			—			—			—
		Operating expenses		66,108			78,872			26,730			55,892			95,189			134,445			53,963			117,311
		Operating income (loss)		1,228			(897	)		1,610			3,342			7,540			8,991			4,646			12,584
Interest expense				2,839			2,811			130			619			927			4,578			835			7,602
Other (income) expense				184			—			(49	)		331			14			100			(13	)		—
Share in loss of affiliate				—			—			165			694			443			815			407			284
Extraordinary item				—			—			—			—			—			442			67			—
Provision (benefit) for taxes				(557	)		(1,357	)		612			683			2,197			1,820			1,338			2,152
	Net income (loss)			(1,238	)		(2,351	)		752			1,015			3,959			1,236			2,012			2,546
Dividends on preferred stock				—			—			—			566			923			462			375			95
	Net income (loss) to common shareholders		$	(1,238	)	$	(2,351	)	$	752		$	449		$	3,036		$	774		$	1,637		$	2,451
Net income (loss) per common share
	Basic
	Diluted
Weighted-average common shares outstanding
	Basic
	Diluted
Other Financial Data:
Adjusted EBITDA(3)			$	4,299		$	2,077		$	2,183		$	4,084		$	9,696		$	13,694		$	6,015		$	19,181
Adjusted EBITDA as of % of net revenue				6.4	%		2.7	%		7.7	%		6.9	%		9.4	%		9.5	%		10.3	%		14.8	%
Cash flows provided by (used in) operating activities			$	2,238		$	5,845		$	(2,393	)	$	4,974		$	1,464		$	1,710		$	2,058		$	6,834
Cash flows provided by (used in) investing activities				(1,201	)		(2,363	)		31,154			(21,545	)		(7,388	)		(88,431	)		(1,511	)		(13,548	)
Cash flows provided by (used in) financing activities				(1,114	)		(1,954	)		(27,216	)		13,445			5,924			87,590			678			6,853
Consolidated Balance Sheet Data (at period end):
Cash and cash equivalents			$	54		$	1,581					$	1,125		$	0		$	869		$	1,225		$	1,008
Working capital (deficit)				4,128			(22,128	)					6,366			9,258			14,391			10,255			24,367
Total assets				60,524			57,597						30,303			45,263			202,093			53,634			202,352
Total debt				30,895			28,871						6,170			12,473			138,969			26,676			145,819
Redeemable preferred stock				—			—						9,238			10,161			1,909			1,822			2,004
Total stockholders’ equity				—			—						827			3,863			8,584			4,060			11,210

(1)	On May 2, 1997, we acquired all of the outstanding stock of Medical Laboratories Corporation, our predecessor, in a business combination accounted for as a purchase. Therefore the assets and liabilities were recorded at fair value as required by the purchase method of accounting and the operations were reflected in our results of operations from the date of acquisition.
(2)	The financial data for the periods presented are not strictly comparable due to the significant effect that the acquisitions of Medical Laboratories Corporation and APL have had on such data. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—General” and Notes 1 and 6 of the notes to our consolidated financial statements, appearing elsewhere in this prospectus.
(3)	Adjusted EBITDA is defined as EBITDA adjusted to exclude stock-based compensation expense. Stock-based compensation expense for the six-month period ended June 30, 2000 was $172 and zero for all other periods presented. EBITDA consists of net income before interest expense, income taxes, equity in income (loss) of affiliates, depreciation and amortization and extraordinary items. EBITDA and Adjusted EBITDA should not be considered as measures of financial performance under GAAP. Items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial performance. We present Adjusted EBITDA, which is a non-GAAP measure, to enhance the understanding of our operating results. Adjusted EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated from operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

We prepared the following Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 31, 1999 and for the six months ended June 30, 1999 to illustrate the effects of our acquisition of APL on October 13, 1999 and related transactions. The Unaudited Pro Forma Condensed Consolidated Statements of Operations are presented as if these transactions had occurred as of January 1, 1999. We have not presented a pro forma statement of operations for the six months ended June 30, 2000 because these transactions were reflected in our actual results for the entire period, and therefore no pro forma adjustments are required for an understanding of our results of operations for that period. We have not presented a pro forma balance sheet because these transactions were reflected in our balance sheet as of June 30, 2000, and therefore no pro forma adjustments are required for an understanding of our financial position on that date.

We believe that the assumptions used in preparing the Unaudited Pro Forma Condensed Consolidated Statements of Operations provide a reasonable basis for presenting the significant effects directly attributable to the APL acquisition and related transactions. The Unaudited Pro Forma Condensed Consolidated Statements of Operations do not purport to represent what our results of operations would actually have been if these transactions had in fact occurred on January 1, 1999 or to project our results of operations for any future period. These statements should be read in connection with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

		For the Year Ended December 31, 1999
		(in thousands, except per share data)
		Historical
		American Medical
		Laboratories,
		Incorporated,
		including APL
		from October 13,			Historical APL
		1999 to			January 1, 1999 to			Pro Forma			Pro Forma
		December 31, 1999			October 12, 1999			Adjustments			Consolidated
Net revenue		$	143,436		$	82,430		$	(230	)(A)	$	225,636
Cost of services			96,067			57,524			(8,386	)(B)		145,205
Selling, general and administrative			33,575			19,612			—			53,187
Depreciation and amortization			4,803			1,621			5,193	(C)		11,617
	Total operating expenses		134,445			78,757			(3,193	)		210,009
Operating income			8,991			3,673			2,963			15,627
Interest expense			(4,578	)		(1,366	)		(6,003	)(D)		(11,947	)
Share in loss of affiliate			(815	)		—			—			(815	)
Other (income) expense			(100	)		149			—			49
	Income before income taxes and extraordinary items		3,498			2,456			(3,040	)		2,914
Provision for income taxes			1,820			—			1,186	(E)		3,006
	Income (loss) before extraordinary item	$	1,678		$	2,456		$	(4,226	)	$	(92	)
Dividends on preferred stock			(462	)		—			—			(462	)
	Pro forma net income (loss) applicable to common shareholders before extraordinary item		1,216			2,456			(4,226	)		(554	)
Pro forma net loss per common share before extraordinary item — basic and diluted (F)											$
Pro forma weighted-average common shares used in per share computation:
	Basic (F)
	Diluted (F)
Other Financial Data Adjusted EBITDA											$	27,293

(footnotes on page 21)

~~UNAUDITED~~ SELECTED ~~PRO~~CONSOLIDATED ~~FORMA~~FINANCIAL ~~CONDENSED CONSOLIDATED~~DATA

~~STATEMENT~~(in OFthousands, ~~OPERATIONS~~except per share and percentage data)

			For the Six Months Ended June 30, 1999
			Predecessor(1)(2)						American Medical Laboratories, Incorporated(1)(2)
			(dollars in thousands, except per share data)
																					Nine Months
			Historical American
						Period			Period												Ended
			Medical			Historical APL
						January 1,			May 2,			Year Ended									September 30,
			Laboratories,			January 1, 1999			Pro Forma			Pro Forma
			Year Ended			1997			1997 to			December 31,									(unaudited)
			Incorporated			to June 30, 1999			Adjustments			Consolidated
			December 31,			to May 1,			December 31,
Net revenue			$	58,609		$	51,600		$	(115	)(A)	$	110,094
			1996			1997			1997			1998			1999			2000			2000			2001
Cost of services				38,530			32,180			(316	)(B)		70,394
Consolidated Statement of Operations Data:
Selling, general and administrative				14,077			10,544			—			24,621
Net revenue			$	77,975		$	28,340		$	59,234		$	102,729		$	143,436		$	260,824		$	196,329		$	221,500
Depreciation and amortization				1,356			1,333			3,324	(C)		6,013
Cost of services				32,468			20,055			43,541			72,838			98,531			174,512			128,643			148,970
		Total operating expenses		53,963			44,057			3,008			101,028
Selling, general and administrative				37,756			6,151			11,278			20,181			31,111			55,081			41,508			44,224
Operating income				4,646			7,543			(3,123	)		9,066
Depreciation and amortization				2,974			524			1,073			2,170			4,803			13,690			10,059			11,017
Interest expense				(835	)		(817	)		(4,354	)(D)		(6,006	)
Loss on impairment of assets				5,674			—			—			—			—			—			—			—
Share in loss of affiliate				(407	)		—			—			(407	)
		Operating expenses		78,872			26,730			55,892			95,189			134,445			243,283			180,210			204,211
Other (income) expense				13			(13	)		—			—
		Operating income (loss)		(897	)		1,610			3,342			7,540			8,991			17,541			16,119			17,289
		Income before income taxes and extraordinary items		3,417			6,713			(7,477	)		2,653
Interest expense				2,811			130			619			927			4,578			15,503			11,451			11,687
Provision for income taxes				1,338			—			741	(E)		2,079
Share in loss of affiliate				—			165			694			443			815			281			281			—
		Income before extraordinary items		2,079			6,713			(8,218	)		574
Other (income) expense				—			(49	)		331			14			100			(1	)		5			25
Dividends on preferred stock				375			—			—			375
Provision (benefit) for taxes				(1,357	)		612			683			2,197			1,820			3,375			3,449			4,523
		Pro forma net income applicable to common shareholders before extraordinary item	$	1,704		$	6,713		$	(8,218	)	$	199
	Income (loss) before extraordinary item			(2,351	)		752			1,015			3,959			1,678			(1,617	)		933			1,054
Pro forma net income per common share before extraordinary item — basic and diluted (F)
Extraordinary item				—			—			—			—			442			—			—			—
												$
Net income (loss)				(2,351	)		752			1,015			3,959			1,236			(1,617	)		933			1,054
Pro forma weighted-average common shares used in per share computation:
Dividends on preferred stock				—			—			566			923			462			192			143			158
	Basic (F)
	Net income (loss) to common shareholders		$	(2,351	)	$	752		$	449		$	3,036		$	774		$	(1,809	)	$	790		$	896
	Diluted (F)
Net income (loss) per common share before extraordinary item
Other Financial Data Adjusted EBITDA												$	15,079
	Basic			—			—		$	0.02		$	0.16		$	0.06		$	(0.09	)	$	0.04		$	0.04
	Diluted			—			—		$	0.02		$	0.16		$	0.06		$	(0.09	)	$	0.04		$	0.04
Weighted-average common shares outstanding
	Basic			—			—			18,597			18,864			19,102			20,848			20,828			21,209
	Diluted			—			—			18,597			19,569			19,813			20,848			21,697			21,676
Pro forma unaudited basic and diluted net income per common share				—			—			—			—						—			—
Shares used to compute pro forma unaudited net income per common share
	Basic			—			—			—			—						—			—
	Diluted			—			—			—			—						—			—
Other Financial Data:
Adjusted EBITDA(3)			$	2,077		$	2,183		$	4,084		$	9,696		$	13,044		$	30,354		$	24,195		$	27,985
Adjusted EBITDA as of % of net revenue				2.7	%		7.7	%		6.9	%		9.4	%		9.1	%		11.6	%		12.3	%		12.6	%
Cash flows provided by (used in) operating activities			$	5,845		$	(2,393	)	$	4,974		$	1,464		$	1,710		$	12,816		$	9,331		$	8,341
Cash flows provided by (used in) investing activities				(2,363	)		31,154			(21,545	)		(7,388	)		(88,431	)		(19,011	)		(16,024	)		(9,154	)
Cash flows provided by (used in) financing activities				(1,954	)		(27,216	)		13,445			5,924			87,590			6,141			6,922			3,520
Consolidated Balance Sheet Data (at period end):
Cash and cash equivalents			$	1,581					$	1,125		$	0		$	869		$	815		$	1,098		$	3,522
Working capital (deficit)				(22,128	)					6,366			9,202			14,391			23,326			24,422			28,462
Total assets				57,597						30,303			45,207			197,147			196,871			197,577			203,909
Total debt				28,871						6,170			12,473			138,969			145,235			145,888			146,357
Redeemable preferred stock				—						9,238			10,161			1,909			2,101			2,052			2,259
Total stockholders’ equity				—						827			3,807			8,584			7,620			9,685			10,348

(footnotes on following page)


(1)	On May 2, 1997, we acquired all of the outstanding stock of Medical Laboratories Corporation, our predecessor, in a business combination accounted for as a purchase. Therefore the assets and liabilities were recorded at fair value as required by the purchase method of accounting and the operations were reflected in our results of operations from the date of acquisition.
(2)	The financial data for the periods presented are not strictly comparable due to the significant effect that the acquisitions of Medical Laboratories Corporation and APL have had on such data. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—General” and Notes 1 and 7 of the notes to our consolidated financial statements, appearing elsewhere in this prospectus.
(3)	Adjusted EBITDA is defined as EBITDA adjusted to exclude stock-based compensation expense and non-recurring items. EBITDA consists of net income before interest expense, income taxes, share in loss of affiliates, depreciation and amortization and extraordinary items. Stock-based compensation expense was zero and $0.4 million for the years ended December 31, 1999 and 2000, respectively, and $0.3 million and $0.4 million for the nine-month periods ended September 30, 2000 and 2001, respectively. Non-recurring items reduced Adjusted EBITDA by $0.7 million and $1.3 million for the years ended December 31, 1999 and 2000, respectively, by $2.3 million and $0.7 million for the nine-month periods ended September 30, 2000 and 2001, respectively, and by zero for all other periods presented. EBITDA and Adjusted EBITDA should not be considered as measures of financial performance under GAAP. Items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial performance. We present Adjusted EBITDA, which is a non-GAAP measure, to enhance the understanding of our operating results. Adjusted EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated from operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

For the Year Ended December 31, 1999 and the Six Months Ended June 30, 1999

A Reflects the elimination of approximately $230,000 and $115,000 of inter-company sales from January 1, 1999 to October 12, 1999 and January 1, 1999 to June 30, 1999, respectively. B Reflects the elimination of expense associated with the following: (1) approximately $7.9 million and $200,000 in salaries and bonuses of the former owners and key members of management of APL during the periods January 1, 1999 to October 12, 1999 and January 1, 1999 to June 30, 1999, respectively, based on contractual agreements which established the compensation of these individuals subsequent to the closing of the transaction; and (2) approximately $224,000 and $0 in merger related expenses incurred by APL from January 1, 1999 to October 12, 1999 and January 1, 1999 to June 30, 1999, respectively. C Reflects the amortization of intangible assets, including goodwill over three to twenty year periods. The estimated period of amortization of identifiable intangible assets and goodwill is based on preliminary allocations of values to identifiable assets of APL. We do not believe that the final allocation of values to intangible assets and goodwill of APL will result in amortization expense materially different from the adjustment above. D Reflects the elimination of the historical interest expense related to debt not assumed in the acquisition, and inclusion of the debt incurred to finance the acquisition. E Reflects the income tax effect of combining our company’s and APL’s results of operations and pro forma adjustments, excluding the impact of nondeductible amounts. In conjunction with the APL acquisition, APL changed from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which requires APL to recognize the tax consequences of operations in its statements of operations. The pro forma adjustments reflect the estimated impact of recognizing income tax expense as if APL had been a C Corporation and part of our consolidated group for tax reporting purposes for the entire year ended December 31, 1999. F The pro forma net income (loss) per common share before extraordinary item information gives effect to the issuance of common stock to the former owners of APL in conjunction with the transaction.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

~~The~~You ~~following~~should ~~discussion~~read ~~should~~the befollowing ~~read~~discussion in conjunction with our consolidated financial statements, the notes to those statements and the other financial information appearing elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

Background

Our company was founded in 1959 by pathologists in Fairfax, Virginia. Over time, we expanded our clinical laboratory operations and became the leading provider of laboratory tests to physicians’ offices in the metropolitan Washington, D.C. area. We also developed a significant business in esoteric testing for hospital customers in the central Atlantic states. In 1992, we moved our headquarters into a custom-designed laboratory facility in Chantilly, Virginia, located near Dulles International Airport.

On May 2, 1997, GTCR and members of current management purchased our company from the prior owners for $23.0 million in cash. The transaction was accounted for using the purchase method of accounting, under which a new basis was established for the company’s assets. Accordingly, the results of operations in the selected consolidated financial data table for ~~the~~ the predecessor company for periods prior to May 2, 1997 are not comparable to the results of subsequent periods.

We have grown significantly since May 1997. Shortly after the purchase of the company by GTCR and ~~current~~members of current management, we implemented an aggressive sales program, which, combined with our focus on customer service, has resulted in growth in our esoteric business nationwide as well as our esoteric and routine business in the metropolitan Washington, D.C. area. In June 1998, we acquired Providence Laboratory Associates, ~~or PLA,~~ a small laboratory located in Maryland, which also contributed to our growth.

WeTo ~~grew~~further ~~dramatically~~our instrategy ~~1999~~of ~~with~~leveraging ~~the~~a strong infrastructure to expand our esoteric testing services nationwide, we acquired APL Healthcare ~~acquisition~~Group, Inc. (“APL”) in 1999. APL was founded in 1966 and is the leading laboratory services provider in the state of Nevada. We acquired all of the outstanding capital stock of APL in October 1999 for a total purchase price of $107.2 million, consisting of $64.3 million of of cash, the issuance of ~~convertible~~ subordinated notes in an ~~aggregate~~ aggregate principal amount of $17.5 million, the issuance of shares of our common stock with a value at that time of $5.6 million, the assumption of debt of approximately $17.8 million and acquisition costs of approximately $2.0 million. Holders of $ million aggregate principal amount of these ~~convertible~~ subordinated notes have elected to convert ~~their~~ their notes into shares of our common stock in connection with ~~this~~ this offering. The APL acquisition was accounted for using the purchase method of accounting. Due to the significant effect of the APL acquisition, financial data in the tables and schedules which follow in this prospectus may not be strictly comparable between periods.

2221

Results of Operations

The following table describes our results of operations as a percentage of net revenue for the periods presented:

										Six Months
										Nine Months
										Ended June 30,
										Ended
	Period
										September 30,
	May 2, 1997			Year Ended
	Year Ended
	to			December 31,									(unaudited)
	December 31,
	December 31,									Actual			Pro Forma			Actual
										(unaudited)
	1997			1998			1999			1999			1999			2000
	1998			1999			2000			2000			2001
Statement of Operations Data:
Net revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		~~100.0~~	%
Cost of services		70.59			68.07			6766.09			65.75			6367.93			~~64.5~~
Selling, general and administrative		2219.16			2221.57			2321.41			2421.01			2220.40			~~20.8~~
Depreciation and amortization		12.81			23.13			35.32			25.31			5.50			~~4.9~~
Operating income		57.64	%		76.3	%		6.38	%		78.93	%		87.27	%		~~9.7~~	%
Adjusted EBITDA		6.9.4	%		9.41	%		911.56	%		1012.3	%		1312.76	%		~~14.8~~	%

~~Six~~Nine months ended ~~June~~September 30, ~~2000~~2001 compared to ~~six~~nine months ended ~~June~~ September 30, 2000 ~~1999~~

Net Revenue. Net revenue increased to $~~129~~221.95 million for the ~~six~~nine months ended ~~June~~September 30, ~~2000~~2001 from $58196.63 million for the same period ofin ~~1999~~2000, representing an increase of $7125.32 million or ~~121~~12.78%. ~~Approximately $58.7 million~~The ~~of the~~ increase ~~was~~in ~~attributable to revenue~~net ~~generated~~revenue ~~from~~is ~~the~~primarily ~~acquisition of APL, which was acquired subsequent to~~ the ~~first~~result ~~six months~~ of ~~1999.~~an ~~Excluding~~increase ~~the~~in ~~effect of~~ the ~~acquired business, net revenue increased $12.6 million or 21.5%, primarily as a result of an increased~~ volume of laboratory tests performed. Laboratory tests for our customers are ordered and billed on a per accession basis. An accession represents a single patient intervention on which one or more tests may be performed. ~~Also~~The ~~excluding the effect of the acquired business, the~~ number of billed accessions increased approximately 189.51% in the first ~~six~~nine months of ~~2000~~2001 compared to the same period in ~~1999~~2000, while the average price billed per accession increased approximately 3.25%. This volume growth has primarily been driven by aan ~~net~~ increase in the number of of total customers we serve~~. During 2000~~, weparticularly ~~have been successful~~ in ~~attracting new customers, primarily in~~ the hospital~~, physician~~ and ~~independent clinical laboratory markets, while also~~ physician ~~maintaining a very high retention rate for our existing customers~~markets. The increase in the average price billed per ~~accession~~ accession isin ~~due~~the tofirst anine ~~greater~~months ~~proportion~~ of ~~higher-priced~~2001 ~~esoteric~~compared ~~tests~~to the same ~~performed~~period in the ~~first~~prior ~~six~~year ~~months~~is ofdue ~~2000~~to ~~compared~~favorable tochanges in the ~~same~~mix ~~period~~of intests ~~1999,~~ as well as to price increases ~~during~~in ~~2000~~2001 for ~~certain~~ certain client and patient fee schedules.

Cost of Services. Cost of services increased to $83149.80 million for the ~~six~~nine months ended ~~June~~September 30, ~~2000~~ 2001 from $38128.56 million for the same period in ~~1999~~2000, ~~representing~~ representing an increase of $4520.34 million or ~~approximately 117~~15.78%. Volume ~~Approximately~~growth ~~$35.1~~of ~~million~~laboratory oftesting, ~~the~~based ~~increase~~on isbilled ~~attributable~~accessions, towas ~~the~~approximately 9.1% while increased cost ofper ~~services~~accession ~~performed~~accounted for byapproximately ~~APL~~6.2% ~~Excluding~~of the ~~effect~~difference. ofThe major elements accounting for the ~~acquired~~increase ~~business,~~in the cost of services ~~increased~~are ~~$10.2 million~~salaries, orwages ~~approximately~~and ~~26.5%.~~benefits, ~~Approximately $6.4 million~~laboratory ofsupplies, ~~the $10.2 million increase is due to~~and ~~the~~laboratory ~~greater~~work ~~volume~~referred. ofSalaries, ~~laboratory~~wages ~~tests~~and ~~performed~~benefits increased 15.5% in the ~~first~~nine ~~six~~ months ofended ~~2000~~September 30, ~~compared~~2001 compared to the same period in ~~1999.~~2000, Indue ~~addition,~~ to weincreases ~~experienced~~in ~~cost~~both ~~increases~~headcount and onwage arates. ~~per-test~~Headcount ~~basis~~in ~~for~~operations ~~laboratory~~ increased ~~supplies~~approximately 8.9%, ~~operations~~while ~~labor~~wage ~~and~~rates ~~transportation~~increased ~~costs~~approximately 4.0%. Supplies ~~cost~~expense ~~per~~increased ~~test~~approximately ~~increased~~17.4% primarily due to the increase ~~greater~~in testing volume as well as an increased proportion of higher-cost esoteric tests ~~performed~~ in 2001. Laboratory work referred is the ~~first~~cost ~~six~~we ~~months~~incur ofin ~~2000~~sending ~~compared~~out selected specimens to ~~the~~other ~~same~~laboratories ~~period~~for oftesting ~~1999,~~and ~~while~~will ~~the~~generally ~~increases~~fluctuate in ~~labor~~line with ~~and~~changes in the total volume of accessions. Laboratory work ~~transportation~~referred ~~primarily~~increased ~~reflect~~approximately ~~wage~~8.4%, ~~increases~~slightly ~~and~~less ~~higher~~than the ~~transportation~~increase ~~volumes~~in ~~and~~the ~~fuel~~total ~~costs~~volume of billed accessions.

Selling, General and Administrative. Selling, general and administrative expense increased to $2744.12 million for the ~~six~~nine months ended ~~June~~September 30, ~~2000~~2001 from $1441.15 million for the same period ofin ~~1999~~2000, representing an increase of $132.07 million or 926.25%. ~~Approximately~~As ~~$10.9 million~~a percentage of net ~~the~~revenue, ~~increase~~selling, ~~was~~general ~~attributable~~and administrative expense decreased to 20.0% in the ~~acquisition~~first nine months of ~~APL~~2001 compared to 21. ~~Excluding~~1% in the ~~effect~~prior ofyear ~~the~~period. ~~acquired~~The ~~business,~~increase in selling, general and administrative expense is primarily

due to increases in salaries, wages, and employee benefit costs, information systems expenses, and group purchasing organization administrative expense, offset by a small decrease in bad debt expense. The increase in salaries, wages and benefits and in information systems expenses primarily relates to expansion of our management team and our information technology capabilities in order to support our growth. Bad debt expense was $10.0 million, or 4.5% of net revenue, for the nine months ended September 30, 2001 compared to $10.4 million, or 5.3% of net revenue, for the same period in 2000. Stock-based compensation expense was $0.4 million for the nine months ended September 30, 2001 compared to $0.3 million for the same period in 2000.

Depreciation and Amortization. Depreciation and amortization expense increased to $11.0 million for the nine months ended September 30, 2001 from $10.1 million for the same period in 2000, representing an increase of $0.9 million or 9.5%. The increase primarily is due to an increase in depreciation expense of $0.9 million. Depreciation expense increased due to higher property and equipment depreciable balances in 2001 compared to the prior year. Capital expenditures during the period primarily related to laboratory equipment and to information technology systems development.

Interest Expense. Interest expense increased to $11.7 million for the nine months ended September 30, 2001 from $11.5 million for the same period in 2000, representing an increase of $0.2 million or 2.1%. The increase was primarily due to a higher average total debt balance of approximately $1.8 million compared to the same period in the prior year. The company’s effective interest rate was approximately the same as the prior year, primarily because the benefit of lower interest rates on variable-rate debt balances in 2001 was offset by the related cost of our interest rate swap.

Provision for Income Taxes. The provision for income taxes increased to $4.5 million for the nine months ended September 30, 2001 from $3.4 million for the same period in 2000, representing an increase of $1.1 million or 31.2%. The increase in total tax expense is primarily due to the increase in pretax book income, as well as to a small increase in the estimated effective tax rate applied to book income. The estimated effective tax rate increased to 81.2% for the nine months ended September 30, 2001 from 78.7% in the same period in 2000. The estimated effective tax rate on book income significantly exceeds the statutory tax rate due to the effect of the amortization of intangibles acquired in connection with the APL acquisition in 1999, which are not deductible for tax purposes.

Adjusted EBITDA. Adjusted EBITDA increased to $28.0 million for the nine months ended September 30, 2001 from $24.2 million for the same period in 2000, representing an increase of $3.8 million or 15.7%. Adjusted EBITDA was 12.6% of net revenue for the nine months ended September 30, 2001, compared to 12.3% of net revenue in the same period in 2000. The increase in Adjusted EBITDA was primarily attributable to the higher net revenue in the 2001 period compared to the prior year period.

Year ended December 31, 2000 compared to year ended December 31, 1999

Net Revenue. Net revenue increased to $260.8 million for the year ended December 31, 2000 from $143.4 million in the prior year, representing an increase of $117.4 million or 81.8%. Approximately $92.9 million of the increase was attributable to revenue generated from the acquisition of APL, whose results were included for a full year in 2000 but were included only for the period from October 13 to December 31, 1999. Excluding the effect of the acquired business, net revenue increased $24.5 million or 20.3%, primarily as a result of an increased volume of laboratory tests performed. Laboratory tests for our customers are ordered and billed on a per accession basis. An accession represents a single patient intervention on which one or more tests may be performed. The total number of billed accessions increased approximately 70.7% in the year ended December 31, 2000 compared to the prior year, while the average price billed per accession increased approximately 6.5%. Excluding the effect of the acquired business, the number of billed accessions increased

~~administrative expense increased $2.1 million or~~ approximately 1417.97%. ~~The~~in ~~increase~~2000 incompared ~~selling~~to ~~expense~~1999, iswhile ~~due~~the toaverage ~~increased~~price ~~costs~~billed toper ~~expand~~accession ~~our~~increased ~~national~~approximately ~~sales~~2.1%. ~~coverage, including~~This ~~additional~~volume ~~travel~~growth ~~and~~has ~~sales~~primarily ~~office~~been ~~costs.~~driven ~~The~~by an increase in ~~general~~the number ~~and~~of ~~administrative~~total ~~expense~~customers ~~primarily~~we ~~relates~~serve, toparticularly ~~expansion~~in ofthe ~~our~~hospital ~~management team~~ and ~~our~~physician ~~information technology capabilities in order to support our growth~~markets. WeThe ~~incurred~~increase ~~increased costs~~ in ~~personnel~~ ~~salaries~~the ~~and~~average ~~benefits,~~price ~~travel and information~~billed ~~technology.~~per ~~General~~accession ~~and~~in ~~administrative expense for~~ the ~~six~~year ~~months~~ ended ~~June~~December 3031, 2000 ~~also includes $0.2 million of~~compared ~~stock-based~~to ~~compensation expense; there was no similar charge in~~ the prior year ~~period.~~is ~~Stock-based~~due ~~compensation~~to ~~expense represents~~favorable ~~the~~changes ~~difference~~in ~~between~~ the ~~exercise~~mix ~~price~~ of ~~options~~ ~~granted~~tests ~~during~~as ~~the~~well ~~first~~as ~~six~~to ~~months~~price ofincreases in 2000 ~~and~~for ~~the~~certain ~~deemed fair~~client ~~value~~and ofpatient ~~our~~fee ~~common stock on the date of grant~~schedules. ~~The difference is~~ ~~being amortized over the five-year vesting period.~~

~~Depreciation~~Including ~~and~~the ~~Amortization.~~effect ~~Depreciation~~of ~~and amortization~~the ~~expense~~acquired ~~increased~~business ~~to $6.4 million~~ for the ~~six~~entire ~~months ended June 30~~year, ~~2000~~pro ~~from~~forma ~~$1.4~~net ~~million~~revenue for the ~~same period~~year inended ~~1999~~December 31, 1999 ~~representing~~would anhave ~~increase~~been ofapproximately $5225.06 million., compared ~~The~~to ~~increase~~$260.8 ismillion ~~primarily~~for ~~due~~the toyear ~~approximately~~ended ~~$2.7~~December ~~million~~31, 2000. The increase in ~~goodwill~~2000 ~~amortization~~of ~~and~~ $235.1 2 million ofor ~~additional~~15.6% over the prior year ~~depreciation~~is ~~expense~~due asprimarily ato ~~result~~increased volume of approximately 14.3% based on the ~~acquisition~~total number of ~~APL~~billed inaccessions, while the average ~~fourth~~price ~~quarter~~billed ofper ~~1999~~accession increased approximately 1.1%.

~~Interest~~Cost ~~Expense~~of Services. ~~Interest~~Cost ~~expense~~of services increased to $7174.65 million for the ~~six~~year ~~months~~ ended ~~June~~December 3031, 2000 from $98.5 million in the prior year, representing an increase of $76.0 million or 77.81%. Approximately $55.5 million ~~for~~of the ~~same~~increase ~~period~~is attributable to the cost of ~~1999~~services performed by APL, ~~representing~~which was included in the results anfor ~~increase~~a full year in 2000 but for only the period from October 13 to December 31, 1999. Excluding the effect of the acquired business, cost of services increased $620.85 million or 24.0% ~~The~~in ~~increase~~the ~~reflects~~year ended December 31, 2000 compared to the prior year. Approximately $15.1 million of the $20.5 million increase is due to the greater volume of laboratory tests performed in ~~long~~the year ended December 31, 2000 compared to the prior year. In addition, we experienced cost increases on a per-~~term~~test ~~debt~~basis ~~arranged~~for salaries, wages and benefits, laboratory supplies, and laboratory work referred. Salaries, wages and benefits increased 22.2% in ~~conjunction~~the ~~with~~year ended December 31, 2000 compared to the ~~acquisition~~prior year, due to increases in both headcount and wage rates. Supplies expense increased approximately 34.9% primarily due to the increase in testing volume as well as an increased proportion of ~~APL~~higher-cost esoteric tests in 2000. Laboratory work referred is the ~~fourth~~cost ~~quarter~~incurred by AML in sending out selected specimens to other laboratories for testing. Laboratory work referred increased approximately 32.0% in 2000, primarily due to a higher volume of ~~1999~~specimens referred out.

~~Provision~~Including ~~for~~the ~~Income~~effect ~~Taxes.~~of ~~The~~the ~~provision~~acquired business for ~~income~~the ~~taxes~~entire year, ~~increased~~pro toforma ~~$2.2 million~~cost of services for the ~~six~~year ~~months~~ ended ~~June~~December 3031, ~~2000~~1999 ~~from~~would have been approximately $1150.32 million, compared to $174.5 million for the ~~same~~year ~~period of~~ended ~~1999~~December 31, ~~representing~~2000. anApproximately ~~increase~~$21.5 million of the $024.9 3 million. ~~The~~ increase is due ~~both~~ to the ~~increase~~greater involume ~~income~~of ~~before income taxes as~~laboratory ~~well~~tests asperformed ~~to an increase~~ in the ~~effective~~year ~~tax~~ended ~~rate.~~December 31, ~~The effective~~2000 ~~tax~~compared ~~rate~~to ~~has~~the ~~increased~~prior ~~due~~year. toApproximately ~~the~~$2.8 ~~amortization~~million of ~~intangibles~~the ~~acquired~~$24.3 inmillion ~~connection~~increase ~~with~~is ~~the~~due ~~APL~~to ~~acquisition,~~cost ~~which~~increases ~~are~~on ~~not deductible~~a ~~for tax purposes~~per-test basis.

~~Adjusted~~Selling, ~~EBITDA~~General and Administrative. ~~Adjusted~~Selling, ~~EBITDA~~general and administrative expense increased to $1955.21 million for the year ~~six months~~ ended ~~June~~December 3031, 2000 from $631.01 million ~~for~~in the prior ~~same period of 1999~~year, representing an increase of $1324.20 million or 77.0%. ~~Approximately~~As a percentage of net revenue, selling, general and administrative expense decreased to 21.1% in 2000 compared to 21.7% in 1999. Approximately $1218.06 million of the increase was isattributable ~~due~~ to the acquisition of APL. Excluding the effect of the acquired business, ~~Adjusted~~selling, ~~EBITDA~~general ~~increased~~and administrative ~~approximately~~expense increased $15.23 million or 2021.01%. The increase in selling, general and administrative expense primarily relates to expansion of our management team and our information technology capabilities in order to support our growth, as well as to increases in bad debt expense, stock-based compensation expense, and non-recurring expenses. Approximately $2.6 million of the ~~first~~$5.3 million ~~six~~increase ~~months~~is due to higher salaries, wages and employee benefits, due primarily to an increase in personnel of ~~2000~~11.7% ~~compared~~combined with increases in salary rates. Bad debt expense increased $1.6 million, due to both the ~~same~~reserves needed ~~period~~in connection with the increase in revenue of $24.5 million, ~~1999~~as well as to a specific reserve recorded of $0.7 million on outstanding receivables due from our 49%-owned affiliate, Shared Laboratory Services, L.L.C. Stock-based compensation expense was $0.4 million for the year ended December 31, 2000; there was no

Actual six months ended June 30, 2000 compared to pro forma six months ended June 30, 1999

Net Revenue. Net revenue increased to $129.9 million for the six months ended June 30, 2000 from $110.1 million for the pro forma 1999 period, representing an increase of $19.8 million or 18.0%. We achieved substantial volume growth in billed accessions at both of our major laboratories, with total volume growth approximating 15.8%. This volume increase has primarily been driven by a net increase in the number of total customers we serve, particularly in the hospital, physician and independent clinical laboratory markets. The average price per billed accession increased approximately 2.7% in the first six months of 2000 compared to the pro forma 1999 period. The increase in the average price billed per accession is due to a greater proportion of higher-priced esoteric tests performed as well as to price increases in 2000 for certain client and patient fee schedules.

Cost of Services. Cost of services increased to $83.8 million for the six months ended June 30, 2000 from $70.4 million for the pro forma 1999 period, representing an increase of $13.4 million or 19.0%. The increase in cost of services was primarily due to the increase in the testing volume at our laboratories. In addition, we experienced cost increases on a per test basis for laboratory supplies, operations labor and transportation costs. Supplies cost per test increased due to the greater proportion of esoteric tests performed in the first six months of 2000, while the increases in labor and transportation primarily reflect wage increases and higher transportation volumes and fuel costs.

~~Selling,~~similar ~~General~~charge ~~and~~in ~~Administrative~~the prior year. Selling, general and administrative expense ~~increased~~in ~~to $27.1 million for the six months ended June 30,~~ 2000 ~~from~~also ~~$24.6 million~~includes ~~for~~ the ~~pro~~write-off ~~forma 1999 period, representing an increase~~ of $21.50 million ~~or 10.2%. The increase~~ in ~~selling~~non-recurring ~~costs~~expenses isincurred ~~due~~in toconnection ~~increased~~with ~~costs to expand~~ our ~~national~~planned ~~sales~~initial ~~coverage.~~public ~~The increase~~offering in ~~general and administrative costs primarily relates to~~2000, which ~~expansion~~was ofsubsequently ~~our management team and our information technology capabilities in order to support our growth~~withdrawn.

Depreciation and Amortization. Depreciation and amortization expense increased to $613.47 million for the ~~six~~ ~~months~~year ended ~~June~~December 3031, 2000 from $64.08 million ~~for~~in the ~~pro~~prior ~~forma 1999 period~~year, representing an increase of $08.49 million or 185.0%. The increase is ~~primarily~~due to an increase in depreciation expense of $2.8 million and an increase in amortization expense of $6.1 million. Depreciation expense increased due to higher property and equipment depreciable balances in 2000 compared to ~~additional~~the prior year. Capital expenditures during the ~~depreciation~~period primarily related to laboratory equipment and to information technology systems development. Amortization expense increased asin 2000 compared to 1999 due to the inclusion in 2000 of a ~~result~~full year of ~~capital~~amortization ~~expenditures~~of the goodwill intangibles related to the APL acquisition and amortization of the senior credit facility deferred debt issuance costs.

Interest Expense. Interest expense increased to $715.65 million for the ~~six~~year ~~months~~ ended ~~June~~December 3031, 2000 from $64.06 million for the ~~pro~~prior ~~forma~~year, ~~1999~~representing ~~period~~an increase of $10.9 million or 238.6%. The increase ~~reflects~~was primarily ~~greater~~due ~~borrowings~~to ~~under~~a ~~our~~higher ~~senior~~average ~~credit~~total debt balance of ~~facility~~approximately $99.8 million compared to the prior year, which was incurred primarily to finance the ~~expansion~~acquisition of ~~our~~APL. The ~~business~~company’s effective interest rate was approximately 0.9% higher in 2000 than in the prior year, primarily due to the effect of higher interest rates in 2000 on variable-rate debt balances.

Provision for Income Taxes. The provision for income ~~taxes~~ taxes increased to $23.24 million for the ~~six~~year ~~months~~ ended ~~June~~December 3031, 2000 from $2.1.8 million for the ~~pro forma 1999~~prior ~~period.~~year, ~~The~~representing an increase isof ~~due~~$1.6 million ~~both~~or to85.4%. The ~~the~~ increase in ~~income~~the ~~before~~ provision ~~income~~is ~~taxes~~primarily asdue ~~well as~~ to aan ~~decrease~~increase in ~~the effective tax rate.~~ operating ~~The~~income ~~effective~~in ~~tax~~2000 ~~rate~~compared ~~has~~to ~~decreased~~1999, ~~due~~and to the effect of the amortization of intangibles acquired in connection with the APL acquisition, which are not deductible for tax purposes. ~~Because~~ ~~the non-deductible amount is fixed, to the extent our income~~ ~~before income taxes increases, our effective tax rate declines.~~

Adjusted EBITDA. Adjusted EBITDA increased to $1930.24 million for the ~~six~~year ~~months~~ ended ~~June~~December 3031, 2000 from $1513.10 million for the ~~pro~~prior ~~forma~~year, ~~1999~~representing ~~period~~an increase of $17.4 million Asor ~~a result,~~132.7%. Adjusted EBITDA aswas 11.6% ~~a percentage~~ of net revenue ~~increased~~for the year ended December 31, 2000, compared to 149.81% of net revenue for the ~~six~~prior ~~months~~year. ~~ended~~The ~~June 30,~~increase in ~~2000~~Adjusted ~~from~~EBITDA ~~13.7%~~was primarily attributable to the higher net revenue for the ~~pro~~year ~~forma~~ended ~~1999~~December 31, ~~period~~2000 compared to the prior year.

Year ended December 31, 1999 compared to year ended December 31, 1998

Net Revenue. Net revenue increased to $143.4 million for the year ended December 31, 1999 from $102.7 million in the prior year, representing an increase of $40.7 million or 39.6%. Approximately $22.98 million of the increase was attributable to revenue generated from the acquisition of APL. Excluding the effect of the acquired business, net revenue increased $1718.80 million or 17.35%, primarily as a result of an increased volume of laboratory tests performed. Also excluding the effect of the acquired business, the number of billed accessions increased approximately 1114.30% in the year ended December 31, 1999 compared to the year ended December 31, 1998, while the average price billed per accession increased approximately 53.20%. Our volume growth has primarily been driven by a net increase in the number of total customers we serve. During ~~2000~~1999, we ~~have~~were ~~been~~ successful in attracting new customers, primarily in the hospital, physician and independent clinical laboratory markets while also maintaining a very high retention rate for our existing customers. The increase in the average price billed per ~~accession~~ accession is due to a greater proportion of higher-priced esoteric tests performed in 1999 compared to 1998, as well as to price increases during 1999 for ~~certain~~selected client and patient fee schedules.

Cost of Services. Cost of services increased to $9698.15 million for the year ended December 31, 1999 ~~from~~ from $6972.98 million in the prior year, representing an ~~increase~~ increase of $2625.27 million or 3735.53%. Approximately $1413.34 million of the increase is attributable to the cost of services performed by APL, ~~which was acquired during the fourth quarter of 1999.~~ ~~Excluding the effect of the acquired business, cost of services~~ increased $11.9 million or approximately 17.0%. Approximately $6.9 million of the $11.9 million increase is due to the greater volume of laboratory tests performed in 1999 compared to the prior year. The remaining $5.0 million is due to cost increases on a per-test basis for laboratory supplies, operations labor and transportation costs. Supplies cost per test increased due to the greater proportion of esoteric tests performed in 1999 compared to the prior year, while the increases in labor and transportation costs primarily reflect wage increases and higher transportation volumes and fuel costs.

~~Selling,~~which ~~General~~was ~~and~~acquired ~~Administrative.~~during ~~Selling,~~the ~~general~~fourth ~~and administrative~~quarter ~~expense~~of ~~increased to $33~~1999.~~6 million~~ ~~for the~~Excluding ~~year~~the ~~ended~~effect ~~December 31,~~of ~~1999 from $23.1 million for~~ the ~~year~~acquired ~~ended December 31~~business, ~~1998,~~cost ~~representing~~of anservices ~~increase of~~increased $1012.53 million or 45approximately 16.59%. Approximately $510.02 million of the $12.3 million increase ~~was~~is ~~attributable~~due to the ~~acquisition~~greater volume of ~~APL. Excluding~~laboratory ~~the~~tests ~~effect~~performed ofin ~~the~~1999 compared ~~acquired~~to ~~business,~~the ~~selling,~~prior ~~general and~~year. ~~administrative~~The ~~costs~~remaining ~~increased~~ $52.51 million ~~or 23.8%. The increase in selling expense~~ is due to ~~increased~~cost ~~costs~~increases ~~to expand~~on ~~our~~a ~~national~~per-test ~~sales~~basis ~~coverage~~for laboratory supplies, ~~including~~operations ~~additional~~labor ~~travel~~ and ~~sales~~transportation ~~office~~ costs. ~~The~~Supplies cost ~~increase~~per intest ~~general~~increased ~~and administrative~~due ~~expense~~to ~~primarily~~the ~~relates~~greater toproportion ~~expansion~~ of ~~our~~ ~~management~~esoteric ~~team~~tests ~~and~~performed ~~our~~in ~~information~~1999 ~~technology~~compared ~~capabilities~~to ~~in order~~the toprior ~~support~~year, while ~~our~~the ~~growth.~~increases Wein ~~incurred~~labor ~~increased~~and transportation costs inprimarily ~~personnel~~reflect ~~salaries~~wage increases and ~~benefits,~~higher ~~travel~~transportation ~~and~~volumes ~~information~~and ~~technology~~fuel costs.

Selling, General and Administrative. Selling, general and administrative expense increased to $31.1 million for the year ended December 31, 1999 from $20.2 million for the year ended December 31, 1998, representing an increase of $10.9 million or 54.2%. Approximately $5.8 million of the increase was attributable to APL’s selling, general and administrative costs from the date of acquisition. Excluding the effect of the acquired business, selling, general and administrative costs increased $5.1 million or 25.3%. The increase in selling expense is due to increased costs to expand our national sales coverage, including additional travel and sales office costs. The increase in general and administrative expense primarily relates to expansion of our management team and our information technology capabilities in order to support our growth. We incurred increased costs in personnel salaries and benefits, travel and information technology.

Depreciation and Amortization. Depreciation and amortization expense increased to $4.8 million for the year ended December 31, 1999 from $2.2 million for the year ended December 31, 1998, representing an increase of $2.6 million. The increase is primarily due to amortization of goodwill and additional depreciation attributable to the acquisition of APL in the fourth quarter of 1999.

Interest Expense. Interest expense increased to $4.6 million for the year ended December 31, 1999 from $0.9 million for the year ended December 31, 1998, representing an increase of $3.7 million. The increase reflects the effect of an increase in long-term debt arranged in conjunction with acquisition of APL in the fourth quarter of 1999.

Provision for Income Taxes. The provision for income taxes decreased to $1.8 million for the year ended December 31, 1999 from $2.2 million for the year ended December 31, 1998, representing a decrease of $0.4 million. The decrease is due to the decrease in income before income taxes, primarily due to higher interest expense in 1999, which was partially offset by an increase in the effective tax rate. The effective tax rate has increased due to the amortization of intangibles acquired in connection with the APL acquisition, which are not deductible for tax purposes.

Adjusted EBITDA. Adjusted EBITDA increased to $13.70 million for the year ended December 31, 1999 ~~from~~ from $9.7 million for the year ended December 31, 1998, representing an increase of $43.03 million. Approximately $32.58 million of the increase is due to the acquisition of APL, which was acquired during the fourth quarter of 1999. Excluding the effect of the acquired business, Adjusted EBITDA increased approximately $0.5 million or 5.26% in 1999 compared to 1998.

Year ended December 31, 1998 compared to the period May 2, 1997 to December 31, 1997

Net Revenue. Net revenue increased to $102.7 million in the year ended December 31, 1998, from $59.2 million in the May 2, 1997 to December 31, 1997 period, representing an increase of $43.5 million or 73.5%. The increase in net revenue in the twelve-month 1998 period compared to the eight-month 1997 period is due both to the longer time period and to a full year-to-year growth in the volume of billed accessions. The growth in testing volume was the result of the success of the aggressive sales and marketing program instituted during 1997 and 1998. The average price per accession did not vary significantly between periods.

Cost of Services. Cost of services increased to $69.9 million in the year ended December 31, 1998 from $41.7 million in the May 2, 1997 to December 31, 1997 period, representing an increase of $28.2 million or approximately 67.6%. The increase in the cost of services of the twelve-month 1998 period compared to the eight-month 1997 period of 67.6% is due both to the longer time period and to a full year increase in the volume of laboratory tests performed. The average cost per test did not vary significantly between periods.

Selling, General and Administrative. Selling, general and administrative expense increased to $23.1 million in the year ended December 31, 1998 from $13.1 million in the May 2, 1997 to December 31, 1997 period, representing an increase of $10.0 million or 76.3%. This increase is due both to the longer time period as well as increased expenditures. Selling expense increased due to the costs

associated with the expanded sales coverage and marketing program initiated by the new management team.

Depreciation and Amortization. Depreciation and amortization increased to $2.2 million in the year ended December 31, 1998 from $1.1 million in the May 2, 1997 to December 31, 1997 period. The increase in 1998 over the 1997 amount is due to the longer time period, the effect of depreciation on capital additions and amortization of the goodwill from the 1998 Providence Laboratory Associates acquisition.

Adjusted EBITDA. Adjusted EBITDA increased to $9.7 million for the year ended December 31, 1998 from $4.1 million in the May 2, 1997 to December 31, 1997 period, representing an increase of 136.6%. This increase is due both to the longer time period in 1998 as well as to the factors discussed above.

Suppliers

OnNo ~~a pro forma basis, no~~ single supplier comprised greater than 6 18.20% of our laboratory supply purchases for the year ended December 31, ~~1999~~ 2000. We believe that suppliers are numerous and compete aggressively for our business. We believe that our relative size and position in the market offer us procurement advantages not available to other smaller laboratories in the industry.

Seasonality

We experience seasonal trends that we believe affect all ~~clinical~~ clinical laboratory companies. Testing volume generally tends to be lower during the holiday seasons and, to a lesser extent, ~~inclement~~ inclement weather. As a result, because a substantial portion of ~~our~~ our expenses are relatively fixed over the short ~~term, our operating~~ ~~income as a percentage of revenue tends to decrease during the~~ ~~third and fourth quarter of each year. Our historical results do not necessarily demonstrate the impact of seasonality given our high growth during the periods presented.~~

~~Liquidity and Capital Resources~~26

Our principal sources of liquidity are cash flow generated from operations and borrowings under our senior credit facility. Total debt obligations increased to $145.8 million as of June 30, 2000 from $139.0 million as of December 31, 1999 and $12.5 million as of December 31, 1998. Total debt obligations as of June 30, 2000 are composed of $123.5 million in borrowings under our senior credit facility, $17.5 million related to the convertible subordinated notes, and $4.8 million in other borrowings. The increase resulted primarily from borrowings to finance the acquisition of APL in 1999. As of June 30, 2000, we had $1.0 million in cash and cash equivalents and $23.4 million in non-cash working capital.

Net cash flow from operations was $1.5 million in the year ended December 31, 1998, $1.7 million in the year ended December 31, 1999, and $6.8 million in the six months ended June 30, 2000. The trend of improved operating cash flow is due to an improvement in our net income since our acquisition of APL in October 1999. Operating cash flow has been negatively impacted by increases in working capital, primarily accounts receivable and inventories, that have accompanied the growth in business volumes.

Net cash used for investing activities was $7.4 million in the year ended December 31, 1998, $88.4 million in the year ended December 31, 1999, and $13.5 million in the six months ended June 30, 2000. Investing activities consist of acquisitions and capital expenditures for property, equipment and intangibles. Cash used in investing activities for the year ended December 31, 1998 was primarily for the acquisition of Providence Laboratory Associates. Cash used in investing activities for the year ended December 31, 1999 was primarily for the acquisition of APL. Capital expenditures primarily represent laboratory operating equipment, leasehold improvements to the lab facilities and office equipment, primarily computers. Capital expenditures during fiscal 1998 were approximately $2.9 million, $5.5 million in 1999 and $3.2 million in the six months ended June 30, 2000.

~~Net~~term, ~~cash~~our ~~provided~~operating byincome ~~(used~~as ~~in)~~a ~~financing~~percentage ~~activities~~of ~~was $5.9 million~~revenue intends ~~the year ended December 31, 1998,~~to ~~$87.6 million~~decrease induring the ~~year~~third ~~ended December 31, 1999,~~ and ~~$6.9~~ ~~million~~fourth inquarters ~~the six months ended June 30, 2000. Financing activities in 1998 consisted primarily~~ of ~~borrowings and~~each ~~repayments under a $20~~year.0 ~~million credit facility with Heller~~Our ~~Financial~~historical ~~Inc.,~~results ~~which~~do ~~consisted~~not ofnecessarily ademonstrate ~~term~~the ~~loan~~impact ~~and accounts receivable based line~~ of ~~credit. Financing activities in 1999~~ ~~included~~seasonality ~~the~~given ~~refinancing of~~ our ~~credit~~high ~~agreement~~growth ~~with~~during ~~Heller Financial Inc. with a new term loan of $20.0 million and a revolving facility of $15.0 million. On October 13, 1999, all of~~ the ~~outstanding~~periods ~~debt related to the Heller Financial credit agreement was repaid~~presented.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flow generated from operations and borrowings under our debt facilities. Total debt obligations increased to $146.4 million as of September 30, 2001 from $145.2 million as of December 31, 2000 and $139.0 million as of December 31, 1999. Total debt obligations as of September 30, 2001 are composed of $112.4 million in borrowings under our senior credit facility, $17.5 million related to the subordinated notes, $12.0 million related to the senior subordinated loan, and $4.5 million in other borrowings. As of September 30, 2001, we had $3.5 million in cash and cash equivalents and $24.9 million in non-cash working capital.

Net cash flow from operations was $1.7 million in the year ended December 31, 1999, $12.8 million in the year ended December 31, 2000, and $8.3 million in the nine months ended September 30, 2001. The trend of improved operating cash flow is due to an improvement in our net income since our acquisition of APL in October 1999. Operating cash flow has been negatively impacted by increases in working capital, primarily accounts receivable and inventories, that have accompanied the growth in business volumes.

Net cash used for investing activities was $88.4 million in the year ended December 31, 1999, $19.0 million in the year ended December 31, 2000, and $9.2 million in the nine months ended September 30, 2001. Investing activities consist of acquisitions and capital expenditures for property, equipment and intangibles. Cash used in investing activities for the year ended December 31, 1999 was primarily for the acquisition of APL. Capital expenditures primarily represent purchases of laboratory operating equipment, leasehold improvements to the lab facilities and office equipment, primarily computers and software. Capital expenditures were approximately $5.5 million in 1999, $8.7 million in 2000 and $9.2 million in the nine months ended September 30, 2001.

Net cash provided by financing activities was $87.6 million in the year ended December 31, 1999, $6.1 million in the year ended December 31, 2000, and $3.5 million in the nine months ended September 30, 2001. Financing activities in 1999 included the refinancing of our credit agreement with Heller Financial Inc. with a new term loan of $20.0 million and a revolving facility of $15.0 million. On October 13, 1999, all of the outstanding debt related to the Heller Financial credit agreement was repaid.

On October 13, 1999, in connection with the APL acquisition, we entered into an amended and restated senior credit facility with Bankers Trust Company, as agent, and various other lenders that provides for:


	•	a revolving credit facility providing for up to $25.0 million in revolving credit loans and letters of credit;

	•	a Term A Loan facility providing for $50.0 million in term loans; and

	•	a Term B Loan facility providing for $65.0 million in term loans.

We may borrow amounts under the senior credit facility for permitted acquisitions, including related fees and expenses and to fund working capital and general corporate needs. All revolving loans incurred under the senior credit facility will mature on October 13, 2004. At ~~June~~September 30, ~~2000~~2001, there was $4838.0 million outstanding under the Term A ~~facility~~ facility and $6463.7 million outstanding under the Term B facility, $10.87 million of revolving credit borrowings and $14.23 million of unused borrowing capacity. The senior credit facility provides that all of our indebtedness be secured by a first priority security interest in some of our assets and the capital stock of our subsidiaries.

27 ~~Our borrowings under the senior credit facility bear interest at~~ ~~a floating rate and may be maintained by us as base rate loans~~ or, at our option, as Euro-rate loans, in each case, plus an applicable margin. For the six-month period ended June 30, 2000, our weighted average interest rate under our senior credit facility was 9.94%.

The term loans mature, and as a result must be repaid, in quarterly installments on March 31, June 30, September 30 and December 31 of each year, beginning on June 30, 2000. The scheduled repayments for the term loans for the remainder of this year and 2001 are $4.7 million and $9.2 million, respectively. The final maturity date of the Term A loan is October 13, 2004 and the final maturity date of the Term B loan is April 13, 2006.

The senior credit facility requires us to meet certain financial tests, including, without limitation, minimum interest coverage ratios, a maximum senior debt leverage ratio, a maximum level of capital expenditures and a minimum adjusted net worth. For the three-month period ended June 30, 2000, we were not in compliance with a financial ratio covenant in our senior credit facility. We have received a waiver from the lenders under our senior credit facility for that noncompliance.

The senior credit facility contains customary events of default, including without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, specified events of bankruptcy and insolvency, judgment defaults, failure of any guaranty or security document supporting the senior credit facility to be in full force and effect and a change of control.

We will use the net proceeds of the offering to repay indebtedness under the Term A loan and the Term B loan. In connection with, and subject to, the offering, we expect to amend or refinance our senior credit facility on terms and conditions that are more favorable to us.

We believe that our cash and cash equivalents together with cash flows expected to be generated from operations and borrowing capabilities under the current or an amended senior credit facility will be sufficient to meet anticipated requirements for working capital, interest payments, capital expenditures and scheduled principal payments under our debt obligations for the foreseeable future.

Our borrowings under the senior credit facility bear interest at a floating rate and we may designate them as base rate loans or, at our option, as Euro-rate loans, in each case, plus an applicable margin. For the nine-month period ended September 30, 2001, our weighted average interest rate under our senior credit facility was 8.9%.

The term loans have scheduled quarterly payments due on March 31, June 30, September 30 and December 31 of each year. The scheduled repayments for the term loans for the remainder of 2001 and 2002 are $2.7 million and $11.4 million, respectively. The final maturity date of the Term A loan is October 13, 2004 and the final maturity date of the Term B loan is April 13, 2006.

The senior credit facility requires us to meet financial tests, including, without limitation, minimum interest coverage ratios, a maximum senior debt leverage ratio, a maximum level of capital expenditures, a minimum fixed charge coverage ratio and a minimum adjusted net worth. For the three-month period ended September 30, 2001, we were in compliance with these covenants.

The senior credit facility contains customary events of default, including without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, specified events of bankruptcy and insolvency, judgment defaults, failure of any guaranty or security document supporting the senior credit facility to be in full force and effect and a change of control.

In June 2001, we amended our senior credit facility and also entered into a senior subordinated loan agreement with two of our shareholders, GTCR Capital Partners, L.P. and Jerrold L. Glick. The amendment to the senior credit facility provided for, among other things, the approval by the bank group of the senior subordinated loan agreement.

Under the terms of the senior subordinated loan agreement, we issued $15.0 million of notes which mature in June 2008 and bear interest at 14.0% per year. Proceeds from the issuance were used to pay down the revolving notes under the senior credit facility. Interest on the notes is paid-in-kind (added to principal) until we achieve specified financial ratios. In addition, we issued warrants to the two subordinated lenders which granted them the right to purchase a total of 1,168,673 shares of our common stock at an exercise price of $0.01 per share. The fair value of the warrants was determined to be $2.69 per warrant based on an independent valuation of our common stock as of June 1, 2001. Accordingly, we recorded a discount on the notes of approximately $3.2 million. Each lender exercised its stock purchase warrant on June 12, 2001. A portion of the loan proceeds was deemed payment of the purchase price of the warrants. The senior subordinated loan agreement includes provisions which require us to meet specified financial and reporting covenants. We were in compliance with these covenants at September 30, 2001.

We will use the net proceeds of the offering to repay indebtedness under the Term A loan and the Term B loan and pay off the senior subordinated debt. Following the offering, we expect to amend or refinance our senior credit facility on terms and conditions that we anticipate will be more favorable to us.

We believe that our cash and cash equivalents together with cash flows we expect to generate from operations and borrowing capabilities under the current or an amended senior credit facility will be sufficient to meet anticipated requirements for working capital, interest payments, capital expenditures and scheduled principal payments under our debt obligations through the end of calendar year 2002.

Quantitative and Qualitative Disclosure of Market Risks

~~Interest~~Our onexposure ~~amounts borrowed under our credit facility discussed above is subject~~ to ~~adjustment determined based on certain levels of~~ financial ~~performance.~~market ~~For~~risks ~~LIBOR~~is ~~borrowings,~~primarily the ~~applicable~~market ~~margin~~risk ~~added~~of tochanges ~~LIBOR~~in ~~can~~interest ~~range~~rates. ~~from~~Our ~~2.00%~~exposure to ~~3.25%~~market risk for ~~Term~~changes ~~A and~~in ~~revolving~~interest ~~loans~~rates ~~and~~relates isprimarily ~~equal~~ to ~~3.875%~~our ~~for~~variable rate ~~Term~~bank ~~B loans~~debt. ~~At any~~We ~~time,~~use aderivative ~~sharp~~financial ~~rise~~instruments insuch as interest ~~rates~~rate ~~could~~swaps ~~have~~to control a ~~material adverse~~portion ~~impact on our cost~~ of ~~working~~this ~~capital~~risk. ~~and interest~~Under ~~expense.~~these ~~For~~arrangements, ~~every~~a ~~one-half~~portion ~~percent~~of ~~rise in interest rates,~~ our variable ~~note~~rate ~~obligations held at June 30, 2000 interest~~indebtedness ~~expense~~is ~~would~~converted ~~increase~~to byfixed ~~$0.6 million annually.~~rates

28 ~~During 1999, we entered into one interest rate swap agreement,~~ ~~which is used to reduce the impact of interest rate changes on~~ net income. This agreement effectively converts, for a three-year period, $58.0 million of floating rate borrowings to fixed rate borrowings. We secured a fixed interest rate on this agreement of 6.6225%.

based on a notional principal amount. We do not use derivative financial instruments for trading purposes. During 1999, we entered into an interest rate swap agreement to mitigate the risk of changes in short-term Eurodollar interest rates associated with our variable rate bank debt. This interest rate protection was required under the terms of our senior credit facility with Bankers Trust Company.

Interest on amounts borrowed under our credit facility discussed above is subject to adjustment determined based on our financial performance. For LIBOR borrowings, the applicable margin added to LIBOR can range from 2.50% to 3.50% for Term A and revolving loans and can range from 3.875% to 4.125% for Term B loans. At any time, a sharp rise in interest rates could have a material adverse impact on our cost of working capital and interest expense. For every one-half percent rise in interest rates, our variable note obligations held at September 30, 2001 interest expense would increase by $0.6 million annually.

The interest rate swap agreement discussed above effectively converts, for a three-year period, approximately $58.0 million of floating rate borrowings to fixed rate borrowings. We secured a fixed interest rate on this agreement of 6.6225% plus the applicable margin.

We do not conduct business operations in foreign currencies and, as a result, are not generally subject to the exposures that arise from foreign exchange rate movements. However, occasionally we may purchase laboratory supplies or reagents from vendors who are located outside the United States. In such cases, we usually arrange to purchase the supplies or reagents through a U.S. distributor, so we would not be directly exposed to exchange rate risk.

~~Recent~~ Impact of New Accounting ~~Pronouncements~~Standards

In ~~June~~July ~~1998~~2001, the Financial Accounting Standards Board issued SFAS No. ~~133~~141, “~~Accounting~~Business ~~for~~Combinations” (“SFAS 141”) ~~Derivative~~and SFAS No. 142, ~~Instruments~~“Goodwill and ~~Hedging~~Other ~~Activities~~Intangible Assets,” (“SFAS 142”). ~~which~~SFAS 141 ~~establishes~~requires business ~~accounting~~combinations ~~and~~initiated ~~reporting~~after ~~standards~~July 1, 2001 to be accounted for ~~derivative~~using ~~instruments~~the purchase method of accounting, and broadens the criteria ~~hedging~~for ~~activities.~~recording intangible assets separate from goodwill. SFAS ~~133~~142 ~~requires~~addresses ~~that~~the anmethod ~~entity recognize~~of ~~all~~identifying ~~derivatives~~and asmeasuring goodwill ~~either~~and ~~assets~~certain orintangibles ~~liabilities~~acquired in ~~the~~a business ~~statement~~combination, ofeliminates ~~financial~~further ~~position~~amortization of goodwill, and requires ~~measure~~periodic ~~those~~evaluations ~~instruments~~of ~~at fair~~impairment ~~value~~of goodwill balances. ~~This~~Impairment ~~statement~~charges ~~was~~will ~~amended~~be byrecorded ~~SFAS 137~~in ~~which~~the periods in ~~defers~~which the ~~effective~~carrying ~~date~~value toof ~~all~~goodwill ~~fiscal~~is ~~quarters~~greater than its estimated fair value. The provisions of ~~fiscal~~SFAS 141 ~~years~~will be ~~beginning~~adopted ~~after~~for any business combination consummated after June 1530, ~~2000~~2001. ~~SFAS~~The ~~133~~provisions isof ~~effective~~SFAS 142, ~~for~~which ~~our~~apply to ~~first~~goodwill ~~quarter~~and inintangible ~~the~~assets, ~~fiscal~~will ~~year~~be ~~ending~~adopted ~~December~~by us on January 311, ~~2001 and~~2002. isThe ~~not~~adoption ~~expected~~of tothese ~~have~~accounting astandards is ~~material~~expected ~~effect~~to onreduce our ~~financial position~~amortization orof ~~results~~intangible ofassets commencing ~~operations~~January 1, 2002. ~~However,~~We ~~the~~are ~~ultimate~~currently ~~impact~~evaluating ~~will~~whether ~~depend~~the onnew ~~the~~criteria ~~derivative~~for ~~activity~~recording ~~that~~intangible weassets separate ~~have~~from atgoodwill ~~the~~will ~~date of~~require ~~adoption~~us ~~and~~to ~~thereafter~~reclassify any of our intangible assets.

In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 requires the use of a consistent accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired and extends the presentation of discontinued operations to include more disposal transactions. SFAS 144 is effective for all fiscal quarters for all fiscal years beginning after December 31, 2001. We do not believe that our adoption of SFAS 144 will have a material effect on our results of operations or financial position.

BUSINESS

Overview

We are a leading ~~national~~ provider of esoteric ~~laboratory~~ testing services. ~~Esoteric~~to ~~tests~~a ~~are~~wide range ~~clinical~~of ~~laboratory~~healthcare ~~tests~~professionals ~~that~~nationwide and are the largest ~~more~~provider ~~complex~~of esoteric and ~~typically~~routine ~~priced~~laboratory ~~higher~~testing ~~than~~services ~~routine~~in our ~~tests~~core geographic markets of metropolitan Washington, D.C. and Nevada. We operate a full-service ~~market~~laboratory ~~our~~in ~~esoteric~~each ~~testing~~of ~~services~~our tocore ~~hospitals~~geographic ~~and~~markets ~~independent~~24 hours a ~~clinical~~day, ~~laboratories~~365 days ~~nationwide~~a year through which we offer approximately 1,500 different tests. As of September 1530, ~~2000~~2001, we provided our services to ~~over~~approximately ~~380~~ 470 hospitals, ~~and 160~~150 independent clinical laboratories, in7,900 31physician ~~states.~~offices ~~Our two main~~and ~~laboratories~~14 ~~are~~managed ~~located~~care groups in ~~metropolitan~~40 ~~Washington, D~~states.~~C.,~~ ~~and Las Vegas, Nevada.~~ We are ~~the~~currently ~~leading~~performing on ~~provider~~average ofmore ~~comprehensive laboratory~~than ~~services~~430,000 intotal ~~each~~tests ofper ~~those markets~~week. We strengthen ~~our~~ our offering byand ~~providing~~foster ~~our~~long ~~clients~~term ~~advanced~~customer ~~information~~relationships ~~technology~~by providing ~~solutions,~~superior asservice ~~well~~and ~~as other~~ value-added laboratory services.

WeOur ~~believe~~clinical ~~that~~laboratory wetesting ~~are~~business ~~well~~in ~~positioned~~our tocore ~~serve~~geographic markets ~~our~~provides ~~target clients.~~us ~~Many~~with ~~hospitals~~steadily growing revenues and ~~independent~~strong cash ~~clinical~~flow, ~~laboratories~~while ~~do not~~our ~~perform~~nationwide esoteric ~~tests~~testing ~~because~~business provides ofsignificant ~~the~~opportunities ~~complexity~~for ~~and~~profitable ~~high~~growth. We ~~cost~~have ofgrown ~~performing~~our ~~these~~business ~~tests~~organically ~~internally.~~and ~~These~~through ~~organizations~~selected ~~choose~~acquisitions. usIn asOctober ~~their~~1999, ~~esoteric~~we ~~laboratory~~acquired ~~because~~APL weHealthcare ~~offer them~~Group, ~~superior~~Inc., ~~service~~or APL, ~~excellent~~the ~~quality~~leading ~~and~~laboratory ~~rapid~~services ~~turnaround~~provider ~~time~~in Nevada. In With ~~addition~~this acquisition, ~~unlike~~we ~~the~~acquired ~~laboratories~~a ~~that~~full ~~provide comprehensive~~service ~~services~~laboratory onfacility ain ~~national~~Las ~~basis~~Vegas, weNevada ~~generally~~that docomplements ~~not~~the geographic ~~compete~~reach ~~with~~of our Chantilly, Virginia facility and enhances our ~~clients~~leadership ~~for~~position ~~routine~~as ~~testing~~a ~~business~~nationwide inprovider ~~their~~of esoteric ~~local~~testing ~~markets~~services. We ~~believe~~Pro ~~that~~forma for the APL acquisition, we have ~~offer~~grown our ~~clients~~net ~~one~~revenue ofand ~~the~~Adjusted ~~most~~EBITDA ~~complete~~at compounded ~~esoteric~~annual ~~testing~~rates ~~service~~of ~~offerings~~15.9% ~~available~~and 19.3%, asrespectively ~~well~~between as1997 ~~access~~and 2000. Our net revenue increased to $221.5 million for the nine ~~latest~~months inended ~~innovative~~September 30, ~~testing~~2001 ~~technology~~from $196.3 million Wefor ~~obtain~~the ~~this access~~nine ~~through~~months ~~acquisition~~ended ~~and~~September 30, 2000, ~~licensure~~an increase of ~~new~~12.8%. ~~testing~~Our Adjusted EBITDA increased to ~~technologies,~~$28.0 million ~~which~~for ~~leverages~~the ~~external~~nine ~~research~~months inended ~~esoteric~~September 30, ~~testing~~2001 ~~and~~from ~~reduces~~$24.2 million ~~our~~for ~~development~~the ~~time~~nine ~~and~~months ~~costs~~ended September 30, 2000, an increase of 15.7%.

In ~~October~~our ~~1999,~~core wegeographic ~~acquired~~markets ~~APL,~~we are the leading provider of both esoteric and routine laboratory testing services. We attribute ~~provider~~our inleadership ~~Nevada.~~position ~~With~~to ~~this~~our ~~purchase,~~ability weto ~~acquired~~offer a ~~full~~ ~~service~~full-range ~~laboratory~~of ~~facility~~testing inservices, ~~Las~~our ~~Vegas~~excellent quality, ~~Nevada~~our ~~that complements~~rapid turn ~~the~~around ~~geographic~~time, ~~reach of~~ our ~~Chantilly,~~commitment ~~Virginia~~to ~~facility~~customer service and ~~enhances~~ our ability ~~position~~to asattract anew ~~nationwide~~customers. ~~provider~~These ofattributes ~~esoteric testing~~give ~~services.~~us Wethe ability ~~have~~to ~~been~~attract ~~successful~~new incustomers ~~attracting~~while ~~a wide~~retaining ~~range~~our existing ofcustomers, ~~clients~~as ~~for~~evidenced by our ~~esoteric~~98% ~~testing services, including~~client ~~Kaiser~~retention ~~Permanente,~~rate ~~Consorta~~from ~~Catholic~~January ~~Health~~1999 ~~Resource~~to ~~Partners,~~September 2001. Over ~~Health~~the ~~Trust~~past ~~Purchasing~~40 years, ~~Group~~we ~~and~~have ~~Massachusetts~~established ~~General~~a ~~Hospital.~~significant infrastructure Weand ~~are~~an ~~currently~~extensive ~~performing~~service ~~more than 330~~network,~~000~~ ~~total~~which ~~tests per~~includes ~~week.~~two ~~For~~full-service ~~the~~laboratories, ~~six~~four ~~months~~short ~~ended~~turn ~~June 30,~~around ~~2000~~time laboratories and ~~for~~51 ~~the~~patient centers. Our infrastructure enables ~~year~~us ~~ended~~to ~~December 31,~~efficiently ~~1999~~and oncost aeffectively ~~pro~~provide ~~forma~~a ~~basis,~~broad werange ~~had~~of ~~net~~testing ~~revenue~~services ofon ~~$129.9 million~~a ~~and~~regional ~~$225~~basis.~~6 million, respectively,~~ ~~and~~We ~~Adjusted~~also ~~EBITDA~~leverage ofthis infrastructure ~~$19.2 million~~to ~~and~~provide ~~$27.3~~ esoteric ~~million,~~testing ~~respectively~~services nationally.

Nationwide, many hospitals, physicians and independent clinical laboratories cannot or do not perform their own esoteric tests because of the complexity and high cost of performing these tests. These organizations choose to outsource their esoteric testing needs to providers like us who possess the specialized personnel and equipment necessary to perform these tests. We believe that our customers choose us because we offer them excellent quality and timely service. In addition, unlike many of our larger competitors, we generally do not compete with our customers for routine testing business in their local markets. We generated $129.2 million in net revenue from esoteric testing in the nine months ended September 30, 2001, an increase of 19.1% from the same period a year ago and achieved an estimated 22.5% compound annual growth rate in this area from September 30, 1999 through September 30, 2001 (pro forma for the APL transaction). We believe our strong scientific team, leading testing technology platform and comprehensive test offering have positioned us to successfully meet the anticipated future growth in demand for esoteric testing.

Industry

Reliance on laboratory testing for detection, diagnosis, evaluation, monitoring and treatment of diseases and other medical conditions creates significant market demand for ~~clinical~~ clinical laboratory testing services. InAccording ~~1998,~~to ~~over~~Lab ~~5.6 billion~~Industry ~~tests~~Strategic ~~were~~Outlook ~~performed~~2000, inpublished ~~the~~by ~~United States. According to industry~~Washington G-2 ~~sources~~Reports, ~~more~~in ~~than~~1998 ~~70%~~laboratories ofperformed ~~all~~over ~~health care decisions and spending~~5.6 billion ~~are~~tests ~~impacted~~in bythe ~~clinical~~United ~~laboratory test results~~States.

According to Washington G-2 Reports, the U.S. clinical laboratory industry generated $31.8 billion in revenues in 1999, which represented approximately 3% of total healthcare expenditures. We expect ~~growth in~~ clinical laboratory spending to continue to grow due to the following:


	•	general aging of the U.S. population;

	•	growth in new highly-specialized tests, including genetic testing;

	•	increasing testing for diagnosis and monitoring of infectious diseases, such as HIV and hepatitis C;

	•	increasing testing by employers for substance abuse;

	•	increasing outsourcing in the health care industry; and

	•	increasing awareness of patients as to the value of laboratory testing and an increasing willingness of patients to pay for screening and other tests that may not be covered by third-party payors.

30 Laboratory tests are provided by hospital-affiliated laboratories, physician-owned laboratories and independent clinical laboratories. The clinical laboratory testing market is highly fragmented with over 165,000 federally-regulated clinical laboratories, 8,900 of which were hospital-based clinical laboratories and 4,900 of which were independent clinical laboratories in 1998. Washington G-2 Reports estimates that in 1999, hospital-based laboratories generated 63% of all laboratory testing revenue, independent clinical laboratories generated 26% and physician-based laboratories generated the remaining 11%. As esoteric testing has increased in complexity, we believe that many health care providers have sought to outsource their esoteric testing needs to independent clinical laboratories such as ours. We believe hospitals and independent clinical laboratories will continue to outsource esoteric laboratory testing services because of the complexity and high cost of performing these tests internally. We also believe that hospitals will compete on an “outreach” basis with independent clinical laboratories for routine, physician-generated testing business in local markets. Providing these services allows hospitals to spread the fixed costs of their internal laboratory facilities across a broader revenue base.

We perform laboratory tests on body fluids such as blood and urine as well as on tissue and other samples, such as human cells. We categorize the tests that we perform as follows:

Esoteric Tests: Esoteric tests are specialized tests that physicians use to obtain information not provided by routine tests. These tests are performed less frequently than routine tests and require specialized equipment, highly-trained personnel and may have significant non-automated processes. In 1998, the esoteric testing market represented approximately $2.0 billion according to Washington G-2 Reports. We believe the esoteric testing market is growing rapidly, driven by general advances in medical technology and the accelerating pace of new genetic-based testing. Esoteric tests generally command a higher price, are more profitable and have a more attractive payor mix than routine tests. We believe that, due to the high degree of complexity and costs involved with esoteric testing, independent clinical laboratories, such as AML, perform the majority of these tests.

Toxicology Tests: Toxicology tests are targeted at the discovery and identification of chemical and drug substances present in the body’s metabolism. Employers are increasingly utilizing toxicology tests in attempting to lower their overall health care costs and improve their workplace environment

~~Laboratory~~by ~~tests~~maintaining ~~are~~a ~~provided by hospital-affiliated laboratories~~healthy, ~~physician-owned~~drug ~~laboratories~~free ~~and~~work ~~independent clinical laboratories~~force. ~~The~~According ~~clinical~~to Washington ~~laboratory~~G-2 ~~testing~~Reports, ~~market~~among ~~is highly~~firms ~~fragmented~~in ~~with~~the ~~over~~United ~~165~~States,~~000~~ approximately ~~federally-regulated~~70% ~~clinical laboratories,~~tested ~~8,900~~employees ofor ~~which~~job ~~are~~applicants ~~hospital-based~~for ~~clinical~~illegal ~~laboratories~~drug ~~and~~use ~~4,900~~in ~~of which are independent clinical laboratories~~1999. Washington G-2 Reports estimates ~~that in 1998, 63%~~the oftoxicology ~~all laboratory~~ testing ~~revenue~~market ~~was~~in ~~derived from hospital-based laboratories, 26% was derived from independent clinical laboratories and~~ the ~~remaining~~United ~~11%~~States was ~~derived from~~ ~~physician-based~~$750 million ~~laboratories~~in 1998. WeToxicology ~~believe~~tests ~~hospitals~~are ~~and independent~~often ~~clinical laboratories will continue to outsource~~classified ~~esoteric~~as ~~laboratory~~a ~~testing~~subcategory ~~services because~~ of ~~the~~esoteric ~~complexity and high cost of performing these~~ tests ~~internally~~. ~~We also~~ believe that hospitals will compete on an “outreach” basis with independent clinical laboratories for routine, physician-generated testing business in local markets. Providing these services allows hospitals to spread the fixed costs of their internal laboratory facilities across a broader revenue base.

WeRoutine ~~perform~~Tests: ~~laboratory~~Physicians use routine tests onin ~~body~~general patient ~~fluids~~care ~~such~~to asestablish ~~blood~~or support a diagnosis and to monitor ~~urine~~disease. asThese ~~well~~tests typically measure the functionality of organs such as onthe ~~tissue~~kidney, heart, liver and ~~other~~thyroid. ~~samples~~Routine tests are conducted 24 hours-a-day, ~~such~~365 asdays-a-year, ~~human~~with ~~cells~~results often provided electronically within 24 hours of testing. ~~The~~Among independent laboratory companies, routine tests are ~~that~~offered weor ~~perform~~conducted ~~can~~through betheir ~~categorized~~respective aspatient centers, ~~follows:~~primary laboratories and short turn around time laboratories. Patient centers are facilities at which specimens are collected and are typically in close proximity to medical professional buildings or complexes.

Esoteric Tests: Esoteric tests are specialized tests which are used by physicians to obtain information not provided by routine tests. These tests are performed less frequently than routine tests and require specialized equipment, highly-trained personnel and may have significant non-automated processes. In 1998, the esoteric testing market represented approximately $2.0 billion. We believe the esoteric testing market is growing rapidly, driven by general advances in medical technology and the accelerating pace of new genetic-based testing. Esoteric tests generally command a higher price, are more profitable and have a more attractive payor mix than routine tests. We believe that, due to the high degree of complexity and costs involved with esoteric testing, the majority of these tests are performed by independent clinical laboratories, such as AML.

Toxicology Tests: Toxicology tests are targeted at the discovery and identification of chemical and drug substances present in the body’s metabolism. Employers are increasingly utilizing toxicology tests in attempting to lower their overall health care costs and improve their workplace environment by maintaining a healthy, drug free work force. According to Washington G-2 Reports, among firms in the United States, approximately 70% test employees or job applicants for illegal drug use. The toxicology testing market in the United States has been estimated at $750 million per year. Toxicology tests are often classified as a subcategory of esoteric tests.

Routine Tests: Routine tests are used by physicians in general patient care to establish or support a diagnosis and to monitor disease. These tests typically measure the functionality of organs such as the kidney, heart, liver and thyroid. Routine tests are conducted 24 hours-a-day, 365 days-a-year, with results often provided electronically within 24 hours of testing. Among independent laboratory companies, routine tests are offered or conducted through their respective patient service centers, primary laboratories and short turnaround time, or STAT, laboratories. Patient service centers are facilities at which specimens are collected and are typically in close proximity to medical professional buildings or complexes.

Our Business Strategy

The principal elements of our business strategy include:

• Expanding Our Position as a Leading National Provider of Esoteric Clinical Laboratory Testing Services. We will continue to expand nationally by providing esoteric testing services to our ~~clients~~customers as a service offering that complements their routine testing operations. We believe that as tests become more complex and costly, hospitals and independent clinical laboratories will refer more of these tests to esoteric testing laboratories, such as ours. Hospitals and independent clinical laboratories find our esoteric testing services attractive in part because we do not compete with them for routine testing services outside of our core markets of Nevada and metropolitan Washington, D.C. With significant operations in both the eastern and western United States, we offer hospitals and independent clinical laboratories throughout the nation access to esoteric testing technology and expertise that supports and enhances their clinical laboratory offerings and objectives. • Maintaining and Expanding Our Comprehensive Offering of Laboratory Tests. We will continue to acquire and license new tests to satisfy our customers’ needs. We believe this approach allows us to leverage external research and reduce our development time and costs while providing the latest in technological innovation. We will continue to maintain strong relationships with developers of new medical testing technologies to remain a leading provider of esoteric testing services. Our operating history, market knowledge and strong professional relationships have consistently enabled us to access and provide the latest in testing services. • Growing Our Leadership Position in Our Core Geographic Markets. We believe the attractive demographic characteristics and growth prospects of our core geographic markets, Nevada and metropolitan Washington, D.C., provide an excellent opportunity for us to continue to expand and grow our esoteric and routine operations. We also believe that our strong regional presence and reputation for superior quality and customer service position us as the preferred provider of laboratory testing services for hospitals, managed care organizations and physician offices in these markets. In response to our customers’ needs, we have developed an extensive infrastructure and provide a full spectrum of testing services supported by a network of rapid collection, processing and distribution services. Our extensive infrastructure and strong financial performance in our core geographic markets provide us with a leverageable and scalable platform for offering esoteric testing services on a national basis. While we believe we have a strong base to provide our services nationally, we may opportunistically expand, including through acquisitions, our full-service testing offering in strategic locations throughout the United States.

31 • Enhancing Our Competitive Position by Providing the Highest Levels of Customer Service.

~~Table~~ We seek to achieve the highest levels of ~~Contents~~customer satisfaction and foster long-term relationships through superior customer service. Members of our executive management team

services outside of our core markets of Nevada and metropolitan Washington, D.C. With significant operations in both the eastern and western United States, we offer hospitals and independent clinical laboratories throughout the nation access to esoteric testing technology and expertise that supports and enhances their clinical laboratory offerings and objectives. • Maintaining Our Comprehensive Offering of Esoteric Tests. We will continue to acquire and license new esoteric tests to satisfy our clients’ needs. We believe this approach allows us to leverage external research and reduce our development time and costs while providing the latest in technological innovation. We will continue to maintain strong relationships with developers of new medical testing technologies to remain a leading provider of esoteric testing services. Our operating history, market knowledge and strong professional relationships have consistently enabled us to access and provide newly-created esoteric tests expeditiously. • Growing Our Leadership Position in Our Core Geographic Markets. We believe the attractive demographic characteristics and growth prospects of our core geographic markets, Nevada and metropolitan Washington, D.C., provide an excellent opportunity for us to continue to expand and grow our esoteric and routine operations. We also believe that our strong regional presence and reputation for superior quality and client service position us as the preferred provider of laboratory testing services for hospitals, independent clinical laboratories and physician laboratories in these markets. In response to our clients’ needs, we have developed an extensive infrastructure and provide a full spectrum of testing services supported by a network of rapid collection, processing and distribution services. Our extensive infrastructure and strong financial performance in our core geographic markets provide us with a platform for offering esoteric testing services on a national basis. We may opportunistically expand our full-service testing offering in strategic locations throughout the United States. • Enhancing Our Competitive Position by Providing the Highest Levels of Client Service. We seek to achieve the highest levels of client satisfaction and foster long-term relationships through superior customer service. Members of our executive management team begin each day with a meeting to address specific client service issues. We have a comprehensive quality assurance program which ensures that laboratory specimens are properly collected and tested and that client and patient information is timely and properly recorded, billed and filed. Our sales and operations teams are trained to identify, respond to and resolve all client service issues in a time efficient and satisfactory manner. We constantly monitor, assess and strive to improve turnaround time, process workflow and overall client satisfaction. We utilize external providers to perform proficiency testing on, and confirm accuracy of, laboratory results. We believe we have a reputation as one of the highest quality providers of clinical laboratory services in the markets in which we operate. We believe our strong client service has contributed to our 99% client retention rate over the period from January 1999 to June 2000. • Strengthening Customer Relationships with Value-Added Services. We will continue to leverage our long history of clinical laboratory experience and expertise to develop and strengthen the community outreach efforts of our clients. We have developed innovative services that address the evolving needs of our hospital, physician and independent clinical laboratory clients. Our value-added services enable our clients to more effectively manage certain laboratory services while outsourcing other services to us. We believe that offering these value-added services to our clients creates a long-term relationship, providing us with a sustainable competitive advantage.

begin each day with a meeting to address specific customer service issues. We have a comprehensive quality assurance program which ensures that laboratory specimens are properly collected and tested and that customer and patient information is timely and properly recorded, billed and filed. We train our sales and operations teams to identify, respond to and resolve all customer service issues in a time efficient and satisfactory manner. We constantly monitor, assess and strive to improve turn around time, process workflow and overall customer satisfaction. We utilize external providers to perform proficiency testing on, and confirm accuracy of, laboratory results. We believe we have a reputation as one of the highest quality providers of clinical laboratory services in the markets in which we operate. We believe our strong customer service focus has contributed to our 98% customer retention rate over the period from January 1999 to September 2001.

•

Strengthening Customer Relationships with Value-Added Services. We have developed innovative services that address the evolving needs of our hospital, physician and independent clinical laboratory customers. The value-added services we provide, including information technology, medical directorships and ancillary support services, enable our customers to more effectively manage some laboratory services while outsourcing other services to us. In addition, we draw upon our experience in the routine testing market to assist our customers in improving the effectiveness of their “outreach” businesses. We believe that offering these value-added services to our customers strengthens our long-term relationships with them, providing us with a sustainable competitive advantage.

Our Services

The following table depicts the various services we offer:

Testing Category Scientific Focus Selected Examples Selected ~~Client~~Customer Relationships Esoteric Endocrinology Genetics Immunology Immunoperoxidase Microbiology Molecular Biology Oncology Serology Special Chemistry Clinical Toxicology HIV Genotyping Polymerase Chain Reaction Tuberculosis Blood Cultures Bone Marrow Karotyping Phenotyping Prognostic HIV DNA Sequencing Blood Leads ~~Kaiser Permanente~~ Whitman Walker Clinic Georgetown University Hospital Massachusetts General Hospital Universal Health Services Toxicology Forensic Drug Testing (Hair and Urine) Blood Alcohol USU.S. Postal Service US Airways Starwood Resorts Frito Lay Publix Supermarkets Routine Hematology Cytology Histology Automated Chemistry Bacteriology Complete Blood Count Routine Health Screens Cholesterol Tests Electrolytes Pregnancy and Prenatal Pap Smears Glucose Monitoring Sierra Health Aetna USU.S. Healthcare Individual physician practices

Esoteric Testing. We perform anapproximately ~~average of 123~~164,000 esoteric tests per week on average. The nature of these tests requires a high level of accuracy, quick ~~turnaround~~turn around time and ~~substantial~~ substantial human involvement. Because it is not cost effective for most laboratories to perform esoteric tests in-house, they ~~generally~~ generally refer many esoteric tests to outside testing laboratories.

We offer our clients a broad array of esoteric tests, which we believe represent substantially all of the esoteric tests typically requested. We have relationships with niche laboratories that perform the small number of tests that we do not perform internally. We acquire and license new esoteric ~~tests~~ tests created by others to leverage external research and reduce ~~our~~ our development time and costs while providing the latest ~~testing~~ testing technology to our ~~clients~~customers.

We currently offer a wide range of genetic tests, which are tests that are based on DNA and RNA. We believe genetic testing is a substantial area of growth for us because recent scientific advances have made it possible to use esoteric testing to identify genetic characteristics of many diseases. As science expands our understanding of the human genome, we believe that genetic testing will increase in importance.

We use complex testing technologies, such as Branch DNA and polymerase chain reaction, ~~or PCR~~testing, ~~testing~~ to directly evaluate ~~genetic~~ genetic material. These testing technologies provide earlier and ~~more~~ more precise detection of disease and predisposition to disease ~~than~~ than historically has been available. InWe ~~August of this year, we~~ became the first national laboratory to offer Roche’s ~~new PCR~~polymerase ~~test~~chain reaction test for the sexually ~~transmitted~~

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transmitted diseases chlamydia and gonorrhea. This highly ~~specialized~~ specialized esoteric test has been scientifically proven to be a ~~more~~ more sensitive test than traditional methodologies.

For the year ended December 31, ~~1999~~2000 and the ~~six~~nine months ended ~~June~~September 30, ~~2000~~2001, esoteric testing represented 47 54.09% and 52 57.93% of our net revenue, respectively.

Toxicology Testing. We perform anapproximately ~~average of 43~~42,~~500~~000 forensic toxicology tests per week on average. Forensic toxicology requires complex procedures and government licensure, which we have both at our Las Vegas, Nevada and Chantilly, Virginia laboratories. Our toxicology customers ~~are~~include large employers and government organizations who test their employees for drugs of abuse, as well as hospitals and independent laboratories who choose not to do these tests.

Our forensic toxicology department screens urine and hair specimens for the presence of drugs. Specimens are submitted to us by customers needing to comply with company, state or federal government workplace drug testing programs. Toxicology testing can occur on a pre-employment, random, for cause, return-to-duty or post-accident basis. Hair testing can often detect drugs used by an individual in the last 60 to 90 days, whereas conventional urine drug testing typically only detects drug use in the last few days.

WeIn ~~have~~April 2000, ~~made~~the ~~significant~~FDA ~~proprietary~~issued ~~advances~~a inrule (effective June 8, 2001) governing the use ofin ~~hair~~non-medical settings of ~~testing~~test ~~for~~sample ~~drug~~collection ~~use,~~systems ~~which~~for ~~have~~drugs ~~enabled~~of ~~enhanced~~abuse ~~detection~~testing, ofsuch ~~drug~~as ~~users~~our hair testing product. WeUnder ~~recently~~the rule, unless the collection system has received aFDA ~~patent~~approval, ~~related~~the tosample ~~our~~may ~~hair~~only ~~testing~~be ~~product~~tested ~~and,~~ in ~~accordance~~a ~~with~~laboratory (1) using a ~~final~~test ~~rule~~approved, cleared, ~~published~~or otherwise recognized by the FDA inas ~~April~~accurate and reliable; and (2) ~~2000,~~that weis ~~will~~recognized beas ~~seeking~~having adequate capability to ~~obtain~~perform ~~FDA approval~~screening ofand ~~that~~confirmatory ~~product~~tests. ~~Our~~We have filed a 510(k) application seeking FDA approval for hair testing for ~~product~~a ~~shortens~~substance ~~the time~~of ~~needed~~abuse. toThe ~~perform~~Company ais ~~hair~~confident ~~test~~that it has the capability to aperform ~~single~~the ~~day~~screening and confirmatory tests.

For the year ended December 31, ~~1999~~2000 and ~~six~~nine months ended ~~June~~September 30, ~~2000~~2001, toxicology testing represented 107.18% and 106.37% of our net revenue, respectively.

Routine Testing. We perform anapproximately ~~average of 164~~228,000 routine tests per week on average. Routine clinical laboratory tests measure various important bodily health parameters such as the function of the kidneys, heart, liver, thyroid and other organs. Commonly ordered tests include:

• blood chemistry tests; • complete blood count, ~~or CBC~~tests; • pap smears; • HIV screening tests; • urinalyses; and • pregnancy tests.

We perform routine testing through our primary and ~~STAT~~short turn around time laboratories. We also perform routine testing in hospitals where we have on-site laboratories. ~~Many~~We ~~test~~use ~~results are delivered~~electronic ~~electronically~~delivery to ~~our~~transmit ~~customers,~~many ~~which~~test ~~include~~results ~~managed~~to ~~care organizations~~our ~~and individual physician practices~~customers.

For the year ended December 31, ~~1999~~2000 and the ~~six~~nine months ended ~~June~~September 30, ~~2000~~2001, routine testing represented 4237.93% ~~and~~ and 36.80% of our net revenue, respectively.

Value-Added Services. As part of our comprehensive ~~service~~ service offering, we ~~provide~~offer value-added services designed to ~~support~~help our customers’ ~~laboratory~~develop ~~businesses~~ and ~~enhance~~strengthen ~~our relationship~~their ~~with~~community ~~these customers~~outreach services. We draw on our expertise in the clinical laboratory testing market to provide the following value-added services to our customers:

	•	Information Technology Services. Our information technology capabilities enable online connectivity between us and our clients.
	•	Medical Directorships. We provide medical directors for 37 of our clients’ laboratories.


	•	Information Technology Services. Our information technology capabilities enable online connectivity between us and our clients.

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• ~~Test~~Medical ~~Management~~Directorships. We ~~examine~~provide ~~our~~medical ~~client’s~~directors ~~testing~~for ~~menu~~44 ~~and~~of ~~services~~our ~~and~~clients’ ~~recommend strategies to reduce overall laboratory costs, while optimizing laboratory quality and turnaround time~~laboratories.

• Test Management. We examine our client’s testing menu and services and recommend strategies to reduce overall laboratory costs, while optimizing laboratory quality and turn around time. • Sales Support. Our sales force accompanies clients’ representatives to promote our esoteric laboratory testing services as the client’s reference laboratory. • Ancillary Services. We assist our clients in ancillary services, including courier services, information technology and laboratory technical expert consultation. • On-Site Laboratories. Some hospitals wish to reduce their involvement in the day-to-day operation of their in-house laboratories. We sometimes enter into agreements with our clients under which we establish and license, in our name, an on-site laboratory, renting space from the client as necessary. • Phlebotomy Services. In response to a request by a client, we will work with our client to provide phlebotomy services, which is the process for collecting a blood specimen, in accord with relevant state and federal law.

Customers

We provide testing services to a broad range of health care providers including hospitals, independent clinical laboratories, employers, managed care organizations, physicians and physician practice groups. No single customer or affiliated group of customers accounted for more than 76.0% of our total net ~~revenues~~ revenues for the ~~six~~nine months ended ~~June~~September 30, ~~2000~~2001. Our strong client service focus has contributed to a 9998% client retention rate from January 1999 to ~~June~~September ~~2000~~2001.

Our principal customers include:

Hospitals. We provide esoteric testing and value-added services to over ~~380~~470 hospitals throughout the United States. We believe that we are one of the industry leaders in servicing hospitals’ esoteric laboratory testing needs. Hospitals are competing for routine testing businesses in order to spread the fixed costs of their internal laboratory facilities across a broader revenue base. Our ability to assist hospitals in expanding their routine testing businesses as permitted by applicable law helps position us as their preferred provider for esoteric testing services.

Our clients in the hospital market include individual hospitals, hospital networks and hospitals belonging to ~~GPOs~~group purchasing organizations. We ~~recently were~~are ~~named~~ a preferred provider in contracts with two large ~~GPOs~~group purchasing organizations, Health Trust Purchasing Group and Consorta Catholic Health Resource Partners, which together have over 600 hospitals as participating members. Our individual hospital clients include Georgetown University Hospital and Massachusetts General Hospital; and our hospital network clients include Central Pennsylvania Alliance of Laboratories and Inova Health System.

Hospitals generally maintain on-site laboratories to perform routine testing and outsource less frequently needed and ~~esoteric~~ esoteric procedures to laboratories like ~~AML~~us. Many hospitals compete with independent laboratories by offering testing services to community physicians via the hospital’s own laboratory. As a national esoteric laboratory services provider, we provide our hospital customers with services that complement their routine testing operations, and unlike other comprehensive ~~national~~ national laboratory service providers, other than in our core ~~geographic~~ geographic markets, we do not compete with those hospitals for ~~routine~~ routine testing business in their local markets.

Independent Clinical Laboratories. We provide esoteric testing services to local and regional independent laboratories that do not have the breadth of our esoteric testing capabilities. The services ~~we perform for independent laboratory~~ ~~clients are similar to the esoteric testing services we perform~~ ~~for hospital clients. We have over 160 independent clinical reference laboratories as clients, including MDS, PathLab and Dynacare.~~

36 ~~Employers and Other Institutions. We believe that we are~~ ~~one of the leaders in the clinical laboratory industry in providing testing to employers for illegal drug use. We believe that the employer~~

~~market~~we isperform ~~a large, growing market~~ for independent laboratory ~~testing~~clients ~~as companies~~are ~~and~~similar ~~governmental~~to ~~agencies increase their pre-employment~~the esoteric ~~drug~~testing ~~screening~~services ~~programs~~we toperform ~~ensure~~for ~~that~~hospital ~~their work environments are safe and drug-free~~clients. ~~All of our 4,730 employer and other~~We ~~institutional~~have ~~customers~~148 ~~are~~independent ~~charged~~clinical onreference alaboratories ~~fee-for-service~~as ~~basis~~clients. ~~These customers include US Airways, United States Postal Service and Publix Supermarkets.~~

~~Managed~~Employers ~~Care~~and ~~Organizations~~Other Institutions. InWe ~~our~~believe ~~core~~that ~~geographic markets,~~ we ~~service~~are one of the ~~managed~~leaders ~~care~~in ~~needs~~the ofclinical ~~our~~laboratory ~~physician clients.~~industry ~~Managed care organizations~~ in providing ~~these~~testing ~~markets~~to ~~contract with~~employers usfor ~~because~~drugs of ~~our~~abuse. ~~share~~We ofbelieve that the ~~physician~~employer market ~~and~~is ~~our extensive~~a ~~service~~large, ~~network.~~growing Wemarket ~~also~~for laboratory ~~service~~testing ~~the~~as ~~esoteric~~companies ~~testing needs~~and ofgovernmental ~~managed~~agencies increase ~~care~~their ~~organizations~~pre-employment ~~such~~drug asscreening ~~Kaiser~~programs ~~Permanente,~~to ensure ~~which~~that ~~have~~ their ~~own~~work ~~routine~~environments ~~testing~~are ~~laboratories~~safe ~~but~~and ~~outsource esoteric~~drug-free. ~~testing~~All toof ~~us.~~our 5,700 Weemployer ~~have~~and ~~capitated~~other ~~contracts,~~institutional ~~which provide~~customers ~~for~~are ~~billing~~charged on a ~~fixed-~~fee-for-service basis,. ~~with~~These 13customers ~~managed~~include ~~care~~US Airways, ~~organizations~~United States Postal Service and Publix Supermarkets.

~~Physicians~~Managed ~~and~~Care ~~Physician Groups~~Organizations. WeIn ~~provide~~our ~~esoteric testing~~core ~~services to physicians and physician groups on a national~~geographic markets, ~~basis.~~we ~~We also~~ service the ~~routine~~managed ~~testing~~care needs of ~~these~~our physician customers. inManaged ~~our~~care ~~core~~organizations ~~geographic~~in these markets. ~~Many physicians are~~contract ~~required~~with tous ~~refer~~because ~~tests~~of toour ashare ~~specific~~of ~~laboratory.~~the Inphysician ~~addition~~market toand our ~~capturing~~extensive aservice ~~share~~network. ofWe ~~that~~also ~~business,~~service wethe ~~believe~~esoteric ~~our reputation as~~testing aneeds ~~premier provider~~ of ~~testing~~managed ~~services~~care ~~has~~organizations, ~~enabled~~which ushave totheir ~~capture~~own ~~many~~routine ~~physicians’~~testing orlaboratories ~~physician~~but ~~groups’~~outsource ~~other~~esoteric testing to ~~business~~us. ~~Our~~We ~~physician~~have ~~and~~capitated ~~physician~~contracts, ~~group~~which ~~clients~~provide ~~are~~for ~~billed~~billing on a ~~fee~~ fixed-~~for-service~~fee basis, with 14 managed care organizations.

Physicians and Physician Groups. We provide esoteric testing services to physicians and physician groups on a national basis. We also service the routine testing needs of these customers in our core geographic markets. As a result of managed care contracts, many physicians are required to refer tests to a specific laboratory. In addition to obtaining a share of that business, we believe our reputation as a premier provider of testing services has allowed us to receive many physicians’ or physician groups’ other testing business. Where allowed by federal and state laws, we bill our physician and physician group clients on a fee-for-service basis.

Payors

We bill the majority of our testing services on a fee-for-service basis. If the service is a physician-ordered test, the payor may be the physician, the patient or a third party who pays the bill for the patient, such as an insurance company, Medicare or Medicaid. Fees are billed to hospitals, independent clinical laboratories and physicians based on a negotiated fee schedule. Medicare and Medicaid reimbursements are based on fee schedules set by governmental authorities.

Over the past ~~few~~several years, billing on a capitated basis has ~~become~~ become a larger segment of the industry’s revenue. We have selectively entered into capitated agreements and we received only approximately 2.5% of our net revenue for the ~~six~~nine months ~~ended~~ ended ~~June~~September 30, ~~2000~~2001 from capitated arrangements. The ~~following~~ following table shows current estimates of the breakdown of the ~~percentage~~ percentage of our net revenue for the ~~six~~nine months ended ~~June~~ September 30, ~~2000~~ 2001 applicable to each payor group:

	Six Months Ended
	Nine Months Ended
	June 30, 2000
	September 30, 2001
Health care providers and employers		5957.92%
Patient		12.48%
Other insurance		2123.02%
Medicare and Medicaid		6.78%
Total		100.0%

Sales and Marketing

Our sales and marketing strategy is designed to expand our esoteric services nationally and increase the penetration of our comprehensive service offering in Nevada and metropolitan Washington, D.C. The key elements of our strategy include:


	•	continuing our direct sales efforts targeted at hospitals and independent clinical laboratories;

	•	expanding our direct sales force with an increasing national focus; and

	•	increasing the technical expertise of our sales organization.

36 We believe our sales force is a key competitive advantage. Our sales force includes recognized laboratory industry veterans and is currently composed of 52 sales professionals and a field support staff of 21 individuals. Twenty-five of our salespeople focus on sales of esoteric testing and value-added services, while nine focus primarily on toxicology sales. The remaining 18 salespeople focus primarily on sales to physicians and physician groups in Nevada and metropolitan Washington, D.C. Many of our sales professionals are medical technologists or other health care professionals. We continue to expand our sales force with additional personnel and management staff to accommodate new market opportunities and to concentrate on increasing revenues and profitability from existing clients.

~~Table~~ We continually train and educate our sales force on the testing services offered by our company. We emphasize customer service and quality, including periodic comprehensive reviews of ~~Contents~~our performance and daily meetings among management and the sales professionals to review any issues or problems with our customers. We believe the success of our focus and efforts on customer service and quality is demonstrated by our strong customer retention, growth in new customers and high customer satisfaction.

We believe our sales force is a key competitive advantage. Our sales force includes recognized laboratory industry veterans and is currently comprised of 46 sales professionals and a support staff of 16 individuals. Twenty-four of our salespeople focus on sales of esoteric testing and value-added services, while seven focus primarily on toxicology sales. The remaining 15 salespeople focus primarily on sales to physicians and physician groups in Nevada and metropolitan Washington, D.C. Many of our sales professionals are medical technologists or other health care professionals. We continue to expand our sales force with additional personnel and management staff to accommodate new market opportunities and to concentrate on increasing revenues and profitability from existing clients.

We continually train and educate our sales force on the testing services offered by our company. We emphasize client service and quality, including periodic comprehensive reviews of our performance and daily meetings among management and the sales professionals to review any issues or problems with our clients. We believe the success of our focus and efforts on client service and quality is demonstrated by our strong client retention, growth in new clients and high customer satisfaction.

Information Technology

We provide a comprehensive offering of information technology solutions to our ~~clients~~customers that enables multi-level connectivity and system interface functionality. Our offering includes a wide range of flexible services, ranging from electronic data interchange to ~~internet~~Internet-based services. Drawing on our extensive operating history and diverse client base, we have created a state of the art information technology solution that is user friendly, cost effective and hardware neutral. Our service offering includes:

• automated test ordering; • results reporting; • legacy system interface and connectivity; and • a strategic relationship with LabPortal, Inc., which weprovides ~~believe~~our ~~will~~customers ~~provide~~with ~~our~~what ~~clients~~we ~~with~~believe to be the latest clinical laboratory web-based connectivity software products and services.

These information technology capabilities help us establish a long term relationship and provide value-added services ~~not typically~~to ~~offered in the laboratory industry~~our customers. We have made a significant investment in building a strong information technology infrastructure that allows our customers to efficiently and cost-effectively access and deliver data. We believe that these investments give us a competitive advantage, as customers find it easier to do business with us than with our competitors.

Privacy of Medical Information

The use and disclosure of patient medical information is subject to substantial regulation by federal and state governments. For example, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) calls for the establishment of national standards to facilitate the electronic exchange of health information and to maintain the security and privacy of health information. To date, the Department of Health and Human Services (“HHS”) has issued two rules mandating the use of new HIPAA Standards. The first rule requires the use of uniform standards for common healthcare transactions and establishes standards for the use of electronic signatures. The second rule relates to the privacy of individually identifiable health information. Pursuant to this privacy rule, covered entities, including clinical laboratories, may not use or disclose individually identifiable health information without patient authorization, except in certain circumstances, and then only to the minimum extent required. HHS has proposed a third rule proposing new security standards for health information, but this rule has not been finalized to date. We are required to be in compliance with the electronic transaction rules by October 2002 and the privacy rules by April 2003. In addition, stringent state laws and regulations exist regarding the use and disclosure of health information, many of which are not preempted by HIPAA.

Competition

The esoteric clinical laboratory business is highly competitive and is served by several national laboratories, as well as many niche and regional organizations. Our primary competitors ~~include~~ include large independent laboratories, such as Quest Diagnostics and Laboratory Corporation of America. We also compete with niche laboratories such as Specialty Laboratories, Impath and Athena Diagnostics, as well as laboratories affiliated with educational institutions such as Mayo Medical Laboratories and Associated Regional University Pathologists~~, in the esoteric testing market~~. In the toxicology testing business, we compete with Quest Diagnostics, Laboratory Corporation of America, Psychemedics and PharmChem. The routine laboratory testing business is highly fragmented and also very competitive.

We believe that health care providers consider the following factors, among others, in selecting a laboratory:

• accuracy, timeliness and consistency in reporting test results; • breadth of tests performed by the laboratory; • customer service capability; • reputation in the medical community; • logistics capability and geographic location; • information technology solutions; • approval of managed care organizations; and • pricing.

• reputation in the medical community;

• logistics capability and geographic location; • information technology solutions; • approval of managed care organizations; and • pricing.

We believe that we compete favorably in each of these areas.

Compliance Program

Compliance with government rules and regulations is a ~~significant~~ significant concern throughout the clinical laboratory industry because of evolving interpretations of regulations and the national debate over health care expenditures, and fraud and abuse. We have created a compliance program that we believe substantially follows the ~~United~~ ~~States~~HHS ~~Department of Health and Human Services’~~ Office of Inspector General’s Model Compliance Plan for Clinical Laboratories. We ~~are~~have substantially inintegrated the ~~process of integrating the~~ compliance programs of AML and APL. We believe that we comply, in all material respects, with applicable statutes and regulations.

Quality Assurance

Our goal is to provide the highest levels of ~~client satisfaction~~customer satisfaction and foster long-term relationships. To achieve that goal, we have implemented a comprehensive quality assurance program which ensures that laboratory specimens are properly collected and tested and ~~client~~customer and patient information is timely and properly recorded, billed and filed.

Internal Quality Control and Audits. Quality control samples are processed in parallel with the analysis of patient specimens. ~~The~~We then monitor the results of tests on quality control samples ~~are then monitored~~ to identify imprecision in the analytical processes. In addition, we administer an extensive internal program of “blind” proficiency testing, where quality control samples are processed through our systems as normal patient samples. We also perform internal process audits as part of our comprehensive quality assurance program.

External Proficiency Testing and Accreditation. Our laboratories participate in various externally-conducted blind sample quality surveillance programs. These programs are performed in connection with all other quality assurance procedures. They include proficiency testing programs administered by the College of American Pathologists, as well as many state agencies. Our main laboratories ~~are~~in ~~all~~Virginia and Nevada are accredited by the College of American Pathologists, an independent nongovernmental organization of board certified pathologists approved by the ~~United~~ ~~States~~U.S. ~~Health~~Centers ~~Care~~for ~~Financing~~Medicare ~~Administration~~and Medicaid Services (“CMS”) to inspect laboratories to determine compliance with the standards required by the Clinical Laboratory Improvement Amendments of 1988. ~~The~~(“CLIA”). The College of American Pathologists, ~~or CAP,~~ offers an accreditation program, which includes on-site inspections and participation in a proficiency testing program, to which laboratories may voluntarily subscribe.

Regulation of Clinical Laboratory Operations

The clinical laboratory industry is subject to significant federal and state regulation. Governmental authorities may impose fines or criminal penalties or take other enforcement actions, including revoking a clinical laboratory’s right to conduct business, in order to enforce laws and regulations.

~~CLIA~~Clinical Laboratory Improvement Amendments and State Law. Our laboratories and patient service centers are licensed and accredited by applicable federal and state agencies. ~~The Clinical Laboratory Improvement Amendments of~~CLIA regulates ~~1988, or CLIA, regulate~~ virtually all clinical laboratories by requiring that they be certified by or registered with the federal government to to ensure that laboratory testing services are uniformly accurate, reliable and timely. CLIA permits states to adopt ~~regulations~~ regulations that are more stringent than federal law. For example, state laws may require additional personnel qualifications, including licensure or certification, specific lab report formats, quality control, record maintenance or proficiency ~~billing~~testing. State laws may also prohibit mark-ups or multiple fee schedules by laboratories performing tests on specimens originating in the state. A number of states with some degree of jurisdiction over our activities, including New York, have in fact adopted regulations stricter than those prescribed by CLIA. The College of American Pathologists performs inspections under CLIA for CMS every two years. CLIA certification via the College of American Pathologists or other federally designated agencies and compliance with applicable state licensure requirements also are prerequisites for our continued participation in the Medicare and Medicaid programs.

38 Drug Testing. The Substance Abuse and Mental Health Services Administration regulates drug testing for public sector employees. The Substance Abuse and Mental Health Services Administration has established detailed performance and quality standards that laboratories must meet to perform drug testing on federal employees and contractors and other regulated entities. Our laboratories that perform such testing must be certified as meeting the Substance Abuse and Mental Health Services Administration standards. Our Substance Abuse and Mental Health Services Administration certified

~~disclosure,~~laboratories ~~quality~~are ~~control,~~subject ~~record~~to ~~maintenance or proficiency testing. State laws may also prohibit mark~~on-~~ups~~site orinspections ~~multiple~~twice ~~fee schedules~~a byyear ~~laboratories performing tests on specimens~~by ~~originating in~~ the ~~state.~~Substance AAbuse ~~number~~and ofMental ~~states~~Health ~~with~~Services ~~some degree of~~Administration jurisdiction over our activities, including New York, have in fact adopted regulations stricter than those set forth in CLIA. CAP performs inspections under CLIA for HCFA every two years. CLIA certification via CAP or other federally designated agencies and ~~compliance with applicable state licensure requirements also are prerequisites for our continued participation in~~ the ~~Medicare~~ ~~and~~College ~~Medicaid~~of ~~programs~~American Pathologists.

~~Drug~~Controlled ~~Testing~~Substances. The ~~Substance~~federal ~~Abuse~~Drug ~~and Mental Health~~Enforcement ~~Services~~ Administration, or(“DEA”) ~~SAMHSA,~~ regulates ~~drug~~access ~~testing~~to ~~for~~controlled ~~public~~substances ~~sector~~in ~~employees. SAMHSA has established detailed performance and quality standards that laboratories must meet to perform~~ drug ~~testing~~abuse ~~on federal employees and contractors and other regulated entities~~testing. Our laboratories that ~~perform such~~handle ~~testing~~controlled ~~must~~substances ~~be certified as meeting SAMHSA standards. Our SAMHSA certified laboratories~~ are ~~subject~~licensed ~~to on-site inspections twice a year~~ by ~~SAMHSA~~the ~~and CAP~~DEA.

~~Controlled~~Medical ~~Substances~~Waste and Radioactive Materials. ~~The~~Clinical laboratories are also subject to federal, ~~Drug~~state ~~Enforcement~~and local ~~Administration,~~regulations orrelating ~~DEA~~to the handling and disposal of medical waste, ~~regulates~~hazardous ~~access~~waste toand ~~controlled~~radioactive ~~substances~~materials. We use licensed inoutside ~~drug~~suppliers ~~abuse~~for ~~testing~~such disposal. ~~Our~~We ~~laboratories~~believe that ~~handle controlled~~we ~~substances~~currently ~~are~~comply ~~licensed~~with byall laws in connection with the ~~DEA~~disposal of medical waste, hazardous waste and radioactive materials.

~~Medical~~Occupational ~~Waste~~Safety. The federal Occupational Safety and Health ~~Radioactive~~Administration ~~Materials.~~(“OSHA”) ~~Clinical~~has established ~~laboratories~~extensive ~~are~~requirements ~~also~~relating ~~subject~~specifically to ~~federal,~~workplace ~~state~~safety for ~~and~~health ~~local~~care employers. This includes laboratories whose ~~regulations~~workers ~~relating~~may be exposed to blood-borne or airborne viruses. In addition, the ~~handling~~Needlestick Safety and ~~disposal~~Prevention ofAct, ~~medical~~signed into ~~specimens,~~law ~~hazardous~~on ~~waste~~November 6, 2000, and ~~radioactive~~related ~~materials.~~regulations Wereleased by ~~use~~OSHA in January 2001, mandate that health care employers take ~~licensed~~certain ~~outside~~steps ~~suppliers~~to ~~for~~protect ~~such~~their ~~disposal~~employees from transmission of bloodborne pathogens through accidental needlesticks, including requiring employers to improve exposure control plans and recordkeeping. We believe that we ~~currently~~ ~~comply~~are ~~with~~in ~~all~~substantial ~~laws~~compliance with inOSHA ~~connection~~rules ~~with~~and ~~the~~regulations ~~disposal~~and of have ~~medical~~adopted ~~waste~~policies ~~and~~to meet ~~radioactive~~OSHA ~~materials~~requirements.

~~Occupational~~Specimen ~~Safety~~Transportation. ~~The~~Regulations ~~federal~~of ~~Occupational~~the ~~Safety~~Department ~~and~~of ~~Health Administration~~Transportation, orthe ~~OSHA,~~Federal ~~has~~Aviation ~~established~~Administration, ~~extensive requirements~~the ~~relating specifically to workplace safety for health~~Public Health ~~care~~Service ~~employers.~~and ~~This~~the ~~includes~~United ~~laboratories~~States ~~whose~~Postal ~~workers~~Service ~~may~~apply beto ~~exposed~~surface toand ~~blood-borne~~air ortransportation ~~airborne~~of ~~viruses~~laboratory specimens. We believe that we are in substantial compliance with ~~OSHA rules and regulations and~~such ~~have adopted policies to meet OSHA requirements~~regulations.

~~Specimen~~Blood ~~Transportation~~Testing. ~~Regulations~~The ofU.S. Food ~~the~~and ~~Department~~Drug ofAdministration ~~Transportation~~(“FDA”) regulates certain blood testing facilities. Our Chantilly, ~~the~~Virginia ~~Public~~facility ~~Health~~is ~~Service~~registered ~~and~~with the ~~United~~FDA ~~States~~as ~~Postal~~an ~~Service~~independent ~~apply~~blood toproduct ~~surface~~testing laboratory, and, ~~air~~as ~~transportation of~~a ~~laboratory~~result, ~~specimens.~~is Wesubject ~~believe~~to ~~that~~on-site weinspections ~~are~~by inthe ~~substantial compliance with such regulations~~FDA.

Genetic Testing. Genetic testing may raise legal issues related to the manner in which tests are developed or performed or the propriety of a test itself. Consequently, governmental entities may enact legislation or issue other guidance limiting or enhancing our ability to perform such tests. We cannot predict whether such regulation will occur or the extent to which it will affect our business.

Regulation of Reimbursement for Laboratory Services

Overview. The health care industry has been undergoing significant changes. Governmental payors, such as Medicare, ~~which~~ which principally serves patients aged 65 years and older, ~~and~~ and Medicaid, which principally services indigent patients, as ~~well~~ well as private insurers and large employers, have taken steps to to control the cost, utilization and delivery of health care services. We believe that our non-government reimbursed business may depend on continued participation in the Medicare and Medicaid programs, because many clients may want a single laboratory to perform all of their laboratory testing services, regardless of whether reimbursements are ultimately made by themselves, Medicare, Medicaid or other payors.

Billing and reimbursement for laboratory testing is subject to significant federal and state regulation. Penalties for violations of laws relating to billing federal ~~health~~and ~~care~~state health care programs and for violations of federal fraud and abuse laws include:

• exclusion or debarment from participation in Medicare/ Medicaid and other federal and state health care programs; • asset forfeitures; ~~• civil and criminal penalties and fines; and • loss of various licenses, certificates and authorizations necessary to operate some or all of our business.~~

3941

~~Reduced~~• ~~Reimbursements.~~civil In 1984, Congress established a Medicare fee schedule for laboratory services performed for patients covered under Part B of the Medicare program. In 1986, Congress imposed a ceiling (the national limitation amount) on the amount that would be paid under the Medicare fee schedule reimbursement methodology. Since then, Congress has periodically reduced previous ceilings on the national limitation amount. The Medicare national limitation amount was reduced in 1996 to 76% of the national limitation amount and incriminal ~~1998~~penalties to 74% of the national limitation amount. In addition, Congress also eliminated through 2002 the provision for annual fee schedule increases based on the consumer price index. The Clinton administration’s proposed budget for fiscal Year 2000 sought to reduce further the Medicare national limitation amount to 72%, to reduce laboratory payment updates by the Consumer Price Index, or CPI, minus one percent over the next five years, and to fines; ~~reduce laboratory payments by 30 percent for four common laboratory tests (HgbAlc, TSH, PSA~~ and ~~urine culture) where data show Medicare overpays compared to the private sector. We cannot predict whether Congress will implement the proposed reductions or any other reductions.~~

~~Laboratories~~• ~~must~~loss ~~bill the Medicare program directly and must accept the scheduled amount as payment in full for most tests performed on behalf~~ of ~~Medicare~~various ~~beneficiaries. In addition~~licenses, ~~state~~ certificates ~~Medicaid programs are prohibited from paying more (~~and inauthorizations ~~most instances,~~necessary ~~pay~~to ~~significantly~~operate ~~less)~~some ~~than~~or ~~Medicare.~~all ~~Major laboratories,~~of ~~including~~our ~~us, typically use two fee schedules:~~ business.

• Reduced ~~Fees~~Reimbursements. ~~charged~~In to1984, ~~physicians~~Congress established a Medicare fee schedule for laboratory services performed for patients covered under Part B of the Medicare program. In 1986, ~~hospitals~~Congress ~~and~~imposed ~~institutions~~a toceiling, which ais ~~laboratory~~also ~~supplies~~known ~~services~~as the national limitation amount, on athe ~~wholesale~~amount ~~basis~~that would be paid under the Medicare fee schedule reimbursement methodology. ~~These~~Since then, ~~are~~Congress ~~generally~~has ~~subject~~periodically toreduced ~~negotiation~~previous orceilings ~~discount~~on the national limitation amount. •The ~~Fees~~Medicare ~~charged~~national limitation amount was reduced in 1996 to ~~individual~~76% ~~patients~~of the national limitation amount and ~~third~~in ~~party~~1998 ~~payors,~~to ~~like~~74% ~~Medicare~~of ~~and~~the ~~Medicaid~~national limitation amount. Congress ~~These~~also ~~generally~~eliminated ~~require~~through ~~separate~~2002 ~~bills~~the provision for ~~each~~annual fee ~~requisition~~schedule increases based on the consumer price index. Effective January 1, 2001, however the limitation amount for new clinical laboratory tests, for which no limitation amount has previously been established, is 100% of the median of all the fee schedules established for that test, so long as the Secretary of the HHS determines that the test is a new test.

~~The~~Despite ~~fees~~these ~~established~~prior byenactments, ~~Medicare~~there ~~are~~have ~~typically~~been ~~lower~~a ~~than~~number ~~patient~~of recent ~~fees~~legislative ~~otherwise~~initiatives ~~charged~~aimed byat ~~us,~~restoring ~~but~~reimbursements to ~~are~~clinical ~~higher~~laboratories. ~~than~~In ~~our~~December ~~fees~~2000 Medicare began paying ~~actually~~for ~~charged~~biennial (as opposed to ~~many~~triennial) ~~clients~~pap smears. ~~During~~In ~~1992~~addition, the ~~Office~~Patient ofAccess ~~the Inspector~~to ~~General,~~Preventative orand ~~OIG~~Diagnostic Tests Act, currently ofpending ~~the~~in ~~Department~~Congress, ofwould ~~Health~~establish ~~and~~a ~~Human~~national fee ~~Services,~~schedule orpayment ~~HHS,~~for ~~issued~~laboratory ~~final~~test ~~regulations~~services ~~that~~and ~~prohibited~~lift the ~~charging~~freeze ~~Medicare~~on ~~fees~~fee ~~substantially~~increases ininstituted ~~excess~~by ofearlier ~~a provider’s usual charges~~legislation. ~~The~~We cannot ~~OIG~~predict, however, ~~declined~~whether toCongress will enact this ~~provide~~legislation or any ~~guidance~~other ~~concerning~~legislation ~~interpretation~~in ofthe ~~these~~future. ~~rules,~~We also ~~including~~cannot ~~whether~~assure orthat ~~not~~significant ~~discounts~~changes to ~~nongovernmental~~the ~~clients and~~Medicare reimbursement ~~payors~~system orfor ~~the~~clinical ~~dual-fee~~laboratory ~~structure~~services ~~might~~would benot have ~~inconsistent~~a ~~with these~~material ~~rules~~adverse effect on our business.

ALaboratories ~~proposed~~must ~~rule~~bill ~~released in September 1997 would have authorized~~ the ~~OIG to exclude from participation in the~~ Medicare program ~~providers,~~directly ~~including~~and ~~laboratories, that charge Medicare~~must ~~and~~accept ~~other~~the ~~federal~~scheduled ~~health~~amount ~~care~~as ~~programs~~payment ~~fees that are “substantially~~ in ~~excess~~full offor ~~. . .~~most ~~usual charges~~tests performed ~~. . .~~on tobehalf ~~any~~ of ~~[their]~~Medicare ~~customers, clients or patients~~beneficiaries.” ~~This~~In ~~proposal was withdrawn by the OIG in 1998. However~~addition, state ~~the~~Medicaid ~~1997~~programs ~~Balanced~~are ~~Budget~~prohibited ~~Act~~from ~~permits~~paying ~~HCFA to adjust reimbursement for some Part B services~~more, ~~including~~and ~~laboratory~~in most ~~services~~instances, ifpay ~~the~~significantly ~~fees are “inherently unreasonable.” In January 1998~~less, HCFA issued an interim final rule setting forth criteria to be used by HCFA in determining whether to exercise this power. Among the factors listed in the rule are whether the statutorily prescribed fees are “grossly higher or lower than ~~the payment made for the~~ Medicare. ~~. .~~ ~~services~~Major bylaboratories, ~~other~~including ~~purchasers~~us, intypically ~~the~~use ~~same~~two ~~locality.”~~fee ~~We cannot provide~~schedules: ~~any assurances to you that fees payable by Medicare could not be reduced as a result of the application of this rule.~~

~~HCFA~~• ~~recently~~Fees ~~issued~~charged ~~a contract~~ to aphysicians, ~~company~~hospitals toand ~~develop background~~institutions ~~data~~ to bewhich ~~used~~a inlaboratory ansupplies ~~inherent~~services ~~reasonableness~~on ~~review of~~a ~~Pap~~wholesale ~~Smears and 50 other high volume tests~~basis. ~~The~~These ~~background~~are ~~data~~ generally ~~will~~subject ~~be used by HCFA~~ to ~~determine~~negotiation ~~whether~~or ~~the~~discount ~~payments~~and ~~made by Medicare~~ are ~~grossly~~usually ~~deficient~~billed oron ~~grossly~~a ~~excessive~~monthly ~~for the tests to be studied~~basis. We• ~~cannot~~Fees ~~determine~~charged ~~the~~to ~~results~~individual ofpatients ~~this~~and ~~review~~third at party ~~this time. The Clinical Laboratory Management Association~~payors, ~~or CLMA,~~like a trade association representing the clinical laboratory industry, is also conducting its own industry-wide study of costs of 21 laboratory tests, including the four targeted in President Clinton’s fiscal year 2001 budget proposal for Medicare ~~payment~~ ~~reductions~~and ~~of 30%~~Medicaid. ~~The~~Generally, ~~CLMA~~fees ~~hopes~~charged to ~~make~~patients ~~the~~and ~~study~~third ~~an annual~~party ~~event~~payors soare ~~that~~billed ~~there~~on ~~will be~~ a ~~database~~daily ~~for test costs~~basis. We

40 The fees established by Medicare are typically lower than patient fees otherwise charged by us, but are higher than our fees actually charged to many clients. During 1992, the HHS Office of Inspector General issued final regulations that prohibited charging Medicare fees substantially in excess of a provider’s usual charges. The HHS Office of Inspector General, however, declined to provide any guidance concerning interpretation of these rules, including whether or not discounts to nongovernmental clients and payors or a dual-fee structure in the clinical laboratory context might be inconsistent with these rules. In addition, a proposed rule released in September 1997 that would have authorized the HHS Office of Inspector General to exclude from participation in the Medicare program providers, including laboratories, that charge Medicare and other federal and state health care programs fees that are “substantially in excess of . . . usual charges . . . to any of their customers, clients or patients” was subsequently withdrawn by the HHS Office of Inspector General. At this time, however, we cannot predict whether federal officials will adopt our interpretation of this “substantially in excess” rule or whether the interpretation they adopt, if any, could require changes to our fee structure that could have a material adverse effect on our revenue or results of operations.

The 1997 Balanced Budget Act also permits CMS to adjust reimbursement for some Part B services, including laboratory services, if the fees are “inherently unreasonable.” In January 1998,

~~cannot~~CMS ~~determine~~issued atan ~~this~~interim ~~time~~final ~~what~~rule setting forth criteria to be used by CMS in determining whether to exercise this power. Among the ~~outcome~~factors oflisted in the ~~study~~rule ~~will~~are whether the statutorily ~~be,~~prescribed orfees ~~how~~are ~~HCFA~~“grossly higher or ~~Congress~~lower ~~will~~than ~~respond~~the payment made for the . . . services by other purchasers in the same locality.” We cannot provide any assurances to ityou that fees payable by Medicare could not be reduced as a result of the application of this rule.

In ~~addition~~1999, inCMS ~~the~~conducted ~~1997~~an ~~Balanced~~inherent ~~Budget~~reasonableness ~~Act~~review ~~Congress~~of ~~directed~~pap ~~the~~smear ~~Institute~~and of50 ~~Medicine,~~other orhigh ~~IOM,~~volume totest ~~undertake~~payments ato ~~study~~determine ofif Medicare’s ~~current~~payments ~~payment~~were ~~system~~either ~~for~~grossly ~~clinical~~deficient ~~laboratory~~or grossly ~~services,~~excessive tofor ~~include~~the atests. CMS has not completed this review as a result of the ~~adequacy~~Balanced Budget Refinement Act of ~~the~~1999, ~~current~~which ~~methodology~~temporarily ~~and~~suspended ~~recommendations~~CMS’s ~~regarding~~authority ~~alternative~~to ~~payment~~conduct inherent ~~systems.~~reasonableness ~~The~~reviews ~~IOM~~of ~~study~~pap issmear ~~scheduled~~and toother betest ~~completed~~payments, and ~~released~~ inset ~~the~~a ~~Fall~~national limitation amount of not less than $14.60 for pap smears performed on or after January 1, 2000. We cannot predict ~~the~~if ~~study~~or when CMS’s authority to conduct inherent ~~recommendations~~reasonableness ~~regarding~~reviews ~~payment~~will ~~methodologies~~be restored, ornor ~~how~~can we predict whether Congress will alter the national limitation amount for ~~may~~pap ~~react~~smears toor other tests. The Clinical Laboratory Management Association, a trade association representing the ~~study’s~~clinical laboratory ~~findings~~industry, ~~and~~recently weconducted ~~cannot~~its ~~assure~~own ~~you~~industry-wide ~~that~~study ~~significant~~of ~~changes~~costs of 21 laboratory tests. The CLMA, however, was unable to draw any conclusions from the ~~Medicare~~data. ~~reimbursement~~We ~~system~~are ~~for~~therefore uncertain ~~clinical~~as ~~laboratory~~to ~~services~~whether ~~would~~the ~~not~~study will have aany ~~material~~effect ~~adverse~~on ~~effect~~Congressional or CMS decision making or on our business.

~~Reduced~~In ~~Utilization~~addition, ofin ~~Laboratory~~the ~~Testing.~~1997 InBalanced ~~recent years,~~Budget ~~HCFA~~Act ~~has~~Congress ~~taken~~directed the ~~several~~Institute ~~steps~~of Medicine to ~~reduce~~undertake ~~utilization~~a study of ~~laboratory~~Medicare’s ~~testing.~~current ~~Since~~payment ~~1995~~system for clinical laboratory services, ~~Medicare~~to ~~carriers~~include ~~have~~a ~~adopted~~review of the adequacy of the current ~~policies~~methodology ~~under~~and ~~which~~recommendations ~~they~~regarding doalternative ~~not~~payment systems. ~~pay~~The ~~for~~Institute ~~some~~of ~~commonly-ordered~~Medicine study was completed and ~~tests~~released ~~unless~~in ~~the~~Fall ~~ordering~~2000. ~~physician~~The ~~has~~study ~~provided~~concluded, anamong ~~appropriate~~other things, ~~diagnostic~~that ~~code~~(1) Medicare ~~supporting~~payments ~~the~~for ~~medical~~outpatient ~~necessity~~clinical laboratory ofservices ~~the~~should ~~test.~~be based on a single, rational, ~~Physicians~~national ~~are~~fee ~~required~~schedule; by(2) processes ~~law~~should tobe ~~provide~~put ~~diagnostic~~in ~~information~~place ~~when~~to ~~they~~refine ~~order~~and ~~tests~~periodically update the fee schedule for Medicare outpatient clinical laboratory services; and ~~Medicaid~~(3) more accurate, ~~patients~~open, and timely coding processes for new ~~which~~technologies, as well as tests ~~the~~and ~~laboratory~~services, isshould ~~required~~be sought. Some of these recommendations appear in the Patient Access to Preventative ~~provide~~and aDiagnostic ~~diagnosis~~Tests Act currently before Congress. ~~However~~We cannot predict whether Congress will enact this legislation, nor ~~there~~can iswe noassure ~~penalty~~you ~~prescribed~~that ~~for~~these ~~violations~~or ofother ~~this~~significant changes to ~~law~~the byMedicare ~~physicians~~reimbursement system for clinical laboratory services would not have a materially adverse effect on our business.

InReduced ~~March 1996,~~Utilization ~~HCFA~~of ~~eliminated~~Laboratory ~~its~~Testing. ~~prior~~In ~~policy under which~~recent ~~Medicare~~years, ~~paid~~CMS ~~for~~has ~~all~~taken ~~tests~~several ~~contained~~steps into anreduce ~~automated~~utilization ~~chemistry~~of ~~panel~~laboratory ~~when~~testing. atSince ~~least~~1995, ~~one~~Medicare ofcarriers ~~the~~have ~~tests in the panel is medically~~adopted ~~necessary.~~limited ~~HCFA~~coverage ~~indicated~~policies ~~that~~ under ~~the~~which ~~new~~they ~~policy,~~do ~~Medicare will~~not ~~only~~ pay for ~~those~~some commonly-ordered ~~individual~~ tests inunless athe ~~chemistry~~ordering ~~panel~~physician has ~~that~~provided ~~are~~an ~~medically~~appropriate ~~necessary.~~diagnostic ~~Later~~code insupporting ~~1996,~~ the ~~American Medical~~medical necessity ~~Association, or AMA, in conjunction with HCFA, designed four new panels~~ of ~~“clinically~~the ~~relevant” automated chemistry panels~~test. ~~Each~~Physicians ~~panel~~are ~~consists~~required ofby ~~between~~law 4to ~~and 12 tests. These four~~provide diagnostic ~~new~~information ~~panels~~when ~~replaced~~they ~~the~~order ~~previous automated chemistry test panels, consisting of 19 to 22~~ tests. ~~HCFA~~for ~~adopted~~Medicare ~~these panels~~and inMedicaid ~~early 1998. Since then~~patients, ~~Medicare~~for ~~carriers~~which ~~have~~tests ~~focused limited coverage application to~~ the ~~panel~~laboratory ~~level~~is ~~and~~required ~~not~~ to ~~the test~~ ~~component~~provide ~~level~~a diagnosis. However, wethere ~~cannot~~is ~~assure~~no ~~you~~penalty ~~that~~prescribed ~~Medicare~~for ~~carriers~~violations ~~will~~of ~~not~~this ~~focus~~law ~~future~~by ~~limited coverage application to the test component level, thereby further limiting our ability to obtain Medicare reimbursement for these profiles~~physicians.

WeIn ~~are~~March 1996, ~~generally~~CMS ~~permitted~~eliminated tothe ~~bill~~prior ~~patients~~policy ~~directly~~under ~~for some~~which ~~statutorily~~Medicare ~~excluded~~paid ~~laboratory~~for ~~services.~~all Wetests ~~are~~contained ~~also~~in ~~generally~~an automated chemistry ~~permitted~~panel towhen ~~bill~~at ~~patients~~least ~~for~~one ~~laboratory~~of the tests in the panel is medically necessary. CMS indicated that under the new policy, Medicare ~~does~~will ~~not~~only pay for ~~due~~those toindividual tests in a chemistry panel that are medically necessary. Later in 1996, the American Medical Association in conjunction with CMS, designed four new panels of “~~medical~~clinically ~~necessity~~relevant” automated chemistry ~~limitations,~~panels. ~~but~~Each ~~only~~panel ifconsists ~~the~~of ~~patient~~between ~~signs~~4 aand ~~properly~~12 ~~completed~~tests. These ~~Advance~~four ~~Beneficiary~~new ~~Notice~~panels replaced the previous automated chemistry test panels, orconsisting ~~ABN~~of ~~(such~~19 to 22 tests. ~~include~~CMS ~~limited~~adopted these panels ~~coverage~~in ~~tests~~early ~~for~~1998. ~~which~~Since anthen, ~~approved~~Medicare ~~diagnosis~~carriers ~~code~~have isfocused limited coverage application to the panel level and not ~~provided~~ byto the test ~~ordering~~component ~~physician)~~level. WeHowever, ~~often~~we ~~must~~cannot ~~rely~~assure onyou ~~our~~that ~~physician~~Medicare ~~customers~~carriers will not focus future limited coverage application to ~~obtain~~the ~~ABNs~~test ~~from~~component ~~their~~level, thereby further limiting our ability to obtain Medicare ~~patients~~reimbursement for these panels.

43 ~~Negotiated Rulemaking. On March 10, 2000, the Health~~ Care Financing Administration issued a proposed rule that would adopt national coverage and claims processing policies for clinical laboratory services. These proposals were the result of negotiated rulemaking mandated by Congress in the Balanced Budget Act of 1997 in response to concerns resulting from inconsistent Medicare carrier policies relating to medical necessity, documentation and recordkeeping requirements for clinical laboratory services. We have reviewed the proposed rule and do not believe it will have a significant impact on our business. However, we cannot provide any assurances that HCFA will not implement substantial changes in the final rule that could have a material adverse affect on us.

Regional Medicare Carriers. The 1997 Balanced Budget Act also directed HCFA to replace the current system of local Medicare carriers with no more than five regional lab carriers. To date, HCFA has delayed taking any substantive action on this mandate and has indicated a desire to have the regional lab carrier requirement repealed by Congress. We do not believe that implementation of this regional carrier concept is important to our success.

Competitive Bidding. The 1997 Balanced Budget Act requires HCFA to conduct and complete by 2002 five Medicare bidding demonstrations involving various types of medical services. HCFA is expected

toIn ~~include~~addition, afor ~~laboratory~~the ~~demonstration~~past ~~project~~several inyears aCongress ~~metropolitan~~has considered ~~statistical~~proposals ~~area~~that asbeneficiary ~~part~~cost ofsharing, ~~the~~namely ~~legislative~~a ~~mandate.~~20% ~~Competitive~~copayment, ~~bidding~~be ~~for~~applied ~~laboratory~~to ~~tests~~clinical islaboratory ~~still~~testing ~~under~~paid ~~review.~~for Ifby Medicare ~~competitive~~to ~~bidding~~reduce ~~were~~utilization ~~implemented~~and oncosts ato ~~regional~~the orMedicare ~~national~~program. In ~~basis~~addition ~~for~~to ~~laboratory~~decreased ~~testing,~~revenues itthat could ~~materially~~result ~~adversely~~from decreased ~~affect~~utilization, the ~~clinical~~costs ~~laboratory~~associated ~~industry~~with ~~and~~collecting ~~our~~these copayments ~~business~~could also further reduce the revenues we realize.

~~Future~~We ~~Legislation~~are generally permitted to bill patients directly for some statutorily excluded laboratory services. ~~Future~~We ~~changes~~are inalso ~~federal,~~generally permitted ~~state~~to ~~and~~bill patients for laboratory tests that Medicare ~~local~~does ~~statutes~~not ~~and~~pay ~~regulations~~for ~~(or~~due into “medical necessity” limitations, but only if the ~~interpretation~~patient ofsigns a properly completed ~~current~~Advance ~~regulations)~~Beneficiary ~~affecting~~Notice. ~~governmental~~Such ~~reimbursement~~tests ~~for~~include limited coverage ~~laboratory~~tests ~~testing~~for ~~could~~which ~~materially~~an ~~adversely~~approved ~~affect~~diagnosis uscode is not provided by the ordering physician. We often must rely on our physician ~~cannot~~customers ~~predict~~to obtain Advance Beneficiary Notices from their Medicare patients. CMS recently indicated, however, ~~whether~~that ~~and~~the clinical ~~what~~laboratory ~~type~~is ofultimately ~~legislation~~responsible orfor obtaining the ~~regulations~~Advance Beneficiary Notice because it is financially liable in the case of denial of the claim. We cannot predict if we will be able ~~enacted~~to ~~into~~obtain ~~law~~proper Advance Beneficiary Notices in every case, or if we will ultimately receive reimbursement directly from patients.

~~Fraud~~Negotiated ~~and~~Rulemaking. ~~Abuse~~On ~~Regulations.~~March 10, ~~The~~2000, ~~federal~~CMS ~~anti-kickback~~issued ~~statute~~a ~~broadly~~proposed ~~prohibits~~rule ~~laboratories~~that ~~from~~would ~~making~~adopt ~~payments~~national orcoverage and claims ~~furnishing~~processing ~~other~~policies ~~benefits~~for toclinical ~~influence~~laboratory services. These proposals were the ~~referral~~result of ~~tests~~negotiated rulemaking mandated by ~~billed~~Congress in the Balanced Budget Act of 1997 in response to concerns resulting from inconsistent Medicare, ~~Medicaid~~carrier orpolicies relating ~~other~~to ~~federal~~medical ~~health~~necessity, ~~care~~documentation and recordkeeping ~~programs.~~requirements ~~Enforcement~~for ofclinical ~~this~~laboratory ~~anti-kickback~~services. ~~prohibition~~We ~~has~~have reviewed ~~steadily~~the ~~increased~~proposed inrule ~~recent~~and ~~years~~do asnot ~~part~~believe ofit awill ~~broader~~have ~~effort~~a bysignificant impact ~~various~~on ~~federal~~our ~~enforcement~~business. ~~agencies~~However, ~~including~~we ~~the~~cannot ~~Federal~~provide any ~~Bureau~~assurances ofthat ~~Investigation~~CMS ~~and~~will not implement substantial changes in the ~~OIG,~~final torule ~~interpret~~that ~~liberally~~could ~~and enforce~~have ~~aggressively~~a ~~statutory~~material ~~fraud~~adverse ~~and~~effect ~~abuse~~on ~~provisions~~us.

~~According~~Regional toMedicare ~~public~~Carriers. ~~statements~~The by1997 ~~the~~Balanced ~~Department~~Budget ~~of Justice, or~~Act ~~DOJ,~~also ~~health~~directed ~~care~~CMS ~~fraud~~to ~~has~~replace ~~been~~the ~~elevated~~current tosystem ~~one~~ of ~~the highest~~local ~~priorities~~Medicare ofcarriers ~~the~~with ~~DOJ~~no ~~and~~more ~~substantial~~than ~~prosecutorial~~five ~~and~~regional ~~other~~lab ~~law~~carriers. To ~~enforcement~~date, ~~resources~~CMS ~~have~~has ~~been~~delayed ~~committed~~taking toany ~~investigating~~substantive action on this ~~health~~mandate ~~care~~and ~~provider~~has ~~fraud.~~indicated ~~The~~a ~~OIG~~desire ~~also~~to ishave ~~involved~~the inregional ~~such~~lab ~~investigations~~carrier ~~and~~requirement ~~has,~~repealed ~~according~~by toCongress. ~~recent~~We ~~public~~do ~~statements~~not ~~and~~believe that implementation ~~workplans,~~of ~~targeted~~this ~~certain~~regional ~~laboratory~~carrier ~~practices~~concept ~~for~~is ~~study,~~important to ~~investigation~~our ~~and prosecution~~success.

AsCompetitive ~~noted~~Bidding. ~~above,~~The ~~the~~1997 ~~penalties~~Balanced ~~for~~Budget ~~violation of these laws may~~Act ~~include~~requires ~~criminal~~CMS ~~and~~to ~~civil~~conduct ~~fines~~ and ~~penalties~~complete ~~and~~by ~~exclusion~~2002 ~~from~~five Medicare bidding ~~participation~~demonstrations ininvolving ~~federal~~various ~~programs.~~types ~~Many~~ of ~~the anti-fraud~~medical ~~statutes~~services. ~~and~~CMS ~~regulations,~~is ~~including~~expected ~~those relating~~ to ~~joint ventures~~include ~~and~~a ~~alliances,~~laboratory ~~are~~demonstration project ~~vague~~in ora ~~indefinite~~metropolitan ~~and~~statistical ~~have~~area ~~not~~as ~~been~~ part ~~interpreted~~of by the legislative ~~courts~~mandate. InCompetitive ~~addition,~~bidding ~~regulators~~for ~~have generally offered little guidance to the clinical~~ laboratory ~~industry.~~ ~~Despite~~tests ~~several requests from the clinical laboratory~~is ~~industry~~still ~~for~~under ~~clarification~~review. ofIf ~~the~~competitive ~~anti-fraud~~bidding ~~and~~were ~~abuse~~implemented ~~rules since~~on ~~1992, the OIG has issued only~~ a regional ~~few~~or ~~fraud~~national ~~alerts~~basis ~~and advisory~~for ~~opinions regarding~~ laboratory ~~practices. Although we believe we are in compliance with these laws~~testing, weit ~~cannot predict~~could ifmaterially ~~some~~adversely ofaffect the ~~fraud~~clinical ~~and~~laboratory ~~abuse~~industry ~~rules will be interpreted contrary~~and to our ~~practices~~business.

Future Legislation. Future changes in federal, state and local statutes and regulations, or in the interpretation of current regulations, affecting governmental reimbursement for laboratory testing could materially adversely affect us. We cannot predict, however, whether and what type of legislation or regulations will be enacted into law.

Fraud and Abuse Regulations. The federal anti-kickback statute broadly prohibits laboratories from making payments or furnishing other benefits to induce or reward the referral of tests billed to Medicare, Medicaid or other federal and state health care programs. Enforcement of this anti-kickback prohibition has steadily increased in recent years as part of a broader effort by various federal enforcement agencies, including the Department of Justice and the HHS Office of Inspector General, to interpret liberally and enforce aggressively statutory fraud and abuse provisions.

According to public statements issued prior to September 11, 2001, the Department of Justice has elevated health care fraud to one of its highest priorities and substantial prosecutorial and other law enforcement resources have been committed to investigating health care provider fraud. While the Department of Justice has announced plans to reorganize its law enforcement priorities in

response to the September 11, 2001 terrorist attacks, it is unclear at this time what impact, if any, this will have on the Department’s healthcare fraud efforts. In any event, the HHS Office of Inspector General also is involved in such investigations and has, according to recent public statements and workplans, targeted particular laboratory practices for study, investigation and prosecution.

As noted above, the penalties for violation of these laws may include criminal and civil fines and penalties and exclusion or debarment from participation in federal programs. Many of the anti-fraud statutes and regulations, including those relating to joint ventures and alliances, are subject to varying interpretations and the courts have offered limited guidance with respect to their application to health care business arrangements and practices. Similarly, regulators have generally offered little guidance to the clinical laboratory industry. Despite several requests from the clinical laboratory industry for clarification of the anti-fraud and abuse rules since 1992, the HHS Office of Inspector General has issued only a few fraud alerts and advisory opinions regarding laboratory practices. Although we believe we are in compliance with these laws, we cannot predict if some of the fraud and abuse rules will be interpreted contrary to our practices.

CMS also has the authority to suspend Medicare payment to any entity it believes has engaged in fraudulent billing practices, and also may, in the absence of fraud, retroactively deny payment, and seek restitution for overpayments, when it determines that an entity has not satisfied requirements for reimbursement. Finally, in addition to government actions, private “whistleblowers” also may bring an action under federal or state law, which the government may choose to join, seeking damages for unlawful kickbacks or improper billing practices. “Whistleblower” actions may have a significant financial impact on an entity when defense costs are coupled with potential damage or out of court settlement payments.

Moreover, many states have anti-kickback, anti-rebate, anti-fee-splitting and other laws that also affect our relationships with clients who refer non-government-reimbursed laboratory testing business to us.

In addition, since 1992, a federal ~~anti-~~“self-referral” law, commonly known as the “Stark” law, prohibits, with ~~certain~~limited exceptions, Medicare payments for laboratory tests referred by physicians who have, personally or through a ~~business~~ business or immediate family member, an investment interest in, or a compensation arrangement with, the testing laboratory. ~~Since~~ ~~January 1995~~Penalties, ~~these~~such ~~restrictions~~as ~~have~~denial ~~also applied to Medicaid-covered services. Penalties apply to violations~~ of ~~this statute.~~payment, ~~Many~~required ~~states~~refunds, ~~have similar anti-“self-referral”~~civil ~~laws~~money ~~that~~penalties ~~also affect investment~~ and ~~compensation~~exclusion ~~arrangements with~~or ~~physicians~~debarment ~~and~~from ~~other~~participation ~~clients who refer laboratory testing~~in ~~business~~federal toand ~~us.~~state ~~Penalties~~health ~~also~~care programs, apply to violations of the ~~these~~“Stark” ~~laws~~law.

The Omnibus Budget Reconciliation Act of 1993 expanded the “Stark” law to cover certain “designated health services,” in addition to clinical laboratory services, and applied the law’s restrictions to Medicaid-covered services as well. CMS released implementing regulations related to referrals for clinical laboratory services on August 14, 1995, and released additional regulations applicable to all “designated health services” on January 4, 2001 (effective January 4, 2002). The 2001 regulations, which include new exceptions for certain indirect financial relationships and fair market value transactions among other provisions, and CMS’s interpretation of them, may have some relevance to our business, but the 1995 regulations largely implemented the “Stark” law as applied to clinical laboratories. Although we believe we are in compliance with the “Stark” law, we cannot predict if CMS’s current or future interpretations of its provisions will be contrary to our practices.

Many states have similar anti-“self-referral” laws that also affect investment and compensation arrangements with physicians and other clients who refer laboratory testing business to us. Penalties also apply to violations of these laws.

Insurance

We maintain liability insurance, subject to limits and deductibles, for claims that could result from providing or failing to provide laboratory testing, including inaccurate testing results. These claims could be substantial. Management believes that present insurance coverage and reserves are adequate to cover currently estimated exposures. Although we believe that we will be able to obtain adequate insurance coverage in the future at acceptable costs, we cannot assure you that we will be able to do so, or obtain coverage at an acceptable cost, or that we will not incur significant liabilities in excess of policy limits.

Properties

We conduct most of our testing from our 250,000 square foot laboratory facility in Chantilly, Virginia, just outside of Washington, D.C., under a lease which expires in 2017, and our ~~124~~facilities in Las Vegas, Nevada, of which 85,000 square feet ~~foot~~are owned and 39,000 square feet are leased. In addition to our facilities in Virginia and Nevada, we operate 29 remote service centers that are used to consolidate shipments to our Virginia and Nevada facilities, 51 patient centers that are located in the Washington, D.C. and Nevada areas to draw samples from patients and eight short turn around time laboratories established for quick-turn around, customer-specific testing. We lease space for all of our remote service centers, patient centers and short turn around time laboratories.

facilities in Las Vegas, Nevada, of which 85,000 square feet are owned and 39,000 square feet are leased. In addition to our facilities in Virginia and Nevada, we operate 22 remote service centers that are used to consolidate shipments to our Virginia and Nevada facilities, 53 patient centers that are located in the Washington, D.C. and Nevada areas to draw samples from patients and eight STAT laboratories established for quick-turnaround, customer-specific testing. We lease space for all of our remote service centers, patient centers and STAT laboratories. Our remote service centers are generally 1,500 square feet, our patient centers are generally 1,200 square feet and our STAT laboratories are generally 500 to 5,000 square feet in size.

Employees

At ~~June~~September 30, ~~2000~~2001, we employed approximately 23,~~700~~ 000 people, of which approximately 2,~~400~~700 were full-time employees. We believe that we have good relations with our workers, none of whom is represented by a union.

Legal Proceedings

There are claims, suits and complaints which arise in the ordinary course of business that have been filed or are pending against us. We believe that all such matters either are adequately reserved for, are covered by insurance, or would not have a material adverse effect on us, if adversely determined against us.

In September 2000, our APL subsidiary reached an agreement with the United States Department of Justice, the HHS Office of Inspector General ~~of the Department of Health~~ and ~~Human Services and~~ the Tricare Management Activity of the Department of Defense to settle allegations raised in a 1996 “whistleblower” lawsuit filed under the federal False Claims Act. The settlement agreement ~~requires~~required APL to pay approximately $1.5 million to fully resolve the allegations that from 1989 until 1993 APL billed Medicare and other federal health care programs for medically unnecessary tests. The settlement amount and all legal fees and other expenses associated with this matter ~~are~~were covered by an indemnity and paid from an escrow account provided by the sellers in ~~the~~ the APL acquisition. Moreover, in recognition of APL’s voluntary compliance efforts since 1993, the government ~~has~~did not ~~required~~require APL to enter into a corporate integrity agreement as part of the settlement; rather, APL ~~must~~agreed to maintain its ~~existing~~ existing compliance program for a period of three years. Thus, ~~the~~ the settlement does not involve any material continuing ~~obligations~~ obligations on the part of APL and will have no impact on our ability to conduct our business.

We are currently undergoing an IRS ~~audit~~audits relating to our 1997 ~~tax~~and 1998 ~~year~~tax years. We ~~have~~believe ~~not~~that ~~yet~~the ~~made~~additional ~~any~~tax ~~determination~~liability relating as to ~~the additional~~these ~~tax liability~~audits, if any, ~~that~~would ~~could result from that audit. We do~~ not ~~believe that any such liability would~~ be material.

We are not aware of any other material allegations or investigations concerning our business by any governmental entity.

4346

MANAGEMENT

Directors, Executive Officers and Key Employees

The following table provides information about our directors, executive officers and key employees.

Name	Age		Position
Timothy J. Brodnik		5253	Chairman of the Board, President and Chief Executive Officer
John E. Bergstrom		5455	Executive Vice President — Business Development
Victoria L. DiFrancesco		44	Executive Vice President — Sales
E. Craig Dawson		50	Senior Executive Vice President and Chief Operating Officer
Alvin Ezrin		60	Executive Vice President — Law and Corporate Compliance Officer
Victoria L. DiFrancesco		46	Executive Vice President — Sales
H. Bryan Firestone		42	Senior Vice President — Chief Information Officer
Alvin Ezrin		61	Executive Vice President — Law and Corporate Compliance Officer
Charles J. Krambuhl		50	Executive Vice President — Employee and Client Relations
H. Bryan Firestone		43	Executive Vice President — Chief Information Officer
Robert C. Low		46	Senior Vice President — Controller
Charles J. Krambuhl		51	Executive Vice President — Eastern Operations
Steve R. Pierce		53	Executive Vice President and Chief Financial Officer
Robert C. Low		47	Senior Vice President — Controller
John P. Schwartz		50	President of Western Operations
Steve R. Pierce		55	Executive Vice President and Chief Financial Officer
Craig D. Shanklin		44	Executive Vice President — Marketing
Leonard A. Poikey		48	Executive Vice President — Operations
Nathan Sherman		49	Senior Vice President and Medical Director
John P. Schwartz		51	President of Western Operations
Jay D. Tyler		43	Executive Vice President — Operations
Craig D. Shanklin		45	Executive Vice President — Marketing
Vance R. White		53	Executive Vice President — Technical Operations and Research and Development
Nathan Sherman		50	Senior Vice President and Medical Director
Jerrold L. Glick		58	Director and Secretary
Jay D. Tyler		44	Executive Vice President — Administration
Bruce V. Rauner		44	Director
Jerrold L. Glick		59	Director and Secretary
Donald J. Edwards		34	Director
Bruce V. Rauner		45	Director
Donald J. Edwards		35	Director

Timothy J. Brodnik, Chairman of the Board, President and ~~Chief~~ Chief Executive Officer, has served as Chairman of the Board ~~since~~ since December 1999 and has served as Director, President ~~and~~ and Chief Executive Officer of AML since May 1997. From 1991 to ~~1997~~ 1996, Mr. Brodnik was Executive Vice President and a member of the Executive Management Committee of Laboratory ~~Corporation~~ Corporation of America and its predecessor, National Health Laboratories.

John E. Bergstrom, Executive Vice President — Business Development, has served in that capacity since May 1997. From 1995 to 1996, Mr. Bergstrom served as Senior Vice President of Laboratory Corporation of America. From 1993 to 1995, he served as Executive Director – Managed Care of National Health Laboratories.

E. Craig Dawson, Senior Executive Vice President and Chief Operating Officer, has served in this capacity since July 2001. From November 1997 to July 2001, Mr. Dawson was a Corporate Senior Vice President of Fresenius Medical Care, N.A. Prior to that time he was a Senior Vice President for the Mid-Atlantic Operations of Laboratory Corporation of America from May 1995 to November 1997.

Victoria L. DiFrancesco, Executive Vice President — Sales, has served in that capacity since November 1997. From 1990 until November 1997, Ms. DiFrancesco was the Associate Vice President of Division Business Development and Customer Service for Laboratory Corporation of America in San Diego.

47 ~~Alvin Ezrin, Executive Vice President — Law and~~ ~~Corporate Compliance Officer, has served in that capacity~~ ~~since May 1997. From 1995 to 1996, Mr. Ezrin served as Vice President of Law at Laboratory Corporation of America.~~

H. Bryan Firestone, Senior Vice President — Chief Information Officer, has served in that capacity since April 2000. From 1987 to 2000, Mr. Firestone was the Associate Vice President of Information Systems at Laboratory Corporation of America and its predecessor, National Health Laboratories.

~~Charles~~Alvin ~~J. Krambuhl~~Ezrin, Executive Vice President — ~~Employee~~ Law and Corporate ~~Client~~Compliance ~~Relations~~Officer, has served in that capacity since ~~October~~May ~~1998~~1997. From 1991 to ~~1998~~1996, Mr. ~~Krambuhl~~ ~~was~~Ezrin served as Vice President ~~the~~of ~~Director,~~Law ~~Manufacturing,~~at ~~Distribution~~Laboratory ~~and~~Corporation ~~Marketing~~of ~~for~~America ~~the~~and its ~~American~~predecessor, ~~Petroleum~~National ~~Institute~~Health Laboratories.

~~Robert C~~H. Bryan ~~Low~~Firestone, ~~Senior~~Executive Vice President — Chief ~~Controller~~Information Officer, has served in that capacity since ~~May~~ April 2000. ~~Prior~~From 1987 to ~~that~~ ~~time~~2000, heMr. Firestone was ~~Vice President and Controller of~~ the ~~Process~~ ~~Division~~Associate ofVice ~~Stone~~President ~~& Webster. Prior to that time, he was the Director~~ of ~~Financial~~Information ~~Analysis~~Systems at ~~Dresser Industries, Inc. at its~~Laboratory Corporation ~~corporate headquarters. He also served as Controller for subsidiaries~~ of ~~Dresser~~America ~~in both the United States~~ and ~~abroad. Mr. Low~~its ~~joined~~predecessor, ~~Dresser~~National ~~in 1984 after nine years with Arthur~~Health ~~Andersen~~Laboratories.

Charles J. Krambuhl, Executive Vice President — Eastern Operations, has been with us since October 1998. From 1991 to 1998, Mr. Krambuhl was the Director of Manufacturing, Distribution and Marketing for the American Petroleum Institute.

Robert C. Low, Senior Vice President — Controller, has served in that capacity since May 2000. From December 1998 until May 2000, he was Vice President and Controller of the Process Division of Stone & Webster. Prior to that time, he was the Director of Financial Analysis at Dresser Industries, Inc. at its corporate headquarters. He also served as Controller for subsidiaries of Dresser in both the United States and abroad. Mr. Low joined Dresser in 1984 after nine years with Arthur Andersen.

Steve R. Pierce, Executive Vice President and Chief Financial Officer, has served in that capacity since January 2000. From 1998 until January 2000, Mr. Pierce was the Vice President of Finance and Administration and Controller of Kellogg Brown and Root, a division of Halliburton Company. From 1995 until 1998, he served as Vice President and Chief Financial Officer for subsidiaries of Dresser Industries, Inc. in both the United States and abroad, prior to Dresser’s merger with Halliburton Company.

Leonard A. Poikey, Executive Vice President — Operations, has served in that capacity since April 2000. Prior to that time, Dr. Poikey served as Chief Executive Officer of Southern California Clinical Laboratories, Inc. in Pasadena, California. He previously has held the positions of Regional Director of National Health Laboratories’ National Reference Laboratory and Technical Director of National Health Laboratories.

John P. Schwartz, President of Western Operations, has served in that capacity since October of 1999, and as the President and Chief Executive Officer of APL since 1981.

Craig D. Shanklin, Executive Vice President — Marketing, has served in that capacity since October 1999 and as Vice President of Marketing of APL since May 1995.

Nathan Sherman, Senior Vice President & Medical Director, has served in that capacity since October 1999. From 1987 to 1999, heDr. Sherman served as Medical Director of ~~Laboratory~~ Laboratory Corporation of America’s Northern Virginia ~~regional~~ regional laboratory and its predecessor, National Health Laboratories.

Jay D. Tyler, Executive Vice President — ~~Operations,~~ Administration, has served in that capacity since November 1997 and was Vice President from May 1997 to November 1997. From January to May 1997, Mr. Tyler served as Corporate Billing Leader for Quest Diagnostics, Inc. From 1988 to 1996, he served in various financial positions including Vice President of Corporate Finance of Laboratory Corporation of America.

~~Vance~~Jerrold RL. ~~White~~Glick, ~~Executive~~Director ~~Vice~~and ~~President —~~Secretary, ~~Technical~~ has ~~Operations~~served ~~and~~as ~~Research~~a Director ~~and~~of ~~Development~~AML since May 1997, ~~has~~as ~~served~~Chairman inof ~~that~~the Board ~~capacity~~from ~~since~~May 1997 to December 1999, and as our Secretary since May 1997. ~~For~~Mr. Glick ~~seven~~has ~~years~~been ~~prior~~a togeneral ~~that~~partner of ~~time,~~Columbia heGroup ~~was~~Limited, LLLP, a ~~clinical~~real ~~laboratory~~estate ~~consultant~~development company, ~~the~~since ~~last~~1972. ~~two~~Mr. Glick ~~years~~has ~~for~~been involved in the ~~company.~~clinical ~~From~~laboratory ~~1973~~industry tosince ~~1991~~1967, hehaving ~~held~~founded ~~various~~a ~~positions including~~chain ~~Executive~~of ~~Vice~~clinical ~~President~~laboratories ofthat was later sold to National Health Laboratories.

48 ~~Jerrold L. Glick, Director and Secretary, has served as a~~ ~~Director of AML since May 1997, as Chairman of the Board~~ from May 1997 to December 1999, and as our Secretary since May 1997. Mr. Glick has been a general partner of Columbia Group Limited, LLLP, a real estate development company, since 1972. Mr. Glick has been involved in the clinical laboratory industry since 1967, having founded a chain of clinical laboratories that was later sold to National Health Laboratories. Mr. Glick is also a director of Telik, Inc. and a number of private companies.

Bruce V. Rauner, Director, has served as a Director of AML since May 1997. Mr. Rauner is managing principal of GTCR Golder Rauner, LLC, formed in May 1998 as a successor to Golder, Thoma, Cressey, Rauner, Inc., of which he has been a principal since 1981. Mr. Rauner is also a director of AnswerThink Consulting Group, Inc., divine interVentures, inc., Polymer Group, Inc., U.S. Aggregates, Inc. and a number of private companies in GTCR’s portfolio.

Donald J. Edwards, Director, has served as a Director of AML since May 1997. Mr. Edwards is a principal of GTCR Golder Rauner, LLC, formed in May 1998 as a successor to Golder, Thoma, Cressey, Rauner, Inc., of which he has been a principal since 1996 and was an associate from 1994 to 1996. Mr. Edwards is also a director of a number of private companies in GTCR’s portfolio.

There are no family relationships between any of our directors or executive officers.

~~Our~~Bruce ~~board~~V. ofRauner, ~~directors~~Director, ~~currently~~has ~~consists~~served ofas ~~four~~a ~~directors.~~Director of ~~Within~~AML 90since ~~days~~May ~~after~~1997. ~~the~~Mr. Rauner ~~consummation~~is managing principal of GTCR ~~the~~Golder ~~offering~~Rauner, weLLC, ~~expect to~~formed ~~appoint~~in ~~three~~May ~~additional~~1998 ~~directors~~as ~~who~~a ~~are~~successor ~~not employees of~~to ~~our~~Golder, ~~company~~Thoma, orCressey, ~~otherwise~~Rauner, ~~affiliated~~Inc., ~~with~~of ~~our~~which ~~company~~he orhas ~~our~~been a principal ~~stockholders~~since 1981. ~~The~~Mr. Rauner ~~board~~is ofalso ~~directors~~a ~~has~~director ~~the power to~~of ~~appoint~~AnswerThink ~~the~~Consulting ~~officers~~Group, ~~of the company~~Inc., ~~Each~~divine ~~officer~~interVentures, ~~will hold~~inc., ~~office~~Polymer ~~for~~Group, ~~such~~Inc., ~~term~~U.S. asAggregates, ~~may~~Inc. beDynacare, ~~prescribed~~Inc. ~~by the board~~ and ~~until~~a ~~such~~number ~~person’s~~of ~~successor~~companies isin ~~chosen and qualified or until such person~~GTCR’s ~~death, resignation or removal~~portfolio.

~~Prior~~Donald toJ. ~~the completion of this offering~~Edwards, ~~we will divide our board of directors into three classes~~Director, ashas ~~nearly~~served ~~equal in number~~ as ~~possible, with each director serving~~ a ~~three-year~~Director ~~term and one~~of AML ~~class~~since ~~being~~May ~~elected at each year’s annual meeting of stockholders~~1997. Mr. Edwards ~~will~~is bea inprincipal ~~the class~~ of ~~directors whose~~GTCR Golder ~~term~~Rauner, ~~expires~~LLC, atformed ~~the 2001 annual meeting of our stockholders. Mr. Glick will be~~ in ~~the~~May ~~class~~1998 ofas ~~directors~~a ~~whose~~successor ~~term~~to ~~expires at~~Golder, ~~the~~Thoma, ~~2002~~Cressey, ~~annual~~Rauner, ~~meeting of our stockholders~~Inc., ~~Messrs. Brodnik and Rauner will be in the class~~ of ~~directors~~which ~~whose~~he ~~term~~has ~~expires~~been ata principal ~~the~~since ~~2003~~1996 ~~annual~~and ~~meeting~~was ofan ~~our~~associate ~~stockholders.~~from ~~One~~1994 ~~of the three additional directors that we expect~~ to ~~appoint to the board will~~1996. ~~serve in each class~~Mr. Edwards Atis ~~each~~also ~~annual~~a ~~meeting~~director of ~~our~~Select ~~stockholders,~~Medical ~~successors~~Corporation toand ~~the~~Dynacare, ~~class~~Inc. ofand ~~directors~~a ~~whose~~number ~~term~~of ~~expires~~companies ~~at such~~in ~~meeting~~GTCR’s ~~will be elected to serve for three-year terms and until their respective successors are elected and qualified~~portfolio.

There are no family relationships between any of our directors or executive officers.

Our board of directors currently consists of four directors. Within 90 days after the consummation of the offering, we expect to appoint three additional directors who are not employees of our company or otherwise affiliated with our company or our principal stockholders. The board of directors has the power to appoint the officers of the company. Each officer will hold office for such term as the board may prescribe and until such person’s successor is chosen and qualified or until such person’s death, resignation or removal.

Prior to the completion of this offering, we will divide our board of directors into three classes, as nearly equal in number as possible, with each director serving a three-year term and one class being elected at each year’s annual meeting of stockholders. Mr. Rauner will be in the class of directors whose term expires at the 2002 annual meeting of our stockholders. Mr. Glick will be in the class of directors whose term expires at the 2003 annual meeting of our stockholders. Messrs. Brodnik and Edwards will be in the class of directors whose term expires at the 2004 annual meeting of our stockholders. One of the three additional directors that we expect to appoint to the board will serve in each class. At each annual meeting of our stockholders, successors to the class of directors whose term expires at such meeting will be elected to serve for three-year terms and until their respective successors are elected and qualified.

Compensation of Directors

Directors are currently not entitled to receive any compensation for serving on the board of directors. ~~Directors~~We ~~are~~reimburse ~~reimbursed~~directors for their out-of-pocket expenses incurred in connection with ~~such~~ such services. Following this offering, directors who are not ~~our~~ our employees will receive cash and/or stock options as ~~compensation~~ compensation for their services.

Committees of the Board of Directors

Upon the closing of this offering, the board of directors will have an audit committee and a compensation committee. The audit committee will report to the board regarding the appointment of our independent public accountants, the scope and results of our annual audits, compliance with our accounting and financial policies and management’s procedures and policies relative to the adequacy of our internal accounting controls. ~~Upon the completion of the initial public offering, the audit committee will consist exclusively of independent directors.~~ The compensation committee of the board of directors will review and make recommendations to the board regarding our compensation policies and all forms of compensation to be provided to our executive officers. In addition, the compensation committee will review bonus and stock compensation arrangements for all of our other employees.

Compensation Committee Interlocks and Insider Participation

We currently do not have a compensation committee. The compensation arrangements for each of our executive officers was established ~~pursuant~~according to the terms of the respective employment ~~agreements between us and each executive officer. The terms of~~ the employment agreements were established pursuant to arms-length negotiations between representatives of GTCR and each executive officer, except the agreement relating to Mr. Krambuhl, which was negotiated with us and approved by the board of directors. On a going forward basis, any changes in the compensation arrangements of our executive officers will be determined by the compensation committee.

agreements between us and each executive officer. The terms of the employment agreements were established in arms-length negotiations between representatives of GTCR or the Company and each executive officer. On a going forward basis, any changes in the compensation arrangements of our executive officers will be determined by the board of directors.

Professional Services Agreement

For a description of our professional services agreement with GTCR, see “Certain Relationships and Related Transactions — Professional Services Agreement.”

Executive Compensation

The following table provides, for the year ended December 31, ~~1999~~2000, the compensation paid to our Chief Executive Officer and our other executive officers whose total annual salary and bonus was in excess of $100,000 for fiscal year 2000. For ease of reference, we refer to each of these executive officers throughout this section as a Named Executive Officer and collectively as the Named Executive Officers.

of $100,000 for fiscal year 1999. For ease of reference, we refer to each of these executive officers throughout this section as a Named Executive Officer and collectively as the Named Executive Officers.

Summary Compensation Table

									All Other
				Annual Compensation
				Annual Compensation					Compensation($)(1)
Name and									Other
Name and
Principal Position		Year		Salary		Bonus			Compensation
Principal Position		Year		Salary($)		Bonus($)
Timothy J. Brodnik			2000	$	534,608	$	363,367		$	—
Timothy J. Brodnik			1999	$	394,859	$	350,000		$	1,776
	Chairman, President and Chief Executive Officer
John E. Bergstrom			~~1999~~2000		~~220~~225,~~815~~035		~~122~~150,~~500~~000			~~264~~—
	Executive Vice President — Business
	Development
Charles Krambuhl			1999		161,511		60,000			264
Victoria DiFrancesco			2000		200,013		100,000			155,494	(2)
	Executive Vice President — Employee and Client Relations
	Executive Vice President — Sales
Alvin Ezrin			1999		158,831		30,000			264
John P. Schwartz			2000		300,000		3,491,239	(1)		—
	Executive Vice President — Law and Corporate Compliance Officer
	President of Western Operations
Craig D. Shanklin			2000		300,000		3,491,239	(1)		—
	Executive Vice President — Marketing
Jay D. Tyler			2000		225,014		50,000			446,795	(2)
	Executive Vice President — Administration

(1) Represents amounts paid by us in respect of term life insurance premiums.


(1)	Includes one-time payments made in connection with the APL acquisition.

(2)	Includes the excess of the fair value of the common stock over the exercise price of the common stock options on the date of exercise in 2000.

50 ~~We did not grant any stock options to any of our Named Executive~~ ~~Officers during the year ended December 31, 1999.~~

The following table provides, for the year ended December 31, 2000, non-qualified stock options granted to the following individuals to purchase our common stock:





Option Grants in Fiscal Year 2000


									Potential realizable
									value at assumed
	Number of		Percent of total						annual rates of stock
	securities		options/SARs						price appreciation for
	underlying		granted to		Exercise				option term
	options/SARs		employees in		price		Expiration
Name	granted		fiscal year		per share(1)		date		5%		10%

Timothy J. Brodnik		—		—		—		—		—		—




John E. Bergstrom		—		—		—		—		—		—




Victoria DiFrancesco		40,000		3.8%	$	4.90		2010	$	123,263	$	312,374




John P. Schwartz		—		—		—		—		—		—




Craig D. Shanklin		—		—		—		—		—		—




Jay D. Tyler		—		—		—		—		—		—


	(1)	The exercise price is based on the fair market value of the underlying common stock on the date of grant as determined by the Board of Directors.

Fiscal Year End Option Values

The following table contains information regarding unexercised and exercised options held by the Named Executive Officers as of December 31, ~~1999~~2000. There was no public trading market for our common stock as of December 31, ~~1999~~2000. Accordingly, ~~the~~we calculated the value of unexercised ~~options~~and ~~has~~exercised ~~been~~options ~~calculated~~ by ~~subtracting~~ subtracting the exercise price from the fair market value of $710.6840 per share on December 31, ~~1999~~2000, estimated by management for financial reporting purposes, multiplied by the number of shares underlying the option. ~~No options were exercised by the Named Executive~~ ~~Officers during the year ended December 31, 1999.~~

Number of

Securities

Underlying

Value of Unexercised

Unexercised

In-the-Money

Options/SARs at

Fiscal Year-End

Shares Acquired on

Exercisable/

Name

Exercise (#)

Value Realized ($)

Unexercisable

Exercise (#)

Value Realized

Unexercisable

Timothy J. Brodnik

—

—/—

John E. Bergstrom

—

—/—

Charles Krambuhl

—

17,500/57,500

134,050/$440,450

John P. Schwartz

—

—/—

Alvin Ezrin

—

11,250/28,750

86,175/$220,225

Craig D. Shanklin

—

—/—

Jay D. Tyler

86,507

897,943

4,743/58,750

49,232/$609,825

Victoria DiFrancesco

28,192

292,633

16,308/55,500

130,237/$419,930

Management Employment Agreements

Timothy Brodnik. We are party to a senior management agreement with Mr. Brodnik. Under the agreement, Mr. Brodnik is entitled to receive an annual base salary of not less than $650,000. Mr. Brodnik is also eligible for a bonus based on our achievement of budgetary and other objectives set by our board of directors, provided that we are obligated to ~~pay~~ pay Mr. Brodnik a minimum bonus of $50150,000 per year. Mr. Brodnik is also entitled to all other benefits as are approved by the board and made generally available to other members of our senior management.

47 Under the agreement, on May 2, 1997, Mr. Brodnik purchased 1,476,470 shares of common stock at a price of $0.02 per share and 80.99 shares of preferred stock at $1,000 per share. Mr. Brodnik paid for this stock by delivering $75,000 in cash, a $9,023 bridge note and a $26,501

~~Under~~promissory ~~the agreement, on May 2, 1997, Mr~~note. ~~Brodnik purchased~~ ~~1,476,470 shares of common stock at a price of $0.02 per share and 80.99 shares of preferred stock at $1,000 per share.~~ Mr. Brodnik ~~paid~~repaid ~~for~~the ~~this stock by delivering $75,000 in cash, a $9,023~~ bridge note ~~and a $26,501 promissory note. The bridge note was repaid~~ on August 15, 1997. ~~The~~and ~~promissory note bears interest at~~ the ~~applicable~~promissory ~~federal~~note ~~rate and is due~~ on ~~December~~ April 317, ~~2005~~ 1999.

Of the 1,476,470 shares of common stock purchased by Mr. Brodnik, 151,435 shares were vested on the date of purchase and the remaining 1,325,035 shares are scheduled to vest in 20% increments on each of the first five anniversaries of May 2, 1997. The agreement also provides that upon completion of an initial public offering, such as this offering, the shares which were scheduled to vest during the twelve months immediately following the date of the offering will vest at the time of the offering.

On August 20, 2001, Mr. Brodnik purchased 56,719 shares of common stock at a purchase price of $4.90 per share pursuant to his senior management agreement. Mr. Brodnik paid for this stock by delivering a promissory note in the principal amount of $277,923. The promissory note bears interest at 5.02% per annum, compounded annually and the promissory note and all accrued interest is due on December 31, 2005. The 56,719 shares purchased on August 20, 2001 vest on the same schedule and pursuant to the same terms as the 1,325,035 shares purchased by Mr. Brodnik on May 2, 1997.

Mr. Brodnik’s employment with the company will continue until terminated by the resignation, death or disability of Mr. Brodnik or by the board with or without cause. In the event Mr. Brodnik’s employment is terminated by the board without cause or Mr. Brodnik resigns for good reason, Mr. Brodnik would be entitled to receive a severance payment equal to $2.0 million and would also be entitled to 18 months of continued group medical and life insurance coverage. Mr. Brodnik has agreed not to compete with the company or solicit any customers or employees of the company during the term of his employment and for two years thereafter.

John E. Bergstrom. We are party to a senior management agreement with Mr. Bergstrom. Under the agreement, Mr. Bergstrom is entitled to receive an annual base salary of not less than $175,000. Mr. Bergstrom is also eligible for a bonus based on our achievement of budgetary and other objectives set by our board of directors, provided that we are obligated to pay Mr. Bergstrom a minimum bonus of $50,000 per year. Mr. Bergstrom is also entitled to all other benefits as are approved by the board and made generally available to other members of our senior management.

Under the agreement, on May 2, 1997 Mr. Bergstrom purchased 618,350 shares of common stock at a price of $0.02 per share and 27 shares of preferred stock at $1,000 per share. Mr. Bergstrom paid for this stock by delivering $25,000 in cash, a $3,008 bridge note and a $11,~~347~~357 promissory note. ~~The~~ ~~bridge~~Mr. Bergstrom ~~note~~repaid ~~was~~the ~~repaid~~notes on April 7, 1999. ~~The promissory note~~ ~~bears interest at the applicable federal rate and is due on~~ ~~December 31, 2005.~~

Of the 618,350 shares of common stock purchased by Mr. Bergstrom, 50,480 shares were vested on the date of purchase and the remaining 567,870 shares are scheduled to vest in 20% increments on each of the first five anniversaries of May 2, 1997. The agreement also provides that upon completion of an initial public offering, such as this offering, the shares which were scheduled to vest during the twelve months immediately following the date of the offering will vest at the time of the offering.

On August 20, 2001, Mr. Bergstrom’s ~~employment~~purchased ~~with~~28,427 ~~the company will~~shares ~~continue~~of ~~until~~common ~~terminated~~stock byat ~~the~~a ~~resignation,~~purchase ~~death~~price ~~or disability~~ of Mr$4. ~~Bergstrom~~90 orper byshare ~~the~~pursuant to ~~board~~his ~~with~~senior ormanagement ~~without cause~~agreement. ~~In the event~~ Mr. Bergstrom’s ~~employment~~paid isfor this ~~terminated~~stock by ~~the~~ ~~board~~delivering ~~without~~a ~~cause~~promissory ornote byin ~~Mr. Bergstrom~~the ~~for~~principal amount ~~good~~of ~~reason~~$139, Mr292. ~~Bergstrom~~ isThe ~~entitled~~promissory tonote ~~severance~~bears interest at ~~a rate equal to~~5.02% ~~his~~per ~~then-current~~annum, ~~base~~compounded ~~salary~~annually ~~for~~and athe ~~period~~promissory ofnote ~~twelve months~~ and all ~~continued~~accrued ~~group~~interest ~~medical~~is ~~and~~due ~~life~~on ~~insurance~~December 31, ~~coverage~~2005. ~~during~~The ~~such~~28,427 ~~period.~~shares ~~Mr. Bergstrom~~purchased ~~has~~on ~~agreed~~August 20, ~~not~~2001 tovest ~~compete~~on ~~with~~ the same ~~company~~schedule orand ~~solicit~~pursuant ~~any~~to ~~customers~~the orsame ~~employees~~terms ofas the ~~company~~567,870 shares ~~during~~purchased ~~the~~by ~~term~~Mr. Bergstrom ofon ~~his~~May 2, ~~employment and for two years thereafter~~1997.

~~Alvin Ezrin~~Mr. Bergstrom’s Weemployment ~~are~~with ~~party~~the tocompany ~~a severance and~~will ~~non-solicitation~~continue ~~agreement~~until ~~with~~terminated ~~Mr. Ezrin.~~by ~~Under~~ the ~~agreement~~ resignation, ~~Mr. Ezrin~~death ~~will be entitled to receive severance~~or ~~payments~~disability ~~equal to twelve months~~ of ~~his~~Mr. Bergstrom ~~base~~or ~~salary~~by ifthe ~~we terminate~~board ~~his~~with ~~employment~~or without cause. In the event Mr. ~~Ezrin~~Bergstrom’s ~~has~~employment ~~agreed~~is terminated ~~not~~by tothe ~~solicit~~board ~~any~~without ~~customers~~cause or ~~employees~~by ~~of ours during the~~Mr. Bergstrom ~~period~~for ~~in which he is receiving severance payments.~~good

52 ~~Charles J. Krambuhl. We are party to an employment~~ ~~agreement with Mr. Krambuhl. Under the agreement,~~ ~~Mr. Krambuhl is entitled to receive an annual base salary of $155,000. Mr. Krambuhl also~~

~~received~~reason, aMr. Bergstrom ~~signing~~is ~~bonus~~entitled ofto ~~$20,000~~severance ~~and~~at ~~management~~a ~~incentive~~rate ~~bonus~~equal ~~of $30,000 in January 2000. We agreed~~ to ~~grant Mr. Krambuhl~~his anthen-current ~~option~~base tosalary ~~purchase~~for ~~15,000~~a ~~shares~~period of ~~our~~twelve ~~common~~months ~~stock~~and atcontinued angroup ~~exercise~~medical ~~price~~and oflife ~~$0.02~~insurance ~~per~~coverage during ~~share~~such period. Mr. ~~Krambuhl~~Bergstrom ishas ~~also~~agreed ~~entitled~~not to ~~other~~compete with ~~benefits~~the ascompany ~~are approved~~or bysolicit ~~the~~any ~~board~~customers ~~and~~or ~~made~~employees ~~generally~~of ~~available~~the company toduring ~~other members~~the term of ~~our~~his ~~senior~~employment ~~management~~and for two years thereafter.

John P. Schwartz. We are party to an employment agreement with Mr. Schwartz. Under the agreement, Mr. ~~Krambuhl~~Schwartz is ~~will be~~ entitled to receive ~~severance~~an ~~payments~~annual ~~equal~~base tosalary ~~twelve months~~ of ~~his~~$300,000 ~~base~~and an ~~salary~~annual ifbonus weof ~~terminate~~at ~~his~~least ~~employment without cause~~$200,000. If Mr. ~~Krambuhl’s~~Schwartz ~~employment~~is ~~terminates~~also entitled ~~after~~to aother ~~change~~benefits ~~in control~~as ofare ~~our~~approved ~~company,~~by hethe ~~will~~board beand ~~entitled~~made generally available to ~~receive~~other ~~two~~members ~~years~~ of ~~severance~~our ~~payments~~senior management.

The term of the agreement is three years. Under the agreement, Mr. Schwartz will be entitled to receive severance payments equal to his base salary and bonus until the end of the term of the agreement if we terminate his employment without cause during the term of the agreement. Mr. Schwartz has agreed not to compete with us or solicit any customer or employee of ours during the term of his employment agreement and for three years thereafter.

Craig Shanklin. We are party to an employment agreement with Mr. Shanklin. Under the agreement, Mr. Shanklin is entitled to receive an annual base salary of $300,000 and an annual bonus of at least $200,000. Mr. Shanklin is also entitled to other benefits as are approved by the board and made generally available to other members of our senior management.

The term of the agreement is three years. Under the agreement, Mr. Shanklin will be entitled to receive severance payments equal to his base salary and bonus until the end of the term of the agreement if we terminate his employment without cause during the term of the agreement. Mr. Shanklin has agreed not to compete with us or solicit any customer or employee of ours during the term of his employment agreement and for three years thereafter.

Jay D. Tyler. We are party to an employment agreement with Mr. Tyler. Under the agreement, Mr. Tyler was initially entitled to receive an annual base salary of $130,000 subject to annual review and increase. Mr. Tyler is also entitled to other benefits as are approved by the board and made generally available to other members of our senior management.

We are party to a severance and non-solicitation agreement with Mr. Tyler. Under the agreement, Mr. Tyler will be entitled to receive severance payments equal to twelve months of his base salary if we terminate his employment without cause. Mr. Tyler has agreed not to solicit any customers or employees of ours during the period in which he is receiving severance payments.

Victoria DiFrancesco. We are party to an employment agreement with Ms. DiFrancesco. Under the agreement, Ms. DiFrancesco was initially entitled to receive an annual base salary of $125,000 subject to annual review and increase. Ms. DiFrancesco is eligible for a year end bonus based on certain performance criteria. We agreed to grant Ms. DiFrancesco an option to purchase 50,000 shares of our common stock at an exercise price of $0.02 per share. Ms. DiFrancesco is also entitled to other benefits as are approved by the board and made generally available to other members of our senior management.

We are party to a severance and non-solicitation agreement with Ms. DiFrancesco. Under the agreement, Ms. DiFrancesco will be entitled to receive severance payments equal to twelve months of her base salary if we terminate her employment without cause. Ms. DiFrancesco has agreed not to solicit any customers or employees of ours during the period in which she is receiving severance payments.

1997 Stock Option Plan

In May 1997, our board of directors approved the 1997 Stock Option Plan, which as amended we refer to as the 1997 stock option plan, and which authorizes the granting of non-qualified stock ~~options to employees of AML or its subsidiaries. The 1997~~ ~~stock option plan authorizes the granting of stock options up to~~ an aggregate of shares of common stock, subject to adjustment based on the occurrence of specified events and to prevent any dilution or expansion of the rights of participants that might otherwise result from the occurrence of such events.

53 ~~Options to purchase an aggregate of~~ ~~shares of our~~ common stock were outstanding as of September 30, 2000 under the 1997 stock option plan. Such options generally vest and become exercisable in five equal installments beginning on the first anniversary of the grant date and continuing thereafter on an annual basis. Unvested options will terminate in the event that the optionee ceases to be employed by AML or its subsidiaries and vested but unexercised options will terminate immediately if the optionee is terminated for cause, after 30 days if the optionee is terminated without cause, or after 90 days in the case of death, disability or retirement. Subsequent to the adoption of the long-term equity incentive plan described below, no future grants will be made under the 1997 stock option plan.

options to employees of AML or its subsidiaries. The 1997 stock option plan authorizes the granting of stock options up to an aggregate of 1,908,000 shares of common stock, subject to adjustment based on the occurrence of specified events and to prevent any dilution or expansion of the rights of participants that might otherwise result from the occurrence of such events.

Options to purchase an aggregate of 1,663,941 shares of our common stock were outstanding as of September 30, 2001 under the 1997 stock option plan. Such options generally vest and become exercisable in five equal installments beginning on the first anniversary of the grant date and continuing thereafter on an annual basis. Unvested options will terminate in the event that the optionee ceases to be employed by AML or its subsidiaries and vested but unexercised options will terminate immediately if the optionee is terminated for cause, after 30 days if the optionee is terminated without cause, or after 90 days in the case of death, disability or retirement. Subsequent to the adoption of the long-term equity incentive plan described below, no future grants will be made under the 1997 stock option plan.

Long-Term Equity Incentive Plan

Prior to the closing of the offering, we will adopt the American Medical Laboratories, Incorporated ~~2000~~2001 Equity Incentive Plan. The equity incentive plan provides for grants of stock options, stock appreciation rights, restricted stock and performance awards. Directors, officers and other employees of us or our subsidiaries and persons who engage in services for us are eligible for grants under the plan. The purpose of the equity incentive plan is to provide these individuals with incentives to to maximize stockholder value and otherwise contribute to our success and to enable us to attract, retain and reward the best available persons for positions of responsibility.

A total of shares of our common stock, representing % of our currently outstanding common stock, will be available for issuance under the equity incentive plan, subject to adjustment in the event of a reorganization, stock split, merger or similar change in our corporate structure or the outstanding shares of common stock.

The compensation committee of our board of directors will administer the equity incentive plan. Our board also has the authority to administer the plan and to take all actions that ~~the~~ the compensation committee is otherwise authorized to take under ~~the~~ the plan. We anticipate that in connection with the offering, we will grant options to purchase an aggregate of approximately shares of our common stock to ~~approximately~~ approximately employees. All of these options will have an exercise price equal to the initial public offering price of the common stock in the ~~offering~~ offering and will be subject to vesting over a three-year period.

Directors, officers and employees of us and our subsidiaries, as well as other individuals performing significant services for us, or to whom we have extended an offer of employment, will be eligible to receive grants under the equity incentive plan. However, only employees may receive grants of incentive stock options. In each case, the compensation committee will select the actual grantees.

grants under the equity incentive plan. However, only employees may receive grants of incentive stock options. In each case, the compensation committee will select the actual grantees.

Under the equity incentive plan, the compensation committee or the board may award grants of incentive stock options conforming to the provisions of Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, stock appreciation rights, restricted stock grants and other performance awards. The compensation committee may not, however, award to any one person in any calendar year options to purchase common stock equal to more than % of the total number of shares authorized under the plan, and it may not award incentive options first exercisable in any calendar year whose underlying shares have a fair market value greater than $100,000, determined at the time of grant.

The compensation committee will determine the exercise price of any option in its discretion. However, the exercise price of an incentive option may not be less than 100% of the fair market ~~value of a share of common stock on the date of grant, and the~~ ~~exercise price of an incentive option awarded to a person who owns stock constituting more than 10% of our voting power may not be less than 110% of such fair market value on such date.~~

54 ~~Unless the compensation committee determines otherwise, the~~ ~~exercise price of any option may be paid in any of the following~~ ~~ways:~~

•Table in cash, • by delivery of shares of common stock with a fair market value equal to the exercise price, • by simultaneous sale through a broker of shares of common stock acquired upon exercise, and/or • subject to certain conditions, by having us withhold shares of common stock otherwise issuable upon exercise.Contents

value of a share of common stock on the date of grant, and the exercise price of an incentive option awarded to a person who owns stock constituting more than 10% of our voting power may not be less than 110% of such fair market value on such date.

Unless the compensation committee determines otherwise, participants may pay the exercise price of any option in any of the following ways:


	•	in cash,

	•	by delivery of shares of common stock with a fair market value equal to the exercise price,

	•	by simultaneous sale through a broker of shares of common stock acquired upon exercise, and/or

	•	by having us withhold shares of common stock otherwise issuable upon exercise.

The delivery of shares of stock, simultaneous sale and withholding of shares are all subject to conditions designed to ensure compliance with applicable law.

If a participant elects to deliver or withhold shares of common stock in payment of any part of an option’s exercise price, the compensation committee may in its discretion grant the participant a “reload option.” The reload option entitles its holder to purchase a number of shares of common stock equal to the number so delivered or withheld.

The compensation committee will determine the term of each option at its discretion. However, no term may exceed ten years from the date of grant or, in the case of an incentive option granted to a person who owns stock constituting more than 10% of our voting power, five years from the date of grant. In addition, all options under the equity incentive plan, whether or not then exercisable, generally cease vesting when a grantee ceases to be a director, officer or employee of, or to otherwise perform services for, us or our subsidiaries. Options generally expire 30 days after the date of cessation of service, so long as the grantee does not compete with us during the 30-day period. In the case of a grantee’s death or disability, however, all options will become fully vested and exercisable and remain so for up to 180 days after the date of death or disability. In the event of retirement, a grantee’s vested options will remain exercisable for up to 90 days after the date of retirement, while his or her unvested options may become fully vested and exercisable in the discretion of the compensation committee. Upon termination for cause, all options will terminate immediately. In addition, the compensation committee has the authority to grant options that will become fully vested and exercisable automatically upon a change in control, whether or not the grantee is subsequently terminated.

The compensation committee may also grant stock appreciation rights, restricted stock awards and other performance awards. Upon exercise of stock appreciation right, the grantee will receive an amount in cash and/or shares of common stock or other of our securities equal to the difference between the fair ~~market~~ market value of a share of common stock on the date of exercise and the exercise price of the right. Restricted stock awards ~~will~~ will consist of shares of stock granted to the recipient subject to to vesting restrictions imposed in connection with the award. A grantee ~~will~~must ~~be required to~~ pay us at least the aggregate par value of any shares of restricted stock within ten days of the date of grant, unless the shares are treasury shares. The compensation committee may grant performance awards contingent upon achievement by the grantee or the company of set goals and objectives regarding specified performance criteria, such as return on equity, over a specified performance cycle, as designated by the compensation committee. We may pay a performance award in cash and/or shares of common stock or other of our securities.

50 The board may amend or terminate the equity incentive plan in its discretion, except that no amendment will become effective without prior approval of our stockholders if such approval is necessary for continued compliance with the performance-based compensation exception of

~~The~~Section 162(m) ~~compensation~~of ~~committee~~the ~~may~~Code ~~grant~~or ~~performance~~any ~~awards contingent~~stock ~~upon~~exchange ~~achievement~~listing requirements. byFurthermore, ~~the~~any ~~grantee~~termination ormay ~~the~~not ~~company of set~~materially ~~goals~~ and ~~objectives~~adversely ~~regarding~~affect ~~specified~~any ~~performance~~outstanding ~~criteria, such~~rights asor ~~return~~obligations onunder the equity, ~~over~~incentive aplan ~~specified~~without ~~performance~~the ~~cycle, as~~affected ~~designated~~participant’s byconsent. ~~the~~If ~~compensation~~not ~~committee.~~previously Aterminated ~~performance~~by ~~award may~~the board, bethe ~~paid~~equity ~~out~~incentive inplan ~~cash~~will ~~and/or~~terminate ~~shares~~on ofthe ~~common~~tenth anniversary ~~stock or other~~ of ~~our~~ ~~securities~~its adoption.

The board may amend or terminate the equity incentive plan in its discretion, except that no amendment will become effective without prior approval of our stockholders if such approval is necessary for continued compliance with the performance-based compensation exception of Section 162(m) of the Code or any stock exchange listing requirements. Furthermore, any termination may not materially and adversely affect any outstanding rights or obligations under the equity incentive plan without the affected participant’s consent. If not previously terminated by the board, the equity incentive plan will terminate on the tenth anniversary of its adoption.

One Million Dollar Compensation Limit

The Revenue Reconciliation Act of 1993 limits the annual deduction a publicly held company may take for compensation paid to its chief executive officer or any of its four other highest compensated officers in excess of $1.0 million per year. This limitation excludes compensation that is “performance-based” within the meaning of Section 162(m) of the Code. We intend that compensation realized upon the exercise of an option or other award granted under the equity incentive plan be regarded as “performance-based” under Section 162(m) and that such compensation be deductible without regard to the limits imposed by Section 162(m) on compensation that is not “performance-based.”

Compensation paid under the equity incentive plan will not qualify as performance-based except to the extent paid ~~pursuant~~in toconnection with grants made under the plan following the approval of the plan by the Company’s stockholders in accordance with Section 162(m)(4)(c) of the Code and the related Treasury Regulations, and except to the extent that other requirements are satisfied. However, based on a special rule contained in regulations issued under Section 162(m), the $1.0 million deduction limitation described above should not apply to any options or other awards under the equity incentive plan prior to our annual meeting of shareholders in the calendar year following the close of the third calendar year after the offering.

Employee Stock Purchase Plan

The ~~2000~~2001 Employee Stock Purchase Plan, which we refer to as the stock purchase plan, will be adopted by our board of directors and stockholders prior to the completion of this offering. The stock purchase plan will be established to give employees desiring to do so a convenient means of purchasing shares of common stock through payroll deductions. The stock purchase plan provides an incentive to participate by permitting purchases at a a discounted price. We believe that ownership of stock by employees will foster greater employee interest in our success, growth and development.

Subject to restrictions, each of our employees is eligible to participate in the stock purchase plan if he or she has been employed by us for more than six months. Participation is discretionary with each eligible employee. We have reserved shares of common stock for issuance in connection with the stock purchase plan. Each eligible employee is entitled to purchase a maximum of shares per year. Elections to participate and purchases of stock will be made on a quarterly basis. Each participating employee contributes to the stock purchase plan by choosing a payroll deduction in any specified amount. A participating employee may increase or decrease the amount of such employee’s payroll deduction, including a change to a zero deduction as of the beginning of any calendar quarter. Elected contributions will be credited to participants’ accounts at the end of each calendar quarter. In addition, employees may make lump sum contributions at the end of the year to enable them to purchase the maximum number of shares available for purchase during the plan year.

51 The following is a summary of how the stock purchase plan will operate:


	•	Each participating employee’s contributions will be used to purchase shares for the employee’s share account within 15 days after the last day of each calendar quarter.

	•	The cost per share is 85% of the lower of the closing price of our common stock on the New York Stock Exchange on the first or the last day of the calendar quarter.

~~Set~~• ~~forth~~The ~~below~~number of shares purchased on each employee’s behalf and deposited in his/her share account is abased ~~summary~~on ofthe ~~how~~amount accumulated in such participant’s cash account and the purchase price for shares with respect to any calendar quarter. • Shares purchased under the stock purchase plan carry full rights to receive dividends declared from time to time. • Any dividends attributable to shares in the employee’s share account are automatically used to purchase additional shares for such employee’s share account. • Share distributions and share splits will ~~operate:~~ be credited to the participating employee’s share account as of the record date and effective date, respectively. • A participating employee has full ownership of all shares in his/her share account and may withdraw them for sale or otherwise by written request to the compensation committee of the board of directors following the close of each calendar quarter.

• Each participating employee’s contributions will be used to purchase shares for the employee’s share account within 15 days after the last day of each calendar quarter. • The cost per share is 85% of the lower of the closing price of our common stock on the Nasdaq Stock Market on the first or the last day of the calendar quarter. • The number of shares purchased on each employee’s behalf and deposited in his/her share account is based on the amount accumulated in such participant’s cash account and the purchase price for shares with respect to any calendar quarter. • Shares purchased under the stock purchase plan carry full rights to receive dividends declared from time to time. • Any dividends attributable to shares in the employee’s share account are automatically used to purchase additional shares for such employee’s share account. • Share distributions and share splits will be credited to the participating employee’s share account as of the record date and effective date, respectively. • A participating employee has full ownership of all shares in his/her share account and may withdraw them for sale or otherwise by written request to the compensation committee of the board of directors following the close of each calendar quarter.

Subject to applicable federal securities and tax laws, the board of directors has the right to amend or to terminate the stock purchase plan. Amendments to the stock purchase plan will not affect a participating employee’s right to the benefit of the contributions made by such employee prior to the date of any such amendment. In the event the stock purchase plan is terminated, the compensation committee is required to distribute all shares held in each participating employee’s share account plus an amount of cash equal to the balance in each participating employee’s cash account.

5257

PRINCIPAL STOCKHOLDERS

The following table sets forth ~~certain~~ information regarding our beneficial ownership as of September 1530, ~~2000~~2001, on an actual basis and as adjusted to reflect completion of the offering, by:


	•	each person or entity known to us to own more than 5% of any class of outstanding voting securities;

	•	each of our named executive officers;

	•	each of our directors; and

	•	all of our directors and executive officers as a group.

To our knowledge, each of such stockholders has sole voting and investment power as to the shares shown unless otherwise noted. You should keep the following points in mind as you read the information in the table.

	•	The amounts and percentage of our common stock beneficially owned by a holder are reported on the basis of the regulations of the SEC that govern the determination of beneficial ownership of securities. Under these regulations, a person or group of persons is deemed to be a “beneficial owner” of a security if that person or group has or share “voting power,” which includes the power to dispose of or to direct the disposition of the security. A person or group of persons is also deemed to be a beneficial owner of any securities that such person has the right to acquire within 60 days of September 1530, ~~2000~~2001. Under these rules, more than one person may be deemed a beneficial owner of the same security and a person may be deemed to be a beneficial owner of securities as to which that person has no economic interest.
	•	The percentage of our common stock outstanding is based on the 2022,~~807~~190,~~765~~344 shares of our common stock outstanding as of September 1530, ~~2000~~2001, including shares of common stock deemed outstanding ~~pursuant~~under to the definition of beneficial ownership in the preceding paragraph. These shares are deemed to be outstanding when computing the percentage of ownership of each person or group of persons named above, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person or group.

Unless otherwise provided herein, the street address of each director and executive officer is 14225 Newbrook Drive, Chantilly, VA 20153.

	Shares Beneficially Owned
			Percentage
			Prior to		After
	Number		the		the
	of Shares		Offering		Offering
Principal Stockholders:
Golder, Thoma, Cressey, Rauner Fund V, L.P. (1)		13,427,025		64.5%
Golder, Thoma, Cressey, Rauner Fund V, L.P.(1)		14,496,984		65.3%
Directors and Executive Officers:
Timothy J. Brodnik (2)		1,182,691		5.7
Timothy J. Brodnik(2)		1,239,410		5.6
John E. Bergstrom (3)		567,346		2.7
John E. Bergstrom(3)		595,773		2.7
Charles Krambuhl		67,500		0.3
John P. Schwartz		153,694		0.7
Alvin Ezrin		31,250		0.1
Craig D. Shanklin		153,694		0.7
Jerrold L. Glick (4)		2,082,200		10.0
Jay D. Tyler		118,750		0.5
Bruce V. Rauner (5)		13,427,025		64.5
Victoria DiFrancesco		62,833		0.3
Donald J. Edwards (5)		13,427,025		64.5
Jerrold L. Glick(4)		2,206,944		9.9
All directors and executive officers as a group (8 persons)		17,366,345		83.1
Bruce V. Rauner(5)		14,496,984		65.3
Donald J. Edwards(5)		14,496,984		65.3
All directors and executive officers as a group (13 persons)		19,165,332		86.4

(1) Includes 23,417 shares of common stock held by GTCR Associates V, a partnership affiliated with Golder, Thoma, Cressey, Rauner Fund V, L.P. The address of each of Golder, Thoma, Cressey, Rauner Fund V, L.P. and GTCR Associates V is 6100 Sears Tower, Chicago, Illinois 60606.


(1)	Includes 23,417 shares of common stock held by GTCR Associates V, a partnership affiliated with Golder, Thoma, Cressey, Rauner Fund V, L.P. and 1,069,959 shares of common stock held by GTCR Capital Partners, L.P., a partnership affiliated with Golder, Thoma, Cressey, Rauner Fund V, L.P. The address of each of Golder, Thoma, Cressey, Rauner Fund V, L.P., GTCR Associates V and GTCR Capital Partners, L.P. is 6100 Sears Tower, Chicago, Illinois 60606.

(2)	Includes 591,346 shares of common stock held by Mr. Brodnik’s spouse.

(3)	Includes 245,173 shares of common stock held by Mr. Bergstrom’s spouse and 77,000 shares of common stock held by Mountain Stream Investments LLC, an affiliate of Mr. Bergstrom. Mr. Bergstrom disclaims beneficial ownership of such shares.

(4)	Includes shares of common stock held by affiliates of Mr. Glick as follows: J. Glick Co., LLC — 454,300; Glick Family Investment — 84,130; Lemnos Corporation — 168,260; and Columbia Trading II, L.L.C. — 134,605. Mr. Glick disclaims beneficial ownership of such shares. The address of each of these holders is 1600 Wynkoop Street, Suite 200, Denver, Colorado 80202.

(5)	Includes 13,403,608 shares of common stock held by Golder, Thoma, Cressey, Rauner Fund V, L.P. of which GTCR V, L.P. is the general partner, and also includes 23,417 shares of common stock held by GTCR Associates V and 1,069,959 shares of common stock held by GTCR Capital Partners, L.P. Each of Messrs. Rauner and Edwards is a principal of Golder, Thoma, Cressey, Rauner, Inc., the general partner of GTCR V, L.P. and the managing general partner of GTCR Associates V, and therefore may be deemed to share investment and voting control over the shares of common stock held by Golder, Thoma, Cressey, Rauner Fund V, L.P. and GTCR Associates V. Each of Messrs. Rauner and Edwards is a principal of GTCR Golder Rauner, L.L.C., the general partner of GTCR Partners VI, L.P., the general partner of GTCR Mezzanine Partners, L.P., the general partner of GTCR Capital Partners, L.P., and therefore may be deemed to share investment and voting control over the shares of common stock held by GTCR Capital Partners, L.P. Each of Messrs. Rauner and Edwards disclaims beneficial ownership of the shares of common stock owned by Golder, Thoma, Cressey, Rauner Fund V, L.P., GTCR Associates V and GTCR Capital Partners, L.P. The address of each of these holders is 6100 Sears Tower, Chicago, Illinois 60606.

5359

(2)	Includes 1,182,691 shares of common stock held by Timothy J. Brodnik with his spouse as joint tenants.
(3)	Includes 567,346 shares of common stock held by John E. Bergstrom with his spouse as joint tenants.
(4)	Includes shares of common stock held by affiliates of Mr. Glick as follows: J. Glick Co., LLC — 454,300; Glick Family Investment — 84,130; Lemnos Corporation — 168,260; and Columbia Trading II, L.L.C. — 134,605. Mr. Glick disclaims beneficial ownership of such shares. The address of each of these holders is 1600 Wynkoop Street, Suite 200, Denver, Colorado 80202.
(5)	Includes 13,403,608 shares of common stock held by Golder, Thoma, Cressey, Rauner Fund V, L.P. of which GTCR V, L.P. is the general partner, and also includes 23,416 shares of common stock held by GTCR Associates V. Each of Messrs. Rauner and Edwards is a principal of Golder, Thoma, Cressey, Rauner, Inc., the general partner of GTCR V, L.P. and the managing general partner of GTCR Associates V, and therefore may be deemed to share investment and voting control over the shares of common stock held by Golder, Thoma, Cressey, Rauner Fund V, L.P. and GTCR Associates V. Each of Messrs. Rauner and Edwards disclaims beneficial ownership of the shares of common stock owned by Golder, Thoma, Cressey, Rauner Fund V, L.P. and GTCR Associates V. The address of each of these holders is 6100 Sears Tower, Chicago, Illinois 60606.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

~~Certain~~ Loans to Executives

In May 1997, we loaned $35,524 to Timothy J. Brodnik and $14,365 to John E. Bergstrom ~~pursuant~~ to ~~promissory notes to~~ finance their purchase of our common and preferred stock. See “Management — Management Employment Agreements.” Each of the promissory notes is secured by a pledge of the securities purchased with the promissory note. The promissory notes bear interest at a rate per annum equal to the applicable federal rate. The principal amount of the promissory notes and all accrued interest matures on December 31, 2005. The promissory notes may be prepaid in full or in part at any time at at the payor’s option. In connection with the loans to executives in April 1999 described below, these loans were repaid.

In April 1999, we loaned Mr. Brodnik $1,530,000 in cash to afford Mr. Brodnik ~~This~~some personal liquidity. This loan is evidenced by a promissory note which bears interest at 8.1% per annum, compounded annually. This note is secured by a pledge of all of Mr. Brodnik’s common stock and preferred stock, but is recourse only to that stock. ~~The~~ The principal amount of this promissory note and all accrued interest matures on December 31, 2005. The promissory note may be prepaid in full or in part at any time at Mr. Brodnik’s option.

In April 1999, we loaned Mr. Bergstrom $30,000 in cash to afford Mr. Bergstrom some personal liquidity. This loan is evidenced by a promissory note which bears interest at 10.0% per annum, compounded annually. This note is secured by a pledge of all of Mr. Bergstrom’s common stock and ~~preferred~~ preferred stock, but is recourse only to that stock. The principal amount of this promissory note and all accrued interest matures on December 31, 2005. The promissory note may be prepaid in full or in part at any time at Mr. Bergstrom’s option.

In April 1999, we loaned Jerrold L. Glick and his affiliate stockholders $950,000 in cash to afford Mr. Glick some personal liquidity. This loan is evidenced by a promissory note which bears interest at 10.0% per annum, ~~compounded~~ compounded annually. This note is secured by a pledge of all of Mr. Glick’s and his affiliate stockholders’ ~~common~~ common stock and preferred stock, but is recourse only to that stock. The principal amount of this promissory note and all ~~accrued~~ accrued interest matures on December 31, 2005. The promissory note may be prepaid in full or in part at any time at Mr. Glick’s option.

In August 1999, we loaned Mr. Bergstrom $250,000 in cash to afford Mr. Bergstrom ~~This~~some personal liquidity. This loan is evidenced by a promissory note which bears interest at 8.0% per annum, compounded annually. This note is secured by a pledge of all of Mr. Bergstrom’s common stock and preferred stock, but is recourse only to that stock. ~~The~~ The principal amount of this promissory note and all accrued interest matures on December 31, 2005. The promissory note may be prepaid in full or in part at any time at Mr. Bergstrom’s option.

In August 2001, we loaned $277,923 to Mr. Brodnik, $139,292 to Mr. Bergstrom and $127,547 to Mr. Glick to finance their purchase of our common stock. See “Management — Management Employment Agreements.” Each of the promissory notes is secured by a pledge of the securities purchased with the promissory note. The promissory notes bear interest at a rate of 5.02% per annum, compounded annually. The principal amount of the promissory notes and all accrued interest matures on December 31, 2005. The promissory notes may be prepaid in full or in part at any time at the payor’s option.

Redemptions of Preferred Stock and Common Stock

In April 1999, we repurchased 293,779 shares of common stock from Timothy J. Brodnik for $1,440,000 in cash.

In May 1999, we redeemed all 7,181.46 shares of preferred stock from GTCR for $8,714,070 in cash consisting of an aggregate liquidation value of $7,181,460 and accrued and unpaid dividends of $1,532,610.

In August 1999, we repurchased 51,004 shares of common stock from John E. Bergstrom for $250,000 in cash.

In September 2000, we repurchased 189,295 shares of common stock from Jerrold L. Glick for the original cost of $3,786 in cash.

AtIn ~~the~~October ~~time of the offering~~2001, we ~~anticipate~~redeemed ~~redeeming~~ all ~~of our remaining 1,490~~178.7191 ~~outstanding~~ shares of preferred stock ~~for~~from ~~a price~~another ~~equal~~shareholder tofor ~~the~~$268,400 ~~sum~~in cash consisting of ~~the~~an ~~preferred stock’s~~ aggregate liquidation value of $1178,~~490,710~~910 and accrued ~~and unpaid dividends.~~ ~~Such~~ dividends ~~equaled $562,396 as~~ of ~~September 30, 2000. Of this, the approximately~~ $~~346~~89,~~301 portion payable to Messrs~~490. ~~Brodnik, Bergstrom and Glick as holders of~~

55 At the time of the offering, we anticipate redeeming all of our remaining 1,311.81 outstanding shares of preferred stock for a price equal to the sum of the preferred stock’s aggregate liquidation value of $1,311,810 and accrued and unpaid dividends. Such dividends equaled $697,309 as of September 30, 2001. Of this, the approximately $483,337 portion payable to Messrs. Brodnik, Bergstrom and Glick as holders of 917.93 shares of preferred stock would be satisfied by offsetting a like amount against their promissory notes discussed above under “Loans to Executives” and the remaining approximately $589,853 payable to the other holders of the remaining 393.88 shares of preferred stock would be paid in cash.

917.92 shares of preferred stock would be satisfied by offsetting a like amount against their promissory notes discussed above under “Certain Loans to Executives” and the remaining approximately $ payable to the other holders of the remaining 572.79 shares of preferred stock would be paid in cash.

Professional Services Agreement

We are party to a professional services agreement with GTCR under which GTCR has agreed to consult with us on business and financial matters, including corporate strategy, budgeting of corporate investments, acquisition and divestiture strategies and debt and equity financings. In exchange for such services, GTCR is entitled to an annual management fee of up to $150,000, plus reimbursement of out-of-pocket expenses, and a fee of 1% of the amount of debt or equity capital raised by us from any source. In October 1999, in connection with our acquisition of APL, we raised $140.0 million of debt financing and thus a $1.4 million fee would have been owed to GTCR. GTCR agreed to amend the professional services agreement to eliminate this fee in exchange for our agreement to pay a $1.4 million one-time success fee, plus interest at 8% per annum from October 1999, upon consummation of a change of control or an initial public offering. This fee will be paid to GTCR upon consummation of the offering. This agreement will automatically terminate upon consummation of the offering, and except as provided above, no fee is payable with respect to the issuance of the common stock in the offering. Bruce V. Rauner and Donald J. Edwards, each of whom is a principal of GTCR, will continue to serve as directors of the Company.

Stock Purchase Agreement

We are party to a purchase agreement with GTCR dated as of May 2, 1997, pursuant to which GTCR made its investment in our company. At that time, GTCR purchased 13,427,025 shares of our common stock at a price of $0.02 per share and 7,181.46 shares of our preferred stock at a price of $1,000 per share. The purchase agreement provides that as long as GTCR owns at least 15% of the securities purchased thereunder, we ~~must~~ must obtain GTCR’s prior consent before taking ~~certain~~ important actions, including paying dividends, issuing equity securities, ~~acquiring~~ acquiring other businesses or merging with other entities. The ~~provisions~~ provisions of the purchase agreement providing GTCR with such consent rights will be terminated upon completion of the offering.

Consulting and Non-Competition Agreement

We have a consulting and non-competition agreement with Jerrold L. Glick dated as of May 2, 1997 ~~pursuant~~under to which Mr. Glick provides consulting services to us. The agreement will terminate upon the first to occur of:


	•	the resignation or removal of Mr. Glick from our board of directors;

	•	the termination of the agreement by either party upon thirty days prior written notice; and

	•	the death or incapacity of Mr. Glick.

We agreed to reimburse Mr. Glick for all reasonable ~~expenses~~ expenses incurred by him in the course of performing his duties under the agreement. During the term of the agreement, Mr. Glick has agreed not to compete with us or solicit any of our employees or customers. InWith ~~1999,~~respect to fiscal year 2000, Mr. Glick received a total of $87142,~~484~~076 in compensation or reimbursement of expenses from us under this agreement or otherwise.

Stockholders Agreement

In connection with our formation, we and our stockholders entered into a stockholders agreement dated as of May 2, 1997, as amended, which:

• provides for the designation of our board of directors; • imposes ~~certain~~ restrictions on the transfer of our shares; • requires all stockholders, upon the approval by a majority of the stockholders, to support, to the extent required, an initial public offering or a sale of the company; • requires us to offer to sell shares to the stockholders upon authorization of a dilutive issuance or sale of additional shares; and • grants stockholders affiliated with GTCR participation rights in connection with a sale of shares by other stockholders.

• requires the stockholders to take certain actions upon the approval by a majority of the stockholders in connection with an initial public offering or a sale of the company; • requires us to offer to sell shares to the stockholders under certain circumstances upon authorization of an issuance or sale of additional shares; and • grants certain of the stockholders participation rights in connection with a sale of shares by other stockholders.

Upon the completion of the offering, the stockholders agreement will be terminated.

Subordinated Debt Agreement

We are party to a senior subordinated loan agreement, dated June 12, 2001 with GTCR Capital Partners, L.P. (“GTCR Capital”), an affiliate of GTCR, and Jerrold L. Glick pursuant to which we guaranteed the loans made by GTCR Capital and Mr. Glick to our subsidiary, AML Inc. Under this agreement, GTCR Capital and Mr. Glick loaned an aggregate of $15.0 million to AML Inc. The proceeds of such loans were used to repay a portion of the revolving loans outstanding under our senior credit facility. The subordinated loans bear an interest rate of 14%, and the principal amount and accrued interest matures on June 12, 2008. Subject to the terms of our senior credit facility and the senior subordinated loan agreement, the subordinated loans may be prepaid in full or in part at any time at AML Inc.’s option. Subject to the terms of our senior credit facility, the subordinated loans must be prepaid in full upon the occurrence of certain events, including a change in control or an initial public offering. In connection with the subordinated loans, we issued a warrant to GTCR Capital to purchase 1,069,959 shares of our common stock and a warrant to Mr. Glick to purchase 98,714 shares of our common stock. The purchase price of the common stock under the warrants was $0.01 per share. GTCR Capital and Mr. Glick exercised their warrants in full on June 12, 2001.

Registration Agreement

In connection with our formation, we and our stockholders ~~entered~~ entered into a registration agreement dated as of May 2, 1997, as amended. ~~Pursuant~~Under tothis ~~the~~ agreement, the existing stockholders are entitled to registration rights. Holders of at least a majority of the shares of common stock held by the existing stockholders may require us to effect the registration of their shares of common stock from time to time. Such requirement is called a demand registration. We are required to pay all registration expenses in connection with all “short-form” demand registrations and up to four “long-form” demand registrations. In addition, if we propose to register any of our common stock under the Securities Act, whether for our own account or otherwise, the existing stockholders are entitled to notice of the registration and, subject to ~~certain~~ priority provisions, are entitled to include their shares of common stock in such registration with all registration expenses being paid by us. Notwithstanding the foregoing, we will not be obligated to effect a demand registration within six months after the effective date of a prior demand registration or of a registration we initiate. A request may be delayed by us for up to six months, but on no more than once in any twelve-month period. The existing stockholders have waived their registration rights under the registration agreement in connection with the offering.

Investment in LabPortal, Inc.

WeLabPortal ~~recently~~is ~~sold~~a ~~certain~~business ofthat ~~our~~provides web-enabled clinical laboratory connectivity software products and services. On October 24, 2000, we sold intellectual property and computer hardware and accessories touseful in that business to LabPortal in exchange for $2.0 million of redeemable preferred stock of LabPortal. ~~LabPortal~~ ~~is a new business that will provide web-enabled clinical laboratory connectivity software products and services.~~ At the same time, Park City Solutions, Inc., another GTCR portfolio company, also sold ~~certain of its~~ intellectual property to LabPortal in exchange for $2.0 million of redeemable preferred stock of LabPortal. ~~Once LabPortal’s software is~~We ~~available~~are ~~for use, we expect to be~~ a customer of LabPortal and party to ~~enter into~~ a customary license or usage agreement with LabPortal. GTCR is the majority investor in LabPortal; and ~~Timothy J.~~ ~~Brodnik,~~ Jerrold L. Glick, and ~~certain~~some ~~of our~~AML ~~other~~ employees are also investors in LabPortal. Mr. Brodnik and Donald J. Edwards are also directors of LabPortal. In connection with Mr. Brodnik’s appointment to the LabPortal board, he was granted an option to acquire up to approximately 5% of LabPortal’s common stock at an exercise price significantly in excess of the current fair market value of LabPortal’s common stock. In May, 2001 LabPortal sold shares of its common stock and granted options to purchase shares of its common stock to certain of our executive officers and employees. The purchase price for such shares and the exercise price of such options were equal to the fair market value of LabPortal’s common stock at such time. The LabPortal common stock is subject to repurchase by GTCR and LabPortal upon the termination of the holder’s employment with us.

Practice Management Agreement

We have a practice management agreement with Robert R. Belliveau, M.D., Thome J. Butler, M.D., Associated Pathologists, Chartered, or ~~APC~~Associated Pathologists, dated as of October 13, 1999, under which we provide administrative and management services to ~~APC~~Associated Pathologists, and Associated ~~APC~~Pathologists provides pathology medical services to us. This agreement was entered into in connection with our acquisition of some ~~certain~~ of the assets of ~~APC~~Associated Pathologists concurrent with our acquisition of APL. Our compensation under this agreement is equal to the gross revenues of ~~APC~~Associated ~~less~~Pathologists ~~certain~~ less expenses of ~~APC~~Associated Pathologists incurred under the agreement. During the term of the agreement and for at least five years thereafter, ~~APC~~Associated Pathologists agreed not to compete with us or solicit any of our employees or customers of ours.

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DESCRIPTION OF CAPITAL STOCK

Under our certificate of incorporation, we are authorized to issue shares of common stock and shares of preferred stock. Shares of each class have a par value of $.01 per share. The following description summarizes the material provisions of our capital stock.

Common Stock

As of September 1530, ~~2000~~2001, there were ~~shares~~ 22,001,049 shares of common stock outstanding, which were held of record by 45 58 shareholders. Each share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. Subject to any preference rights of holders of preferred stock, the holders of common stock are entitled to receive dividends, if any, declared from time to time by the directors out of legally available funds. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to any rights of holders of preferred stock to prior distribution.

The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable and the shares of common stock to be issued on completion of this offering will be fully paid and nonassessable.

Serial Preferred Stock

The board of directors has the authority, without action by the stockholders, to designate and issue preferred stock and to designate the rights, preferences and privileges of each series of preferred stock, which may be greater than the rights attached to the common stock. It will not be possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of common stock until the board of directors determines the specific rights attached to that preferred stock. The effects of issuing preferred stock could include one or more of the following:


	•	restricting dividends on the common stock;

	•	diluting the voting power of the common stock;

	•	impairing the liquidation rights of the common stock; or

	•	delaying or preventing a change of control of AML.

There will be no shares of preferred stock outstanding immediately after this offering, and we have no current plan to issue any shares of preferred stock outstanding.

Options

As of ~~June~~September 30, ~~2000~~2001, options to purchase a total of 1,663,941 shares of common stock were outstanding, of which 517,846 have vested. The exercise prices of the vested options range from $ ~~to $~~ 0.02 ~~In addition, of the outstanding options have an exercise price equal~~ to ~~the initial public offering price of our common stock~~$10.40.

Anti-Takeover Effects of ~~Provisions of Delaware Law and~~ our Certificate of Incorporation and Bylaws

Some provisions of our certificate of incorporation and bylaws may be deemed to have an anti-takeover effect and may delay or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders.

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These provisions include:

Classified Board of Directors

Our board of directors is divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the board of directors is elected each year. These provisions, when coupled with the provision of our certificate of incorporation authorizing the board of directors to fill vacant directorships or increase the size of the board of directors, may deter a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors by filling the vacancies created by this removal with its own nominees.

Cumulative Voting

Our certificate of incorporation expressly denies our stockholders the right to cumulative voting in the election of directors. As a result, stockholders may not aggregate their votes for a single director.

Stockholder Action; Special Meeting of Stockholders

Our certificate of incorporation eliminates the ability of stockholders to act by written consent. It further provides that special meetings of our stockholders may be called only by the chairman of the board of directors, the ~~president~~chief executive officer or a majority of the board of directors. As a result, stockholders must rely on management to call a special meeting or wait until the next annual meeting to hold a vote on extraordinary matters like a significant transaction.

Advance Notice Requirements for Stockholder Proposals and Directors Nominations

Our bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide timely notice in writing. To be timely, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices not less than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders. However, in the event that the annual meeting is called for a date that is not within 30 days before or after that anniversary date, notice by the stockholder in order to be timely must be received not later than the close of business on the tenth day following the date on which notice of the date of the annual meeting was mailed to stockholders or made public, whichever first occurs. Our bylaws also specify requirements as to the form and content of a stockholder’s notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual meeting of stockholders.

Authorized But Unissued Shares

The authorized but unissued shares of common stock and preferred stock will be available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of AML by means of a proxy contest, tender offer, merger or otherwise.

Amendments; Supermajority Vote Requirements

The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or by-laws, unless either a corporation’s certificate of incorporation or bylaws require a ~~greater~~ ~~percentage. Our certificate of incorporation imposes~~ ~~supermajority vote requirements in connection with business combination transactions and the amendment of provisions of our certificate of incorporation and bylaws,~~

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greater percentage. Our certificate of incorporation imposes supermajority vote requirements in connection with business combination transactions and the amendment of provisions of our certificate of incorporation and bylaws, including those provisions relating to the classified board of directors, action by written consent and the ability of stockholders to call special meetings.

Material Provisions of Delaware Law

Following the consummation of this offering, we will be subject to the “Business Combination” provisions of the Delaware General Corporation Law. In general, such provisions prohibit a publicly held Delaware corporation from engaging in various “business combination” transactions with any “interested stockholder” for a period of three years after the date of the transaction in which the person became an “interested stockholder,” unless:


	•	the transaction is approved by the board of directors prior to the date the “interested stockholder” obtained such status,

	•	upon consummation of the transaction which resulted in the stockholder becoming an “interested stockholder,” the “interested stockholder” owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by (a) persons who are directors and also officers and (b) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or

	•	on or subsequent to such date the “business combination” is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the “interested stockholder.”

A “business combination” is defined to include mergers, asset sales and other transactions resulting in financial benefit to a stockholder. In general, an “interested stockholder” is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporation’s voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts with respect to AML and, accordingly, may discourage attempts to acquire our company.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is ~~American~~ American Stock Transfer & Trust Company. Its address is ~~40 Wall~~59 ~~Street~~Maiden Lane, New York, New York ~~10005~~10038.

Listing

We are applying to list our common stock on the ~~Nasdaq~~New ~~National~~York Stock ~~Market~~Exchange under the symbol “~~AMLS~~AMJ.”

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our common stock. Future sales in the public markets of substantial amounts of common stock, including shares issued on the exercise of outstanding options, could adversely affect the market prices prevailing from time to time for the common stock. It could also impair our ability to raise capital through future sales of equity securities.

After completion of this offering, we will have shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options. All of the shares of common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act, except for any of the shares that are acquired by affiliates as that term is defined in Rule 144 under the Securities Act.

Shares acquired by affiliates and the remaining shares held by existing shareholders are restricted securities as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144, which is summarized below. The following table illustrates the shares eligible for sale in the public market assuming Credit Suisse First Boston Corporation does not release any portion of the shares subject to lock-up agreements described below and under “Underwriting.”


NUMBER OF SHARES				DATE

				Upon the date of this prospectus subject, in some cases, to volume and manner of sale limitations under Rule 144.
				After 90 days from the date of this prospectus.
				After 180 days from the date of this prospectus, subject, in some cases, to volume and manner of sale limitations under Rule 144.
				At various times after 180 days after the date of this prospectus on expiration of applicable one year holding periods, subject to volume and manner of sale limitations under Rule 144.

Lock-Up

We have agreed that, without the prior written consent of Credit Suisse First Boston Corporation, we will not, directly or indirectly, offer, sell or otherwise dispose of any shares of capital stock or any securities that may be converted into or exchanged for shares of capital stock for a period of 180 days from the date of this prospectus. Each of our officers, directors and substantially all of our existing stockholders have also entered into an agreement to the same effect.

Rule 144

In general, Rule 144 has the effect that, beginning 90 days after the date of this prospectus, a person who has beneficially owned ordinary shares for at least one year would be entitled to sell within any three month period a number of shares that does not exceed the greater of:

	•	1% of the total number of shares of common stock then outstanding; or
	•	the average weekly trading volume of the common stock on ~~The~~the ~~Nasdaq~~New ~~National~~York ~~Market~~Stock Exchange during the four calendar weeks preceding the filing of notice on Form 144 with respect to the sale.

Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.

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Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, ~~including the holding period of any prior owner which was not an affiliate,~~ is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of of Rule 144. Therefore, unless otherwise restricted, shares eligible for sale under Rule 144(k) may be sold immediately upon completion of this offering.

Rule 701

In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchases ordinary shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this prospectus is entitled to resell those shares 90 days after the effective date of this prospectus in reliance on Rule 144, without having to comply with the restrictions, including the holding period, contained in Rule 144.

Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. It permits non-affiliates to sell their Rule 701 shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling those shares.

Stock Options

Following the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of common stock issued or reserved for issuance under our various stock option plans. The registration statement will become effective automatically upon filing. As of ~~June~~September 30, ~~2000~~2001, options to purchase 1,663,941 shares of common stock were issued and outstanding, of which 517,846 options had vested. Accordingly, shares registered under the registration statement will, subject to vesting provisions and Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market immediately after the 180-day lock-up agreements expire.

Registration Rights

The existing stockholders of the Company have ~~certain~~ registration rights as described under “Certain Relationships ~~and~~ and Related Transactions — Registration Agreement.”

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MATERIAL UNITED STATES TAX CONSIDERATIONS

FOR NON-UNITED STATES HOLDERS

General

The following is a general discussion of the principal U.S. federal income and estate tax consequences of the ownership and disposition of our common stock by a Non-U.S. Holder. For this purpose, the term “Non-U.S. Holder” is defined as any person or entity that is, for U.S. federal income tax purposes:


	•	a foreign corporation or other entity taxable as a corporation;

	•	a non-resident alien individual; or

	•	a foreign estate or trust.

If an entity treated as a partnership for U.S. federal income tax purposes holds our common shares, the tax treatment of each partner will generally depend upon the status of the partner and upon the activities of the partnership. If you are a partner of a partnership holding our common shares, you should consult your tax advisor.

This discussion is based on currently existing provisions of the Internal Revenue Code, existing, temporary and proposed Treasury ~~regulations~~ regulations promulgated thereunder, and administrative and ~~judicial~~ judicial interpretations thereof, all as in effect or proposed on the date hereof and all of which are subject to change, possibly with retroactive effect, or different interpretations. This discussion is limited to Non-U.S. Holders who hold shares of common stock as capital assets within the meaning of section 1221 of the Internal Revenue Code. Moreover, this discussion is for general information only and does not address all of the tax consequences that may be relevant to:


	•	particular Non-U.S. Holders in light of their personal circumstances;

	•	special tax rules that may apply to some Non-U.S. Holders, including banks, insurance companies, dealers in securities and traders in securities who elect to apply a market-to-market method of accounting;

	•	special tax rules that may apply to a Non-U.S. Holder that holds our common stock as part of a “straddle,” “hedge” or “conversion transaction”; and

	•	to individuals who relinquish their U.S. citizenship or residence.

An individual may, subject to certain exceptions, be deemed to be be a resident alien, as opposed to a nonresident alien, by ~~virtue~~ virtue of being present in the U.S. for at least 31 days in ~~the~~ the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year, counting for these purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year ~~are counted~~. Resident aliens are subject to U.S. ~~federal~~ federal income tax as if they were U.S. citizens and thus, are ~~not~~ not Non-U.S. Holders for purposes of this discussion.

We have not and will not seek a ruling from the IRS with respect to the U.S. federal income tax consequences described below, and as a result, there can be no assurance that the IRS will not disagree with or challenge any of the conclusions ~~set~~described ~~forth~~ in this discussion.

Each prospective purchaser of common stock is advised to consult a tax advisor with respect to current and possible ~~future~~ future tax consequences of purchasing, owning, and disposing of ~~common~~ common stock as well as any tax consequences that may arise under the laws of any U.S. state, municipality or other taxing jurisdiction, or non-U.S. taxing jurisdiction.

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Dividends

We do not anticipate paying dividends on our common stock in the foreseeable future. However, in the event that dividends are ~~paid~~ paid on shares of common stock, dividends paid to a Non-U.S. ~~Holder~~ Holder of common stock generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. To claim ~~the~~ the benefit of a lower federal income tax rate under an income ~~tax~~ tax treaty, a Non-U.S. Holder of common stock must properly file ~~with~~ with the payor an IRS Form ~~1001 or an IRS Form~~ W-8BEN, or successor form, claiming an exemption from or reduction in withholding under such tax treaty. ~~A Form 1001 is replaced~~ ~~with a Form W-8BEN for payments after December 31,~~ ~~2000.~~

Any dividends paid on shares of common stock to a Non-U.S. Holder will not be subject to withholding tax, but instead will be subject to U.S. federal income tax on a net basis at applicable graduated individual or corporate rates if:

	•	dividends are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States or, where a tax treaty applies, are attributable to a U.S. permanent establishment, or, in the case of an individual, a “fixed base” in the U.S., of the Non-U.S. Holder, (which we collectively ~~referred~~refer to as “U.S. trade or business income”); and
	•	an IRS Form ~~4224 or a Form~~ W-8ECI, or successor form, is filed with the payor.

Any U.S. trade or business income received by a foreign corporation may, under ~~certain~~specified circumstances, be subject to an additional “branch profits tax” at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. ~~A Form 4224 is replaced with a Form W-8ECI for~~ ~~payments after December 31, 2000.~~

~~Unless~~A the payor has knowledge to the contrary, dividends paid prior to January 1, 2001 to an address outside the United States are presumed to be paid to a resident of such country for purposes of the withholding discussed above and for purposes of determining the applicability of a tax treaty rate. However, recently finalized Treasury Regulations pertaining to U.S. federal withholding tax, the “Final Withholding Tax Regulations”,provide that a Non-U.S. Holder must comply with certification procedures, or, in the case of payments made outside the United States with respect to an offshore account, ~~certain~~ documentary evidence procedures, directly or under specified circumstances through an intermediary, to obtain the benefits of a reduced withholding rate under an income tax treaty ~~with respect to dividends paid after December 31, 2000~~. ~~In addition,~~A ~~the Final Withholding Tax Regulations will require a~~ Non-U.S. Holder who provides an IRS Form W-8BEN or successor form, as discussed above, may also be required to provide its U.S. taxpayer ~~identification~~ identification number.

A Non-U.S. Holder of common stock eligible for a reduced rate of U.S. withholding tax ~~pursuant~~under to an income tax treaty may obtain a a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.

Gain on Disposition of Common Stock

A Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale or other disposition of common stock unless:

(1) the gain is a U.S. trade or business income;

(2) in the case of a Non-U.S. Holder who is an individual and holds the common stock as a capital asset, such holder is present in United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met; or


	(2)	in the case of a Non-U.S. Holder who is an individual and holds the common stock as a capital asset, such holder is present in United States for 183 or more days in the taxable year of the sale or other disposition and other conditions are met; or

	(3)	We are or have been a “U.S. real property holding corporation” (as defined below) for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the Non-U.S. Holder’s holding period for its common stock as discussed below.

64 An individual Non-U.S. Holder who falls under clause (1) above will, unless an applicable treaty provides otherwise, be taxed on his or her net gain derived from the sale of Common Stock under regular graduated U.S. federal income tax rates. An individual Non-U.S. Holder who falls under clause (2) above will be subject to a flat 30% tax on the gain derived from such sale, which may be offset by allowable U.S. capital losses.

~~(3)~~ A WeNon-U.S. ~~are~~Holder orthat ~~have~~is ~~been~~ a ~~“U.S.~~foreign ~~real~~corporation ~~property~~falling ~~holding~~under clause ~~corporation,”~~(1) orabove awill ~~“USRPHC,”~~be ~~for~~taxed on its gain under regular corporate U.S. federal income tax ~~purposes~~rates atand ~~any~~may ~~time~~be ~~within~~subject to an additional branch profits tax equal to 30% of its “effectively connected earnings and profits” within the ~~shorter~~meaning of the ~~five-year~~Internal ~~period~~Revenue ~~preceding~~Code, for the ~~disposition~~taxable oryear, as ~~the~~adjusted, ~~Non-U.S.~~unless ~~Holding~~it ~~period~~qualifies for ~~its~~a ~~common~~lower ~~stock~~rate asunder ~~discussed~~an applicable ~~below~~income tax treaty.

AnA ~~individual~~corporation ~~Non-~~is a U.S. ~~Holder~~real ~~who~~property ~~falls~~holding ~~under~~corporation ~~clause~~if the ~~(1) above~~fair ~~will,~~market ~~unless~~value anof ~~applicable~~the ~~treaty~~U.S. ~~provides otherwise,~~real beproperty ~~taxed~~interests onheld ~~his~~by the corporation is 50% or ~~her~~more ~~net~~of ~~gain~~the ~~derived~~aggregate ~~from~~fair market value of the ~~sale~~sum of its U.S. and foreign real property interests ~~under~~and ~~regular~~any ~~graduated~~other assets used or held for use by the corporation in a trade or business. Based on our current and anticipated assets, we believe that we are not currently, and are not likely to become, a U.S. ~~federal~~real ~~income~~property ~~tax~~holding ~~rates~~corporation. AnHowever, ~~individual~~since ~~Non-~~the determination of U.S. ~~Holder~~real ~~who~~property ~~falls~~holding corporation ~~under~~status ~~clause~~is ~~(2) above~~based upon the composition of our assets ~~will~~from time to time, and because there are uncertainties in the application of relevant rules, there can be ~~subject~~no assurance that we will not become a U.S. real property holding corporation. If we were to become a ~~flat~~U.S. ~~30%~~real ~~tax~~property onholding ~~the~~corporation, then gain ~~derived~~on ~~from~~ the sale, ~~which~~or ~~may~~other bedisposition ~~offset~~of bycommon ~~certain~~stock by a Non-U.S. ~~capital~~Holder ~~losses~~generally would be subject to U.S. federal income tax unless both

A Non-U.S. Holder that is a foreign corporation falling under clause (1) above will be taxed on its gain under regular corporate U.S. federal income tax rates and may be subject to an additional branch profits tax equal to 30% of its “effectively connected earnings and profits” within the meaning of the Internal Revenue Code, for the taxable year, as adjusted for certain items, unless it qualifies for a lower rate under an applicable income tax treaty.

A corporation is a USRPHC if the fair market value of the U.S. real property interests held by the corporation is 50% or more of the aggregate fair market value of its U.S. and foreign real property interests and any other assets used or held for use by the corporation in a trade or business. Based on our current and anticipated assets, we believe that we are not currently, and are likely not to become, a USRPHC. However, since the determination of USRPHC status is based upon the composition of our assets from time to time, and because there are uncertainties in the application of certain relevant rules, there can be no assurance that we will not become a USRPHC. If we were to become a USRPHC, then gain on the sale or other disposition of common stock by a Non-U.S. Holder generally would be subject to U.S. federal income tax unless both


	•	the common stock was “regularly traded” on an established securities market within the meaning of applicable Treasury regulations; and

	•	the Non-U.S. Holder actually or constructively owned 5% or less of the common stock during the shorter of the five-year period preceding such disposition or the Non-U.S. Holder’s holding period.

Non-U.S. Holders should consult their tax advisors concerning ~~any~~ any U.S. tax consequences that may arise if we were to become a ~~USRPHC~~U.S. real property holding corporation.

Federal Estate Tax

Common stock owned or treated as owned by an individual Non-U.S. Holder at the time of death will be included in such holder’s gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise.

Information Reporting and Backup Withholding Tax

We must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to each holder and the tax withheld with respect to dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available by the IRS to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty or ~~certain~~ other applicable agreements.

Backup withholding is imposed at the rate of 3130.5% on(30% ~~certain~~after December 31, 2001) on specified payments to persons that fail to furnish identifying information to the payer. ~~Backup~~A ~~withholding~~Non-U.S. Holder generally will ~~not~~be ~~apply~~subject to backup withholding tax ~~dividends~~unless ~~paid~~specified ~~prior~~certification toprocedures, ~~January 1~~or, ~~2001~~in tothe acase ~~Non-U.S. Holder~~of payments atmade ~~an address~~ outside the United States ~~unless~~with ~~the~~respect ~~payer~~to ~~has~~an ~~knowledge~~offshore ~~that~~account, ~~the~~documentary ~~payee~~evidence isprocedures, aare ~~U.S.~~complied with, ~~person~~directly or under specified circumstances through an intermediary. InBackup ~~the~~withholding ~~case~~and ofinformation reporting generally will also apply to dividends paid ~~after~~on ~~December 31,~~common ~~2000,~~stock ~~the Final~~at ~~Withholding~~addresses ~~Tax~~inside ~~Regulations~~the ~~provide~~United ~~that~~States ato Non-U.S. ~~Holder~~Holders that fail ~~generally~~to ~~will~~provide beidentifying ~~subject~~information toin ~~withholding~~the ~~tax~~manner atrequired. Treasury aRegulations ~~31%~~provide ~~rate~~presumptions ~~unless~~ under ~~specified~~which ~~certification~~a ~~procedures,~~Non-U.S. Holder ~~or,~~would inbe ~~the~~subject ~~case~~to ofbackup ~~payments made~~withholding ~~outside~~and ~~the~~information reporting ~~United~~unless ~~States~~certification ~~with~~from ~~respect~~the toholder anof ~~offshore~~the Non-U.S. ~~account,~~Holder’s ~~documentary~~Non-U.S. ~~evidence~~status ~~procedures,~~is ~~are~~provided.

65 Payment of the proceeds of a sale of common stock effected by or through a U.S. office of a broker is subject to both backup withholding at the rate of 30.5% (30% after December 31, 2001)

~~complied~~and information reporting unless the beneficial owner provides the payer with, ~~directly~~its orname and address and certifies under penalties ~~certain~~of ~~circumstances~~perjury ~~through~~that anit is a Non-U.S. Holder, or otherwise establishes ~~intermediary~~an exemption. ~~Backup~~In general, backup withholding and information reporting ~~generally~~ will ~~also~~not apply to ~~dividends~~a ~~paid~~payment onof the proceeds of a sale of common stock atby or through a foreign ~~addresses~~office ~~inside~~of ~~the~~a ~~United~~broker. ~~States~~If, tohowever, ~~Non-~~such broker is, for U.S. federal ~~Holders~~income tax purposes, a U.S. person, a controlled foreign corporation, a foreign person that ~~fail~~derives 50% or more of its togross ~~provide~~income ~~identifying~~from ~~information~~the conduct of a trade or business in the United ~~manner~~States, ~~required.~~or ~~The Final~~a ~~Withholding~~foreign ~~Tax~~partnership ~~Regulations~~that ~~provide~~at ~~presumptions~~any ~~under~~time during ~~which~~its tax year either is engaged in the conduct of a ~~Non-~~U.S. ~~Holder~~trade ~~would~~or business or has as partners one or more U.S. persons that, in the aggregate, hold more than 50% of the income or capital interest in the partnership, such payments will be subject to information reporting, but not backup withholding, unless such ~~and~~broker ~~information~~has ~~reporting~~documentary ~~unless~~evidence ~~certification~~in ~~from~~its ~~the~~records ~~holder~~that ofthe beneficial ~~the~~owner is a Non-U.S. Holder’s ~~Non-U.S.~~and ~~status~~other isspecified conditions ~~provided~~are met or the beneficial owner otherwise establishes an exemption.

~~Payment~~Backup ofwithholding ~~the~~is ~~proceeds~~not ofan aadditional ~~sale of common stock effected by or through a U~~tax.S. ~~office~~Any ~~of a broker is subject to both backup~~amounts ~~withholding~~withheld atunder the ~~rate~~backup ofwithholding ~~31%~~rules ~~and~~generally ~~information~~will ~~reporting unless~~be ~~the~~allowed ~~beneficial~~as ~~owner~~a ~~provides~~refund ~~the~~or ~~payer~~a ~~with~~credit ~~its~~against ~~name~~the ~~and address and certifies under penalties of perjury that it is a~~ Non-U.S. Holder,’s or otherwise establishes an exemption. In general, backup withholding and information reporting will not apply to a payment of the proceeds of a sale of common stock by or through a foreign office of a broker. If, however, such broker is, for U.S. federal income tax ~~purposes~~liability, aprovided ~~U.S. person, a controlled foreign corporation, or a foreign person that derives 50% or more if its gross income for certain periods from~~ the ~~conduct of a~~ ~~trade~~required orinformation ~~business in the United States, or, in addition, for periods after December 31, 2000, a foreign partnership that at any time during its tax year either~~ is ~~engaged~~furnished in ~~the conduct of~~ a ~~U.S.~~timely ~~trade~~manner ~~or business or has as partners one or more U.S. persons that, in the aggregate, hold more than 50% of the income or capital interest in the partnership, such payments will be subject~~ to ~~information reporting, but not backup withholding,~~ ~~unless such broker has documentary evidence in its records that~~ the ~~beneficial owner is a Non-U~~ IRS.~~S. Holder and other specified~~ ~~conditions are met or the beneficial owner otherwise establishes~~ ~~an exemption.~~

72 ~~The Final Withholding Tax Regulations unify current certification~~ procedures and forms and clarify reliance standards. Except as noted above with respect to foreign brokers that are partnerships, the Final Withholding Tax Regulations do not significantly alter the substantive withholding and information reporting requirements but do alter the procedures for claiming the benefits of an income tax treaty and change the certification procedures relating to the receipt by intermediaries of payments on behalf of the beneficial owner of shares of common stock. Non-U.S. Holders should consult their own tax advisors regarding the effect, if any, of the Final Withholding Tax Regulations on their particular situations.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against the Non-U.S. Holder’s U.S. federal income tax liability provided the required information is furnished in a timely manner to the IRS.

UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting agreement, ~~dated~~ dated , ~~2000~~2001, we have agreed to sell to the underwriters named below, ~~for~~ for whom Credit Suisse First Boston Corporation, Banc of America Securities LLC, U.S. Bancorp Piper Jaffray Inc. and First Union Securities, Inc. are acting as representatives, the following respective numbers of shares of common stock.

Number of Underwriter Shares Credit Suisse First Boston Corporation Banc of America Securities LLC U.S. Bancorp Piper Jaffray Inc. First Union Securities, Inc. Total

The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the representative may change the public offering price and concession and discount to broker/dealers ~~may be changed by the representatives~~.

The following table summarizes the compensation and estimated expenses we will pay.

Per Share

Total

Without

With

Without

With

Over-allotment

Underwriting Discounts and Commissions paid by us

Expenses payable by us

73 ~~The underwriters do not intend to confirm sales to any accounts~~ ~~over which they exercise discretionary authority.~~

Affiliates of Banc of America Securities LLC and First Union Securities, Inc. have provided and will in the future likely provide us with various financial services in the ordinary course of their business. In particular, an affiliate of First Union Securities, Inc. is a lender under our senior credit facility. As a result of our use of the net proceeds of the offering to repay indebtedness under the senior credit facility, this affiliate will receive more than 10% of the net offering proceeds. The offering therefore is being conducted in accordance with the applicable provision of Rule 2720 of the National Association of Securities Dealers, Inc. Conduct Rules. Rule 2720 requires that the initial public offering price of the shares of common stock not be higher than that recommended by a “qualified independent underwriter” meeting certain standards. Accordingly, Credit Suisse First Boston Corporation is assuming the responsibilities of acting as the qualified independent underwriter in pricing the offering and conducting due diligence. The initial public

~~offering~~The ~~price~~underwriters ofdo ~~the~~not ~~shares~~intend ofto ~~common~~confirm ~~stock~~sales isto noany ~~higher than~~accounts ~~the~~over ~~price~~which ~~recommended~~they byexercise ~~Credit~~discretionary ~~Suisse First Boston Corporation~~authority.

WeAffiliates ~~have~~of ~~agreed~~Banc ~~that~~of weAmerica ~~will~~Securities ~~not~~LLC ~~offer,~~and ~~sell~~First Union Securities, ~~contract~~Inc. tohave ~~sell,~~provided and will in the future likely ~~pledge~~provide orus ~~otherwise~~with ~~dispose~~various financial services in the ordinary course of, ~~directly~~their orbusiness. ~~indirectly~~In particular, oran ~~file with~~affiliate ~~the~~of First Union Securities, ~~and~~Inc. ~~Exchange~~is ~~Commission~~ a ~~registration statement~~lender under our senior credit facility. As a result of our use of the ~~Securities~~net ~~Act~~proceeds ~~relating~~of the offering to repay indebtedness under the senior credit facility, this ~~any~~affiliate ~~shares~~will receive more than 10% of ~~our~~ the ~~common~~net ~~stock~~offering proceeds. orThe ~~securities~~offering ~~convertible~~therefore ~~into~~is orbeing ~~exchangeable~~conducted orin ~~exercisable~~accordance ~~for~~with ~~any~~the ~~shares~~applicable provision of ~~our~~Rule 2710 ~~common~~of the ~~stock~~National Association of Securities Dealers, orInc. ~~publicly~~Conduct ~~disclose~~Rules. Rule 2710 requires that the ~~intention~~initial topublic ~~make~~offering price ~~any~~of ~~such~~the ~~offer,~~shares ~~sale,~~of ~~pledge,~~common stock not be higher than that ~~disposition~~recommended orby ~~filing,~~a ~~without~~“qualified ~~the~~independent ~~prior~~underwriter” within ~~written~~the ~~consent~~meaning of Rule 2720. Accordingly, Credit Suisse First Boston Corporation ~~for~~is aassuming ~~period~~the responsibilities of ~~180 days~~acting ~~after~~as the ~~date~~qualified ofindependent ~~this~~underwriter ~~prospectus,~~in ~~except~~pricing ~~issuances~~the offering ~~pursuant~~and toconducting due diligence. The initial public offering price of the ~~exercise~~shares of ~~employee~~common stock ~~options~~is ~~outstanding on~~no higher than the ~~date~~price ~~hereof~~recommended orby ~~pursuant~~Credit toSuisse ~~our~~First ~~2000~~Boston ~~Employee Stock Purchase Plan~~Corporation.

We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus, except issuances pursuant to the exercise of employee stock options outstanding on the date hereof or pursuant to our 2001 Employee Stock Purchase Plan.

Our officers, directors and substantially all of our stockholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or such other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus.

The underwriters have reserved for sale, at the initial public offering price up to shares of the common stock for employees, directors and other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares.

We have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect.

We are applying to list our shares of common stock on ~~The~~the ~~Nasdaq~~New York Stock ~~Market’s~~Exchange ~~National Market~~ under the symbol “~~AMLS~~AMJ.”

Prior to this offering, there has been no public market for our common stock. The initial public offering price for the common stock will be negotiated by us and representatives of the underwriters. Among the principal factors to be considered in determining the initial public offering price will be:


	•	market conditions for initial public offerings;

	•	the history of and prospects for our business, our past and present operations;

	•	our past and present earnings and current financial position;

	•	an assessment of our management;

	•	the market of securities of companies in businesses similar to ours; and

	•	the general condition of the securities markets.

There can be no assurance that the initial public offering price will correspond to the price at which the common stock will trade in the public market subsequent to the offering or that an active trading market will develop and continue after the offering.

In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934.


	•	Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

	•	Over-allotment involves sales by the underwriters in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market.

	•	Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

	•	Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a a decline in the market price of the common stock. As a result ~~the~~ the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on ~~The~~the ~~Nasdaq~~New ~~National~~York ~~Market~~Stock Exchange or otherwise and, if commenced, may be discontinued at any time.

75 ~~A prospectus in electronic form may be made available on the web~~ ~~sites maintained by one or more of the underwriters participating~~ in this offering. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters that will make Internet distributions on the same basis as other allocations.

A prospectus in electronic form may be made available on the web sites maintained by one or more of the underwriters participating in this offering. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters that will make Internet distributions on the same basis as other allocations. Credit Suisse First Boston Corporation may effect an on-line distribution through its affiliate, CSFBdirect, Inc., an on-line broker/dealer, as a selling group member.

First Union Securities, Inc., one of the underwriters, is an indirect, wholly-owned subsidiary of Wachovia Corporation. Wachovia Corporation conducts its investment banking, institutional, and capital markets businesses through its various bank, broker-dealer and nonbank subsidiaries (including First Union Securities, Inc.) under the trade name of Wachovia Securities. Any references to Wachovia Securities in this prospectus, however, do not include Wachovia Securities, Inc., member NASD/SIPC and a separate broker-dealer subsidiary of Wachovia Corporation and an affiliate of First Union Securities, Inc., which may or may not be participating as a selling dealer in the distribution of the securities offered by this prospectus supplement.

NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of the common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock.

Representations of Purchasers

By purchasing common stock in Canada and accepting a purchase confirmation a purchaser is representing to us and the dealer from whom the purchase confirmation is received that

• the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under those securities laws; • where required by law, that such purchaser is purchasing as principal and not as agent; and • the purchaser has reviewed the ~~test~~text above under Resale Restrictions.

Rights of Action (-Ontario Purchasers)

The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws.

Enforcement of Legal Rights

All of the issuer’s directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgement obtained in Canadian courts against such issuer or persons outside of Canada.

Notice to British Columbia Residents

A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by the purchaser pursuant to this offering. The report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one report must be filed for common stock acquired on the same date and under the same prospectus exemption.

Taxation and Eligibility for Investment

Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and about the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation.

LEGAL MATTERS

Some of the legal matters in connection with the issuance of the common stock will be passed upon for us by Kirkland & Ellis (a partnership including professional corporations), Chicago, Illinois. The underwriters have been represented by Latham & Watkins, Washington, D.C. Kirkland & Ellis has, from time to time, represented, and may continue to represent, some of the underwriters in connection with various legal matters and GTCR and some of their affiliates in connection with legal ~~matters. In~~ ~~addition, Latham & Watkins has, from time to time,~~ ~~represented and may continue to represent affiliates of GTCR in connection with legal matters.~~

matters. In addition, Latham & Watkins has, from time to time, represented and may continue to represent affiliates of GTCR in connection with legal matters.

EXPERTS

The consolidated financial statements of American Medical Laboratories, Incorporated and subsidiaries as of December 31, ~~1998~~1999 and ~~1999~~2000, and for each of the years in ~~the~~ the three year period ended December 31, ~~1999~~2000 included in ~~this~~ this prospectus and registration statement have been included ~~herein~~ herein in reliance upon the report of KPMG LLP, independent ~~certified~~ certified public accountants, appearing elsewhere in this prospectus, given on the authority of that firm as experts in accounting and auditing.

The combined ~~financial~~ statements of ~~APL~~operations ~~Healthcare Group, Inc.~~ and ~~affiliates~~cash asflows of ~~December 31, 1997 and 1998 and~~APL ~~September 30,~~Healthcare ~~1999~~Group, Inc. and affiliates for ~~each of~~ the ~~years in the three~~ year ~~period~~ ended December 31, 1998 and for the nine month period from January 1, 1999 to September 30, 1999 included in this prospectus and registration statement have been included herein in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere in this prospectus, given on the authority of that firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act for the common stock offered by this prospectus. This prospectus, which is a part of the registration statement, does not contain all of the information in the registration statement or the exhibits and schedules which are part of the registration statement.

For more information about our company and the common stock offered by this prospectus, we refer you to the registration statement and the exhibits and schedules filed as part of the registration statement. You may read and copy any document we file at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC’s world wide web site at ~~http://~~sec.gov.

Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities and Exchange Act and will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC’s public reference rooms and the web site of the SEC.

7178

INDEX TO FINANCIAL STATEMENTS

		Page
American Medical Laboratories, Incorporated
Annual Financial Statements
	Independent Auditors’ Report		F-2
	Consolidated Balance Sheets as of December 31, 1998 and 1999		F-3
	Consolidated Balance Sheets as of December 31, 1999 and 2000		F-3
	Consolidated Statements of Operations for the period January 1, 1997 to May 1, 1997, the period May 2, 1997 to December 31, 1997 and the years ended December 31, 1998 and 1999		F-4
	Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000		F-4
	Consolidated Statement of Changes in Redeemable Preferred Stock and Stockholders’ Equity for the period January 1, 1997 to May 1, 1997, the period May 2, 1997 to December 31, 1997 and the years ended December 31, 1998 and 1999		F-5
	Consolidated Statement of Changes in Redeemable Preferred Stock and Stockholders’ Equity for the years ended December 31, 1998, 1999 and 2000		F-5
	Consolidated Statements of Cash Flows for the period January 1, 1997 to May 1, 1997, the period May 2, 1997 to December 31, 1997 and the years ended December 31, 1998 and 1999		F-6
	Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000		F-6
	Notes to Consolidated Financial Statements		F-8
Interim Financial Statements (unaudited)
	Condensed Consolidated Balance Sheet as of June 30, 2000		F-27
	Condensed Consolidated Balance Sheet as of September 30, 2001		F-27
	Condensed Consolidated Statements of Operations for the six months ended June 30, 1999 and 2000		F-28
	Condensed Consolidated Statements of Operations for the nine months ended September 30, 2000 and 2001		F-28
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 2000		F-29
	Consolidated Statement of Changes in Redeemable Preferred Stock and Stockholders’ Equity for the nine months ended September 30, 2001		F-29
	Notes to Condensed Consolidated Financial Statements		F-30
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 2001		F-30
	Notes to Condensed Consolidated Financial Statements		F-31
APL Healthcare Group, Inc. and Affiliates
Financial Statements
	Independent Auditors’ Report		F-3233
	Combined Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999		F-33
	Combined Statements of Operations for the year ended December 31, 1998 and the nine months ended September 30, 1999		F-34
	Combined Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1999		F-34
	Combined Statements of Cash Flows for the year ended December 31, 1998 and the nine months ended September 30, 1999		F-35
	Combined Statements of Stockholders’ Deficit for the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1999		F-35
	Notes to Combined Statements of Operations and Cash Flows		F-36
	Combined Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1999		F-36
	Notes to Combined Financial Statements		F-37

F-1

INDEPENDENT AUDITORS’ REPORT

The Stockholders and Board of Directors

American Medical Laboratories, Incorporated:

We have audited the accompanying consolidated balance sheets of American Medical Laboratories, Incorporated and subsidiaries as of December 31, ~~1998~~1999 and ~~1999~~2000, and the related consolidated statements of operations, changes in redeemable preferred stock and stockholders’ equity and cash flows for each of the years in the three -year period ended December 31, ~~1999~~2000. These consolidated financial statements are the responsibility of of the Company’s management. Our responsibility is to ~~express~~ express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted ~~auditing~~ ~~standards~~in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to to above present fairly, in all material respects, the ~~consolidated~~ consolidated financial position of American Medical Laboratories, Incorporated and subsidiaries as of December 31, ~~1998~~1999 and ~~1999~~ 2000, and the results of their operations and their cash flows for each of the years in the three -year period ended December 31, ~~1999~~2000, in conformity with accounting principles generally accepted in the United ~~accounting~~States ~~principles~~of America.


	KPMG LLP

McLean, Virginia

~~April~~February 716, ~~2000~~2001 except as to

note 17 which is as of June 12, 2001

F-2

AMERICAN MEDICAL LABORATORIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, ~~1998~~1999 and ~~1999~~2000

(in thousands, except share data)

			1998		1999
			1999		2000
ASSETS
Current assets:
	Cash and cash equivalents		$	—869	$	~~869~~815
	Accounts receivable, less allowance for doubtful accounts of $904 in 1998 and $1,314 in 1999 (notes 7 and 15)			21,798		51,802
	Accounts receivable, less allowance for doubtful accounts of $3,564 in 1999 and $10,360 in 2000 (note 3)			51,802		59,269
	Inventory			1,692		5,456
	Receivable from affiliate, less allowance for doubtful accounts of $0 in 1999 and $665 in 2000 (note 6)			680		65
	Receivable from affiliate (note 5)			306		680
	Notes receivable from employees (note 14)			—		126
	Notes receivable from officers and directors (note 13)			56		—
	Inventory			5,456		7,482
	Income tax receivable			—		1,603
	Income tax receivable (note 13)			1,603		—
	Deferred income taxes (note 12)			718		4,704
	Deferred income taxes (note 13)			2,352		1,001
	Prepaid expenses and other current assets			2,~~221~~955		21,~~955~~160
		Total current assets		2665,~~791~~717		6869,~~069~~918
Restricted cash (note 7)				1,485		—
Property, plant and equipment, net (notes 4 and 8)				24,485		26,635
Property, plant and equipment, net (notes 3 and 7)				6,254		24,485
Intangible assets, net (notes 5 and 7)				100,322		92,867
Notes receivable from officers and directors (note 13)				—		2,760
Notes receivable from officers and directors (note 14)				2,760		2,760
Deferred income taxes (note 12)				412		2,594
Investment in affiliate (note 14)				—		1,625
Other assets				~~131~~3,863		3,~~863~~066
Intangible assets, net (notes 4 and 6)				10,190		100,322
			$	197,147	$	196,871
			$	45,263	$	202,093
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Bank overdraft		$	306	$	—
	Notes payable and capital lease obligations (note 8)		$	7,315	$	9,578
	Accounts payable			412,~~959~~932		1218,~~932~~866
	Notes payable and capital lease obligations (note 7)			1,249		7,315
	Accrued expenses (note 9)			31,079		18,148
	Accrued expenses (note 8)			9,063		31,079
		Total current liabilities		51,326		46,592
	Accrued income taxes			745		—
Notes payable and capital lease obligations, less current portion (note 8)				114,154		118,157
	Deferred income taxes (note 12)			1,211		2,352
Notes payable to stockholders (notes 7 and 8)				17,500		17,500
		Total current liabilities		17,533		53,678
Investment in affiliate (note 6)				1,627		1,908
Deferred income taxes (note 12)				315		2,751
Deferred income taxes (note 13)				157		1,227
Notes payable and capital lease obligations, less current portion (note 7)				11,224		114,154
Other liabilities				1,890		1,766
Notes payable to shareholders (notes 6 and 7)				—		17,500
		Total liabilities		186,654		187,150
Investment in affiliate (note 5)				812		1,627
Commitments and contingencies (notes 6, 8, 10, 11, 14, 15, 16 and 17)
Other liabilities				1,355		1,890
Redeemable preferred stock (note 11):
		Total liabilities		31,239		191,600
	Class A redeemable cumulative 10% preferred stock, $0.01 par value, 60,000 shares authorized, 1,491 shares issued and outstanding in 1999 and 2000, stated at liquidation value			1,909		2,101
Redeemable preferred stock (note 10):
Stockholders’ equity (note 12):
	Class A redeemable cumulative 10% preferred stock, $0.01 par value, 60,000 shares authorized, 8,672 and 1,491 shares issued and outstanding in 1998 and 1999, respectively, stated at liquidation value			10,161		1,909
	Common stock, $0.01 par value, 25,000,000 shares authorized in 1999 and 2000; 20,671,191 and 20,910,495 shares issued in 1999 and 2000, respectively; and 20,671,191 and 20,721,200 shares outstanding in 1999 and 2000, respectively			207		209
Stockholders’ equity (note 11):
	Additional paid-in capital			5,802		8,963
	Common stock; $0.01 par value, 25,000,000 shares authorized, 18,864,255 and 20,671,191 shares issued and outstanding in 1998 and 1999, respectively			189		207
	Stock-based deferred compensation			—		(2,314	)
	Additional paid-in capital			189		5,802
	Treasury stock, 189,295 shares at cost			—		(4	)
	Retained earnings			32,~~485~~575		~~2,575~~766
		Total stockholders’ equity		38,~~863~~584		87,~~584~~620
Commitments and contingencies (notes 5, 6, 7, 9, 13, 14, 15 and 16)
			$	197,147	$	196,871
			$	45,263	$	202,093

See accompanying notes to consolidated financial statements.

F-3

AMERICAN MEDICAL LABORATORIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

~~Period~~Years ~~from~~ended ~~January~~December 131, ~~1997 to May 1~~1998, ~~1997,~~1999 ~~period from~~and ~~May 2, 1997~~2000

to(in ~~December 31~~thousands, ~~1997,~~except share and ~~years~~per ~~ended~~share ~~December 31,~~data) ~~1998 and 1999~~

(in thousands, except share data)


			1998		1999			2000

Net revenue			$	102,729	$	143,436		$	260,824




Operating expenses:




	Cost of services			72,838		98,531			174,512




	Selling, general and administrative			20,181		31,111			55,081




	Depreciation and amortization			2,170		4,803			13,690

		Total operating expenses		95,189		134,445			243,283

		Operating income		7,540		8,991			17,541

Interest expense				927		4,578			15,503




Share in loss of affiliate (note 6)				443		815			281




Other (income) expense				14		100			(1	)

		Income before income taxes and extraordinary item		6,156		3,498			1,758




Provision for income taxes (note 13)				2,197		1,820			3,375

		Income (loss) before extraordinary item		3,959		1,678			(1,617	)




Extraordinary item — loss on early extinguishment of debt, net of tax benefit of $261,000 (note 8)				—		442			—

		Net income (loss)		3,959		1,236			(1,617	)




Less dividends on preferred stock (note 11)				923		462			192

		Income (loss) applicable to common stockholders	$	3,036	$	774		$	(1,809	)

Net income (loss) per common share — basic and diluted:




	Income (loss) before extraordinary item, less preferred dividends		$	0.16	$	0.06		$	(0.09	)




	Extraordinary item			—		(0.02	)		—

		Net income (loss) per common share	$	0.16	$	0.04		$	(0.09	)

Weighted-average common shares outstanding				18,864,255		19,102,026			20,847,527

Diluted average common shares outstanding				19,569,464		19,813,351			20,847,527

			Predecessor
						Period from
			Period from			May 2, 1997
			January 1, 1997			to
			to			December 31,
			May 1, 1997			1997		1998		1999
Net revenue			$	28,340		$	59,234	$	102,729	$	143,436
Operating expenses:
	Cost of services			20,055			41,748		69,888		96,067
	Selling, general and administrative			6,151			13,071		23,131		33,575
	Depreciation and amortization			524			1,073		2,170		4,803
		Total operating expenses		26,730			55,892		95,189		134,445
		Operating income		1,610			3,342		7,540		8,991
Interest expense				130			619		927		4,578
Other (income) expense				(49	)		331		14		100
Share in loss of affiliate (note 5)				165			694		443		815
Income before income taxes and extraordinary item				1,364			1,698		6,156		3,498
Provision for income taxes (note 11)				612			683		2,197		1,820
		Income before extraordinary item		752			1,015		3,959		1,678
Extraordinary item — loss on early extinguishment of debt, net of tax benefit of $261,000 (note 7)				—			—		—		442
		Net income	$	752			1,015		3,959		1,236
Less dividends on preferred stock (note 10)							566		923		462
		Income applicable to common stockholders				$	449	$	3,036	$	774
Net income per common share — basic and diluted:
	Income before extraordinary item, less preferred dividends					$	0.02	$	0.16	$	0.06
	Extraordinary item						—		—		(0.02	)
		Net income per common share				$	0.02	$	0.16	$	0.04
Weighted-average common shares outstanding							18,596,525		18,864,255		19,102,026
Diluted average common shares outstanding							18,596,525		19,569,464		19,813,351

See accompanying notes to consolidated financial statements.

F-4

AMERICAN MEDICAL LABORATORIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

~~Period~~Years ~~from~~ended ~~January~~December 131, ~~1997 to May 1~~1998, ~~1997,~~1999 ~~period from~~and ~~May 2, 1997 to~~2000

December 31, 1997, and years ended December 31, 1998 and 1999

(in thousands, except share data)

								Stockholders’ Equity
		Class A
		Redeemable															Stock-
		Preferred Stock						Common Stock						Additional			Based			~~Notes Receivable~~
														Paid-in			~~Treasury~~Deferred			~~from Stockholders~~Treasury
		Shares			Amount			Shares			Amount			Capital			~~Stock~~Compensation			~~and Benefit Plan~~Stock			Notes Receivable
Predecessor
Balance, December 31, 1997			8,672		$	9,238			18,864,255		$	189		$	189		$	—		$	—		$	(56	)
Balance, December 31, 1996			—		$	—			342,300		$	342		$	1,307		$	—		$	(434	)
	Accrued dividends on redeemable preferred stock (note 11)		—			923			—			—			—			—			—			—
	Net income		—			—			—			—			—			—			—			—
	Effect of adjustments relating to the acquisition of all outstanding stock by Successor and resulting change in basis of accounting (note 1)		—			—			(342,300	)		(342	)		(1,307	)		—			434
Balance, December 31, 1998			8,672			10,161			18,864,255			189			189			—			—			(56	)
Balance, May 1, 1997			—			—			—			—			—			—			—
	Repurchase of treasury stock (note 11)		—			—			—			—			—			—			(1,690	)		—
Successor
	Retirement of treasury stock (note 11)		—			—			(344,783	)		(3	)		(3	)		—			1,690			—
	Issuance of common stock		—			—			17,793,335			178			178			—			—
	Repayment on notes receivable		—			—			—			—			—			—			—			56
	Issuance of preferred stock		8,099			8,099			—			—			—			—			—
	Redemption of preferred stock (note 11)		(7,181	)		(8,714	)		—			—			—			—			—			—
	Exercise of stock options		573			573			1,070,920			11			11
	Issuance of stock related to acquisition (note 7)		—			—			2,151,719			21			5,616			—			—			—
	Accrued dividends on redeemable preferred stock		—			566			—			—			—			—			—
	Accrued dividends on redeemable preferred stock (note 11)		—			462			—			—			—			—			—			—
	Net income		—			—			—			—			—			—			—			—
Balance, December 31, 1997			8,672			9,238			18,864,255			189			189			—			—
Balance, December 31, 1999			1,491		$	1,909			20,671,191		$	207			5,802			—			—			—
	Accrued dividends on redeemable preferred stock		—			923			—			—			—			—			—
	Accrued dividends on redeemable preferred stock (note 11)		—			192			—			—			—			—			—			—
	Net income		—			—			—			—			—			—			—
	Stock options exercised		—			—			239,304			2			3			—			—			—
Balance, December 31, 1998			8,672			10,161			18,864,255			189			189			—			—
	Deferred compensation related to stock options granted		—			—			—			—			2,761			(2,761	)		—			—
	Repurchase of treasury stock (note 11)		—			—			—			—			—			(1,690	)		—
	Amortization of deferred compensation		—			—			—			—			—			447			—			—
	Retirement of treasury stock (note 11)		—			—			(344,783	)		(3	)		(3	)		1,690			—
	Tax benefit on stock option exercises		—			—			—			—			397			—			—			—
	Redemption of preferred stock (note 10)		(7,181	)		(8,714	)		—			—			—			—			—
	Purchase of treasury stock (note 12)																				(4	)		—
	Issuance of stock related to acquisition (note 6)		—			—			2,151,719			21			5,616			—			—
	Net loss		—			—			—			—			—			—			—			—
	Accrued dividends on redeemable preferred stock (note 10)		—			462			—			—			—			—			—
Balance, December 31, 2000			1,491		$	2,101			20,910,495		$	209		$	8,963		$	(2,314	)	$	(4	)	$	—
	Net income		—			—			—			—			—			—			—
Balance, December 31, 1999			1,491		$	1,909			20,671,191		$	207		$	5,802		$	—		$	—

[Additional columns below]

[Continued from above table, first column(s) repeated]

		Stockholders’ Equity
					Total
		Retained			Stockholders’
		Earnings			Equity
Predecessor
Balance, December 31, 1997		$	449		$	771
Balance, December 31, 1996		$	15,575		$	16,790
	Accrued dividends on redeemable preferred stock (note 11)		(923	)		(923	)
	Net income		752			752
	Effect of adjustments relating to the acquisition of all outstanding stock by Successor and resulting change in basis of accounting (note 1)		(16,327	)		(17,542	)
Balance, May 1, 1997			—			—
Successor
	Issuance of common stock		—			356
	Issuance of preferred stock		—			—
	Exercise of stock options					22
	Accrued dividends on redeemable preferred stock		(566	)		(566	)
	Net income		1,015			1,015
Balance, December 31, 1997			449			827
	Accrued dividends on redeemable preferred stock		(923	)		(923	)
	Net income		3,959			3,959
Balance, December 31, 1998			3,485			3,~~863~~807
	Repurchase of treasury stock (note 11)		—			(1,690	)
	Retirement of treasury stock (note 11)		(1,684	)		—
	Redemption of preferred stock (note 10)		—			—
	Repayment on notes receivable		—			56
	Issuance of stock related to acquisition (note 6)		—			5,637
	Redemption of preferred stock (note 11)		—			—
	Accrued dividends on redeemable preferred stock (note 10)		(462	)		(462	)
	Issuance of stock related to acquisition (note 7)		—			5,637
	Accrued dividends on redeemable preferred stock (note 11)		(462	)		(462	)
	Net income		1,236			1,236
Balance, December 31, 1999		$	2,575		$	8,584
	Accrued dividends on redeemable preferred stock (note 11)		(192	)		(192	)
	Stock options exercised		—			5
	Deferred compensation related to stock options granted		—			—
	Amortization of deferred compensation		—			447
	Tax benefit on stock option exercises		—			397
	Purchase of treasury stock (note 12)		—			(4	)
	Net loss		(1,617	)		(1,617	)
Balance, December 31, 2000		$	766		$	7,620

See accompanying notes to consolidated financial statements.

F-5

AMERICAN MEDICAL LABORATORIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~Period~~Years ~~from~~ended ~~January~~December 131, ~~1997 to May 1~~1998, ~~1997,~~1999 ~~period from~~and ~~May 2, 1997 to December 31, 1997,~~2000

years ended December 31, 1998 and 1999

(in thousands)

					Predecessor
					1998			1999			2000
					period from			Period from
Cash flows from operating activities:
					January 1, 1997			May 2, 1997 to
	Net income (loss)				$	3,959		$	1,236		$	(1,617	)
					to			December 31,
	Adjustments to reconcile net income to net cash provided by operating activities:
					May 1, 1997			1997			1998			1999
		Depreciation and amortization				2,170			4,803			13,690
Cash flows from operating activities:
		Provision for bad debts				2,259			4,817			13,911
	Net income				$	752		$	1,015		$	3,959		$	1,236
		Deferred income taxes				649			1,723			2,421
		Adjustments to reconcile net income to net cash provided by operating activities:
		Share in loss of affiliate				443			815			281
			Depreciation and amortization			524			1,073			2,170			4,803
		Tax benefit on stock option exercises				—			—			397
			Provision for bad debts			172			1,530			2,259			4,817
		Stock compensation				—			—			447
			Deferred income taxes			(909	)		(205	)		649			1,723
		Net loss (gain) on disposal of property, plant and equipment				—			23			(8	)
			Share in loss of affiliate			165			694			443			815
		Changes in:
			Net loss (gain) on disposal of property, plant and equipment			—			(26	)		—			23
			Accounts receivable			(6,681	)		(11,229	)		(20,213	)
			Changes in:
			Inventory			(441	)		(1,769	)		(2,026	)
				Accounts receivable		(2,992	)		(2,625	)		(6,681	)		(11,229	)
			Prepaid expenses and other current assets			(64	)		268			1,903
				Inventory		83			(249	)		(441	)		(1,769	)
			Receivable from affiliate			(263	)		(374	)		(50	)
				Prepaid expenses and other current assets		(377	)		338			(64	)		268
			Income tax receivable			—			(1,603	)		1,603
				Receivable from affiliate		—			—			(263	)		(374	)
			Other assets			(21	)		(273	)		(828	)
				Income tax receivable		—			—			—			(1,603	)
			Accounts payable			(113	)		3,174			5,934
				Other assets		—			—			(21	)		(273	)
			Accrued expenses			725			309			(2,905	)
				Accounts payable		(939	)		1,196			(113	)		3,174
			Accrued income taxes			(1,578	)		(746	)		—
				Accrued expenses		(520	)		1,151			725			309
			Other liabilities			420			536			(124	)
				Accrued income taxes		1,521			802			(1,578	)		(746	)
				Net cash provided by operating activities		1,464			1,710			12,816
				Other liabilities		127			280			420			536
Cash flows from investing activities:
				Net cash provided by (used in) operating activities		(2,393	)		4,974			1,464			1,710
	Purchase of property, plant and equipment					(2,948	)		(5,464	)		(8,673	)
Cash flows from investing activities:
	Net proceeds from disposal of property, plant and equipment					20			8			38
	Net proceeds from disposal of property, plant and equipment					31,329			4,166			20			8
	Change in restricted cash					(267	)		1,485			—
	Purchase of property, plant and equipment					(175	)		(1,564	)		(2,948	)		(5,464	)
	Investment in affiliate					—			—			(350	)
	Change in restricted cash					—			(1,218	)		(267	)		1,485
	Payments related to business acquisitions					—			(1,000	)		(10,026	)
	Payment related to business acquisition					—			—			—			(1,000	)
	Acquisitions of businesses, net of cash acquired					(4,193	)		(83,460	)		—
	Acquisitions of businesses, net of cash acquired					—			(22,929	)		(4,193	)		(83,460	)
				Net cash used in investing activities		(7,388	)		(88,431	)		(19,011	)
				Net cash provided by (used in) investing activities		31,154			(21,545	)		(7,388	)		(88,431	)
Cash flows from financing activities:
Cash flows from financing activities:
	Borrowings on notes payable and capital lease obligations					96,628			181,192			41,097
	Borrowings on notes payable and capital lease obligations					—			59,943			96,628			181,192
	Payments on notes payable and capital lease obligations					(90,806	)		(76,343	)		(34,831	)
	Payments on notes payable and capital lease obligations					(27,216	)		(55,428	)		(90,806	)		(76,343	)
	Issuance of notes to officers and directors					—			(2,760	)		—
	Issuance of shareholder notes					—			—			—			(2,760	)
	Issuance of notes to employees					—			—			(126	)
	Proceeds from shareholder notes					—			—56			—			56
	Payments on obligations relating to acquisition					—(87	)		—			~~(87~~—	)		—
	Cost of purchase and redemption of preferred stock					—			(8,~~672~~714	)		—			~~(8,714~~	)
	Proceeds from issuance of common stock					—			~~377~~—			—5			—
	Cost of purchase and retirement of treasury stock					—			—(1,690	)		—(4	)		~~(1,690~~	)
	Debt issuance costs paid					—(24	)		(~~212~~3,845	)		~~(24~~—	)		~~(3,845~~	)
	Bank overdraft					—213			93(306	)		~~213~~—			~~(306~~	)
				Net cash provided by (used in) financing activities		(27,216	)		13,445			5,924			87,590
				Net cash provided by financing activities		5,924			87,590			6,141
				Net increase in cash and cash equivalents		1,545			(3,126	)		—			869
				Net increase (decrease) in cash and cash equivalents		—			869			(54	)
Cash and cash equivalents, beginning of period						1,581			3,126			—			—
Cash and cash equivalents, beginning of year						—			—			869
Cash and cash equivalents, end of period					$	3,126		$	—		$	—		$	869
Cash and cash equivalents, end of year					$	—		$	869		$	815

(Continued)

F-6

AMERICAN MEDICAL LABORATORIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

~~Period~~Years ~~from~~ended ~~January~~December 131, ~~1997 to May 1~~1998, ~~1997,~~1999 ~~period from~~and ~~May 2, 1997 to December 31, 1997,~~2000

years ended December 31, 1998 and 1999

(in thousands)

					Predecessor
					1998		1999		2000
					period from		Period from
Supplemental disclosure of cash flow information:
					January 1, 1997		May 2, 1997 to
	Cash paid for interest				$	914	$	3,543	$	13,958
					to		December 31,
	Cash paid for income taxes					3,125		2,017		271
					May 1, 1997		1997		1998		1999
Supplemental schedule of noncash investing and financing activities:
Supplemental disclosure of cash flow information:
	Acquisitions accounted for as a purchase:
	Cash paid for interest				$	347	$	626	$	914	$	3,543
		Assets acquired			$	6,079	$	135,281	$	—
	Cash paid for income taxes					—		—		3,125		2,017
		Less:
Supplemental schedule of noncash investing and financing activities:
			Liabilities assumed (including capital lease obligations disclosed in note 6)			1,886		46,184		—
	Acquisitions accounted for as a purchase:
			Issuance of stock			—		5,637		—
		Assets acquired			$	—	$	35,298	$	6,079	$	135,281
				Acquisitions, net of cash acquired	$	4,193	$	83,460	$	—
		Less:
	Sale of assets in exchange for acquired investment in affiliate				$	—	$	—	$	1,625
			Liabilities assumed (including capital lease obligations disclosed in note 6)			—		12,369		1,886		46,184
			Issuance of stock			—		—		—		5,637
				Acquisitions, net of cash acquired	$	—	$	22,929	$	4,193	$	83,460

See accompanying notes to consolidated financial statements.

F-7

AMERICAN MEDICAL LABORATORIES, INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, ~~1997~~1998, ~~1998~~1999 and ~~1999~~2000

Note 1 — Organization

American Medical Laboratories, Incorporated and its subsidiaries (the Company) is a clinical laboratory testing company. The Company’s primary source of revenue is derived from the performance of medical laboratory tests used by physicians to diagnose, treat and monitor diseases and other medical conditions. These tests include esoteric testing as well as routine clinical testing. The Company’s customers include physicians, managed care organizations, hospitals, employers and other clinical laboratories. The Company operates in one reportable segment, the medical laboratory industry. The Company’s main laboratory facilities are located in Chantilly, Virginia and Las Vegas, Nevada. The Company also maintains patient and service centers in various states throughout the United States.

On May 2, 1997, AML Inc., a Delaware corporation, acquired all of the outstanding stock of Medical Laboratories Corporation, a Virginia corporation (Predecessor). The purchase price, including related costs, was approximately $23.0 million. The excess of the purchase price over the fair value of the net assets acquired was $5.6 million. The accompanying 1997 financial statements include the operations, cash flows and changes in stockholders’ equity in two separate statements, one of which presents the Company for the period from May 2, 1997 to December 31, 1997, and the other presents the Predecessor for the period from January 1, 1997 to May 1, 1997.

American Medical Laboratories, Incorporated is a Delaware holding company which was incorporated in 1999. During 1999, the stockholders of AML Inc., contributed all their outstanding stock of AML Inc. to American Medical Laboratories, Incorporated in exchange for the same share class and amounts of stock in American Medical Laboratories, Incorporated. The ownership interests in American Medical Laboratories, Incorporated were the same as the ownership interests in AML Inc. prior to the exchange of shares. Accordingly, the accompanying American Medical Laboratories, Incorporated financial statements include the historical financial information of AML Inc. as if the exchange of shares occurred as of the beginning of the periods presented.

On October 13, 1999, American Medical Laboratories, Incorporated acquired all of the stock of APL Healthcare Group, Inc. (APL). This business combination was accounted for by the purchase method of accounting (see note 67). Simultaneously with the purchase of stock of APL, Robert R. Belliveau M.D., ~~Thorne~~ Thorne J. Butler, M.D. Associated Pathologists, ~~Chartered~~ Chartered (APC) sold, assigned, transferred and delivered substantially all of its assets to APL, and the members of APL Properties, LLC (APL Properties) transferred all of the LLC interests to APL. APC is a professional corporation that employs pathologists licensed to practice medicine in Nevada and other states. APL Properties is a limited liability company, formerly owned by six stockholders of APC, that owns the building that ~~APL~~ APL occupies in Las Vegas, Nevada. Prior to these transactions APL, APC, and APL Properties were commonly controlled. On October 13, 1999, APL entered into a practice management agreement with APC to provide management services to APC. This practice management agreement gives APL a controlling financial interest in APC and therefore APC has been combined with APL for financial reporting purposes.

Note 2 — Summary of Significant Accounting Policies

(a) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of American Medical Laboratories, Incorporated, and its wholly owned subsidiaries, AML Inc. (AML), Medical Laboratories Corporation, APL Healthcare Group, Inc. and APL Properties, LLC. The accompanying consolidated financial statements also include the accounts of APC, in which APL has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.

(b) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts

F-8

AMERICAN MEDICAL LABORATORIES, INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

December 31, ~~1997~~1998, ~~1998~~1999 and ~~1999~~2000

~~Laboratories~~of ~~Corporation,~~assets ~~APL~~and ~~Healthcare~~liabilities ~~Group,~~and ~~Inc.~~disclosure ~~and~~of ~~APL~~contingent assets ~~Properties,~~and ~~LLC.~~liabilities ~~The~~at ~~accompanying~~the date of the consolidated financial statements. Estimates also ~~include~~affect the ~~accounts~~reported amounts of ~~APC,~~net revenue inand ~~which~~expenses ~~APL~~during ~~has~~the ~~a controlling~~reporting ~~financial interest~~period. ~~All~~Actual ~~significant intercompany~~results ~~balances~~could ~~and~~differ ~~transactions~~from ~~have~~those ~~been eliminated in consolidation~~estimates.

(b) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of net revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents are comprised of cash in banks and highly liquid investments with original maturities of three months or less.

(d) ~~Restricted~~Revenue ~~Cash~~Recognition

~~Restricted~~The ~~cash~~Company ~~consists~~operates ofin ~~lock~~one ~~box~~reportable ~~accounts~~segment, ~~which~~the medical laboratory industry. Revenue from laboratory tests is recorded on the accrual basis at the time test results are reported at ~~restricted~~the toestimated ~~pay~~net ~~down~~realizable aamounts ~~revolving~~from ~~credit~~patients, ~~facility~~third party payors and others for services rendered. InThe Company is ~~April 1999,~~reimbursed ~~this~~for ~~restriction~~services ~~was~~under ~~lifted~~fee asschedules, acontractual ~~result~~and other ofpayor arrangements. Final adjustments to the estimated net ~~refinancing~~realizable ofamounts are based on final payments from third party payors. The Company provides laboratory testing services to certain managed care organizations under capitated arrangements. Payments are received monthly under these capitated arrangements and are recognized as revenue during the period in which the Company’s ~~credit~~is ~~facility~~obligated ~~(see~~to ~~note~~provide 7)laboratory testing services to these managed care organizations.

(e) ~~Revenue~~Accounts ~~Recognition~~Receivable

The Company operates in one reportable segment, the medical laboratory industry. Revenue from laboratory tests is recorded on the accrual basis at the time test results are reported at the estimated net realizable amounts from patients, third party payors and others for services rendered. The Company is reimbursed for services under fee schedules, contractual and other payor arrangements. Final adjustments to the estimated net realizable amounts are based on final payments from third party payors.

(f) Accounts Receivable

Accounts receivable include billed and unbilled revenue for testing performed, and are presented net of an allowance for doubtful accounts and contractual allowances. The allowance for doubtful accounts is an estimate based upon actual historical trends and management’s judgment.

(gf) Property, Plant and Equipment

Property, plant and equipment are stated at cost, or if acquired under capital leases, at the present value of the future minimum lease payments. Depreciation and amortization are computed using the straight-line method. The estimated useful lives are as follows:

	Estimated useful lives
Building		30 years
Office furniture and equipment		75-12 years
Laboratory furniture and equipment		5-12 years
Computer equipment and software		2-7 years
Leasehold improvements		Life of the lease
Vehicles		1.5-5 years

Expenditures for repairs and maintenance, which do not materially extend the useful lives of property, plant and equipment, are charged directly to expense. Equipment under capital leases is amortized over the estimated useful lives or the term of the lease, if shorter.

(g) Capitalized Software Costs

The Company capitalizes purchased software, which is ready for service and capitalizes software development costs incurred on significant projects for internal use in accordance with the provisions of AICPA Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or

F-9

AMERICAN MEDICAL LABORATORIES, INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

December 31, ~~1997~~1998, ~~1998~~1999 and ~~1999~~2000

~~Expenditures~~Obtained for ~~repairs~~Internal ~~and~~Use. ~~maintenance,~~Research ~~which~~and dodevelopment ~~not materially~~costs and ~~extend~~other ~~the~~computer ~~useful~~software ~~lives~~maintenance ofcosts ~~property,~~related ~~plant~~to software ~~and~~development ~~equipment,~~ are ~~charged~~ ~~directly~~expensed toas ~~expense~~incurred. ~~Equipment~~Capitalized software ~~under~~costs ~~capital~~are ~~leases is~~ amortized ~~over~~using the straight-line method over the estimated useful ~~lives~~life orof the ~~term~~underlying ofsystem, ~~the~~generally ~~lease,~~three ifto ~~shorter~~five years.

(h) ~~Capitalized~~Intangible ~~Software Costs~~Assets

~~The~~Intangible ~~Company capitalizes purchased software~~assets, ~~which~~consisting isof ~~ready~~goodwill ~~for service~~ and ~~capitalizes software development costs incurred on significant projects. Research and development costs and~~ other ~~computer~~ ~~software maintenance costs related to software~~intangibles ~~development~~ are ~~expensed as incurred. Capitalized software costs are~~ amortized ~~using~~on ~~the~~a straight-line ~~method~~basis over the ~~estimated~~expected periods ~~useful~~to ~~life~~be ofbenefited, ~~the~~20 years ~~underlying~~for ~~system~~goodwill, ~~generally~~trade ~~two~~names ~~to five~~and customer lists and 4 years for assembled workforce.

(i) Intangible Assets

Intangible assets, consisting of goodwill and other intangibles are amortized on a straight-line basis over the expected periods to be benefited, 20 years for goodwill and customer lists, 3 years related to certain patents and over the life of the non-compete agreements.

The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of goodwill and other intangibles might warrant revision or that the remaining balance of goodwill and other intangibles may not be recoverable. When factors indicate that goodwill, other intangibles and other long-lived assets should be evaluated for possible impairment, the Company uses an estimate of undiscounted future net cash flows over the remaining life of goodwill, other intangibles and other long-lived assets to determine if impairment has occurred. If this review indicates that the cost of the recorded assets will not be recoverable, the Company writes down the cost to estimated fair value.

(ji) Cost of Borrowing

Expenses directly related to the issuance of debt are deferred and amortized over the terms of the related debt by the interest method.

(kj) Inventory

Inventory consists principally of purchased laboratory and medical supplies and is stated at the lower of cost (or estimated realizable value and are primarily based on first-in, first-out (“FIFO”) or ~~market~~average ~~value~~cost methods.

(lk) Investment

The Company records its 49 percent-owned affiliate, Shared Laboratory Services, LLC, on the equity method of accounting. The Company records its investment in LabPortal, Inc. under the cost recovery method.

(ml) Interest Rate Swap

The Company has an interest rate swap agreement to manage interest rate exposure. The agreement is accounted for on an accrual basis. Amounts to be paid or received under this agreement are recognized over the life of the related debt and are included in interest ~~income or~~ expense.

(nm) ~~Accrued~~Income ~~Loss on Capitated Contracts~~Taxes

WeTable will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects. See “Description of Capital Stock.” Contents

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Filing Compare · AMERICAN MEDICAL LABORATORIES INC