##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission File Number 001-33815
 
 Virtual Radiologic Corporation
  
 Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    27-0074530
(IRS Employer
Identification No.)11995 Singletree Lane, Suite 500
Eden Prairie, Minnesota
(Address of principal executive offices)
    
    55344
(Zip code)
 (952) 595-1100
 
 þ o
 o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ(Do not check if a smaller reporting company)
Smaller reporting company o o þ




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##### 



TABLE OF CONTENTS
 Part I  Financial InformationItem 1.
    
    Consolidated Financial Statements
    
    
    3Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4.
    
    Controls and Procedures
    
    
    35Part II  Other InformationItem 1.
    
    Legal Proceedings
    
    
    36Item 1A.
    
    Risk Factors
    
    
    36Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 6.
    
    Exhibits
    
    
    38Signatures
    
    
    39EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  Financial Information
 
 ITEM 1. Consolidated Financial Statements
 Virtual Radiologic Corporation
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Contents
 PageConsolidated Financial Statements (unaudited)Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
    
    
    4Consolidated Statements of Operations for the three and nine months ended September 30,
2009 and 2008
    
    
    5Consolidated Statements of Changes in Stockholders Equity for the nine months ended
September 30, 2009 and the year ended December 31, 2008
    
    
    6Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008
    
    
    7Notes to Consolidated Financial Statements
    
    
    8
 3




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VIRTUAL RADIOLOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share data)
 As of
    
    
    As ofSeptember 30,
    
    
    December 31,2009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    47,558
    
    
    $
    19,180Restricted cash
    
    
    1,751
    
    
    
    700Short-term investments
    
    
    
    
    
    
    10,136Accounts receivable, net
    
    
    18,132
    
    
    
    17,383Prepaid expenses and other current assets
    
    
    2,220
    
    
    
    4,126Total current assets
    
    
    69,661
    
    
    
    51,525Property, plant and equipment, net
    
    
    14,680
    
    
    
    11,692Intangible assets, net
    
    
    4,232
    
    
    
    5,073Medical malpractice excess loss reserves receivable
    
    
    945
    
    
    
    1,288Other assets
    
    
    923
    
    
    
    1,423Total assets
    
    $
    90,441
    
    
    $
    71,001Liabilities and Stockholders EquityCurrent liabilities:Accrued professional services compensation expense
    
    $
    6,574
    
    
    $
    5,690Accrued sales, general and administrative compensation expense
    
    
    3,719
    
    
    
    1,383Current deferred tax liability
    
    
    1,099
    
    
    
    1,103Accounts payable and other current liabilities
    
    
    2,224
    
    
    
    2,911Total current liabilities
    
    
    13,616
    
    
    
    11,087Deferred tenant lease allowance
    
    
    2,555
    
    
    
    Medical malpractice loss reserves
    
    
    4,368
    
    
    
    1,419Medical malpractice excess loss reserves
    
    
    945
    
    
    
    1,288Other liabilities
    
    
    2,248
    
    
    
    690Total liabilities
    
    
    23,732
    
    
    
    14,484Commitments and contingencies (see Note 7)Virtual Radiologic Corporation stockholders equity:Common stock, $.001 par value; 100,000,000 shares
authorized at September 30, 2009 and December 31, 2008;
15,884,791 and 15,849,398 shares issued and outstanding at
September 30, 2009 and December 31, 2008, respectively
    
    
    17
    
    
    
    17Additional paid-in capital
    
    
    100,575
    
    
    
    95,881Treasury stock at cost, 1,095,490 and 944,760 shares at September 30, 2009
and December 31, 2008, respectively
    
    
    (9,306
    )
    
    
    (8,000
    )Accumulated deficit
    
    
    (24,589
    )
    
    
    (31,397
    )Accumulated other comprehensive loss
    
    
    (10
    )
    
    
    (6
    )Total Virtual Radiologic Corporation stockholders equity
    
    
    66,687
    
    
    
    56,495Non-controlling interest (see Note 2)
    
    
    22
    
    
    
    22Total stockholders equity
    
    
    66,709
    
    
    
    56,517Total liabilities and stockholders equity
    
    $
    90,441
    
    
    $
    71,001
  4




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VIRTUAL RADIOLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    31,638
    
    
    $
    29,025
    
    
    $
    90,791
    
    
    $
    78,266Operating costs and expenses:Professional services
    
    
    15,293
    
    
    
    12,899
    
    
    
    43,455
    
    
    
    35,176Sales, general and administrative
    
    
    9,679
    
    
    
    9,600
    
    
    
    31,271
    
    
    
    27,667Depreciation and amortization
    
    
    1,819
    
    
    
    1,286
    
    
    
    4,992
    
    
    
    3,357Total operating costs and expenses
    
    
    26,791
    
    
    
    23,785
    
    
    
    79,718
    
    
    
    66,200Operating income
    
    
    4,847
    
    
    
    5,240
    
    
    
    11,073
    
    
    
    12,066Other income (expense):Interest income
    
    
    55
    
    
    
    185
    
    
    
    157
    
    
    
    450Interest expense
    
    
    (2
    )
    
    
    
    
    
    
    (5
    )
    
    
    Total other income
    
    
    53
    
    
    
    185
    
    
    
    152
    
    
    
    450Income before income tax expense
    
    
    4,900
    
    
    
    5,425
    
    
    
    11,225
    
    
    
    12,516Income tax expense
    
    
    1,874
    
    
    
    1,859
    
    
    
    4,417
    
    
    
    4,942Net income
    
    
    3,026
    
    
    
    3,566
    
    
    
    6,808
    
    
    
    7,574Non-controlling interest (income) expense
    
    
    (4
    )
    
    
    2
    
    
    
    
    
    
    
    10Net income attributable to Virtual
Radiologic Corporation
    
    $
    3,030
    
    
    $
    3,564
    
    
    $
    6,808
    
    
    $
    7,564Earnings per common share:Basic
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.43
    
    
    $
    0.45Diluted
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.44Weighted average common shares outstanding:Basic
    
    
    15,849
    
    
    
    16,733
    
    
    
    15,861
    
    
    
    16,689Diluted
    
    
    16,281
    
    
    
    17,186
    
    
    
    16,267
    
    
    
    17,218
  5




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VIRTUAL RADIOLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(unaudited)
(in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Non-controlling
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    Loss
    
    
    Interest
    
    
    EquityBalance at December 31, 2007
    
    
    16,463
    
    
    $
    16
    
    
    $
    90,165
    
    
    $
    
    
    
    $
    (39,851
    )
    
    $
    
    
    
    $
    8
    
    
    $
    50,338Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,454
    
    
    
    
    
    
    
    
    
    
    
    8,454Other comprehensive incomeForeign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,448Stock-based compensation for independent contractor
physicians
    
    
    
    
    
    
    
    
    
    
    (479
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (479
    )Stock-based compensation for employees and directors
    
    
    
    
    
    
    
    
    
    
    1,544
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,544Stock option exercises
    
    
    331
    
    
    
    1
    
    
    
    313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314Excess tax benefits from exercises of stock options
    
    
    
    
    
    
    
    
    
    
    4,396
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,396Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )Repurchase of common stock
    
    
    (945
    )
    
    
    
    
    
    
    
    
    
    
    (8,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,000
    )Balance at December 31, 2008
    
    
    15,849
    
    
    
    17
    
    
    
    95,881
    
    
    
    (8,000
    )
    
    
    (31,397
    )
    
    
    (6
    )
    
    
    22
    
    
    
    56,517Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,808
    
    
    
    
    
    
    
    
    
    
    
    6,808Other comprehensive incomeForeign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,804Stock-based compensation for independent contractor
physicians
    
    
    
    
    
    
    
    
    
    
    653
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    653Stock-based compensation for employees and directors
    
    
    
    
    
    
    
    
    
    
    1,835
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,835Stock option exercises
    
    
    186
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72Excess tax benefits from exercises of stock options
    
    
    
    
    
    
    
    
    
    
    2,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,134Repurchase of common stock
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    (1,306
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,306
    )Balance at September 30, 2009
    
    
    15,885
    
    
    $
    17
    
    
    $
    100,575
    
    
    $
    (9,306
    )
    
    $
    (24,589
    )
    
    $
    (10
    )
    
    $
    22
    
    
    $
    66,709
  6




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VIRTUAL RADIOLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 Nine Months EndedSeptember 30,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    6,808
    
    
    $
    7,574Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts and sales allowances
    
    
    1,353
    
    
    
    450Depreciation and amortization
    
    
    4,992
    
    
    
    3,357Lease abandonment liability
    
    
    200
    
    
    
    Medical malpractice loss reserves
    
    
    3,208
    
    
    
    Stock-based compensation for independent contractor physicians
    
    
    653
    
    
    
    (978
    )Stock-based compensation for employees and directors
    
    
    1,835
    
    
    
    1,121Deferred income taxes
    
    
    1,034
    
    
    
    925Loss on disposal of property, plant and equipment
    
    
    152
    
    
    
    49Other, net
    
    
    (128
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,080
    )
    
    
    (4,059
    )Prepaid expenses and other assets
    
    
    1,894
    
    
    
    2,242Accrued expenses
    
    
    3,096
    
    
    
    1,573Accounts payable and other liabilities
    
    
    680
    
    
    
    69Net cash provided by operating activities
    
    
    23,697
    
    
    
    12,323Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (5,287
    )
    
    
    (6,226
    )Cash paid for acquisition, net of cash acquired
    
    
    
    
    
    
    (6,531
    )Proceeds from maturity of short-term investments
    
    
    10,136
    
    
    
    Restricted cash
    
    
    (1,050
    )
    
    
    Purchase of short-term investment
    
    
    
    
    
    
    (7,000
    )Other, net
    
    
    10
    
    
    
    (36
    )Net cash provided by (used in) investing activities
    
    
    3,809
    
    
    
    (19,793
    )Cash flows from financing activities:Excess tax benefit from exercises of stock options
    
    
    2,134
    
    
    
    3,726Repurchases of common stock
    
    
    (1,306
    )
    
    
    (1,879
    )Other, net
    
    
    44
    
    
    
    (109
    )Net cash provided by financing activities
    
    
    872
    
    
    
    1,738Net increase (decrease) in cash and cash equivalents
    
    
    28,378
    
    
    
    (5,732
    )Cash and cash equivalents:Beginning of period
    
    
    19,180
    
    
    
    33,487End of period
    
    $
    47,558
    
    
    $
    27,755Supplemental disclosure of cash flow information:Cash paid (received) for income taxes, net
    
    $
    1,413
    
    
    $
    (662
    )
  7




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VIRTUAL RADIOLOGIC CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
 1. Business Overview
     2. Summary of Significant Accounting Policies
 Interim Consolidated Financial Statements
   8




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
 Principles of Consolidation and Basis of Presentation
     Revenue Recognition and Accounts Receivables
   9




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
   Recent Accounting Pronouncements
     10




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
    3. Selected Consolidated Financial Statement Information
 Restricted Cash
  Short-term Investments
   11




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
 Level 1
 Level 2
 Level 3
   Property, Plant and Equipment, Net
 As of
    
    
    As ofSeptember 30,
    
    
    December 31,2009
    
    
    2008(in thousands)Equipment
    
    $
    11,790
    
    
    $
    10,332Software
    
    
    7,681
    
    
    
    6,110Furniture and fixtures
    
    
    952
    
    
    
    1,144Leasehold improvements
    
    
    5,412
    
    
    
    342Other
    
    
    179
    
    
    
    1,742Total property, plant and equipment
    
    
    26,014
    
    
    
    19,670Less: Accumulated depreciation and amortization
    
    
    11,334
    
    
    
    7,978Total property, plant and equipment, net
    
    $
    14,680
    
    
    $
    11,692
  4. Goodwill and Other Intangible Assets
 Goodwill
  12




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
  Intangible Assets, Net
  As of
    
    
    As ofSeptember 30, 2009
    
    
    December 31, 2008Estimated
    
    
    Original
    
    
    Accumulated
    
    
    Carrying
    
    
    Original
    
    
    Accumulated
    
    
    CarryingUseful Life
    
    
    Cost
    
    
    Amortization
    
    
    Value
    
    
    Cost
    
    
    Amortization
    
    
    Value(in thousands)Patents
    
    15 years
    
    $
    347
    
    
    $
    74
    
    
    $
    273
    
    
    $
    347
    
    
    $
    56
    
    
    $
    291Non-compete agreements
    
    2 years
    
    
    298
    
    
    
    217
    
    
    
    81
    
    
    
    298
    
    
    
    105
    
    
    
    193Customer relationships
    
    10 years
    
    
    4,968
    
    
    
    1,090
    
    
    
    3,878
    
    
    
    4,968
    
    
    
    379
    
    
    
    4,589Intangible assets, net
    
    
    
    
    
    $
    5,613
    
    
    $
    1,381
    
    
    $
    4,232
    
    
    $
    5,613
    
    
    $
    540
    
    
    $
    5,073
    Amount(in thousands)Three months ending December 31, 2009
    
    $
    280Year ending December 31, 2010
    
    
    879Year ending December 31, 2011
    
    
    689Year ending December 31, 2012
    
    
    570Year ending December 31, 2013
    
    
    473Thereafter
    
    
    1,341Total
    
    $
    4,232
  5. Stock-Based Compensation
 vRad Equity Incentive Plan
  13




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
 Stock Options
  Weighted Average
    
    Exercise PricesExercise Price
    
    Per ShareOutstanding
    
    Per Share
    
    Ranging FromBalance at December 31, 2008 (1)
    
    
    2,183,995
    
    
    $
    10.82Granted
    
    
    377,000
    
    
    
    8.72
    
    
    $
    8.39 - 8.98Exercised
    
    
    (186,123
    )
    
    
    2.52
    
    
    
    2.00 - 5.50Forfeited/Cancelled/Expired
    
    
    (182,919
    )
    
    
    10.28
    
    
    
    2.00 - 19.23Balance at September 30, 2009
    
    
    2,191,953
    
    
    $
    11.21Exercisable at September 30, 2009
    
    
    914,598
    
    
    $
    9.89
    
    
    $
    2.00 - 23.00
 
 (1)
    
    The number of options outstanding includes 120,000 options granted in May 2007
to members of vRads Board of Directors that were not issued pursuant to the vRad Equity Incentive
Plan. Restricted Stock Awards
  Weighted AverageNumber
    
    Fair Valueof Shares
    
    Per ShareUnvested at December 31, 2008
    
    
    
    
    
    $
    Granted
    
    
    110,368
    
    
    
    8.97Vested
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Unvested at September 30, 2009
    
    
    110,368
    
    
    $
    8.97Expected to vest after September 30, 2009
    
    
    110,368
    
    
    $
    8.97
 Stock-Based CompensationEmployees and Directors
   14




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
 Stock-Based CompensationIndependent Contractor Physicians
  6. Stock Repurchase Program
  7. Commitments and Contingencies
    15




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
 (in thousands)2009
    
    $
    112010
    
    
    432011
    
    
    432012
    
    
    432013
    
    
    3143Less: Amount representing interest
    
    
    8Present value of minimum lease payments
    
    
    135Less: Current portion
    
    
    39Capital lease obligations, less current portion
    
    $
    96
 Professional Liability Coverage
    Litigation
  16




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
   8. Related Party Transactions
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008(in thousands)
    
    (in thousands)VRP professional services revenue from vRad
    
    $
    6,758
    
    
    $
    6,274
    
    
    $
    19,411
    
    
    $
    17,186vRad professional services expense to VRP
    
    
    6,758
    
    
    
    6,274
    
    
    
    19,411
    
    
    
    17,186VRP professional services revenue from the Professional Corporations
    
    
    7,094
    
    
    
    6,672
    
    
    
    20,819
    
    
    
    17,646Professional Corporations professional services expense to VRP
    
    
    7,094
    
    
    
    6,672
    
    
    
    20,819
    
    
    
    17,646vRad management fee revenue from the Professional Corporations
    
    
    7,023
    
    
    
    6,605
    
    
    
    20,611
    
    
    
    17,469Professional Corporations management fee expense to vRad
    
    
    7,023
    
    
    
    6,605
    
    
    
    20,611
    
    
    
    17,469Cash paid for professional services by vRad to VRP
    
    
    6,758
    
    
    
    6,274
    
    
    
    19,411
    
    
    
    17,186Cash paid for professional services by the Professional Corporations to VRP
    
    
    7,094
    
    
    
    6,672
    
    
    
    20,819
    
    
    
    17,646Cash paid for management fees by the Professional Corporations to vRad
    
    
    7,023
    
    
    
    6,605
    
    
    
    20,611
    
    
    
    17,469
  9. Earnings Per Share
  17




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands, except per share data)Basic and Diluted Earnings per Share  Two-class MethodBasic Earnings per Share:Undistributed income
    
    $
    3,030
    
    
    $
    3,564
    
    
    $
    6,808
    
    
    $
    7,564Restricted stock ownership
    
    
    0.69
    %
    
    
    0
    % (1)
    
    
    0.69
    %
    
    
    0
    %(1)Restricted stock interest in undistributed income
    
    $
    21
    
    
    $
    
    
    
    $
    47
    
    
    $
    Weighted average restricted shares
outstanding  basic
    
    
    110
    
    
    
    
    
    
    
    90
    
    
    
    Basic earnings per share  restricted
    
    $
    0.19
    
    
    $
    
    
    
    $
    0.52
    
    
    $
    Undistributed income
    
    $
    3,030
    
    
    $
    3,564
    
    
    $
    6,808
    
    
    $
    7,564Common ownership
    
    
    99.31
    %
    
    
    100
    % (1)
    
    
    99.31
    %
    
    
    100
    %(1)Common stockholders interest in undistributed
income
    
    $
    3,009
    
    
    $
    3,564
    
    
    $
    6,761
    
    
    $
    7,564Weighted average common shares
outstanding  basic
    
    
    15,849
    
    
    
    16,733
    
    
    
    15,861
    
    
    
    16,689Basic earnings per share  common
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.43
    
    
    $
    0.45Diluted Earnings per Share:Common stockholders interest in undistributed
earnings
    
    $
    3,009
    
    
    $
    3,564
    
    
    $
    6,761
    
    
    $
    7,564Undistributed earnings  restricted stock
    
    
    21
    
    
    
    
    
    
    
    47
    
    
    
    Net income used in diluted earnings per share
    
    $
    3,030
    
    
    $
    3,564
    
    
    $
    6,808
    
    
    $
    7,564Weighted average common shares
outstanding  basic
    
    
    15,849
    
    
    
    16,733
    
    
    
    15,861
    
    
    
    16,689Weighted average restricted stock outstanding
    
    
    110
    
    
    
    
    
    
    
    90
    
    
    
    Common share equivalents
    
    
    322
    (2)
    
    
    453
    (2)
    
    
    316
    (2)
    
    
    529
    (2)Shares used to compute earnings per common
share  diluted
    
    
    16,281
    
    
    
    17,186
    
    
    
    16,267
    
    
    
    17,218Diluted earnings per share  common
    
    $
    0.19
    
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.44
 
 (1)
    
    There was no restricted stock outstanding during the three and nine months ended September 30, 2008.(2)
    
    The calculation of common stock equivalents excludes options to purchase approximately 1.7 million and 1.8 million shares of common
stock for the three and nine months ended September 30, 2009, respectively, and approximately 1.4 milllion and 1.1 million shares
of common stock for the three and nine months ended September 30, 2008, respectively, because they are antidilutive. 18




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
 10. Subsequent Events
  19




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Special Note Regarding Forward-Looking Statements
    20




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Overview
    Trends in Our Business and Factors Affecting Our Results of Operations
  Revenue
    
    
    an increase in our customer base;
    
    an increase in utilization of our services by our customers, particularly in final reads;
and
 21




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
    
    high customer retention rates.
     Key Revenue Metrics
 September 30,2009
    
    % change
    
    2008
    
    %    changeCustomers
    
    
    658
    
    
    
    9.5
    %
    
    
    601
    
    
    
    31.5
    %Facilities
    
    
    1,154
    
    
    
    18.0
    %
    
    
    978
    
    
    
    24.3
    %Percentage of U.S. hospitals served
    
    
    18.6
    %
    
    
    
    
    
    
    15.4
    %
 For the three months ended September 30,
    
    For the nine months ended September 30,2009
    
    2008
    
    2009
    
    2008Reads
    
    
    702,323
    
    
    
    600,386
    
    
    
    1,980,745
    
    
    
    1,609,274Same site
volume growth(1)
    
    
    6.2
    %
    
    
    0.8
    %
    
    
    3.5
    %
    
    
    6.9
    %Percentage of read revenue from:Final reads
    
    
    28.1
    %
    
    
    23.6
    %
    
    
    27.5
    %
    
    
    22.8
    %Preliminary reads
    
    
    71.9
    %
    
    
    76.4
    %
    
    
    72.5
    %
    
    
    77.2
    %Year-over-year change in price per read
    
    
    (6.9
    %)
    
    
    (5.0
    %)
    
    
    (5.8
    %)
    
    
    (4.8
    %)
 
 (1)
    
    Same site volume growth measures the percentage increase in the number of reads over the comparable prior year period generated by a facility that has been under
contract for at least three months at the beginning of the measurement period and remains a customer throughout that period. 22




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Operating Costs and Expenses
  Professional Services Expense.
 
    
    Physician Cash Compensation Expense.Physician cash compensation expense includes
the fees paid to our independent contractor physicians for providing diagnostic
interpretation services to our customers. We compensate our independent contractor
physicians using a formula that includes a base level of compensation plus additional
amounts for the number and type of reads performed. We recognize physician cash
compensation expense in the month in which our independent contractor physicians
perform the reads for our customers. Physician cash compensation expense also includes
amounts paid for quality assurance services. Since our inception, our physician cash
compensation expense has increased each year as we have added more independent
contractor physicians to fulfill the increased demand for our services as our business
and customer base has grown. However, physician cash compensation expense as a
percentage of revenue has decreased primarily from an increased efficiency driven by continuing
advancements of both our distributed network infrastructure and our physician support
services. This increased efficiency has been, and may continue to be, offset, in part,
by increases in newly engaged independent contractor physicians, specifically the costs
associated with the typical 90- to 180-day period during which newly engaged
independent contractor physicians obtain necessary state licenses and hospital
credentials.
    
    Physician Stock-Based Compensation Expense.We record stock-based compensation
expense in connection with any equity awards to our independent contractor physicians.
Physician stock-based compensation expense is a non-cash expense that fluctuates based
upon the fair value of our common stock underlying the awards at the close of each
reporting period. As such, we may record additional expense or income based on
fluctuations in that value. Our physician stock-based compensation expense may also
increase in future periods if we issue additional equity awards to our independent
contractor physicians.
    
    Medical Malpractice Liability Expense.Medical malpractice liability expense
consists primarily of incurred but not reported, or IBNR, loss reserves, claims-made
loss development reserves related to our self-insured retention and premiums paid for
third-party medical malpractice insurance. We recognize loss development and IBNR loss
reserves based on actuarial analyses performed during the policy term, and amortize
medical malpractice liability insurance premiums over the term of the policy to which
they relate. Our medical malpractice liability expense has increased as a percentage of
revenues due to the establishment of loss development and IBNR loss reserves.
 Key Professional Service Metrics
 As of September 30,2009
    
    2008Radiologists
providing services
    
    
    140
    
    
    
    134
 For the three months ended September 30,
    
    For the nine months ended September 30,2009
    
    2008
    
    2009
    
    2008Average diagnostic
cash compensation
per read
    
    $
    19.31
    
    
    $
    21.25
    
    
    $
    19.52
    
    
    $
    21.41
 23




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Sales, General and Administrative Expenses.
 Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Physician cash compensation expense
    
    
    43.0
    
    
    
    44.5
    
    
    
    42.9
    
    
    
    44.6Physician stock-based compensation expense (income)
    
    
    1.2
    
    
    
    (1.5
    )
    
    
    0.7
    
    
    
    (1.3
    )Medical malpractice liability expense
    
    
    4.1
    
    
    
    1.4
    
    
    
    4.3
    
    
    
    1.6Total professional services
    
    
    48.3
    
    
    
    44.4
    
    
    
    47.9
    
    
    
    44.9Sales, general and administrative
    
    
    30.6
    
    
    
    33.1
    
    
    
    34.4
    
    
    
    35.4Depreciation and amortization
    
    
    5.8
    
    
    
    4.4
    
    
    
    5.5
    
    
    
    4.3Total operating costs and expenses
    
    
    84.7
    
    
    
    81.9
    
    
    
    87.8
    
    
    
    84.6Operating income
    
    
    15.3
    
    
    
    18.1
    
    
    
    12.2
    
    
    
    15.4Total other income
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.2
    
    
    
    0.6Income tax expense
    
    
    5.9
    
    
    
    6.4
    
    
    
    4.9
    
    
    
    6.3Net income
    
    
    9.6
    
    
    
    12.3
    
    
    
    7.5
    
    
    
    9.7Non-controlling interest (income) expense (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income attributable to Virtual Radiologic Corporation
    
    
    9.6
    %
    
    
    12.3
    %
    
    
    7.5
    %
    
    
    9.7
    %
 
 (1)
    
    Non-controlling interest (income) expense for the three and nine months ended September 30, 2009 and 2008 represents less than 0.1% as a percentage
of revenue. Comparison of the Three and Nine Months Ended September 30, 2009 and September 30, 2008
 Revenue
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    Change2009
    
    
    2008
    
    
    In Dollars
    
    
    Percentage
    
    
    2009
    
    
    2008
    
    
    In Dollars
    
    
    Percentage(dollars in thousands)Revenue from reads
    
    $
    30,936
    
    
    $
    28,653
    
    
    $
    2,283
    
    
    
    8.0
    %
    
    $
    89,085
    
    
    $
    77,215
    
    
    $
    11,870
    
    
    
    15.4
    %Other revenue
    
    
    702
    
    
    
    372
    
    
    
    330
    
    
    
    88.7
    
    
    
    1,706
    
    
    
    1,051
    
    
    
    655
    
    
    
    62.3Total revenue
    
    $
    31,638
    
    
    $
    29,025
    
    
    $
    2,613
    
    
    
    9.0
    
    
    $
    90,791
    
    
    $
    78,266
    
    
    $
    12,525
    
    
    
    16.0
  24




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Operating Costs and Expenses
 Professional Services
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    Change2009
    
    
    2008
    
    
    In Dollars
    
    
    Percentage
    
    
    2009
    
    
    2008
    
    
    In Dollars
    
    
    Percentage(dollars in thousands)Physician cash compensation expense
    
    $
    13,617
    
    
    $
    12,908
    
    
    $
    709
    
    
    
    5.5
    %
    
    $
    38,909
    
    
    $
    34,933
    
    
    $
    3,976
    
    
    
    11.4
    %Physician stock-based
compensation expense (income)
    
    
    369
    
    
    
    (419
    )
    
    
    788
    
    
    
    188.1
    
    
    
    653
    
    
    
    (978
    )
    
    
    1,631
    
    
    
    166.8Medical malpractice liability expense
    
    
    1,307
    
    
    
    410
    
    
    
    897
    
    
    
    218.8
    
    
    
    3,893
    
    
    
    1,221
    
    
    
    2,672
    
    
    
    218.8Total professional services
    
    $
    15,293
    
    
    $
    12,899
    
    
    $
    2,394
    
    
    
    18.6
    
    
    $
    43,455
    
    
    $
    35,176
    
    
    $
    8,279
    
    
    
    23.5
   Sales, General and Administrative
 Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    Change2009
    
    2008
    
    In Dollars
    
    Percentage
    
    2009
    
    2008
    
    In Dollars
    
    Percentage(dollars in thousands)Sales, general
and administrative
    
    $
    9,679
    
    
    $
    9,600
    
    
    $
    79
    
    
    
    0.8
    %
    
    $
    31,271
    
    
    $
    27,667
    
    
    $
    3,604
    
    
    
    13.0
    %
   Depreciation and Amortization
  25




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Income Tax Expense
  Liquidity and Capital Resources
 Cash, Cash Equivalents and Short-Term Investments
   Nine Months EndedSeptember 30,2009
    
    
    2008(in thousands)Net cash provided by operating activities
    
    $
    23,697
    
    
    $
    12,323Net cash provided by (used in) investing activities
    
    
    3,809
    
    
    
    (19,793
    )Net cash provided by financing activities
    
    
    872
    
    
    
    1,738Net increase (decrease) in cash and cash equivalents
    
    $
    28,378
    
    
    $
    (5,732
    )
 Cash Flows from Operating Activities
  26




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##### Table of Contents



Cash Flows from Investing Activities
   Cash Flows from Financing Activities
   Future Liquidity Requirements
  27




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##### Table of Contents



Contractual Obligations and Commitments
   (in thousands)2009
    
    $
    112010
    
    
    432011
    
    
    432012
    
    
    432013
    
    
    3143Less: Amount representing interest
    
    
    8Present value of minimum lease payments
    
    
    135Less: Current portion
    
    
    39Capital lease obligations, less current portion
    
    $
    96
 Critical Accounting Policies & Estimates
   Principles of Consolidation
  28




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##### Table of Contents



Condensed Consolidating Balance Sheets
(unaudited)
 As of September 30, 2009AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash and cash equivalents
    
    $
    46,591
    
    
    $
    967
    
    
    $
    
    
    
    $
    47,558Accounts receivable, net
    
    
    9,574
    
    
    
    8,558
    
    
    
    
    
    
    
    18,132Other current assets
    
    
    28,750
    
    
    
    25,908
    
    
    
    (50,687
    )
    
    
    3,971Non-current assets
    
    
    20,780
    
    
    
    16
    
    
    
    (16
    )
    
    
    20,780Total assets
    
    $
    105,695
    
    
    $
    35,449
    
    
    $
    (50,703
    )
    
    $
    90,441Current liabilities
    
    $
    21,912
    
    
    $
    42,391
    
    
    $
    (50,687
    )
    
    $
    13,616Non-current liabilities
    
    
    10,132
    
    
    
    
    
    
    
    (16
    )
    
    
    10,116Total liabilities
    
    
    32,044
    
    
    
    42,391
    
    
    
    (50,703
    )
    
    
    23,732Stockholders equity (deficiency)
    
    
    73,651
    
    
    
    (6,942
    )
    
    
    
    
    
    
    66,709Total liabilities and stockholders equity
    
    $
    105,695
    
    
    $
    35,449
    
    
    $
    (50,703
    )
    
    $
    90,441
 As of December 31, 2008AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash and cash equivalents
    
    $
    17,399
    
    
    $
    1,781
    
    
    $
    
    
    
    $
    19,180Short-term investments
    
    
    10,136
    
    
    
    
    
    
    
    
    
    
    
    10,136Accounts receivable, net
    
    
    8,842
    
    
    
    8,541
    
    
    
    
    
    
    
    17,383Other current assets
    
    
    20,677
    
    
    
    8,223
    
    
    
    (24,074
    )
    
    
    4,826Non-current assets
    
    
    19,292
    
    
    
    16
    
    
    
    168
    
    
    
    19,476Total assets
    
    $
    76,346
    
    
    $
    18,561
    
    
    $
    (23,906
    )
    
    $
    71,001Current liabilities
    
    $
    8,595
    
    
    $
    26,566
    
    
    $
    (24,074
    )
    
    $
    11,087Non-current liabilities
    
    
    3,229
    
    
    
    
    
    
    
    168
    
    
    
    3,397Total liabilities
    
    
    11,824
    
    
    
    26,566
    
    
    
    (23,906
    )
    
    
    14,484Stockholders equity (deficiency)
    
    
    64,522
    
    
    
    (8,005
    )
    
    
    
    
    
    
    56,517Total liabilities and
stockholders equity
    
    $
    76,346
    
    
    $
    18,561
    
    
    $
    (23,906
    )
    
    $
    71,001
 29




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##### Table of Contents



Condensed Consolidating Statements of Operations
(unaudited)
 Three Months Ended September 30, 2009AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenue
    
    $
    24,426
    
    
    $
    28,087
    
    
    $
    (20,875
    )
    
    $
    31,638Operating costs and expenses
    
    
    19,998
    
    
    
    27,668
    
    
    
    (20,875
    )
    
    
    26,791Operating income
    
    
    4,428
    
    
    
    419
    
    
    
    
    
    
    
    4,847Other income
    
    
    52
    
    
    
    1
    
    
    
    
    
    
    
    53Income before income tax expense
    
    
    4,480
    
    
    
    420
    
    
    
    
    
    
    
    4,900Income tax expense
    
    
    1,773
    
    
    
    101
    
    
    
    
    
    
    
    1,874Non-controlling interest income
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Net income attributable to vRad
    
    $
    2,707
    
    
    $
    319
    
    
    $
    4
    
    
    $
    3,030
 Three Months Ended September 30, 2008AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenue
    
    $
    22,285
    
    
    $
    26,291
    
    
    $
    (19,551
    )
    
    $
    29,025Operating costs and expenses
    
    
    16,761
    
    
    
    26,575
    
    
    
    (19,551
    )
    
    
    23,785Operating income (loss)
    
    
    5,524
    
    
    
    (284
    )
    
    
    
    
    
    
    5,240Other income
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    185Income (loss) before income tax expense
    
    
    5,709
    
    
    
    (284
    )
    
    
    
    
    
    
    5,425Income tax expense
    
    
    1,858
    
    
    
    1
    
    
    
    
    
    
    
    1,859Non-controlling interest expense
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Net income (loss) attributable to vRad
    
    $
    3,851
    
    
    $
    (285
    )
    
    $
    (2
    )
    
    $
    3,564
 Nine Months Ended September 30, 2009AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenue
    
    $
    69,646
    
    
    $
    81,986
    
    
    $
    (60,841
    )
    
    $
    90,791Operating costs and expenses
    
    
    60,213
    
    
    
    80,346
    
    
    
    (60,841
    )
    
    
    79,718Operating income
    
    
    9,433
    
    
    
    1,640
    
    
    
    
    
    
    
    11,073Other income
    
    
    151
    
    
    
    1
    
    
    
    
    
    
    
    152Income before income tax expense
    
    
    9,584
    
    
    
    1,641
    
    
    
    
    
    
    
    11,225Income tax expense
    
    
    3,840
    
    
    
    577
    
    
    
    
    
    
    
    4,417Net income attributable to vRad
    
    $
    5,744
    
    
    $
    1,064
    
    
    $
    
    
    
    $
    6,808
 30




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##### Table of Contents



Nine Months Ended September 30, 2008AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenue
    
    $
    60,429
    
    
    $
    70,138
    
    
    $
    (52,301
    )
    
    $
    78,266Operating costs and expenses
    
    
    47,518
    
    
    
    70,983
    
    
    
    (52,301
    )
    
    
    66,200Operating income (loss)
    
    
    12,911
    
    
    
    (845
    )
    
    
    
    
    
    
    12,066Other income
    
    
    450
    
    
    
    
    
    
    
    
    
    
    
    450Income (loss) before income tax expense
    
    
    13,361
    
    
    
    (845
    )
    
    
    
    
    
    
    12,516Income tax expense
    
    
    4,936
    
    
    
    6
    
    
    
    
    
    
    
    4,942Non-controlling interest expense
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Net income (loss) attributable to vRad
    
    $
    8,425
    
    
    $
    (851
    )
    
    $
    (10
    )
    
    $
    7,564
 Revenue Recognition and Accounts Receivable
     Stock-Based Compensation
  31




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##### Table of Contents



Physician Stock-Based Compensation.
 Employee Stock-Based Compensation.
 Medical Malpractice Loss Reserves
  Intangible Assets and Goodwill
    32




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##### Table of Contents



Income Taxes
      Recent Accounting Pronouncements
   33




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##### Table of Contents



34




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
 Foreign Currency Exchange Risk
  Interest Rate Market Risk
  
 ITEM 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  35




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##### Table of Contents



PART II  Other Information
 
 ITEM 1. Legal Proceedings
   ITEM 1A. Risk Factors
  The forthcoming potential loss of our ability to leverage our Joint Commission accreditation
for credentialing and privileging purposes, or any future loss of Joint Commission accreditation
could negatively impact our business and operating results
      36




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##### Table of Contents



ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  Total Number ofSharesTotal Number
    
    Average Price
    
    Purchased as
    
    Maximum Value thatof Shares
    
    Paid per
    
    Part of Publicly
    
    May Yet Be PurchasedPeriod
    
    Purchased
    
    Share
    
    Announced Plans
    
    Under the PlanJuly 1, 2009 - July 23, 2009
    
    
    48,852
    
    
    $
    9.49
    
    
    
    48,852
    
    
    $
    3,693,770Total
    
    
    48,852
    
    
    $
    9.49
    
    
    
    48,852
 37




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##### Table of Contents



ITEM 6. Exhibits
  EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    Certification by Principal Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.***31.2
    
    Certification of Principal Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.***32.1
    
    Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.***32.2
    
    Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.***
 
 ***
    
    Filed herewith. 38




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##### Table of Contents



SIGNATURES
  Signature
    
    Title
    
    Date/s/ Robert C. Kill

Robert C. Kill
    
    President and Chief Executive Officer (Principal
Executive Officer)
    
    November 12, 2009/s/ Leonard C. Purkis

Leonard C. Purkis
    
    Chief Financial Officer (Principal Financial
and Accounting Officer)
    
    November 12, 2009
 39