##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2010
 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
 (Exact name of registrant as specified in its charter)
 
 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  Registrants telephone number, including area code
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 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
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    25Item 4. Controls and Procedures
    
    25Part II  Other InformationItem 1. Legal Proceedings
    
    26Item 6. Exhibits
    
    26Signatures
    
    27EX-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 March 31, 2010 and December 31, 2009
    
    4Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009
    
    5Consolidated Statements of Changes in Stockholders Equity for the three months ended March 31,
2010 and the year ended December 31, 2009
    
    6Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009
    
    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 ofMarch 31,
    
    
    December 31,2010
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    52,392
    
    
    $
    50,163Restricted cash
    
    
    1,751
    
    
    
    1,751Accounts receivable, net
    
    
    18,451
    
    
    
    17,384Prepaid expenses and other current assets
    
    
    2,633
    
    
    
    2,768Total current assets
    
    
    75,227
    
    
    
    72,066Property and equipment, net
    
    
    12,371
    
    
    
    13,489Intangible assets, net
    
    
    4,092
    
    
    
    3,952Goodwill
    
    
    871
    
    
    
    858Medical malpractice excess loss reserves
receivable
    
    
    974
    
    
    
    1,008Deferred tax asset
    
    
    3,401
    
    
    
    3,084Other assets
    
    
    5
    
    
    
    5Total assets
    
    $
    96,941
    
    
    $
    94,462Liabilities and Stockholders EquityCurrent liabilities:Accrued professional services compensation
expense
    
    $
    5,838
    
    
    $
    5,719Accrued sales, general and administrative
compensation expense
    
    
    2,019
    
    
    
    4,087Current deferred tax liability
    
    
    
    
    
    
    1,089Current taxes payable
    
    
    2,741
    
    
    
    1,635Medical malpractice loss reserves, current
    
    
    410
    
    
    
    468Accounts payable and other current
liabilities
    
    
    2,893
    
    
    
    2,076Total current liabilities
    
    
    13,901
    
    
    
    15,074Deferred tenant lease allowance
    
    
    2,427
    
    
    
    2,491Medical malpractice loss reserves
    
    
    6,462
    
    
    
    5,101Medical malpractice excess loss reserves
    
    
    974
    
    
    
    1,008Other liabilities
    
    
    1,398
    
    
    
    1,454Total liabilities
    
    
    25,162
    
    
    
    25,128Commitments and contingencies (Note 5)Stockholders equity:Common stock, $.001 par value; 100,000,000
shares authorized as of March 31,
2010 and December 31, 2009; 16,245,994
and 16,054,829 shares issued and
15,964,860 and 15,928,661 shares
outstanding as of March 31, 2010 and
December 31, 2009, respectively
    
    
    17
    
    
    
    17Additional paid-in capital
    
    
    102,620
    
    
    
    102,118Treasury stock at cost, 1,095,980 and
1,095,490 shares as of March 31,
2010 and December 31, 2009, respectively
    
    
    (9,312
    )
    
    
    (9,306
    )Accumulated deficit
    
    
    (21,528
    )
    
    
    (23,482
    )Accumulated other comprehensive loss
    
    
    (18
    )
    
    
    (13
    )Total stockholders equity
    
    
    71,779
    
    
    
    69,334Total liabilities and stockholders
equity
    
    $
    96,941
    
    
    $
    94,462
  4




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VIRTUAL RADIOLOGIC CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except per share data)
 Three Months EndedMarch 31,2010
    
    
    2009Revenue
    
    $
    30,813
    
    
    $
    28,568Operating costs and expenses:Professional services
    
    
    15,124
    
    
    
    13,766Sales, general and administrative
    
    
    10,641
    
    
    
    11,066Depreciation and amortization
    
    
    1,872
    
    
    
    1,450Total operating costs and expenses
    
    
    27,637
    
    
    
    26,282Operating income
    
    
    3,176
    
    
    
    2,286Other income (expense):Interest income
    
    
    45
    
    
    
    57Interest expense
    
    
    (1
    )
    
    
    (1
    )Total other income
    
    
    44
    
    
    
    56Income before income tax expense
    
    
    3,220
    
    
    
    2,342Income tax expense
    
    
    1,266
    
    
    
    950Net income
    
    $
    1,954
    
    
    $
    1,392Earnings per common share:Basic
    
    $
    0.12
    
    
    $
    0.09Diluted
    
    $
    0.12
    
    
    $
    0.09Weighted average common shares outstanding:Basic
    
    
    15,949
    
    
    
    15,863Diluted
    
    
    16,305
    
    
    
    16,240
  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, 2008
    
    
    15,849
    
    
    $
    17
    
    
    $
    95,881
    
    
    $
    (8,000
    )
    
    $
    (31,397
    )
    
    $
    (6
    )
    
    $
    22
    
    
    $
    56,517Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,915
    
    
    
    
    
    
    
    
    
    
    
    7,915Other comprehensive incomeForeign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,908Stock-based compensation for independent contractor physicians
    
    
    
    
    
    
    
    
    
    
    787
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    787Stock-based compensation for employees and directors
    
    
    
    
    
    
    
    
    
    
    2,420
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,420Stock option exercises
    
    
    230
    
    
    
    
    
    
    
    219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219Excess tax benefits from exercises of stock options
    
    
    
    
    
    
    
    
    
    
    2,811
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,811Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    (22
    )Repurchases of common stock
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    (1,306
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,306
    )Balance at December 31, 2009
    
    
    15,929
    
    
    $
    17
    
    
    $
    102,118
    
    
    $
    (9,306
    )
    
    $
    (23,482
    )
    
    $
    (13
    )
    
    $
    
    
    
    $
    69,334Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,954
    
    
    
    
    
    
    
    
    
    
    
    1,954Other comprehensive incomeForeign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,949Stock-based compensation for independent contractor physicians
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11Stock-based compensation for employees and directors
    
    
    
    
    
    
    
    
    
    
    577
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    577Issuance of common stock from equity awards
    
    
    36
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Tax shortfall from exercises of stock options
    
    
    
    
    
    
    
    
    
    
    (96
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96
    )Repurchases of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Balance at March 31, 2010
    
    
    15,965
    
    
    $
    17
    
    
    $
    102,620
    
    
    $
    (9,312
    )
    
    $
    (21,528
    )
    
    $
    (18
    )
    
    $
    
    
    
    $
    71,779
  6




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VIRTUAL RADIOLOGIC CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Three Months EndedMarch 31,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    1,954
    
    
    $
    1,392Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts and sales allowances
    
    
    243
    
    
    
    535Depreciation and amortization
    
    
    1,872
    
    
    
    1,450Medical malpractice loss reserves
    
    
    1,361
    
    
    
    1,300Stock-based compensation for independent contractor physicians
    
    
    11
    
    
    
    (143
    )Stock-based compensation for employees and directors
    
    
    577
    
    
    
    721Deferred income taxes
    
    
    (1,960
    )
    
    
    23Other, net
    
    
    (48
    )
    
    
    16Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,310
    )
    
    
    (1,142
    )Prepaid expenses and other assets
    
    
    673
    
    
    
    517Accrued expenses
    
    
    (1,822
    )
    
    
    1,134Accounts payable and other liabilities
    
    
    1,690
    
    
    
    880Net cash provided by operating activities
    
    
    3,241
    
    
    
    6,683Cash flows from investing activities:Purchases of property and equipment
    
    
    (606
    )
    
    
    (2,230
    )Cash paid for acquisition (see Note 2)
    
    
    (400
    )
    
    
    Restricted cash
    
    
    
    
    
    
    (1,050
    )Other, net
    
    
    
    
    
    
    5Net cash used in investing activities
    
    
    (1,006
    )
    
    
    (3,275
    )Cash flows from financing activities:Payments on capital lease
    
    
    (10
    )
    
    
    Proceeds from stock option exercises
    
    
    10
    
    
    
    22Excess tax benefits from exercises of stock options
    
    
    
    
    
    
    461Repurchases of common stock
    
    
    (6
    )
    
    
    (116
    )Net cash (used in) provided by financing activities
    
    
    (6
    )
    
    
    367Net increase in cash and cash equivalents
    
    
    2,229
    
    
    
    3,775Cash and cash equivalents:Beginning of period
    
    
    50,163
    
    
    
    19,180End of period
    
    $
    52,392
    
    
    $
    22,955Supplemental disclosure of cash flow information:Cash paid (received) for income taxes, net
    
    $
    2,113
    
    
    $
    (538
    )
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VIRTUAL RADIOLOGIC CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
 1. Business Overview and Basis of Presentation
     Interim Consolidated Financial Statements
   8




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
 Significant Accounting Policies and Estimates
 Summary
of Significant Accounting Policies Managements Discussion and Analysis of Financial Condition and Results of Operations
 Principles of Consolidation
      9




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
 Revenue Recognition and Accounts Receivable
       New Accounting Standards
 Consolidation of Variable Interest Entities
 10




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
 Fair Value Measurements
 Subsequent Events
 2. Goodwill and Other Intangible Assets, Net
  Goodwill
  Intangible Assets, Net
 As of
    
    
    As ofMarch 31, 2010
    
    
    December 31, 2009Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedOriginal Cost
    
    
    Amortization
    
    
    Carrying Value
    
    
    Original Cost
    
    
    Amortization
    
    
    Carrying Value(in thousands)Patent application costs
    
    $
    347
    
    
    $
    (86
    )
    
    $
    261
    
    
    $
    347
    
    
    $
    (80
    )
    
    $
    267Non-compete agreements
    
    
    298
    
    
    
    (292
    )
    
    
    6
    
    
    
    298
    
    
    
    (255
    )
    
    
    43Customer relationships
    
    
    5,354
    
    
    
    (1,529
    )
    
    
    3,825
    
    
    
    4,968
    
    
    
    (1,326
    )
    
    
    3,642Intangible assets, net
    
    $
    5,999
    
    
    $
    (1,907
    )
    
    $
    4,092
    
    
    $
    5,613
    
    
    $
    (1,661
    )
    
    $
    3,952
   11




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
   Amount(in thousands)Nine months ending December 31, 2010
    
    $
    690Year ending December 31, 2011
    
    
    864Year ending December 31, 2012
    
    
    699Year ending December 31, 2013
    
    
    498Year ending December 31, 2014
    
    
    393Thereafter
    
    
    948Total
    
    $
    4,092
  3. Stock-Based Compensation
 vRad Equity Incentive Plan
  Stock-Based Compensation Costs
 Employee Stock-Based Compensation.
   Physician Stock-Based Compensation.
 12




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
  Stock Option Activity
  Weighted
    
    
    WeightedAverage
    
    
    AverageExercise Price
    
    
    Contractual LifeOutstanding
    
    
    Per Share
    
    
    (in years)Balance at December 31, 2009(1)
    
    
    2,098,400
    
    
    $
    11.31
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (15,689
    )
    
    
    3.25
    
    
    
    Forfeited/Cancelled/Expired
    
    
    (77,789
    )
    
    
    12.18
    
    
    
    Balance at March 31, 2010
    
    
    2,004,922
    
    
    
    11.34
    
    
    
    5.81Options vested and expected to vest at March 31, 2010(2)
    
    
    1,976,700
    
    
    
    11.32
    
    
    
    5.82Exercisable at March 31, 2010
    
    
    1,045,632
    
    
    
    10.24
    
    
    
    5.06
 
 (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.(2)
    
    Options expected to vest reflect an estimated forfeiture rate. Restricted Stock Award Activity
  Weighted
    
    
    WeightedAverage
    
    
    AverageFair Value
    
    
    Vesting PeriodOutstanding
    
    
    Per Share
    
    
    (in years)Balance at December 31, 2009
    
    
    126,168
    
    
    $
    9.53
    
    
    
    Granted
    
    
    180,866
    
    
    
    10.58
    
    
    
    Vested
    
    
    (21,000
    )
    
    
    8.70
    
    
    
    Forfeited/Cancelled/Expired
    
    
    (4,900
    )
    
    
    9.14
    
    
    
    Balance at March 31, 2010
    
    
    281,134
    
    
    
    10.18
    
    
    
    3.59Awards vested and expected to vest at March 31, 2010(1)
    
    
    274,642
    
    
    
    10.18
    
    
    
    3.59
 
 (1)
    
    Awards expected to vest reflect an estimated forfeiture rate. 4. Stock Repurchase Program
  13




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
 5. Commitments and Contingencies
  Professional Liability Coverage
    As of
    
    
    
    
    
    
    
    
    
    
    As ofDecember 31,
    
    
    
    
    
    
    
    
    
    
    March 31,2009
    
    
    Payments
    
    
    Reserves
    
    
    2010(in thousands)Specific claims reserves
    
    $
    115
    
    
    $
    
    
    
    $
    
    
    
    $
    115Medical malpratice loss development reserves
    
    
    2,942
    
    
    
    58
    
    
    
    787
    
    
    
    3,671IBNR reserves
    
    
    2,512
    
    
    
    
    
    
    
    574
    
    
    
    3,086Total
    
    $
    5,569
    
    
    $
    58
    
    
    $
    1,361
    
    
    $
    6,872
  14




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##### Table of Contents



VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
 Litigation
  6. Related Party Transactions
   Three Months EndedMarch 31,2010
    
    2009(in thousands)VRP professional services revenue from vRad
    
    $
    7,196
    
    
    $
    6,134vRad professional services expense to VRP
    
    
    7,196
    
    
    
    6,134VRP professional services revenue from the Professional Corporations
    
    
    6,383
    
    
    
    6,624Professional Corporations professional services expense to VRP
    
    
    6,383
    
    
    
    6,624vRad management fee revenue from the Professional Corporations
    
    
    6,319
    
    
    
    6,557Professional Corporations management fee expense to vRad
    
    
    6,319
    
    
    
    6,557Cash paid for professional services by vRad to VRP
    
    
    7,196
    
    
    
    6,134Cash paid for professional services by the Professional Corporations to VRP
    
    
    6,383
    
    
    
    6,624Cash paid for management fees by the Professional Corporations to vRad
    
    
    6,319
    
    
    
    6,557
   7. Earnings Per Share
  15




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
  Three Months EndedMarch 31,2010
    
    
    2009(in thousands, except per share data)Basic and Diluted Earnings per Share (Two-class Method)Basic Earnings per Share:Undistributed income available to common stockholders
    
    $
    1,954
    
    
    $
    1,392Participating securities ownership
    
    
    0.6
    %
    
    
    0.6
    %Participating securities interest in undistributed income
    
    $
    12
    
    
    $
    8Weighted average participating securities outstanding
    
    
    112
    
    
    
    57Basic earnings per share  participating securities
    
    $
    0.11
    
    
    $
    0.14Undistributed income available to common stockholders
    
    $
    1,954
    
    
    $
    1,392Common ownership
    
    
    99.4
    %
    
    
    99.4
    %Common stockholders interest in undistributed income
    
    $
    1,942
    
    
    $
    1,384Weighted average common shares outstanding
    
    
    15,949
    
    
    
    15,863Basic earnings per share  common
    
    $
    0.12
    
    
    $
    0.09Diluted Earnings per Share:Common stockholders interest in undistributed income
    
    $
    1,942
    
    
    $
    1,384Participating securities interest in undistributed income
    
    
    12
    
    
    
    8Net income used in diluted earnings per share
    
    $
    1,954
    
    
    $
    1,392Weighted average common shares outstanding
    
    
    15,949
    
    
    
    15,863Weighted average participating securities outstanding
    
    
    112
    
    
    
    57Common share equivalents
    
    
    244
    (1)
    
    
    320
    (1)Shares used to compute earnings per common share  diluted
    
    
    16,305
    
    
    
    16,240Diluted earnings per share
    
    $
    0.12
    
    
    $
    0.09
 
 (1)
    
    The calculation of common stock equivalents excludes options and awards to purchase
approximately 1.7 million and 1.8 million common shares for the three months ended
March 31, 2010 and 2009, respectively, because they are antidilutive. 16




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Special Note Regarding Forward-Looking Statements
    Overview
    Trends in Our Business
    17




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##### Table of Contents



Results of Operations
  Three Months Ended March 31,2010
    
    
    2009Revenue
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Physician cash compensation expense
    
    
    43.8
    
    
    
    43.4Physician stock-based compensation expense (income)
    
    
    0.1
    
    
    
    (0.5
    )Medical malpractice liability expense
    
    
    5.2
    
    
    
    5.3Total professional services
    
    
    49.1
    
    
    
    48.2Sales, general and administrative
    
    
    34.5
    
    
    
    38.7Depreciation and amortization
    
    
    6.1
    
    
    
    5.1Total operating costs and expenses
    
    
    89.7
    
    
    
    92.0Operating income
    
    
    10.3
    
    
    
    8.0Total other income
    
    
    0.1
    
    
    
    0.2Income before income tax expense
    
    
    10.4
    
    
    
    8.2Income tax expense
    
    
    4.1
    
    
    
    3.3Net income
    
    
    6.3
    %
    
    
    4.9
    %
 Comparison of the Three Months Ended March 31, 2010 and March 31, 2009
 Revenue
   18




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##### Table of Contents



Key Revenue Metrics
 Three months ended March 31,2010
    
    2009
    

%
changeRevenue (in thousands)
    
    $
    30,813
    
    
    $
    28,568
    
    
    
    8
    %Reads
    
    
    700,443
    
    
    
    613,117
    
    
    
    14
    %Year-over-year change in price per read
    
    
    (6
    %)
    
    
    (5
    %)Same site volume growth(1)
    
    
    5
    %
    
    
    2
    %Percentage of read volume from:Final reads
    
    
    32
    %
    
    
    27
    %Preliminary reads
    
    
    68
    %
    
    
    73
    %Customers
    
    
    658
    
    
    
    625
    
    
    
    5
    %Facilities
    
    
    1,205
    
    
    
    1,050
    
    
    
    15
    %Percentage of U.S. hospitals served
    
    
    21
    %
    
    
    17
    %
 
 (1)
    
    Same site volume growth measures the percentage increase in the number of reads over
the comparable prior 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.  Operating Costs and Expenses
  Professional Services
   19




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##### Table of Contents



Key Professional Service Metrics
 Three Months EndedMarch 31,2010
    
    
    2009
    
    

%
Change(dollars in thousands)Physician cash compensation expense
    
    $
    13,504
    
    
    $
    12,402
    
    
    
    9
    %Physician stock-based compensation expense (income)
    
    
    11
    
    
    
    (143
    )
    
    
    (108
    %)Medical malpractice liability expense
    
    
    1,609
    
    
    
    1,507
    
    
    
    7
    %Total professional services
    
    $
    15,124
    
    
    $
    13,766
    
    
    
    10
    %Radiologists providing services
    
    
    144
    
    
    
    134
    
    
    
    7
    %Average diagnostic cash compensation per read
    
    $
    19.16
    
    
    $
    20.09
  Sales, General and Administrative
   Depreciation and Amortization
  Income Tax Expense
  20




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##### Table of Contents



Liquidity and Capital Resources
 Cash and Cash Equivalents
  Three Months EndedMarch 31,2010
    
    
    2009(in thousands)Net cash provided by operating activities
    
    $
    3,241
    
    
    $
    6,683Net cash used in investing activities
    
    
    (1,006
    )
    
    
    (3,275
    )Net cash (used in) provided by financing activities
    
    
    (6
    )
    
    
    367Net increase in cash and cash equivalents
    
    $
    2,229
    
    
    $
    3,775
 Cash Flows from Operating Activities
   Cash Flows from Investing Activities
  Cash Flows from Financing Activities
  Future Liquidity Requirements
  21




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##### Table of Contents



Contractual Obligations and Commitments
   Significant Accounting Policies and Estimates
 Significant Accounting Policies and
Estimates,
 Principles of Consolidation
   22




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##### Table of Contents



Condensed Consolidating Balance Sheets
(unaudited)
 As of March 31, 2010AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash and cash equivalents
    
    $
    51,910
    
    
    $
    482
    
    
    $
    
    
    
    $
    52,392Accounts receivable, net
    
    
    10,862
    
    
    
    7,589
    
    
    
    
    
    
    
    18,451Other current assets
    
    
    40,589
    
    
    
    51,889
    
    
    
    (88,094
    )
    
    
    4,384Non-current assets
    
    
    21,699
    
    
    
    15
    
    
    
    
    
    
    
    21,714Total assets
    
    $
    125,060
    
    
    $
    59,975
    
    
    $
    (88,094
    )
    
    $
    96,941Current liabilities
    
    $
    35,165
    
    
    $
    66,830
    
    
    $
    (88,094
    )
    
    $
    13,901Non-current liabilities
    
    
    11,261
    
    
    
    
    
    
    
    
    
    
    
    11,261Total liabilities
    
    
    46,426
    
    
    
    66,830
    
    
    
    (88,094
    )
    
    
    25,162Stockholders equity (deficiency)
    
    
    78,634
    
    
    
    (6,855
    )
    
    
    
    
    
    
    71,779Total liabilities and stockholders equity
    
    $
    125,060
    
    
    $
    59,975
    
    
    $
    (88,094
    )
    
    $
    96,941
 As of December 31, 2009AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash and cash equivalents
    
    $
    49,159
    
    
    $
    1,004
    
    
    $
    
    
    
    $
    50,163Accounts receivable, net
    
    
    9,706
    
    
    
    7,678
    
    
    
    
    
    
    
    17,384Other current assets
    
    
    34,701
    
    
    
    38,629
    
    
    
    (68,811
    )
    
    
    4,519Non-current assets
    
    
    21,898
    
    
    
    20
    
    
    
    478
    
    
    
    22,396Total assets
    
    $
    115,464
    
    
    $
    47,331
    
    
    $
    (68,333
    )
    
    $
    94,462Current liabilities
    
    $
    29,673
    
    
    $
    54,212
    
    
    $
    (68,811
    )
    
    $
    15,074Non-current liabilities
    
    
    9,576
    
    
    
    
    
    
    
    478
    
    
    
    10,054Total liabilities
    
    
    39,249
    
    
    
    54,212
    
    
    
    (68,333
    )
    
    
    25,128Stockholders equity (deficiency)
    
    
    76,215
    
    
    
    (6,881
    )
    
    
    
    
    
    
    69,334Total liabilities and stockholders equity
    
    $
    115,464
    
    
    $
    47,331
    
    
    $
    (68,333
    )
    
    $
    94,462
 23




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##### Table of Contents



Condensed Consolidating Statements of Operations  (unaudited)
 Three Months Ended March 31, 2010AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenue
    
    $
    24,309
    
    
    $
    26,401
    
    
    $
    (19,897
    )
    
    $
    30,813Operating costs and expenses
    
    
    21,124
    
    
    
    26,410
    
    
    
    (19,897
    )
    
    
    27,637Operating income (loss)
    
    
    3,185
    
    
    
    (9
    )
    
    
    
    
    
    
    3,176Other income
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    44Income (loss) before income tax expense
    
    
    3,229
    
    
    
    (9
    )
    
    
    
    
    
    
    3,220Income tax expense (benefit)
    
    
    1,302
    
    
    
    (36
    )
    
    
    
    
    
    
    1,266Net income
    
    $
    1,927
    
    
    $
    27
    
    
    $
    
    
    
    $
    1,954
 Three Months Ended March 31, 2009AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenue
    
    $
    21,863
    
    
    $
    26,020
    
    
    $
    (19,315
    )
    
    $
    28,568Operating costs and expenses
    
    
    19,965
    
    
    
    25,632
    
    
    
    (19,315
    )
    
    
    26,282Operating income
    
    
    1,898
    
    
    
    388
    
    
    
    
    
    
    
    2,286Other income
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    56Income before income tax expense
    
    
    1,954
    
    
    
    388
    
    
    
    
    
    
    
    2,342Income tax expense
    
    
    782
    
    
    
    168
    
    
    
    
    
    
    
    950Net income
    
    $
    1,172
    
    
    $
    220
    
    
    $
    
    
    
    $
    1,392
 24




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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 over Financial Reporting
  25




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##### Table of Contents



PART II  Other Information
 
 ITEM 1. Legal Proceedings
   
 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. 26




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##### Table of Contents



SIGNATURES
  Signature
    
    Title
    
    Date/s/ Leonard C. Purkis

Leonard C. Purkis
    
    Chief Financial Officer (Principal
Financial and Accounting Officer, and
Duly Authorized Officer)
    
    April 28, 2010
 27