##### 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 MARCH
31, 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
 (Exact name of registrant as specified in its charter)
 
 Delaware
    
    27-0074530(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)11995 Singletree Lane, Suite 500Eden Prairie, Minnesota
    
    55344(Address of principal executive offices)
    
    (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. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33Part II  Other InformationItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    36Signatures
    
    
    37EX-10.1EX-10.2EX-10.3EX-10.4EX-10.5EX-10.6EX-10.7EX-10.8EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  Financial Information
 
 ITEM 1. Financial Statements
 Virtual Radiologic Corporation
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Contents
 PageConsolidated Financial Statements (unaudited)Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008
    
    
    4Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008
    
    
    5Consolidated Statements of Changes in Stockholders Equity for the three months ended
March 31, 2009 and the year ended December 31, 2008
    
    
    6Consolidated Statements of Cash Flows for the three months ended March 31, 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 ofMarch 31,
    
    
    December 31,2009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    22,955
    
    
    $
    19,180Restricted cash
    
    
    1,750
    
    
    
    700Short-term investments
    
    
    10,136
    
    
    
    10,136Accounts receivable, net
    
    
    17,989
    
    
    
    17,383Prepaid expenses
    
    
    1,308
    
    
    
    1,704Other current assets
    
    
    2,498
    
    
    
    2,422Total current assets
    
    
    56,636
    
    
    
    51,525Property, plant and equipment, net
    
    
    15,173
    
    
    
    11,692Intangible assets, net
    
    
    4,793
    
    
    
    5,073Medical malpractice excess loss reserves receivable
    
    
    1,396
    
    
    
    1,288Other assets
    
    
    1,339
    
    
    
    1,423Total assets
    
    $
    79,337
    
    
    $
    71,001Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    797
    
    
    $
    421Accrued professional services compensation expense
    
    
    5,758
    
    
    
    5,690Accrued sales, general and administrative compensation expenses
    
    
    2,133
    
    
    
    1,383Medical malpractice loss reserves
    
    
    2,691
    
    
    
    1,419Current deferred tax liability
    
    
    1,103
    
    
    
    1,103Other current liabilities
    
    
    3,050
    
    
    
    2,490Total current liabilities
    
    
    15,532
    
    
    
    12,506Deferred tenant lease allowance
    
    
    2,684
    
    
    
    Medical malpractice excess loss reserves
    
    
    1,396
    
    
    
    1,288Other non-current liabilities
    
    
    864
    
    
    
    690Total liabilities
    
    
    20,476
    
    
    
    14,484Commitments and contingencies (see Note 7)Virtual Radiologic Corporation Stockholders equity:Common stock, $.001 par value; 100,000,000 shares
authorized at March 31, 2009 and December 31, 2008; 15,863,693
and 15,849,398 shares issued and outstanding at March 31, 2009
and December 31, 2008, respectively
    
    
    17
    
    
    
    17Additional paid-in capital
    
    
    96,951
    
    
    
    95,881Treasury stock at cost, 965,272 and 944,760 shares at March 31, 2009
and December 31, 2008, respectively
    
    
    (8,116
    )
    
    
    (8,000
    )Accumulated deficit
    
    
    (30,005
    )
    
    
    (31,397
    )Accumulated other comprehensive loss
    
    
    (8
    )
    
    
    (6
    )Total Virtual Radiologic Corporation stockholders equity
    
    
    58,839
    
    
    
    56,495Non-controlling interest (See Note 2)
    
    
    22
    
    
    
    22Total stockholders equity
    
    
    58,861
    
    
    
    56,517Total liabilities and stockholders equity
    
    $
    79,337
    
    
    $
    71,001
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##### Table of Contents



VIRTUAL RADIOLOGIC CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except per share data)
 Three Months EndedMarch 31,2009
    
    
    2008Revenue
    
    $
    28,568
    
    
    $
    23,320Operating costs and expensesProfessional services
    
    
    13,766
    
    
    
    10,367Sales, general and administrative
    
    
    11,066
    
    
    
    8,735Depreciation and amortization
    
    
    1,450
    
    
    
    855Total operating costs and expenses
    
    
    26,282
    
    
    
    19,957Operating income
    
    
    2,286
    
    
    
    3,363Other income (expense)Interest income
    
    
    57
    
    
    
    176Interest expense
    
    
    (1
    )
    
    
    Total other income (expense)
    
    
    56
    
    
    
    176Income before income tax expense
    
    
    2,342
    
    
    
    3,539Income tax expense
    
    
    950
    
    
    
    1,535Net income
    
    
    1,392
    
    
    
    2,004Non-controlling interest expense
    
    
    
    
    
    
    4Net income attributable to Virtual Radiologic Corporation
    
    $
    1,392
    
    
    $
    2,000Earnings per common shareBasic
    
    $
    0.09
    
    
    $
    0.12Diluted
    
    $
    0.09
    
    
    $
    0.12Weighted average common shares outstandingBasic
    
    
    15,863
    
    
    
    16,616Diluted
    
    
    16,240
    
    
    
    17,268
  5




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##### Table of Contents



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
    
    
    Income
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,448Equity based compensation for independent contractor physicians
    
    
    
    
    
    
    
    
    
    
    (479
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (479
    )Equity based compensation for employees
    
    
    
    
    
    
    
    
    
    
    1,544
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,544Stock option exercises
    
    
    331
    
    
    
    1
    
    
    
    313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314Excess tax benefit from exercises of stock options
    
    
    
    
    
    
    
    
    
    
    4,396
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,396Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )Repurchase of common shares
    
    
    (945
    )
    
    
    
    
    
    
    
    
    
    
    (8,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,000
    )Balance at December 31, 2008
    
    
    15,849
    
    
    $
    17
    
    
    $
    95,881
    
    
    $
    (8,000
    )
    
    $
    (31,397
    )
    
    $
    (6
    )
    
    $
    22
    
    
    $
    56,517Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,392
    
    
    
    
    
    
    
    
    
    
    
    1,392Other comprehensive lossForeign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,390Equity based compensation for independent contractor physicians
    
    
    
    
    
    
    
    
    
    
    (143
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (143
    )Equity based compensation for employees
    
    
    
    
    
    
    
    
    
    
    721
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    721Stock option exercises
    
    
    35
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Excess tax benefit from exercises of stock options
    
    
    
    
    
    
    
    
    
    
    461
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    461Repurchase of common shares
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (116
    )Balance at March 31, 2009
    
    
    15,864
    
    
    $
    17
    
    
    $
    96,951
    
    
    $
    (8,116
    )
    
    $
    (30,005
    )
    
    $
    (8
    )
    
    $
    22
    
    
    $
    58,861
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VIRTUAL RADIOLOGIC CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Three Months EndedMarch 31,2009
    
    
    2008Cash flows from operating activitiesNet income
    
    $
    1,392
    
    
    $
    2,004Adjustments to reconcile net income to net cash provided by operating activitiesProvision for doubtful accounts and sales allowance
    
    
    535
    
    
    
    Depreciation and amortization
    
    
    1,450
    
    
    
    855Interest and discount amortization
    
    
    
    
    
    
    13Loss on disposal of property, plant and equipment
    
    
    16
    
    
    
    Equity based compensation for independent contractor physicians
    
    
    (143
    )
    
    
    (495
    )Equity based compensation for employees
    
    
    721
    
    
    
    282Deferred income taxes
    
    
    23
    
    
    
    145Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,142
    )
    
    
    (665
    )Prepaid expenses
    
    
    396
    
    
    
    488Current taxes receivable
    
    
    664
    
    
    
    783Other current assets
    
    
    (543
    )
    
    
    (57
    )Accounts payable
    
    
    438
    
    
    
    (69
    )Accrued expenses
    
    
    2,434
    
    
    
    244Current taxes payable
    
    
    338
    
    
    
    Other current liabilities
    
    
    (15
    )
    
    
    (104
    )Deferred rent
    
    
    119
    
    
    
    (8
    )Net cash provided by operating activities
    
    
    6,683
    
    
    
    3,416Cash flows from investing activitiesPurchases of property, plant and equipment
    
    
    (2,230
    )
    
    
    (4,559
    )Proceeds from sale of property, plant and equipment
    
    
    5
    
    
    
    2Payments to acquire patents
    
    
    
    
    
    
    (51
    )Restricted cash
    
    
    (1,050
    )
    
    
    Net cash used in investing activities
    
    
    (3,275
    )
    
    
    (4,608
    )Cash flows from financing activitiesPayments of offering costs
    
    
    
    
    
    
    (291
    )Proceeds from stock option exercises
    
    
    22
    
    
    
    111Excess tax benefit from exercises of stock options
    
    
    461
    
    
    
    1,381Repurchases of common stock
    
    
    (116
    )
    
    
    Net cash provided by financing activities
    
    
    367
    
    
    
    1,201Net increase in cash and cash equivalents
    
    
    3,775
    
    
    
    9Cash and cash equivalentsBeginning of period
    
    
    19,180
    
    
    
    33,487End of period
    
    $
    22,955
    
    
    $
    33,496Supplemental disclosure of cash flow informationCash (received) paid for income taxes
    
    $
    (538
    )
    
    $
    930
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##### Table of Contents



VIRTUAL RADIOLOGIC CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 1. Business Overview
     2. Summary of Significant Accounting Policies
 Interim Financial Statements
   8




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##### Table of Contents



VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)
 Principles of Consolidation and Basis of Presentation
 Consolidation of Variable Interest
Entities
   Recent Accounting Pronouncements
 Fair Value Measurements, Effective Date of FASB Statement
No. 157,
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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)
 Non-controlling Interests in Consolidated
Financial Statements an amendment of ARB 51
 Determination of the Useful Life of
Intangible Assets
 Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
 3. Selected Consolidated Financial Statement Information
 Restricted Cash
  Short-term Investments
 Accounting for Certain
Investments in Debt and Equity Securities
 As of
    
    As ofMarch 31,
    
    December 31,2009
    
    2008(in thousands)Due in one year or less:Certificates of deposit
    
    $
    10,136
    
    
    $
    10,136
 10




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)
  Level 1
 Level 2
 Level 3
   Fair Value Measurements as ofMarch 31, 2009Total
    
    Level 1
    
    Level 2
    
    Level 3(in thousands)DescriptionShort-term investments (Certificates of Deposit)
    
    $
    10,136
    
    
    $
    10,136
    
    
    $
    
    
    
    $
    
 Property, Plant and Equipment, Ne
 As of
    
    
    As ofMarch 31,
    
    
    December 31,2009
    
    
    2008(in thousands)Equipment
    
    $
    11,533
    
    
    $
    10,332Software
    
    
    6,345
    
    
    
    6,110Furniture and fixtures
    
    
    929
    
    
    
    1,144Leasehold improvements
    
    
    4,599
    
    
    
    342Other
    
    
    395
    
    
    
    1,742Total property, plant and equipment
    
    
    23,801
    
    
    
    19,670Less: Accumulated depreciation and amortization
    
    
    8,628
    
    
    
    7,978Property, plant and equipment, net
    
    $
    15,173
    
    
    $
    11,692
  11




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)
 4. Goodwill and Other Intangible Assets
 Goodwill
 Goodwill and Other Intangible Assets
 Intangible Assets, Net
  As of March 31, 2009
    
    
    As of December 31, 2008(in thousands)Estimated
    
    
    Original
    
    
    Accumulated
    
    
    Carrying
    
    
    Original
    
    
    Accumulated
    
    
    CarryingUseful Life
    
    
    Cost
    
    
    Amortization
    
    
    Value
    
    
    Cost
    
    
    Amortization
    
    
    ValuePatents
    
    15 years
    
    $
    347
    
    
    $
    62
    
    
    $
    285
    
    
    $
    347
    
    
    $
    56
    
    
    $
    291Non-compete agreements
    
    2 years
    
    
    298
    
    
    
    143
    
    
    
    155
    
    
    
    298
    
    
    
    105
    
    
    
    193Customer relationships
    
    10 years
    
    
    4,968
    
    
    
    615
    
    
    
    4,353
    
    
    
    4,968
    
    
    
    379
    
    
    
    4,589Intangible assets, net
    
    
    
    
    
    $
    5,613
    
    
    $
    820
    
    
    $
    4,793
    
    
    $
    5,613
    
    
    $
    540
    
    
    $
    5,073
   Amount(in thousands)Nine months ending December 31, 2009
    
    $
    841Year ending December 31, 2010
    
    
    879Year ending December 31, 2011
    
    
    689Year ending December 31, 2012
    
    
    570Year ending December 31, 2013
    
    
    473Thereafter
    
    
    1,341Total
    
    $
    4,793
  12




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VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)
 5. Stock Options and Accounting for Stock-Based Compensation
  Stock OptionsWeightedAverage
    
    
    Exercise PricesExercise Price
    
    
    Per ShareOutstanding
    
    
    Per Share
    
    
    Ranging FromBalance at December 31, 2008 (1)
    
    
    2,183,995
    
    
    $
    10.82Granted
    
    
    375,000
    
    
    
    8.72
    
    
    $
    8.39 - $8.98Exercised
    
    
    (34,807
    )
    
    
    2.72
    
    
    
    2.00 - 5.50Forfeited/Cancelled/Expired
    
    
    (93,309
    )
    
    
    12.15
    
    
    
    2.00 - 17.55Balance at March 31, 2009
    
    
    2,430,879
    
    
    
    10.56Exercisable at March 31, 2009
    
    
    766,846
    
    
    
    7.46
    
    
    
    2.00 - 23.00
 
 (1)
    
    The number of options outstanding includes 120,000 options granted in May 2007 to
members of the Companys Board of Directors that were not issued pursuant to the VRC Equity
Incentive Plan.  Restricted Stock AwardsWeightedNumber
    
    
    Average Grantof Shares
    
    
    Date Fair ValueUnvested at December 31, 2008
    
    
    
    
    
    $
    Granted
    
    
    88,000
    
    
    
    8.65Vested
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Unvested at March 31, 2009
    
    
    88,000
    
    
    
    8.65Expected to vest after March 31, 2009
    
    
    88,000
    
    
    
    8.65
  Stock-Based CompensationEmployees and Directors
   13




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##### Table of Contents



VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)
  Stock-Based CompensationPhysicians
  6. Stock Repurchase Program
  7. Commitments and Contingencies
  Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others Application of FASB Interpretation
No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners
 14




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##### Table of Contents



VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)
  (in thousands)2009
    
    $
    322010
    
    
    432011
    
    
    432012
    
    
    432013
    
    
    3164Less: Amount representing interest
    
    
    11Present value of minimum lease payments
    
    
    153Less: Current portion
    
    
    38Capital lease obligations, less current portion
    
    $
    115
 Accounting
for Uncertain Income Tax
 Professional Liability Coverage
   Litigation
  15




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##### Table of Contents



VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)
    8. Related Party Transactions
   Three Months EndedMarch 31,2009
    
    2008(in thousands)VRP professional services revenue from VRC
    
    $
    6,134
    
    
    $
    5,266VRC professional services expense to VRP
    
    
    6,134
    
    
    
    5,266VRP professional services revenue from the Professional Corporations
    
    
    6,624
    
    
    
    5,074Professional Corporations professional services expense to VRP
    
    
    6,624
    
    
    
    5,074VRC management fee revenue from the Professional Corporations
    
    
    6,557
    
    
    
    5,024Professional Corporations management fee expense to VRC
    
    
    6,557
    
    
    
    5,024Cash paid for professional services by VRC to VRP
    
    
    6,134
    
    
    
    5,266Cash paid for professional services by the Professional Corporations to VRP
    
    
    6,624
    
    
    
    5,074Cash paid for management fees by the Professional Corporations to VRC
    
    
    6,557
    
    
    
    5,024
   16




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##### Table of Contents



VIRTUAL RADIOLOGIC CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)
 9. Earnings Per Share
 Participating
Securities and the two-class method under FASB Statement
No. 128 Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
 Earnings Per Share
  Three Months Ended March 31,2009
    
    
    2008(in thousands, except per share data)Basic and Diluted Earnings per Share  Two-class Method
Basic Earnings per ShareUndistributed income
    
    $
    1,392
    
    
    $
    Restricted stock ownership
    
    
    0.6
    %
    
    
    0%(1)Restricted stock interest in undistributed income
    
    $
    8
    
    
    $
    Weighted average restricted shares outstanding  Basic
    
    
    57
    
    
    
    Total basic earnings per share  Restricted
    
    $
    0.14
    
    
    $
    Undistributed income
    
    $
    1,392
    
    
    $
    2,000Common ownership
    
    
    99.4
    %
    
    
    100%(1)Common stockholders interest in undistributed income
    
    $
    1,384
    
    
    $
    2,000Weighted average common shares outstanding  Basic
    
    
    15,863
    
    
    
    16,616Total basic earnings per share  Common
    
    $
    0.09
    
    
    $
    0.12Diluted Earnings per ShareCommon stockholders interest in undistributed earnings
    
    $
    1,384
    
    
    $
    2,000Add: Undistributed earnings  restricted stock
    
    
    8
    
    
    
    Net income used in diluted earnings per share
    
    $
    1,391
    
    
    $
    2,000Weighted average common shares outstanding  Basic
    
    
    15,863
    
    
    
    16,616Weighted average restricted stock outstanding
    
    
    57
    
    
    
    Common share equivalents
    
    
    320
    
    
    
    652Shares used to compute earnings per common share  Diluted
    
    
    16,240
    
    
    
    17,268Total diluted earnings per share
    
    $
    0.09
    
    
    $
    0.12
 
 (1)
    
    There was no restricted stock outstanding during the quarter ended March 31,
2008. 
 17




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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
   
    
    the impact of general economic conditions on the number of reads our customers
send to us;
    
    the competition in the teleradiology market, including pricing pressure resulting
from that competition;
    
    our ability to effectively manage our growth and development;
    
    the impact of intellectual property infringement claims;
    
    our ability to recruit and retain qualified radiologists;
    
    our characterization of our affiliated radiologists as independent contractors;
    
    our ability to obtain proper physician licenses and hospital credentials on
behalf of our affiliated radiologists;
    
    the regulation of the corporate practice of medicine;
    
    our dependence on our Affiliated Medical Practices, which we do not own;
    
    our ability to enforce the non-competition agreements with our affiliated
radiologists;
    
    the loss of key members of management and personnel;
    
    new technologies;
    
    the breach of our security measures that safeguard patient and customer data;
    
    the performance of our information systems, which are dependent on systems
provided by third parties;
    
    our ability to comply with government regulations;
    
    the general economic conditions of the markets that we operate in; and
    
    other risk factors listed from time to time in our reports filed with the SEC,
including without limitation, the section entitled Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2008, as updated by Part II,
Item 1A of this report.
  18




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##### Table of Contents



Overview
    Critical Accounting Policies
   Principles of Consolidation
 Consolidation of Variable Interest Entities
 19




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##### Table of Contents



Condensed Consolidating Balance Sheets
(unaudited)
 As of March 31, 2009AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash and cash equivalents
    
    $
    22,007
    
    
    $
    948
    
    
    $
    
    
    
    $
    22,955Short-term investments
    
    
    10,136
    
    
    
    
    
    
    
    
    
    
    
    10,136Accounts receivable, net
    
    
    8,875
    
    
    
    9,114
    
    
    
    
    
    
    
    17,989Other current assets
    
    
    28,382
    
    
    
    19,776
    
    
    
    (42,602
    )
    
    
    5,556Non-current assets
    
    
    22,686
    
    
    
    15
    
    
    
    
    
    
    
    22,701Total assets
    
    $
    92,086
    
    
    $
    29,853
    
    
    $
    (42,602
    )
    
    $
    79,337Current liabilities
    
    $
    20,496
    
    
    $
    37,638
    
    
    $
    (42,602
    )
    
    $
    15,532Non-current liabilities
    
    
    4,944
    
    
    
    
    
    
    
    
    
    
    
    4,944Total liabilities
    
    
    25,440
    
    
    
    37,638
    
    
    
    (42,602
    )
    
    
    20,476Total stockholders equity (deficiency)
    
    
    66,646
    
    
    
    (7,785
    )
    
    
    
    
    
    
    58,861Total liabilities and stockholders equity
    
    $
    92,086
    
    
    $
    29,853
    
    
    $
    (42,602
    )
    
    $
    79,337
 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
    
    $
    10,014
    
    
    $
    26,566
    
    
    $
    (24,074
    )
    
    $
    12,506Non-current liabilities
    
    
    1,810
    
    
    
    
    
    
    
    168
    
    
    
    1,978Total liabilities
    
    
    11,824
    
    
    
    26,566
    
    
    
    (23,906
    )
    
    
    14,484Total stockholders equity (deficiency)
    
    
    64,522
    
    
    
    (8,005
    )
    
    
    
    
    
    
    56,517Total liabilities and stockholders equity
    
    $
    76,346
    
    
    $
    18,561
    
    
    $
    (23,906
    )
    
    $
    71,001
 20




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##### Table of Contents



Condensed Consolidating Statements of Operations
(unaudited)
 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
    
    
    1,954
    
    
    
    388
    
    
    
    
    
    
    
    2,342Income tax expense
    
    
    782
    
    
    
    168
    
    
    
    
    
    
    
    950Net income
    
    $
    1,172
    
    
    $
    220
    
    
    $
    
    
    
    $
    1,392
 Three Months Ended March 31, 2008AffiliatedMedicalvRad
    
    
    Practices
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenue
    
    $
    18,189
    
    
    $
    20,495
    
    
    $
    (15,364
    )
    
    $
    23,320Operating costs and expenses
    
    
    14,551
    
    
    
    20,770
    
    
    
    (15,364
    )
    
    
    19,957Operating income
    
    
    3,638
    
    
    
    (275
    )
    
    
    
    
    
    
    3,363Other income
    
    
    176
    
    
    
    
    
    
    
    
    
    
    
    176Income (loss) before income tax
    
    
    3,814
    
    
    
    (275
    )
    
    
    
    
    
    
    3,539Income tax expense
    
    
    1,533
    
    
    
    2
    
    
    
    
    
    
    
    1,535Net income (loss)
    
    $
    2,281
    
    
    $
    (277
    )
    
    $
    
    
    
    $
    2,004
 Revenue Recognition and Allowance for Doubtful Accounts
  Stock-Based Compensation
 Accounting for Stock Based Compensation Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
 21




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##### Table of Contents



Physician Stock-Based Compensation.
 Employee Stock-Based Compensation. Accounting for Stock Issued
to Employees
 Medical Malpractice Loss Reserves
  Intangible Assets and Goodwill
 Business Combinations Goodwill and Other Intangible
Assets
  Income Taxes
  22




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##### Table of Contents



Trends in our Business and Factors Affecting Our Results of Operations
  Revenue
   
    
    an increase in the number of customers and facilities we serve;
    
    an increase in utilization of our services by our customers;
    
    an increase in volume of higher-priced final reads;
    
    high customer retention rates; and
    
    customer relationships acquired through our acquisition of Diagna Radiology LLC.
   23




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##### Table of Contents



Key Revenue Metrics
 For the three months ended March 31,2009
    
    % change
    
    2008
    
    % changeCustomers
    
    
    625
    
    
    
    27.3
    %
    
    
    491
    
    
    
    19.5
    %Facilities
    
    
    1,050
    
    
    
    25.3
    %
    
    
    838
    
    
    
    13.9
    %Reads
    
    
    613,117
    
    
    
    30.3
    %
    
    
    470,694
    
    
    
    33.7
    %% of U.S. hospitals served
    
    
    17.1
    %
    
    
    
    
    
    
    13.2
    %Same site volume growth
    
    
    2.2
    %
    
    
    
    
    
    
    14.6
    %Percentage of read revenue from:Final reads
    
    
    27.2
    %
    
    
    
    
    
    
    22.7
    %Preliminary reads
    
    
    72.8
    %
    
    
    
    
    
    
    77.3
    %Year-over-year change in price per read
    
    
    (5.4
    )%
    
    
    
    
    
    
    (3.7
    )%
 SM
 24




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##### Table of Contents



Operating Expenses
  Professional Services Expense.
 
    
    Physician Cash Compensation Expense.Physician cash compensation expense is the
fees paid to our affiliated radiologists for providing diagnostic interpretation
services for our customers. We compensate our affiliated radiologists using a formula
that includes a base level of compensation and additional amounts with regard to the
number and type of reads performed. We recognize physician cash compensation expense in
the month in which our affiliated radiologists perform the reads for our customers.
Physician cash compensation 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 affiliated radiologists 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 due to the increased
productivity of our affiliated radiologists. The increases in productivity by the
existing affiliated radiologists have been, and may continue to be, offset, in part, by
increases in newly engaged affiliated radiologists and the costs associated with the
typical 150- to 180-day period during which newly engaged affiliated radiologists
obtain necessary state licenses and hospital credentials, and thereafter become
accustomed to our workflow technology. We expect that our physician cash compensation
expense will continue to increase, but may decrease as a percentage of revenues over
time as the efficiency and utilization of our affiliated radiologists improves.
    
    Physician Stock-Based Compensation Expense.We record stock-based compensation
expense in connection with any stock-based awards to our affiliated radiologists.
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 required by EITF Issue No. 96-18. As the value of an award is based
on the underlying value of the common stock, 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 options and other stock-based
awards to our affiliated radiologists.
    
    Medical Liability Expense.Medical liability expense consists primarily of premiums
paid for third-party medical malpractice insurance, claims made loss development
reserves related to our self-insured retention and incurred but not reported, or IBNR,
loss reserves. We amortize medical liability insurance premiums over the term of the
policy to which they relate and recognize loss development and IBNR reserves based on
actuarial analyses performed during the policy term. Our medical liability expense has
increased each year since inception due to the increases in our medical liability
insurance premiums primarily associated with the increased volume of reads our
affiliated radiologists have performed.
 Key Professional Service Metrics
 For the three months ended March 31,2009
    
    2008Radiologists providing services
    
    
    134
    
    
    
    116Average diagnostic cash compensation per read
    
    $
    20.09
    
    
    $
    21.79
 25




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##### Table of Contents



Sales, General and Administrative Expense.
 Results of Operations
  Three Months EndedMarch 31,2009
    
    2008Revenue
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Professional services
    
    
    48.2
    
    
    
    44.5Physician cash compensation
    
    
    43.4
    
    
    
    44.8Physician stock-based compensation
    
    
    (0.5
    )
    
    
    (2.1
    )Medical liability expenses
    
    
    5.3
    
    
    
    1.8Sales, general and administrative
    
    
    38.7
    
    
    
    37.4Depreciation and amortization
    
    
    5.1
    
    
    
    3.7Total operating costs and expenses
    
    
    92.0
    
    
    
    85.6Operating income
    
    
    8.0
    
    
    
    14.4Interest income, net
    
    
    0.2
    
    
    
    0.8Income tax expense
    
    
    3.3
    
    
    
    6.6Net income
    
    
    4.9
    
    
    
    8.6Net income attributable to non-controlling interest(1)
    
    
    
    
    
    
    Net income attributable to Virtual Radiologic Corporation
    
    
    4.9
    %
    
    
    8.6
    %
 
 (1)
    
    Non-controlling interest for the three months ended March 31,
2009 and 2008 represents less than 0.1% as a percentage of revenue. 26




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##### Table of Contents



Comparison of the Three Months Ended March 31, 2009 and March 31, 2008
 Revenue
 Three Months EndedMarch 31,
    
    
    Change2009
    
    
    2008
    
    
    In Dollars
    
    
    Percentage(dollars in thousands)Revenue from reads
    
    $
    28,102
    
    
    $
    22,929
    
    
    $
    5,173
    
    
    
    22.6
    %Other revenue
    
    
    466
    
    
    
    391
    
    
    
    75
    
    
    
    19.2Total revenue
    
    $
    28,568
    
    
    $
    23,320
    
    
    $
    5,248
    
    
    
    22.5
    %
    Operating Costs and Expenses
 Professional Services
 Three Months Ended
    
    
    Percentage
    
    
    Three Months Ended
    
    
    Percentage
    
    
    ChangeMarch 31, 2009
    
    
    of Revenue
    
    
    March 31, 2008
    
    
    of Revenue
    
    
    In Dollars
    
    
    Percentage(dollars in thousands)Physician cash compensation expense
    
    $
    12,402
    
    
    
    43.4
    %
    
    $
    10,452
    
    
    
    44.8
    %
    
    $
    1,950
    
    
    
    18.7
    %Physician stock-based
compensation income
    
    
    (143
    )
    
    
    (0.5
    )
    
    
    (495
    )
    
    
    (2.1
    )
    
    
    352
    
    
    
    (71.1
    )Medical liability expense
    
    
    1,507
    
    
    
    5.3
    
    
    
    410
    
    
    
    1.8
    
    
    
    1,097
    
    
    
    267.6Professional services
    
    $
    13,766
    
    
    
    48.2
    %
    
    $
    10,367
    
    
    
    44.5
    %
    
    $
    3,399
    
    
    
    32.8
    %
  27




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##### Table of Contents



Sales, General and Administrative
 Three Months Ended
    
    Percentage
    
    Three Months Ended
    
    Percentage
    
    ChangeMarch 31, 2009
    
    of Revenue
    
    March 31, 2008
    
    of Revenue
    
    In Dollars
    
    Percentage(dollars in thousands)Sales, general and
administrative
    
    $
    11,066
    
    
    
    38.7
    %
    
    $
    8,735
    
    
    
    37.4
    %
    
    $
    2,331
    
    
    
    26.7
    %
  
    
    Employee Compensation.Our employee compensation expense increased from $4.9
million for the three months ended March 31, 2008 to $6.0 million for the three months
ended March 31, 2009. The 22.4% increase resulted primarily from additional non-cash
employee stock-based compensation expense, accrued performance-based bonus
compensation, and tax indemnity costs associated with the election by VRP to be taxed
as a corporation. Non-cash employee stock-based compensation increased $438,000 for the
three months ended March 31, 2009 as a result of an increase in the number of options
outstanding and the accelerated vesting of certain outstanding employee stock-based
awards. Employee compensation also increased $405,000 from additional accrued
performance-based bonus compensation resulting from the achievement of certain
financial targets during the first quarter of 2009 and $295,000 from costs associated
with VRPs election to be taxed as a corporation rather than a partnership. These
increases were partially offset by a decrease in salaries expense as a result of a
14.4% decline in the number of administrative and operations personnel from March 31,
2008 to March 31, 2009. Employee compensation expense as a percentage of revenue was
21.0% for the three months ended March 31, 2009 and 2008.
    
    Information Technology.Our information technology expense increased from
$541,000 for the three months ended March 31, 2008 to $814,000 for the three months
ended March 31, 2009. The 50.5% increase resulted primarily from increased software
transactional costs associated with our growth in volumes and incremental provisioning
costs for data center floor space and communications bandwidth. Information technology
expense as a percentage of revenue was 2.9% and 2.3% for the three months ended March
31, 2009 and 2008, respectively.
    
    Other General and Administrative.Our other general and administrative
expenses increased from $2.1 million for the three months ended March 31, 2008 to
$3.1 million for the three months ended March 31, 2009. The 47.6% increase resulted
primarily from a $420,000 charge related to amounts due to our former Chairman under
the Transition Agreement between us and our former Chairman, a $354,000 increase in bad
debt reserves, and a $155,000 increase in outside professional fees. These increases
were partially offset by reductions in shipping costs and hiring and recruiting expense
for the three months ended March 31, 2009 compared to the three months ended March 31,
2008. Other general and administrative expenses as a percentage of revenue were 11.0%
and 9.0% for the three months ended March 31, 2009 and 2008, respectively.
  Depreciation and Amortization Expense.
 28




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##### Table of Contents



Interest Income, Net.
 Income Tax Expense.
 Liquidity and Capital Resources
 Cash, Cash Equivalents and Short-Term Investments
   Three Months Ended March 31,2009
    
    
    2008(in thousands)Net cash provided by operating activities
    
    $
    6,683
    
    
    $
    3,416Net cash used in investing activities
    
    
    (3,275
    )
    
    
    (4,608
    )Net cash provided by financing activities
    
    
    367
    
    
    
    1,201Increase in cash and cash equivalents
    
    $
    3,775
    
    
    $
    9
 29




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##### Table of Contents



Cash Flows from Operating Activities
   Cash Flows from Investing Activities
   Cash Flows from Financing Activities
   30




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##### Table of Contents



Future Liquidity Requirements
  Contractual Obligations and Commitments
  Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others Application of FASB
Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners
  (in thousands)2009
    
    $
    322010
    
    
    432011
    
    
    432012
    
    
    432013
    
    
    3164Less: Amount representing interest
    
    
    11Present value of minimum lease payments
    
    
    153Less: Current portion
    
    
    38Capital lease obligations, less current portion
    
    $
    115
 31




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##### Table of Contents



Accounting
for Uncertain Income Tax
 Recent Accounting Pronouncements
 Fair Value Measurements, Effective Date of FASB Statement
No. 157,
 Non-controlling Interests in Consolidated
Financial Statements an amendment of ARB 51
 Determination of the Useful Life of
Intangible Assets
 Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
 32




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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
  33




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##### Table of Contents



PART II  Other Information
 
 ITEM 1. Legal Proceedings
     
 ITEM 1A. Risk Factors
  We are subject to medical device regulations applicable to our use of vRad PACS and our
failure to maintain regulatory clearance for this software or to maintain regulatory compliance as
a medical device establishment could adversely impact our business.
    34




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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 planMarch 4, 2009  March 31, 2009
    
    
    20,512
    
    
    $
    5.63
    
    
    
    20,512
    
    
    $
    4,883,959
 
 ITEM 5. Other Information
   35




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##### Table of Contents



ITEM 6. Exhibits
 Exhibits are incorporated herein by reference or are filed with this quarterly report as set
forth below:
 
 EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    Amendment No. 3 to Management Professional and Management
Services Agreement and License, dated as of April 30, 2009, by
and between Virtual Radiologic Professionals, LLC and Virtual
Radiologic Corporation.***10.2
    
    Amendment No. 2 to Management Services Agreement, dated as of
April 30, 2009, by and between Virtual Radiologic Corporation
and Virtual Radiologic Professionals of California, P.A. ***10.3
    
    Amendment No. 2 to Management Services Agreement, dated as of
April 30, 2009, by and between Virtual Radiologic Corporation
and Virtual Radiologic Professionals of Illinois, S.C.***10.4
    
    Amendment No. 2 to Management Services Agreement, dated as of
April 30, 2009, by and between Virtual Radiologic Corporation
and Virtual Radiologic Professionals of Michigan, P.C.***10.5
    
    Amendment No. 2 to Management Services Agreement, dated as of
April 30, 2009, by and between Virtual Radiologic Corporation
and Virtual Radiologic Professionals of Minnesota, P.A.***10.6
    
    Amendment No. 2 to Management Services Agreement, dated as of
April 30, 2009, by and between Virtual Radiologic Corporation
and Virtual Radiologic Professionals of New York, P.A.***10.7
    
    Amendment No. 2 to Management Services Agreement, dated as of
April 30, 2009, by and between Virtual Radiologic Corporation
and Virtual Radiologic Professionals of Texas, P.A.***10.8
    
    First Amendment to Lease, effective
March 31, 2009, between
Windsor Plaza, LLC and Virtual Radiologic Corporation***31.1
    
    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. 36




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##### Table of Contents



SIGNATURES
  Signature
    
    Title
    
    Date/s/ Robert C. Kill
    
    President and Chief Executive OfficerRobert C. Kill
    
    (Principal
Executive Officer)
    
    May 1, 2009/s/ Leonard C. Purkis
    
    Chief Financial Officer (PrincipalLeonard C. Purkis
    
    Financial
and Accounting Officer)
    
    May 1, 2009
 37