UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
001-33815
Virtual Radiologic
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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27-0074530
(IRS Employer
Identification No.)
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11995 Singletree Lane, Suite 500
Eden Prairie, Minnesota
(Address of principal
executive offices)
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55344
(Zip
code)
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(952) 595-1100
(Registrants telephone
number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Common Stock, par value $0.001 per share
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NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company þ
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2009, the last business day of the
registrants most recently completed second fiscal quarter,
the aggregate market value of the voting stock held by
non-affiliates of the registrant was $60,672,137 based on the
closing sale price of such shares on the Nasdaq Global Market on
such date.
As of February 16, 2010, 15,955,056 shares of the
registrants common stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Listed hereunder are the documents, any portions of which are
incorporated by reference and the Parts of this
Form 10-K
into which such portions are incorporated:
The Registrants definitive proxy statement for its 2010
Annual Meeting of Stockholders to be filed within 120 days
after the Registrants fiscal year ended December 31,
2009, portions of which are incorporated by reference into
Part III of this
Form 10-K.
PART I
Special
Note Regarding Forward-Looking Statements
Certain statements in this annual report are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934,
including, in particular, statements about our plans,
objectives, strategies and prospects regarding, among other
things, our business and results of operations. These statements
can be identified by the use of words such as will,
believe, expect, and
anticipate and similar terms or expressions of
future expectation. These statements involve a number of risks,
uncertainties and other factors that could cause actual results,
performance or achievements of Virtual Radiologic Corporation to
be materially different from any future results, performance or
achievements expressed or implied by these forward-looking
statements. Statements that are not historical facts and
statements of expectations or future beliefs in this annual
report on
Form 10-K
are forward-looking statements that involve certain risks,
uncertainties and assumptions including the risks set forth in
Item 1A Risk Factors. Should one or more of
these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially
from those indicated. Given these risks and uncertainties,
readers are cautioned not to place undue reliance on these
forward-looking statements. Except as required by applicable
law, Virtual Radiologic Corporation undertakes no duty to update
these forward-looking statements due to new information or as a
result of future events.
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Overview
Virtual Radiologic Corporation, or vRad, is a national radiology
practice working in partnership with radiologists and hospitals
to optimize radiologys pivotal role in the delivery of
patient care. Enabled by next-generation technology, vRads
collaborative partnerships enhance productivity and deliver
demonstrated quality outcomes that help lower the overall cost
of care. vRads 143 affiliated radiologists serve over
1,170 facilities (approximately 19% of U.S. hospitals),
reading more than 2.6 million interpretations annually with
unparalleled subspecialist expertise and expedited time to
diagnosis. Continually recognized for high-quality reports and
industry-leading service, vRad is ranked #1 in the
teleradiology services category by independent healthcare
research firm KLAS and has received the Joint Commission Gold
Seal of Approval each year since 2004.
We were incorporated in Minnesota in 2003 and reincorporated in
Delaware in 2005. Our headquarters is located at 11995
Singletree Lane, Suite 500, Eden Prairie, Minnesota 55344,
and our telephone number is
(952) 595-1100.
Our
Corporate Structure
vRad was formed through a merger between Virtual Radiologic
Consultants, Inc., a Minnesota corporation, and Virtual
Radiologic Consultants, Inc., a Delaware corporation, that was
consummated on May 2, 2005. On January 1, 2006,
Virtual Radiologic Consultants, Inc., a Delaware corporation and
the surviving entity in the merger, changed its name to Virtual
Radiologic Corporation. vRad also has two wholly-owned and
consolidated subsidiaries, Virtual Radiologic Limited, or VRL,
and vRad Professional Insurance Ltd., or VPIL. VRL was formed
under the laws of England and Wales to facilitate the
international expansion of the Companys business. VPIL was
formed as an exempted company in the Cayman Islands with limited
liability to insure the Companys self-insured retention
under its medical malpractice insurance policy.
Virtual Radiologic Professionals, LLC , or VRP, is our
affiliated physician-owned medical practice that contracts with
independent contractor physicians for the provision of their
services to fulfill customer contracts held by vRad or by the
Professional Corporations, consisting of Virtual
Radiologic Professionals of California, P.A., Virtual Radiologic
Professionals of Illinois, S.C., Virtual Radiologic
Professionals of Michigan, P.C., Virtual Radiologic
Professionals of Minnesota, P.A., Virtual Radiologic
Professionals of New York, P.A. and Virtual Radiologic
Professionals of Texas, P.A. As of December 31, 2009, each
of these entities was a professional corporation with one
stockholder, who was also an officer and a director of vRad and
the sole equity owner of VRP. The Professional Corporations hold
customer contracts in certain states to facilitate compliance
with corporate practice of medicine laws in such states. VRP and
the Professional Corporations are collectively referred to as
the Affiliated Medical Practices.
Our services are provided to our customers under contracts held
by vRad or one of the Professional Corporations. vRad contracts
with our customers for the provision of our services in those
jurisdictions in which we believe that it is lawful for a
business corporation to contract for the provision of medical
services. In those states in which only a physician-owned
professional corporation may contract to provide medical
services, the Professional Corporations contract with our
customers to provide teleradiology services.
The terms Company, we, us,
and our are used in this report to refer to vRad,
the Affiliated Medical Practices, VRL and VPIL.
Our
Services
We provide radiologic interpretations for a broad range of
digital diagnostic imaging modalities, including computed
tomography (CT), x-ray or plain film, magnetic resonance imaging
(MRI), ultrasound, nuclear medicine and positron emission
tomography (PET) through our proprietary workflow management
software and radiologist reading application. Diagnostic
radiology aids in the diagnosis and treatment of injuries,
diseases and other medical conditions by interpreting images of
the human body. We generally contract with radiology practices
to provide coverage for the hospitals that are their customers;
although, in some instances, we contract directly with hospitals.
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Our independent contractor physicians collectively have the
expertise, including subspecialty fellowship training, necessary
to read all diagnostic imaging modalities, including CT, plain
film, MRI, ultrasound, nuclear medicine and PET modalities. Our
independent contractor physicians generally perform the reads
from their home offices using a high-speed encrypted internet
connection that connects them to our network, and in some cases
provide
on-site
diagnostic and interventional radiology services.
Scope of Coverage. We provide coverage and
operations support services to our customers 24 hours a
day, 365 days a year. A majority of the services that we
provide are preliminary diagnostic reads performed via
teleradiology during
off-hours
for hospital emergency rooms during evenings, nights and
weekends. We also provide our customers with emergent final
reads in lieu of preliminary reads, as well as final reads
performed for non-emergent purposes. We assist our customers by
providing them with additional capacity to meet their patient
demand and additional coverage for periods when their own
radiologists may be on vacation or otherwise unavailable due to
illness or emergency. In some cases, we provide full radiology
coverage, including both
on-site and
teleradiology services, to hospitals. Our independent contractor
physicians also provide subspecialty capabilities that may not
otherwise be available to our customers.
Preliminary and Final Reads. A preliminary
read is intended primarily to address an emergent condition, or
those requiring prompt medical attention. A final read report
typically contains detailed findings, including an analysis of
the images with measurements of each abnormality found and a
diagnosis of the condition evidenced by the images. Final reads,
unlike preliminary reads, may be reimbursed by Medicare,
Medicaid and other third party payers.
Turn Around Time. The generally accepted
turnaround time for emergent reads is 30 minutes, while the
generally accepted turnaround time for non-emergent reads is
72 hours. We typically provide preliminary and final reads
in emergent care settings within 20 minutes from receipt of
order. We typically provide final reads in non-emergent cases
within 24 hours from receipt of patient images.
Quality Assurance Process. We have a Quality
Assurance, or QA, process that is designed to meet best
practice standards of the American College of Radiology.
We have an established QA Committee that is directed by our
Chief Medical Officer and is comprised of practicing vRad
independent contractor physicians. Our QA Committee members are
selected to ensure a complete cross-section of subspecialty
training in all aspects of radiology. The QA Committee is
responsible for providing the professional peer review function
for our medical practice, including the review of all
discrepancy reports from clients and the daily over read of a
random selection of final interpretations.
Our
Operations
Our
Medical Practice
Our Independent Contractor Physicians. As of
December 31, 2009, we had 143 independent contractor
physicians who were providing services for us, and an additional
8 independent contractor physicians who had entered into
contracts with us but had not yet begun serving our customers.
Our relationships with radiologists are structured in a manner
that results in an independent contractor relationship. We
typically enter into two-year professional services contracts
with our independent contractor physicians that automatically
renew unless terminated by either party pursuant to the terms of
the agreement.
Our goal is to recruit highly qualified board-certified
radiologists who are based in the United States. We schedule our
recruiting to match our anticipated case study volumes, and
assist our new physicians in obtaining the required state
medical licenses and hospital privileges. We believe that our
compensation policies are competitive with the average
radiologist compensation at traditional private radiology
practices and are designed to accommodate varying levels of
productivity including the ability to earn performance-based
compensation. We also offer our independent contractor
physicians the opportunity to obtain equity ownership in vRad
through our equity incentive plan. We believe our compensation
model assists us in recruiting radiologists because it permits
us to accommodate our independent contractor physicians
professional practice of medicine and their personal lifestyle
choices.
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Licensing and Credentialing. Our independent
contractor physicians are required to hold a current license in
good standing to practice medicine from each of the states in
which they read and from which they receive radiologic images.
In addition, our independent contractor physicians are required
to have privileges at each facility from which those images
originate. Licensing procedures and requirements vary according
to each states laws and regulations governing medical
licenses. We determine the appropriate licenses for each of our
independent contractor physicians and aid them in complying with
these various requirements. In addition, each of our physicians
is privileged by VRP pursuant to a Joint Commission accredited
process.
We have been a Joint Commission-accredited organization since
2004, and many of the institutions we serve have historically
relied upon our accreditation and privileging decisions in lieu
of conducting their own privileging. Over the past few years
however, the Centers for Medicare and Medicaid Services (CMS)
has increasingly expressed concerns regarding this reliance. In
response to the CMS position, the Joint Commission has recently
announced that the standards allowing this practice will expire
in July 2010. We are working with our customers and covered
facilities in order to address the need for individual facility
privileging in light of the planned phase-out of the Joint
Commission standards.
Our
Workflow Technologies and Operations Center
Technical Infrastructure. We have designed,
implemented and maintained our technical infrastructure to be
reliable, secure and scalable. We operate our production
infrastructure from our secure data center locations utilizing
multiple internet connections with diverse routing and redundant
network, server and storage processing equipment with failover
capability. We employ information technology professionals to
continually monitor and maintain our systems and network and to
provide technical support to our customers.
Network and Workflow Overview. We deliver our
services to our customers through a workflow process that
utilizes secure public network technologies, virtual private
networks, or VPNs, our web-based radiology information system,
or RIS, our proprietary Picture Archiving Communication System
(vRad PACS) and proprietary workflow technologies. Our network
has been designed to be secure, scalable, efficient and
reliable. The following is a description of our workflow process:
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Site Implementation In conjunction with each
new customer implementation, our site-implementation engineers
establish firewall permissions for customer access to our
web-based RIS and configure a VPN circuit to transfer digital
imaging and communications. Upon successful testing of the image
transfers and order entry functions, the customer may begin to
use our services.
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Requisition of Reads When a radiological
procedure is performed, the radiology technologist at the
hospital transmits the patient images to us. A corresponding
order is created within our web-based RIS that is accessible on
the technologists computer screen at the hospital.
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Image Transmission and Assignment
Radiological images and related data are encrypted and
transmitted securely at high speed over the Internet to
vRads PACS and are assigned to an independent contractor
physician that is appropriately licensed and privileged.
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Reports and Delivery Our independent
contractor physicians are presented with orders on their work
list based on aging, examine the images using vRad PACS, and
report their findings utilizing a voice recognition dictation
system integrated with our RIS to dictate a detailed report.
When the report has been completed, the radiologist
electronically signs the report, and the report is immediately
posted in our RIS and is accessible at the facility for viewing.
The report is also simultaneously faxed to the hospital, or, in
cases in which we have established an integration into the
hospitals health information system, the report is
transmitted via that integration.
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Software Development. We employ software
development engineers to improve and enhance our existing
workflow solutions, including development of new products and
solutions that will enable us to more efficiently and
effectively serve our customers. Our proprietary software and
workflow solutions are subject to pending patent applications.
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HIPAA Security Compliance/Disaster
Recovery. Our network architecture and technical
infrastructure are designed to comply with the security rule
requirements of the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, which regulates the
activities of certain entities that use, maintain or transmit
electronic health information. In accordance with the HIPAA
security rule requirements, we also maintain a disaster recovery
program in case of disaster or extended electrical outage at our
headquarters and data center locations.
Operations Center. We maintain a staffed
operations center 24 hours a day with a comprehensive
support team dedicated to maintain efficiency in the
teleradiology interpretation process. The operations center
staff is responsible for order management including receiving
orders and images, monitoring the status of orders and
turnaround times, and confirming report delivery. In addition,
the operations center staff facilitates communication between
our independent contractor physicians and hospital staff, and
provides client technical assistance and systems monitoring.
Sales
and Marketing
Our direct sales force is our primary means of selling our
services. We employ field sales professionals who are organized
by geographic regions in the United States. Our sales
professionals focus their efforts on selling our services to
radiology practices, hospitals, clinics and diagnostic imaging
centers. In addition, we have acquired, and we expect to
continue to acquire, new customers as a result of referrals from
our existing customers.
Through our marketing efforts, we seek to build customer and
radiologist awareness of our brand, service offerings and value
propositions and to generate qualified sales leads. We focus our
marketing efforts on lead generation programs, brand awareness
activities, participation in and sponsorship of radiology events
and trade shows, and our external website.
Our
Customers and Customer Service
We provide our services to customers pursuant to contracts that
generally have a one or two-year initial term and automatically
renew for successive one-year terms unless terminated by the
customer or by us. The majority of our services are provided on
a
fee-for-service
basis charged to our customer, and the amount that we charge for
our radiology services varies by customer and is based upon a
number of factors, including the hours of coverage, the number
of reads, whether the reads are preliminary reads or final
reads, and the technical and administrative services provided.
For a small number of our customers, we bill Medicare, Medicaid,
third party payers and patients directly for our services. Our
customer contracts generally provide that we are their exclusive
third-party provider of teleradiology services during the agreed
upon hours of coverage.
As of December 31, 2009, we provided services to 655
customers serving 1,173 medical facilities. None of our
customers represent more than 10% of our annual revenue.
Our
Competition
The market for teleradiology is highly competitive, rapidly
evolving and fragmented, and is subject to changing technology
and market dynamics. The market has experienced, and is expected
to continue to experience, competitive pricing pressure. We
compete directly with both large and small-scale service
providers who offer local, regional and national operations. We
believe that our principal competitor is Nighthawk Radiology
Holdings, Inc, a publicly-traded company.
We compete to attract and retain relationships with customers
and radiologists in different ways:
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Customers We compete to attract and retain
customers primarily through the quality of our services, the
reliability of our coverage, the ability to perform preliminary
and final interpretations, our ability to provide a billing
solution for final reads that complies with applicable Medicare,
Medicaid and third party payer requirements, the number and
quality and subspecialty expertise of our independent contractor
physicians and on price.
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Radiologists We compete to attract and retain
radiologists primarily through the flexibility in lifestyle we
offer, cash and equity compensation, the administrative support
services we offer, our radiologist technology applications and
systems, and our reputation.
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Governmental
Regulation and Oversight
The healthcare industry is highly regulated and we believe that
healthcare regulations will continue to change. Therefore, we
monitor developments in healthcare law, and we are likely to be
required to modify our operations from time to time as the
business and regulatory environment changes. Although we believe
that we are operating in compliance with applicable federal and
state laws, many aspects of the healthcare services and
radiology markets have been the subject of specific judicial or
regulatory interpretation. We cannot assure you that a review of
our business by courts or regulatory authorities will not result
in a determination that could adversely affect our operations or
that the healthcare regulatory environment will not change in a
way that restricts our operations. Future changes in healthcare
regulation are difficult to predict and may constrain or require
us to restructure our operations, which could negatively impact
our business and operating results.
Physician Licensure Laws. The practice of
medicine, including the practice of radiology and teleradiology,
is subject to state licensure laws, regulations and approvals.
Physicians located in one state who provide professional medical
services to a patient located in another state via a
telemedicine system must ordinarily hold a valid license to
practice medicine in both the state where the physician is
located and the state in which the patient is located. We have
established a system for ensuring that our independent
contractor physicians are appropriately licensed under
applicable state law. If we are unable to obtain proper
physician licenses or hospital privileges on behalf of our
independent contractor physicians, or if our independent
contractor physicians lose those licenses or privileges, our
business, financial condition and results of operations may be
negatively impacted.
Corporate Practice of Medicine. Generally,
various state corporate practice of medicine laws prohibit
anyone but a duly licensed physician from exercising control
over the medical judgments or decisions rendered by another
physician. Given that general prohibition, some states permit a
business corporation to hold, directly or indirectly, customer
contracts for the provision of medical services, including
radiology and teleradiology, and to own a medical practice that
provides such services, provided that only physicians exercise
control over the medical judgments or decisions of other
physicians. Other states, including more populous states such as
New York, Illinois, Texas, California and certain others, have
more specific and stringent prohibitions. In such states, not
only must the individual physician be licensed, but the medical
practice by whom the physician is employed or engaged as an
independent contractor must itself be licensed or otherwise
qualified to do business. Moreover, the laws of such states
prohibit anyone but a physician who is duly licensed in such
state from owning any interest in a medical practice that is
incorporated or doing business in such state or the state of
incorporation. Failure to comply with these laws could have
material and adverse consequences, including the judicially
sanctioned refusal of third party payers to pay for services
rendered, the absolute right of customers to immediately
repudiate the contract for services, malpractice claims against
the provider, and possibly the hospital, based upon violation of
a statute designed to protect the public, as well as civil or
criminal penalties.
We believe that we are in compliance with the corporate practice
of medicine laws in each state in which our Affiliated Medical
Practices and independent contractor physicians provide medical
services. Each of our Affiliated Medical Practices is duly
licensed or qualified as a medical practice or foreign
corporation in the states where such license or qualification is
required. Each of our Affiliated Medical Practices is
wholly-owned by a physician who is properly licensed in the
state where such license is required. We do not exercise control
over the medical judgments or decisions of our independent
contractor physicians. Although we believe we are in compliance
with the requirements of the corporate practice of medicine
laws, these laws and their interpretations are continually
evolving and may change in the future. Moreover, these laws and
their interpretations are generally enforced by state courts and
regulatory agencies that have broad discretion in their
enforcement. If our arrangements with our Affiliated Medical
Practices, our independent contractor physicians or our
customers are found to violate state laws prohibiting the
practice of medicine by general business corporations or fee
splitting, our business, financial condition and ability to
operate in those states could be adversely affected.
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Fee Splitting. Many states have also enacted
laws prohibiting a physician from splitting fees derived from
the practice of medicine with anyone else. We believe that the
management, administrative, technical and other non-medical
services we provide to each of our Affiliated Medical Practices
for a service fee do not constitute fee splitting. However,
these laws and their interpretations also vary from state to
state and are also enforced by state courts and regulatory
authorities that have broad discretion in their enforcement. If
our arrangements with our independent contractor physicians or
our customers are found to violate state laws prohibiting the
practice of medicine by general business corporations or fee
splitting, our business, financial condition and ability to
operate in those states could be adversely affected.
Medicare and Medicaid Reimbursement
Programs. Professional radiology interpretation
services performed from a location outside of the United States
are generally not reimbursable by the Medicare program and
certain state Medicaid programs. The vast majority of our
independent contractor physicians are located within the United
States, and are therefore generally eligible to submit to
Medicare and state Medicaid programs for reimbursement for
services performed. Since Medicare and state Medicaid programs
will only reimburse for a final read, none of the preliminary
reads that are provided by our independent contractor physicians
are reimbursable. Instead, we derive our revenue from these
reads from the service fees paid to us or our Professional
Corporations by our customers and from the management fees paid
to us by our Affiliated Medical Practices. Where our independent
contractor physicians provide final reads that are reimbursable
under these programs, our business model generally provides that
we are still paid service fees by our customer who accepts
reassignment and bears the risk of loss of reimbursement. As a
result, the service fees for a majority of our final reads do
not fluctuate or change based solely on changes in Medicare or
Medicaid reimbursement levels. For a small number of our
customers, however, we bill Medicare and Medicaid directly.
Medicare reimbursement rules generally provide that the proper
Medicare carrier to pay physician claims is the Medicare carrier
for the region in which the physician or practice providing the
service is located rather than the Medicare carrier for the
region in which the patient receiving the services is located.
For most of our final reads provided via teleradiology, our
independent contractor physician interpreting the study is
located in a Medicare region that is different from the Medicare
region in which the patient and treating hospital are located.
Some insurers (notably members of the Blue Cross and Blue Shield
Association) have similar jurisdictional billing rules based
upon the location of the reading radiologist. To address these
situations, we provide our
fee-for-service
finals customers with a compliant billing solution for an
administrative fee. This billing solution also enables us to
bill these payers directly.
Federal False Claims Act. The Federal False
Claims Act provides, in part, that the federal government may
bring a lawsuit against any person whom it believes has
knowingly presented, or caused to be presented, a false or
fraudulent request for payment from the federal government, or
who has knowingly made a false statement or knowingly used a
false record to have a claim approved. The Federal False Claims
Act further provides that a lawsuit brought under that act may
be initiated in the name of the United States by an individual
who was the original source of the allegations, known as the
relator. Actions brought under the Federal False Claims Act are
sealed by the court at the time of filing. The only parties
privy to the information contained in the complaint are the
relator, the federal government and the court. Therefore, it is
possible that lawsuits have been filed against us of which we
are unaware. Penalties include fines ranging from $5,500 to
$11,000 for each false claim, plus three times the amount of
damages that the federal government sustained because of the act
of the violator.
Under the Federal False Claims Act, we may be liable if we or
one of our customers submitted a false claim. If we were found
to have violated these rules and regulations and, as a result,
submitted or caused our customers to submit a false claim, any
sanctions imposed under the Federal False Claims Act could
result in substantial fines and penalties or exclusion from
participation in federal and state healthcare programs, which
could have a material adverse effect on our business and
financial condition. If we are excluded from participation in
federal or state healthcare programs, our customers who
participate in those programs could not do business with us.
Federal regulatory and law enforcement authorities have recently
increased enforcement activities with respect to Medicare and
Medicaid fraud and abuse regulations and other reimbursement
laws and regulations, including laws and regulations that govern
our activities and the activities of teleradiologists. These
increased
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enforcement activities may have a direct or indirect adverse
affect on our business, financial condition and results of
operations.
Additionally, some state statutes contain prohibitions similar
to and possibly even more restrictive than the Federal False
Claims Act. These state laws may also empower state
administrators to adopt regulations restricting financial
relationships or payment arrangements involving healthcare
providers under which a person benefits financially by referring
a patient to another person. We believe that we are operating in
compliance with these laws. However, if we are found to have
violated such laws, our business, results of operations and
financial condition would be harmed.
Federal and State Anti-kickback
Prohibitions. Various federal and state laws
govern financial arrangements among healthcare providers. The
federal anti-kickback law prohibits the knowing and willful
offer, payment, solicitation or receipt of any form of
remuneration in return for, or with the purpose to induce, the
referral of Medicare, Medicaid or other federal healthcare
program patients, or in return for, or with the purpose to
induce, the purchase, lease or order of items or services that
are covered by Medicare, Medicaid or other federal healthcare
programs. Similarly, many state laws prohibit the solicitation,
payment or receipt of remuneration in return for, or to induce,
the referral of patients to private as well as government
programs. Violation of these anti-kickback laws may result in
substantial civil or criminal penalties for individuals or
entities
and/or
exclusion from participating in federal or state healthcare
programs. We believe that we are operating in compliance with
applicable federal and state anti-kickback laws and that our
contractual arrangements with our customers are structured in a
manner that is compliant with such laws. However, any finding
that we have violated such laws would adversely affect our
business, operations or financial condition.
Physician Self-Referral Prohibitions. The
federal physician self-referral statute, known as the
Stark statute, prohibits a physician from making a
referral for certain designated health services, including
radiology services, to any entity with which the physician has a
financial relationship, unless there is an exception in the
statute that allows the referral. The entity that receives a
prohibited referral from a physician may not submit a bill to
Medicare for that service. Federal courts have ruled that a
violation of the Stark statute, as well as a violation of the
federal anti-kickback law described above, can serve as the
basis for a Federal False Claims Act suit. Many state laws
prohibit physician referrals to entities with which the
physician has a financial interest, or require that the
physician provide the patient notice of the physicians
financial relationship before making the referral. Violation of
the Stark statute can result in substantial civil penalties for
both the referring physician and any entity that submits a claim
for a healthcare service made pursuant to a prohibited referral.
We believe that all of our customer arrangements are in
compliance with the Stark statute. However, future
interpretations of these laws or findings that our business
practices violate these laws could adversely affect our business
and operations.
Medicare Anti-Markup Rule. The anti-markup
rules are generally applicable where a physician or other
supplier bills for the technical component or professional
component of a diagnostic test that was ordered by the physician
or other supplier (or ordered by a party related to such
physician or other supplier through common ownership or
control), and the diagnostic test is performed by a physician
that does not share a practice with the billing physician or
other supplier. If the anti-markup rule applies to a diagnostic
test, then the reimbursement provided by Medicare to a billing
physician or other supplier for that transaction may be limited.
Because our independent contractor physicians do not order
diagnostic tests, and no party under common control with either
us or our Affiliated Medical Practices orders diagnostic tests,
we believe that the anti-markup rule does not apply to the
professional services our independent contractor physicians
perform. However, this rule could be subject to an
interpretation that affects the amounts either we or our
customers may be reimbursed by Medicare for professional
diagnostic interpretations.
Health Insurance Portability and Accountability Act of
1996. HIPAA made changes to increase and expand
the penalties for knowingly defrauding any aspect of the
publics health care system. In addition, it directed the
promulgation of administrative regulations establishing national
standards for the transmission of electronic health information
and national standards for the protection of the privacy and
security of patient health information. HIPAA authorizes the
imposition of civil money penalties against entities that employ
or enter into contracts with individuals or entities that have
been excluded from participation in the Medicare or Medicaid
programs. We perform background checks on our independent
contractor physicians and we do not believe that we engage or
10
contract with any excluded individuals or entities. However, a
finding that we have violated this provision of HIPAA could have
a material adverse effect on our business and financial
condition.
HIPAA also establishes several separate criminal penalties for
making false or fraudulent claims to insurance companies and
other non-governmental payers of healthcare services. These
provisions are intended to punish some of the same conduct in
the submission of claims to private payers as the Federal False
Claims Act covers in connection with governmental health
programs. We believe that our services have not historically
been provided in a way that would place either our clients or
ourselves at risk of violating the HIPAA anti-fraud statutes,
including those in which we may be considered to receive an
indirect reimbursement because of the reassignment by us to our
customers of the right to collect for final reads. We have
entered into agreements and, may in the future enter into
agreements with hospitals that are subject to an integrity order
by the U.S. Department of Health and Human Services Office
of the Inspector General, or HHS-OIG, that requires the hospital
to ensure that each subcontractor to the hospital fully complies
with HIPAAs anti-fraud provisions and the terms of the
integrity order, including written policies and procedures
assuring compliance, and subjects each subcontractor to audit at
the determination of the HHS-OIG. We could be vulnerable to
prosecution under these statutes if any of our customers
deliberately or recklessly submits claims that contain false,
misleading or incomplete information.
In addition, the administrative simplification provisions of
HIPAA require the promulgation of regulations establishing
national standards for, among other things, certain electronic
healthcare transactions, the use and disclosure of certain
individually identifiable patient health information and the
security of the electronic systems maintaining this information.
These are commonly known as the HIPAA transaction and code set
standards, privacy standards, and security standards,
respectively.
The administrative simplification provisions of HIPAA directed
the federal government to adopt national electronic standards
for automated transfer of certain healthcare data among
healthcare payers, plans and providers. HIPAAs transaction
and code set standards are designed to enable the entire
healthcare industry to communicate electronic data using a
single set of standards. HIPAAs administrative
simplification provisions also regulate the protection of the
privacy of a patients health information and the security
standards that must be followed to protect the integrity and
privacy of a patients electronic health information. We
are a covered entity under HIPAA and, as such, we
must operate in compliance with the electronic transaction and
code set standards, privacy standards and security standards. We
are also a business associate under HIPAA because we
perform services for or on behalf of other covered entities. We
have developed policies, procedures and systems for handling
patient health information that we believe are in compliance
with the electronic transaction and code set standards, privacy
standards and security standards of HIPAA. However, any future
non-compliance with HIPAA or state or federal regulations
concerning the privacy and security of patient information may
adversely affect our business, financial condition or operations.
Enactment in February 2009 of the Health Information Technology
for Economic and Clinical Health (HITECH) Act, which was part of
the American Recovery and Reinvestment Act of 2009, created
federal notification requirements for security breaches of a
patients protected health information and substantially
increased the civil and criminal enforcement and penalty
provisions of HIPAA for violations of the privacy and security
rules. The HITECH Act empowers state attorneys general to bring
civil actions in federal court if they have reason to believe
that one or more of the residents of that State has been
or is threatened or adversely affected by a violator; the
state can seek injunctive relief or statutory damages as well as
attorneys fees. Expansion of enforcement rights to state
attorneys general may subject covered entities and
business associates to more extensive scrutiny. The
HITECH Act also significantly increases the existing civil
monetary penalties for each violation. Civil penalties now
generally range from a minimum of $100 to $50,000 per violation,
with a cap of $1.5 million for all violations of a single
requirement in a calendar year. The severity of the penalties
increases based upon the cause of the violation and the
violators level of knowledge regarding the violation.
Federal Deficit Reduction Act of 2005. The
Federal Deficit Reduction Act of 2005, or the DRA, requires
medical providers receiving more than $5.0 million in
annual Medicaid payments from a specific state to establish
certain written policies to be disseminated to that
providers employees, contractors and agents. The written
policies required by the DRA include information about the
Federal False Claims Act, administrative remedies under the
Program Fraud Civil Remedies Act, state and local laws regarding
false claims for those localities in which the
11
practice operates, and the protections given to whistleblowers
under such laws. We believe that we are not currently subject to
the informational and educational mandates of the DRA because we
do not now receive more than the requisite amount of Medicaid
payments from any state. However, we believe that we will be
able to efficiently comply with the DRAs requirements in
the event that the DRA becomes applicable to us.
Medical Device Regulation. Our vRad PACS is a
medical device subject to regulation by the United States Food
and Drug Administration, or FDA. Under the Federal Food, Drug,
and Cosmetic Act, the FDA regulates the design control,
development, manufacturing, labeling, record keeping and
surveillance procedures for medical devices. Medical devices and
their manufacturers are also subject to inspection by the FDA.
We have received clearance from the FDA to utilize and market
vRad PACS under a premarket notification, or 510(k)
demonstrating that the software is substantially
equivalent to a predicate system legally marketed in the
United States. Although vRad PACS has received 510(k) clearance,
any modification that could significantly affect its safety or
effectiveness will require a new 510(k) clearance. The FDA may
review our determinations and evaluate the regulatory status of
any modifications at any time.
Although vRad PACS has received requisite marketing clearance
from the FDA, the FDA could require us to cease using vRad PACS
due to failure to comply with regulatory standards or the
occurrence of unforeseen problems. As a developer of a medical
device, our facilities and processes are also subject to
regulation. The FDA can and will be expected to inspect our
facilities to determine whether we are in compliance with
various regulations relating to quality systems, such as
manufacturing practices, validation, testing, quality control,
product labeling and product surveillance.
FDA regulations depend heavily on administrative interpretation,
and there can be no assurance that future interpretations made
by the FDA or other regulatory bodies, with possible retroactive
effect, will not adversely affect us. A determination that we
are in violation of FDA regulations could lead to imposition of
civil penalties, including fines, product recalls or product
seizures and, in extreme cases, criminal sanctions, depending on
the nature of the violation, all of which could have a material
adverse effect on our business.
Intellectual
Property
Our principal intellectual property assets include our brand,
our vRad PACS image management software, our proprietary
workflow and business processes and our proprietary software
technology. We rely on trade secret and unfair competition laws
in the United States and other jurisdictions, as well as
confidentiality procedures and contractual provisions, to
protect these assets. As of December 31, 2009, we have
filed seven provisional patent applications, two utility patent
applications, one PCT application, and four patent applications
in foreign countries covering certain aspects of our business
processes and proprietary workflow software, and we may file
additional applications in the future. We have copyrights
protecting our proprietary software programs and may federally
register these copyrights in the future.
We enter into confidentiality and proprietary rights agreements
with our employees, independent contractor physicians,
consultants and other third parties, and we control access to
our software, documentation and other proprietary information.
Although we utilize vRad PACS as our principal image management
software, we continue to license certain image management
software that we use in our workflow from Fujifilm Medical
Systems U.S.A., or Fujifilm, a minority stockholder of vRad. The
license agreement currently provides for a one year term that
automatically renews, unless earlier terminated. Under the terms
of the licensing agreement, either party may terminate the
agreement for cause upon 30 days written notice and
opportunity to cure. Fees paid under this agreement are
calculated on a per read basis and vary depending on the
modality of the read. Additionally, these per-read fees may be
reduced if, at our option, we choose to guarantee an aggregate
minimum amount of fees to Fujifilm.
Employees
and Independent Contractor Physicians
As of December 31, 2009, we employed 244 full-time,
part-time and seasonal employees. None of our employees are
covered by labor agreements or affiliated with labor unions. As
of December 31, 2009, we had 143 independent contractor
physicians providing services to our customers and an additional
eight independent
12
contractor radiologists under contract but not yet providing
interpretations. We consider our relationships with our
employees and independent contractor physicians to be
satisfactory.
Website
Our website is www.vrad.com and can be used to access investor
relations material, free of charge, such as our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with or
furnish it to the Securities and Exchange Commission, or the
SEC. Our website also contains certain governance policies. The
information on our website is not incorporated as a part of this
report. The public can also obtain copies of these reports by
visiting the SECs Public Reference Room at
100 F Street, NE, Washington DC 20549, by calling the
SEC at
1-800-SEC-0330,
or by accessing the SECs website at
http://www.sec.gov.
Our business, financial condition or results of operations
could be materially adversely affected by any of the risks and
uncertainties described below. Additional risks not presently
known to us, or that we currently deem immaterial, may also
impair our business, financial condition or results of
operations.
The
number of reads we perform may be affected by a continued
general decline in economic conditions.
The willingness and ability of our customers to both enter into
new services agreements with us and send reads to us under
existing agreements depends on a number of factors, including
broader economic conditions and perceptions of such conditions
by our customers. For example, our revenues are highly dependent
upon emergency department patient volumes, which can and have
varied alongside general economic conditions. Generally,
patients may seek to delay medical treatment as a reaction to a
general downturn in the economy or a corresponding loss of
employment or insurance coverage, which in turn may affect the
number of scans that are available for reading by our
independent contractor physicians. A continued difficult
economic environment may lead to fluctuations in patient volumes
and the willingness of our customer radiologists to send us
reads, and a corresponding effect on our periodic operating
results.
Current
health care reform initiatives targeting diagnostic imaging
could adversely impact our customers or the overall imaging
market, resulting in an adverse impact on our
business.
Current health care reform initiatives have targeted diagnostic
imaging as an area for reimbursement cuts, utilization
management, and other reform measures. Although the ultimate
outcome of these reform efforts remains uncertain, the proposed
reforms could adversely affect the overall imaging market and
our customers by, among other things, reducing the growth in, or
overall number of, diagnostic imaging procedures performed, and
the payments to radiology groups and facilities for such
procedures. While our direct exposure to these reforms is
believed to be limited due to the nature of our services as
primarily emergent, hospital-based interpretations and due to
our business model of principally contracting with radiology
groups for outsourced interpretations, reduced diagnostic
imaging demand, as well as reduced reimbursement to groups and
facilities that utilize our services could in turn adversely
affect our business.
The
industry in which we operate is highly competitive and has
experienced pricing pressure, which may result in reduced
revenue and reduced market share.
The market for teleradiology is intensely competitive. We expect
that this intense competition will continue since barriers to
entry for any licensed radiologist are not significant and the
necessary technology is reasonably accessible. We compete
directly with both large and small-scale service providers who
offer local, regional and national operations. We believe that
our principal competitor is Nighthawk Radiology Holdings, Inc.,
a publicly traded company. Certain of our competitors, including
Nighthawk Radiology Holdings, Inc., may offer their services at
a lower price, which results in pricing pressure. If we are
unable to maintain our current pricing, our operating results
could be negatively impacted. Moreover, pricing pressures and
increased competition could result in reduced revenue and
reduced profits.
13
In addition, if one or more of our competitors were to merge or
partner with another of our competitors or if companies larger
than us enter the market through internal expansion or
acquisition of one of our competitors, the change in the
competitive landscape could adversely affect our ability to
compete effectively. These competitors could establish customer
relationships and greater financial, technical, sales, marketing
and other resources than we have, and could be able to respond
more quickly to new or emerging technologies or devote greater
resources to the development, promotion and sale of their
services. This competition could harm our ability to sell our
services, which could lead to lower prices, reduced revenue and,
ultimately, reduced market share.
Our
inability to effectively manage our growth could adversely
affect our business and our operating results.
We continue to experience rapid growth in the scale of our
business and operations, which has placed, and will continue to
place, a significant strain on our management, administrative,
operational and financial infrastructure. We also anticipate
that further growth will be required to address increases in the
scope of our operations and size of our customer base. Our
success will depend in part upon the ability of our current
senior management team to effectively manage this growth. Our
management will be required to devote considerable time to this
process, which will reduce the time our management will have to
implement our business and expansion plans.
To effectively manage our business and planned growth, we must
continue to improve our operational, financial and management
processes and controls and our reporting systems and procedures.
If we are unable to effectively manage our growth, our expenses
may increase more than expected, our revenues could decline or
grow more slowly than expected and we may be unable to implement
our business strategy.
We may
in the future become involved in intellectual property rights
claims, which could harm our business and operating
results.
The information technology industry is characterized by the
existence of a large number of patents, trademarks and
copyrights and by frequent litigation based on allegations of
infringement or other violations of intellectual property
rights. If a claim is asserted that we have infringed the
intellectual property of a third party, we may be required to
seek licenses to that technology. In addition, third parties may
infringe or misappropriate our proprietary rights and we may
initiate claims or litigation against such third parties for
infringement of our proprietary rights or to establish the
validity of our proprietary rights. Any litigation, whether or
not it is resolved in our favor, could result in significant
expense to us and divert the efforts of our technical and
management personnel.
If we
are unable to recruit and retain a sufficient number of
qualified independent contractor physicians, our future growth
would be limited and our business and operating results would be
negatively impacted.
Our success is highly dependent upon the continuing ability of
VRP to recruit and retain qualified radiologists to perform
radiological services for us. We face competition for
radiologists from other healthcare providers, including
radiology practices, research and academic institutions,
government entities and other organizations. The competitive
demand for radiologists may require us in the future to offer
higher compensation in order to secure the services of
radiologists. As a result, our compensation expense for our
independent contractor physicians may increase and if we were
not able to offset any such increase by increasing our prices,
this could have a material adverse effect on our results of
operations. An inability to recruit and retain radiologists
would have a material adverse effect on our ability to grow and
would adversely affect our results of operations.
If we
are unable to obtain proper physician licenses or hospital
privileges on behalf of our independent contractor physicians,
or if our independent contractor physicians lose those licenses
or privileges, our business, financial condition and results of
operations may be negatively impacted.
Pursuant to hospital policies, each of our independent
contractor physicians must be granted privileges to practice at
each hospital from which the radiologist receives radiological
images and, pursuant to state regulations, each of our
independent contractor physicians must hold a license in good
standing to practice medicine in the state in which the hospital
is located and, subject to certain limited exceptions, in the
state in which the doctor is located. The requirements for
obtaining and maintaining hospital privileges and state medical
licenses vary significantly
14
among hospitals and states. Although we maintain a staff of
specially trained employees to process the necessary
applications to obtain these licenses and privileges, any delay
in obtaining new licenses or privileges could create a shortage
of independent contractor physicians available to perform reads
for a particular customer. In addition, any loss of existing
privileges or medical licenses held by our independent
contractor physicians could impair our ability to serve our
existing customers and could have a material adverse effect on
our business, financial condition and results of operations.
The
forthcoming potential loss of our ability to leverage our Joint
Commission accreditation for privileging purposes, or any future
loss of Joint Commission accreditation could negatively impact
our business and operating results.
Our independent contractor physicians must be privileged at each
of the institutions that they serve. Although the privileging
process of these institutions varies significantly, many Joint
Commission-accredited organizations have historically relied
upon the privileging decisions of other Joint
Commission-accredited organizations as a means of expediting
privileging, as permitted under Joint Commission rules.
We have been a Joint Commission-accredited organization since
2004, and many of the institutions we serve rely upon our
accreditation and privileging decisions in lieu of conducting
their own privileging. Over the past few years however, CMS has
increasingly expressed concerns regarding this reliance. In
response to the CMS position, the Joint Commission has recently
announced that the standards allowing this practice will expire
in July, 2010.
Although we are currently involved in legislative efforts
designed to allow continued reliance on third party privileging
pursuant to standards such as the current Joint Commission rules
(including the Rural TECH (Telemedicine Enhancing Community
Health) Act of 2009), the outcome of these efforts is uncertain.
In light of the planned phase-out of the Joint Commission rules
we are also working with our customers and covered facilities in
order to address the need for local privileging in the event
that legislative and other efforts fail to address the issue.
The anticipation of the phase-out, and the actual phase-out, if
it occurs, may adversely affect our business and operations. If
the phase-out occurs, the institutions we serve may seek to
privilege fewer radiologists, affecting our ability to serve our
customers, and could additionally cause us to incur additional
privileging expenses. Anticipation of the phase-out could also
cause institutions that we serve to take similar actions. All of
the foregoing could, in turn, negatively impact our financial
condition and results of operations.
To the extent reliance on third party privileging is permitted
to continue under Joint Commission rules, any future loss of our
accreditation would have similar effects.
We are
dependent upon our engagement with a physician who is properly
licensed to oversee our medical practice.
Our success depends largely upon the engagement of a physician
who is licensed to practice medicine in the jurisdictions
relevant to the Affiliated Medical Practices. Dr. Eduard
Michel, M.D., currently serves as our Medical Director and
oversees the clinical aspects of VRP. The loss of
Dr. Michel could result in a time-consuming search for a
replacement, and could distract our management team from the
day-to-day
operations of our business.
We are
also dependent on our management team, and the loss of any key
member of this team may prevent us from implementing our
business plan in a timely manner.
Our success depends largely upon the continued services of our
executive officers and directors. The loss of any member of the
management team could have a material adverse effect on our
business, financial condition, results of operations and the
trading price of our common stock.
We may not be able to effectively recruit executives to fill
these positions and, even if we are successful, integrating
these new executives may prove difficult and time-consuming. The
search for replacements for any of our executives could be time
consuming and could distract our management team from the
day-to-day
operations of our business.
15
As a
result of our corporate structure, we are highly dependent upon
our Affiliated Medical Practices, which we do not
own.
We provide our services through contracts between our customers
and us and through contracts between our customers and the six
Professional Corporations among our Affiliated Medical
Practices, and utilizing the services of independent contractor
physicians engaged by VRP, our other Affiliated Medical
Practice. Each of our Affiliated Medical Practices is
wholly-owned by Dr. Eduard Michel. While the ownership of
our Affiliated Medical Practices is subject to certain rights
and restrictions contained in management agreements among vRad
and the Affiliated Medical Practices and contained in certain
governing documents of the Professional Corporations, any change
in our relationship, whether resulting from a dispute between
the entities or with Dr. Michel, a change in government
regulation, or the loss of these Affiliated Medical Practices,
could impair our ability to provide services and could have a
material adverse affect on our business, financial condition and
operations.
Interruptions
or delays in our or our customers information systems or
in network or related services provided by third party suppliers
could impair the delivery of our services and harm our
business.
Our operations depend on the uninterrupted performance of our
information systems, which are dependent in part on systems
provided by third parties over which we have little control.
Failure to maintain reliable information systems, or the
occurrence of disruptions in our information systems could cause
delays in our business operations that could have a material
adverse effect on our business, financial condition and results
of operations. We have infrequently experienced downtime due to
disruptions in services provided by a third party or associated
with implementation of improvements to our system. Although our
systems have been designed around industry-standard architecture
to reduce downtime in the event of outages or catastrophic
occurrences, they remain vulnerable to risks such as internet
service denial attacks, security breaches, natural catastrophes
affecting the geographic availability of internet access,
unreliable internet performance due to increased traffic over
the internet, or changes in internet protocols that render the
technologies we rely on inefficient. Despite any precautions
that we may take, the occurrence of such risks or other
unanticipated problems could result in lengthy interruptions in
our services. Frequent or persistent interruptions in our
services could cause permanent harm to our reputation and brand
and could cause customers to believe that our systems are
unreliable, leading them to switch to our competitors. In
addition, if any of our customers experience any problems with
respect to their own internal information technology
infrastructure, this could lead to a decrease in the number of
reads they ask us to perform on their behalf. Because our
customers use our services for critical healthcare needs, any
system failures could result in damage to our customers
businesses and reputations. These customers could seek
significant compensation from us for their losses. Any claim for
compensation, even if unsuccessful, would likely be time
consuming and costly for us to resolve.
If our
security measures are breached and unauthorized access is
obtained to patient or customer data, we may face liabilities
and our system may be perceived as not being secure, causing
customers to curtail or stop using our services, which could
lead to a decline in revenues.
We are required to implement administrative, physical and
technological safeguards to ensure the security of the patient
data that we create, process, transmit or store. These
safeguards may fail to ensure the security of patient or
customer data, thereby subjecting us to liability, including
civil monetary penalties and possible criminal penalties. If our
security measures are breached, whether as a result of third
party action, employee error, malfeasance or otherwise, and, as
a result, someone obtains unauthorized access to patient or
customer data, our reputation will be damaged, our business may
suffer and we could incur significant liability. Because
techniques used to obtain unauthorized access to systems change
frequently and generally are not recognized until launched
against a target, we may be unable to anticipate these
techniques or to implement adequate preventive measures.
Any
failure to protect our intellectual property rights could impair
its value and our competitive advantage.
We rely heavily on our intellectual property, principally our
proprietary workflow software to transmit radiological images to
the appropriately licensed and credentialed radiologist who is
best able to provide the necessary clinical insight in the least
amount of turnaround time. If we fail to adequately protect our
intellectual
16
property rights, our competition may gain access to our
technology and our business may be harmed. We currently do not
hold any patents with respect to our technology. As of
December 31, 2009, we have filed seven provisional patent
applications, two utility patent applications, one PCT
application, and four patent applications in foreign countries
covering certain aspects of our business processes and
proprietary workflow software, and we may file additional
applications in the future. However, we may be unable to obtain
patent protection for this technology. A portion of our
intellectual property rights, including licenses for certain
software and systems, are not exclusive or proprietary and may
be imitated or purchased by competitors.
If our
arrangements with our independent contractor physicians or our
customers are found to violate state laws prohibiting the
practice of medicine by general business corporations or fee
splitting, our business, financial condition and ability to
operate in those states could be adversely
affected.
The laws of many states, including states in which our
independent contractor physicians perform medical services,
prohibit us from exercising control over the medical judgments
or decisions of physicians and from engaging in certain
financial arrangements, such as splitting professional fees with
physicians. These laws and their interpretations vary from state
to state and are enforced by state courts and regulatory
authorities, each with broad discretion. We enter into
agreements with our independent contractor physicians pursuant
to which they render professional medical services. In addition,
we enter into agreements with our customers to deliver
professional radiology interpretation services in exchange for a
service fee. We structure our relationships with our independent
contractor physicians and our customers in a manner that we
believe is in compliance with prohibitions against the corporate
practice of medicine and fee splitting. While we have not
received notification from any state regulatory or similar
authorities asserting that we are engaged in the corporate
practice of medicine or that the payment of service fees to us
by our customers constitutes fee splitting, if such a claim were
successful we could be subject to substantial civil and criminal
penalties and could be required to restructure or terminate the
applicable contractual arrangements and our contractual
arrangements may be unenforceable in that particular state. A
determination that our arrangements with our independent
contractor physicians or our customers violate state statutes,
or our inability to successfully restructure these arrangements
to comply with these statutes, could eliminate customers located
in certain states from the market for our services, which would
have a material adverse effect on our business, financial
condition and operations.
Non-compliance
with federal and state anti-kickback laws could affect our
business, operations or financial condition.
Various federal and state laws govern financial arrangements
among healthcare providers. The federal anti-kickback law
prohibits the knowing and willful offer, payment, solicitation
or receipt of any form of remuneration in return for, or with
the purpose to induce, the referral of Medicare, Medicaid or
other federal healthcare program patients, or in return for, or
with the purpose to induce, the purchase, lease or order of
items or services that are covered by Medicare, Medicaid or
other federal healthcare programs. Similarly, many state laws
prohibit the solicitation, payment or receipt of remuneration in
return for, or to induce, the referral of patients in private as
well as government programs. We believe that we are operating in
compliance with applicable law and believe that our arrangements
with providers and customers would not be found to violate the
anti-kickback laws. However, these laws could be interpreted in
a manner inconsistent with our operations. Violation of these
anti-kickback laws may result in substantial civil or criminal
penalties for individuals or entities
and/or
exclusion from participating in federal or state healthcare
programs. If we are excluded from federal or state healthcare
programs, our customers who participate in those programs would
not be permitted to continue doing business with us.
Federal
or state self-referral regulations could impact our arrangements
with our independent contractor physicians.
The federal physician self-referral statute, known as the
Stark statute, prohibits a physician from making a
referral for certain designated health services, including
radiology services, to any entity with which the physician has a
financial relationship, unless there is an exception in the
statute that allows the referral. The entity that receives a
prohibited referral from a physician may not submit a bill to
Medicare for that service. Many state laws prohibit physician
referrals to entities in which the physician has a financial
interest, or require that the physician provide the
17
patient notice of the physicians financial relationship
before making the referral. We believe that all of our customer
arrangements are in compliance with the Stark statute. However,
these laws could be interpreted in a manner inconsistent with
our operations Violation of the Stark statute can result in
substantial civil penalties for both the referring physician and
any entity that submits a claim for a healthcare service made
pursuant to a prohibited referral. In addition, federal courts
have ruled that violations of the Stark statute can be the basis
for a legal claim under the Federal False Claims Act.
Any
lawsuit against us or our customers under the Federal False
Claims Act, and the outcome of any such lawsuit could have a
material adverse effect on our business, financial condition and
results of operations.
The Federal False Claims Act provides, in part, that the federal
government may bring a lawsuit against any person whom it
believes has knowingly presented, or caused to be presented, a
false or fraudulent request for payment from the federal
government, or who has made a false statement or used a false
record to have a claim approved. Federal courts have ruled that
a violation of the anti-kickback provision of the Stark statute
can serve as the basis for the Federal False Claims Act suit.
The Federal False Claims Act further provides that a lawsuit
brought under that act may be initiated in the name of the
United States by an individual who was the original source of
the allegations, known as the relator. Actions brought under the
Federal False Claims Act are sealed by the court at the time of
filing. The only parties privy to the information contained in
the complaint are the relator, the federal government and the
court. Therefore, it is possible that lawsuits have been filed
against us that we are unaware of or which we have been ordered
by the court not to discuss until the court lifts the seal from
the case. Penalties include fines ranging from $5,500 to $11,000
for each false claim, plus three times the amount of damages
that the federal government sustained because of the act of the
violator.
Historically, our customers, and not us, had billed and received
payments from Medicare
and/or
Medicaid for the professional services provided by our
independent contractor physicians. In some instances, our
customers and independent contractor physicians indicated that
the practice location where the professional services occurred
was the same as the address of the medical facility where the
image was obtained for the purposes of submitting the applicable
claims for reimbursement. It is possible that CMS may take the
position that claims submitted for reimbursement indicating the
practice location as the same as the address of the medical
facility where the image was obtained were not properly filed
and, in such event, the Federal False Claims Act may be
implicated. In 2006 and 2007, we revised our billing practices
and we, instead of our customers, began in most cases to submit
claims for reimbursement to Medicare and Medicaid directly. In
those claims, we identify the practice location as the location
where the image is interpreted by our independent contractor
physicians and we remit the collected proceeds to our customers.
We believe that we are operating in compliance with the Medicare
rules and regulations and, thus, the Federal False Claims Act.
However, if we were found to have violated certain rules and
regulations and, as a result, submitted or caused our customers
to submit allegedly false claims, any sanctions imposed under
the Federal False Claims Act could result in substantial fines
and penalties or exclusion from participation in federal and
state healthcare programs, which could have a material adverse
effect on our business and financial condition. If we are
excluded from participation in federal or state healthcare
programs, our customers who participate in those programs could
not do business with us.
Federal regulatory and law enforcement authorities have recently
increased enforcement activities with respect to Medicare and
Medicaid fraud and abuse regulations and other reimbursement
laws and regulations, including laws and regulations that govern
our activities and the activities of teleradiologists. These
increased enforcement activities may have a direct or indirect
adverse affect on our business, financial condition and results
of operations.
Additionally, some state statutes contain prohibitions similar
to and possibly even more restrictive than the Federal False
Claims Act. These state laws may also empower state
administrators to adopt regulations restricting financial
relationships or payment arrangements involving healthcare
providers under which a person benefits financially by referring
a patient to another person. We believe that we are operating in
compliance with these laws.
18
However, if we are found to have violated such laws, our
business, results of operations and financial condition would be
harmed.
Medicare
and Medicaid rules governing reassignment of payments could
affect our customers ability to collect fees for final
interpretation services provided by our independent contractor
physicians and our ability to market these services to our
customers.
Medicare reimbursement rules generally provide that the proper
Medicare carrier to pay physician claims is the Medicare carrier
for the region in which the physician or practice providing the
service is located rather than the Medicare carrier for the
region in which the patient receiving the services is located.
Conversely, Medicaid reimbursement rules generally provide that
the proper Medicaid carrier to pay physician claims is the
Medicaid plan for the state in which the patient receiving the
services is located. For these reasons, we bill Medicare and
Medicaid on behalf of our customers for
fee-for-service
final interpretations we provide, and remit reimbursement
payments to our customers. Medicare and Medicaid payments may
comprise a significant portion of the total payments received by
our customers for these services. Medicare and Medicaid
generally prohibit a physician who performs a covered medical
service from reassigning to anyone else (including
to other physicians) the performing physicians right to
receive payment directly from Medicare or Medicaid, except in
certain circumstances. We believe we satisfy one or more of the
exceptions to this prohibition, but the various Medicare
carriers and state Medicaid authorities may interpret these
exceptions differently than we do. Our customers could be
prohibited from billing Medicare
and/or
Medicaid for the services of our independent contractor
physicians if it were determined that we do not qualify for an
exception, and this would cause a material adverse effect on our
ability to market our final interpretation services and on our
business and results of operations. Future laws or regulations,
moreover, may require that we bill Medicare or Medicaid directly
for services we provide to certain prospective customers. Should
this occur, we would be required to assume the billing risk for
all final interpretations billed to Medicare and Medicaid.
We are
subject to medical device regulations applicable to 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.
Our vRad PACS is a medical device subject to regulation in the
United States by the United States Food and Drug Administration,
or FDA for which we have received Section 510(k) marketing
clearance from the FDA.
In the United States, the FDA regulates the design control,
development, manufacturing, labeling, record keeping and
surveillance procedures for medical devices. Although vRad PACS
has received requisite marketing clearance from the FDA, the FDA
could require us to cease using vRad PACS due to failure to
comply with regulatory standards or the occurrence of unforeseen
problems. As a developer of a medical device, our facilities and
processes are also subject to regulation. The FDA can and will
be expected to inspect our facilities to determine whether we
are in compliance with various regulations relating to quality
systems, such as manufacturing practices, validation, testing,
quality control, product labeling and product surveillance.
FDA regulations depend heavily on administrative interpretation,
and there can be no assurance that future interpretations made
by the FDA or other regulatory bodies, with possible retroactive
effect, will not adversely affect us. A determination that we
are in violation of FDA regulations could lead to imposition of
civil penalties, including fines, product recalls or product
seizures and, in extreme cases, criminal sanctions, depending on
the nature of the violation, all of which could have a material
adverse effect on our business.
Future
changes in healthcare regulation are difficult to predict and
may constrain or require us to restructure our operations, which
could negatively impact our business and operating
results.
The healthcare industry is heavily regulated and subject to
frequent changes in governing laws and regulations as well as to
evolving administrative interpretations. Our business could be
adversely affected by regulatory changes at the federal or state
level that impose new requirements for licensing, new
restrictions on reimbursement for medical services by government
programs, new pretreatment certification requirements for
patients seeking radiology procedures, or new limitations on
services that can be performed by us. In addition, federal,
state and local
19
legislative bodies have adopted and continue to consider medical
cost-containment legislation and regulations that have
restricted or may restrict reimbursement to entities providing
services in the healthcare industry and referrals by physicians
to entities in which the physicians have a direct or indirect
financial interest or other relationship. Any of these or future
reimbursement regulations or policies could limit the number of
diagnostic tests our customers order and could have a material
adverse effect on our business.
CMS recently finalized certain anti-markup rules relating to
diagnostic tests paid for by the Medicare program. The
anti-markup rules are generally applicable where a physician or
other supplier bills for the technical component or professional
component of a diagnostic test that was ordered by the physician
or other supplier (or ordered by a party related to such
physician or other supplier through common ownership or
control), and the diagnostic test is performed by a physician
who does not share a practice with the billing physician or
other supplier. If the anti-markup rule applies to an
interpretation, then the reimbursement provided by Medicare to a
billing physician or other supplier for that interpretation may
be limited. Because our independent contractor physicians do not
order diagnostic tests, and neither our radiology group
customers nor any party under common control with either us or
our Affiliated Medical Practices orders diagnostic tests, we
believe that the anti-markup rule generally does not apply to
the final interpretation services our independent contractor
physicians perform in our
fee-for-service
business. However, this rule could be subject to future
interpretation or modification that affects the amounts either
us or our customers may be reimbursed by Medicare for
professional diagnostic interpretations.
Although we monitor legal and regulatory developments and modify
our operations from time to time as the regulatory environment
changes, we may not be able to adapt our operations to address
every new regulation, and such regulations may adversely affect
our business. Although we believe that we are operating in
compliance with applicable federal and state laws, our business
operations have not been scrutinized or assessed by judicial or
regulatory agencies. We cannot assure you that a review of our
business by courts or regulatory authorities would not result in
significant distraction of our management or a determination
that adversely affects our operations or that the healthcare
regulatory environment will not change in a way that will
restrict our operations.
Non-compliance
with state and federal regulations concerning the privacy and
security of patient information may adversely affect our
business, financial condition or operations.
The use and disclosure of certain healthcare information by
healthcare providers and their business associates have come
under increasing public scrutiny. The federal standards under
HIPAA establish rules concerning how individually identifiable
health information may be used, disclosed and protected.
Historically, state law has governed privacy issues and HIPAA
preserves these laws to the extent they are more protective of a
patients privacy or provide the patient with more access
to his or her health information. As a result of the
implementation of the HIPAA privacy and security regulations,
many states are considering revisions to their existing privacy,
security and breach notification laws and regulations that may
or may not be more stringent or burdensome than the federal
HIPAA privacy, security and breach notification provisions. In
addition, the recently enacted HITECH Act now empowers state
attorneys general to enforce HIPAAs privacy and security
provisions, including the new federal breach notification
requirements. We must operate our business in a manner that
complies with all applicable laws, both federal and state, and
which does not jeopardize the ability of our customers to comply
with all applicable laws to which they are subject. We believe
that our operations are consistent with these legal standards.
Nevertheless, these laws and regulations present risks for
healthcare providers and their business associates that provide
services to patients in multiple states. Because these laws and
regulations are recent and few have been interpreted by
government regulators or courts, our interpretations and
activities may be challenged. If a challenge to our activities
is successful, it could have an adverse effect on our
operations. In addition, even if our interpretations of HIPAA
and other federal and state laws and regulations are correct, we
could be held liable for unauthorized uses or disclosures of
patient information as a result of inadequate systems and
controls to protect this information or due to the theft of
information by unauthorized computer programmers who penetrate
our network security. Lastly, new legislation to broaden privacy
and security rules has been introduced in Congress and in
numerous states which may require that we change our operations.
20
Changes
in the rules and regulations governing Medicare and
Medicaids payment for medical services could affect our
revenues, particularly with respect to final
reads.
Although the majority of reads we provide are preliminary reads,
we are providing an increasing number of final reads which are
billed, either by us on behalf of our customer or by us
directly, to Medicare and Medicaid. Cost-containment pressures
on Medicare and Medicaid could result in a reduction in the
amount that the government will pay for a final read, which
could cause pricing pressure on our fees for services or loss of
direct reimbursement. In our
fee-for-
service business, this could require us to lower our prices, or
could cause our customers to elect to provide the final reads
themselves or obtain such services from one of our competitors,
and in our direct to payer business would cause a loss of
revenue, in each case adversely affecting our business, results
of operations and financial condition.
Our
business could be materially affected if a HHS-OIG study results
in adverse modifications to Medicare payments for emergency room
imaging.
In its Fiscal Year 2010 Work Plan, the HHS-OIG lists as a
work in progress its current inspection of the
appropriateness of payments for hospital emergency department
x-rays and interpretations. It is possible that, in the final
report, the HHS-OIG could recommend changes to CMS reimbursement
rules regarding emergency imaging that would be adverse to our
business model, if ultimately adopted.
Although
we maintain medical liability insurance covering all of our
independent contractor physicians, our Affiliated Medical
Practices and our company, we are subject to medical malpractice
claims and other lawsuits that may require us to pay significant
damages if not covered by insurance.
Our business entails an inherent risk of claims of medical
malpractice against our independent contractor physicians and
us, and we may also be subject to other lawsuits that may
involve large claims and significant defense costs. We may also
be liable to our customers for certain medical malpractice
claims. Although we currently maintain liability insurance
coverage intended to cover professional liability and other
claims of up to $2 million per incident, $4 million
per physician and $20 million in total claims filed within
the period of the policy term, subject to a $500,000
self-insured retention per claim, there can be no assurance that
such insurance coverage will be adequate to cover liabilities
arising out of claims asserted against us where the outcomes of
such claims are unfavorable. In addition, this insurance
coverage generally must be renewed annually and may not continue
to be available to us in future years at acceptable costs and on
favorable terms. Liabilities in excess of insurance coverage
could have a material adverse effect on our business, financial
condition and results of operations. Moreover, any adverse
claims may negatively affect our reputation.
If we
are unable to retain our customers because they terminate their
contracts with us or allow those contracts to lapse, our
operating results and financial condition may be adversely
affected.
The contracts we have signed with our radiology practice,
hospital, clinic and digital imaging center customers generally
provide for an initial term of one or two years and
automatically renew for successive terms unless earlier
terminated pursuant to the terms of the contract. Many of the
customer contracts also provide that either party may terminate
the agreement without cause upon 90 days notice to
the other party. Our customers may elect not to renew their
contracts with us, they may seek to renegotiate the terms of
their contracts or they may choose to reduce or eliminate our
services in the future. If our arrangements with our customers
are canceled, or are not renewed or replaced with other
arrangements having at least as favorable terms, our business,
financial condition and results of operations could be adversely
affected.
Because
our contracts with our customers contain fixed prices, we are
unable to pass along any increase in our expenses to our
customers during their contract term.
We enter into fixed-price contracts with our customers, pursuant
to which we have agreed to perform our services for a fixed
price. Accordingly, we realize all of the benefit or detriment
resulting from any decrease or increase in expenses that we
incur in providing our services during the term of such
agreements. Our customer contracts do not permit us to recover
any increases in our expenses from our customers during the
contract term. As
21
a result, any such increase in our expenses would result in a
corresponding decrease in our profitability (or an increase in
our losses).
We may
be subject to less favorable levels of payment based upon third
party payer fee schedules.
Many patients are covered by some form of private or government
health insurance or other third party payment program. Third
party payers generally establish fee schedules or other payment
authorization methods for various procedures that govern which
procedures will be reimbursed by the third party payers and the
amount of reimbursement. In most cases, we are indirectly rather
than directly impacted by such fee schedules, to the extent that
such schedules impact the rates at which third party payers are
willing to pay the healthcare providers with whom we contract to
provide final interpretations. We are, however, directly
impacted by such changes by those third party payers with whom
we have negotiated direct payment arrangements. Any reduction in
third party reimbursement for our services could substantially
impact our business.
If we
acquire any companies or technologies in the future, they could
prove difficult to integrate, disrupt our business, dilute
stockholder value and adversely affect our operating
results.
An element of our strategy is to pursue strategic acquisitions
or investments that are complementary to our business or offer
us other strategic benefits. Any acquisitions or investments in
which we may engage involve numerous risks, including:
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difficulties in integrating operations, technologies, services
and personnel;
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diversion of financial and management resources from existing
operations;
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risk of entering new markets;
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potential write-offs of acquired assets;
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potential loss of key employees; and
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inability to generate sufficient revenue to offset acquisition
costs.
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We may experience these difficulties as we integrate the
operations of companies that we acquire with our current
operations.
If we fail to properly evaluate and execute acquisitions, or
experience difficulties in integrating any acquired business,
our business and prospects may be harmed. Acquisitions financed
by issuing convertible debt or equity securities will
additionally dilute the shares owned by existing stockholders,
which could affect the market price of our stock.
Our
operating results are subject to seasonal fluctuations, which
make our results difficult to predict and could cause our
performance to fall short of quarterly
expectations.
We have historically experienced increased demand for our
services and higher revenue growth during the third quarter of
each year. We believe that during the summer months there is an
increased amount of outdoor and transportation activities, which
leads to more hospital visits, as well as there being more
frequent vacation time taken by our customers
radiologists. During the first and fourth quarters of each year,
when weather conditions are colder for a large portion of the
United States, we have historically experienced lower revenue
growth than that experienced during the second and third
quarters. We expect this seasonality with respect to our
revenues to continue, although we believe the current economic
downturn has caused the impact from seasonality to be less than
in previous years and may continue to do so in the future. These
seasonal factors may lead to unpredictable variations in our
quarterly operating results. Additionally, our ability to
schedule adequate radiologist coverage during the seasonal
period of increased demand for our services may affect our
ability to provide faster turnaround times in our services to
clients.
22
If we
are unable to maintain an effective system of internal controls,
our ability to report our financial results in a timely and
accurate manner, and to comply with Sections 302 and 404 of
the Sarbanes-Oxley Act of 2002, may be adversely
affected.
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective internal controls over financial reporting,
including disclosure controls and procedures. In particular, we
must perform system and process evaluation and testing on our
internal controls over financial reporting to allow management
and our independent registered public accounting firm to report
on the effectiveness of our internal controls over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act.
We may in the future discover areas of our internal controls
that need improvement. We cannot be certain that any remedial
measures we take will ensure that we are able to implement and
maintain adequate internal controls over our financial reporting
in the future. Any failure to implement required new or improved
controls, or difficulties encountered in their implementation,
could harm our operating results or cause us to fail to meet our
financial reporting obligations. If we are unable to conclude
that we have effective internal controls over financial
reporting, or if our independent registered public accounting
firm is unable to provide us with an unqualified opinion
regarding the effectiveness of our internal controls over
financial reporting as required by Section 404, investors
could lose confidence in the reliability of our consolidated
financial statements, which could result in a decrease in the
value of our common stock. Failure to comply with
Section 404 could potentially subject us to sanctions or
investigations by the SEC or other regulatory authorities.
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ITEM 1B.
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Unresolved
Staff Comments
|
None.
We lease approximately 82,000 square feet of principal
office space for our corporate headquarters in Eden Prairie,
Minnesota. We also operate data centers in Minnesota pursuant to
various license agreements and co-location agreements. See
Note 12 to the accompanying consolidated financial
statements for information regarding our obligations under
operating leases.
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ITEM 3.
|
Legal
Proceedings
|
We are from time to time subject to, and are presently involved
in, litigation and legal proceedings arising out of the ordinary
course of business, including medical malpractice claims and
certain employment related matters. We believe that neither we,
nor, to our knowledge, any of our independent contractor
physicians, are presently a party to any litigation, the outcome
of which could have a material adverse effect on us.
We maintain professional and general liability insurance
policies with third-party insurers on a claims-made basis,
subject to deductibles, self-insured retention limits, policy
aggregates, exclusions, and other restrictions, in accordance
with standard industry practice. Our self-insured retention
under our professional liability insurance program is insured
through VPIL, our wholly- owned captive insurance subsidiary. We
believe that our insurance coverage is appropriate based upon
our claims experience and the nature and risks of our business.
However, we cannot assure that any pending or future claim will
not be successful or if successful will not exceed the limits of
available insurance.
We continue to await dismissal of a suit filed on July 31,
2007, by Merge eMed, Inc., or Merge, in the United States
District Court for the Northern District of Georgia, Atlanta
Division, alleging that we infringed on certain of Merges
patents relating to teleradiology. On December 11, 2007,
the court granted our motion to stay the patent suit pending the
outcome of a reexamination by the United States Patent and
Trademark Office, or PTO, of these same patents. On
August 28, 2008, the PTO ruled invalid all of the claims in
the patents upon which Merge had sued us. Reexamination
certificates cancelling the claims of the patents have been
issued due to Merges failure to respond to the PTO action
and we are awaiting dismissal from the action as a result of the
cancellation. Pending dismissal, the judicial stay of
proceedings in the lawsuit remains in effect.
23
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ITEM 4.
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Submission
of Matters to a Vote of Security Holders
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None.
PART II
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ITEM 5.
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Market
for Registrants Common Stock, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
for Our Common Stock
Our common stock is traded on the NASDAQ Global Market under the
symbol VRAD. The following table sets forth, for the
period indicated, the high and low sales prices of our common
stock, as reported by the NASDAQ Global Market, for our two most
recent fiscal years.
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Common Stock Price
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High
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Low
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Fiscal Year Ended December 31, 2008
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First Quarter
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$
|
21.10
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$
|
13.88
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Second Quarter
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18.44
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9.52
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Third Quarter
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16.17
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6.74
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Fourth Quarter
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9.50
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5.97
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Fiscal Year Ended December 31, 2009
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First Quarter
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$
|
9.25
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$
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4.50
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Second Quarter
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9.90
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6.14
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Third Quarter
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13.17
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9.02
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Fourth Quarter
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13.70
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10.25
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Holders
of Record
As of February 16, 2010, there were approximately 76
stockholders of record of our common stock, and the closing
price of our common stock was $11.32 per share as reported by
the NASDAQ Global Market. Because many of our shares of common
stock are held by brokers and other institutions on behalf of
stockholders, we are unable to readily estimate the total number
of stockholders represented by these record holders.
Dividends
We currently intend to retain future earnings to fund the
operation, development and expansion of our business and we do
not expect to pay any dividends in the foreseeable future.
Issuer
Purchases of Equity Securities
On March 4, 2009, our Board of Directors authorized the
repurchase of up to $5.0 million of vRads outstanding
common stock in the open market or through private transactions
in accordance with Securities and Exchange Commission
regulations. The repurchase plan does not have an expiration
date. During the year ended December 31, 2009, we
repurchased 150,730 shares of our common stock at an
average price of $8.64 per share for total cash consideration of
$1.3 million.
24
Performance
Graph
The performance graph below illustrates a period comparison of
cumulative total stockholder return data based on an initial
investment of $100 in our common stock, as compared with the
Russell 2000 Index, Dow Jones US Healthcare Index and NASDAQ
Composite Market from November 15, 2007, the date of our
initial public offering, through December 31, 2009.
Recent
Sales of Unregistered Securities
None.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Please see Part III, Item 12 of this report for
disclosure related to our equity compensation plans.
25
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ITEM 6.
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Selected
Consolidated Financial Data
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The following selected consolidated financial data should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements included elsewhere in
this report. The Consolidated Statements of Operations data for
the fiscal years ended December 31, 2009, 2008 and 2007,
and the Consolidated Balance Sheets data as of December 31,
2009 and 2008 was derived from our audited consolidated
financial statements included elsewhere in this report. The
Consolidated Statements of Operations for the fiscal years ended
December 31, 2006 and 2005 and the Consolidated Balance
Sheets data as of December 31, 2007, 2006 and 2005 was
derived from our audited consolidated financial statements not
included in this report. The financial data presented below as
of and for the years ended December 31, 2009, 2008, 2007
and 2006 reflects the consolidated operations of vRad and our
Affiliated Medical Practices. The financial data presented below
as of and for the year ended December 31, 2005 reflects the
consolidated operations of Virtual Radiologic Consultants, Inc.,
our predecessor corporation, and VRP. The historical results
presented below are not necessarily indicative of financial
results to be achieved in future periods.
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Year Ended December 31,
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2009
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2008
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2007
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2006
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2005
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(in thousands, except per share data)
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Consolidated Statements of Operation Data:
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Revenue
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$
|
120,736
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|
|
$
|
106,567
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|
|
$
|
86,243
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|
|
$
|
54,099
|
|
|
$
|
26,991
|
|
Operating costs and expenses(1)
|
|
|
107,915
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|
|
|
92,780
|
|
|
|
77,013
|
|
|
|
53,594
|
|
|
|
29,816
|
|
Operating income (loss)
|
|
|
12,821
|
|
|
|
13,787
|
|
|
|
9,230
|
|
|
|
505
|
|
|
|
(2,825
|
)
|
Net income (loss) attributable to Virtual Radiologic Corporation
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|
|
7,915
|
|
|
|
8,454
|
|
|
|
3,451
|
|
|
|
(529
|
)
|
|
|
(1,465
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)
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Net income (loss) available to common stockholders
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|
|
7,915
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|
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|
8,454
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|
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|
(20,272
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)
|
|
|
(11,966
|
)
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|
|
(29,646
|
)
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
|
$
|
0.51
|
|
|
$
|
(2.31
|
)
|
|
$
|
(1.80
|
)
|
|
$
|
(4.74
|
)
|
Diluted
|
|
$
|
0.48
|
|
|
$
|
0.50
|
|
|
$
|
(2.31
|
)
|
|
$
|
(1.80
|
)
|
|
$
|
(4.74
|
)
|
Cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
25,975
|
|
|
$
|
14,496
|
|
|
$
|
6,861
|
|
|
$
|
3,977
|
|
|
$
|
(1,794
|
)
|
Net cash provided by (used in) investing activities
|
|
|
3,322
|
|
|
|
(25,135
|
)
|
|
|
(5,093
|
)
|
|
|
1,208
|
|
|
|
(7,754
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,686
|
|
|
|
(3,668
|
)
|
|
|
25,761
|
|
|
|
(2,315
|
)
|
|
|
12,151
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
50,163
|
|
|
$
|
29,316
|
|
|
$
|
33,487
|
|
|
$
|
5,958
|
|
|
$
|
8,180
|
|
Total assets
|
|
|
94,462
|
|
|
|
71,001
|
|
|
|
59,436
|
|
|
|
25,649
|
|
|
|
17,555
|
|
Total stockholders equity (deficit)
|
|
|
69,334
|
|
|
|
56,517
|
|
|
|
50,338
|
|
|
|
(34,410
|
)
|
|
|
(26,385
|
)
|
Stock Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted(2)
|
|
|
16,283
|
|
|
|
16,976
|
|
|
|
8,762
|
|
|
|
6,640
|
|
|
|
6,254
|
|
Dividends declared per share
|
|
|
|
|
|
|
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
Series A Cumulative Redeemable Convertible Preferred Stock
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,627
|
|
|
|
3,627
|
|
Dividends declared per share
|
|
|
|
|
|
|
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the non-cash stock-based compensation, medical
malpractice loss reserves, and depreciation and amortization
charges set forth in the following table: |
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Professional services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation
|
|
$
|
787
|
|
|
$
|
(479
|
)
|
|
$
|
3,687
|
|
|
$
|
3,416
|
|
|
$
|
1,995
|
|
Medical malpractice loss reserves
|
|
|
4,669
|
|
|
|
997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation
|
|
|
2,420
|
|
|
|
1,544
|
|
|
|
686
|
|
|
|
115
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,863
|
|
|
|
4,700
|
|
|
|
2,488
|
|
|
|
1,351
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,739
|
|
|
$
|
6,762
|
|
|
$
|
6,861
|
|
|
$
|
4,882
|
|
|
$
|
2,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
The calculation of weighted average common shares outstanding
for the years ended December 31, 2005, 2006 and 2007
excludes the assumed conversion of the shares of Series A
Cumulative Redeemable Convertible Preferred Stock into shares of
common stock, because they are anti-dilutive. The calculation of
weighted average common shares for the years ended
December 31, 2005, 2006 and 2007 also excludes any other
potential common stock equivalents that were outstanding during
the relevant periods, calculated using the treasury stock
method, because they are anti-dilutive. |
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with our audited consolidated financial statements
and notes thereto that appear elsewhere in this report. This
discussion contains forward-looking statements reflecting our
current expectations that involve risks and uncertainties.
Actual results may differ materially from those discussed in
these forward-looking statements due to a number of factors,
including those set forth in the section entitled Risk
Factors and elsewhere in this report.
Overview
We are a national radiology practice working in partnership with
radiologists and hospitals to optimize radiologys pivotal
role in the delivery of patient care. Enabled by next-generation
technology, vRads collaborative partnerships enhance
productivity and deliver demonstrated quality outcomes that help
lower the overall cost of care. vRads 143 affiliated
radiologists serve over 1,170 facilities (approximately 19% of
U.S. hospitals), reading more than 2.6 million
interpretations annually with unparalleled subspecialist
expertise and expedited time to diagnosis. Continually
recognized for high-quality reports and industry-leading
service, vRad is ranked #1 in the teleradiology services
category by independent healthcare research firm KLAS and has
received the Joint Commission Gold Seal of Approval each year
since 2004.
We continue to focus on expanding our business by acquiring new
customers, gaining further penetration into the final read
market and retaining our existing customer base, along with
retaining and attracting additional radiologists.
Trends in
our Business
Our business has grown rapidly since inception, resulting in a
continued trend of increased revenue, and we expect that our
business will continue to grow. However, our revenue growth rate
has generally declined over time, and we expect it will continue
to do so in the near term as a result of competition in the
traditional, off hours preliminary interpretation
teleradiology marketplace, related pricing pressures and
increased penetration in this traditional teleradiology market,
and the difficulty of maintaining growth rates as our revenues
increase to higher levels. In addition, the current general
economic downturn may continue to result in a decrease in
hospital visits and overall imaging volumes, which could
negatively affect the growth rate of our revenues.
Our revenues have been affected by fluctuations in the price per
read charged to the customers to whom we provide service. We
have seen an increased amount of pricing pressure from
competition in our marketplace and we expect these declines in
price to continue in future periods. In addition, our revenues
have been affected by a shift in
27
modality mix between CT reads and plain film reads, resulting in
plain film reads increasing as a percentage of total reads. We
expect to continue to experience these shifts in modality mix as
we continue to focus on further penetration into the daytime
finals read market, which has a higher percentage of plain film
reads.
Our revenues are also affected by seasonality. While our
revenues have continued to grow each year, we typically
experience increased demand for our services and higher revenue
growth during the third quarter of each year. We believe that
during the summer months there are an increased amount of
outdoor and transportation activities leading to more hospital
visits. Additionally, more frequent vacation time taken by our
customers radiologists results in increased reads
performed by our independent contractor physicians. We expect
this seasonality with respect to our revenues to continue,
although we believe the current economic downturn has caused the
impact from seasonality to be less than in previous years and
may continue to do so in the future. As a result, our seasonal
fluctuations are more difficult to predict, and our performance
could fall short of expectations.
Professional services expense consists primarily of physician
cash compensation, which has increased each year since
inception, as we have added more independent contractor
physicians to fulfill the increased demand for our services, and
is expected to increase as our business continues to grow.
Physician cash compensation as a percentage of revenue has
decreased over time due to increased efficiency driven by
technological advancements in our distributed network
infrastructure and our physician support services, and
contractual revisions, but may increase as a percentage of
revenue in future periods.
Sales, general and administrative expenses consist primarily of
employee compensation, information technology costs and
facilities related costs. These costs have increased each year
since our inception as a result of the increased cost associated
with the development and maintenance of our expanding business
but have decreased as a percentage of revenue. Although we
continue to strategically invest in building the necessary
employee and systems infrastructure required to manage our
growth and enhance our services, we expect our sales, general
and administrative expenses to continue to decrease as a
percentage of revenue in future periods.
28
Results
of Operations
The following table sets forth selected Consolidated Statements
of Operations data for each of the periods indicated as a
percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Physician cash compensation expense
|
|
|
43.4
|
|
|
|
44.4
|
|
|
|
44.5
|
|
Physician stock-based compensation expense (income)
|
|
|
0.7
|
|
|
|
(0.4
|
)
|
|
|
4.3
|
|
Medical malpractice liability expense
|
|
|
4.6
|
|
|
|
2.3
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total professional services
|
|
|
48.7
|
|
|
|
46.3
|
|
|
|
50.6
|
|
Sales, general and administrative
|
|
|
35.0
|
|
|
|
36.4
|
|
|
|
35.8
|
|
Depreciation and amortization
|
|
|
5.7
|
|
|
|
4.4
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
89.4
|
|
|
|
87.1
|
|
|
|
89.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10.6
|
|
|
|
12.9
|
|
|
|
10.7
|
|
Total other income (expense)
|
|
|
0.2
|
|
|
|
0.6
|
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
10.8
|
|
|
|
13.5
|
|
|
|
8.5
|
|
Income tax expense
|
|
|
4.3
|
|
|
|
5.6
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6.5
|
|
|
|
7.9
|
|
|
|
4.0
|
|
Non-controlling interest (income) expense(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Virtual Radiologic Corporation
|
|
|
6.5
|
|
|
|
7.9
|
|
|
|
4.0
|
|
Series A cumulative redeemable convertible preferred stock
accretion
|
|
|
|
|
|
|
|
|
|
|
(11.7
|
)
|
Series A preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
(15.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
|
6.5
|
%
|
|
|
7.9
|
%
|
|
|
(23.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-controlling interest (income) expense represents less than
0.1% as a percentage of revenue. |
Comparison
of the Years Ended December 31, 2009, 2008 and
2007
Revenue
We generate substantially all of our revenue from radiology
services that we provide to our customers on a fee-for-service
basis. We provide these services pursuant to contracts that have
a one or two-year initial term and automatically renew for
successive one-year terms unless terminated by the customer or
by us. The amount that we charge for our radiology services
varies by customer and is based upon a number of factors,
including the hours of coverage, the number of reads, whether
the reads are preliminary reads or final reads, and the
technical and administrative services provided. These services
are billed to our customers with whom we contract directly.
Revenues are recognized when delivery of a service is completed
by our independent contractor physicians and collectability is
reasonably assured.
We also bill third-party payers such as Medicare, Medicaid,
private insurance
and/or
patients directly for final interpretations we provide under
agreements with a small number of our customers. Services for
which we submit billings directly to third-party payers are
coded for reimbursement based upon the specific services
provided, and patients are responsible for any remaining
deductibles or coinsurance. Revenue is recorded for these
services based on the anticipated reimbursement, net of any
contractual adjustments
and/or
allowance for denied claims. Revenue related to these services
is recognized when delivery of a service is completed by our
independent contractor physicians and collectability is
reasonably assured.
29
Key
Revenue Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
% Change
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
120,736
|
|
|
|
13
|
%
|
|
$
|
106,567
|
|
|
|
24
|
%
|
|
$
|
86,243
|
|
Reads
|
|
|
2,668,043
|
|
|
|
21
|
%
|
|
|
2,200,365
|
|
|
|
30
|
%
|
|
|
1,691,859
|
|
Year-over-year
change in price per read
|
|
|
(7
|
)%
|
|
|
|
|
|
|
(5
|
)%
|
|
|
|
|
|
|
(3
|
)%
|
Same site volume growth(1)
|
|
|
5
|
%
|
|
|
|
|
|
|
6
|
%
|
|
|
|
|
|
|
18
|
%
|
Percentage of read revenue from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Final reads
|
|
|
28
|
%
|
|
|
|
|
|
|
24
|
%
|
|
|
|
|
|
|
24
|
%
|
Preliminary reads
|
|
|
72
|
%
|
|
|
|
|
|
|
76
|
%
|
|
|
|
|
|
|
76
|
%
|
Customers
|
|
|
655
|
|
|
|
5
|
%
|
|
|
621
|
|
|
|
32
|
%
|
|
|
469
|
|
Facilities
|
|
|
1,173
|
|
|
|
14
|
%
|
|
|
1,026
|
|
|
|
28
|
%
|
|
|
804
|
|
Percentage of U.S. hospitals served
|
|
|
19
|
%
|
|
|
|
|
|
|
17
|
%
|
|
|
|
|
|
|
13
|
%
|
|
|
|
(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. |
The increase in revenue for the year ended December 31,
2009, as compared to the year ended December 31, 2008,
resulted primarily from an increase in the number of customers
to whom we provided services and increased volume from existing
customers. Read volume increased approximately 21% during the
year ended December 31, 2009 to 2.7 million reads and
the number of customers to whom we provided services increased
to 655 as of December 31, 2009. In addition, the number of
medical facilities to whom we provide services increased to
1,173 as of December 31, 2009. Our revenue growth during
2009 included an increase in the number of final reads, which
represented 28% of total read revenue for the year ended
December 31, 2009, compared to 24% for the prior year
period. These revenue increases were partially offset by
declines in our average price per read of 7% as of
December 31, 2009, which were primarily the result of
continued pricing pressures in our marketplace, including the
impact of changes in modality mix.
The increase in revenue for the year ended December 31,
2008, as compared to the year ended December 31, 2007,
resulted primarily from an increase in the number of customers
to whom we provided services, including customer relationships
acquired through the purchase of Diagna, and increased volume
from existing customers. This increase was partially offset by a
5% decline in our average price per read, including the impact
of changes in modality mix.
Operating
Costs and Expenses
Operating costs and expenses are comprised of professional
services, sales, general and administrative expenses and
depreciation and amortization.
Professional
Services
Professional services expense is comprised primarily of
physician cash compensation. 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.
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
30
the policy to which they relate. Professional services expense
also includes physician stock-based compensation which is based
on the fair value of our common stock at the close of each
reporting period.
Key
Professional Service Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
|
(dollars in thousands)
|
|
|
Physician cash compensation expense
|
|
$
|
52,378
|
|
|
|
10.6
|
%
|
|
$
|
47,343
|
|
|
|
23.3
|
%
|
|
$
|
38,388
|
|
Physician stock-based compensation expense (income)
|
|
|
787
|
|
|
|
(264.3
|
)
|
|
|
(479
|
)
|
|
|
(113.0
|
)
|
|
|
3,687
|
|
Medical malpractice liability expense
|
|
|
5,570
|
|
|
|
122.9
|
|
|
|
2,499
|
|
|
|
63.1
|
|
|
|
1,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total professional services
|
|
$
|
58,735
|
|
|
|
19.0
|
|
|
$
|
49,363
|
|
|
|
13.2
|
|
|
$
|
43,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radiologists providing services
|
|
|
143
|
|
|
|
6.7
|
|
|
|
134
|
|
|
|
19.6
|
|
|
|
112
|
|
Average diagnostic cash compensation per read
|
|
$
|
19.52
|
|
|
|
|
|
|
$
|
21.22
|
|
|
|
|
|
|
$
|
22.37
|
|
The increase in physician cash compensation expense for the year
ended December 31, 2009, as compared to the prior year was
primarily the result of additional independent contractor
physicians providing services and an increase in read volume
during 2009. This increase was partially offset by a decline in
average diagnostic cash compensation per read driven by
increased efficiency from technological advancements and
physician support services, and contractual revisions. As of
December 31, 2009, the number of independent contractor
physicians providing services increased 6.7% to 143, and read
volume increased 21.3% during the year ended December 31,
2009. Medical malpractice liability expense increased primarily
due to the recognition of a full year of actuarially-based loss
development and IBNR loss reserves for the year ended
December 31, 2009 compared to the prior year, which we
began to establish in the fourth quarter of 2008. The increase
in non-cash physician stock-based compensation resulted
primarily from an increase in the value of our common stock for
the year ended December 31, 2009 compared to the prior year.
The increase in physician cash compensation expense for the year
ended December 31, 2008, compared to the prior year,
resulted primarily from the 19.6% increase in the number of
physicians providing services, including the additional
independent contractor physicians from the acquisition of
Diagna, and the 30% increase in read volume compared to the
prior year. Medical malpractice liability expense increased due
to additional loss reserves resulting from the establishment of
loss development and IBNR reserves. The decrease in non-cash
physician stock-based compensation resulted primarily from a
decrease in the value of our common stock for the year ended
December 31, 2008 compared to the prior year.
Sales,
General and Administrative
Sales, general and administrative expenses include employee
compensation, information technology costs and facilities
related costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
|
(dollars in thousands)
|
|
|
Sales, general and administrative expenses
|
|
$
|
42,317
|
|
|
|
9.3
|
%
|
|
$
|
38,717
|
|
|
|
25.2
|
%
|
|
$
|
30,918
|
|
The increase in sales, general and administrative expenses for
the year ended December 31, 2009, compared to the prior
year, included a $2.8 million increase in employee
compensation expense, primarily from performance-based
compensation, employee stock-based compensation, and a
$1.4 million increase in facility costs, primarily from
additional rent and utilities costs associated with our new
headquarters facility. These increases were partially offset by
a decrease in specific claims reserves of approximately $825,000
resulting from no additional expenses incurred for specific
claims reserves during 2009.
The increase in sales, general and administrative expenses for
the year ended December 31, 2008, compared to the prior
year, included a $2.2 million increase in employee
compensation expenses, as well as a $1.0 million
31
increase in sales and marketing expenses from additions in
personnel and increased commissions, respectively, and a
$947,000 increase in information technology expenses,
specifically software transactional costs associated with
increased read volumes and provisioning costs for our data
centers. An additional increase to sales, general and
administrative expenses during 2008 included medical malpractice
claims expenses resulting from the settlement of a malpractice
claim.
Depreciation
and Amortization
Increases in depreciation and amortization expense of 46.0% and
88.0% during the years ended December 31, 2009 and 2008,
respectively, were primarily the result of additional technology
and other capital equipment purchased for our operations, our
new corporate headquarters, and the amortization of customer
relationship and non-compete intangible assets acquired from the
purchase of Diagna Radiology, LLC in April 2008.
Income
Tax Expense
The decrease in income tax expense during the year ended
December 31, 2009 compared to the prior year was driven by
lower pre-tax income and a lower overall effective tax rate as a
result of VRPs election to be taxed as a corporation and
not as a partnership, which was effective January 1, 2009.
The increase in income tax expense during the year ended
December 31, 2008 as compared to December 31, 2007 was
due to an increase in taxable income, offset by the impact from
certain discrete tax benefits recognized in the second half of
2008 related to research and development tax credits.
Our effective tax rates during the years ended December 31,
2009, 2008 and 2007 were 39.5%, 41.2% and 52.8%, respectively.
We consolidate our financial results in accordance with
Generally Accepted Accounting Principles, or GAAP. However, for
income tax purposes, vRad is a single tax entity that is taxed
as a corporation and is not included in a tax consolidated group
with the Affiliated Medical Practices. As a result, tax losses
of the Affiliated Medical Practices are not available to offset
taxable income of vRad. This was the primary driver behind the
effective tax rate for the year ended December 31, 2007.
32
Quarterly
Results of Operations (unaudited)
The following table presents our unaudited consolidated results
of operations and other financial data by quarter for the fiscal
years ending December 31, 2009 and 2008. The unaudited
interim consolidated financial statements have been prepared in
accordance with GAAP and SEC rules and regulations for interim
financial statements. The interim financial statements reflect
all adjustments consisting of normal recurring accruals, which,
in the opinion of management, are necessary to present fairly
the results of our operations for the interim periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Dec 31,
|
|
|
Sept 30,
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sept 30,
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(in thousands, except per share data)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
29,945
|
|
|
$
|
31,638
|
|
|
$
|
30,585
|
|
|
$
|
28,568
|
|
|
$
|
28,301
|
|
|
$
|
29,025
|
|
|
$
|
25,921
|
|
|
$
|
23,320
|
|
Total operating costs and expenses(1)
|
|
|
28,197
|
|
|
|
26,791
|
|
|
|
26,645
|
|
|
|
26,282
|
|
|
|
26,580
|
|
|
|
23,785
|
|
|
|
22,458
|
|
|
|
19,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,748
|
|
|
|
4,847
|
|
|
|
3,940
|
|
|
|
2,286
|
|
|
|
1,721
|
|
|
|
5,240
|
|
|
|
3,463
|
|
|
|
3,363
|
|
Other income
|
|
|
63
|
|
|
|
53
|
|
|
|
43
|
|
|
|
56
|
|
|
|
149
|
|
|
|
185
|
|
|
|
89
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
1,811
|
|
|
|
4,900
|
|
|
|
3,983
|
|
|
|
2,342
|
|
|
|
1,870
|
|
|
|
5,425
|
|
|
|
3,552
|
|
|
|
3,539
|
|
Income tax expense
|
|
|
726
|
|
|
|
1,874
|
|
|
|
1,593
|
|
|
|
950
|
|
|
|
976
|
|
|
|
1,859
|
|
|
|
1,548
|
|
|
|
1,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,085
|
|
|
|
3,026
|
|
|
|
2,390
|
|
|
|
1,392
|
|
|
|
894
|
|
|
|
3,566
|
|
|
|
2,004
|
|
|
|
2,004
|
|
Non-controlling interest (income) expense
|
|
|
(22
|
)
|
|
|
(4
|
)
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Virtual Radiologic Corporation
|
|
$
|
1,107
|
|
|
$
|
3,030
|
|
|
$
|
2,386
|
|
|
$
|
1,392
|
|
|
$
|
890
|
|
|
$
|
3,564
|
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.19
|
|
|
$
|
0.15
|
|
|
$
|
0.09
|
|
|
$
|
0.06
|
|
|
$
|
0.21
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.19
|
|
|
$
|
0.15
|
|
|
$
|
0.09
|
|
|
$
|
0.05
|
|
|
$
|
0.21
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
|
|
(1) |
|
Includes the non-cash stock-based compensation, medical
malpractice loss reserves, and depreciation and amortization
charges set forth in the following table: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Dec 31,
|
|
|
Sept 30,
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sept 30,
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Professional services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation
|
|
$
|
134
|
|
|
$
|
369
|
|
|
$
|
427
|
|
|
$
|
(143
|
)
|
|
$
|
499
|
|
|
$
|
(419
|
)
|
|
$
|
(64
|
)
|
|
$
|
(495
|
)
|
Medical malpractice loss reserves
|
|
|
1,461
|
|
|
|
1,070
|
|
|
|
836
|
|
|
|
1,300
|
|
|
|
997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation
|
|
|
585
|
|
|
|
558
|
|
|
|
557
|
|
|
|
721
|
|
|
|
423
|
|
|
|
417
|
|
|
|
422
|
|
|
|
282
|
|
Depreciation and amortization
|
|
|
1,871
|
|
|
|
1,819
|
|
|
|
1,723
|
|
|
|
1,450
|
|
|
|
1,343
|
|
|
|
1,286
|
|
|
|
1,216
|
|
|
|
855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-cash
charges
|
|
$
|
4,051
|
|
|
$
|
3,816
|
|
|
$
|
3,543
|
|
|
$
|
3,328
|
|
|
$
|
3,262
|
|
|
$
|
1,284
|
|
|
$
|
1,574
|
|
|
$
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Liquidity
and Capital Resources
Cash,
Cash Equivalents and Short-Term Investments
Our financial position included cash and cash equivalents of
$50.2 million and $19.2 million at December 31,
2009 and 2008, respectively. In addition, at December 31,
2008, we had $10.1 million of short-term investments which
consisted of certificates of deposit. These were redeemed during
2009, resulting in no short-term investments as of
December 31, 2009. We have historically funded our
operations from cash flows generated from our operating
activities, from the sale of our stock, and to a lesser extent
on a historical basis, from borrowings under our previous credit
facilities.
The reported changes in cash and cash equivalents for the years
ended December 31, 2009, 2008 and 2007 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
25,975
|
|
|
$
|
14,496
|
|
|
$
|
6,861
|
|
Net cash provided by (used in) investing activities
|
|
|
3,322
|
|
|
|
(25,135
|
)
|
|
|
(5,093
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,686
|
|
|
|
(3,668
|
)
|
|
|
25,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
30,983
|
|
|
$
|
(14,307
|
)
|
|
$
|
27,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
Our primary source of operating cash flows is collections from
our customers for radiology services we provide, and our primary
uses of cash from operating activities include compensation paid
to employee and independent contractor physicians and costs
associated with our leased facilities. During the years ended
December 31, 2009, 2008 and 2007, net cash provided by
operating activities was $26.0 million, $14.5 million
and $6.9 million, respectively.
Cash flows from operating activities during 2009 consisted of
net income of $7.9 million, adjustments for non-cash items
of $14.2 million and cash provided by working capital of
$3.9 million. Adjustments for non-cash items primarily
included a provision for doubtful accounts and sales credits,
depreciation and amortization, medical malpractice loss reserves
and stock-based compensation. Significant factors impacting cash
flows provided by working capital included an increase in
accounts receivable generated from growth in revenues, an
increase in accrued expenses for employee and professional
services compensation as a result of the growth in our business,
an increase in current taxes payable and a decrease in other
assets related to the tenant improvement allowance associated
with our new headquarters facility.
Cash flows from operating activities during 2008 consisted of
net income of $8.5 million, adjustments for non-cash items
of $9.5 million and cash used in working capital of
$3.5 million. Adjustments for non-cash items primarily
included a provision for doubtful accounts and sales credits,
depreciation and amortization, medical malpractice loss reserves
and stock-based compensation. Cash used in working capital
included an increase in accounts receivable partially offset by
an increase in accrued expenses for employee and professional
services compensation. Both increases were a result of the
growth in our business during 2008.
Cash flows from operating activities during 2007 consisted of
net income of $3.4 million, adjustments for non-cash items
of $8.8 million and cash used in working capital of
$5.3 million. Adjustments for non-cash items primarily
included depreciation and amortization, medical malpractice loss
reserves and stock-based compensation. Cash used in working
capital included an increase in accounts receivable partially
offset by an increase in accrued expenses for employee and
professional services compensation. Both increases were a result
of the growth in our business during 2007. In addition, cash
used in working capital increased as a result of current taxes
receivable related to tax credits received during 2007.
34
Cash
Flows from Investing Activities
Our primary uses of cash flows from investing activities
primarily consist of capital expenditures related to equipment
and software associated with the continued enhancement of our
information technology infrastructure. Cash flows from investing
activities during 2009 included proceeds from the maturity of
short-term investments that were purchased in 2008, offsetting
capital expenditures of $5.8 million. Cash flows from
investing activities during 2008 also included cash used for the
acquisition of Diagna. During the years ended December 31,
2009, 2008 and 2007, net cash provided by (used in) investing
activities was $3.3 million, ($25.1) million and
($5.1) million, respectively.
Cash
Flows from Financing Activities
Our primary sources of cash flows from financing activities are
excess tax benefits from stock option exercises and our primary
uses of cash from investing activities are the repurchases of
our common stock. During the years ended December 31, 2009,
2008 and 2007, net cash provided by (used in) financing
activities was $1.7 million, ($3.7) million and
$25.8 million, respectively.
Cash flows from financing activities during 2007 also included
the net proceeds from our initial public offering, which was
partially offset by the cash paid for dividends and debt
issuance costs related to the Senior Credit Facility utilized
prior to the initial public offering.
Future
Liquidity Requirements
We believe that our cash balances and the expected cash flow
from our operations will be sufficient to fund our operating
activities, working capital and capital expenditure requirements
for the foreseeable future. We expect our long-term liquidity
needs to consist primarily of working capital and capital
expenditure requirements, as well as potential investments in,
or acquisitions of, complementary businesses, services or
technology. We intend to fund these long-term liquidity needs
from cash generated from operations along with cash generated by
potential future financing transactions. However, our ability to
generate cash is subject to our performance, general economic
conditions, industry trends and other factors. Many of these
factors are beyond our control and cannot be anticipated at this
time. To the extent that existing cash and cash equivalents, and
cash from operations are insufficient to fund our future
activities, we may need to raise additional funds through public
or private equity or debt financing. Potential investments or
acquisitions could also require us to seek additional debt or
equity financing. Additional funds may not be available on terms
favorable to us or at all. If additional funds are obtained by
issuing equity securities, substantial dilution to existing
stockholders may result.
Contractual
Obligations and Commitments
The following table presents a summary of our contractual
obligations and commitments as of December 31, 2009,
related to our operating and capital lease agreements, which
expire in August 2019 and February 2013, respectively. The
professional services agreements that we entered into with our
independent contractor physicians are not included in the
following table because those contracts, subject to certain
notice provisions, may be terminated by either party.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1 - 3
|
|
|
3 - 5
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(in thousands)
|
|
|
Operating lease obligations(1)
|
|
$
|
16,745
|
|
|
$
|
1,816
|
|
|
$
|
3,292
|
|
|
$
|
3,371
|
|
|
$
|
8,266
|
|
Capital lease obligations(2)
|
|
|
132
|
|
|
|
43
|
|
|
|
85
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
16,877
|
|
|
$
|
1,859
|
|
|
$
|
3,377
|
|
|
$
|
3,375
|
|
|
$
|
8,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating lease commitments consist primarily of our principal
office space leased in Eden Prairie, Minnesota. |
|
(2) |
|
Capital lease obligations include interest. |
35
Excluded from contractual obligations and commitments are
certain amounts related to our uncertain tax positions, as the
timing and amount of any payment related to these tax positions
remain uncertain. As of December 31, 2009, we have
recognized $184,000 related to these uncertain tax positions.
Critical
Accounting Policies and Estimates
The discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance GAAP. The
preparation of these financial statements in accordance with
GAAP requires us to utilize accounting policies and make certain
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingencies as of
the date of the financial statements and the reported amounts of
revenue and expenses during a fiscal period. The SEC considers
an accounting policy to be critical if it is important to a
companys financial condition and results of operations,
and if it requires the exercise of significant judgment and the
use of estimates on the part of management in its application.
We believe the policies described in the following paragraphs to
be our critical accounting policies because they are important
to the presentation of our financial condition, results of
operations and cash flows, and require critical management
judgment and estimates about matters that are uncertain.
If actual results or events differ materially from those
contemplated by us in making these estimates, our reported
financial condition, results of operations
and/or cash
flows for future periods could be materially affected.
Principles
of Consolidation
We consolidate our financial results in accordance with
accounting guidance on consolidations and variable interest
entities, which requires a primary beneficiary to consolidate
entities determined to be variable interest entities, or VIEs.
We have determined that the Affiliated Medical Practices are
VIEs, and that vRad is the primary beneficiary of the Affiliated
Medical Practices.
The following tables show the unaudited condensed consolidating
balance sheets as of December 31, 2009 and 2008, and the
unaudited condensed consolidating statements of operations for
the years ended December 31, 2009, 2008 and 2007. The
amounts reflected in the eliminations columns of the condensed
consolidating financial statements represent affiliated party
management and professional fees and non-controlling interest.
The following tables should be read together with our
consolidated financial statements and related footnotes included
elsewhere in this report.
36
Condensed
Consolidating Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Affiliated
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
|
|
|
|
|
|
|
vRad
|
|
|
Practices
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
49,159
|
|
|
$
|
1,004
|
|
|
$
|
|
|
|
$
|
50,163
|
|
Accounts receivable, net
|
|
|
9,706
|
|
|
|
7,678
|
|
|
|
|
|
|
|
17,384
|
|
Other current assets
|
|
|
34,701
|
|
|
|
38,629
|
|
|
|
(68,811
|
)
|
|
|
4,519
|
|
Non-current assets
|
|
|
21,898
|
|
|
|
20
|
|
|
|
478
|
|
|
|
22,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
115,464
|
|
|
$
|
47,331
|
|
|
$
|
(68,333
|
)
|
|
$
|
94,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
29,673
|
|
|
$
|
54,212
|
|
|
$
|
(68,811
|
)
|
|
$
|
15,074
|
|
Non-current liabilities
|
|
|
9,576
|
|
|
|
|
|
|
|
478
|
|
|
|
10,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
39,249
|
|
|
|
54,212
|
|
|
|
(68,333
|
)
|
|
|
25,128
|
|
Stockholders equity (deficiency)
|
|
|
76,215
|
|
|
|
(6,881
|
)
|
|
|
|
|
|
|
69,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
115,464
|
|
|
$
|
47,331
|
|
|
$
|
(68,333
|
)
|
|
$
|
94,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
Affiliated
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
|
|
|
|
|
|
|
vRad
|
|
|
Practices
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
17,399
|
|
|
$
|
1,781
|
|
|
$
|
|
|
|
$
|
19,180
|
|
Short-term investment
|
|
|
10,136
|
|
|
|
|
|
|
|
|
|
|
|
10,136
|
|
Accounts receivable, net
|
|
|
8,842
|
|
|
|
8,541
|
|
|
|
|
|
|
|
17,383
|
|
Other current assets
|
|
|
20,677
|
|
|
|
8,223
|
|
|
|
(24,074
|
)
|
|
|
4,826
|
|
Non-current assets
|
|
|
19,292
|
|
|
|
16
|
|
|
|
168
|
|
|
|
19,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
76,346
|
|
|
$
|
18,561
|
|
|
$
|
(23,906
|
)
|
|
$
|
71,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
10,014
|
|
|
$
|
26,566
|
|
|
$
|
(24,074
|
)
|
|
$
|
12,506
|
|
Non-current liabilities
|
|
|
1,810
|
|
|
|
|
|
|
|
168
|
|
|
|
1,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
11,824
|
|
|
|
26,566
|
|
|
|
(23,906
|
)
|
|
|
14,484
|
|
Stockholders equity (deficiency)
|
|
|
64,522
|
|
|
|
(8,005
|
)
|
|
|
|
|
|
|
56,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
76,346
|
|
|
$
|
18,561
|
|
|
$
|
(23,906
|
)
|
|
$
|
71,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Condensed
Consolidating Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
|
|
|
|
Affiliated
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
|
|
|
|
|
|
|
vRad
|
|
|
Practices
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
|
Revenue
|
|
$
|
92,968
|
|
|
$
|
108,526
|
|
|
$
|
(80,758
|
)
|
|
$
|
120,736
|
|
Operating costs and expenses
|
|
|
81,830
|
|
|
|
106,843
|
|
|
|
(80,758
|
)
|
|
|
107,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
11,138
|
|
|
|
1,683
|
|
|
|
|
|
|
|
12,821
|
|
Other income
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
11,353
|
|
|
|
1,683
|
|
|
|
|
|
|
|
13,036
|
|
Income tax expense
|
|
|
4,583
|
|
|
|
560
|
|
|
|
|
|
|
|
5,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6,770
|
|
|
|
1,123
|
|
|
|
|
|
|
|
7,893
|
|
Non-controlling interest income
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Virtual Radiologic Corporation
|
|
$
|
6,770
|
|
|
$
|
1,123
|
|
|
$
|
22
|
|
|
$
|
7,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2008
|
|
|
|
|
|
|
Affiliated
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
|
|
|
|
|
|
|
vRad
|
|
|
Practices
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
|
Revenue
|
|
$
|
82,047
|
|
|
$
|
96,020
|
|
|
$
|
(71,500
|
)
|
|
$
|
106,567
|
|
Operating costs and expenses
|
|
|
67,362
|
|
|
|
96,918
|
|
|
|
(71,500
|
)
|
|
|
92,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
14,685
|
|
|
|
(898
|
)
|
|
|
|
|
|
|
13,787
|
|
Other income
|
|
|
599
|
|
|
|
|
|
|
|
|
|
|
|
599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
15,284
|
|
|
|
(898
|
)
|
|
|
|
|
|
|
14,386
|
|
Income tax expense
|
|
|
5,910
|
|
|
|
8
|
|
|
|
|
|
|
|
5,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
9,374
|
|
|
|
(906
|
)
|
|
|
|
|
|
|
8,468
|
|
Non-controlling interest expense
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Virtual Radiologic Corporation
|
|
$
|
9,374
|
|
|
$
|
(906
|
)
|
|
$
|
14
|
|
|
$
|
8,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
|
|
|
|
Affiliated
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
|
|
|
|
|
|
|
vRad
|
|
|
Practices
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
65,711
|
|
|
$
|
82,294
|
|
|
$
|
(61,762
|
)
|
|
$
|
86,243
|
|
Operating costs and expenses
|
|
|
54,292
|
|
|
|
84,483
|
|
|
|
(61,762
|
)
|
|
|
77,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
11,419
|
|
|
|
(2,189
|
)
|
|
|
|
|
|
|
9,230
|
|
Other expense
|
|
|
(1,929
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
9,490
|
|
|
|
(2,189
|
)
|
|
|
|
|
|
|
7,301
|
|
Income tax expense (benefit)
|
|
|
3,877
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
3,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
5,613
|
|
|
|
(2,179
|
)
|
|
|
|
|
|
|
3,434
|
|
Non-controlling interest income
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Virtual Radiologic Corporation
|
|
$
|
5,613
|
|
|
$
|
(2,179
|
)
|
|
$
|
17
|
|
|
$
|
3,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Revenue
Recognition and Accounts Receivable
We generate substantially all of our revenue from radiology
services provided to our customers on a
fee-for-service
basis. We provide these services pursuant to contracts that have
a one or two-year initial term and automatically renew for
successive one-year terms unless terminated by the customer or
by us. The amount that we charge for our radiology services
varies by customer and is based upon a number of factors,
including the hours of coverage, the number of reads, whether
the reads are preliminary reads or final reads, and the
technical and administrative services provided. These services
are billed to our customers with whom we contract directly.
Revenues are recognized when delivery of a service is completed
by our independent contractor physicians and collectability is
reasonably assured.
We also bill third-party payers such as Medicare, Medicaid,
private insurance
and/or
patients directly for final interpretations we provide under
agreements with a small number of our customers. Services for
which we submit billings directly to third-party payers are
coded for reimbursement based upon the specific services
provided, and patients are responsible for any remaining
deductibles or coinsurance. Revenue is recorded for these
services based on the anticipated reimbursement, net of any
contractual adjustments
and/or
allowance for denied claims. Revenue related to these services
is recognized when delivery of a service is completed by our
independent contractor physicians and collectability is
reasonably assured.
We maintain an allowance for doubtful accounts, which is
comprised of a general reserve and specific reserves for
potentially uncollectable amounts based on our historical bad
debts. General reserves are determined based upon a percentage
of outstanding aged receivables. The percentage we use to
establish our general reserves is based on our historical
collection experience and may fluctuate as our collections
experience changes over time. Our general reserve balances have
historically increased as our revenue and receivable amounts
have increased and we expect that trend to continue for the
foreseeable future. In determining the amount of the specific
reserve, we review the accounts receivable for customers who are
past due to identify specific customers with known disputes or
collectability issues. We make judgments about their
creditworthiness based on collections information available to
us and historical payment performance. For services which are
billed directly to patients, we maintain an allowance for
doubtful accounts for potentially uncollectable amounts based on
historical industry collection rates.
We also maintain a sales allowance to reserve for potential
credits issued to customers. The amount of the reserve is
determined based on historical credits issued.
Recently, our customers have been impacted by the economic
downturn. We are unable to fully predict what impact a continued
economic downturn will have on our customers ability to
pay us, or when general economic conditions will improve, which
may impact the amount of specific reserves in future periods.
Stock-Based
Compensation
Employee Stock-Based Compensation. We
calculate the stock-based compensation expense associated with
employee and director awards granted prior to January 1,
2006 using the intrinsic value method. For awards granted on or
after January 1, 2006, we calculate the stock-based
compensation expense relating to the issuance of stock options
based on the current fair value of the award at the date of the
grant using a Black-Scholes model. The Black-Scholes model
utilizes various assumptions that require significant judgment,
including volatility, forfeiture rates and expected option term.
Stock-based compensation costs related to the issuance of
restricted stock awards are based on the fair value of our
common stock on the date the restricted stock awards are issued.
Stock-based compensation expense is recognized over the
requisite service period. Employee and director stock-based
compensation expense is included in Sales, general and
administrative expenses in the Consolidated Statements of
Operations.
Physician Stock-Based Compensation. We
calculate the stock-based compensation expense associated with
physician stock option awards by determining the current fair
value of the award at the date of the grant and at each
subsequent reporting period thereafter using a Black-Scholes
model. The Black-Scholes model utilizes various assumptions that
require significant judgment, including volatility, forfeiture
rates and expected option term. Stock-based compensation costs
related to the issuance of restricted stock awards are based on
the fair value of our common stock on the date the restricted
stock awards are issued and at each subsequent financial
reporting period
39
thereafter. Stock-based compensation expense is recognized over
the requisite service period. Physician stock-based compensation
expense is included in Professional services expense in the
Consolidated Statements of Operations.
Medical
Malpractice Loss Reserves
We maintain professional liability insurance policies with a
third-party insurer on a claims-made basis, subject to a
self-insured retention, deductibles, exclusions and other
restrictions. Our self-insured retention under our professional
liability insurance program is insured by VPIL, our wholly-owned
captive insurance subsidiary. We record liabilities for specific
case reserves, claims made loss development reserves and claims
incurred but not reported reserves based on specific case
analysis and an actuarial valuation using industry data and our
historical loss patterns. Insurance liabilities are necessarily
based on estimates, including claim frequency and severity. An
inherent assumption in such estimates is that industry data and
our historical loss patterns can be used to predict future loss
patterns with reasonable accuracy. Because many factors can
affect historical and future loss patterns, the determination of
an appropriate reserve involves complex, subjective judgment,
and actual results may vary significantly from current
estimates. Specific claims reserves are recorded in Sales,
general and administrative expenses on the Consolidated
Statement of Operations. Loss development reserves and claims
incurred but not reported are recorded in Professional services
expense on the Consolidated Statement of Operations.
Intangible
Assets and Goodwill
We record acquired assets, including identifiable intangible
assets and liabilities, at their respective fair values,
recording goodwill as the excess of cost over the fair value of
the net assets acquired. The values assigned to identifiable
intangible assets are based on valuations that have been
prepared using methodologies and valuation techniques consistent
with those used by independent appraisers. These methodologies
and techniques utilize various assumptions that require
significant judgment, including an estimation of the future cash
flows of identifiable intangible assets and the discounting of
cash flows to their present value utilizing an appropriate
risk-adjusted rate of return, or discount rate. The discount
rate used is determined at the time of the acquisition in
accordance with accepted valuation methods.
We continually review the events and circumstances related to
our financial performance and economic environment for factors
that would provide evidence of potential impairment of our
intangible assets or that may warrant a revision to the
remaining periods of amortization. If impairment indicators are
identified with respect to our intangible assets, we then test
for impairment using undiscounted cash flows to determine fair
value. If such tests indicate impairment, we then measure the
impairment as the difference between the carrying value of the
asset and the fair value of the asset.
We test our goodwill for impairment at least annually (during
the second quarter) or more frequently if impairment indicators
are identified. We test for goodwill impairment based on our
single operating segment and reporting unit structure. The first
step of the goodwill impairment test is a comparison of the fair
value of a reporting unit to its carrying value. Quoted market
prices in active markets are used as the basis of our
measurement in estimating the fair value of our reporting unit.
The results of the annual impairment test performed as of
June 30, 2009 indicated the fair value of the reporting
unit substantially exceeded its carrying value and therefore our
goodwill was not impaired. Accordingly, we were not required to
complete the second step of the goodwill impairment test. During
the remaining quarters of 2009, we determined that no events or
changes in circumstances indicated potential impairment. There
were no accumulated impairment losses as of December 31,
2009 and 2008.
Income
Taxes
We recognize income taxes under the asset and liability method.
As such, deferred taxes are based on temporary differences, if
any, between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible
amounts. The deferred taxes are determined using the enacted tax
rates that are expected to apply when the temporary differences
reverse. Income tax expense is based on taxes payable for the
period plus the change during the period in deferred income
taxes. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
40
Developing a provision for income taxes, including the effective
tax rate and the analysis of potential tax exposure items, if
any, requires significant judgment and expertise in federal,
state and foreign income tax laws, regulations and strategies,
including the determination of deferred tax assets. Our judgment
and tax strategies are subject to audit by various taxing
authorities. While we believe we have provided adequately for
our income tax liabilities in the consolidated financial
statements, adverse determinations by these taxing authorities
could have a material adverse effect on our consolidated
financial condition, results of operations,
and/or cash
flows.
As previously noted, we consolidate our financial results in
accordance with GAAP. For income tax purposes, however, we are
not considered a consolidated entity. As a result, income
generated by the Affiliated Medical Practices, as well as any
losses they are able to fund, are excluded from vRads
calculation of income tax liability. In addition, losses
generated by the Affiliated Medical Practices that are funded by
vRad result in temporary differences between vRads book
and tax bases of accounting. These temporary differences will
reverse in future periods to the extent those losses are able to
be recovered by vRad.
vRad and VRPs 2006 federal income tax returns recently
underwent examination by the Internal Revenue Service, or IRS.
During the year ended December 31, 2009, we received notice
from the IRS that the examination of vRads 2006 federal
income tax return was closed without adjustment. In addition, we
received notice from the IRS that the examination of VRPs
2006 federal income tax return was closed without adjustment. In
conjunction with their audit of VRPs 2006 federal income
tax return, the IRS also examined the 2006 quarterly employment
tax returns of VRP. During the quarter ended December 31,
2009, we received notice from the IRS that this examination was
closed without adjustment.
Effective January 1, 2009, the owners of VRP made the
election with the IRS to have VRP taxed as a corporation. Prior
to that date, VRP was taxed as a partnership.
Recent
Accounting Pronouncements
On January 1, 2009, we adopted new accounting guidance on
fair value measurements. The new guidance defines fair value,
establishes a framework for measuring fair value under GAAP, and
expands disclosures about fair value measurements. The new
guidance was effective for certain of our financial assets and
liabilities on January 1, 2009 (see Note 3 to our
consolidated financial statements). The adoption of the guidance
did not have a material impact on our consolidated financial
position, results of operations or cash flows. For non-financial
assets and liabilities, the effective date of this guidance is
January 1, 2010. We believe that the adoption of the new
guidance applicable to non-financial assets and liabilities will
not have a material effect on our consolidated financial
position, results of operations or cash flows.
On January 1, 2009, we adopted new accounting guidance on
non-controlling interests in consolidated financial statements
which establishes accounting and reporting standards for the
non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. The new guidance clarifies that
a non-controlling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in
the consolidated entity that should be reported as a component
of equity in the consolidated financial statements.
Additionally, the new guidance requires disclosure on the face
of the consolidated income statement of the amounts of
consolidated net income attributable to the parent and to the
non-controlling interest. The presentation and disclosure
requirements of the new guidance have been applied
retrospectively for prior periods presented. See Note 2 to
our consolidated financial statements for additional information
on our principles of consolidation. The adoption of this
guidance did not have a material impact on our consolidated
financial position, results of operations or cash flows.
On January 1, 2009, we adopted new accounting guidance
amending the factors considered in developing renewal or
extension assumptions for determining the useful life of a
recognized intangible asset. The adoption of the guidance did
not have a material impact on our consolidated financial
position, results of operations or cash flows.
In June 2009, we adopted new accounting guidance which
establishes general standards of accounting for and disclosures
of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
It also requires entities to disclose the date through which
subsequent events were evaluated as well as the rationale for
why that date was selected. The guidance refers to these events
as recognized (Type I) and non-recognized (Type II);
however, it does not change existing literature regarding
recognition and disclosure requirements
41
of Type I and Type II subsequent events. The new guidance
was adopted prospectively during the quarter ended June 30,
2009, with no material impact on our consolidated financial
position, results of operations or cash flows.
In June 2009, the Financial Accounting Standards Board (FASB)
issued new accounting guidance establishing the Hierarchy of
Generally Accepted Accounting Principles, also referred to as
the Codification, which establishes two levels of GAAP;
authoritative and non-authoritative. The Codification will
become the source of authoritative, non-governmental GAAP,
except for rules and interpretive releases of the SEC, which are
additional sources of authoritative guidance for SEC
registrants. All previously existing accounting guidance is
superseded as described in the Codification and all other
non-grandfathered, non-SEC accounting literature not covered by
the Codification will become non-authoritative. The guidance was
effective for interim and annual reporting periods after
September 15, 2009, and accordingly, we adopted the new
guidance in the third quarter of 2009. As the Codification was
not intended to change or alter existing GAAP, it did not have a
material impact on our consolidated financial position, results
of operations or cash flows.
In June 2009, the FASB issued new accounting guidance which
requires an analysis to determine whether a variable interest
gives the entity a controlling financial interest in a variable
interest entity. The new guidance requires an ongoing
reassessment and eliminates the quantitative approach previously
required for determining whether an entity is the primary
beneficiary. The guidance is effective for fiscal years
beginning after November 15, 2009. Accordingly, we will
adopt the guidance in the first quarter of 2010. We believe that
the adoption of the new guidance will not have a material impact
on our consolidated financial position, results of operations or
cash flows.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosure about Market Risk
|
Foreign
Currency Exchange Risk
As of December 31, 2009, we did not have significant
exposure to foreign currency exchange rates, as substantially
all of our transactions are denominated in U.S. dollars.
VRLs functional currency is the British pound; however, as
of and for the year ended December 31, 2009, VRLs
operations were not significant and did not have a material
impact on our consolidated financial position, results of
operations or cash flows.
Interest
Rate Market Risk
Our cash is invested in commercial paper and demand deposit
accounts denominated in U.S. dollars. The carrying value of
our cash, restricted cash, short-term investments, accounts
receivable, other current assets, trade accounts payable,
accrued expenses and customer security deposits approximate fair
value because of the short period of time to their maturity.
42
|
|
ITEM 8.
|
Consolidated
Financial Statements and Supplementary Data
|
Virtual
Radiologic Corporation
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Contents
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Page
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44
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|
Consolidated Financial Statements
|
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|
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|
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|
47
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48
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|
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49
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50
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51
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|
The supplementary financial data required by this Item 8 is
included in Item 7 under Quarterly Results of
Operations.
43
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Virtual Radiologic
Corporation
We have audited the accompanying consolidated balance sheet of
Virtual Radiologic Corporation and subsidiaries (the
Company) as of December 31, 2009, and the
related consolidated statements of operations,
stockholders equity, and cash flow for the year ended
December 31, 2009. We also have audited the Companys
internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting,
included in Managements Report on Internal Control Over
Financial Reporting appearing under Item 9A. Our
responsibility is to express an opinion on these financial
statements and an opinion on the Companys internal control
over financial reporting based on our audit. The consolidated
financial statements of the Company for the years ended
December 31, 2008 and 2007, before the effects of the
adjustments to retrospectively apply the change in accounting
discussed in Note 2 to the consolidated financial
statements, were audited by other auditors whose report, dated
February 19, 2009, expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
We have also audited the adjustments to the 2007 and 2008
consolidated financial statements to retrospectively apply the
change in presentation and disclosure requirements for the
adoption of accounting guidance related to non-controlling
interests in 2009, as discussed in Note 2 to the
consolidated financial statements. Our procedures included
(1) obtaining the Companys underlying accounting
analysis comparing the noncontrolling interests presented to
such analysis, (2) comparing previously reported amounts to
the previously issued financial statements for such year, and
(3) testing the mathematical accuracy of the presentation
of the noncontrolling interests. In our
44
opinion, such retrospective adjustments are appropriate and have
been properly applied. However, we were not engaged to audit,
review, or apply any procedures to the 2007 and 2008
consolidated financial statements of the Company other than with
respect to the retrospective adjustments and, accordingly, we do
not express an opinion or any other form of assurance on the
2007 and 2008 consolidated financial statements taken as a whole.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Virtual Radiologic Corporation and subsidiaries as
of December 31, 2009, and the results of their operations
and their cash flows for the year ended December 31, 2009,
in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on
the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 18, 2010
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Virtual Radiologic
Corporation
In our opinion, the consolidated balance sheet as of
December 31, 2008 and the related consolidated statements
of operations, of changes in stockholders (deficiency)
equity and of cash flows for each of the two years in the period
ended December 31, 2008, before the effects of the
adjustments to retrospectively apply the accounting guidance
related to non-controlling interests in the consolidated
financial statements described in Note 2, present fairly,
in all material respects, the financial position of Virtual
Radiologic Corporation and its subsidiaries (the
Company) at December 31, 2008, and the results
of its operations and its cash flows for each of the two years
in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America (the 2008 financial statements before the effects of the
adjustments discussed in Note 2 are not presented herein).
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits, before the effects of the adjustments
described above, of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
We were not engaged to audit, review or apply any procedures to
the adjustments to retrospectively apply the accounting guidance
related to non-controlling interests in the consolidated
financial statements described in Note 2 and accordingly,
we do not express an opinion or any other form of assurance
about whether such adjustments are appropriate and have been
properly applied. Those adjustments were audited by other
auditors.
Chicago, Illinois
February 19, 2009
46
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands, except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
50,163
|
|
|
$
|
19,180
|
|
Restricted cash
|
|
|
1,751
|
|
|
|
700
|
|
Short-term investments
|
|
|
|
|
|
|
10,136
|
|
Accounts receivable, net
|
|
|
17,384
|
|
|
|
17,383
|
|
Prepaid expenses and other current assets
|
|
|
2,768
|
|
|
|
4,126
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
72,066
|
|
|
|
51,525
|
|
Property, plant and equipment, net
|
|
|
13,489
|
|
|
|
11,692
|
|
Intangible assets, net
|
|
|
3,952
|
|
|
|
5,073
|
|
Goodwill
|
|
|
858
|
|
|
|
858
|
|
Medical malpractice excess loss reserves receivable
|
|
|
1,008
|
|
|
|
1,288
|
|
Deferred tax asset
|
|
|
3,084
|
|
|
|
184
|
|
Other assets
|
|
|
5
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
94,462
|
|
|
$
|
71,001
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued professional services compensation expense
|
|
$
|
5,719
|
|
|
$
|
5,690
|
|
Accrued sales, general and administrative compensation expense
|
|
|
4,087
|
|
|
|
1,383
|
|
Current deferred tax liability
|
|
|
1,089
|
|
|
|
1,103
|
|
Current taxes payable
|
|
|
1,635
|
|
|
|
|
|
Other accrued expenses
|
|
|
1,299
|
|
|
|
1,848
|
|
Medical malpractice loss reserves, current
|
|
|
468
|
|
|
|
1,419
|
|
Accounts payable and other current liabilities
|
|
|
777
|
|
|
|
1,063
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
15,074
|
|
|
|
12,506
|
|
Deferred tenant lease allowance
|
|
|
2,491
|
|
|
|
|
|
Medical malpractice loss reserves
|
|
|
5,101
|
|
|
|
|
|
Medical malpractice excess loss reserves
|
|
|
1,008
|
|
|
|
1,288
|
|
Other liabilities
|
|
|
1,454
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
25,128
|
|
|
|
14,484
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Virtual Radiologic Corporation stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value; 100,000,000 shares
authorized at December 31, 2009 and 2008; 15,928,661 and
15,849,398 shares issued and outstanding at
December 31, 2009 and 2008, respectively
|
|
|
17
|
|
|
|
17
|
|
Additional paid-in capital
|
|
|
102,118
|
|
|
|
95,881
|
|
Treasury stock at cost,1,095,490 and 944,760 shares at
December 31, 2009 and 2008, respectively
|
|
|
(9,306
|
)
|
|
|
(8,000
|
)
|
Accumulated deficit
|
|
|
(23,482
|
)
|
|
|
(31,397
|
)
|
Accumulated other comprehensive loss
|
|
|
(13
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Total Virtual Radiologic Corporation stockholders equity
|
|
|
69,334
|
|
|
|
56,495
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest (See Note 2)
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
69,334
|
|
|
|
56,517
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
94,462
|
|
|
$
|
71,001
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands, except per share data)
|
|
|
Revenue
|
|
$
|
120,736
|
|
|
$
|
106,567
|
|
|
$
|
86,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
|
58,735
|
|
|
|
49,363
|
|
|
|
43,607
|
|
Sales, general and administrative
|
|
|
42,317
|
|
|
|
38,717
|
|
|
|
30,918
|
|
Depreciation and amortization
|
|
|
6,863
|
|
|
|
4,700
|
|
|
|
2,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
107,915
|
|
|
|
92,780
|
|
|
|
77,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
12,821
|
|
|
|
13,787
|
|
|
|
9,230
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
220
|
|
|
|
599
|
|
|
|
451
|
|
Interest expense
|
|
|
(5
|
)
|
|
|
|
|
|
|
(2,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
215
|
|
|
|
599
|
|
|
|
(1,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
13,036
|
|
|
|
14,386
|
|
|
|
7,301
|
|
Income tax expense
|
|
|
5,143
|
|
|
|
5,918
|
|
|
|
3,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7,893
|
|
|
|
8,468
|
|
|
|
3,434
|
|
Non-controlling interest (income) expense
|
|
|
(22
|
)
|
|
|
14
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Virtual Radiologic Corporation
|
|
|
7,915
|
|
|
|
8,454
|
|
|
|
3,451
|
|
Series A cumulative redeemable convertible preferred stock
accretion
|
|
|
|
|
|
|
|
|
|
|
(10,127
|
)
|
Cash dividends paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred stock
|
|
|
|
|
|
|
|
|
|
|
(13,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
7,915
|
|
|
$
|
8,454
|
|
|
$
|
(20,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
|
$
|
0.51
|
|
|
$
|
(2.31
|
)
|
Diluted
|
|
$
|
0.48
|
|
|
$
|
0.50
|
|
|
$
|
(2.31
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,872
|
|
|
|
16,500
|
|
|
|
8,762
|
|
Diluted
|
|
|
16,283
|
|
|
|
16,976
|
|
|
|
8,762
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Stockholders
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Non-controlling
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Loss
|
|
|
Interest
|
|
|
(Deficiency)
|
|
|
|
(in thousands)
|
|
|
Balance at December 31, 2006
|
|
|
6,719
|
|
|
$
|
7
|
|
|
$
|
(31,049
|
)
|
|
$
|
|
|
|
$
|
(3,393
|
)
|
|
$
|
|
|
|
$
|
25
|
|
|
$
|
(34,410
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,451
|
|
|
|
|
|
|
|
|
|
|
|
3,451
|
|
Stock-based compensation for independent contractor physicians
|
|
|
|
|
|
|
|
|
|
|
3,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,687
|
|
Stock-based compensation for employees and directors
|
|
|
|
|
|
|
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
686
|
|
Stock option exercises
|
|
|
2,045
|
|
|
|
2
|
|
|
|
1,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,514
|
|
Excess tax benefits from exercises of stock options
|
|
|
|
|
|
|
|
|
|
|
4,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,780
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
(17
|
)
|
Stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
(4,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,211
|
)
|
Repurchase of common stock
|
|
|
(910
|
)
|
|
|
(1
|
)
|
|
|
(10,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,010
|
)
|
Reissuance of common stock
|
|
|
910
|
|
|
|
1
|
|
|
|
10,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,010
|
|
Series A cumulative redeemable convertible preferred stock
accretion
|
|
|
|
|
|
|
|
|
|
|
(10,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,127
|
)
|
Warrant exercise
|
|
|
72
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Payment of dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,909
|
)
|
|
|
|
|
|
|
|
|
|
|
(39,909
|
)
|
Common stock issued in initial public offering
|
|
|
4,000
|
|
|
|
4
|
|
|
|
63,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,240
|
|
Series A Preferred Stock conversion to common stock
|
|
|
3,627
|
|
|
|
3
|
|
|
|
61,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
16,463
|
|
|
$
|
16
|
|
|
$
|
90,165
|
|
|
$
|
|
|
|
$
|
(39,851
|
)
|
|
$
|
|
|
|
$
|
8
|
|
|
$
|
50,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,454
|
|
|
|
|
|
|
|
|
|
|
|
8,454
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,448
|
|
Stock-based compensation for independent contractor physicians
|
|
|
|
|
|
|
|
|
|
|
(479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(479
|
)
|
Stock-based compensation for employees and directors
|
|
|
|
|
|
|
|
|
|
|
1,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,544
|
|
Stock option exercises
|
|
|
331
|
|
|
|
1
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314
|
|
Excess tax benefits from exercises of stock options
|
|
|
|
|
|
|
|
|
|
|
4,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,396
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
Stock 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
|
|
|
$
|
56,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,915
|
|
|
|
|
|
|
|
|
|
|
|
7,915
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,908
|
|
Stock-based compensation for independent contractor physicians
|
|
|
|
|
|
|
|
|
|
|
787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
787
|
|
Stock-based compensation for employees and directors
|
|
|
|
|
|
|
|
|
|
|
2,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,420
|
|
Stock option exercises
|
|
|
230
|
|
|
|
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219
|
|
Excess tax benefits from exercises of stock options
|
|
|
|
|
|
|
|
|
|
|
2,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,811
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
(22
|
)
|
Repurchase of common stock
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
15,929
|
|
|
$
|
17
|
|
|
$
|
102,118
|
|
|
$
|
(9,306
|
)
|
|
$
|
(23,482
|
)
|
|
$
|
(13
|
)
|
|
$
|
|
|
|
$
|
69,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,893
|
|
|
$
|
8,468
|
|
|
$
|
3,434
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts and sales allowances
|
|
|
1,976
|
|
|
|
879
|
|
|
|
298
|
|
Depreciation and amortization
|
|
|
6,863
|
|
|
|
4,700
|
|
|
|
2,488
|
|
Lease abandonment liability
|
|
|
194
|
|
|
|
|
|
|
|
|
|
Medical malpractice loss reserves
|
|
|
4,647
|
|
|
|
1,394
|
|
|
|
(75
|
)
|
Amortization of debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
1,428
|
|
Loss on disposal and impairment of property, plant and equipment
|
|
|
202
|
|
|
|
774
|
|
|
|
114
|
|
Stock-based compensation for independent contractor physicians
|
|
|
787
|
|
|
|
(479
|
)
|
|
|
3,687
|
|
Stock-based compensation for employees and directors
|
|
|
2,420
|
|
|
|
1,544
|
|
|
|
686
|
|
Deferred income taxes
|
|
|
(2,914
|
)
|
|
|
659
|
|
|
|
197
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,953
|
)
|
|
|
(5,212
|
)
|
|
|
(3,748
|
)
|
Prepaid and other assets
|
|
|
1,424
|
|
|
|
520
|
|
|
|
(2,523
|
)
|
Accrued expenses
|
|
|
2,590
|
|
|
|
1,329
|
|
|
|
1,390
|
|
Current taxes payable
|
|
|
1,635
|
|
|
|
|
|
|
|
(608
|
)
|
Accounts payable and other liabilities
|
|
|
211
|
|
|
|
(80
|
)
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
25,975
|
|
|
|
14,496
|
|
|
|
6,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(5,775
|
)
|
|
|
(8,429
|
)
|
|
|
(5,051
|
)
|
Cash paid for acquisition, net of cash acquired
|
|
|
|
|
|
|
(6,447
|
)
|
|
|
|
|
Purchase of short-term investment
|
|
|
|
|
|
|
(10,136
|
)
|
|
|
|
|
Proceeds from maturity of short-term investments
|
|
|
10,136
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(1,051
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
12
|
|
|
|
(123
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
3,322
|
|
|
|
(25,135
|
)
|
|
|
(5,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on capital leases
|
|
|
(28
|
)
|
|
|
|
|
|
|
(21
|
)
|
Payment of offering costs
|
|
|
|
|
|
|
(306
|
)
|
|
|
(2,139
|
)
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
63,240
|
|
Proceeds from stock option exercises
|
|
|
209
|
|
|
|
242
|
|
|
|
1,238
|
|
Repurchases of common stock
|
|
|
(1,306
|
)
|
|
|
(8,000
|
)
|
|
|
(10,010
|
)
|
Reissuance of common stock
|
|
|
|
|
|
|
|
|
|
|
10,010
|
|
Excess tax benefits from exercises of stock options
|
|
|
2,811
|
|
|
|
4,396
|
|
|
|
4,780
|
|
Proceeds from the issuance of debt
|
|
|
|
|
|
|
|
|
|
|
41,000
|
|
Payment of debt
|
|
|
|
|
|
|
|
|
|
|
(41,000
|
)
|
Payment of debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(1,428
|
)
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
(39,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,686
|
|
|
|
(3,668
|
)
|
|
|
25,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
30,983
|
|
|
|
(14,307
|
)
|
|
|
27,529
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
19,180
|
|
|
|
33,487
|
|
|
|
5,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
50,163
|
|
|
$
|
19,180
|
|
|
$
|
33,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
940
|
|
Cash paid (received) for income taxes, net
|
|
|
2,656
|
|
|
|
(900
|
)
|
|
|
1,298
|
|
Significant non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical malpractice excess receivable
|
|
|
1,008
|
|
|
|
1,288
|
|
|
|
|
|
Medical malpractice excess liability
|
|
|
1,008
|
|
|
|
1,288
|
|
|
|
|
|
Stock issuance costs reclassified to additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
4,211
|
|
Series A preferred stock accretion
|
|
|
|
|
|
|
|
|
|
|
10,127
|
|
Series A preferred stock conversion to common stock
|
|
|
|
|
|
|
|
|
|
|
61,653
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
Virtual Radiologic Corporation, or vRad, is a national radiology
practice working in partnership with radiologists and hospitals
to optimize radiologys pivotal role in the delivery of
patient care. Enabled by next-generation technology, vRads
collaborative partnerships enhance productivity and deliver
demonstrated quality outcomes that help lower the overall cost
of care. vRads 143 affiliated radiologists serve over
1,170 facilities (approximately 19% of U.S. hospitals),
reading more than 2.6 million interpretations annually with
unparalleled subspecialist expertise and expedited time to
diagnosis. Continually recognized for high-quality reports and
industry-leading service, vRad is ranked #1 in the
teleradiology services category by independent healthcare
research firm KLAS and has received the Joint Commission Gold
Seal of Approval each year since 2004.
Virtual Radiologic Professionals, LLC (VRP) is the
Companys affiliated physician-owned medical practice that
contracts with independent contractor physicians for the
provision of their services to fulfill customer contracts held
by vRad or the Professional Corporations, consisting
of Virtual Radiologic Professionals of California, P.A., Virtual
Radiologic Professionals of Illinois, S.C., Virtual Radiologic
Professionals of Michigan, P.C., Virtual Radiologic
Professionals of Minnesota, P.A., Virtual Radiologic
Professionals of New York, P.A. and Virtual Radiologic
Professionals of Texas, P.A. As of December 31, 2009, each
of these entities was a professional corporation with one
stockholder, who was also an officer and a director of vRad and
the sole equity owner of VRP. The Professional Corporations hold
customer contracts in certain states to facilitate compliance
with corporate practice of medicine laws in such states. VRP and
the Professional Corporations are collectively referred to as
the Affiliated Medical Practices.
vRad also has two wholly-owned and consolidated subsidiaries,
Virtual Radiologic Limited, or VRL, and vRad Professional
Insurance Ltd., or VPIL. VRL was formed under the laws of
England and Wales and is located in London, England. VRL was
formed to facilitate the international expansion of the
Companys business. VPIL was formed as an exempted company
in the Cayman Islands to insure the Companys self-insured
retention under its medical malpractice insurance policy.
The term Company as used in this report refers to
vRad, its Affiliated Medical Practices, VRL and VPIL.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation and Basis of Presentation
The Company consolidates its financial results in accordance
with accounting guidance on consolidations and variable interest
entities, which requires a primary beneficiary to consolidate
entities determined to be variable interest entities, or VIEs.
The Affiliated Medical Practices were created as the
Companys business expanded, for the purpose of
facilitating compliance with corporate practice of medicine laws
in various states. The management of vRad was involved
significantly in the design and creation of the Affiliated
Medical Practices and, with the exception of rendering medical
judgments, controls their continuing operations through rights
contained in management service agreements, including the
unilateral right to appoint a successor owner of the Affiliated
Medical Practices, to reset the management fee on an annual
basis and to restrict the distribution of any accumulated
earnings to the equity owners of the Affiliated Medical
Practices. The management service agreements that exist between
the entities are perpetual agreements that are not cancellable
by the owner of the Affiliated Medical Practices other than for
gross negligence, fraud or other illegal acts by vRad, and they
were not intended to cause a party other than vRad to bear any
economic risk or reward. The management fees contained in these
agreements are generally evaluated on an annual basis, for
purposes of resetting vRads financial interests in the
Affiliated Medical Practices, and to ensure that no party other
than vRad bears any economic risk or reward. As a result, the
Company has determined that the Affiliated Medical Practices are
VIEs and that vRad is the primary beneficiary of such VIEs.
Although vRad holds no equity ownership in the VIEs, as a result
of the rights described above, the Company has
51
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determined that vRad has a controlling financial interest in the
Affiliated Medical Practices and that vRad should not allocate
any of the residual net earnings or losses of these entities to
the legal equity owners.
Prior to January 1, 2009, the Company allocated any
accumulated earnings of the Affiliated Medical Practices to the
equity owners of the Affiliated Medical Practices through
non-controlling interest in the consolidated financial
statements. However, in accordance with accounting guidance for
non-controlling interests in consolidated financial statements,
the Company has determined that vRad has a controlling financial
interest in the VIEs which requires full consolidation of the
Affiliated Medical Practices. As a result, during the year ended
December 31, 2009, the Company recorded an adjustment of
approximately $22,000 to eliminate the previously recognized
non-controlling interest in the VIEs. Due to the immaterial
amount of previously recognized non-controlling interest, prior
periods have not been adjusted.
The effect of the VIEs consolidation on the Companys
Consolidated Balance Sheet at December 31, 2009 was an
increase in the Companys assets and liabilities of
approximately $8.7 million and $6.0 million,
respectively. At December 31, 2008, as a result of
consolidating the VIEs, the Companys assets and
liabilities increased by approximately $11.1 million and
$6.1 million, respectively. For the years ended
December 31, 2009, 2008 and 2007, the revenue of the VIEs
represented approximately 45%, or $54.8 million, 46%, or
$48.5 million and 46%, or $39.8 million of the
consolidated revenue of the Company, respectively.
As of and for the years ended December 31, 2009, 2008 and
2007, the financial statements of vRad have been presented on a
consolidated basis to include its variable interests in the
Affiliated Medical Practices, as well as VRL and VPIL,
vRads wholly-owned subsidiaries.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles, or
GAAP, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements. Estimates also affect the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ materially from those
estimates.
Cash
and Cash Equivalents
Cash and cash equivalents are highly liquid investments with
original maturities of three months or less at the time of
acquisition.
Property,
Plant and Equipment
Property, plant and equipment are carried at cost, less
accumulated depreciation and amortization. Depreciation and
amortization of property and equipment are computed using the
straight-line method over the estimated useful life of the
asset. Useful lives range from three to 10 years. Leasehold
improvements are amortized over the shorter of the asset life or
the lease term. Expenditures for maintenance, repairs, and minor
renewals and betterments that do not improve or extend the life
of the respective assets are expensed as incurred. All other
expenditures for renewals and betterments are capitalized and
depreciated over the estimated useful life of the asset. The
assets and related depreciation accounts are adjusted for
property retirements and disposals with any resulting gain or
loss included in current period operations.
Software
Development Costs
The Company capitalizes internally-developed software costs in
accordance with accounting guidance on developed software. It
requires that costs incurred during the application development
stage be capitalized and amortized over the useful life once the
assets are placed in service to be used internally. These costs
primarily include compensation costs for employees who are
involved in the application development stage and direct costs
of
52
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
materials utilized during application development. Generally,
the Company amortizes these costs over three years unless a
shorter life is deemed appropriate based on the remaining useful
life of the asset. When the Company enters the development stage
for a new application, management reviews the remaining useful
life of previously developed applications to determine if an
adjustment to the amortization period is warranted. The Company
has capitalized total costs of approximately $3.3 million
and $1.6 million as of December 31, 2009 and 2008,
respectively, and has recognized amortization of capitalized
software development costs of approximately $680,000, $350,000
and $92,000 for the years ended December 31, 2009, 2008 and
2007, respectively.
Intangible
Assets and Other Long-Lived Assets
Intangible assets include customer relationships, non-compete
agreements and patents. Patent application costs are being
amortized on a straight-line basis over 15 years, which
approximates their respective economic lives. The Company
believes the straight-line method of amortization for patent
application costs allocates the cost to earnings in proportion
to the amount of economic benefit. Non-compete agreements and
customer relationships represent assets acquired in the purchase
of Diagna. Non-compete agreements are being amortized on a
straight-line basis over their term of two years, and customer
relationships are amortized over ten years on an accelerated
basis utilizing the annual discounted economic cash flows
associated with the acquired customer relationships.
The Company continually reviews events and changes in
circumstances related to its financial performance and economic
environment for factors that would provide evidence of potential
impairment or that may warrant a revision to the remaining
periods of amortization of its intangible assets. If impairment
indicators are identified, the Company would test for impairment
using undiscounted cash flows as the basis for measuring the
fair value of its intangible assets. During the year ended
December 31, 2009, the Company determined that no events or
changes in circumstances indicated potential impairment.
Goodwill
The Company records acquired assets, including identifiable
intangible assets and liabilities, at their respective fair
values, recording goodwill as the excess of cost over the fair
value of the net assets acquired. Goodwill is not amortized, but
instead tested for impairment at least annually (during the
second quarter), or more frequently if events or changes in
circumstances indicate potential impairment. The tests are based
on the Companys single operating segment and reporting
unit structure. The first step of the goodwill impairment test
is a comparison of the fair value of a reporting unit to its
carrying value. Quoted market prices in active markets are used
as the basis of the Companys measurement in estimating the
fair value of its single reporting unit. The results of the
annual impairment test performed as of June 30, 2009
indicated the fair value of the reporting unit substantially
exceeded its carrying value, and therefore, goodwill was not
impaired. Accordingly, the Company was not required to complete
the second step of the goodwill impairment test. During the
remaining quarters of 2009, the Company determined that no
events or changes in circumstances indicated potential
impairment. There were no accumulated impairment losses as of
December 31, 2009 or 2008.
Medical
Malpractice Loss Reserves
The Company maintains professional liability insurance policies
with third-party insurers on a claims-made basis, subject to
self-insured retention, deductibles, exclusions and other
restrictions. The Companys self-insured retention under
its professional liability insurance program is insured through
a wholly-owned captive insurance subsidiary. The Company records
liabilities for specific case reserves, claims made loss
development reserves and claims incurred but not reported based
on specific case analysis and an actuarial valuation using
industry data and our historical loss patterns. The actuarial
analysis utilizes industry loss data as a result of the
Companys limited loss history. Specific claims reserves
are recorded in Sales, general and administrative expenses on
the Consolidated Statement of Operations. Loss development
reserves and claims incurred but not reported, or IBNR, are
recorded in Professional services expense on the Consolidated
Statement of Operations.
53
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Insurance liabilities are necessarily based on estimates,
including claim frequency and severity. An inherent assumption
in such estimates is that industry data and the Companys
historical loss patterns can be used to predict future patterns
with reasonable accuracy. Because many factors can affect
historical and future loss patterns, the determination of an
appropriate reserve involves complex, subjective judgment, and
actual results may vary significantly from estimates.
Liabilities for claims incurred but not reported are not
discounted.
Medical
Malpractice Excess Loss Receivables and
Liabilities
In accordance with accounting guidance on offsetting amounts
related to certain contracts, the Company records gross
receivables and liabilities for medical malpractice loss
reserves in excess of the Companys deductible or
self-insured retention for reported claims other than unreserved
claims and claims with agreed upon losses. The Company recorded
$1.0 million and $1.3 million in gross receivables and
liabilities as medical malpractice excess loss receivables and
reserves on its Consolidated Balance Sheets as of
December 31, 2009 and 2008, respectively.
Revenue
Recognition and Accounts Receivable
The Company generates substantially all of its revenue from
radiology services it provides to its customers on a
fee-for-service
basis. The Company provides these services pursuant to contracts
that have a one or two-year initial term and automatically renew
for successive one-year terms unless terminated by the customer
or by the Company. The amount that the Company charges for its
radiology services varies by customer and is based upon a number
of factors, including the hours of coverage, the number of
reads, whether the reads are preliminary reads or final reads,
and the technical and administrative services provided. These
services are billed to the Companys customers with whom it
contracts directly. Revenues are recognized when delivery of a
service is completed by the Companys independent
contractor physicians and collectability is reasonably assured.
The Company also bills third-party payers such as Medicare,
Medicaid, private insurance
and/or
patients directly for final interpretations provided under
agreements with a small number of its customers. Services for
which the Company submits billings directly to third-party
payers are coded for reimbursement based upon the specific
services provided, and patients are responsible for any
remaining deductibles or coinsurance. Revenue is recorded for
these services based on the anticipated reimbursement, net of
any contractual adjustments
and/or
allowance for denied claims. Revenue related to these services
is recognized when delivery of a service is completed by the
Companys independent contractor physicians and
collectability is reasonably assured.
The Company maintains an allowance for doubtful accounts, which
is comprised of a general reserve and specific reserves for
potentially uncollectable amounts based on historical bad debts.
General reserves are determined based upon a percentage of
outstanding aged receivables. The percentage used to establish
general reserves is based on historical collection experience
and may fluctuate as collections experience changes over time.
The general reserve balances have historically increased as
revenue and receivable amounts have increased and the Company
expects that trend to continue for the foreseeable future. In
determining the amount of the specific reserve, the Company
reviews the accounts receivable for customers who are past due
to identify specific customers with known disputes or
collectability issues. The Company makes judgments about their
creditworthiness based on collections information available and
historical payment performance. For services which are billed
directly to patients, the Company maintains a general allowance
for doubtful accounts for potentially uncollectable amounts
based on historical industry collection rates.
The Company also maintains a sales allowance to reserve for
potential credits issued to customers. The amount of the reserve
is determined based on historical credits issued.
Recently, the Companys customers have been impacted by the
economic downturn. The Company is unable to fully predict what
impact a continued economic downturn will have on
customers ability to pay, or when general economic
conditions will improve, which may impact the amount of specific
reserves in future periods.
54
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
The Company recognizes income taxes under the asset and
liability method. As such, deferred taxes are based on the
temporary differences, if any, between the financial statement
and tax bases of assets and liabilities that will result in
future taxable or deductible amounts. The deferred taxes are
determined using the enacted tax rates that are expected to
apply when the temporary differences reverse. Income tax expense
is the tax payable for the period plus the change during the
period in deferred income taxes. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Developing a provision for income taxes, including the effective
tax rate and the analysis of potential tax exposure items, if
any, requires significant judgment and expertise in federal,
state and foreign income tax laws, regulations and strategies,
including the determination of deferred tax assets. The
Companys judgment and tax strategies are subject to audit
by various taxing authorities. While the Company believes it has
provided adequately for its income tax liabilities in the
consolidated financial statements, adverse determinations by
these taxing authorities could have a material adverse effect on
the Companys consolidated financial condition, results of
operations,
and/or cash
flows.
As previously noted, the Company consolidates its financial
results in accordance with GAAP. For income tax purposes,
however, the Company is not considered a consolidated entity. As
a result, each entity is a single tax entity and income or
losses of the individual entities cannot be utilized to offset
income or losses of the other entities.
vRad and VRPs 2006 federal income tax returns recently
underwent examination by the Internal Revenue Service, or IRS.
During the year ended December 31, 2009, vRad and VRP
received notice from the IRS that the examinations of their
federal income tax returns were closed without adjustment. In
conjunction with their audit of VRPs 2006 federal income
tax return, the IRS also examined the 2006 quarterly employment
tax returns of VRP. During the quarter ended December 31,
2009, VRP received notice from the IRS that this examination was
closed without adjustment.
Effective January 1, 2009, the owners of VRP made the
election with the IRS to have VRP taxed as a corporation. Prior
to that date, VRP was taxed as a partnership.
Professional
Services Expense
Professional services expense consists primarily of the fees the
Company pays to its independent contractor physicians, non-cash
stock-based compensation expense related to those independent
contractor physicians, medical malpractice loss development
reserves and incurred but not reported claims reserves. The
Company also includes premiums related to medical liability
insurance in professional services expense, which are expensed
over the life of the insurance policy on a straight-line basis.
The Companys physicians are independent contractors and
they are compensated using a formula that includes a base level
of compensation plus additional amounts for the number and type
of reads performed. The Company recognizes physician cash
compensation expense in the month in which the independent
contractor physicians perform the reads for the customers. The
Company recorded medical malpractice loss development reserves
and incurred but not recorded claims reserves of
$2.6 million and $2.1 million, respectively, during
the year ended December 31, 2009, and $573,000 and
$424,000, respectively, during the year ended December 31,
2008.
Sales,
General and Administrative Expenses
Sales, general and administrative expenses include employee
compensation expense, sales and marketing expense, information
technology expense, the costs associated with the licensing and
credentialing of the Companys independent contractor
physicians and the costs associated with maintaining the
Companys facilities. The Company recognizes these expenses
when incurred.
55
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising expense for the Company, which is included in sales,
general and administrative expenses and expensed over the
duration of the advertisement, was $30,000, $155,000, and
$244,000 for the years ended December 31, 2009, 2008 and
2007, respectively.
Stock-Based
Compensation
Stock-based compensation costs associated with employee and
director awards granted after January 1, 2006 are estimated
using the fair value of the award, as calculated using a
Black-Scholes option-pricing model, and are recognized as
expense over the requisite service period. The Black-Scholes
model utilizes various assumptions that require significant
judgment, including volatility, forfeiture rates and expected
option term. Stock-based compensation costs related to the
issuance of restricted stock awards are based on the fair value
of the Companys common stock on the date the restricted
stock awards are issued. For the years ended December 31,
2009, 2008 and 2007, stock-based compensation expense related to
employee and director awards was $2.4 million,
$1.5 million and $686,000, respectively. This expense is
included in Sales, general and administrative expenses on the
Consolidated Statements of Operations.
For all options issued prior to January 1, 2006, the
Company calculates the stock-based compensation expense using
the intrinsic value method. The table which follows provides the
pro-forma disclosures required in accordance with the disclosure
provisions, as if the fair value method had been applied
in the periods presented. The Company calculated the fair value
using a Black-Scholes model assuming the minimum value method
had been used. If the Company had adopted the fair value based
accounting method to account for the cost of stock option grants
occurring prior to January 1, 2006, and charged
compensation cost against income over the vesting period based
on the fair value of options at the date of grant, the
Companys net income in the periods presented would have
been decreased as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands, except per share data)
|
|
|
Net income attributable to Virtual Radiologic Corporation, as
reported
|
|
$
|
7,915
|
|
|
$
|
8,454
|
|
|
$
|
3,451
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employee stock-based compensation expense determined under
the fair value-based method, net of related tax effects
|
|
|
14
|
|
|
|
26
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
7,901
|
|
|
$
|
8,428
|
|
|
$
|
3,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.50
|
|
|
$
|
0.51
|
|
|
$
|
(2.31
|
)
|
Pro forma
|
|
|
0.50
|
|
|
|
0.51
|
|
|
|
(2.31
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.48
|
|
|
$
|
0.50
|
|
|
$
|
(2.31
|
)
|
Pro forma
|
|
|
0.49
|
|
|
|
0.50
|
|
|
|
(2.31
|
)
|
The Company calculates stock-based compensation expense
associated with the issuance of stock options to independent
contractor physicians by determining the fair value of the award
using a Black-Scholes model at the date of grant and at the end
of each subsequent financial reporting period thereafter until
vested. Stock-based compensation costs related to the issuance
of restricted stock awards are based on the fair value of the
Companys common stock on the date the restricted stock
awards are issued and at each subsequent financial reporting
period thereafter until vested. Total non-cash stock-based
compensation related to independent contractor physicians, which
is included in Professional services expense, was expense of
approximately $787,000 for the year ended December 31,
2009, income of approximately $479,000 for the year ended
December 31, 2008, and expense of $3.7 million for the
year ended December 31, 2007, respectively.
56
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounting
for Series A Preferred Stock
In June 2005, the Company began recording the current estimated
fair value of its Series A Cumulative Redeemable
Convertible Preferred Stock, or Series A Preferred Stock on
a quarterly basis using the fair market value of that stock as
determined by vRads management and Board of Directors. In
accordance with accounting guidance, the Company recorded
changes in the current fair value of its Series A Preferred
Stock in the Consolidated Statements of Changes in
Stockholders Equity (deficiency) as accretion of
Series A Cumulative Redeemable Convertible Preferred Stock
and as Additional paid-in capital, and in the Consolidated
Statements of Operations as Series A Cumulative Redeemable
Convertible Preferred Stock accretion.
Upon completion of vRads initial public offering in
November 2007, all outstanding shares of Series A Preferred
Stock were automatically converted into common stock and the
rights of the holders of the Series A Preferred Stock to
exercise redemption rights were terminated. As of
December 31, 2009, 2008 and 2007, there were no shares of
Series A Preferred Stock outstanding.
Concentration
of Credit Risk
Financial instruments that potentially expose the Company to
concentration of credit risk consist primarily of cash and cash
equivalents, short-term investments and accounts receivable. The
Company maintains its cash and cash equivalents with high
quality credit institutions. The balances, at times, may exceed
federally insured limits.
Credit risk related to accounts receivable is largely mitigated
by the Companys credit evaluation process and the
reasonably short collection terms of its receivables. Management
makes judgments as to its ability to collect outstanding
receivables based upon the Companys historical collections
experience, the current aging of past due accounts, the
financial condition of its customers and the general economic
conditions of its marketplace, and has established an allowance
for doubtful accounts based on that judgment.
Fair
Value of Financial Instruments
The Companys financial instruments consist of cash, cash
equivalents, short-term investments and short-term trade
receivables and payables for which current carrying amounts
approximate fair market value.
Recent
Accounting Pronouncements
On January 1, 2009, the Company adopted new accounting
guidance on fair value measurements. The new guidance defines
fair value, establishes a framework for measuring fair value
under GAAP, and expands disclosures about fair value
measurements. The new guidance was effective for certain
financial assets and liabilities of the Company on
January 1, 2009 (see Note 3). The adoption of the
guidance did not have a material impact on the Companys
consolidated financial position, results of operations or cash
flows. For non-financial assets and liabilities, the effective
date of this guidance is January 1, 2010. The Company
believes that the adoption of the new guidance applicable to
non-financial assets and liabilities will not have a material
effect on its consolidated financial position, results of
operations or cash flows.
On January 1, 2009, the Company adopted new accounting
guidance on non-controlling interests in consolidated financial
statements which establishes accounting and reporting standards
for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. The new guidance clarifies that
a non-controlling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in
the consolidated entity that should be reported as a component
of equity in the consolidated financial statements.
Additionally, the new guidance requires the amounts of
consolidated net income attributable to the parent and to the
non-controlling interest to be disclosed on the face of the
consolidated income statement. The presentation and disclosure
requirements of the new guidance have been applied
retrospectively for prior periods presented. See
Principles of Consolidation and Basis of
Presentation earlier in this note. The adoption of this
guidance did not have a material impact on the Companys
consolidated financial position, results of operations or cash
flows.
57
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On January 1, 2009, the Company adopted new accounting
guidance amending the factors considered in developing renewal
or extension assumptions for determining the useful life of a
recognized intangible asset. The adoption of the guidance did
not have a material impact on the Companys consolidated
financial position, results of operations or cash flows.
In June 2009, the Company adopted new accounting guidance which
establishes general standards of accounting for and disclosures
of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
It also requires entities to disclose the date through which
subsequent events were evaluated as well as the rationale for
why that date was selected. The guidance refers to these events
as recognized (Type I) and non-recognized (Type II);
however, it does not change existing literature regarding
recognition and disclosure requirements of Type I and
Type II subsequent events. The new guidance was adopted
prospectively during the quarter ended June 30, 2009, with
no material impact on the Companys consolidated financial
position, results of operations or cash flows.
In June 2009, the Financial Accounting Standards Board, or FASB,
issued new accounting guidance establishing the hierarchy of
GAAP, referred to as the Codification, which establishes two
levels of GAAP; authoritative and non-authoritative. The
Codification has become the source of authoritative,
non-governmental GAAP, except for rules and interpretive
releases of the SEC, which are additional sources of
authoritative guidance for SEC registrants. All previously
existing accounting guidance was superseded as described in the
Codification and all other non-grandfathered, non-SEC accounting
literature not covered by the Codification has become
non-authoritative.
The guidance was effective for interim and annual reporting
periods after September 15, 2009, and accordingly, the
Company adopted the new guidance in the third quarter of 2009.
As the Codification was not intended to change or alter existing
GAAP, it did not have a material impact on the Companys
consolidated financial position, results of operations or cash
flows.
In June 2009, the FASB issued new accounting guidance which
requires an analysis to determine whether a variable interest
gives the entity a controlling financial interest in a variable
interest entity. The new guidance requires an ongoing
reassessment and eliminates the quantitative approach previously
required for determining whether an entity is the primary
beneficiary. The guidance is effective for fiscal years
beginning after November 15, 2009. Accordingly, the Company
will adopt the guidance in the first quarter of 2010. The
Company does not anticipate the adoption of the new guidance to
have a material impact on its consolidated financial position,
results of operations and cash flows.
|
|
3.
|
Selected
Consolidated Financial Statement Information
|
Restricted
Cash
The Company had approximately $1.8 million and $700,000 in
restricted cash as of December 31, 2009 and 2008,
respectively. As of December 31, 2009, restricted cash
consisted of cash deposits supporting letters of credit for a
security deposit required by the lease agreement for the
Companys headquarters, for the Companys medical
malpractice policy and its self-insured retention through VPIL.
Cash in the amounts of such letters of credit is required to be
held on deposit with a bank and is restricted as to its use.
Short-term
Investments
The Companys short-term investments were classified as
held-to-maturity
investments. The Company intended and had the ability to hold
these investments to maturity, and therefore carried such
investments at cost. Cost approximated fair value due to the
highly liquid nature of these investments. As of
December 31, 2008, the Companys short-term
investments consisted of two certificates of deposit totaling
$10.1 million, due in one year or less. Both certificates
were redeemed during the year ended December 31, 2009, and
the funds were reinvested in money market accounts which are
included in Cash and cash equivalents on the Consolidated
Balance Sheet as of December 31, 2009.
58
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On January 1, 2009, the Company adopted new accounting
guidance on fair value measurements. The new guidance defines
fair value, establishes a framework for measuring fair value
under GAAP and expands disclosures about fair value
measurements. The new guidance defines fair value as the price
that would be received to sell an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction
between market participants on the measurement date. The new
guidance also establishes the following three-tier valuation
hierarchy based upon observable and non-observable inputs:
Level 1 Quoted prices in active markets
for identical assets or liabilities.
Level 2 Observable inputs other than
Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities.
Level 3 Unobservable inputs that are
supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
The Company utilizes the market approach to measure fair value
for its financial assets and liabilities. The market approach
uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities.
Assets and liabilities measured at fair value on a recurring
basis included short-term investments (certificates of deposit)
totaling zero and $10.1 million as of December 31,
2009 and 2008, respectively. Short-term investments are valued
using Level 1 inputs as defined by the fair value hierarchy.
Accounts
Receivable, Net
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Accounts receivable
|
|
$
|
18,231
|
|
|
$
|
17,762
|
|
Less: Allowance for doubtful accounts
|
|
|
754
|
|
|
|
360
|
|
Less: Allowance for sales credits
|
|
|
93
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
17,384
|
|
|
$
|
17,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
|
|
|
Allowance for
|
|
|
|
Doubful Accounts
|
|
|
Sales Credits
|
|
|
|
(in thousands)
|
|
|
Beginning balance, January 1, 2007
|
|
$
|
304
|
|
|
$
|
11
|
|
Charged to costs and expenses
|
|
|
98
|
|
|
|
202
|
|
Deductions/write-offs
|
|
|
(74
|
)
|
|
|
(198
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2007
|
|
$
|
328
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2008
|
|
$
|
328
|
|
|
$
|
15
|
|
Charged to costs and expenses
|
|
|
364
|
|
|
|
511
|
|
Deductions/write-offs
|
|
|
(332
|
)
|
|
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2008
|
|
$
|
360
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2009
|
|
$
|
360
|
|
|
$
|
19
|
|
Charged to costs and expenses
|
|
|
906
|
|
|
|
1,044
|
|
Deductions/write-offs
|
|
|
(512
|
)
|
|
|
(970
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2009
|
|
$
|
754
|
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
|
59
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property,
Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Equipment
|
|
$
|
11,812
|
|
|
$
|
10,332
|
|
Software
|
|
|
8,157
|
|
|
|
6,110
|
|
Furniture and fixtures
|
|
|
1,935
|
|
|
|
1,144
|
|
Leasehold improvements
|
|
|
4,264
|
|
|
|
342
|
|
Other
|
|
|
121
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
26,289
|
|
|
|
19,670
|
|
Less: Accumulated depreciation and amortization
|
|
|
12,800
|
|
|
|
7,978
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
13,489
|
|
|
$
|
11,692
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to the property,
plant and equipment of the Company for the years ended
December 31, 2009, 2008 and 2007, was approximately
$5.7 million, $4.2 million and $2.5 million,
respectively.
During the year ended December 31, 2008, the Company
recorded impairment charges totaling $666,000 relating to
portions of a trade show booth that were no longer being
utilized and internally-developed software to be sold. In
regards to the portions of the trade show booth, the Company
determined that the carrying value of the assets was in excess
of the fair value based on quoted market prices. For the
internally-developed software, the Company determined that the
net realizable value was less than the carrying value of the
capitalized costs associated with this asset. The impairment
charges are recorded in Sales, general and administrative
expenses in the Consolidated Statement of Operations for the
year ended December 31, 2008.
Accounts
Payable and Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Accounts payable
|
|
$
|
369
|
|
|
$
|
421
|
|
Billing services payable
|
|
|
324
|
|
|
|
347
|
|
Licensing fees
|
|
|
|
|
|
|
240
|
|
Other
|
|
|
84
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and other current liabilities
|
|
$
|
777
|
|
|
$
|
1,063
|
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Non-current taxes payable
|
|
$
|
364
|
|
|
$
|
235
|
|
Lease abandonment liability
|
|
|
152
|
|
|
|
|
|
Deferred rent
|
|
|
852
|
|
|
|
150
|
|
Licensing fee obligation
|
|
|
|
|
|
|
305
|
|
Other
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
1,454
|
|
|
$
|
690
|
|
|
|
|
|
|
|
|
|
|
60
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Goodwill
and Other Intangible Assets, Net
|
Goodwill
The Company records acquired assets, including identifiable
intangible assets and liabilities, at their respective fair
values, recording goodwill as the excess of cost over the fair
value of the net assets acquired. Goodwill is not amortized, but
instead tested for impairment at least annually (during the
second quarter), or more frequently if events or changes in
circumstances indicate potential impairment. The tests are based
on the Companys single operating segment and reporting
unit structure. The first step of the goodwill impairment test
is a comparison of the fair value of a reporting unit to its
carrying value. Quoted market prices in active markets are used
as the basis of the Companys measurement in estimating the
fair value of its single reporting unit. The results of the
annual impairment test performed as of June 30, 2009
indicated the fair value of the reporting unit substantially
exceeded its carrying value, and therefore, goodwill was not
impaired. Accordingly, the Company was not required to complete
the second step of the goodwill impairment test. During the
remaining quarters of 2009, the Company determined that no
events or changes in circumstances indicated potential
impairment. There were no accumulated impairment losses as of
December 31, 2009 and 2008.
Intangible
Assets, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Patent application costs
|
|
$
|
347
|
|
|
$
|
(80
|
)
|
|
$
|
267
|
|
|
$
|
347
|
|
|
$
|
(56
|
)
|
|
$
|
291
|
|
Non-compete agreements
|
|
|
298
|
|
|
|
(255
|
)
|
|
|
43
|
|
|
|
298
|
|
|
|
(105
|
)
|
|
|
193
|
|
Customer relationships
|
|
|
4,968
|
|
|
|
(1,326
|
)
|
|
|
3,642
|
|
|
|
4,968
|
|
|
|
(379
|
)
|
|
|
4,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
5,613
|
|
|
$
|
(1,661
|
)
|
|
$
|
3,952
|
|
|
$
|
5,613
|
|
|
$
|
(540
|
)
|
|
$
|
5,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense related to intangible assets for the
years ended December 31, 2009, 2008 and 2007, was
$1.1 million, $508,000 and $16,000, respectively.
The Company continually reviews events and changes in
circumstances related to its financial performance and economic
environment for factors that would provide evidence of potential
impairment or that may warrant a revision to the remaining
amortization of its intangible assets. If impairment indicators
are identified, the Company would test for impairment using
undiscounted cash flows as the basis for measuring the fair
value of its intangible assets. During the year ended
December 31, 2009, the Company determined that no events or
changes in circumstances indicated potential impairment.
As of December 31, 2009, future estimated amortization
expense related to intangible assets was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
2010
|
|
|
879
|
|
2011
|
|
|
689
|
|
2012
|
|
|
570
|
|
2013
|
|
|
473
|
|
2014
|
|
|
393
|
|
Thereafter
|
|
|
948
|
|
|
|
|
|
|
|
|
$
|
3,952
|
|
|
|
|
|
|
61
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
This future amortization expense is an estimate. Actual amounts
may change these estimated amounts due to additional intangible
asset acquisitions, potential impairment, accelerated
amortization or other events.
On April 14, 2008, the Company entered into a Membership
Interest Purchase Agreement with Diagna Radiology, LLC, or
Diagna, and Diagnas owners, pursuant to which the Company
purchased all of the membership interests of Diagna. Diagna was
a teleradiology provider that offered
24-hour a
day emergent and non-emergent services including subspecialty
expertise in neuroradiology, musculoskeletal and nuclear
medicine. Total consideration for the transaction was
approximately $6.6 million, which included
$6.0 million as the initial purchase price, $644,000 of
current assets, $149,000 of current liabilities and $93,000 of
initial direct acquisition costs. The acquisition of Diagna was
accounted for under the purchase method of accounting in
accordance with accounting guidance for business combinations.
Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based
on their estimated fair values. The allocation of the purchase
price to the assets and liabilities acquired was finalized in
the fourth quarter of 2008. There have been no significant
adjustments to the preliminary purchase price allocation.
|
|
6.
|
Financing
Arrangements
|
The Company entered into a credit agreement, or the Senior
Credit Facility, among the Company, the guarantors named
therein, the lenders from time to time party thereto and NewStar
Financial, Inc., as administrative agent, on August 29,
2007 that was comprised of a $4.0 million revolver and a
$41.0 million term loan. The proceeds of the term loan
after the payment of fees and expenses incurred in connection
with the Senior Credit Facility, together with cash on hand,
were used to fund a one-time dividend of $3.00 per share for
common and preferred stockholders that was declared by the Board
of Directors on August 10, 2007. On September 5, 2007,
the Company paid an aggregate of approximately
$39.9 million in respect of the dividend, which was paid to
all of its stockholders of record as of August 29, 2007,
including preferred stockholders. On November 20, 2007, the
Company used approximately $43.4 million of the net
proceeds from its initial public offering completed on
November 14, 2007 to repay outstanding debt under the
Senior Credit Facility, including interest accrued thereon and
fees and expenses incurred in connection therewith. In
connection with the repayment, the Company terminated the Senior
Credit Facility on November 20, 2007. No prepayment
penalties were incurred in connection with the termination of
the Senior Credit Facility. As a result of early repayment of
the term loan, accelerated amortization of approximately
$1.4 million related to deferred debt issuance costs was
recognized in interest expense for the year ended
December 31, 2007.
In April 2007, certain current and former members of the
Companys management exercised options to purchase common
stock in the Company and concurrently sold those shares of
common stock to Generation Members Fund II LP and
Generation Capital Partners VRC LP. Although no obligation
existed to do so, in order to facilitate the flow of funds
related to this transaction, the Company received payment for
the shares to be purchased, withheld the exercise price for such
shares and the applicable taxes, and distributed the net
proceeds to the applicable selling stockholders, which
effectively resulted in these stock option awards being settled
for cash. The transaction was accounted for as a repurchase of
equity awards, and as a result, the cash transferred to
repurchase these shares was recorded as a repurchase of common
shares and reissuance of common shares in Additional paid-in
capital in the Consolidated Statement of Changes in
Stockholders Equity (Deficiency) and in Cash flows from
financing activities in the Consolidated Statement of Cash Flows.
62
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On May 2, 2005, vRad closed on a sale of shares of its
Series A Preferred Stock. Changes in the current market
value of the Series A Preferred Stock, as determined by
vRads Board of Directors, were recorded in the
Consolidated Statements of Changes in Stockholders Equity
(Deficiency) as additional paid-in capital and accretion of
Series A Cumulative Redeemable Convertible Preferred Stock
and in the Consolidated Statements of Operations as
Series A Cumulative Redeemable Convertible Preferred Stock
accretion.
Each share of Series A Preferred Stock was automatically
converted into shares of vRads common stock on
November 20, 2007, upon the closing of the initial public
offering of vRads common stock, pursuant to a registration
statement on
Form S-1
at a public offering price of $17.00 per share. As a result,
dividends will no longer accumulate, and previously accumulated,
undeclared and unpaid dividends are no longer payable on the
Series A Preferred Stock by the Company.
|
|
9.
|
Stock-Based
Compensation
|
vRad
Equity Incentive Plan
vRads Amended and Restated Equity Incentive Plan provides
for the grant of incentive stock options, nonqualified stock
options, stock appreciation rights and restricted stock to the
Companys officers, employees and independent contractor
physicians. Options granted under the plan have a maximum
duration of ten years and typically vest in five years or less
in a manner approved by the Board of Directors. As of
December 31, 2009, there were 2,098,400 options
outstanding, which include 120,000 options granted in May 2007
to members of vRads Board of Directors that were not
issued pursuant to the plan. During the second quarter of 2009,
the stockholders of vRad voted in favor of increasing the number
of common shares available under the plan by
500,000 shares. As of December 31, 2009 and 2008,
there were 615,951 and 386,517 shares available for
issuance under the plan, respectively.
Stock-Based
Compensation Costs
Employee Stock-Based Compensation. The Company
calculates the stock-based compensation expense associated with
employee and director awards granted prior to January 1,
2006 using the intrinsic value method. For awards granted on or
after January 1, 2006, the Company calculates the
stock-based compensation expense relating to the issuance of
stock options based on the fair value of the award at the date
of the grant using a Black-Scholes model. Stock-based
compensation costs related to the issuance of restricted stock
awards are based on the fair value of vRads common stock
on the date the restricted stock awards are issued. Stock-based
compensation expense is recognized over the requisite service
period. Stock-based compensation expense related to employee and
director equity awards was approximately $2.4 million,
$1.5 million and $686,000 for the years ended
December 31, 2009, 2008 and 2007, respectively. Included in
stock-based compensation expense for the year ended
December 31, 2009 was $235,000 related to the accelerated
vesting of certain stock option awards. Employee and director
stock-based compensation expense is included in Sales, general
and administrative expenses in the Consolidated Statements of
Operations.
During the year ended December 31, 2009, the Company issued
111,968 restricted stock awards to certain employees and
directors. No restricted stock awards were issued prior to 2009.
During the years ended December 31, 2009, 2008 and 2007,
vRad issued 377,000, 326,000 and 981,600 stock options,
respectively, to certain employees and directors. During the
years ended December 31, 2009, 2008 and 2007, 7,500, 12,060
and 15,192 options expired, respectively.
As of December 31, 2009, unrecognized stock-based
compensation expense related to unvested employee stock options
and restricted stock awards granted on or after January 1,
2006, was approximately $4.5 million, net of estimated
forfeitures. These costs are to be recognized over a weighted
average period of approximately 2.5 years.
63
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Physician Stock-Based Compensation. The
Company calculates the stock-based compensation expense
associated with physician stock option awards by determining the
current fair value of the award at the date of the grant and at
each subsequent reporting period thereafter until vested using a
Black-Scholes model. Stock-based compensation costs related to
the issuance of restricted stock awards are based on the fair
value of the Companys common stock on the date the
restricted stock awards are issued and at each subsequent
financial reporting period thereafter until vested. Stock-based
compensation expense is recognized over the requisite service
period. The Company recorded physician stock-based compensation
expense of approximately $787,000, income of approximately
$479,000 and expense of $3.7 million for the years ended
December 31, 2009, 2008 and 2007, respectively. Physician
stock-based compensation expense is included in Professional
services expense in the Consolidated Statements of Operations.
During the year ended December 31, 2009, vRad issued 18,600
restricted stock awards to certain independent contractor
physicians. No restricted stock awards were issued prior to
2009. During the year ended December 31, 2009, no stock
options were issued to independent contractor physicians, and
during the years ended December 31, 2008 and 2007, 66,000
and 151,840 stock options were issued to independent contractor
physicians, respectively. During the years ended
December 31, 2009, 2008 and 2007, 26,000, 1,950 and 15,000
stock options expired, respectively.
Black-Scholes
Assumptions
The Black-Scholes model utilizes various assumptions that
require significant judgment, including volatility, forfeiture
rates and expected option term. Expected volatility is
calculated using volatility rates of companies in the same
industry sector, as the Company does not yet have sufficient
relevant history to use its own historical volatility. Expected
term is calculated using the simplified method, as the Company
does not yet have sufficient option exercise history. The
Company does not have a formal dividend program; therefore the
dividend rate variable in the Black-Scholes model is zero. The
risk-free interest rate assumption is based upon observed
interest rates on zero coupon U.S. Treasury bonds whose
maturity period approximates the term of the stock option award.
A summary of the weighted average assumptions used in the
valuations for the years ended December 31, 2009, 2008 and
2007 are set forth in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Employee and Director Awards
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
Fair value of options granted
|
|
$
|
4.54
|
|
|
$
|
6.77
|
|
|
$
|
5.14
|
|
Risk-free interest rate
|
|
|
2.3
|
%
|
|
|
3.6
|
%
|
|
|
4.6
|
%
|
Expected volatility
|
|
|
52.0
|
%
|
|
|
43.8
|
%
|
|
|
40.4
|
%
|
Expected term of options (in years)
|
|
|
6.3
|
|
|
|
6.0
|
|
|
|
4.1
|
|
Dividend yield
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
|
(1) |
|
Includes 140,000 options granted in May 2007 to members of the
vRads Board of Directors that were not issued pursuant to
the Plan. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Physician Awards
|
|
2009(1)
|
|
|
2008
|
|
|
2007
|
|
|
Risk-free interest rate
|
|
|
|
|
|
|
2.2
|
%
|
|
|
4.0
|
%
|
Expected volatility
|
|
|
|
|
|
|
97.8
|
%
|
|
|
50.2
|
%
|
Expected term of options (in years)
|
|
|
|
|
|
|
3.4
|
|
|
|
1.8
|
|
Dividend yield
|
|
|
|
|
|
|
None
|
|
|
|
None
|
|
|
|
|
(1) |
|
No options were granted to independent contractor physicians in
2009. |
64
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option Activity
Stock option activity for employees, directors and independent
contractor physicians during the year ended December 31,
2009, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
per Share
|
|
|
(in years)
|
|
|
Value(3)
|
|
|
Balance at December 31, 2008(1)
|
|
|
2,183,995
|
|
|
$
|
10.82
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
377,000
|
|
|
|
8.72
|
|
|
|
|
|
|
|
1,524,060
|
|
Exercised
|
|
|
(229,993
|
)
|
|
|
3.01
|
|
|
|
|
|
|
|
1,821,561
|
|
Forfeited/Cancelled/Expired
|
|
|
(232,602
|
)
|
|
|
10.75
|
|
|
|
|
|
|
|
917,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
2,098,400
|
|
|
|
11.31
|
|
|
|
6.01
|
|
|
|
5,709,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at December 31, 2009(2)
|
|
|
1,116,263
|
|
|
|
12.25
|
|
|
|
7.00
|
|
|
|
2,183,576
|
|
Exercisable at December 31, 2009
|
|
|
948,425
|
|
|
|
10.17
|
|
|
|
4.87
|
|
|
|
3,457,219
|
|
|
|
|
(1) |
|
The number of options outstanding includes 120,000 options
granted in May 2007 to members of vRads Board of Directors
that were not issued pursuant to the Plan. |
|
(2) |
|
Options expected to vest reflect an estimated forfeiture rate. |
|
(3) |
|
The aggregate intrinsic value in the table above represents the
difference between the closing market price of vRads
common stock at December 31, 2009, and the exercise price,
multiplied by the number of
in-the-money
options that would have been received by the option holders had
all option holders exercised their options on December 31,
2009. |
The following table summarizes additional information about
stock options outstanding, exercisable and vested as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Life
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
(in Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$2.00 $2.00
|
|
|
177,438
|
|
|
|
4.87
|
|
|
$
|
2.00
|
|
|
|
177,438
|
|
|
$
|
2.00
|
|
3.75 5.50
|
|
|
193,350
|
|
|
|
2.30
|
|
|
|
4.92
|
|
|
|
143,780
|
|
|
|
4.83
|
|
6.00 9.00
|
|
|
425,625
|
|
|
|
8.79
|
|
|
|
8.49
|
|
|
|
24,625
|
|
|
|
7.34
|
|
10.20 14.52
|
|
|
673,447
|
|
|
|
5.98
|
|
|
|
12.09
|
|
|
|
374,817
|
|
|
|
12.03
|
|
16.46 19.23
|
|
|
621,040
|
|
|
|
5.70
|
|
|
|
16.91
|
|
|
|
220,265
|
|
|
|
16.95
|
|
23.00 23.00
|
|
|
7,500
|
|
|
|
0.01
|
|
|
|
23.00
|
|
|
|
7,500
|
|
|
|
23.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,098,400
|
|
|
|
6.01
|
|
|
|
11.31
|
|
|
|
948,425
|
|
|
|
10.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total weighted average fair value of stock options vested
during 2009, 2008 and 2007 was $2.4 million,
$3.2 million, and $3.5 million, respectively. The
aggregate intrinsic value of all options exercised during 2009,
2008 and 2007 was $1.8 million, $4.9 million and
$31.2 million, respectively.
65
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Stock Award Activity
The following table summarizes the activity of unvested stock
awards for employees, directors and independent contractor
physicians during the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Fair Value
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
per Share
|
|
|
(in years)
|
|
|
Value(1)
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
130,568
|
|
|
|
9.53
|
|
|
|
|
|
|
|
1,666,048
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled/Expired
|
|
|
(4,400
|
)
|
|
|
9.32
|
|
|
|
|
|
|
|
56,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
126,168
|
|
|
|
9.53
|
|
|
|
8.25
|
|
|
|
1,609,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards expected to vest at December 31, 2009
|
|
|
123,098
|
|
|
|
9.52
|
|
|
|
8.25
|
|
|
|
1,570,730
|
|
|
|
|
(1) |
|
The aggregate intrinsic value in the table above represents the
closing market price of vRads common stock at
December 31, 2009, multiplied by the number of awards. |
Cash retained as a result of the tax deductibility of employee
and director stock-based awards is presented as a component of
cash flows from financing activities in the Consolidated
Statements of Cash Flows. During the years ended
December 31, 2009, 2008 and 2007, the Company realized
approximately $2.8 million, $4.4 million and
$4.8 million, respectively, as a result of the tax
deductibility of employee and director stock-based awards
exercised.
As previously noted, the Company consolidates its financial
results under GAAP. For income tax purposes, however, the
Company is not considered a consolidated entity. As a result,
vRad and each of the Affiliated Medical Practices file
individual entity returns with the various applicable state and
federal agencies, and the income and losses of the Affiliated
Medical Practices do not result in a tax liability or benefit to
vRad. vRad and the Professional Corporations are taxed as
corporations, and effective January 1, 2009, the owners of
VRP made the election to be taxed as a corporation. Prior to
that date, VRP was taxed as a partnership.
66
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows the components of deferred tax assets
and liabilities as of December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
1,190
|
|
|
$
|
3,037
|
|
Stock-based compensation deductions
|
|
|
2,220
|
|
|
|
211
|
|
Accruals and reserves
|
|
|
2,091
|
|
|
|
854
|
|
Tenant improvements
|
|
|
907
|
|
|
|
|
|
Credits
|
|
|
119
|
|
|
|
793
|
|
Other
|
|
|
343
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset before valuation allowance
|
|
|
6,870
|
|
|
|
4,990
|
|
Less: Valuation allowance
|
|
|
(1,212
|
)
|
|
|
(3,098
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
5,658
|
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
|
Accelerated depreciation and amortization
|
|
|
1,848
|
|
|
|
1,397
|
|
Prepaid expenses
|
|
|
1,815
|
|
|
|
1,431
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
3,663
|
|
|
|
2,828
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
1,995
|
|
|
$
|
(936
|
)
|
|
|
|
|
|
|
|
|
|
The decrease in the net operating loss component of the deferred
tax assets was primarily driven by $1.3 million of
disallowed net operating losses related to VRPs election
to be taxed as a corporation, which was effective
January 1, 2009. As of December 31, 2009 and 2008, the
Company had a valuation allowance of approximately
$1.2 million and $3.1 million, respectively, against
certain deferred tax assets due to uncertainties related to
their utilization. The valuation allowances at December 31,
2009 and 2008 relate primarily to cumulative net operating
losses of certain of the Affiliated Medical Practices which, if
not utilized, begin to expire in 2026. In addition, during 2009,
the Company recorded a $1.5 million deferred tax asset for
stock-based compensation related to previously recognized
expense.
During the year ended December 31, 2009, the Company
utilized vRads remaining federal net operating loss
carryforward of approximately $5.6 million. As a result,
the Company recognized the remaining $2.2 million of
suspended Additional paid-in capital generated from excess
stock-based compensation deductions. In accordance with
equity-based compensation accounting guidance, the amount of
windfall benefit recognized in Additional paid-in capital is
limited to the amount of benefit realized in income taxes
payable. The Company has recorded approximately
$12.0 million in cumulative excess tax deductions from
stock option exercises in Additional paid-in capital.
67
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows components of income tax expense for
the years ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,880
|
|
|
$
|
4,369
|
|
|
$
|
2,946
|
|
State
|
|
|
691
|
|
|
|
862
|
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
6,571
|
|
|
|
5,231
|
|
|
|
3,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,177
|
)
|
|
|
806
|
|
|
|
156
|
|
State
|
|
|
(251
|
)
|
|
|
(119
|
)
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(1,428
|
)
|
|
|
687
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense
|
|
$
|
5,143
|
|
|
$
|
5,918
|
|
|
$
|
3,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the Companys effective income tax rate
compared to the statutory federal income tax rate for the years
ended December 31, 2009, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statutory federal income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
2.7
|
|
|
|
3.4
|
|
|
|
6.9
|
|
Valuation allowance
|
|
|
0.4
|
|
|
|
2.8
|
|
|
|
10.2
|
|
Other
|
|
|
2.4
|
|
|
|
1.0
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
39.5
|
%
|
|
|
41.2
|
%
|
|
|
52.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously discussed, the Company consolidates its financial
results in accordance with GAAP. However, for income tax
purposes, vRad is a single tax entity that is taxed as a
corporation and is not included in a tax consolidated group with
the Affiliated Medical Practices. As a result, tax losses of the
Affiliated Medical Practices are not available to offset taxable
income of vRad. The deferred tax assets from net operating
losses generated by the Affiliated Medical Practices are
evaluated for realization based on whether it is more likely
than not that each individual Affiliated Medical Practice will
generate sufficient future taxable income to utilize those
losses. The difference in the consolidated group for financial
statement purposes and tax purposes, combined with the valuation
allowances established for deferred tax assets related to net
operating loss carryforwards of certain Affiliated Medical
Practices results in the Company having an effective tax rate of
39.5% in 2009, 41.2% in 2008 and 52.8% in 2007.
In accordance with accounting guidance for income taxes, the
Company recognizes the financial statement benefit of a tax
position only after determining that the relevant tax authority
would more likely than not sustain the position following an
audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is
the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the
relevant taxing authority. The Company had unrecognized tax
benefits of $184,000 and $135,000 as of December 31, 2009
and 2008, respectively.
68
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
|
Balance at December 31, 2008
|
|
$
|
135
|
|
Additions based on tax positions related to the current year
|
|
|
49
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
184
|
|
|
|
|
|
|
The amount of unrecognized tax benefit of $184,000, if
ultimately recognized, will reduce the Companys effective
tax rate.
The Company is subject to income taxes in the U.S. federal
jurisdiction, and various state and foreign jurisdictions. Tax
regulations within each jurisdiction are subject to the
interpretation of the relevant tax laws and regulations and
require significant judgment to apply. Prior to 2004, the
Company was not subject to significant income tax exposure as a
result of its status as a limited liability company. The Company
is potentially subject to U.S. federal, state and local
income tax examinations by tax authorities for the tax years
ended December 31, 2009, 2008, 2007 and 2006.
vRad and VRPs 2006 federal income tax returns recently
underwent examination by the Internal Revenue Service, or IRS.
During the year ended December 31, 2009, vRad and VRP
received notice from the IRS that the examinations of their
respective 2006 federal income tax returns were closed without
adjustment. In conjunction with its audit of VRPs 2006
federal income tax return, the IRS also examined the 2006
quarterly employment tax returns of VRP. During the quarter
ended December 31, 2009, the Company received notice from
the IRS that this examination was closed without adjustment.
The Company recognizes penalties and interest accrued related to
unrecognized tax benefits in income tax expense for all periods
presented. As of the years ended December 31, 2009 and
2008, the Company had $180,000 and $100,000 accrued for the
payment of interest and penalties, respectively.
|
|
11.
|
Stock
Repurchase Program
|
In March 2009, vRads Board of Directors authorized the
repurchase of up to $5.0 million of vRads outstanding
common stock. Repurchases may take place in the open market, or
pursuant to negotiated or block transactions in accordance with
applicable SEC guidelines and regulations, including plans
intended to comply with
Rule 10b5-1
under the Securities Exchange Act. During the year ended
December 31, 2009, vRad repurchased 150,730 shares of
common stock at an average price of $8.64 per share for total
cash consideration of $1.3 million. As of December 31,
2009, vRad had $3.7 million remaining under the
$5.0 million share repurchase program.
In August 2008, vRads Board of Directors authorized the
repurchase of up to $8.0 million of vRads outstanding
common stock. On October 24, 2008, vRad completed this
stock repurchase program. vRad repurchased 944,760 shares
at an average price of $8.44 per share. Repurchases took place
in the open market, or pursuant to negotiated or block
transactions in accordance with applicable SEC guidelines and
regulations, including plans intended to comply with
Rule 10b5-1
under the Securities Exchange Act.
12. Commitments
and Contingencies
The Company leases office space and equipment under
non-cancellable operating leases with lease terms ranging from
two to ten and a half years through August 2019. For the years
ended December 31, 2009, 2008 and 2007, total rent expense
for the Company was $1.7 million, $654,000 and $482,000,
respectively.
69
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, future minimum lease commitments
applicable to operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Future minimum lease commitments
|
|
$
|
1,816
|
|
|
$
|
1,635
|
|
|
$
|
1,657
|
|
|
$
|
1,673
|
|
|
$
|
1,698
|
|
|
$
|
8,266
|
|
|
$
|
16,745
|
|
On December 7, 2007, the Company entered into an agreement
to lease approximately 82,000 square feet of space in Eden
Prairie, Minnesota, to consolidate its corporate headquarters.
The lease commenced on March 2, 2009 and expires on
August 31, 2019. In conjunction with the lease, the Company
was entitled to a tenant improvement allowance of approximately
$2.7 million and the Company recorded the allowance in
leasehold improvements and deferred tenant lease allowance. The
amounts for leasehold improvements and deferred tenant lease
allowance are recorded in property, plant and equipment, net and
deferred tenant lease allowance on the Consolidated Balance
Sheet as of December 31, 2009. In addition, the lease
arrangement contains a rent escalation clause and the related
lease expenses are recognized on a straight-line basis over the
term of the lease. Deferred rent in the amount of $852,000
associated with this lease is included in Other liabilities on
the Consolidated Balance Sheet as of December 31, 2009.
During the year ended December 31, 2009, the Company
recorded a pre-tax net charge of approximately $200,000 for
costs pertaining to vacated leased facilities located in
Minnetonka, Minnesota and Mountain View, California, net of the
reversal of any remaining deferred rent. The net charge was
recognized in Sales, general and administrative expenses on the
Consolidated Statement of Operations for the year ended
December 31, 2009. The accrual related to the vacated
facilities is calculated net of any estimated sublease income
which is based on current market quotes for similar properties.
If the Company is unable to sublet the vacated properties on a
timely basis or is forced to sublet them at lower rates due to
changes in market conditions, the Company will adjust the
accrual accordingly. The balance of the remaining lease
liability was $152,000 as of December 31, 2009, and is
included in Other liabilities on the Consolidated Balance Sheet.
The Company entered into capital leases for equipment in
February 2009 that expire in February 2013. Capital leases are
recorded in Property, plant and equipment, net, Other current
liabilities and Other liabilities on the Consolidated Balance
Sheet as of December 31, 2009. Future minimum lease
payments under these capital leases, together with the present
value of minimum lease payments, as of December 31, 2009,
were as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
2010
|
|
$
|
43
|
|
2011
|
|
|
43
|
|
2012
|
|
|
43
|
|
2013
|
|
|
3
|
|
|
|
|
|
|
|
|
|
132
|
|
Less: Amount representing interest
|
|
|
8
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
124
|
|
Less: Current portion
|
|
|
39
|
|
|
|
|
|
|
Capital lease obligations, less current portion
|
|
$
|
85
|
|
|
|
|
|
|
Professional
Liability Coverage
The Companys business entails an inherent risk of claims
of medical malpractice against its independent contractor
physicians and itself. The Company contracts and pays premiums
for professional liability insurance that indemnifies it and its
independent contractor physicians for losses incurred related to
medical malpractice
70
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
litigation. The Company maintains professional liability
insurance policies with a third-party insurer on a claims-made
basis, subject to a self-insured retention, deductibles,
exclusions and other restrictions. The Companys
self-insured retention under its professional liability
insurance program is insured by VPIL, its wholly-owned captive
insurance subsidiary. The Company records liabilities for
self-insured amounts and claims incurred but not reported based
on an actuarial valuation using historical loss patterns. The
actuarial analysis utilizes industry loss data as a result of
the Companys limited loss history.
Insurance liabilities are necessarily based on estimates,
including claim frequency and severity. An inherent assumption
in such estimates is that historical loss patterns can be used
to predict future loss patterns with reasonable accuracy.
Because many factors can affect historical and future loss
patterns, the determination of an appropriate reserve involves
complex, subjective judgment, and actual results may vary
significantly from current estimates. Liabilities for claims
incurred but not reported are not discounted.
For the year ended December 31, 2009, the Company had no
additional specific claims reserves, but recorded medical
malpractice loss development reserves and IBNR reserves of
approximately $2.6 million and $2.1 million,
respectively. The Company recorded specific claims reserves,
medical malpractice loss development reserves and IBNR reserves
of $825,000, $573,000 and $424,000, respectively, during the
year ended December 31, 2008. Prior to 2008, the Company
recorded only specific reserves for medical malpractice claims
as a result of the Companys limited historical loss
experience. The Company recorded specific claims reserves of
$50,000 during the year ended December 31, 2007.
The Company believes that its insurance coverage is appropriate
based upon its claims experience and the nature and risks of its
business. However, the Company cannot assure that any pending or
future claim will not be successful or if successful will not
exceed the limits of available insurance coverage. If the
self-insured retention amounts
and/or other
amounts that the Company is actually required to pay materially
exceed the estimates that have been reserved, the Companys
financial condition, results of operations and cash flows could
be materially adversely affected.
Litigation
On July 31, 2007, Merge eMed, Inc., or Merge, filed a
complaint against vRad in the United States District Court for
the Northern District of Georgia, Atlanta Division, alleging
that vRad has infringed on certain of Merges patents
relating to teleradiology. On December 11, 2007, the court
granted vRads motion to stay the patent suit pending the
outcome of a reexamination by the United States Patent and
Trademark Office, or PTO, of these same patents. On
August 28, 2008, the PTO ruled invalid all of the claims in
the patents upon which Merge had sued vRad. Reexamination
certificates cancelling the claims of the patents have been
issued due to Merges failure to respond to the PTO action,
and vRad is awaiting dismissal from the action as a result of
the cancellation. Pending dismissal, the judicial stay of
proceedings in the lawsuit remains in effect.
On March 8, 2009, DR Systems, Inc. filed a complaint
against vRad in the United States District Court for the
Southern District of California, alleging that vRad has
infringed on a patent held by DR Systems through its use of
medical imaging and archival systems. On July 7, 2009, this
suit was dismissed as a result of vRads assertion of its
use of third party software, and a pre-existing license
agreement between DR Systems and the third party, covering
vRads use.
The Company is from time to time subject to, and is presently
involved in, other litigation or legal proceedings arising out
of the ordinary course of business, including medical
malpractice claims and certain employment related matters.
Although the results of litigation and claims cannot be
predicted with certainty, as of December 31, 2009 and
December 31, 2008 the Companys management believed
that the final outcome of these matters would not have a
material adverse effect on the Companys business,
consolidated financial position, results of operations or cash
flows.
71
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Employee
Benefit Plan
|
The Company has a 401(k) profit sharing plan, or the 401(k)
Plan, that allows employees to participate immediately upon hire
and does not include any age restriction. The 401(k) Plan allows
each participant to contribute between 1% and 75% of their
compensation, subject to current IRS limitations. The plan
allows for participants to receive matching contributions six
months from their date of hire and become fully vested in
matching contributions upon receipt. For the years ended
December 31, 2009, 2008 and 2007, the Company contributed
$415,000, $431,000 and $339,000, respectively, to the 401(k)
Plan included in Sales, general and administrative expenses on
the Consolidated Statements of Operations.
|
|
14.
|
Related
Party Transactions
|
The Company has entered into a non-exclusive, non-transferable
license agreement for the use of certain image management
software from a minority stockholder of vRad. For the years
ended December 31, 2009, 2008 and 2007, the Company
incurred licensing fees under this contract of approximately
$1.0 million, $1.0 million and $866,000, respectively.
The following table illustrates the revenues, expenses and cash
flows that result from the management and professional service
agreements between the related parties described in Note 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
|
VRP professional services revenue from vRad
|
|
$
|
26,356
|
|
|
$
|
23,243
|
|
|
$
|
20,633
|
|
vRad professional services expense to VRP
|
|
|
26,356
|
|
|
|
23,243
|
|
|
|
20,633
|
|
VRP professional services revenue from the Professional
Corporations
|
|
|
27,338
|
|
|
|
24,250
|
|
|
|
21,873
|
|
Professional Corporations professional services expense to VRP
|
|
|
27,338
|
|
|
|
24,250
|
|
|
|
21,873
|
|
vRad management fee revenue from the Professional Corporations
|
|
|
27,064
|
|
|
|
24,007
|
|
|
|
19,256
|
|
Professional Corporations management fee expense to vRad
|
|
|
27,064
|
|
|
|
24,007
|
|
|
|
19,256
|
|
Cash paid for professional services by vRad to VRP
|
|
|
26,356
|
|
|
|
23,243
|
|
|
|
20,633
|
|
Cash paid for professional services by the Professional
Corporations to VRP
|
|
|
27,338
|
|
|
|
24,250
|
|
|
|
21,873
|
|
Cash paid for management fees by the Professional Corporations
to vRad
|
|
|
27,064
|
|
|
|
24,007
|
|
|
|
19,256
|
|
During the quarter ended March 31, 2009, the Company
incurred approximately $535,000 in expenses related to amounts
due to its former Chairman under the Transition Agreement
between the Company and the former Chairman that are recorded in
Sales, general and administrative expenses on the Consolidated
Statement of Operations for the year ended December 31,
2009. As of December 31, 2009, $105,000 of this amount was
included in Other accrued expenses on the Consolidated Balance
Sheet.
vRads restricted stock awards, which contain
non-forfeitable dividends, are classified as participating
securities in accordance with accounting guidance on earnings
per share. In addition, vRads preferred stockholders had
contractual dividend participation rights prior to their
conversion to common stock and therefore were also classified as
participating securities for the year ended December 31,
2007. In calculating basic earnings per share, net income is
reduced by the amount of dividends declared in the current
period for each participating security and by the contractual
amount of dividends or other participation payments that are
paid or accumulated for the current
72
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
period. Undistributed earnings for the period are allocated to
participating securities based on the contractual participation
rights of the security to share in those current earnings
assuming all earnings for the period are distributed. The
Companys recipients of restricted stock awards have
contractual participation rights that are equivalent to those of
common stockholders. Therefore, the Company allocates
undistributed earnings to restricted stock and common
stockholders based on their respective ownership percentage, as
of the end of the period.
Diluted earnings per share are calculated using the two-class
method in accordance with accounting guidance on earnings per
share. The two-class method requires the denominator to include
the weighted average restricted stock along with the additional
share equivalents from the assumed conversion of stock options
calculated using the treasury stock method.
The following table presents the computation of earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Basic and Diluted Earnings per Share
(Two-class Method)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Virtual Radiologic Corporation
|
|
$
|
7,915
|
|
|
$
|
8,454
|
|
|
$
|
3,451
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Cumulative Redeemable Convertible Preferred Stock
accretion
|
|
|
|
|
|
|
|
|
|
|
(10,127
|
)
|
Cash dividends paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
(13,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed income (loss) available to common stockholders
|
|
$
|
7,915
|
|
|
$
|
8,454
|
|
|
$
|
(20,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid to Series A Preferred stockholders
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,596
|
|
Weighted average preferred shares outstanding
|
|
|
|
|
|
|
|
|
|
|
3,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings per share Preferred
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid to common stockholders
|
|
$
|
|
|
|
$
|
|
|
|
$
|
26,312
|
|
Weighted average common shares outstanding
|
|
|
15,872
|
|
|
|
16,500
|
|
|
|
8,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings per share Common
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed income (loss) available to common stockholders
|
|
$
|
7,915
|
|
|
$
|
8,454
|
|
|
$
|
(20,272
|
)
|
Participating securities ownership(1)
|
|
|
0.8
|
%
|
|
|
0.0
|
%(2)
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Participating securities interest in undistributed income
|
|
$
|
63
|
|
|
$
|
|
|
|
$
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average restricted shares outstanding basic
|
|
|
99
|
|
|
|
|
|
|
|
|
|
Basic earnings per share participating securities
|
|
$
|
0.63
|
|
|
$
|
|
|
|
$
|
|
|
Undistributed income (loss) available to common stockholders
|
|
$
|
7,915
|
|
|
$
|
8,454
|
|
|
$
|
(20,272
|
)
|
Common ownership
|
|
|
99.2
|
%
|
|
|
100.0
|
%(2)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stockholders interest in undistributed income (loss)
|
|
$
|
7,852
|
|
|
$
|
8,454
|
|
|
$
|
(20,272
|
)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
15,872
|
|
|
|
16,500
|
|
|
|
8,762
|
|
Basic earnings per share common
|
|
$
|
0.50
|
|
|
$
|
0.51
|
|
|
$
|
(2.31
|
)
|
Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
(If-converted Method)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stockholders interest in undistributed earnings (losses)
|
|
$
|
7,852
|
|
|
$
|
8,454
|
|
|
$
|
(20,272
|
)
|
Undistributed earnings participating securities
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used in diluted earnings per share
|
|
$
|
7,915
|
|
|
$
|
8,454
|
|
|
$
|
(20,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
15,872
|
|
|
|
16,500
|
|
|
|
8,762
|
|
Weighted average restricted shares outstanding
|
|
|
99
|
|
|
|
|
|
|
|
|
|
Common share equivalents
|
|
|
312
|
(4)
|
|
|
476
|
(4)
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute income (loss) per common
share diluted
|
|
|
16,283
|
|
|
|
16,976
|
|
|
|
8,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share common
|
|
$
|
0.48
|
|
|
$
|
0.50
|
|
|
$
|
(2.31
|
)
|
|
|
|
(1) |
|
Participating securities include Series A preferred stock
for 2007 and restricted stock for 2009. |
|
|
|
|
73
VIRTUAL
RADIOLOGIC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(2) |
|
There was no restricted stock or Series A preferred stock
outstanding during the year ended December 31, 2008. |
|
(3) |
|
Preferred stockholders do not participate in any undistributed
losses with Common stockholders. |
|
(4) |
|
Common share equivalents are not included in the diluted
earnings per common share calculation for these periods as they
are anti-dilutive. Potential common shares totaled approximately
1.8 million, 1.3 million and 0.8 million for the
years ended December 31, 2009, 2008 and 2007, respectively. |
The Company has evaluated whether any recognized or
non-recognized events occurred after December 31, 2009, the
balance sheet date, through February 18, 2010, the issuance
date of these consolidated financial statements, and determined
that there have been no such events or transactions during this
time which would have a material effect on the consolidated
financial statements and therefore would require recognition or
disclosure in the statements.
74
|
|
ITEM 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
ITEM 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
As of the end of the period covered by this report, or the
Evaluation Date, we carried out an evaluation, under the
supervision and with the participation of management, including
our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended, or the
Exchange Act). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were
effective to ensure that information required to be disclosed in
the reports that we file or submit under the Exchange Act is
(i) recorded, processed, summarized and reported within the
time periods specified in the applicable rules and forms, and
(ii) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.
Managements
Report on Internal Control Over Financial
Reporting
Management of the Company is responsible for establishing and
maintaining effective internal control over financial reporting
as defined in
Rule 13a-15(f)
under the Exchange Act. The Companys internal control over
financial reporting is designed to provide reasonable assurance
to the Companys management and Board of Directors
regarding the preparation and fair presentation of published
financial statements in accordance with GAAP, including those
policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
assets of the company, (ii) provide reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and
that receipts and expenditures are being made only in accordance
with authorizations of management and directors of the company,
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.
Management conducted an evaluation of the effectiveness of
internal control over financial reporting based on the framework
in Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission. Managements assessment included an evaluation
of the design of our internal control over financial reporting
and testing of the operational effectiveness of our internal
control over financial reporting. Based on this assessment,
management concluded the Company maintained effective internal
control over financial reporting as of December 31, 2009.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
The Companys independent registered public accounting firm
has issued an attestation report regarding its assessment of the
Companys internal control over financial reporting as of
December 31, 2009, which appears on page 44.
Changes
in Internal Controls
During the most recent fiscal quarter, there has been no change
in our internal control over financial reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
75
|
|
ITEM 9B.
|
Other
Information
|
Payment
of 2009 Bonuses
In February 2009, our Compensation Committee and Board of
Directors approved a performance-based cash bonus plan for 2009
for our management team, including our executive officers. Under
this plan, target bonus amounts for 2009 were set at 60% of base
salary for our Chief Executive Officer, $60,000 for our Medical
Director, which amount was subsequently increased to $100,000
effective July 1, 2009 in connection with a new employment
agreement which reduced Dr. Michels overall cash
compensation , and 50% of base salary for each other executive
officer. Payment of performance-based cash bonuses under the
plan was based upon our level of achievement of 2009 adjusted
EBITDA goals, and, in the case of all executive officers other
than the CEO, additional achievement of individual performance
goals.
On January 18, 2010, our Compensation Committee approved
payment of the following 2009 performance-based bonuses to our
executive officers pursuant to the plan, based upon our adjusted
EBITDA performance and individual performance goal achievement:
Robert C. Kill, President & Chief Executive Officer
($453,109); Leonard C. Purkis, Chief Financial Officer
($269,708); Richard W. Jennings, Chief Technology Officer
($269,617); Eduard Michel, M.D., Ph.D., Chief Medical
Officer ($120,829); and Michael J. Kolar, Vice President,
General Counsel and Secretary ($233,747).
Approval
of 2010 Bonus Plan
On January 15, 2010, our Board of Directors approved our
2010 performance-based cash bonus plan for our management team,
including our executive officers, based upon the recommendation
of our Compensation Committee. Under this plan, target bonus
amounts for 2010 will remain the same as the 2009 levels, and
payment of performance-based cash bonuses under the plan will be
based upon our level of achievement of 2010 adjusted EBITDA
goals, and, in the case of all executive officers other than the
CEO, additional achievement of individual performance goals. A
summary of the 2010 bonus plan has been filed as an exhibit to
this report.
76
PART III
|
|
ITEM 10.
|
Directors,
Executive Officers and Corporate Governance
|
Directors
The information in the Proposal One
Election of Directors section of our Proxy Statement in
connection with our 2010 Annual Meeting of Stockholders is
incorporated herein by reference.
Executive
Officers
The information in the Executive Officers and Key
Employees section of our Proxy Statement in connection
with our 2010 Annual Meeting of Stockholders is incorporated
herein by reference.
Section 16(a)
Beneficial Ownership Reporting Compliance
The information in the Section 16(a) Beneficial
Ownership Reporting Compliance section of our Proxy
Statement in connection with our 2010 Annual Meeting of
Stockholders is incorporated herein by reference.
Code
of Conduct and Ethics
The information in the Corporate Governance
Our Codes of Conduct and Committee Charters section of our
Proxy Statement in connection with our 2010 Annual Meeting of
Stockholders is incorporated herein by reference.
Changes
to Nomination Procedures
We have made no material changes to the procedures by which
stockholders may recommend nominees to our Board of Directors,
as described in our most recent Proxy Statement.
Audit
Committee Matters
The information under the heading Corporate
Governance Audit Committee section of our
Proxy Statement in connection with our 2010 Annual Meeting of
Stockholders is incorporated herein by reference.
|
|
ITEM 11.
|
Executive
Compensation
|
The information contained under the headings Compensation
Discussion and Analysis, Executive
Compensation, Compensation Committee Interlocks and
Insider Participation and Compensation Committee
Report in the Proxy Statement for our 2010 Annual Meeting
of Stockholders is incorporated herein by reference.
|
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information contained under the heading Security
Ownership of Certain Beneficial Owners and Management in
the Proxy Statement for our 2010 Annual Meeting of Stockholders
is incorporated herein by reference.
77
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table sets forth information about our equity
compensation plans as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Number of Securities
|
|
|
Weighted-Average
|
|
|
under Equity
|
|
|
|
to be Issued Upon
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Exercise of Outstanding
|
|
|
Outstanding
|
|
|
(Excluding Securities
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Reflected in
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
Column a)
|
|
|
Equity compensation plans approved by security holders(1)
|
|
|
2,098,400
|
|
|
$
|
11.31
|
|
|
|
615,951
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,098,400
|
|
|
$
|
11.31
|
|
|
|
615,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of options to be issued excludes 120,000 options
granted to members of our Board of Directors that were not
issued pursuant to an equity compensation plan. |
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information contained under the headings Certain
Relationships and Related Transactions, and Director
Independence in the Proxy Statement for our 2010 Annual
Meeting of Stockholders is incorporated herein by reference.
|
|
ITEM 14.
|
Principal
Accounting Fees and Services
|
The information contained under the heading Principal
Accountant Fees and Services in the Proxy Statement for
our 2010 Annual Meeting of Stockholders is incorporated herein
by reference.
PART IV
|
|
ITEM 15.
|
Exhibits,
Financial Statement Schedules
|
The following information required under this item is filed as
part of this annual report:
|
|
|
|
1)
|
Consolidated Financial Statements: See Index to Consolidated
Financial Statements contained in Item 8 on page 43 of
this annual report.
|
|
|
2)
|
Financial Statement Schedule: Schedule II
Consolidated Valuation and Qualifying Accounts
|
Financial statement schedules not listed above are omitted
because they are not required or are not applicable, or the
required information is presented in the financial statements
(including the notes thereto). Captions and column headings have
been omitted where not applicable.
|
|
|
|
3)
|
Exhibits are incorporated herein by reference or are filed with
this annual report on Form
10-K as set
forth below:
|
78
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Filing Date
|
|
Number
|
|
Herewith
|
|
|
3
|
.1
|
|
Second Amended and Restated Certificate of Incorporation of
Virtual Radiologic Corporation.
|
|
10-K
|
|
2/20/09
|
|
|
3
|
.1
|
|
|
|
3
|
.2
|
|
Amended and Restated Bylaws of Virtual Radiologic Corporation.
|
|
10-K
|
|
2/20/09
|
|
|
3
|
.2
|
|
|
|
3
|
.3
|
|
First Amendment to Amended and Restated Bylaws of Virtual
Radiologic Corporation.
|
|
8-K
|
|
2/9/09
|
|
|
3
|
.1
|
|
|
|
4
|
.1
|
|
Form of Stock Certificate.
|
|
S-1/A
|
|
9/17/07
|
|
|
4
|
.2
|
|
|
|
10
|
.1
|
|
Lease Agreement, dated as of March 11, 2004, by and between
Midwest Holding Corp. # 9, Inc. and Virtual Radiologic
Consultants, LLC.
|
|
S-1/A
|
|
9/17/07
|
|
|
10
|
.30
|
|
|
|
10
|
.2
|
|
First Amendment to Lease, dated August 12, 2004, by and
between Midwest Holding Corp. # 9, Inc. and Virtual Radiologic
Consultants, LLC.
|
|
S-1/A
|
|
9/17/07
|
|
|
10
|
.31
|
|
|
|
10
|
.3
|
|
Second Amendment to Lease, dated as of December 1, 2006, by
and between Wells REIT II 5995 Opus Parkway, LLC (as
successor in interest to Midwest Holding Corp. # 9, Inc.) and
Virtual Radiologic Corporation.
|
|
S-1/A
|
|
9/17/07
|
|
|
10
|
.67
|
|
|
|
10
|
.4
|
|
Third Amendment to Lease, dated as of August 21, 2007, by
and between Wells REIT II 5995 Opus Parkway, LLC and
Virtual Radiologic Corporation.
|
|
S-1/A
|
|
9/17/07
|
|
|
10
|
.68
|
|
|
|
10
|
.5
|
|
Office Lease, effective December 3, 2007, by and between
Windsor Plaza, LLC and Virtual Radiologic Corporation.
|
|
8-K
|
|
12/7/07
|
|
|
10
|
.1
|
|
|
|
10
|
.6
|
|
First Amendment to Lease, effective March 31, 2009, between
Windsor Plaza, LLC and Virtual Radiologic Corporation.
|
|
10-Q
|
|
5/1/09
|
|
|
10
|
.8
|
|
|
|
10
|
.7
|
|
Investor Rights Agreement, dated as of May 2, 2005, by and
among Virtual Radiologic Consultants, Inc. and the parties
listed on the signature page thereto.
|
|
S-1/A
|
|
9/26/06
|
|
|
10
|
.2
|
|
|
|
10
|
.8
|
|
Form of Indemnification Agreement, between Virtual Radiologic
Corporation and individual members of the Board of Directors.
|
|
S-1/A
|
|
9/26/06
|
|
|
10
|
.4
|
|
|
|
10
|
.9
|
|
Amended and Restated Virtual Radiologic Corporation Equity
Incentive Plan, as amended as of February 3, 2009.*
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.10
|
|
Form of Incentive Stock Option Agreement.*
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.11
|
|
Form of Non-Incentive Stock Option Agreement.*
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.12
|
|
Form of Restricted Stock Award Agreement (Non-Employee Director
Grants).*
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.13
|
|
Form of Restricted Stock Award Agreement (Executive Grants).*
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.14
|
|
Form of Restricted Stock Award Agreement (Executive Grants
Waiving Dividends).*
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.15
|
|
Summary of 2010 Employee Bonus Plan.*
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.16
|
|
Second Revised Licensing Agreement, dated as of April 1,
2006, between Fujifilm Medical Systems U.S.A., Inc. and Virtual
Radiologic Corporation.
|
|
S-1/A
|
|
9/17/07
|
|
|
10
|
.33
|
|
|
|
10
|
.17
|
|
Membership Interest Purchase Agreement between the Company,
Diagna Radiology, LLC, and the owners of Diagna Radiology, LLC
dated April 14, 2008.
|
|
8-K
|
|
4/16/08
|
|
|
10
|
.1
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Filing Date
|
|
Number
|
|
Herewith
|
|
|
10
|
.18
|
|
Employment Agreement, effective July 1, 2009, between
Virtual Radiologic Corporation and Eduard
Michel, M.D., Ph.D.*
|
|
10-Q
|
|
7/30/09
|
|
|
10
|
.1
|
|
|
|
10
|
.19
|
|
Independent Physician Agreement, effective July 1, 2009,
between Virtual Radiologic Professionals, LLC and Eduard
Michel, M.D., Ph.D.*
|
|
10-Q
|
|
7/30/09
|
|
|
10
|
.2
|
|
|
|
10
|
.20
|
|
Employment Agreement, effective as of October 1, 2007, by
and between Virtual Radiologic Corporation and Sean Casey.*
|
|
S-1/A
|
|
9/17/07
|
|
|
10
|
.69
|
|
|
|
10
|
.21
|
|
First Amendment to Employment Agreement, dated December 30,
2008, between Virtual Radiologic Corporation and Sean
Casey, M.D.*
|
|
8-K
|
|
1/2/09
|
|
|
10
|
.1
|
|
|
|
10
|
.22
|
|
Transition Agreement, effective as of January 26, 2009, by
and among Virtual Radiologic Corporation, Sean O.
Casey, M.D., and, for solely the purposes of
Section 1(f) thereof, Virtual Radiologic Professionals,
LLC.*
|
|
8-K
|
|
1/29/09
|
|
|
10
|
.1
|
|
|
|
10
|
.23
|
|
Employment Agreement, effective July 30, 2009, between
Virtual Radiologic Corporation and Robert C. Kill.*
|
|
10-Q
|
|
7/30/09
|
|
|
10
|
.3
|
|
|
|
10
|
.24
|
|
Employment Agreement, effective July 30, 2009, between
Virtual Radiologic Corporation and Leonard C. Purkis.*
|
|
10-Q
|
|
7/30/09
|
|
|
10
|
.4
|
|
|
|
10
|
.25
|
|
Employment Agreement, effective July 30, 2009, between
Virtual Radiologic Corporation and Richard W. Jennings.*
|
|
10-Q
|
|
7/30/09
|
|
|
10
|
.5
|
|
|
|
10
|
.26
|
|
Employment Agreement, effective July 30, 2009, between
Virtual Radiologic Corporation and Michael J. Kolar.*
|
|
10-Q
|
|
7/30/09
|
|
|
10
|
.6
|
|
|
|
10
|
.27
|
|
Professional and Management Services Agreement and License,
dated as of January 1, 2006, by and between Virtual
Radiologic Professionals, LLC and Virtual Radiologic
Corporation.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.28
|
|
Amendment No. 1 to Professional and Management Services
Agreement and License, dated as of February 1, 2007, by and
between Virtual Radiologic Professionals, LLC and Virtual
Radiologic Corporation.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.48
|
|
|
|
10
|
.29
|
|
Amendment No. 2 to Professional and Management Services
Agreement and License, dated as of January 30, 2008, by and
between Virtual Radiologic Professionals, LLC and Virtual
Radiologic Corporation.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.1
|
|
|
|
10
|
.30
|
|
Amendment to Amendment No. 2 to Professional and Management
Services Agreement and License, dated as of April 22, 2008,
by and between Virtual Radiologic Professionals, LLC and Virtual
Radiologic Corporation.
|
|
8-K
|
|
4/25/08
|
|
|
10
|
.1
|
|
|
|
10
|
.31
|
|
Amendment No. 3 to 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-Q
|
|
5/1/09
|
|
|
10
|
.1
|
|
|
|
10
|
.32
|
|
Management Services Agreement, dated as of January 1, 2006,
by and between Virtual Radiologic Corporation and Virtual
Radiologic Professionals of California, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.20
|
|
|
|
10
|
.33
|
|
Amendment No. 1 to Management Services Agreement, dated as
of January 30, 2008, by and between Virtual Radiologic
Professionals of California, P.A. and Virtual Radiologic
Corporation.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.2
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Filing Date
|
|
Number
|
|
Herewith
|
|
|
10
|
.34
|
|
Amendment No. 2 to Management Services Agreement, dated as
of April 30, 2009, by and between Virtual Radiologic
Professionals of California, P.A. and Virtual Radiologic
Corporation.
|
|
10-Q
|
|
5/1/09
|
|
|
10
|
.2
|
|
|
|
10
|
.35
|
|
Management Services Agreement, dated as of January 1, 2006,
by and between Virtual Radiologic Corporation and Virtual
Radiologic Professionals of Illinois, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.21
|
|
|
|
10
|
.36
|
|
Amendment No. 1 to Management Services Agreement, dated as
of January 30, 2008, by and between Virtual Radiologic
Professionals of Illinois, S.C. and Virtual Radiologic
Corporation.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.3
|
|
|
|
10
|
.37
|
|
Amendment No. 2 to Management Services Agreement, dated as
of April 30, 2009, by and between Virtual Radiologic
Professionals of Illinois, S.C. and Virtual Radiologic
Corporation.
|
|
10-Q
|
|
5/1/09
|
|
|
10
|
.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.38
|
|
Management Services Agreement, dated as of January 1, 2006,
by and between Virtual Radiologic Corporation and Virtual
Radiologic Professionals of Michigan, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.22
|
|
|
|
10
|
.39
|
|
Amendment No. 1 to Management Services Agreement, dated as
of January 30, 2008, by and between Virtual Radiologic
Professionals of Michigan, P.C. and Virtual Radiologic
Corporation.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.4
|
|
|
|
10
|
.40
|
|
Amendment No. 2 to Management Services Agreement, dated as
of April 30, 2009, by and between Virtual Radiologic
Professionals of Michigan, P.C. and Virtual Radiologic
Corporation.
|
|
10-Q
|
|
5/1/09
|
|
|
10
|
.4
|
|
|
|
10
|
.41
|
|
Management Services Agreement, dated as of January 1, 2006,
by and between Virtual Radiologic Corporation and Virtual
Radiologic Professionals of Minnesota, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.18
|
|
|
|
10
|
.42
|
|
Amendment No. 1 to Management Services Agreement, dated as
of January 30, 2008, by and between Virtual Radiologic
Professionals of Minnesota, P.A. and Virtual Radiologic
Corporation.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.5
|
|
|
|
10
|
.43
|
|
Amendment No. 2 to Management Services Agreement, dated as
of April 30, 2009, by and between Virtual Radiologic
Professionals of Minnesota, P.A. and Virtual Radiologic
Corporation.
|
|
10-Q
|
|
5/1/09
|
|
|
10
|
.5
|
|
|
|
10
|
.44
|
|
Management Services Agreement, dated as of January 1, 2006,
by and between Virtual Radiologic Corporation and Virtual
Radiologic Professionals of New York, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.19
|
|
|
|
10
|
.45
|
|
Amendment No. 1 to Management Services Agreement, dated as
of January 30, 2008, by and between Virtual Radiologic
Professionals of New York, P.A. and Virtual Radiologic
Corporation.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.6
|
|
|
|
10
|
.46
|
|
Amendment No. 2 to Management Services Agreement, dated as
of April 30, 2009, by and between Virtual Radiologic
Professionals of New York, P.A. and Virtual Radiologic
Corporation.
|
|
10-Q
|
|
5/1/09
|
|
|
10
|
.6
|
|
|
|
10
|
.47
|
|
Management Services Agreement, dated as of January 1, 2006,
by and between Virtual Radiologic Corporation and Virtual
Radiologic Professionals of Texas, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.23
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Filing Date
|
|
Number
|
|
Herewith
|
|
|
10
|
.48
|
|
Amendment No. 1 to Management Services Agreement, dated as
of January 30, 2008, by and between Virtual Radiologic
Professionals of Texas, P.A. and Virtual Radiologic
Corporation.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.49
|
|
Amendment No. 2 to Management Services Agreement, dated as
of April 30, 2009, by and between Virtual Radiologic
Professionals of Texas, P.A. and Virtual Radiologic Corporation.
|
|
10-Q
|
|
5/1/09
|
|
|
10
|
.7
|
|
|
|
10
|
.50
|
|
Professional Services Agreement, dated as of January 1,
2006, by and between Virtual Radiologic Professionals, LLC, and
Virtual Radiologic Professionals of California, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.26
|
|
|
|
10
|
.51
|
|
Amendment No. 1 to Professional Services Agreement, dated
as of February 1, 2007, by and between Virtual Radiologic
Professionals, LLC, and Virtual Radiologic Professionals of
California, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.51
|
|
|
|
10
|
.52
|
|
Amendment No. 2 to Professional Services Agreement, dated
as of January 30, 2008, by and between Virtual Radiologic
Professionals, LLC and Virtual Radiologic Professionals of
California, P.A.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.8
|
|
|
|
10
|
.53
|
|
Professional Services Agreement, dated as of January 1,
2006, by and between Virtual Radiologic Professionals, LLC, and
Virtual Radiologic Professionals of Illinois, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.27
|
|
|
|
10
|
.54
|
|
Amendment No. 1 to Professional Services Agreement, dated
as of February 1, 2007, by and between Virtual Radiologic
Professionals, LLC and Virtual Radiologic Professionals of
Illinois, S.C.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.52
|
|
|
|
10
|
.55
|
|
Amendment No. 2 to Professional Services Agreement, dated
as of January 30, 2008, by and between Virtual Radiologic
Professionals, LLC and Virtual Radiologic Professionals of
Illinois, S.C.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.9
|
|
|
|
10
|
.56
|
|
Professional Services Agreement, dated as of January 1,
2006, by and between Virtual Radiologic Professionals, LLC, and
Virtual Radiologic Professionals of Michigan, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.28
|
|
|
|
10
|
.57
|
|
Amendment No. 1 to Professional Services Agreement, dated
as of February 1, 2007, by and between Virtual Radiologic
Professionals, LLC, and Virtual Radiologic Professionals of
Michigan, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.53
|
|
|
|
10
|
.58
|
|
Amendment No. 2 to Professional Services Agreement, dated
as of January 30, 2008, by and between Virtual Radiologic
Professionals, LLC and Virtual Radiologic Professionals of
Michigan, P.C.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.59
|
|
Professional Services Agreement, dated as of January 1,
2006, by and between Virtual Radiologic Professionals, LLC, and
Virtual Radiologic Professionals of Minnesota, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.24
|
|
|
|
10
|
.60
|
|
Amendment No. 1 to Professional Services Agreement, dated
as of February 1, 2007, by and between Virtual Radiologic
Professionals, LLC, and Virtual Radiologic Professionals of
Minnesota, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.49
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Filing Date
|
|
Number
|
|
Herewith
|
|
|
10
|
.61
|
|
Amendment No. 2 to Professional Services Agreement, dated
as of January 30, 2008, by and between Virtual Radiologic
Professionals, LLC, and Virtual Radiologic Professionals of
Minnesota, P.A.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.11
|
|
|
|
10
|
.62
|
|
Professional Services Agreement, dated as of January 1,
2006, by and between Virtual Radiologic Professionals, LLC, and
Virtual Radiologic Professionals of New York, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.25
|
|
|
|
10
|
.63
|
|
Amendment No. 1 to Professional Services Agreement, dated
as of February 1, 2007, by and between Virtual Radiologic
Professionals, LLC, and Virtual Radiologic Professionals of New
York, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.50
|
|
|
|
10
|
.64
|
|
Amendment No. 2 to Professional Services Agreement, dated
as of January 30, 2008, by and between Virtual Radiologic
Professionals, LLC and Virtual Radiologic Professionals of New
York, P.A.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.12
|
|
|
|
10
|
.65
|
|
Professional Services Agreement, dated as of January 1,
2006, by and between Virtual Radiologic Professionals, LLC, and
Virtual Radiologic Professionals of Texas, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.29
|
|
|
|
10
|
.66
|
|
Amendment No. 1 to Professional Services Agreement, dated
as of February 1, 2007, by and between Virtual Radiologic
Professionals, LLC, and Virtual Radiologic Professionals of
Texas, P.A.
|
|
S-1/A
|
|
2/9/07
|
|
|
10
|
.54
|
|
|
|
10
|
.67
|
|
Amendment No. 2 to Professional Services Agreement, dated
as of January 30, 2008, by and between Virtual Radiologic
Professionals, LLC and Virtual Radiologic Professionals of
Texas, P.A.
|
|
8-K
|
|
2/1/08
|
|
|
10
|
.13
|
|
|
|
21
|
.1
|
|
List of subsidiaries of Registrant.
|
|
|
|
|
|
|
|
|
|
X
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP.
|
|
|
|
|
|
|
|
|
|
X
|
|
23
|
.2
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
X
|
|
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.
|
|
|
|
|
|
|
|
|
|
X
|
|
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.
|
|
|
|
|
|
|
|
|
|
X
|
|
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.
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
* |
|
Indicates management contract or compensatory plan contract or
arrangement. |
|
|
|
Confidential treatment has been requested for certain portions
of this exhibit, which portions have been omitted and filed
separately with the Securities and Exchange Commission. |
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934 the registrant has duly caused
this report to be signed on its behalf by the undersigned on the
18th day
of February 2010, thereunto duly authorized.
VIRTUAL RADIOLOGIC CORPORATION
Name: Robert C. Kill
|
|
|
|
Title:
|
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
C. Kill
Robert
C. Kill
|
|
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
|
|
February 18, 2010
|
|
|
|
|
|
/s/ Leonard
C. Purkis
Leonard
C. Purkis
|
|
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
February 18, 2010
|
|
|
|
|
|
/s/ Nabil
N. El-Hage
Nabil
N. El-Hage
|
|
Director
|
|
February 18, 2010
|
|
|
|
|
|
/s/ Andrew
P. Hertzmark
Andrew
P. Hertzmark
|
|
Director
|
|
February 18, 2010
|
|
|
|
|
|
/s/ Mark
E. Jennings
Mark
E. Jennings
|
|
Director
|
|
February 18, 2010
|
|
|
|
|
|
/s/ Eduard
Michel, M.D., Ph.D.
Eduard
Michel, M.D., Ph.D.
|
|
Director
|
|
February 18, 2010
|
|
|
|
|
|
/s/ Richard
J. Nigon
Richard
J. Nigon
|
|
Director
|
|
February 18, 2010
|
|
|
|
|
|
/s/ Kevin
H. Roche
Kevin
H. Roche
|
|
Director
|
|
February 18, 2010
|
|
|
|
|
|
/s/ David
L. Schlotterbeck
David
L. Schlotterbeck
|
|
Director
|
|
February 18, 2010
|
|
|
|
|
|
/s/ Brian
F. Sullivan
Brian
F. Sullivan
|
|
Director
|
|
February 18, 2010
|
84