Attached files
file | filename |
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EX-31.2 - EX-31.2 - Virtual Radiologic CORP | c57777exv31w2.htm |
EX-31.1 - EX-31.1 - Virtual Radiologic CORP | c57777exv31w1.htm |
EX-32.2 - EX-32.2 - Virtual Radiologic CORP | c57777exv32w2.htm |
EX-32.1 - EX-32.1 - Virtual Radiologic CORP | c57777exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33815
Virtual Radiologic Corporation
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
27-0074530 (IRS Employer Identification No.) |
|
11995 Singletree Lane, Suite 500 Eden Prairie, Minnesota (Address of principal executive offices) |
55344 (Zip code) |
(952) 595-1100
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 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.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
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 April 26, 2010, 16,268,944 shares of the registrants common stock were outstanding.
Table of Contents
PART I Financial Information
ITEM 1. Consolidated Financial Statements
Virtual Radiologic Corporation
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
Page | ||
4 | ||
5 | ||
6 | ||
7 | ||
8 |
3
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VIRTUAL RADIOLOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share data)
(unaudited)
(in thousands, except share data)
As of | As of | |||||||
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 52,392 | $ | 50,163 | ||||
Restricted cash |
1,751 | 1,751 | ||||||
Accounts receivable, net |
18,451 | 17,384 | ||||||
Prepaid expenses and other current assets |
2,633 | 2,768 | ||||||
Total current assets |
75,227 | 72,066 | ||||||
Property and equipment, net |
12,371 | 13,489 | ||||||
Intangible assets, net |
4,092 | 3,952 | ||||||
Goodwill |
871 | 858 | ||||||
Medical malpractice excess loss reserves
receivable |
974 | 1,008 | ||||||
Deferred tax asset |
3,401 | 3,084 | ||||||
Other assets |
5 | 5 | ||||||
Total assets |
$ | 96,941 | $ | 94,462 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accrued professional services compensation
expense |
$ | 5,838 | $ | 5,719 | ||||
Accrued sales, general and administrative
compensation expense |
2,019 | 4,087 | ||||||
Current deferred tax liability |
| 1,089 | ||||||
Current taxes payable |
2,741 | 1,635 | ||||||
Medical malpractice loss reserves, current |
410 | 468 | ||||||
Accounts payable and other current
liabilities |
2,893 | 2,076 | ||||||
Total current liabilities |
13,901 | 15,074 | ||||||
Deferred tenant lease allowance |
2,427 | 2,491 | ||||||
Medical malpractice loss reserves |
6,462 | 5,101 | ||||||
Medical malpractice excess loss reserves |
974 | 1,008 | ||||||
Other liabilities |
1,398 | 1,454 | ||||||
Total liabilities |
25,162 | 25,128 | ||||||
Commitments and contingencies (Note 5) |
||||||||
Stockholders equity: |
||||||||
Common stock, $.001 par value; 100,000,000
shares authorized as of March 31,
2010 and December 31, 2009; 16,245,994
and 16,054,829 shares issued and
15,964,860 and 15,928,661 shares
outstanding as of March 31, 2010 and
December 31, 2009, respectively |
17 | 17 | ||||||
Additional paid-in capital |
102,620 | 102,118 | ||||||
Treasury stock at cost, 1,095,980 and
1,095,490 shares as of March 31,
2010 and December 31, 2009, respectively |
(9,312 | ) | (9,306 | ) | ||||
Accumulated deficit |
(21,528 | ) | (23,482 | ) | ||||
Accumulated other comprehensive loss |
(18 | ) | (13 | ) | ||||
Total stockholders equity |
71,779 | 69,334 | ||||||
Total liabilities and stockholders
equity |
$ | 96,941 | $ | 94,462 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
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VIRTUAL RADIOLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Revenue |
$ | 30,813 | $ | 28,568 | ||||
Operating costs and expenses: |
||||||||
Professional services |
15,124 | 13,766 | ||||||
Sales, general and administrative |
10,641 | 11,066 | ||||||
Depreciation and amortization |
1,872 | 1,450 | ||||||
Total operating costs and expenses |
27,637 | 26,282 | ||||||
Operating income |
3,176 | 2,286 | ||||||
Other income (expense): |
||||||||
Interest income |
45 | 57 | ||||||
Interest expense |
(1 | ) | (1 | ) | ||||
Total other income |
44 | 56 | ||||||
Income before income tax expense |
3,220 | 2,342 | ||||||
Income tax expense |
1,266 | 950 | ||||||
Net income |
$ | 1,954 | $ | 1,392 | ||||
Earnings per common share: |
||||||||
Basic |
$ | 0.12 | $ | 0.09 | ||||
Diluted |
$ | 0.12 | $ | 0.09 | ||||
Weighted average common shares outstanding: |
||||||||
Basic |
15,949 | 15,863 | ||||||
Diluted |
16,305 | 16,240 |
The accompanying notes are an integral part of these consolidated financial statements.
5
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VIRTUAL RADIOLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(unaudited)
(in thousands)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid-In | Treasury | Accumulated | Comprehensive | Non-controlling | Stockholders | ||||||||||||||||||||||||||
Shares | Amount | Capital | Stock | Deficit | Loss | Interest | Equity | |||||||||||||||||||||||||
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 | ) | ||||||||||||||||||||||
Repurchases of common stock |
(150 | ) | | | (1,306 | ) | | | | (1,306 | ) | |||||||||||||||||||||
Balance at December 31, 2009 |
15,929 | $ | 17 | $ | 102,118 | $ | (9,306 | ) | $ | (23,482 | ) | $ | (13 | ) | $ | | $ | 69,334 | ||||||||||||||
Net income |
| | | | 1,954 | | | 1,954 | ||||||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | | (5 | ) | | (5 | ) | ||||||||||||||||||||||
Total comprehensive income |
1,949 | |||||||||||||||||||||||||||||||
Stock-based compensation for independent contractor physicians |
| | 11 | | | | | 11 | ||||||||||||||||||||||||
Stock-based compensation for employees and directors |
| | 577 | | | | | 577 | ||||||||||||||||||||||||
Issuance of common stock from equity awards |
36 | | 10 | | | | | 10 | ||||||||||||||||||||||||
Tax shortfall from exercises of stock options |
| | (96 | ) | | | | | (96 | ) | ||||||||||||||||||||||
Repurchases of common stock |
| | (6 | ) | | | | (6 | ) | |||||||||||||||||||||||
Balance at March 31, 2010 |
15,965 | $ | 17 | $ | 102,620 | $ | (9,312 | ) | $ | (21,528 | ) | $ | (18 | ) | $ | | $ | 71,779 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
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VIRTUAL RADIOLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,954 | $ | 1,392 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for doubtful accounts and sales allowances |
243 | 535 | ||||||
Depreciation and amortization |
1,872 | 1,450 | ||||||
Medical malpractice loss reserves |
1,361 | 1,300 | ||||||
Stock-based compensation for independent contractor physicians |
11 | (143 | ) | |||||
Stock-based compensation for employees and directors |
577 | 721 | ||||||
Deferred income taxes |
(1,960 | ) | 23 | |||||
Other, net |
(48 | ) | 16 | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,310 | ) | (1,142 | ) | ||||
Prepaid expenses and other assets |
673 | 517 | ||||||
Accrued expenses |
(1,822 | ) | 1,134 | |||||
Accounts payable and other liabilities |
1,690 | 880 | ||||||
Net cash provided by operating activities |
3,241 | 6,683 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(606 | ) | (2,230 | ) | ||||
Cash paid for acquisition (see Note 2) |
(400 | ) | | |||||
Restricted cash |
| (1,050 | ) | |||||
Other, net |
| 5 | ||||||
Net cash used in investing activities |
(1,006 | ) | (3,275 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments on capital lease |
(10 | ) | | |||||
Proceeds from stock option exercises |
10 | 22 | ||||||
Excess tax benefits from exercises of stock options |
| 461 | ||||||
Repurchases of common stock |
(6 | ) | (116 | ) | ||||
Net cash (used in) provided by financing activities |
(6 | ) | 367 | |||||
Net increase in cash and cash equivalents |
2,229 | 3,775 | ||||||
Cash and cash equivalents: |
||||||||
Beginning of period |
50,163 | 19,180 | ||||||
End of period |
$ | 52,392 | $ | 22,955 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid (received) for income taxes, net |
$ | 2,113 | $ | (538 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
7
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VIRTUAL RADIOLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
1. Business Overview and Basis of Presentation
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 144 affiliated radiologists serve over 1,200 facilities (approximately 21% of
U.S. hospitals), reading more than 2.6 million interpretations annually.
Virtual Radiologic Professionals, LLC, or 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, comprised 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 March 31, 2010, 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 comply 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.
Interim Consolidated Financial Statements
The Company has prepared the unaudited interim consolidated financial statements and related
notes thereto in accordance with generally accepted accounting principles in the United States of
America, or GAAP, and the rules and regulations of the Securities and Exchange Commission, or the
SEC, for interim financial statements. Certain information and note disclosures normally included
in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to
such rules and regulations. These interim financial statements reflect all adjustments consisting
of normal recurring accruals, which, in the opinion of management, are necessary to present fairly
the Companys consolidated financial position, the results of its operations and its cash flows for
the interim periods. The nature of the Companys business is such that the results of any interim
period may not be indicative of the results to be expected for the entire year.
These interim consolidated financial statements should be read in conjunction with the
consolidated annual financial statements and the notes thereto included in the Companys 2009
Annual Report on Form 10-K filed with the SEC on February 18, 2010. The December 31, 2009 balance
sheet data has been derived from audited financial statements as of that date, but does not include
all note disclosures required by GAAP. However, the Company believes that the disclosures
presented are adequate to make the information presented not misleading.
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VIRTUAL RADIOLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
Significant Accounting Policies and Estimates
The Companys significant accounting policies and estimates are described in Note 2, Summary
of Significant Accounting Policies, of the Notes to Consolidated Financial Statements and in Item
7, Managements Discussion and Analysis of Financial Condition and Results of Operations included
in the Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no
significant changes in the Companys significant accounting policies or critical accounting
estimates during the quarter ended March 31, 2010.
Principles of Consolidation
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 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 were not adjusted.
The effect of the VIEs consolidation on the Companys Consolidated Balance Sheet at March 31,
2010 was an increase in the Companys assets and liabilities of approximately $8.2 million and $6.3
million, respectively. At December 31, 2009, as a result of consolidating the VIEs, the Companys
assets and liabilities increased by approximately $8.7 million and $6.0 million, respectively. For
the three months ended March 31, 2010 and 2009, the revenue of the VIEs represented approximately
42%, or $12.8 million, and 46%, or $13.3 million of the consolidated revenue of the Company,
respectively.
As of March 31, 2010 and December 31, 2009, and for the three months ended March 31, 2010 and
2009, 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.
The results of the Companys operations are based on a single reportable segment for purposes
of presenting financial information in accordance with accounting guidance on segment reporting.
9
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VIRTUAL RADIOLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
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 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.
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.
The Company 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.
As a result of its limited history in billing third party payers, the Company estimates the
anticipated reimbursement using a combination of industry collection rates, and collection rates
based on the Companys own collection experience. These estimates are evaluated and revised on a
quarterly basis as more collection data becomes available. The allowance for contractual
adjustments is recorded in Revenue as a contra revenue account on the Consolidated Statements of
Operations and in Accounts receivable, net, on the Consolidated Balance Sheets. 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.
For services which are billed directly to patients, the Company maintains an allowance
for doubtful accounts for potentially uncollectable amounts based on historical industry patient
collection rates.
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.
New Accounting Standards
Consolidation of Variable Interest Entities On January 1, 2010, the Company adopted new
guidance which requires a qualitative approach to identifying a controlling financial interest in a
VIE and also requires an ongoing reassessment of whether an entity is a VIE and whether an interest
in a VIE makes the holder the primary beneficiary. The adoption of this new guidance did not have a
material effect on the Companys consolidated financial position, results of operations and/or cash
flows.
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VIRTUAL RADIOLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
Fair Value Measurements On January 1, 2010, the Company adopted new guidance on fair value
measurements for non-financial assets and liabilities. The new guidance defines fair value,
establishes a framework for measuring fair value under GAAP, and expands disclosures about fair
value measurements. The adoption of this new guidance did not have a material effect on the
Companys consolidated financial position, results of operations and/or cash flows.
Subsequent Events In February 2010, the Financial Accounting Standards Board, or FASB,
issued new guidance on amending certain recognition and disclosure requirements for subsequent
events. The new guidance clarifies existing guidance for evaluating subsequent events and removes
the requirement for SEC filers to disclose the date through which subsequent events have been
evaluated. The adoption of this new guidance did not have a material effect on the Companys
consolidated financial position, results of operations and/or cash flows.
2. Goodwill and Other Intangible Assets, Net
During the quarter ended March 31, 2010, the Company acquired certain assets of a radiology
practice for total cash consideration of $400,000. In connection with this acquisition, the
Company recorded goodwill of $14,000 and $386,000 of customer relationships.
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, or more frequently if events or changes in circumstances indicate potential impairment.
The Companys annual test is performed during the second quarter and the results of the test
completed as of June 30, 2009 indicated the fair value of the reporting unit substantially exceeded
its carrying value, and therefore, goodwill was not impaired. As of March 31, 2010, the Company has
determined that no events or changes in circumstances have indicated potential impairment. There
were no accumulated impairment losses as of March 31, 2010 and December 31, 2009.
Intangible Assets, Net
As of | As of | |||||||||||||||||||||||
March 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||
Original Cost | Amortization | Carrying Value | Original Cost | Amortization | Carrying Value | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Patent application costs |
$ | 347 | $ | (86 | ) | $ | 261 | $ | 347 | $ | (80 | ) | $ | 267 | ||||||||||
Non-compete agreements |
298 | (292 | ) | 6 | 298 | (255 | ) | 43 | ||||||||||||||||
Customer relationships |
5,354 | (1,529 | ) | 3,825 | 4,968 | (1,326 | ) | 3,642 | ||||||||||||||||
Intangible assets, net |
$ | 5,999 | $ | (1,907 | ) | $ | 4,092 | $ | 5,613 | $ | (1,661 | ) | $ | 3,952 | ||||||||||
The Company records amortization related to patents and non-compete agreements on a
straight-line basis over their estimated useful lives of 15 years and 2 years, respectively. The
Company records amortization related to customer relationships over their estimated useful lives
between 3 and 10 years based on the expected future economic benefits of those customer
relationships on an accelerated basis. Amortization expense related to intangible assets was
approximately $246,000 and $280,000 for the three months ended March 31, 2010 and 2009,
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 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
11
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VIRTUAL RADIOLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
the fair value of its intangible assets. As of March 31, 2010, the Company has determined that no events or changes in circumstances have
indicated potential impairment.
As of March 31, 2010, future estimated amortization expense related to intangible assets was
as follows:
Amount | ||||
(in thousands) | ||||
Nine months ending December 31, 2010 |
$ | 690 | ||
Year ending December 31, 2011 |
864 | |||
Year ending December 31, 2012 |
699 | |||
Year ending December 31, 2013 |
498 | |||
Year ending December 31, 2014 |
393 | |||
Thereafter |
948 | |||
Total |
$ | 4,092 | ||
This future amortization expense is an estimate. Actual amounts may vary from these estimated
amounts due to additional intangible asset acquisitions, potential impairment, accelerated
amortization or other events.
3. 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 March 31, 2010, there were 517,774 shares available for issuance
under the vRad Equity Incentive Plan.
Stock-Based Compensation Costs
Employee Stock-Based Compensation. Stock-based compensation expense related to employee and
director equity awards was approximately $577,000 and $721,000 for the three months ended March 31,
2010 and 2009, respectively. Included in stock-based compensation expense for the three months
ended March 31, 2009 was $182,000 related to the accelerated vesting of certain stock option
awards. There were no expenses incurred during the three months ended March 31, 2010 associated
with modifications to the terms of existing equity awards. Employee and director stock-based
compensation expense is included in Sales, general and administrative expenses in the Consolidated
Statements of Operations.
During the three months ended March 31, 2010 and 2009, the Company issued 169,666 and 88,000
restricted stock awards, respectively, to certain employees and directors. There were no stock
options issued to employees or directors during the three months ended March 31, 2010. During the
three months ended March 31, 2009, 375,000 stock options were issued to certain employees and
directors.
As of March 31, 2010, unrecognized stock-based compensation related to unvested employee stock
options and restricted stock awards granted on or after January 1, 2006, was approximately $5.4
million, net of estimated forfeitures. These costs are to be recognized over a weighted average
period of approximately 2.8 years.
Physician Stock-Based Compensation. The Company recorded physician stock-based compensation
expense of approximately $11,000 and income of approximately $143,000 for the three months ended
March 31, 2010 and 2009, respectively. Physician stock-based compensation expense is included in
Professional services expense in the Consolidated Statements of Operations.
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VIRTUAL RADIOLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
During the three months ended March 31, 2010 and 2009, the Company issued 11,200 and zero
restricted stock awards, respectively, to certain independent contractor physicians. There were no
stock options issued to independent contractor physicians during the three months ended March 31,
2010 and 2009.
Stock Option Activity
Stock option activity for employees, directors and independent contractor physicians during
the three months ended March 31, 2010 was as follows:
Weighted | Weighted | |||||||||||
Average | Average | |||||||||||
Exercise Price | Contractual Life | |||||||||||
Outstanding | Per Share | (in years) | ||||||||||
Balance at December 31, 2009(1) |
2,098,400 | $ | 11.31 | | ||||||||
Granted |
| | | |||||||||
Exercised |
(15,689 | ) | 3.25 | | ||||||||
Forfeited/Cancelled/Expired |
(77,789 | ) | 12.18 | | ||||||||
Balance at March 31, 2010 |
2,004,922 | 11.34 | 5.81 | |||||||||
Options vested and expected to vest at March 31, 2010(2) |
1,976,700 | 11.32 | 5.82 | |||||||||
Exercisable at March 31, 2010 |
1,045,632 | 10.24 | 5.06 |
(1) | The number of options outstanding includes 120,000 options granted in May 2007 to members of vRads Board of Directors that were not issued pursuant to the vRad Equity Incentive Plan. | |
(2) | Options expected to vest reflect an estimated forfeiture rate. |
Restricted Stock Award Activity
Restricted stock award activity for employees, directors and independent contractor physicians
during the three months ended March 31, 2010 was as follows:
Weighted | Weighted | |||||||||||
Average | Average | |||||||||||
Fair Value | Vesting Period | |||||||||||
Outstanding | Per Share | (in years) | ||||||||||
Balance at December 31, 2009 |
126,168 | $ | 9.53 | | ||||||||
Granted |
180,866 | 10.58 | | |||||||||
Vested |
(21,000 | ) | 8.70 | | ||||||||
Forfeited/Cancelled/Expired |
(4,900 | ) | 9.14 | | ||||||||
Balance at March 31, 2010 |
281,134 | 10.18 | 3.59 | |||||||||
Awards vested and expected to vest at March 31, 2010(1) |
274,642 | 10.18 | 3.59 |
(1) | Awards expected to vest reflect an estimated forfeiture rate. |
4. Stock Repurchase Program
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
three months ended March 31, 2010, vRad did not repurchase any shares of common stock under the
stock repurchase program. As of March 31, 2010, vRad had $3.7 million remaining under the $5.0
million share repurchase program.
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VIRTUAL RADIOLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
5. Commitments and Contingencies
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 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 $859,000 and $852,000 associated with this lease is included in Other liabilities on
the Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009, respectively.
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 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, or IBNR, in combination with its own loss history, based on an actuarial
valuation using historical loss patterns. The actuarial analysis utilizes industry loss data as a
result of the Companys limited experience.
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.
The following table summarizes the activity of the Companys medical malpractice
loss reserves for the three months ended March 31, 2010:
As of | As of | |||||||||||||||
December 31, | March 31, | |||||||||||||||
2009 | Payments | Reserves | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Specific claims reserves |
$ | 115 | $ | | $ | | $ | 115 | ||||||||
Medical malpratice loss development reserves |
2,942 | 58 | 787 | 3,671 | ||||||||||||
IBNR reserves |
2,512 | | 574 | 3,086 | ||||||||||||
Total |
$ | 5,569 | $ | 58 | $ | 1,361 | $ | 6,872 | ||||||||
The Company believes that its insurance coverage is appropriate based upon its claims
experience and the nature of its business. However, the Company cannot assure that any pending or
future claim will not be successful, or if successful that it 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.
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VIRTUAL RADIOLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
Litigation
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 March 31, 2010 and December 31, 2009, 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.
6. 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 three months
ended March 31, 2010 and 2009, the Company incurred licensing fees under this contract of
approximately $74,000 and $289,000, respectively.
The following table illustrates the revenues, expenses and cash flows that result from the
management and professional service agreements between vRad, VRP and the Professional Corporations:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
VRP professional services revenue from vRad |
$ | 7,196 | $ | 6,134 | ||||
vRad professional services expense to VRP |
7,196 | 6,134 | ||||||
VRP professional services revenue from the Professional Corporations |
6,383 | 6,624 | ||||||
Professional Corporations professional services expense to VRP |
6,383 | 6,624 | ||||||
vRad management fee revenue from the Professional Corporations |
6,319 | 6,557 | ||||||
Professional Corporations management fee expense to vRad |
6,319 | 6,557 | ||||||
Cash paid for professional services by vRad to VRP |
7,196 | 6,134 | ||||||
Cash paid for professional services by the Professional Corporations to VRP |
6,383 | 6,624 | ||||||
Cash paid for management fees by the Professional Corporations to vRad |
6,319 | 6,557 |
During the quarter ended March 31, 2009, the owners of VRP made the election with
the Internal Revenue Service to have VRP taxed as a corporation effective January 1, 2009. Prior to
that date VRP was taxed as a partnership. In conjunction with that election, vRad incurred certain
compensation costs totaling approximately $279,000 for expected payments to certain current and
former owners of VRP to reimburse them for taxes owed in connection with the election. These
amounts are included in Sales, general and administrative expense in the Consolidated Statement of
Operations for the three months ended March 31, 2009.
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 included in Sales, general and administrative expenses in
the Consolidated Statement of Operations. As of March 31, 2010 and December 31, 2009, zero and $105,000 of this amount was included in Other current liabilities
on the Consolidated Balance Sheets.
7. Earnings Per Share
Restricted stock awards issued during the year ended December 31, 2009 contain the right to
non-forfeitable dividends and are classified as participating securities in accordance with
accounting guidance on earnings per share. In 2010, the Company began issuing restricted stock
awards in which recipients waive their right to non-forfeitable dividends and therefore, these
restricted awards are classified as non-participating securities in accordance with accounting
guidance on earnings per share.
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VIRTUAL RADIOLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(unaudited)
The following table presents the computation of earnings per share:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(in thousands, except per share data) | ||||||||
Basic and Diluted Earnings per Share (Two-class Method) |
||||||||
Basic Earnings per Share: |
||||||||
Undistributed income available to common stockholders |
$ | 1,954 | $ | 1,392 | ||||
Participating securities ownership |
0.6 | % | 0.6 | % | ||||
Participating securities interest in undistributed income |
$ | 12 | $ | 8 | ||||
Weighted average participating securities outstanding |
112 | 57 | ||||||
Basic earnings per share participating securities |
$ | 0.11 | $ | 0.14 | ||||
Undistributed income available to common stockholders |
$ | 1,954 | $ | 1,392 | ||||
Common ownership |
99.4 | % | 99.4 | % | ||||
Common stockholders interest in undistributed income |
$ | 1,942 | $ | 1,384 | ||||
Weighted average common shares outstanding |
15,949 | 15,863 | ||||||
Basic earnings per share common |
$ | 0.12 | $ | 0.09 | ||||
Diluted Earnings per Share: |
||||||||
Common stockholders interest in undistributed income |
$ | 1,942 | $ | 1,384 | ||||
Participating securities interest in undistributed income |
12 | 8 | ||||||
Net income used in diluted earnings per share |
$ | 1,954 | $ | 1,392 | ||||
Weighted average common shares outstanding |
15,949 | 15,863 | ||||||
Weighted average participating securities outstanding |
112 | 57 | ||||||
Common share equivalents |
244 | (1) | 320 | (1) | ||||
Shares used to compute earnings per common share diluted |
16,305 | 16,240 | ||||||
Diluted earnings per share |
$ | 0.12 | $ | 0.09 |
(1) | The calculation of common stock equivalents excludes options and awards to purchase approximately 1.7 million and 1.8 million common shares for the three months ended March 31, 2010 and 2009, respectively, because they are antidilutive. |
16
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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
Certain statements in this quarterly 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 quarterly report on Form
10-Q are forward-looking statements that involve certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those indicated. Except as required by
applicable law, we undertake no duty to update these forward-looking statements due to new
information or as a result of future events.
Factors that could cause our actual results to differ materially from those expressed or
implied in such forward-looking statements include, but are not limited to, those discussed in the
risk factors listed from time to time in our reports filed with the SEC, including without
limitation, the section entitled Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2009.
Given these risks and uncertainties, readers are cautioned not to place undue reliance on
these forward-looking statements.
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 144 affiliated radiologists serve over 1,200 facilities (approximately 21% of U.S.
hospitals), reading more than 2.6 million interpretations annually.
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.
The terms Company, we, us, and our are used in this report to refer to vRad, the
Affiliated Medical Practices, VRL and VPIL.
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 slowed over time as the traditional off hours market for preliminary interpretations has
matured resulting in increased competition and related pricing pressures.
Our revenues have been affected by declines 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 average price per read has been affected by growth in plain film reads 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.
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
17
Table of Contents
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.
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:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenue |
100.0 | % | 100.0 | % | ||||
Operating costs and expenses: |
||||||||
Physician cash compensation expense |
43.8 | 43.4 | ||||||
Physician stock-based compensation expense (income) |
0.1 | (0.5 | ) | |||||
Medical malpractice liability expense |
5.2 | 5.3 | ||||||
Total professional services |
49.1 | 48.2 | ||||||
Sales, general and administrative |
34.5 | 38.7 | ||||||
Depreciation and amortization |
6.1 | 5.1 | ||||||
Total operating costs and expenses |
89.7 | 92.0 | ||||||
Operating income |
10.3 | 8.0 | ||||||
Total other income |
0.1 | 0.2 | ||||||
Income before income tax expense |
10.4 | 8.2 | ||||||
Income tax expense |
4.1 | 3.3 | ||||||
Net income |
6.3 | % | 4.9 | % | ||||
Comparison of the Three Months Ended March 31, 2010 and March 31, 2009
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
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 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 primarily 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 provided 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. As a result of our limited history in billing third party payers, we estimate the
anticipated reimbursement using a combination of industry collection rates, and collection rates
based on our own collection experience. These estimates are evaluated and revised on a quarterly
basis as more collection data becomes available. Revenue related to these services is recognized
when delivery of a service is completed by our independent contractor physicians and collectability
is reasonably assured. The allowance for contractual
18
Table of Contents
adjustments is recorded in Revenue as a contra revenue account on the Consolidated
Statements of Operations and in Accounts receivable, net, on the Consolidated Balance Sheets.
Key Revenue Metrics
Three months ended March 31, | ||||||||||||
2010 | 2009 | % change | ||||||||||
Revenue (in thousands) |
$ | 30,813 | $ | 28,568 | 8 | % | ||||||
Reads |
700,443 | 613,117 | 14 | % | ||||||||
Year-over-year change in price per read |
(6 | %) | (5 | %) | ||||||||
Same site volume growth(1) |
5 | % | 2 | % | ||||||||
Percentage of read volume from: |
||||||||||||
Final reads |
32 | % | 27 | % | ||||||||
Preliminary reads |
68 | % | 73 | % | ||||||||
Customers |
658 | 625 | 5 | % | ||||||||
Facilities |
1,205 | 1,050 | 15 | % | ||||||||
Percentage of U.S. hospitals served |
21 | % | 17 | % |
(1) | Same site volume growth measures the percentage increase in the number of reads over the comparable prior period generated by a facility that has been under contract for at least three months at the beginning of the measurement period and remains a customer throughout that period. |
The increase in revenue for the three months ended March 31, 2010, as compared to the prior
year period, resulted primarily from an increase in the number of customers to whom we provided
services and increased volume from existing customers, partially offset by declines in our average
price per read, which were primarily the result of continued pricing pressures in our marketplace,
and 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 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.
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Table of Contents
Key Professional Service Metrics
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
2010 | 2009 | % Change | ||||||||||
(dollars in thousands) | ||||||||||||
Physician cash compensation expense |
$ | 13,504 | $ | 12,402 | 9 | % | ||||||
Physician stock-based compensation expense (income) |
11 | (143 | ) | (108 | %) | |||||||
Medical malpractice liability expense |
1,609 | 1,507 | 7 | % | ||||||||
Total professional services |
$ | 15,124 | $ | 13,766 | 10 | % | ||||||
Radiologists providing services |
144 | 134 | 7 | % | ||||||||
Average diagnostic cash compensation per read |
$ | 19.16 | $ | 20.09 |
The increase in physician cash compensation expense for the three months ended March 31, 2010,
as compared to the prior year period, was primarily the result of additional independent contractor
physicians providing services and an increase in read volume. 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. Physician
stock-based compensation is based on the value of our common stock, which increased during the
three months ended March 31, 2010, as compared to the prior year period.
Sales, General and Administrative
Sales, general and administrative expenses include employee compensation, information
technology costs and facilities related costs.
The 4% decrease in sales, general and administrative expenses for the three months ended March
31, 2010, compared to the prior year period, included decreases in software transactional costs and
employee stock-based compensation of approximately $215,000 and $140,000, respectively, and a
$420,000 decrease resulting from a payment to our former Chairman under the Transition Agreement
between us and our former Chairman
during the three months ended March 31, 2009. These decreases were partially offset by an increase
of approximately $380,000 in facility costs, primarily from additional rent and utilities costs
associated with our new headquarters facility.
Depreciation and Amortization
Increases in depreciation and amortization expense during the three months ended March 31,
2010 and 2009, were primarily the result of additional technology and other capital equipment
purchased for our operations and new corporate headquarters.
Income Tax Expense
Income tax expense was approximately $1.3 million and $950,000 for the three months ended
March 31, 2010 and 2009, respectively. The increase was a result of higher pre-tax income for vRad
of approximately $3.2 million for the three months ended March 31, 2010, compared to approximately
$2.3 million for the same period in 2009, partially offset by a decline in the effective tax rate
to 39.3% for the three months ended March 31, 2010, compared to 40.6% for the same period in 2009.
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Liquidity and Capital Resources
Cash and Cash Equivalents
Our financial position included cash and cash equivalents of $52.4 million and $23.0 million
as of March 31, 2010 and 2009, respectively. The reported changes in cash and cash equivalents for
the three months ended March 31, 2010 and 2009 are summarized below:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Net cash provided by operating activities |
$ | 3,241 | $ | 6,683 | ||||
Net cash used in investing activities |
(1,006 | ) | (3,275 | ) | ||||
Net cash (used in) provided by financing activities |
(6 | ) | 367 | |||||
Net increase in cash and cash equivalents |
$ | 2,229 | $ | 3,775 | ||||
Cash Flows from Operating Activities
Our primary source of operating cash flows is collections from our customers and/or third
party payers for radiology services we provide, and our primary uses of cash from operating
activities include compensation paid
to employees and independent contractor physicians and costs associated with our leased
facilities. During the three months ended March 31, 2010 and 2009, net cash provided by operating
activities was $3.2 million and $6.7 million, respectively.
Cash flows from operating activities during the three months ended March 31, 2010 and 2009
consisted of net income of $1.9 million and $1.4 million, respectively, and adjustments for
non-cash items of $2.1 million and $3.9 million, respectively. During the three months ended March
31, 2010, adjustments for non-cash items primarily included depreciation and amortization and
changes in medical malpractice loss reserves and deferred income taxes. During the three months
ended March 31, 2009, adjustments for non-cash items primarily included depreciation and
amortization and changes in medical malpractice loss reserves. Other cash flows from operating
activities resulted from changes in operating assets and liabilities, including cash outflows and
cash inflows of approximately $770,000 and $1.4 million, respectively, during the three months
ended March 31, 2010 and 2009.
Cash Flows from Investing Activities
Our uses of cash flows from investing activities consist primarily of capital expenditures
related to equipment and software associated with the continued enhancement of our information
technology infrastructure. Cash flows from investing activities during the three months ended March
31, 2010 and 2009 included capital expenditures of approximately $606,000 and $2.2 million,
respectively. In addition, during the quarter ended March 31, 2010, we acquired certain assets of a
radiology practice for total cash consideration of $400,000. During the three months ended March
31, 2010 and 2009, net cash used in investing activities was $1.0 million and $3.3 million,
respectively.
Cash Flows from Financing Activities
Our primary sources of cash flows from financing activities are generally from excess tax
benefits from stock option exercises and our primary uses of cash from financing activities are
generally for the repurchases of our common stock. During the three months ended March 31, 2010 and
2009, net cash (used in) provided by financing activities was ($6,000) and $367,000, respectively.
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,
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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
On December 7, 2007, we entered into an agreement to lease approximately 82,000 square feet of
space in Eden Prairie, Minnesota, to consolidate our corporate headquarters. The lease commenced
on March 2, 2009 and expires on August 31, 2019. In conjunction with the lease, we were entitled to
a tenant improvement allowance of approximately $2.7 million, and upon commencement of the lease,
we recorded the allowance in leasehold improvements and deferred tenant lease allowance. The
amounts for leasehold improvements and deferred tenant lease allowance are included in Property and
equipment, net and Deferred tenant lease allowance, respectively on the Consolidated Balance Sheets
as of March 31, 2010 and 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 associated with this lease in the amount of $859,000 and $852,000
is included in Other liabilities on the Consolidated Balance Sheets as of March 31, 2010 and
December 31, 2009, respectively.
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 March 31, 2010, we have recognized $202,000 related to these uncertain tax
positions.
Significant Accounting Policies and Estimates
We describe our significant accounting policies in Note 1, Significant Accounting Policies and
Estimates, of the Notes to the Consolidated Financial Statements included in this report.
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 March 31,
2010 and December 31, 2009, and the unaudited condensed consolidating statements of operations for
the three months ended March 31, 2010 and 2009. The amounts reflected in the eliminations columns
of the condensed consolidating financial statements represent affiliated party management and
professional services fees. The following tables should be read together with our consolidated
financial statements and related notes included elsewhere in this report.
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Condensed Consolidating Balance Sheets
(unaudited)
(unaudited)
As of March 31, 2010 | ||||||||||||||||
Affiliated | ||||||||||||||||
Medical | ||||||||||||||||
vRad | Practices | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Cash and cash equivalents |
$ | 51,910 | $ | 482 | $ | | $ | 52,392 | ||||||||
Accounts receivable, net |
10,862 | 7,589 | | 18,451 | ||||||||||||
Other current assets |
40,589 | 51,889 | (88,094 | ) | 4,384 | |||||||||||
Non-current assets |
21,699 | 15 | | 21,714 | ||||||||||||
Total assets |
$ | 125,060 | $ | 59,975 | $ | (88,094 | ) | $ | 96,941 | |||||||
Current liabilities |
$ | 35,165 | $ | 66,830 | $ | (88,094 | ) | $ | 13,901 | |||||||
Non-current liabilities |
11,261 | | | 11,261 | ||||||||||||
Total liabilities |
46,426 | 66,830 | (88,094 | ) | 25,162 | |||||||||||
Stockholders equity (deficiency) |
78,634 | (6,855 | ) | | 71,779 | |||||||||||
Total liabilities and stockholders equity |
$ | 125,060 | $ | 59,975 | $ | (88,094 | ) | $ | 96,941 | |||||||
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 | |||||||
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Condensed Consolidating Statements of Operations
(unaudited)
(unaudited)
Three Months Ended March 31, 2010 | ||||||||||||||||
Affiliated | ||||||||||||||||
Medical | ||||||||||||||||
vRad | Practices | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue |
$ | 24,309 | $ | 26,401 | $ | (19,897 | ) | $ | 30,813 | |||||||
Operating costs and expenses |
21,124 | 26,410 | (19,897 | ) | 27,637 | |||||||||||
Operating income (loss) |
3,185 | (9 | ) | | 3,176 | |||||||||||
Other income |
44 | | | 44 | ||||||||||||
Income (loss) before income tax expense |
3,229 | (9 | ) | | 3,220 | |||||||||||
Income tax expense (benefit) |
1,302 | (36 | ) | | 1,266 | |||||||||||
Net income |
$ | 1,927 | $ | 27 | $ | | $ | 1,954 | ||||||||
Three Months Ended March 31, 2009 | ||||||||||||||||
Affiliated | ||||||||||||||||
Medical | ||||||||||||||||
vRad | Practices | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue |
$ | 21,863 | $ | 26,020 | $ | (19,315 | ) | $ | 28,568 | |||||||
Operating costs and expenses |
19,965 | 25,632 | (19,315 | ) | 26,282 | |||||||||||
Operating income |
1,898 | 388 | | 2,286 | ||||||||||||
Other income |
56 | | | 56 | ||||||||||||
Income before income tax expense |
1,954 | 388 | | 2,342 | ||||||||||||
Income tax expense |
782 | 168 | | 950 | ||||||||||||
Net income |
$ | 1,172 | $ | 220 | $ | | $ | 1,392 | ||||||||
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ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
Foreign Currency Exchange Risk
As of March 31, 2010, 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 three months ended March 31, 2010, 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, 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.
ITEM 4. 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.
Changes in Internal Controls over Financial Reporting
During the period covered by this report, 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.
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PART II Other Information
ITEM 1. 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.
ITEM 6. Exhibits
Exhibits are incorporated herein by reference or are filed with this quarterly report as set forth below:
EXHIBIT INDEX
Exhibit No. | Description | |
31.1
|
Certification by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*** | |
31.2
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*** | |
32.1
|
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*** | |
32.2
|
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*** |
*** | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following person on behalf of the registrant and in the capacities and on the dates
indicated.
Signature | Title | Date | ||
/s/ Leonard C. Purkis
|
Chief Financial Officer (Principal Financial and Accounting Officer, and Duly Authorized Officer) | April 28, 2010 |
27