**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

**FORM 10-K/A**

 

**(AmendmentNo. 2)**

 
| **ý**                                                                                                                                                         | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                         | ** ** | ** **                                                                                               |
| **For the  fiscal year ended December 31, 2004**                                                                                                              |
| ** **                                                                                                                                                         | ** ** | ** **                                                                                               |
| **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 0-22229**                                                                                                                                |

 

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**VITAL IMAGES, INC.**

(Exact name of Registrant asspecified in its charter)

 
| **Minnesota**                                                                   | ** ** | **42-1321776**                        |
|---------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of  incorporation or organization)                |       | (I.R.S.  Employer Identification No.) |
|                                                                            |       |                                  |
| **5850  Opus Parkway, Suite 300  Minnetonka, MN 55343-4414**               | ** ** | **55343-4414**                        |
| (Address of  principal  executive offices)                                      |       | (Zip Code)                            |
|                                                                            |       |                                  |
| **(952)  487-9500**                                                             |
| (Registrant’s  telephone number, including area code)                      |
|                                                                            |
| Securities  registered pursuant to Section 12(b) of the Act: **None** |
|                                                                            |
| Securities  registered pursuant to Section 12(g) of the Act:          |
|                                                                            |
| **Common Stock, $.01 par value  Preferred Stock Purchase Rights**               |
| (Title of  Class)                                                               |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to the Form 10-K.  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act). Yes ý No o

 

The aggregate market value of the common stock held by non-affiliatesof the registrant computed by reference to the price at which the common stockwas last sold as of June 30, 2004, the last business day of the registrant’smost recently completed second fiscal quarter, was $144,724,926.  The common stock is the registrant’s onlyclass of voting stock.

 

The number of shares outstanding of the issuer’s classes of commonstock as of February 28, 2005: Common stock, $.01 Par Value – 12,051,530.

 

 

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**ExplanatoryNote**

 

This Amendment No. 2 on Form 10-K/A (the “Amendment”) to the AnnualReport on Form 10-K for the fiscal year ended December 31, 2004, which wasoriginally filed with the Securities and Exchange Commission on March 16, 2005and amended by Amendment No. 1 filed on May 2, 2005 (the “Original Filing”), isbeing filed to amend the Original Filing as follows:

 

•          Item4 of the certifications pursuant to Section 302 of the Sarbanes-Oxley Act of2002, filed as exhibits to the Original Filing, have been updated to covermanagement’s report on internal control over financial reporting; and

 

•          Acurrently dated consent letter is included from the Company’s IndependentRegistered Public Accounting Firm dated May 3, 2005 to cover their reportrelated to internal control over financial reporting.

 

Except for the amendments described above, this Amendment does notmodify or update other disclosures in, or exhibits to, the Original Filing.

 

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Vital Images, Inc.

Form 10-K/A

 

Table of Contents

 
| Item 9A.   | Controls and Procedures                    |   |
|------------|--------------------------------------------|--------|
| Item 15.   | Exhibits and Financial Statement Schedules |   |
| Signatures |                                       |   |

 

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**Item 9A.   Controls and Procedures**

 

**Disclosure controls and procedures**

 

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the reportsthat the Company files or submits under Securities Exchange Acts are recorded,processed, summarized, and reported within the time periods specified in theSEC’s rules and forms, and that such information is accumulated andcommunicated to the Company’s management, including its Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required financial disclosure.

 

As of the end of the period covered by this report, the Company carriedout an evaluation, under the supervision and with the participation of Companymanagement, including the Chief Executive Officer and the Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934 (“Exchange Act”).  Based upon, and as of the date of thisevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that our disclosure controls and procedures were not effective,because of the material weaknesses discussed below.  In light of the material weaknesses describedbelow, the Company performed additional analysis and other post-closingprocedures to ensure that the consolidated financial statements were preparedin accordance with generally accepted accounting principles.  Accordingly, management believes that thefinancial statements previously filed with the Original Filing fairly presentin all material respects our financial condition, results of operations andcash flows for the periods presented.

 

**Management’s report on internal control overfinancial reporting**

 

Management of the Company is responsible for establishing andmaintaining adequate internal control over financial reporting. The Company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions or that the degree of compliance with establishedpolicies or procedures may deteriorate.

 

Management has completed its evaluation of the Company’s internalcontrol over financial reporting as of December 31, 2004.  In making its assessment of internal controlover financial reporting, management used the criteria described in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

A material weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.  Management’sassessment identified the following material weaknesses in the Company’sinternal control over financial reporting as of December 31, 2004:

 

(i) As of December 31, 2004, the Company did not maintain effectivecontrol over the accuracy and completeness of maintenance and services revenuesand deferred revenues.  Specifically,effective controls were not in place to recognize maintenance and servicesrevenue in the appropriate period.  Thiscontrol deficiency resulted in the restatement of the Company’s consolidatedfinancial statements for the year ended December 31, 2003, for the first andsecond quarters of 2004 and for the first, second and third quarters of2003.  Additionally, this controldeficiency could result in a misstatement of maintenance and services revenueand deferred revenue that would result in a material misstatement to annual orinterim financial statements that would not be prevented or detected.  Accordingly, management determined that thiscontrol deficiency constitutes a material weakness.

 

(ii) As of December 31, 2004, the Company did not maintain effectivecontrol over property and equipment. Specifically, effective controls were not in place to verify theexistence of certain property and equipment. This control deficiency did not result in an adjustment to the Company’sconsolidated financial statements; however, it could result in a misstatementof property and equipment that would result in a material misstatement toannual or interim financial statements that would not be prevented or detected.  Accordingly, management determined that thiscontrol deficiency constitutes a material weakness.

 

(iii) As of December 31, 2004, the Company did not maintain effectivecontrol over the period-end financial reporting

 

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process.  Specifically, reviewand approval controls over quarterly financial results and related disclosuresdid not operate as designed for a sufficient period of time to demonstrate thatthey operate effectively.  This controldeficiency did not result in an adjustment to the Company’s consolidatedfinancial statements; however, it could result in a misstatement of accountsand disclosures that would result in a material misstatement to annual orinterim financial statements that would not be prevented or detected.  Accordingly, management determined that thiscontrol deficiency constitutes a material weakness.

 

Because of the material weaknesses discussed above, management hasconcluded that the Company did not maintain effective internal control overfinancial reporting as of December 31, 2004 based on the criteria in *Internal Control*—*Integrated Framework*.

 

Management’s assessment of the effectivenessof the Company’s internal control over financial reporting as of December 31,2004 has been audited by PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm, as stated in their report included herein.

 

**Remediation of material weaknesses**

 

During the first quarter of 2005, the Company has implemented, or is inthe process of implementing, the following remediation steps to address thematerial weaknesses described above:

 

•          The process of recognizing revenue related tomaintenance and services has been redesigned to ensure more timely receipt ofinformation from operational areas to ensure revenue is recognized in theappropriate period.

•          New procedures have been established toaddress the tagging and tracking of fixed assets to ensure that property andequipment can be adequately accounted for.

•          Controls related to the quarterly financialreporting process are being closely monitored to ensure they are operating asdesigned.  This material weakness was related to the third quarter of2004.  Although the controls related tothe review and approval of fourth quarter results did operate as designed, thecontrols have not operated for a sufficient period of time to demonstrate thatthey operate effectively.

 

In addition, the Company has added a number of additional personnel toits finance and accounting staff to ensure that all of the material weaknessesdescribed above are appropriately remediated in a timely manner.  The additional personnel include a new SeniorDirector of Finance, a new Controller, a new Manager of Financial Reporting andSenior Staff Accountant, all of whom have strong public accounting and publiccompany experience.  The Company believesthat these remediation steps will correct the material weaknesses describedabove.

 

**Changes in internal control over financialreporting**

 

Except as otherwise discussed herein, there have been no changes in ourinternal control over financial reporting during our fourth fiscal quarterended December 31, 2004 that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

 

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**Report of Independent Registered PublicAccounting Firm**

 

To the Board of Directors and Stockholders of VitalImages, Inc.:

 

We have audited management’s assessment, included inManagement’s Report on Internal Control Over Financial Reporting appearingunder Item 9A, that Vital Images, Inc. did not maintain effective internalcontrol over financial reporting as of December 31, 2004, because the Companydid not maintain effective controls over (i) the accuracy and completeness ofmaintenance and services revenues and deferred revenues, (ii) the existence ofproperty and equipment and, (iii) the review and approval of quarterlyfinancial results and related disclosures, based on criteria established in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”). TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to expressopinions on management’s assessment and on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. An audit includes obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsider necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (iii)provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets thatcould have a material effect on the financial statements.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions, orthat the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesseshave been identified and included in management’s assessment as of December 31,2004:

 

(i) As of December 31, 2004, the Company did not maintain effective controlover the accuracy and completeness of maintenance and services revenues anddeferred revenues.  Specifically,effective controls were not in place to recognize maintenance and servicesrevenue in the appropriate period.  Thiscontrol deficiency resulted in the restatement of the Company’s consolidatedfinancial statements for the year ended December 31, 2003, for the first andsecond quarters of 2004 and for the first, second and third quarters of2003.  Additionally, this controldeficiency could result in a misstatement of maintenance and services revenueand deferred revenue that would result in a material misstatement to annual orinterim financial statements that would not be prevented or detected.  Accordingly, management determined that thiscontrol deficiency constitutes a material weakness.

 

(ii) As of December 31, 2004, the Company did not maintain effectivecontrol over property and equipment. Specifically, effective controls were not in place to verify theexistence of certain property and equipment. This control deficiency did not result in an adjustment to the Company’sconsolidated financial statements; however, it could result in a misstatementof property and equipment that would result in a material misstatement toannual or interim financial statements that would not be prevented ordetected.  Accordingly, managementdetermined that this control deficiency constitutes a material weakness.

 

(iii) As of December 31, 2004, the Company did not maintain effectivecontrol over the period-end financial reporting process.  Specifically, review and approval controlsover quarterly financial results and related disclosure did not operate asdesigned for a sufficient period of time to demonstrate that they operateeffectively.  This control deficiency didnot result in an adjustment to the Company’s consolidated financial statements;however, it could result in a misstatement of accounts and

 

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disclosures that would result in a material misstatement to annual orinterim financial statements that would not be prevented or detected.  Accordingly, management determined that thiscontrol deficiency constitutes a material weakness.

 

These material weaknesses were considered indetermining the nature, timing, and extent of audit tests applied in our auditof the 2004 consolidated financial statements, and this report does not affectour report dated March 2, 2005 on those consolidated financial statements.

 

In our opinion, management’s assessment that VitalImages, Inc. did not maintain effective internal control over financialreporting as of December 31, 2004, is fairly stated, in all material respects,based on criteria established in Internal Control - Integrated Framework issuedby the COSO. Also, in our opinion, because of the effect of the materialweaknesses described above on the achievement of the objectives of the controlcriteria, Vital Images, Inc. has not maintained effective internal control overfinancial reporting as of December 31, 2004, based on criteria established in *Internal Control - Integrated Framework* issued by the COSO.

 

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated financial statements of Vital Images, Inc. at December 31, 2004and 2003 and for each of the three years in the period ended December 31, 2004and in our report dated March 2, 2005 we expressed an unqualified opinionthereon.

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
| Minneapolis, Minnesota         |
| April 29, 2005                 |

 

**Item 15. Exhibits and Financial Statement Schedules.**

 

(a)(3)          Listing of Exhibits

 

The Exhibits required to be a part of this Report are listed in theIndex to Exhibits.

 

(b)                       Exhibits

 

See Item 15(a)(3) above.

 

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**Signatures**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized, inMinneapolis, Minnesota, on the fourth day of May, 2005.

 
|   |   |   | Vital Images, Inc.                                                                                                  |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                     |   |
|   |   | By:    | /s/Michael H. Carrel                                                                                                     |   |
|   |   |   | Michael H. Carrel                                                                                                        |
|   |   |   | Chief Financial Officer and  Vice President-Finance  (Principal Financial Officer and Principal Accounting Officer) |

 

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**Vital Images, Inc.Form 10-K/A**

 

**Index to Exhibits**

 
| **Item  No.** | ** ** | **Description**                                                                                                                                                                                                                |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |       |                                                                                                                                                                                                                           |
| 23.1          |       | Consent of PricewaterhouseCoopers LLP (filed herewith  electronically).                                                                                                                                                        |
|          |       |                                                                                                                                                                                                                           |
| 31.1          |       | Certification  of Chief Executive Officer Pursuant to  Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934  and Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith  electronically). |
|          |       |                                                                                                                                                                                                                           |
| 31.2          |       | Certification  of Chief Financial Officer Pursuant to  Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934  and Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith  electronically). |

 

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