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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) x
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the quarterly period ended June 30, 2004. OR o
    
    Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the transition period from:  to: . Commission file number 0-32809 VIALTA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware
(State or Other Jurisdiction of Incorporation or Organization)
    
    94-3337236
(I.R.S. Employer Identification No.)
 48461 Fremont Boulevard
Fremont, California 94538
(Address, including zip code, of Registrants principal executive offices) (510) 870-3088
(Registrants 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 x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x The number of outstanding shares of the registrants common stock, par
value $0.001 per share, on August 6, 2004 was 82,975,639 shares.




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VIALTA, INC.
FORM 10-Q: QUARTER ENDED JUNE 30, 2004 TABLE OF CONTENTS PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited):
    
    3Condensed Consolidated Balance Sheets - June 30, 2004 and December 31, 2003
    
    3Condensed Consolidated Statements of Operations - three and six months ended June 30, 2004 and 2003
    
    4Condensed Consolidated Statements of Cash Flows - three and six months ended June 30, 2004 and 2003
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    14Item 4.
    
    Controls and Procedures
    
    14PART II.
    
    OTHER INFORMATIONItem 4.
    
    Submission of Matters to a Vote of Security Holders
    
    15Item 6.
    
    Exhibits and Reports on Form 8-K
    
    15SIGNATURES
    
    16EXHIBIT INDEX
    
    17EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1: Financial Statements VIALTA, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands)
(unaudited)
 June 30, 2004
    
    December 31, 2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    13,811
    
    
    $
    13,756Restricted cash
    
    
    3,041
    
    
    
    2,226Short-term investments
    
    
    6,761
    
    
    
    10,552Accounts receivable, net
    
    
    1,054
    
    
    
    3,941Inventories
    
    
    7,139
    
    
    
    5,196Prepaid expenses and other
    
    
    952
    
    
    
    729Total current assets
    
    
    32,758
    
    
    
    36,400Property and equipment, net
    
    
    406
    
    
    
    685Other assets
    
    
    29
    
    
    
    29Total assets
    
    $
    33,193
    
    
    $
    37,114Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    292
    
    
    $
    1,915Accrued liabilities and other
    
    
    2,438
    
    
    
    3,149Deferred profit
    
    
    1,110
    
    
    
    3,997Total current liabilities
    
    
    3,840
    
    
    
    9,061Stockholders equity:Common stock
    
    
    95
    
    
    
    95Additional paid-in capital
    
    
    144,122
    
    
    
    144,114Treasury stock
    
    
    (9,458
    )
    
    
    (9,458
    )Accumulated deficit
    
    
    (105,388
    )
    
    
    (106,709
    )Accumulated other comprehensive income (loss)
    
    
    (18
    )
    
    
    11Total stockholders equity
    
    
    29,353
    
    
    
    28,053Total liabilities and stockholders equity
    
    $
    33,193
    
    
    $
    37,114
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3




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VIALTA, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
(unaudited)
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net revenue
    
    $
    2,782
    
    
    $
    2,520
    
    
    $
    7,756
    
    
    $
    6,363Cost of goods sold
    
    
    997
    
    
    
    570
    
    
    
    2,393
    
    
    
    1,433Gross profit
    
    
    1,785
    
    
    
    1,950
    
    
    
    5,363
    
    
    
    4,930Operating expenses:Engineering and development
    
    
    266
    
    
    
    621
    
    
    
    602
    
    
    
    1,589Sales and marketing
    
    
    511
    
    
    
    641
    
    
    
    1,116
    
    
    
    1,083General and administrative
    
    
    1,333
    
    
    
    1,974
    
    
    
    2,693
    
    
    
    3,704Total operating expenses
    
    
    2,110
    
    
    
    3,236
    
    
    
    4,411
    
    
    
    6,376Operating income (loss)
    
    
    (325
    )
    
    
    (1,286
    )
    
    
    952
    
    
    
    (1,446
    )Interest income and other, net
    
    
    160
    
    
    
    178
    
    
    
    369
    
    
    
    366Net income (loss)
    
    $
    (165
    )
    
    $
    (1,108
    )
    
    $
    1,321
    
    
    $
    (1,080
    )Net income (loss) per share:Basic
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.01
    )Diluted
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.01
    )Weighted average common shares outstanding:Basic
    
    
    82,907
    
    
    
    82,151
    
    
    
    82,855
    
    
    
    82,194Diluted
    
    
    82,907
    
    
    
    82,151
    
    
    
    88,068
    
    
    
    82,194
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4




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VIALTA, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
(unaudited)
 Six months endedJune 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    1,321
    
    
    $
    (1,080
    )Adjustments to reconcile net income to net cash used in
operating activities:Depreciation
    
    
    285
    
    
    
    1,016Changes in operating assets and liabilities:Accounts receivable, net
    
    
    2,887
    
    
    
    744Inventories
    
    
    (1,943
    )
    
    
    (176
    )Prepaid expenses and other
    
    
    (223
    )
    
    
    616Restricted cash deposit
    
    
    (815
    )
    
    
    Deferred profit
    
    
    (2,887
    )
    
    
    (1,603
    )Accounts payable and accrued liabilities and other
    
    
    (2,334
    )
    
    
    (1,463
    )Net cash used in operating activities
    
    
    (3,709
    )
    
    
    (1,946
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of short-term investments
    
    
    (4,300
    )
    
    
    (7,478
    )Proceeds from sales of short-term investments
    
    
    8,062
    
    
    
    10,807Acquisitions of property and equipment
    
    
    (6
    )
    
    
    (206
    )Net cash provided by investing activities:
    
    
    3,756
    
    
    
    3,123CASH FLOWS FROM FINANCING ACTIVITIES:Issuance of shares of common stock
    
    
    8
    
    
    
    7Repurchases of shares of common stock
    
    
    
    
    
    
    (295
    )Net cash provided by (used in) financing activities:
    
    
    8
    
    
    
    (288
    )Net increase in cash and cash equivalents
    
    
    55
    
    
    
    889Cash and cash equivalents, beginning of the period
    
    
    13,756
    
    
    
    21,863Cash and cash equivalents, end of the period
    
    $
    13,811
    
    
    $
    22,752
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5




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VIALTA, INC. 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 NOTE 1. THE COMPANY We develop, design and market consumer electronics products designed to
maximize the advantages of digital technology in a convenient and easy-to-use
manner. Our primary products are the Beamer personal videophone line and the
VistaFrame digital picture frame. Our Beamer videophone products add color
video to phone calls, enabling users to see the person they are calling. Since
both parties to a video call must have a Beamer videophone product (or
compatible videophone), our videophone products are primarily sold in pairs.
Our Beamer videophone products work with any home phone over any standard
(analog) home phone line, at no additional cost to a regular phone call. Our
Beamer videophone products include models that are standalone (such as our
first videophone product known as Beamer) or connect through most televisions
(the Beamer TV), and may include the ability to send and receive digital
pictures (the Beamer FX). Beamer videophone products are carried by such
retailers as Best Buy, Frys Electronics, The Good Guys, The Sharper Image and
Cinmar (The Frontgate Catalog), among others. Our VistaFrame product is a digital picture frame that allows users to
display photographs directly from a digital camera memory card or from
VistaFrames internal memory. VistaFrame is compatible with most standard card
formats and does not require a camera or computer connection, special wiring or
web based services to display digital photographs. With VistaFrame, consumers
can view digital pictures individually or in a custom slideshow format with the
user selecting the pictures, the display sequence, display interval and the
transition effect. VistaFrame is currently available at retailers such as The
Sharper Image, The Good Guys and Cinmar, among others. Since our inception, we have incurred substantial losses and negative cash
flows from operations. Although we earned net income for the six months ending
June 30, 2004, we expect operating losses and negative cash flows from
operations to continue for the foreseeable future and anticipate that losses
may increase from current levels because of additional costs and expenses
related to sales and marketing activities, expansion of operations, expansion
of product offerings and development of relationships with other businesses. We
believe that we have sufficient cash and cash equivalents, restricted cash and
investments to fund our existing operations through June 30, 2005. However, in
the longer term, failure to generate sufficient revenues, raise additional
capital or reduce spending could have a material adverse effect on our ability
to continue to operate our business. In June 2004, we announced that we had
retained an investment banking firm to advise us on a range of strategic
alternatives, including a possible sale of the company. Our board of directors
has appointed a special committee of independent directors to work with the
investment banking firm and evaluate any strategic alternatives which may be
presented for consideration. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The accompanying unaudited condensed consolidated financial statements
have been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles in the United States of America
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the accompanying unaudited condensed interim financial
statements contain all adjustments, all of which are normal and recurring in
nature, necessary to fairly present our financial position, operating results
and cash flows. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 2003, included in
our Annual Report on Form 10-K filed on March 26, 2004. The results of
operations for the three and six months ended June 30, 2004 are not necessarily
indicative of the results that may be expected for any other period or for the
fiscal year ending December 31, 2004. Principles of consolidation The consolidated financial statements include the accounts of Vialta, Inc.
and our subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation. Cash equivalents, restricted cash and investments We consider all highly liquid investments with an initial maturity of 90
days or less to be cash equivalents. Cash equivalents 6




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primarily represent money market funds, recorded at cost, which
approximate their fair value. Restricted cash represents cash restricted under letters of credit issued
to the suppliers. Investments are comprised primarily of debt instruments that have been
classified as available-for-sale. Management determines the appropriate
classification of securities at the time of purchase and re-evaluates the
classification at each reporting date. Marketable equity and debt securities
are carried at their fair market value based on quoted market prices as of the
balance sheet date. Realized gains or losses are determined using the specific
identification method and are reflected in income. Net unrealized gains or
losses are recorded directly in stockholders equity except those unrealized
losses that are deemed to be other than temporary, which are reflected in
investment losses. Investments with maturity dates of 90 days or more are classified as
short-term investments since we have the ability to redeem them within the
year. Revenue recognition Products sold to retailers and distributors are subject to rights of
return. We defer recognition of revenue on products sold to retailers and
distributors until the retailers and distributors sell the products to their
customers. Revenue is also deferred for the initial thirty-day period during
which our direct customers, retailers and distributors have the unconditional
right to return products. We generally recognize revenue on products sold to end customers upon
shipment provided that we have no post-sale obligations, we can reliably
estimate and accrue warranty costs and sales returns, the price is fixed or
determinable and collection of the resulting receivable is reasonably assured.
For sales to international distributors and strategic partners we generally
recognize revenue based on the above criteria and upon receipt of payment in
full. For sales to end customers that do not meet the above criteria, revenue
is deferred until such criteria are met. Allowances for sales returns Allowances are provided for estimated returns. Provision for return
allowances are recorded at the time when revenue is recognized based on
historical returns, current economic trends and changes in customer demand.
Such allowances are adjusted periodically to reflect actual experience and
anticipated returns. Warranty We provide a limited warranty on our products for periods ranging from 90
days to 12 months from the date of sale to the end customers. We estimate
warranty costs based on historical experience and accrue for estimated costs as
a charge to cost of sales when revenue is recognized. The following table shows
the details of the product warranty accrual, as required by FASB Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, for the six months
ended June 30, 2004 (in thousands): June 30,2004Beginning balance
    
    $
    484Accruals for warranties issued during the period
    
    
    656Settlements made during the period
    
    
    (372
    )Ending balance
    
    $
    768
 Comprehensive income Comprehensive income is defined to include all changes in equity during a
period from non-owner sources. For the three and six months ended June 30, 2004
and June 30, 2003, comprehensive income approximated the net income reported. Stock-based compensation We account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, or APB No. 25,
Accounting for Stock Issued to Employees. Under APB No. 25, compensation cost
is measured as the excess, if any, of the quoted market price of its stock at
the date of grant over the exercise price of the option granted. Compensation 7




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cost for stock options, if any, is recognized ratably over the vesting
period. We provide additional pro forma disclosures as required under SFAS No.
123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting
for Stock-Based Compensation, Transition and Disclosure. The following table illustrates the effect on our net income and net
income per share if we had recorded compensation costs based on the estimated
grant date fair value as defined by SFAS No. 123 for all granted stock-based
awards (in thousands, except per share amounts). Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    (165
    )
    
    $
    (1,108
    )
    
    $
    1,321
    
    
    $
    (1,080
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects
    
    
    (179
    )
    
    
    (390
    )
    
    
    (413
    )
    
    
    (739
    )Pro forma net income (loss)
    
    $
    (344
    )
    
    $
    (1,498
    )
    
    $
    908
    
    
    $
    (1,819
    )Pro forma net income (loss) per share:Basic and diluted
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    (0.02
    )
 NOTE 3. RELATED PARTY TRANSACTIONS The following is a summary of major transactions between us and ESS
Technology, Inc., which was our parent company prior to August 2001, for the
periods presented (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net payables at beginning of period
    
    $
    (314
    )
    
    $
    (12
    )
    
    $
    (281
    )
    
    $
    (33
    )Charges by Vialta to ESS
    
    
    55
    
    
    
    
    
    
    
    55
    
    
    
    2Charges by ESS to Vialta:Purchase of products
    
    
    (383
    )
    
    
    (15
    )
    
    
    (722
    )
    
    
    (19
    )Building lease
    
    
    (123
    )
    
    
    (464
    )
    
    
    (247
    )
    
    
    (927
    )Other
    
    
    (4
    )
    
    
    (20
    )
    
    
    (10
    )
    
    
    (52
    )Cash receipts from ESS
    
    
    (18
    )
    
    
    (1
    )
    
    
    (18
    )
    
    
    (2
    )Cash payments made to ESS
    
    
    564
    
    
    
    36
    
    
    
    1,000
    
    
    
    555Net payables at end of period
    
    $
    (223
    )
    
    $
    (476
    )
    
    $
    (223
    )
    
    $
    (476
    )
 NOTE 4. INVENTORIES The following table summarizes the activity in inventories and reserves
for the six months ended June 30, 2004 (in thousands): Gross
    
    Reserve
    
    NetAs of December 31, 2003
    
    $
    9,332
    
    
    $
    (4,136
    )
    
    $
    5,196Purchase of inventories
    
    
    1,960
    
    
    
    
    
    
    
    1,960Shipments
    
    
    (1,927
    )
    
    
    935
    
    
    
    (992
    )Use or Disposal of inventories
    
    
    (52
    )
    
    
    (2
    )
    
    
    (54
    )As of March 31, 2004
    
    
    9,313
    
    
    
    (3,203
    )
    
    
    6,110Purchase of inventories
    
    
    2,099
    
    
    
    
    
    
    
    2,099Shipments
    
    
    (1,640
    )
    
    
    570
    
    
    
    (1,070
    )Use or Disposal of inventories
    
    
    (93
    )
    
    
    93
    
    
    
    As of June 30, 2004
    
    $
    9,679
    
    
    $
    (2,540
    )
    
    $
    7,139Raw Material
    
    $
    5,327
    
    
    $
    (1,287
    )
    
    $
    4,040Finished Goods
    
    
    4,352
    
    
    
    (1,253
    )
    
    
    3,099$
    9,679
    
    
    $
    (2,540
    )
    
    $
    7,139
 8




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Because a significant portion of our inventory expenditures for raw
materials and finished goods for Beamer were expensed in prior periods, the
cost of goods sold related to Beamer revenue recognized during the three and
six months ended June 30, 2004 was lower than what would have been recorded had
inventory costs not been previously reserved. If we had not previously expensed
inventory costs, our cost of goods sold for the three and six months ended June
30, 2004 would have been approximately $1.7 million and $5.0 million,
respectively. NOTE 5. BALANCE SHEET COMPONENTS (in thousands) June 30,
    
    December 31,2004
    
    2003Short-term investmentsUS Government debt securities
    
    $
    4,917
    
    
    $
    3,480Corporate debt securities
    
    
    1,844
    
    
    
    7,0726,761
    
    
    
    10,552Due after one year
    
    
    1,925
    
    
    
    1,974Due within one year
    
    $
    4,836
    
    
    $
    8,578Accounts receivable, netAccounts receivable
    
    $
    1,153
    
    
    $
    4,004Receivables, related party
    
    
    37
    
    
    
    Less: Allowance for doubtful accounts
    
    
    (136
    )
    
    
    (63
    )$
    1,054
    
    
    $
    3,941Prepaid expenses and otherPrepaid insurance
    
    $
    73
    
    
    $
    308Other receivables from supplier
    
    
    555
    
    
    
    296Other current assets
    
    
    324
    
    
    
    125$
    952
    
    
    $
    729Property and equipment, netMachinery and equipment
    
    $
    1,037
    
    
    $
    5,918Furniture and fixtures
    
    
    551
    
    
    
    561Software and web site development cost
    
    
    259
    
    
    
    5,3231,847
    
    
    
    11,802Less: Accumulated depreciation
    
    
    (1,441
    )
    
    
    (11,117
    )$
    406
    
    
    $
    685Accrued liabilities and otherAccrued compensation costs
    
    $
    947
    
    
    $
    1,241Customer deposits
    
    
    
    
    
    
    764Product return/warranty liability
    
    
    768
    
    
    
    484Accrued charges, related party
    
    
    260
    
    
    
    281Other current liabilities
    
    
    463
    
    
    
    379$
    2,438
    
    
    $
    3,149Deferred profitDeferred revenue
    
    $
    1,691
    
    
    $
    5,198Deferred costs
    
    
    (581
    )
    
    
    (1,201
    )Deferred profit
    
    $
    1,110
    
    
    $
    3,997
 NOTE 6. COMPUTATION OF NET INCOME PER SHARE Basic net income (loss) per share is computed by dividing the net income
(loss) for the three and six months ended June 30, 2004 and June 30, 2003 by
the weighted average number of shares of common stock outstanding during the
periods. Diluted net income per share is calculated by using the weighted average
number of common shares outstanding for the three and 9




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six months ended June 30, 2004 and June 30, 2003 and gives effect to all
dilutive potential common shares outstanding for the three and six months ended
June 30, 2004 and June 30, 2003. The reconciling difference between the
computation of basic and diluted net income per share for the three and six
months ended June 30, 2004 and June 30, 2003 presented is the inclusion of the
dilutive effect of stock options issued to employees under employee stock
option plans. Diluted net income per share excludes out-of-the-money stock options
totaling 2.3 million shares and 8.2 million shares for the three months ended
June 30, 2004 and June 30, 2003, respectively and 3.8 million shares and 8.0
million shares for the six months ended June 30, 2004 and June 30, 2003,
respectively While these options are currently anti-dilutive, they could be
dilutive in the future. A reconciliation of basic and diluted income per share
is presented below (in thousands, except per share amounts): For the three months ended
    
    For the six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Basic:Net income (loss)
    
    $
    (165
    )
    
    $
    (1,108
    )
    
    $
    1,321
    
    
    $
    (1,080
    )Weighted shares outstanding
    
    
    82,907
    
    
    
    82,151
    
    
    
    82,855
    
    
    
    82,194Net income (loss) per share
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.01
    )Diluted:Net income (loss)
    
    $
    (165
    )
    
    $
    (1,108
    )
    
    $
    1,321
    
    
    $
    (1,080
    )Weighted shares outstanding
    
    
    82,907
    
    
    
    82,151
    
    
    
    82,855
    
    
    
    82,194Effects of dilutive securities: stock options
    
    
    
    
    
    
    
    
    
    
    5,213
    
    
    
    Diluted weighted shares outstanding
    
    
    82,907
    
    
    
    82,151
    
    
    
    88,068
    
    
    
    82,194Net income (loss) per share
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.01
    )
 10




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ITEM 2: Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion includes forward-looking statements with respect
to our future financial performance. Actual results may differ materially from
those currently anticipated depending on a variety of factors, including those
described below under the sub-heading Other Factors That May Affect Our
Business and Future Results and the risks discussed in our most recent filing
with the Securities and Exchange Commission. The following discussion should be
read in conjunction with the unaudited Condensed Consolidated Financial
Statements and notes thereto that appear elsewhere in this report. References
herein to we, our, us, and similar words or phrases are references
collectively to Vialta, Inc. and its subsidiaries. Overview We develop, design and market consumer electronics products designed to
maximize the advantages of digital technology in a convenient and easy-to-use
manner. Our primary products are the Beamer personal videophone line and the
VistaFrame digital picture frame. Our Beamer videophone products add color
video to phone calls, enabling users to see the person they are calling. Since
both parties to a video call must have a Beamer videophone product (or
compatible videophone), our products are primarily sold in pairs. Our Beamer
videophones work with any home phone over any standard (analog) home phone
line, at no additional cost to a regular phone call. Our videophone products
include models that are standalone (such as our first videophone product known
as Beamer) or connect through most televisions (the Beamer TV), and may include
the ability to send and receive digital pictures (the Beamer FX). You can find
our Beamer videophone products carried by such retailers as Best Buy, Frys
Electronics, The Good Guys, The Sharper Image and Cinmar (The Frontgate
Catalog), among others. Our VistaFrame product is a digital picture frame that allows users to
display photographs directly from a digital camera memory card or from
VistaFrames internal memory. VistaFrame is compatible with most standard card
formats and does not require a camera or computer connection, special wiring or
web based services. With VistaFrame consumers can view digital pictures
individually or in a custom slideshow format with the user selecting the
pictures, the display sequence, display interval and the transition effect.
VistaFrame is currently available at retailers such as The Sharper Image, The
Good Guys and Cinmar, among others. Since our inception, we have financed our operations primarily from funds
raised in private offerings of convertible preferred stock and common stock and
through vendor credit. For the three months ended June 30, 2004 and June 30,
2003 we had net losses of $165,000 and $1.1 million, respectively. For the six
months ended June 30, 2004 we had net income of $1.3 million, however we expect
to incur losses at least for the remainder of fiscal 2004. For the six months
ended June 30, 2003 we had a net loss of $1.1 million. As of June 30, 2004, we
had an accumulated deficit of $105.4 million. Results of Operations For the three months ended June 30, 2004 compared with three months ended June
30, 2003 Net revenue.Net revenue was $2.8 million for the three months ended June
30, 2004 compared to $2.5 million for the three months ended June 30, 2003. The
increase was the result of $1.3 million in net revenue from our new products,
(Beamer TV, Beamer FX and VistaFrame). Since these new products were introduced
in the second half of 2003, there were no comparable revenues for the three
months ended June 30, 2003. The increase in net revenue from new products in
the three months ended June 30, 2004 was offset by a decrease of $1.0 million
in net revenue from sales of our original product, Beamer. Cost of goods sold. Cost of goods sold was $997,000 for the three months
ended June 30, 2004 compared to $570,000 for the three months ended June 30,
2003. This increase is primarily due to costs associated with our new products
(Beamer TV, Beamer FX and VistaFrame). Because in prior periods we expensed
certain inventory expenditures for raw materials and finished goods related to
our Beamer videophone products, cost of goods sold for the second quarter of
2004 and 2003 was lower than what would have been recorded had those inventory
costs not been expensed. If we had not previously expensed inventory costs, our
cost of goods sold for the three months ended June 30, 2004 and June 30, 2003
would have been $1.7 million and $2.1 million, respectively. Gross profit. Gross profit was $1.8 million for the three months ended
June 30, 2004 compared to $1.9 million for the three months ended June 30,
2003. If we had not previously expensed inventory costs, our gross profit for
the second quarters of 2004 and 2003 would have been approximately $1.1 million
and $467,000, respectively. Engineering and development.Engineering and development expenses were
$266,000 for the three months ended June 30, 2004, compared to $621,000 for the
three months ended June 30, 2003. The decrease was primarily due to reductions
in engineering and 11




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development personnel. We do not expect engineering and development
expenses to increase significantly in future periods. Sales and marketing.Sales and marketing expenses were $511,000 for the
three months ended June 30, 2004, compared to $641,000 for the three months
ended June 30, 2003. The decrease was primarily due to reductions in sales and
marketing personnel. We expect sales and marketing spending to increase in the
fourth quarter to support retail and consumer marketing initiatives during the
holiday season. We do not currently have the resources to support a significant
and sustained national advertising and consumer awareness program which may be
necessary to significantly increase sales. General and administrative.General and administrative expenses were $1.3
million for the three months ended June 30, 2004 compared to $2.0 million for
the three months ended June 30, 2003. The decrease was primarily due to a
reduction in general and administrative personnel, a decrease in legal expenses
and a decrease in rent. In July 2003, we amended the lease agreement for our
headquarters with ESS. The terms of the amendment included a reduction in the
monthly rent to then current market rates. We do not expect general and
administrative expenses to increase significantly in future periods. Interest income and other, net.Interest income and other, net, was
$160,000 for the three months ended June 30, 2004, compared to $178,000 for the
three months ended June 30, 2003. For the six months ended June 30, 2004 compared with six months ended June 30,
2003 Net revenue.Net revenue was $7.8 million for the six months ended June
30, 2004 compared to $6.4 million for the six months ended June 30, 2003. The
increase in net revenue was the result of an increase in the number of
retailers and distributors which carry our products combined with an increase
in the number of products offered. Net revenue for the six months ended June
30, 2004 included $3.0 million in revenue from new products, such as Beamer TV
and VistaFrame and $4.8 million in revenue from sales of Beamer. Since these
new products were introduced in the second half of 2003, there were no
comparable revenues for the six months ended June 30, 2003. Cost of goods sold. Cost of goods sold was $2.4 million for the six months
ended June 30, 2004 compared to $1.4 million for the six months ended June 30,
2003. This increase is primarily due to costs associated with our new products
(Beamer TV, Beamer FX and VistaFrame). Because in prior periods we expensed
certain inventory expenditures for raw materials and finished goods related to
our Beamer videophone products, cost of goods sold for the six months ended
June 30, 2004 and June 30, 2003 was lower than what would have been recorded
had those inventory costs not been expensed. If we had not previously expensed
inventory costs, our cost of goods sold for the six months ended June 30, 2004
and June 30, 2003 would have been $5.0 million and $4.9 million, respectively. Gross profit. Gross profit was $5.4 million for the six months ended June
30, 2004 compared to $4.9 million for the six months ended June 30, 2003. If we
had not previously expensed inventory costs, our gross profit for the six
months ended June 30, 2004 and June 30, 2003 would have been approximately $2.8
million and $1.5 million, respectively. Engineering and development.Engineering and development expenses were
$602,000 for the six months ended June 30, 2004, compared to $1.6 million for
the six months ended June 30, 2003. The decrease was primarily due to
reductions in engineering and development personnel. We do not expect
engineering and development expenses to increase significantly in future
periods. Sales and marketing.Sales and marketing expenses were $1.1 million for
each of the six months ended June 30, 2004 and June 30, 2003. We expect sales
and marketing spending to increase in the fourth quarter to support retail and
consumer marketing initiatives during the holiday season. We do not currently
have the resources to support a significant and sustained national advertising
and consumer awareness program which may be necessary to significantly increase
sales. General and administrative.General and administrative expenses were $2.7
million for the six months ended June 30, 2004 compared to $3.7 million for the
six months ended June 30, 2003. The decrease was primarily due to a reduction
in general and administrative personnel, a decrease in legal expenses and a
decrease in rent. In July 2003, we amended the lease agreement for our
headquarters with ESS. The terms of the amendment included a reduction in the
monthly rent to then current market rates. We do not expect general and
administrative expenses to increase significantly in future periods. Interest income and other, net.Interest income and other, net, was
$369,000 for the six months ended June 30, 2004, compared to $366,000 for the
six months ended June 30, 2003. 12




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Liquidity and Capital Resources As of June 30, 2004, we had $23.6 million in cash and cash equivalents,
restricted cash and short-term investments compared to $26.5 million as of
December 31, 2003, representing a decrease of $2.9 million. Our principal sources of liquidity are cash and cash equivalents and
investments. Net cash used in operating activities was $3.7 million for the six
months ended June 30, 2004 compared to $1.9 million for the six months ended
June 30, 2003, representing an increase of approximately $1.8. This increase
was primarily due to an increase in purchases of inventory and a decrease in
accounts payable, offset by an increase in cash received from sales of our
products. Net cash provided by investing activities for the six months ended June
30, 2004 was $3.8 million compared to $3.1 million for the six months ended
June 30, 2003. Net cash provided by investing activities was primarily related
to proceeds from the sale of short-term investments. Net cash provided by financing activities for the six months ended June
30, 2004 was $8,000 compared to $288,000 of net cash used in financing
activities for the six months ended June 30, 2003. Net cash used in financing
activities for the six months ended June 30, 2003 was primarily related to
repurchases of our common stock. Capital expenditures for the six-month period ending December 31, 2004 are
expected to be less than $100,000, primarily to acquire capital equipment. We
may utilize cash to acquire or invest in complementary businesses or products
or to obtain the right to use complementary technologies. Any such acquisition
or investment may significantly increase our planned requirements for capital.
From time to time, in the ordinary course of our business, we may evaluate
potential acquisitions of or investments in such businesses, products or
technologies owned by third parties. In September 2001, the Board of Directors authorized the repurchase of up
to 10,000,000 shares of our common stock in open market or private transactions
over a twelve-month period. In June 2002, the Board of Directors authorized the
existing stock repurchase program be extended to include the repurchase of up
to an additional 10,000,000 shares of common stock. Through December 31, 2002,
we repurchased approximately 11,205,000 shares of common stock at an aggregate
cost of $9.1 million. During the first quarter of 2003, we repurchased
approximately 759,000 shares for an aggregate cost of approximately $295,000.
There were no common stock repurchases in the second, third and fourth quarters
of 2003 nor in the first six months of 2004. As of June 30, 2004, approximately
8,036,000 shares remain authorized for repurchase. In January 2000, we entered into a three-year non-cancelable lease
agreement for our headquarters with ESS. In July 2003, we amended the lease.
The terms of the amendment include a 60% reduction in the amount of square
footage leased, a reduction in the monthly rent to then current market rates
and an extension of the term from December 31, 2003 to June 30, 2005. Under the
terms of this and other leases, with various expiration dates through 2006, our
future minimum rental payments as of June 30, 2004 are as follows: $267,000,
$351,000 and $141,000 for the six months ended 2004 and for the years ended
2005, and 2006 respectively. We believe that our existing cash and cash equivalents and investments
will be sufficient to fund our operations through June 30, 2005. However, to
continue our operations beyond that date, or if our current level of operations
change, or to achieve our longer-term goals of introducing additional products
to consumers and to support and sustain a significant national consumer
marketing campaign, we believe we will need to raise additional capital, which
may not be available on acceptable terms, if at all. We have historically used
vendor credit as well as private offerings of convertible preferred stock and
common stock to fund operations and provide for capital requirements. However,
the price per share of any future equity-related financing will be determined
at the time the offering is made and cannot be anticipated at this time. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of current stockholders is likely to or will be reduced
and such equity securities may have rights, preferences or privileges better
than those of current stockholders. We cannot assure you that any additional
financing will be available or that, if available, it will be sufficient or it
can be obtained on terms favorable to us or our stockholders. If adequate funds
are not available if and when needed, we would be required to delay, limit or
eliminate some or all of our proposed operations. In June 2004, we announced
that we had retained an investment banking firm to advise us on a range of
strategic alternatives, including a possible sale of the company. Our board of
directors has appointed a special committee of independent directors to work
with the investment banking firm and evaluate any strategic alternatives which
may be presented for consideration. Critical Accounting Policies Our critical accounting policies were disclosed in Item 7, Managements
Discussion and Analysis of Financial Condition and 13




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##### Table of Contents



Results of Operations, of our Annual Report on Form 10-K for the year
ended December 31, 2003. On an ongoing basis, we re-evaluate our judgments and
estimates including those related to valuation of inventories, valuation of
long-lived assets and certain risks and concentrations. We base our estimates
and judgments on our historical experience, knowledge of current conditions and
our beliefs of what could occur in the future considering available
information. Actual results may differ from these estimates under different
assumptions or conditions. We apply our estimates and judgments consistently
for all periods presented. Other Factors That May Affect Our Business and Future Results Factors that could impact our future business, consolidated financial
position, results of operations or cash flows and cause future results to
differ from our expectations include the following: the ability to achieve
revenues and profitability; the ability to raise additional capital;
competition; pricing pressures; the dependence on a limited number of products
and the need to develop new products and features; the success of our existing
products and other consumer products we may develop; component supply
shortages; potential conflicts with ESS Technology, Inc., our former parent;
the success of current distribution and retail relationships and the ability to
enter into additional distribution agreements; risks associated with the
expansion of our business, including increased costs and the strain on
management and other resources; the risk of product defects, system failures or
interruptions; general economic, political and regulatory changes including in
Asia; claims by third parties of intellectual property infringement; dependence
on key management personnel and the need to attract and retain additional
qualified personnel; risks associated with possible business acquisitions;
regulatory changes that affect consumer electronics, telecommunications,
copyrights or the internet; quarterly fluctuations in operating results; risks
of class action lawsuits based on fluctuations in our stock price; seasonal
trends; and risks identified in the our Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 and other filings with the Securities and
Exchange Commission. 
 ITEM 3: Quantitative and Qualitative Disclosure About Market Risk Interest Rate Risks.We invest in short-term & long-term investments.
Consequently, we are exposed to fluctuations in interest rates on these
investments. Increases or decreases in interest rates generally translate into
decreases and increases in the fair value of these investments. In addition,
the credit worthiness of the issuer, relative values of alternative
investments, the liquidity of the instrument, and other general market
conditions may affect the fair values of interest rate sensitive investments.
In order to reduce the risk from fluctuations in rates, we invest in highly
liquid governmental notes and bonds with contractual maturities of less than
two years. All of the investments have been classified as available for sale,
and at June 30, 2004, are recorded at market values. Foreign Exchange Risks.Because our products are manufactured primarily in
Asia, we are exposed to market risk from changes in foreign exchange rates,
which could affect our results of operations and financial condition. In order
to reduce the risk from fluctuations in foreign exchange rates, our product
sales and all of our arrangements with our third party manufacturers and
component vendors are denominated in U.S. dollars. We do not engage in any
currency hedging activities. 
 ITEM 4: Controls and Procedures Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have
concluded, based on their evaluation as of the end of the period covered by
this quarterly report, that our disclosure controls and procedures are
effective to ensure that material information required to be disclosed by us in
reports filed or submitted by us under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time period
specified in the SECs rules and forms, and includes controls and procedures
designed to ensure that material information required to be disclosed by us in
such reports is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of our evaluation. 14




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##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 4: Submission of Matters to a Vote of Security Holders The annual meeting of Stockholders of Vialta, Inc. was held on June 15,
2004. Of the 82,866,540 shares of common stock outstanding and entitled to vote
at the meeting as of the record date for the meeting, 47,348,638 shares of
common stock were represented in person or by proxy. At the meeting,
stockholders elected six directors of the Company and ratified the appointment
of PricewaterhouseCoopers LLP as independent auditors for 2004. The results of
stockholder voting are as follows: Election of Directors Votes for
    
    WithheldFred S. L. Chan
    
    
    38,833,770
    
    
    
    8,514,868Didier Pietri
    
    
    38,838,333
    
    
    
    8,510,305George M. Cain
    
    
    47,192,133
    
    
    
    156,505Herbert Chang
    
    
    43,014,750
    
    
    
    4,333,888Michael S. Dubester
    
    
    47,192,992
    
    
    
    155,646Matthew K. Fong
    
    
    38,794,418
    
    
    
    8,554,220
 Ratify the appointment of PricewaterhouseCoopers LLP as the Companys independent auditors For
    
    
    47,272,510Against
    
    
    70,130Abstain
    
    
    5,998
 
 ITEM 6: Exhibits and Reports on Form 8-K  (a)
    
    Exhibits. We incorporate by reference all exhibits filed in connection
with our annual report on Form 10K for the year ended December 31, 2003.  31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (b)
    
    Reports on Form 8-K. No reports were filed on Form 8-K for the quarter
ended June 30, 2004. 15




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. VIALTA, INC. (Registrant)Date: August 13, 2004
    
    By:
    
    /s/ Didier PietriDidier PietriChief Executive OfficerBy:
    
    /s/ William M. ScharninghausenWilliam M. ScharninghausenChief Financial Officer
 16




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 17