##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the quarterly period ended June 30, 2005.
 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.
  Delaware
    
    94-3337236(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 
 
  R £
  £ R




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##### Table of Contents



PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited):Condensed Consolidated Balance Sheets  June 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations  three and six months ended June 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows six months ended June 30, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    16PART II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    17SIGNATURES
    
    
    
    
    18EXHIBIT INDEX
    
    
    
    
    19EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I. FINANCIAL INFORMATION
 
 ITEM 1: Financial Statements
 VIALTA, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands)
 (unaudited)
 June 30, 2005
    

    December 31, 2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    23,594
    
    
    $
    7,296Restricted cash
    
    
    35
    
    
    
    3,057Short-term investments
    
    
    1,499
    
    
    
    11,106Accounts receivable, net
    
    
    277
    
    
    
    2,761Inventories
    
    
    4,302
    
    
    
    4,500Prepaid expenses and other
    
    
    202
    
    
    
    351Total current assets
    
    
    29,909
    
    
    
    29,071Property and equipment, net
    
    
    236
    
    
    
    302Other assets
    
    
    30
    
    
    
    29Total assets
    
    $
    30,175
    
    
    $
    29,402Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    31
    
    
    $
    373Accrued liabilities and other
    
    
    1,175
    
    
    
    2,070Deferred profit
    
    
    320
    
    
    
    1,310Total current liabilities
    
    
    1,526
    
    
    
    3,753Stockholders equity:Common stock
    
    
    95
    
    
    
    95Additional paid-in capital
    
    
    144,126
    
    
    
    144,122Treasury stock
    
    
    (9,458
    )
    
    
    (9,458
    )Accumulated deficit
    
    
    (106,111
    )
    
    
    (109,098
    )Accumulated other comprehensive loss
    
    
    (3
    )
    
    
    (12
    )Total stockholders equity
    
    
    28,649
    
    
    
    25,649Total liabilities and stockholders equity
    
    $
    30,175
    
    
    $
    29,402
 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 30,2005
    
    2004
    
    2005
    
    2004Net revenue
    
    $
    676
    
    
    $
    2,782
    
    
    $
    3,634
    
    
    $
    7,756Cost of goods sold
    
    
    718
    
    
    
    997
    
    
    
    2,888
    
    
    
    2,393Gross profit (loss)
    
    
    (42
    )
    
    
    1,785
    
    
    
    746
    
    
    
    5,363Operating expenses and recovery:Engineering and development
    
    
    285
    
    
    
    266
    
    
    
    577
    
    
    
    602Sales and marketing
    
    
    125
    
    
    
    511
    
    
    
    417
    
    
    
    1,116General and administrative
    
    
    882
    
    
    
    1,333
    
    
    
    2,360
    
    
    
    2,693Recovery of prior period impairment charges
    
    
    (5,000
    )
    
    
    
    
    
    
    (5,000
    )
    
    
    Total operating expenses and recovery
    
    
    (3,708
    )
    
    
    2,110
    
    
    
    (1,646
    )
    
    
    4,411Operating income (loss)
    
    
    3,666
    
    
    
    (325
    )
    
    
    2,392
    
    
    
    952Interest income and other:Interest, net
    
    
    298
    
    
    
    160
    
    
    
    501
    
    
    
    369Gain on investment
    
    
    94
    
    
    
    
    
    
    
    94
    
    
    
    Total interest income and other
    
    
    392
    
    
    
    160
    
    
    
    595
    
    
    
    369Net income (loss)
    
    $
    4,058
    
    
    $
    (165
    )
    
    $
    2,987
    
    
    $
    1,321Net income (loss) per share:Basic
    
    $
    0.05
    
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    0.02Diluted
    
    $
    0.05
    
    
    $
    (0.00
    )
    
    $
    0.03
    
    
    $
    0.01Weighted average common shares outstanding:Basic
    
    
    83,092
    
    
    
    82,907
    
    
    
    83,085
    
    
    
    82,855Diluted
    
    
    88,213
    
    
    
    82,907
    
    
    
    87,508
    
    
    
    88,068
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VIALTA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Six months endedJune 30,2005
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,987
    
    
    $
    1,321Adjustments to reconcile net income to net cash used in
operating activities:Depreciation
    
    
    66
    
    
    
    285Changes in operating assets and liabilities:Accounts receivable, net
    
    
    2,484
    
    
    
    2,887Inventories
    
    
    198
    
    
    
    (1,943
    )Prepaid expenses and other
    
    
    148
    
    
    
    (223
    )Deferred profit
    
    
    (990
    )
    
    
    (2,887
    )Accounts payable and accrued liabilities and other
    
    
    (1,237
    )
    
    
    (2,334
    )Net cash provided by (used in) operating activities
    
    
    3,656
    
    
    
    (2,894
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of short-term investments
    
    
    (516
    )
    
    
    (8,800
    )Proceeds from sales of short-term investments
    
    
    10,132
    
    
    
    11,162Restricted cash deposit
    
    
    3,022
    
    
    
    (815
    )Acquisitions of property and equipment
    
    
    
    
    
    
    (6
    )Net cash provided by investing activities:
    
    
    12,638
    
    
    
    1,541CASH FLOWS FROM FINANCING ACTIVITIES:Issuance of shares of common stock
    
    
    4
    
    
    
    8Net cash provided by financing activities:
    
    
    4
    
    
    
    8Net increase (decrease) in cash and cash equivalents
    
    
    16,298
    
    
    
    (1,345
    )Cash and cash equivalents, beginning of the period
    
    
    7,296
    
    
    
    9,356Cash and cash equivalents, end of the period
    
    $
    23,594
    
    
    $
    8,011
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VIALTA, INC.
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 NOTE 1. THE COMPANY
 ä ä
    NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of presentation
  Principles of consolidation
  6




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Cash equivalents, restricted cash and investments
     Revenue recognition
   Allowances for sales returns
   Warranty
  June 30,
    
    June 30,2005
    
    2004Beginning balance
    
    $
    399
    
    
    $
    484Accruals for warranties issued during the period
    
    
    228
    
    
    
    656Settlements made during the period
    
    
    (300
    )
    
    
    (372
    )Ending balance
    
    $
    327
    
    
    $
    768
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Comprehensive gain (loss)
  Stock-based compensation
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss), as reported
    
    $
    4,058
    
    
    $
    (165
    )
    
    $
    2,987
    
    
    $
    1,321Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects
    
    
    (54
    )
    
    
    (179
    )
    
    
    (123
    )
    
    
    (413
    )Pro forma net income (loss)
    
    $
    4,004
    
    
    $
    (344
    )
    
    $
    2,864
    
    
    $
    908Pro forma net income (loss) per share:Basic
    
    $
    0.05
    
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    0.02Diluted
    
    $
    0.05
    
    
    $
    (0.00
    )
    
    $
    0.03
    
    
    $
    0.01
 Revision in Classification of Certain Securities
  Recent Accounting Pronouncements
  NOTE 3. RECOVERY OF PRIOR PERIOD IMPAIRMENT CHARGES
  8




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NOTE 4. RELATED PARTY TRANSACTIONS
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net payables at beginning of period
    
    $
    (97
    )
    
    $
    (314
    )
    
    $
    (127
    )
    
    $
    (281
    )Charges by Vialta to ESS
    
    
    
    
    
    
    55
    
    
    
    208
    
    
    
    55Charges by ESS to Vialta:Purchase of products
    
    
    
    
    
    
    (383
    )
    
    
    (12
    )
    
    
    (722
    )Building lease
    
    
    (127
    )
    
    
    (123
    )
    
    
    (252
    )
    
    
    (247
    )Other
    
    
    (2
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (10
    )Cash receipts from ESS
    
    
    
    
    
    
    (18
    )
    
    
    (208
    )
    
    
    (18
    )Cash payments made to ESS
    
    
    139
    
    
    
    564
    
    
    
    308
    
    
    
    1,000Net payables at end of period
    
    $
    (87
    )
    
    $
    (223
    )
    
    $
    (87
    )
    
    $
    (223
    )
 NOTE 5. MARKETABLE SECURITIES
  June 30, 2005
    
    December 31, 2004Available-for-Sale Securities
    
    Available-for-Sale SecuritiesGross
    
    Gross
    
    
    
    
    
    
    
    
    
    Gross
    
    GrossUnrealized
    
    Unrealized
    
    
    
    
    
    
    
    
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    Fair Value
    
    Cost
    
    Gains
    
    Losses
    
    ValueMoney market funds
    
    $
    18,366
    
    
    $
    
    
    
    $
    
    
    
    $
    18,366
    
    
    $
    4
    
    
    $
    
    
    
    $
    
    
    
    $
    4Commercial paper
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    2,542
    
    
    
    
    
    
    
    
    
    
    
    2,542Cash
    
    
    3,228
    
    
    
    
    
    
    
    
    
    
    
    3,228
    
    
    
    4,750
    
    
    
    
    
    
    
    
    
    
    
    4,750Total cash and cash equivalents
    
    $
    23,594
    
    
    $
    
    
    
    $
    
    
    
    $
    23,594
    
    
    $
    7,296
    
    
    $
    
    
    
    $
    
    
    
    $
    7,296Market auction preferred securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,300
    
    
    $
    
    
    
    $
    
    
    
    $
    5,300U.S. government debt securities
    
    
    977
    
    
    
    
    
    
    
    (1
    )
    
    
    976
    
    
    
    4,741
    
    
    
    
    
    
    
    (10
    )
    
    
    4,731Corporate debt securities
    
    
    525
    
    
    
    
    
    
    
    (2
    )
    
    
    523
    
    
    
    1,077
    
    
    
    
    
    
    
    (2
    )
    
    
    1,075Total short-term investments
    
    $
    1,502
    
    
    $
    
    
    
    $
    (3
    )
    
    $
    1,499
    
    
    
    11,118
    
    
    $
    
    
    
    $
    (12
    )
    
    $
    11,106Due after one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    626
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,385Due within one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    873
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,721$
    1,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11,106
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NOTE 6. INVENTORIES
  Gross
    
    Reserve
    
    NetAs of December 31, 2004
    
    $
    9,540
    
    
    $
    (5,040
    )
    
    $
    4,500Purchase of inventories
    
    
    751
    
    
    
    
    
    
    
    751Shipments and returns
    
    
    (751
    )
    
    
    
    
    
    
    (751
    )Use or disposal of inventories
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )As of March 31, 2005
    
    $
    9,537
    
    
    $
    (5,040
    )
    
    $
    4,497Purchase of inventories
    
    
    177
    
    
    
    
    
    
    
    177Additional reserves
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Shipments and returns
    
    
    (346
    )
    
    
    
    
    
    
    (346
    )Use or disposal of inventories
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )As of June 30, 2005
    
    $
    9,350
    
    
    $
    (5,048
    )
    
    $
    4,302Raw material
    
    $
    2,513
    
    
    $
    (1,615
    )
    
    $
    898Finished goods
    
    
    6,837
    
    
    
    (3,433
    )
    
    
    3,404$
    9,350
    
    
    $
    (5,048
    )
    
    $
    4,302
 NOTE 7. OTHER BALANCE SHEET COMPONENTS (in thousands)
 June 30,
    
    December 31,2005
    
    2004Accounts receivable, netAccounts receivable
    
    $
    329
    
    
    $
    2,838Less: Allowance for doubtful accounts
    
    
    (52
    )
    
    
    (77
    )$
    277
    
    
    $
    2,761Prepaid expenses and otherPrepaid insurance
    
    $
    52
    
    
    $
    207Other current assets
    
    
    150
    
    
    
    144$
    202
    
    
    $
    351Property and equipment, netMachinery and equipment
    
    $
    1,037
    
    
    $
    1,037Furniture and fixtures
    
    
    551
    
    
    
    551Software and web site development cost
    
    
    259
    
    
    
    2591,847
    
    
    
    1,847Less: Accumulated depreciation
    
    
    (1,611
    )
    
    
    (1,545
    )$
    236
    
    
    $
    302Accrued liabilities and otherAccrued compensation costs
    
    $
    153
    
    
    $
    880Professional fees
    
    
    394
    
    
    
    274Other current liabilities
    
    
    214
    
    
    
    390Product return/warranty liability
    
    
    327
    
    
    
    399Accrued charges, related party
    
    
    87
    
    
    
    127$
    1,175
    
    
    $
    2,070Deferred profitDeferred revenue
    
    $
    809
    
    
    $
    3,086Deferred costs
    
    
    (489
    )
    
    
    (1,776
    )$
    320
    
    
    $
    1,310
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NOTE 8. COMPUTATION OF NET INCOME (LOSS) PER SHARE
    For the three months ended
    
    For the six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Basic:Net income (loss)
    
    $
    4,058
    
    
    $
    (165
    )
    
    $
    2,987
    
    
    $
    1,321Weighted shares outstanding
    
    
    83,092
    
    
    
    82,907
    
    
    
    83,085
    
    
    
    82,855Net income (loss) per share
    
    $
    0.05
    
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    0.02Diluted:Net income (loss)
    
    $
    4,058
    
    
    $
    (165
    )
    
    $
    2,987
    
    
    $
    1,321Weighted shares outstanding
    
    
    83,092
    
    
    
    82,907
    
    
    
    83,085
    
    
    
    82,855Effects of dilutive securities: stock options
    
    
    5,121
    
    
    
    
    
    
    
    4,423
    
    
    
    5,213Diluted weighted shares outstanding
    
    
    88,213
    
    
    
    82,907
    
    
    
    87,508
    
    
    
    88,068Net income (loss) per share
    
    $
    0.05
    
    
    $
    (0.00
    )
    
    $
    0.03
    
    
    $
    0.01
 11




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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,
Cautionary Statement Regarding Forward-Looking Statements as well as 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. This following discussion should be read in conjunction with
the Selected Consolidated Financial Data and the Consolidated Financial Statements and notes
thereto that appear elsewhere in this report. There is no assurance that the proposed merger will
be consummated, that the diversion of management time necessary to complete the proposed merger or
the costs associated with the proposed merger will not affect our results of operations or that
actions we take in anticipation on the proposed merger may be undone if the merger is not
consummated.
 Overview
 ä ä ä
    Results of Operations
 For the three months ended June 30, 2005 compared with three months ended June 30, 2004
 Net revenue.
 12




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Cost of goods sold
 Gross profit (loss)
 Engineering and development.
 Sales and marketing.
 General and administrative.
 Recovery of prior period impairment charges
 Interest income and other, net.
 For the six months ended June 30, 2005 compared with six months ended June 30, 2004
 Net revenue.
 13




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Cost of goods sold
 Gross profit
 Engineering and development.
 Sales and marketing.
 General and administrative.
 Recovery of prior period impairment charges
 Interest income and other, net.
 Liquidity and Capital Resources
    14




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Revision in Classification of Certain Securities
  Critical Accounting Policies
  Other Factors That May Affect Our Business and Future Results
  15




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ITEM 3: Quantitative and Qualitative Disclosure About Market Risk
 Interest Rate Risks .
  Foreign Exchange Risks .
 
 ITEM 4: Controls and Procedures
   16




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PART II. OTHER INFORMATION
 
 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, 2004.
 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
 17




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SIGNATURES
  VIALTA, INC. (Registrant)Date:
August 15, 2005
    
    By:
    
    /s/ Didier PietriDidier PietriChief Executive OfficerBy:
    
    /s/ William M. ScharninghausenWilliam M. ScharninghausenChief Financial Officer
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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
 19