An Interview with Syntax-Brillian's CEO Vince Sollitto

I've been writing a lot about Syntax-Brillian (BRLC) lately, from my opinions on the stock pre- and post-earnings to my attempts to contact the company and schedule an interview. I was very fortunate to speak with Vince Sollitto, Syntax-Brillian's Chairman and CEO, for about an hour over the phone, shortly before he announced he was stepping aside from the CEO role.

Vince was great to interview and he was exceptionally helpful in giving all sorts of information about Syntax-Brillian, and I'd like to thank him for taking the time to talk with me. I'd also like to thank Hope Frank, Syntax-Brillian's Chief Marketing Officer, as she was instrumental in putting this together.

I prepared the transcript of the call that follows, and at 8,000 words it is quite a read. I reviewed it for accuracy and I believe it to be a complete and accurate representation of our conversation. If there are any mistakes, they are mine.

Hopefully this goes a long way toward clarifying many of the questions surrounding Syntax-Brillian. In what follows, Vince discusses the short sellers, the delayed earnings announcement, CFO shuffling, his company's relationship with Kolin, the inventory and tooling deposits, working capital and credit issues, and more.

James Cullen: First off, I've been talking to a lot of shareholders and I've never seen a company that has such passionate debate between longs and shorts. Now, Jim Cramer is not a fan of yours, but I heard you on the conference call talking about the short sellers, how you guys just need to execute and keep doing what you're doing with growing revenues and profits and they'll go away – and I completely agree with that – but do you think there is any reason why people are so negative on Syntax-Brillian?

Vince Sollitto: I think there are two groups, the professional shorts and the day trader wannabes. The professional shorts, I believe, looked at the K we published in June 2006 for that fiscal year end and it looked weird. Remember when we merged in November 2005, Syntax had higher revenues and became a larger percentage of the company and as a result it was a reverse merger and so the historical financials were the Syntax financials, which was a private company. So if you looked at the three year financials that we published in our first K, which only had about seven months of combined company activity, there was a lot of weird stuff in there as you would expect from a private company, you know, related party transactions, so-and-so's father loaned the company money so they could make payroll, a lot of the financial things were trued up at the end of the year because they didn't have to do quarterly audits. Kolin is also something that was strange to people… Kolin bundles all of the rebates and credits that come from all of the suppliers, the panel suppliers, the chip suppliers, the plastics suppliers, power suppliers, etc. and bundles them and passes them through as they have to because they're a contract manufacturer. And they call them "price protection" and it smacks of some sort of pumping up of profits if you will. So I think the professional shorts looked at that K and also the auditors were Horwath Grobstein, which no one had heard of because it's a small firm in LA, and I think they looked at that and said 'this could be one of those phony Chinese companies' like a Vizio or like Mag or Princeton Graphics or eMachines which are private companies in the US that basically move the profits back to Taiwan, go bankrupt and start over, and I think they believed that and that was the main driver behind doing that.

There was probably some percentage of people who said 'this can't be possible, American companies can't be successful in consumer electronics' – you know, there aren't many examples except for maybe Apple, this has got to be funny, something must be funny there. Now, since that filing in 2006, we've changed auditors to Ernst & Young, a Big 4 firm, and post-Sarbanes Oxley you don't just ask a local auditor if they'll take your company, they have to take it all the way to their headquarters in Washington, and there is quite a bit of review that lasted about four months before they would accept the company. So, that should have been the first clue to the professional shorts that maybe they were barking up the wrong tree. Then of course, we did several SEC filings that were approved, and at that point there might have been some concern that said 'hey, we might not have a problem here.' You know, they can make a point about Kolin, but as we can talk about later, Ernst & Young, the SEC, everybody has looked at that with a fine tooth comb and said there's no issue there. They rightly were concerned about a concentration of receivables in a private company called SCHOT [South China House of Technology] who is our distributor for China, and made a big point about the 120 day terms, which to the unsophisticated people might seem like something wrong there, but anyone in business knows that the terms in China are 120 days because their interest rates are 3%. Terms here are 60 days because our interest rates are 7%. It is purely an interest rate issue. So I think they made quite a play on that but they still were having difficultly because the company continued to perform well as you've seen, our growth has been great, we've been profitable and able to hold gross margin because of demand for the product, so then their biggest concern was if these guys – the only issue with Syntax-Brillian is working capital. In fact, I've had a lot of people talk to me about 'when I read your K, your company looks like an oil company' – I mean, the more money you have to put in the ground, the more oil you get and that's very much the case that it's a working capital issue. So when we announced we were going to do a follow-on offering to increase our working capital, the shorts went on quite a campaign to prevent that because they figured if they could stop the follow-on offering they could curtail the growth and they could try to convince people that we were floundering and had money issues. They were pretty aggressive in terms of that, calling all the prospective institutions before and after our meetings, sending these hack jobs that they do on Seeking Alpha, Barron's, pay-to-write reports, they sent them to everyone, not just our auditors and the SEC, but to our insurance carriers – you name it, anyone who could possibly damage our company or impact the investment in the company in a negative way. Fortunately, based on my track record in the past and my relationships, Merrill Lynch was able to bring some very significant institutions in, although we did have to do the offering at a much lower price than I would have expected, we ended up doing it at $5.75, but by doing it at $5.75 we ended up being two-times oversubscribed and we did not have to allocate shares to the hedge funds that were shorting, and we were able to bring in institutions like Fidelity's Magellan Fund, Waddell Reed, and quite a few solid institutions. So where they're at right now, is that they believe – and unfortunately we've given them a lot of fuel to continue their negative campaign in the sense that we've had difficulties with our growth. We've gone from under $100 million to about $193 million to almost $700 million in such a short time and we've really exceeded our ability to build infrastructure on the financial side. Syntax was on QuickBooks when we merged, they went to SAP 101 and now we're moving to Oracle and we're doing all that in about 18 months to 2 years. So its been a difficult time in terms of staffing and bringing onboard the tools to support the kind of growth we've had. I feel good about where we are now in terms of that, we've got a great Chief Information Officer who has put in place the tools that we need, we've strengthened the financial team significantly with a VP of International Finance who has been very active of late in the last few months in terms of putting together financing and opportunities for us, we've brought in an internal auditor and a second staff is about to come on board. If you look at the K and you see the SOX 404 results, the SEC – a few items there that are clearly process and procedure deficiencies, no question. I don't disagree with those. We had issues with inventory, $1 million in inventory with a contract manufacturer in a warehouse that didn't get counted. Revenue recognition, we had a simple model that was accepted by our auditors that said at the end of the quarter, to make sure we don't overcount our revenue, we are going to only count west coast revenue a day before the end of the quarter, Midwest two days before the quarter, and east coast three days before. Well, lo and behold, the auditors discover that some of that stuff got there before the end of the quarter and we understated our revenue, we had to add more in so we got dinged on that.

Tax…very difficult. Here's a case where we struggled a little bit with the GAAP treatment of these convertible debt premiums being used as non-cash interest. But we did not think there was an issue with the treatment of IRS tax because we had gotten tax advice from our outside tax company, our previous auditors had approved the way we were treating it, and Ernst & Young had reviewed three quarters before the final audit and approved the way we were doing tax. Then at the 11th hour the day before our earnings announcement was expected to happen, about 4 o'clock, Ernst & Young came to us and said 'we have a problem, we internally cannot agree on how to handle the IRS treatment of the tax on your convertible preferred dividends and interest – the Phoenix guy and the New York guy disagreed, and we need to wait for the Washington guy to break the tie and he won't be available until tomorrow so you'll have to delay your earnings announcement a day.' Excuses? These are our problems. We're responsible ultimately, the auditors are not your partners anymore, the auditors are graders, they have red pens – they don't provide advice, and its up to us in this Sarbanes-Oxley world to be smarter than the auditors and to hire the right experts to give us direction and we're in the process of doing that. So when all said and done, and I think the professional shorts believe that they have an issue that probably is not true. Certainly the results of the Ernst & Young signoff on our audit was that there is no fraud, everything is correct, and its just the fact that it took them to find some of the procedural issues in order to do that. Having our Chief Financial Officer leave at this time was certainly not a help, I have a lot of respect for Wayne – he's a great guy and he has been a tremendous CFO as the company has grown, but he has come to us and said 'this is not my forte, I'm a start-up company kind of CFO, I have a lot of outside the company responsibility with his church and family, and I really need to go back to a position that is more consistent with my skills and consistent with the amount of time I need for my family,' and I don't blame him. This has been a brutal, brutal job in terms of the growth of this company and certainly the reaction by the Street which makes it doubly hard to get your job done while you're being inundated with people who want to tell you how much they dislike your personality. So anyway, that's where I think the professional shorts have been.

Now in terms of naked shorting, that's a tough one. We've of course talked to NASDAQ, talked to the SEC, talked to the Banking Depository Board, and they obviously keep this a very guarded secret. Naked shorting is something that's very, very close to the vest as a regulatory issue because of what it really is – it's the issuance of counterfeit shares and sometimes the companies who do that can't cover and they go out of business and those counterfeit shares sit out there and they need to be marked to market every night. It's a big problem. They really aren't in the position to tell us how many shares are out there – they'll only tell you its more than a certain percent. We have been on the SHO list for a long time which would lead you to believe that there's quite a bit of naked shorting… what is this caused by? This is a very difficult world. There are a lot of products out there that offer returns for investment and many of them are doing well, they're doing 15-20% and hedge funds are out there trying to do much higher than that – 30, 40, 50% returns… it's a very competitive world and the way they can get those higher returns is not to invest in companies but to actually play movements in stocks, and some of them – I won't say all and I'm sure it's a small percentage – go to the extreme of trying to manipulate the stocks and they will do whatever it takes to try to increase their returns, and that's why you see hedge funds go belly-up every week, because they've been aggressive trying to make those returns and sometimes they get on the wrong side of a trade. They're very sophisticated, there are a lot of different trades out there today, there is a very interesting trade now of basically offering somebody a premium for their stock and the short will take the stock, and short the call and long the put and own the stock and then the person who had the stock will get a premium for their stock plus the long call and the short put so one is back to having a short position and the other having a long position and these are very sophisticated trades that are being done out there today, and they have a tremendous amount of affect on volatility. You see a lot of volatility nowadays that you didn't before and that's unfortunately a result of what has happened with Sarbanes-Oxley and changes with the SEC. Analysts used to be measured on IPOs and follow-on offerings, now they're measured on trading volume. If you're measured on trading volume, what do you want to do? You want to have stocks that go up and down quite a bit and the more volatility, the better, because then you can put a buy then a sell then a buy then a sell and get people to buy the stock, sell the stock and all that trading volume goes to your credit when you're being measured at the end of the day. So that's what I think the situation is with the institutional shorts.

Cramer? He's harmless. I don't think Jim is doing anything with his old hedge fund buddies in terms of trying to knockdown the company on their behalf. I think he's out of that game, he's an entertainer now, if anybody listens to what he says, you realize he was not prepared for our interview and basically embarrassed himself by trying to read the analyst report during the interview. He got a lot of people jazzed up about the company, and then totally coincidentally one of our supply chain partners decided to take us up on our standing offer which is for all our supply chain partners, we offer them the ability to buy a small percentage of stock at a 5% discount with a 10% warrant coverage. And we want them to do that, we want our suppliers to be invested in our future and the success of Olevia and Syntax-Brillian. Those things happened to collide, that interview was scheduled two weeks in advance – I certainly had no knowledge of what was going to happen – he felt embarrassed and as a result he got a lot of calls from his audience and I certainly understand – I talked to him that Monday afterwards – explained it to him, but it was very clear that was he was saying is – he has a big ego, and he should. He's and entertainer and to entertain his audience he has to have a big ego, but I think he's harmless, his comments were obviously not considered very rational, he compared revenue of one quarter to earnings of another quarter, which is pretty hard to get wrong but he did, and then said he didn't believe our issue with the financial slowdown in banking in Taiwan because our 'competitor' Corning didn't have any such problems. Now, I don't think I have to tell you that Corning is not our competitor, they make glass and plates, we make televisions. But that was his comment.

With respect to the amateurs, I used to read the Yahoo board and try to get – at one time we used to accept questions from the board and answer them on conference calls, its gotten to the point now where these chat rooms are unsupervised and they're just not very interesting to anybody anymore and I certainly don't read them.

JC: In terms of the CFO situation, Wayne's [Pratt] leaving and you have Jack Hodgson coming in. Anything in particular on Jack's expertise and what he might bring to Syntax-Brillian that might help you either secure long-term financing, if you go the route of trying to offer more shares, how do you think he's going to help the company?

VS: I think the first thing with Jack is that he is a very experienced CFO. He's been the CFO of many companies as you read in his CV. He has learned to be an executive financial officer and to be able to establish the structure in organizations to do the day-to-day activities so he can be focused on strategic guidance. That was really what we were looking for. Now, having said that, the other thing that's very important is that he was on the board since the company was Brillian, before the merger. So certainly he knows all the board members, he knows all the players, and he knows many of our supply chain partners and those things don't hurt. It provides instant confidence and in fact Jack's coming with me and my international finance manager to Asia today to go over there and meet with a lot of the banks and our supply chain partners, as well as to have another board meeting Sunday to ratify a lot of the changes that are required as the result of all of this. We looked at it and said, 'is there an ideal candidate we'd like to bring in to this position given where we're going,' and you can certainly think of one, but how long would that take even if we did hire Korn Ferry or Christian & Timbers, it could take 3, 4, 5 months and I didn't feel – I've been through that before with PhotonDynamics back in 1998 during the Asian economic crisis and I had to be acting CFO for about four or five months, and its certainly not something I want to do in this situation – that was a lot different, we were in a case where the industry had gone into a slowdown and so as a result the business was stagnant and we were basically rebuilding to come out on the other side – this is not the case here, this company is growing as fast as we can finance it, so we did not have that kind of time. So I think Jack brings a lot of the right things to what we need right now and also being that he was the audit committee chairman, he has been very close to the auditors and the SOX 404 process, and to Deloitte & Touche, who we hired to help us as internal auditors and I think he's well aware of a lot of the issues that we struggled through over this past year.

JC: On the issue of auditing, his credibility will hopefully help you get financing if you need it and clean up a lot of the issues that were expressed by Ernst & Young in the last 10-K that you released about two weeks ago. In that conference call that you had following that, you talked about – I think it was Wayne who said that gross margin guidance was probably going to be around 16% which is down because you were a little above 20% last year. Is that due to lower ASPs, component costs, or is there some sort of change in terms to the rebate percentage from Kolin?

VS: Let's take that one at a time. The first thing is make sure we don't confuse that we do disclose LCD television gross margin and we also disclose overall corporate gross margin. The LCD gross margin is an indication of the ongoing majority of our business. The overall corporate includes LCoS, Vivitar, and some other things that relate to charges from sales that go into gross margin. Now, one of the things you should recognize is that the December quarter, which actually spills into September a little bit because of the way that people buy the product for Black Friday, etc., is historically for all manufacturers, the time when the most credits are given in terms of things like programs for Black Friday, marketing development funds for advertising, and items that reduce the gross margin. So if you look historically at our numbers and go back to last year, you'll see that our gross margins took a dip in the December quarter and then came back in the March quarter and if you look at that data – which should be available on our website because I presented it at our corporate presentation – that gives you a pretty good indication of the cyclicality of the business. In fact, guys who are fairly interested and up on the story will look at the year-over-year numbers very closely and they'll say, 'a year ago they did this number in revenue and what were the circumstances? How much has the industry grown? And now let me forecast what I think they'll do for revenue this same quarter a year later' So that's the main driver behind gross margins.

Now, in terms of Kolin, you've got to be very careful. The reason that we break out Kolin is because it's a related party – because [one of their board members] is on our board, Chris Liu, great guy, he used to be a high government official in the state of Texas. And so we break it out in great detail, we offer tremendous transparency, in fact we've been criticized for being too transparent, we give too much information on this. For example, if we were a Dell or an Apple or a Cisco, the exact same things that we describe in excruciating detail they receive from the same kinds of suppliers – they just describe it as a net gross margin, they don't have any such transparency requirements because there's no related party. The way in which James [Li, the COO] has established the costs, which is brilliant, is that – James was with Gateway and then Elite Computer Group – and he was a buyer of these kinds of electronics components for major players. At Elite Computer Group they were the OEM for Apple and Dell and IBM and Toshiba, so he knows how the pricing works over there; and you get warranty rebates, you get marketing development funds, you get volume discounts and those things. When he went over as Syntax which was this little tiny company to the same people he had known for a long time, they said 'James, you guys aren't that big, we can't do this' and so for something that lets say is a dollar item and the big boys would pay 75 cents, they wanted James to pay 90 [cents]. And he said, 'tell you what, I'll pay you the dollar for your power supply, and if I hit this volume, I want you to give me the 10 cents and if I penetrate this retail account, I want another nickel, and if I do this and I do that, you give me credits at the end of the quarter against my purchases in the following quarter. Well, if you're a supplier, you're going to go 'Hm, there's no risk to me, in fact, I book a dollar.' And so at the end, we true up and we get those credits back and those credits go against the next quarter's purchases. Brilliant concept. The net result of that is that the power supply guys, the circuit guys, the video processing guys like Pixelworks… ATI, panel suppliers like LPL and them, all operate in the same way. As a result at the end of each quarter, we get a pretty significant credit. It's actually a bigger credit than say a Dell would get because we actually paid more in the beginning than they would have. Now that gets passed through to Kolin. In fact Kolin, because it's a public company, their auditors come from the US every quarter to audit them – all of the credits that came to Kolin from our suppliers were in fact passed through to us and there was no leakage. So be very careful when you talk about the Kolin credits, it's really the credits of the supply chain that are passed through by Kolin. Now Kolin of course as a contract manufacturer and assembler also gives us credits, just as we would get from a… Foxcom or anyone else, but that is very different – that is on the assembly portion not the component portion.

JC: One thing you mentioned as part of the first question is that the number one issue is working capital. And you have all this demand – I think you said three times the demand you can meet now with the financing you have – and as part of that secondary offering you raised about the equivalent of all that money went to inventory and tooling deposits…

VS: Ok, let's separate those two things out. The first one, actually, it went to pre-payments for – well, when you count the ARs we collect and that money, it went to basically three things: it went to paying down ARs early to Kolin to get cash to Kolin to help them purchase, it went to tooling deposits for the plastic molds for new models. Everytime you do a new model, a new look, you have to get these molds – they're very big, very expensive, and we – two ways you can do this, you can pay for the molds and own them, meaning you use your cash for that, or fortunately for us because of our supply chain partners both [the plastics company] and Kolin, what we do is give them a deposit – really not a cash deposit, it's a purchase order for the mold. They then take that to their bank in Taiwan at 3% and can borrow the money to pay for the mold. So we carry this kind of tooling deposit thing on our books, and the reason we carry it on the books is, we pay for the mold in every part that we buy. In other words, we're chipping away at that deposit as we make units, but we have to keep it on our books because in the event that we didn't use – didn't actually get 60,000 units of a particular model, which would amortize that total amount, we would have to write that off. So the auditors have to check that every quarter. They go through the deposits, you see one number, but really it's a huge spreadsheet that 323s, 523s, 542s, all that stuff. They're each there and there is a mount for the mold and there's the number of units against that. So that's all being checked and what'll happen is, you'll pay off a mold and you'll design a new plastic, or you might have two factories – you need two molds – because you're making them in the US and in China. Or you might have gone well beyond the lifetime of the mold and you need to get another one because that model is selling so well that you'll need to replace that mold because it wears out.

Now, back to the money. Let's start at the beginning. The company started because the only thing that we have in terms of credit financing is receivables financing – meaning that for CIT and Preferred Bank, they have basically given us a line of let's say $100 million, and what they say is, for eligible receivables – in this case that would be reputable US companies – let's say we have $100 million of receivables, they'll let us borrow $80 million or 80% of those receivables. So we get that – the receivable money – that we were going to collect in 60 days in the US, and we send it right to pay for the next TVs that are going to ship in the next quarter, which we'll be paid for in 60 days. So kind of the way you look at this is to say, you don't really grow that fast in that scenario, because they'll only give you 80%, you're paying 80% because you only have a 20% gross margin, and so you're really only able to gain a couple months worth of growth with that method. Now, how do we do 250%? We're fortunate that we did some offerings – some equity offerings to our supply chain partners, we did a PIPE in December 2005, we did the follow-on offering – but we also were fortunate in that we were able to take our purchase orders which we gave to Kolin, who then distributed those orders to our supply chain partners, and they were able to borrow in China and Taiwan against those orders. So we got the equivalent, over time – at this year it kind of peaked at $430 million worth of working capital lines that were issued to our partners – so between that, our own AR financing, and the equity offerings we did, that was our working capital and we were able to stretch that into growing at about 250%. Now what happened recently is that as a result of a company – one of these Taiwanese LCD companies that was selling to the clubs – they had a huge return problem and as a result they had borrowed on the purchase orders. In other words, they had borrowed on the orders, not on the receivables, so what happened was that the amount they got paid because there were returns was so much less than they borrowed that they went bankrupt. When that happened the bank was left holding the bag; the banks in Taiwan instantly put a lid on loaning money trying to understand whether this was a problem in the US, because our economy had gone through some difficulties as you recall, and as a result they said if you have a $100 million line, but you've only borrowed $60 million so far, we're capping you at $60 million for now.

JC: They put a freeze on it.

VS: Right, they didn't say you had to pay back what you owed, but you can't borrow anymore. That had the impact of taking about $200 million out of – instantaneously taking $200 million out of our working capital – and of course right at the worst possible time, right while we were getting ready for the September and December quarters. Now, we were able to recover some of that, one of our suppliers is WesTech out of Singapore, they were able to borrow – recover their borrowing more quickly – Kolin did do a convertible debt, they're in the process of doing a convertible bond as well, but we haven't seen the results of that yet and we may not until the first half of October, but we will get that back because I think things have loosened up, we have a better interest rate and the Beijing Olympics will drive the economies in Asia, and I think that the banks over there are recognizing that this is a problem that many of these Taiwanese LCD companies who borrow against purchase orders like the Vizios and Emersons and Westinghouses and Polaroids, run the risk of – they've already taken the money, and if they don't get paid – they're bankrupt. Whereas we don't do that, we borrow against receivables, not purchase orders. So I think they recognize that, but its certainly put a crimp on the supply chain for LCD TVs into the US market and what we're seeing is that many of the retailers – many that we don't do business with – have contacted us saying, 'I need 200,000 or 100,000 of these units, can you get them for me? I can't get them from any place else.' And this is not the Tier Ones, the Tier Ones have deep pockets, so their able to do it, but of course their price point only covers one aspect of the market – you need to have the guys that are priced 20% lower like us and the Vizios and the others. So we've gotten a lot of requests for that, and it became very clear that there is a little more pervasive problem in Taiwan than just this one company, Protron, going under. Now, what does that all mean to us? What it means to us it that we clearly did not have as much working capital temporarily as we wanted. We're trying – and it's a very difficult problem because it's such a moving target – trying to make sure that we can figure out how much we can deliver and when to go back to our retailers and say look, you wanted 500,000 units, I told you you could get 300,000, now as a result of that you're only going to be able to get 220,000. That's the difficult thing for us, to make sure that we communicate correctly with these guys because they do national ads and set these things up well in advance. They can't have a situation where they're advertising that they're carrying an Olevia 32" TV and then not have enough product to stock all the stores nationwide. That's a big problem for them, truth in advertising and that sort of thing… so that's what we've struggled through recently. What have we worked on in the meantime? We have been approached as a result of the [10-]K being filed and for those people who are in the industry, they've looked at the K and said, 'this is a really good company, they have some growing pains and some process problems but basically Ernst & Young gave them a clean bill of health, and if you look at the numbers and the financials and the fundamentals, if we give them $100 million in debt, they should be able to in 12 months be able to turn that into $400 million in revenue and $40 million in operating profit.' Because we're putting all this money to work in the business, it's not like when I was at Photon… and we'd do a $150 million follow-on offering and put $120 million on the balance sheet so I could sleep at night, that's not the case here, every dollar that we don't need to pay bills, salaries, that stuff, we're going to put to work to increase our sales. So they look at that and say, 'if you can get a $40 million return on a $100 million investment, you can afford to pay me – a good interest rate.' We've had a lot of people contact us about that. Now, a good interest rate for them is probably not something we want to be locked into for a long time, and so the negotiations we're going through now are, how can we take advantage of this but not get ourselves locked in for three to five years on an interest rate we know is inflated at the moment. So we're working on that. Finally, the whole issue of China is one that I feel really good about what we're doing there – I don't know if everyone understands it. What I've said is, we have the problem with the concentration of receivables at our distributor South China House of Technology. They've done a great job for us, absolutely; we would never have gone from 2% to 5% market share in the last year and been the #1 non-Chinese brand in China in the December quarter last year without them. Because they hire the kids to run the kiosks, they man them, and they hawk the product like a Chinese product, and they do a lot of local advertising and promoting of the Olevia brand. But, there is no question that when people said, 'look at this, a huge percentage of AR are from a single customer that's a private company that we don't have publicly released financials on, and that could be a problem, maybe they won't get paid.' Now the crazies say they aren't even real sales, they're phony, but that's – I don't think people pay attention to that made up stuff – Ernst & Young obviously spent on this audit… they estimated about 100 man hours of people in Hong Kong and Taiwan and China who worked for Ernst & Young going over that relationship and gave it a clean bill of health. But, it is a concentration of AR and we were unsuccessful in finding a bank that would provide us with either factoring or AR financing because we were once-removed from the actual retailers, so we made a decision to change from a distributor relationship – a stocking distributor, they took ownership of the product – to a rep company structure whereby they still do everything they did before, they still hire the people, deliver the product, provide the logistics and all that, but now we pay them a commission as opposed to revenue and the revenue and the AR now comes to us from a dozen retailers in China and Hong Kong who are guys like Best Buy and Circuit City and Target – the Gomes, the Five Stars and Broadways and Fortresses – who are internationally known as retailers that are very reputable. We have been told, and I don't have term sheets… yet, that say we should be able to borrow against those receivables because the paper is coming to us from those kinds of retailers. Once that is in place and we can borrow against those receivables, then the opportunity for us to get back on to this very high-growth trend in China is possible. We were growing at a phenomenal rate, about 300% in China, because the market is growing almost twice as fast as the US, and also because of the unique difference of the 120 days and lower interest and 60 days and higher interest we get higher gross margins in China than we do here. It's just a different world. The retailers here say, 'if you give me another 1% discount I'll pay you in 30 days;' the guys in China would never ask that – 'I'll pay you in 120 days, that's the deal.' The gross margin is better but the time is longer so when you look at it from the standpoint of where we are right now given everything going on, did we think it was a prudent thing to let China – which by the way, does not have the same working capital issues because it's a completely different supply chain for China – do we feel comfortable letting that AR balance grow faster than North America and become a higher percentage of our total business? And the answer is that we didn't, we didn't feel comfortable. Not that we've ever had an uncollectible AR over there, we haven't, but did we feel having that large an AR out there for 120 days? No. It's our money, it's the shareholders' equity, and it didn't make sense for us to do that, so we decided to limit the sales in China in September and December. If we were able to put in place the financing issue, we might change that. But right now, that is the posture that we've taken. Hence you saw the numbers in September come down, while we never really gave an estimate for September by itself, we did give an estimate for the second half of the year combined and it's clearly a reduction in our mind from a number that was probably around $250 million down to about $170-180 million and that's the real driver behind it.

JC: LCoS (Liquid Crystal on Silicon) is a very promising area and I've heard you talk about it before in terms of that's really the big, monster TVs and you're hoping to introduce that in greater numbers. That, and Vivitar – the Olevia LCDs are obviously the focus here, but what do you see those two segments contributing to the company in the future?

VS: Let's start with Vivitar. Vivitar is a great brand – it's known maybe not by your generation but by my generation as – when we all had Canon/Nikon cameras we all had Vivitar lenses and Vivitar flashes. So Vivitar is a great brand name that was owned by a Taiwanese holding company that had used it as a vehicle to sell surplus digital camera parts into the industry. So it really got run down, the website was broken – didn't work – and no marketing had been done in two years, so things got really run down and they needed to sell the company for other reasons. They were also interested in our stock, wanted to get some of our stock, and so we were able to get a good buy on it. What were we looking at there? My feeling was that we had just done a study of entering the European market, which is the largest LCD market today – not because they have HD, they're behind the world in HD, but the European consumers like flat panels – and we had looked at bringing the Olevia product country by country, the brands and the channels are tied together in Europe, and bringing it country by country was going to take us 18 months to accomplish that and make money. And I said, that's brutal. When we looked at Vivitar we found that 80% of the retailers that sold Vivitar cameras also sold televisions, and we enquired if they would be interested in carrying a Vivitar branded LCD TV. And they said yes, very much so. We then looked at the… camera business and discovered that, in Europe, the camera business was actually quite healthy – Vivitar is the #3 or #4 selling brand in the UK. So we looked at it and said, this is amazing, but couldn't we get some better cameras? The cameras were surplus-type stuff. So we talked to Hope Frank and she's a genius and we're blessed to have her on the team, and she said, 'I think we could do this especially when you look at what we're doing at Target and some of the other retailers, they would really like to buy more stuff from us.' Once they go through all the trouble of qualifying a company and setting up the ERP systems, getting involved with the marketing groups, that sort of thing, just selling one product is not as effective as having a suite of products. We looked at it and sure enough, Hope launched that yellow underwater camera, stuck it in the Oscar grab-bags, the trashy news magazines… the paparazzi caught Brooke Shields with the camera and it became the must-have gadget for the summer and sold like crazy on Target.com at $199. Meanwhile she introduced the gold camera, and one of the things she did was with the AV sponsorship that we're doing, while in the US we're using Olevia as the founding sponsor, at the O2 in the London Financial District she used Vivitar. And so the Vivitar brand is getting enormous exposure in Europe, through the O2 and it's a very classy exposure. So what's happened is the gross margins over there are very good for selling the new products – now it doesn't hurt that we're buying the stuff in dollars and selling it in pounds and that's another thing to remember – but they're doing very well. Finally, when we decided to enter the TV market, given the lack of resources we hoped to be selling 50,000 TVs in Europe this year, and given what's happened we looked at that and decided we're going to enter the TV market in Europe at the high end. So we took the extra time to design some new plastics that are very thin, piano black, speakers are hidden behind, they have a very small 1" trumpet underneath the TV to bring the sound out; we showed them at IFA which is a big show in Berlin – that is the largest electronics show in the world – and they were very well received and we'll start shipping those in the first half of calendar '08. So Vivitar we think has a good chance of bringing the gross margins back up into the range we're interested in, 20ish range, and we believe that the brand will eventually help us get back to the US with a reputation that will be not sold in Wal-Mart, but will be sold in Target and Sears and those places.

Now LCoS is a different story. LCoS is a great technology, undisputed the best picture quality in the world, better than LCD, plasma, DLP, you name it – it is clearly the best choice in terms of price performance in the large sizes, 60-70 inches. The problem of course is that it's a new technology. Basically only three companies that have it; Sony – their SXRD is LCoS, JVC is D-ILA and that's LCoS, we have a trademark on LCoS, that's why they use a different name, unfortunately we've seen JVC go out of the business because they've been purchased by… I think Harman Kardon. They were purchased by a holding company and they exited the LCoS business. So now it's just Sony and us; that doesn't bode well because the retailers do not view us as viable – which they shouldn't, we haven't shipped in any kind of quantity yet – so they say, 'this is a problem if Sony is the only one with LCoS, they could own the rear projection market and they already are #1 or #2 in LCDs,' and that would be a problem for the retailers…

So that is an artificial constraint on demand. We believe that a 65" laser light engine, 7" thick LCoS TV at somewhere around $1500-2500 would be a phenomenal seller in competing against even flat panels. To get there though is going to take cost reduction, cost reduction really comes with one simple thing and that is volume. It's a chicken and egg problem, we're not like Sony – we don't have the resources to forward price a product, drive the volume have the volume drive the cost and make money on the backend. So we need to find a way to get that cost down. We found that in the Chinese government, who has a real interest in LCoS, we've done the joint venture on the light engine factory, but it has not taken off as we'd like. There are meetings going on in China, in Beijing, as we speak, to talk about the future there. We've basically told them that, we either have a significant volume LCoS business together, or we don't believe that Syntax-Brillian can continue to carry the losses there. And so hopefully that's going to put a fire under the guys in China to get moving here, they have been very encouraging, of course the President of China went and toured our factory, declared it a national technology, and all that is good but we also want to see some tangible investment that will drive the kind of volumes we need. LCoS is a wait-and-see. It is a fabulous technology, anybody who has ever seen a TV says that, if LCoS goes away I think everybody who is in the know will buy at least two of them and stick them in their closet to make sure they have them for the future. Hopefully, between Sony and Syntax-Brillian, we can make LCoS a very significant part of the home theater experience for a lot of people.

JC: Vince, thank you very much for talking with me – great interview, and I really look forward to seeing you guys put up some big numbers in the future.

VS: Alright, thank you.

Comments

[skumar3]

Great interview and hope this puts to rest all the questions raised around the company. Syntax-Brillian is fundamentally sound with exceptional growth in the past year. The best part is that there is a lot of growth still to come. This maybe a making of a solid brand to rival the Japanese and the Koreans just as Samsung and LG sprang forth to compete with the entrenched Japanese. Best of all, it is American

As for the stock, this is likely the best value in the market today

[NI123]

Excellent interview - Thanks for posting it.

[buysideretired]

A lot of time to get appointment, do the interview, recap it into publish format, and get it sent in..
Thank you James for a proactive stance and passing on an opinion based on as much fact as you can get...
Some people just sling horseshit, James was at the horsess mouth getting the "Rest of the Story"... Job well done young man... dag

[TShea]

From JVC U.S. PR Rep: A correction to Mr. Sollitto's comments about JVC, which are: "...unfortunately we've seen JVC go out of the business because they've been purchased by… I think Harman Kardon. They were purchased by a holding company and they exited the LCoS business."

JVC remains in business throughout the world. Kenwood Corp. has invested in JVC while at the same time Matsushita has reduced its stake in the company. JVC and Kenwood have announced plans to form a holding company next year and merge some operations. Also, JVC continues to market products using its D-ILA technology in both the consumer and professional products markets. These include rear projection televisions and front projectors. Development of this technology continues aggressively.

[Hi_Tork]

This appears to back up what Vince said; " JVC got out of the business (LCoS)"... bought by who isn't important, the fact they exited the LCoS is the point he was making. Less competition in the technology, possibly higher margin.

[TShea]

Not so. JVC's D-ILA is liquid crystal on silcon technology, just like Sony's SXRD -- different names for the same technology, just as Mr. Sollitto noted. We have not exited the business. JVC continues to develop new devices and new products using these devices, such as www.jvc.com/press/inde...

[TShea]

From JVC U.S. PR Rep: A correction to Mr. Sollitto's comments about JVC, which are: "...unfortunately we've seen JVC go out of the business because they've been purchased by… I think Harman Kardon. They were purchased by a holding company and they exited the LCoS business."

JVC remains in business throughout the world. Kenwood Corp. has invested in JVC while at the same time Matsushita has reduced its stake in the company. JVC and Kenwood have announced plans to form a holding company next year and merge some operations. Also, JVC continues to market products using its D-ILA technology in both the consumer and professional products markets. These include rear projection televisions and front projectors. Development of this technology continues aggressively.