This is Part I of III from my recent conversation with Syntax-Brillian (BRLC) Chairman and CEO Vince Sollitto. See the main interview page.

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 (AAPL), 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 (ORCL) 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 an 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.

Part II: Vince discuss the CFO situation, the Kolin relationship, and gross margins.
Part III: Vince on the inventory and tooling deposits, the Asian credit crunch, LCoS and Vivitar.

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