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

James Cullen: 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?

Vince Sollitto: 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.

Part I: Vince’s thoughts from the perspective of BRLC shorts, why the earnings report was delayed, and Jim Cramer.
Part III: Vince on the inventory and tooling deposits, the Asian credit crunch, LCoS and Vivitar.

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