Algorhythm Holdings Inc (RIME) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to The Singing Machine third-quarter results conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded Friday, February 13, 2004.

I would now like to turn the conference over to Mr. Jay Bauer, Chairman of The Singing Machine.

Thank you and good morning.

We have a lot to discuss this morning, let me turn the call right away to Chief Financial Officer April Green to review the third-quarter results, then interim CEO Y.P.

Chang will offer his insights on the quarter and our plans for the future.

Then April, Y.P. and I will be glad to answer your questions.

Thank you, Jay.

Please note that this conference call will include forward-looking statements.

These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management.

These statements are not guarantees of future performance and actual results may differ materially.

A more detailed discussion of these risks and uncertainties is contained in this morning's press release and Singing Machine's various filings with SEC.

The statements made during this call are made only as of the date of the call and we undertake no obligation to update these statements.

As we announced on January 14th, revenue for the third quarter of fiscal 2004 declined to 28.7 million from 45.7 million in the prior year.

Sales in the United States declined to about 20 million, as compared to 44 million last year, while international sales increased to about 9 8 million from 7.2 in the third quarter of the prior year.

Gross profit for the quarter was a loss of 2.6 million, or a negative 9.1 percent of net sales, as compared to a $9 million gross profit, or 19.8 percent of net sales, for the quarter ended December 31st, '02.

This decrease in gross profit can be attributed to the selloff of old inventory at lower prices, pricing pressure based on increased competition, a decrease in music sales of approximately $3.8 million.

In addition, the Company took reserve against the value of inventory in the amount of $4.9 million from historical cost for its anticipated recovery value.

We also took an impairment charge for tools and dies of discontinued models in the amount of $508,000.

Total operating expenses increased by 1.1 million for the third quarter.

The following factors contributed to this increase -- sales in music costs of 562,000 made up of increased commissions of 257,000; increase in freight to customers of 192,000; increased payroll and related costs of 255,000, which are offset by decreases in advertising and public relations of 92,000; reduced handling charges of 27,000; and other decreases in the sales in music area; increases in expenses at our subsidiary in Hong Kong totaling 554,000, primarily comprised of increases in depreciation of newly acquired assets; and a recognition of bad debts of 392,000.

Increases in SG&A at the Florida operations of 189,000 primarily attributable to increases in accounting of 66,000; amortization of loan costs, 49,000; bad debts, 250,000; legal costs, 91,000; consulting fees of 118,000 which were offset by decreases in payroll and related cost of 297,000.

Decreases in warehousing expenses for the quarter offset the above increases by 174,000.

The majority consisted of reductions in payable and related costs.

Our income tax expense for this year's third quarter was 2.2 million versus 1.7 last year.

At March 31st of '03, we had a net deferred tax asset of $1.9 million.

For the nine months ended December 31st, we concluded that a valuation allowance was needed against this deferral.

The valuation is for the full amount of the 1.9 million, as we cannot be reasonably assured that the asset will be realized in the near future.

As you know, International SMP (ph), our wholly-owned subsidiary, has applied for an (indiscernible) of invention from tax in Hong Kong.

The provision recorded at December 31st for estimated taxes in Hong Kong is 425,000.

Due to the level of net operating losses expected in the U.S. company, we expect to recover amounts paid for income taxes in 2003 in the amount of $1.2 million and have recorded a tax receivable for this amount.

Losses from fiscal 2004 will be carried back to the prior two years and any amount remaining will be carried forward to future periods.

This all contributed to the net loss for this year's third quarter of $7 million, or 81 cents per diluted share.

This compares to net income of 3.3 million, or 37 cents per diluted share, for the third quarter of fiscal 2003.

For the nine months, revenue declined 68 million -- to 68 million from 80.9 million for the same period of the prior year.

U.S. sales declined to 41.2 million from 74.9 million and music sales were down to 1.8 million from 7.4 million.

Gross profit declined to 2.6 million from 17.8 for last year's first nine months, reflecting again the selloff of inventory, competitive pricing pressures on hardware prices, a 75 percent decline in contribution from the higher-margin music, and inventory charges previously mentioned, which, in combination, contributed to a $14.5 million decrease in gross profit.

Loss from operations was 11 million, versus income from operations of the prior year of 8.7 million.

The net loss was 13.4 million, or $1.58 per share, versus net income of 6 million, or 67 cents per diluted share, a year ago.

Increases in the operating expenses included the following -- increases in total cash and stock compensation, 725,000; increased bad debt expense at our wholly-owned subsidiary, 392,000; increases in respect to the need to warehouse the excess amounts of inventories that we carried totaling 492,000; increases paid to legal and accounting fees, 626,000; increased costs related to the amendments required to secure financing from LaSalle and related consulting cost of 432,000; increase in bad debt expense for domestic operations, attributable to primarily to K.B.

Toys and FAO Schwartz bankruptcy filings (indiscernible) for a total of 263,000; increases in charitable contributions, insurance, (indiscernible) fees associated with the production of music and customer service totaling 300,000.

Offset to this is a decrease in direct advertising of 697,000 and a decrease in freight paid for shipments to customers of 452,000.

At December 31st, we had cash on hand of $235,958 and a bank overdraft of 85,000, as compared to cash on hand of 268,000 and a bank overdraft of 316,000 at March 31st.

Our current assets consist predominantly of Accounts Receivable and inventory.

Accounts Receivable increased to 14.7 million for the nine months due to the amount of sales that occurred in November and December, as well as some customers' turns exceeding 45 days.

We expect these receivables to be collected in a timely fashion.

Our inventory has been steadily decreasing since March of 2003, as we're shipping goods to our customers.

As of December 31st, we had a net $8 million in inventory.

Our reserves -- $6.2 million against that -- as compared to $25 million in inventory as of March 31st.

We have taken additional reserves against the remaining carryover inventory from March, 2003 due to its age.

The effect of our inventory is to decrease its value.

Our current liability is decreased to 18.9 million as of December 31st, compared to 21.2 million as of March 31st.

The majority of these current liabilities consist of Accounts Payable, of which 75 percent are within terms set by our vendors.

We are not current on approximately $2.7 million of payables, which are due to factories in China.

During fiscal 2003, we had a credit facility with LaSalle Business Credit.

Under this agreement, LaSalle advanced us funds based on our eligible Accounts Receivable and inventories.

The loan was secured by a first lien on all present and future assets except specific tooling located in China.

During fiscal 2004 (sic), the maximal amount that we are permitted to borrow under the credit facility was $7.5 million.

On January 31st, we paid this loan in full, terminated the agreement and the (indiscernible) filings were released.

On February 9, 2004, we entered into an Factum (ph) agreement with (indiscernible) Factors, Inc.

Pursuant to the agreement, Millburg (ph), at its sole discretion, will advance the Company 80 percent of its eligible domestic Accounts Receivables at a fee of 0.8 percent of the gross invoice value.

The maximum initial line available to the Company is the lesser of 3.5 million, or 80 percent of Accounts Receivable that Millburg (ph) has purchased.

The average monthly balance of the line will incur interest at a rate of prime plus .75 percent, while the terms of the agreement include minimum fees of $200,000 for calendar year, 7.5 million in tangible network and 7.5 million in working capital.

This agreement is effective for an initial term of two year. (indiscernible) automatic renewals unless either party gives notice of termination.

Millburg's (ph) loan is secured by a security interest in all of our present and future Accounts Receivable and inventory.

Although this credit line is not equivalent to our previous lines, we believe that, for the next 90 days, it will allow us enough available cash to continue operations and prepare for the upcoming fiscal year.

We've been receiving collections of Accounts Receivables since the termination of our LaSalle agreement, which has enabled us to pay our obligations.

Y.P.?

The fourth quarter was a very difficult one for Singing Machine.

Our performance fell below our expectations.

I'm pleased to report that we made progress in the implementation of our plan to secure our financial partner, reduce our inventory, reduce costs, stabilize the balance sheet and right-size the Company for the future.

Fiscal 2004 is a clean-up year for the Company.

We intend to focus on cash-flow management and improve our balance sheet.

We reduced (indiscernible) from $25 million to $8 million, which is net of (indiscernible) $6.2 million and include an additional (indiscernible) new inventory turn of $9 million.

And we increased our Account Receivable from $5.8 million to $14.7 million.

The decline in revenue for the third quarter is primarily due to the sale of our existing inventory at low price, the loss of market share in seven major detail retail accounts and the decline in high-margin music sales due to a loss of a major customer, reduced music sales due two others as well as the switchover to (indiscernible) distribution.

In addition, (indiscernible), we experienced cancellation of some orders from major customers.

Our third-quarter loss also will affect our decision to write down our remaining inventory by an additional $4.9 million, including approximately $4 million (indiscernible) and $1 million in music.

As (indiscernible), our total inventory was reduced $8 million at December 31, 2003 with inventory (indiscernible) at $6.2 million.

After the holiday season, we have focused on moving additional inventory to our existing customers and nontraditional channels, such as closeouts.

As of February 12, we have received total orders of about 2.2 million, which is ahead of our projected target for most of the old inventory.

However, this order can be canceled any time prior to shipment.

Our goal is to sell 3 to $4 million of old inventory to achieve our goal of 4 to $5 million inventory by March 31, 2004.

Due to the write-down of inventory, impairment of tools and dyes of (indiscernible) models and complete write-off of royalty paid to MTV, we were in technical violation of the covenant with LaSalle Bank at December 31, 2003.

However, as we announced on Wednesday, we have used cash on hand to (indiscernible) the LaSalle liquidity agreement and the violation is no longer an issue.

We also entered into a two-year financing agreement (indiscernible) Factor Inc. in New York, which is one of the largest commercial financing companies in the United States.

The new agreement, as April said before, will allow us initial line of credit of $3.5 million, which we believe is sufficient enough for our needs at the present time.

We plan to minimize inventory in the future by generating a large share of our total sales through an import program, and a smaller share than what was previously the case to direct sales from inventory held by the Company in the United States.

By substantially reducing our investment in inventory, as well as our warehousing and associated labor and other costs, this strategy should reduce our risk and enhance our competitive positions.

It also means that we will need a lot less warehouse space than we did in the past.

I'm pleased to report that we are subleasing part of all three warehouses we had on the lease in California and Florida; we are in the process of finalizing deals to sublease the less (indiscernible) space in one of the warehouses in California.

We've also renegotiated our licensing agreement with one of our partners to reduce the guaranteed licensing fee from $1.5 million to $300,000 in the year 2004.

In addition, we have taken measures to reduce our overhead, including to (indiscernible) layoff in the past eight months to align our cost structure with our new business model.

As in the (indiscernible) initiative, we anticipate that overall overhead expense will be reduced by 20 percent as compared with fiscal year 2004.

So far, I have discussed our cost reduction initiatives, but we cannot view this company by cost-cutting alone.

Now, I would like to take some time to talk about some of the things that we have accomplished that set the stage for recovery.

Our international sales increased from $14.4 million in fiscal year 2003 to $28.9 million in 2004 for the nine months year-to-date.

We are continuing to expand our international business via a strong partnership with an excellent distribution channel, and we are now looking for other countries to increase our international sales.

We introduced an entirely new product line at the consumer electronics shows in Las Vegas back in January.

With these new products, we hope to maintain our reputation for innovation and our position of industry leadership by staying ahead of our competition.

We have applied for both utility and design patents to protect our intellectual property rights in these new products.

(indiscernible) agreement for music sales we have entered with Warner Bros.

Under this agreement, Warner Bros.

Publications will distribute our karaoke music through our (indiscernible) channel, including its direct sales force, the (indiscernible) sales force on the Internet and related channels.

This is a significant strategy for us to increase our sales (inaudible) higher-margin karaoke music business to compensate for increased competition in hardware.

Another important point is that we believe the Warner Bros. deal will enable us to sell product more consistently throughout our year than we were able to do with our existing distribution.

Back in December, 2003, we introduced six Motown original artists and two Nickelodeon (indiscernible) Warner Bros..

We released two Nickelodeon items and two more Motown disks in January, 2004 and we will introduce four Motown disks in February, 2004 and eight more MTV disks by April, 2004.

Let me summarize -- competition in our business is fierce, especially in the U.S. market.

With expect it to remain slow in the coming months and probably the next holiday season.

So, in order for us to move forward, we are focusing on the following -- number one thing, reduce cost.

We expect the reduction in overhead, staff and salary to sublease our warehouse space, the schedule reduction of (indiscernible) on certainty products, reduced legal, audit and bank fees, as well as other reduction measures will save us approximately 20 percent of (indiscernible) for fiscal year 2005.

Number two, we plan to reduce our inventory by $5 million or less by March 31, 2004, so we do not have the inventory problem again for fiscal year 2005.

We launched two new products to maintain our market leadership position.

We focus on reliability, deliverability and quality (indiscernible) working very closely with our manufacturing partner in China.

We offer the widest variety of karaoke systems, the price points for every budget, and our reputation for quality and on-time delivery sets us apart from our competition.

We will strengthen our partnership with Warner Bros. to increase high-margin music business.

Even though many difficult issues we faced during the past year (sic), we are satisfied with the progress we've made so far in cleaning up the Company.

I'm very proud of The Singing Machine team, as we all work together to get the Company back on the right track.

Now Jay, April and I will be glad to answer your questions.

Operator, can we have the first question please?

(OPERATOR INSTRUCTIONS).

Eric Connelly (ph) of Boston Partners.

Yes, two questions.

Number one, did I understand you correctly on the Accounts Receivable terms being extended to retailers?

Is that their 45 days?

Why was that done, given the precarious working capital situation that you've been in?

Predominantly in the market, we have a couple of retailers that normally run 60 days.

In order to entice the sales of some of our discontinued merchandise, we did have to expend some additional terms.

We don't anticipate that this is an issue and going forward, we anticipate going back to more regular terms.

Normal terms usually run between 30 and 60 days.

Is there any of the receivables that are consignment-type sales?

No, consignment sales are not held in receivables.

Do you have any consignment-type relationships currently?

We are just finalizing with Best Buy only on the music area of our business.

We also have a very small amount of inventory that is held on consignment at Walgreens.

Okay.

Also, our agreement with Warner Bros. is all consignment.

To expand on consignment with respect to the music, the music industry is -- the (indiscernible) is dead.

All the music will be in consignment.

We have disclosed before and every time, we said all the music sales are on consignment.

For example, the Warner Bros. deal is that they will order the goods from us, we deliver the goods and normally we do not get paid until between 60 to 90 days, after we deliver the goods.

But we do not book the revenue and do not factor in any of these into Accounts Receivable with (indiscernible).

Last question -- did I hear you correctly that you paid 432,000 for consulting for terminating the LaSalle line?

According to the amendment, we paid a fee of 300,000, which a good portion of that was realized at December; the remainder is realized in January.

But yes, we did have consulting of approximately 220,000, in relation to the LaSalle agreement, plus the increased additional fees on each of the amendments.

Why was there a consulting fee paid for a contract that's already in place -- that was already in place?

This was one of the requirements of the amendment that LaSalle made with us when we signed in August -- actually even in June, back as far as June.

Let me explain that in detail.

What it was is when (indiscernible) when LaSalle extended us the loan back in August instead, they were hiring an outside company that actually was American Express and a corporate group to come and help up to look at our book, make sure that our forecast was done properly, Accounts Receivable was done properly, and everything to (indiscernible) cash flow, make sure we were able to have a sufficient amount of money to fund (indiscernible) and subsequently (indiscernible) payoff.

So they hired initially two people from AmEx to come down here, work with us and we spent quite a lot of time with them on the cash flow analysis, on helping to gauge exactly what our business looks like, so they would have a comfort level and then ensure that they are in a position to payoff.

So you paid 220,000 for two American Express consultants to be down there for a month?

No, it was an engagement since June to July to approximately seventh of January.

All right, thank you.

(OPERATOR INSTRUCTIONS).

Ian Gilson from Roth Capital Partners.

Good morning.

April was rustling her papers while she was talking about some of the numbers, but do I gather that, in fact, you actually paid for the quarter 400,000 roughly in Singapore taxes or accrued taxes in Singapore?

In Hong Kong, and that was actually Y.P. that is sitting in front of the speaker, not me rustling the papers -- (multiple speakers)!

Sorry about that!

The 492,000 is an accrual for potential income taxes in Hong Kong.

If I take that as a 16 percent tax rate --?

It's 17.5; it was just raised a few months ago.

Okay, .492 divided by .175 is equal to a profit out of Hong Kong of $2.8 million.

Is that correct?

Yes, that's reasonably correct.

If you assume that the rest of your cost of goods are in the United States, you essentially lost more than you sold by a significant amount out of the United States, just on cost of goods.

That is correct.

We wrote down the inventory, which was a significant portion of that cost of sales as well.

Some of that was charged as (indiscernible) to reserve, was it not?

The reserve for inventory is charged directly to cost of sales.

Yes, if it but was charged in a prior period and it is on the balance sheet as an expense, that expense goes to the balance sheet and not to the income statement.

The actual accounting for an inventory reserve is a reduction of inventory, which the reduction of inventory for December was $4.998 million.

The offset of that is an increase to the cost of goods sold for the exact amount.

If you had taken an inventory reserve in a prior period and charged the income statement for that reserve, doesn't that employ you are charging it twice?

No, I think you're confusing the reserve we took in March of last year.

The reserve we took in March of last year was down to -- the balance at December 31st was $1.2 million.

We made an additional reserve at December 31st, which raised the total reserve, which is on the balance sheet, to 6.2 million.

What you see on the income statement is 4.99 million addition and that was the exact write-down at December 31st.

But basically, you still have a significant loss in the United States on the cost of sale line.

Correct?

When you add back the $4 million, it's a very small gain for the quarter.

A profit or -- you're telling me that if you add $4 million back on the third quarter, that you are then profitable in the United States?

No, I did not say that.

I'm talking about the gross profit line.

That's what I'm talking about -- Gross profit.

Yes, the gross profit would be profitable if you added back 4.998 to $2.6 million of a loss. you would have approximately a $2.3 million gain.

In the United States?

In total.

But you made 2.8 million in Hong Kong.

You are correct.

Which implies your lost half a million in the United States just on cost of goods.

Ian, that's correct.

I will discuss this with you later.

Let me go to the next line.

If you look at your financials for the fiscal year of '02, a period in which you had a comparable level of revenue, they were significantly lower than the current SG&A expenses, even if you take off 20 percent.

So, why are we spending so much more money on the operating expenses when we are not having any higher level of revenue?

A good portion of those increases are really directly related to legal and accounting expenses, which are also the fees that were associated with LaSalle.

That is a good portion of monies that we had to expense this year, this nine months.

Ian, the expenses with LaSalle, including the $300,000 (indiscernible) fee, plus the other 200,000, plus 60,000 and 10,000 which they charged us, came to something like 600 or $700,000.

That's why it was so important for us, because they were squeezing us left and right and (indiscernible) additional expenses we had in legal fees as well.

Most of this is going away, aside from the fact that the interest that was charged by LaSalle basically was almost three times higher than what Millburg (ph) is charging us right now.

So that's part of the expenses and part of the cost, which we have now eliminated.

If you took G&A in '02 of 4.1 million plus compensation of 2.5 plus royalties of 1.9, advertising of 2.4, commissions of 1.3 and then add all of those numbers up, assuming a rough equivalent fourth quarter, you have almost doubled your operating expenses.

Ian, advertising and royalty have been reclassified this year -- (multiple speakers).

Therefore, in order to compare to last year's numbers, you need to move the advertising up to reduction of sales, and the royalty is an increase in the cost of sales.

All right, but it still appears that, for a level of revenue, your operating expenses have shown a significant increase, far more than is warranted by the current level of revenue.

That 20 percent reduction does not redress that problem.

We understand your point, Ian, and that's one of the things that we have been actively working on to try to compensate for this.

It is not an easy process to reduce in a company.

We want to make sure that we are adequately covered for the future of The Singing Machine.

A part of these things were built in, you know, I mean, the warehouses and everything.

Some of the reductions that are taking place right now -- also the elimination of staff -- is going to definitely show in 2005.

But you cannot -- it takes time.

We had MTV in for like $1.2 million last year; this year, it's going to be $300,000 as a minimum guarantee.

So, I can tell you that, in spite of everything that you say, that we have reduced our expense -- we are reducing our expenses, we have less (indiscernible) hopefully, we also are going to have much more profitable items that we're going to sell in fiscal 2005.

So, it's something that we would be happy to talk to you maybe later and analyze this further, but I can assure you that we have reduced our costs, we have less expenses and (indiscernible) expenses (indiscernible) last year that were just built in and it takes time to eliminate them.

I appreciate that.

However, it's still too high in my opinion.

Now, let me ask you another question.

In the last nine months, what have been the non-cash charges due to all of these changes that you have made (indiscernible) the third quarter, I would appreciate it?

Non-cash charges are a reduction of inventory, $4.998 million;

MTV -- the write-off of the -- actually that's partially cash -- but that's an additional $700,000 against the bottom line; impairment of tooling, $500,000; provisions for bad debt of $600,000; amortization of the discounts of the convertible debentures was $450,000; stock compensation expense, $511,000.

Okay, so you've got about $7 million of non-cash expenses?

I believe there is a little more than that but that's pretty close.

Well obviously, the deferred tax asset, if you're looking below the line, that would also be a non-cash.

I will go through all of these numbers again and I will get back to you later.

Thank you very much.

Linda Donnelly (ph) from Wachovia Securities.

Thank you.

You mentioned that one of the difficulties in the third quarter was competitive pricing pressures.

Can you tell us who specifically is this competition, and are they going to follow you to Europe?

Linda, that's a very good question I think.

In the United States, what happened this year is, in general, I think there's a market where we see there's a lot more coverage and distribution exposure in the stores in terms of large companies and (indiscernible) stores carrying different karaoke products.

Unfortunately, the prices have come down quite a bit in the United States and in some instances, especially on the low-end products, we see the price did come down maybe 20 percent.

In high-end products (indiscernible) less of price competition.

So as an example, the United States was really -- from a unit perspective, I think there was a growth in the unit of the entire market, but I think the price does not really create a larger revenue for a player like us.

In Europe, what we're seeing is that Europe, as you recall, three years ago, our European sales revenue was practically 0.

Last year, we did about $15 million in Europe; this year we are doing $28 million now.

So, what we see is that we were the first one in the European market; we have introduced a different product; we secured a partner.

We know that our competition is going to Europe as well, and they will also try to follow the same pattern in the United States by getting there with price competition.

That's the reason why, this year, for us, we introduced a couple of high-end products and instead of competing on price, we compete on value, the perceived value; we compete on feature and functionality; we compete on the design and innovation and the new design -- because it is unique and we filed a patent for it and we believe we will get a higher margin.

So, I think to summarize this, yes, we expect to have competition in Europe.

All right.

That philosophy on the value and the design also be your emphasis in the United States in the coming year?

Yes, definitely.

I think that's the reason we introduced our new product line in CES back in January in Las Vegas.

The initial response has been pretty favorable to our product line.

We are in discussions with, actually, a few major retailers and they have expressed interest in carrying our new product line.

But at this point, we do not have a definitive commitment, (indiscernible) commitment but the response to our high-end product is really good so far.

Linda, I just want to come back a moment to Europe.

Obviously, as Y.P. mentioned, yes, the competition is going to be there, strong as well.

However, I believe that we're very well positioned in the European market.

We also have, in some countries, exclusive agreements with some of our distributors.

Obviously, they can be canceled in certain terms as we could cancel them as well, but I just received an e-mail this morning that one of the meetings that our office had with an important European customer was extremely favorable.

They had selected models for the upcoming year, and it all points to an increase of maybe 20, 25 percent with this customer over lest year's purchases, which were already up 40 percent of the initial projection.

So, the market is continuing to be strong in Europe as well, and our quality and the variety of our models and our upscale models make it very, very interesting to our customers to buy and commit to The Singing Machine.

Linda, one more thing -- just the competition -- when we observed, in the past -- very interesting enough is that the customer -- some of the retailers who bought the units at the lower end actually did not make a lot of money either.

They did not make a lot of money either before.

We know that one of our major customers that bought a similar amount of products from us and the competition -- the competition has a lot more inventory to be -- (indiscernible) December 31st.

The customer -- actually, this year, the customer has especially expressed interest in high-ended value in the price range of 100, 150, 199 range because they realize that they are going to have the same (indiscernible) if they only compete on price alone.

So, in the United States, what they also will try to do (indiscernible) retailers is they want to move up the value chain and buy some unique product, or packaging uniquely with our music (indiscernible) the MTV, the Nickelodeon and the Motown original (indiscernible) to create what they call exclusivity, and since that's a way there to reduce the price competition (sic).

Another interesting point I would like to point out is that despite all the problems we had last year, we were able to deliver all our goods on time and our quality was very good.

Fortunately for us, some of our competition was not able to deliver the goods on time to the customer.

That is going to have a factoring -- and when a customer decides who they are going to buy the goods from.

In Europe, and interesting point is some of this competition who are not able to keep up their promises and able to deliver the goods on time -- and they know that they are not able to go back to the same customers, so they are going to the European market to try to establish some customers.

But I think that in this day and age, the information (indiscernible) and the retailer and the distributor in Europe know who delivers and who did not deliver.

When they decide to purchase goods, they tend to go with people who deliver are good form them and who help them -- (technical difficulty) -- able to demonstrate with them that they will make money together.

Finally, with the emphasis on value and design, I know, in the past, your three top customers have been Best Buy, Target and Toys R Us.

Who do you see as your top people, going forward?

If you look in the past two or three years, Best Buy, Target and Toys R Us were our top customers.

In fiscal year 2004, actually we have reduced our reliance on a few key customers.

We have more of what I call our (indiscernible) distribution.

The top five customers for our fiscal year 2004 will be basically (indiscernible) Best Buy, Target, Costco, RadioShack and Circuit City and Khol's, in addition to Toys R Us.

As you can see, we've tried to move up to a highly concentrated (inaudible) a few customers to all the distribution and able to reduce our risk, depending on one or to customers.

All right, thank you very much.

A follow-up question from the line of Ian Gilson from Roth Capital Partners.

Yes, could you discuss the share count for me since I calculate equivalent shares should be closer to 11 million than the 8.729818 that you are reporting?

Certainly.

We have approximately 1,120,000 outstanding options.

I did not calculate a full diluted number of shares, as we had a loss.

Due to the loss, all of the equivalent are anti-dilutive.

But there is also the potential of 1,038,962 shares that may be issued in connection with the convertible debentures.

That brings us to 10.8.

Okay, thank you.

At this time, there are no further questions.

I will now turn the call back to you.

Please continue with your presentation or your closing remarks.

Thank you very much for listening to this conference call, and I will see you next time.

Thank you very much.

Thank you, ladies and gentlemen.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and we ask that you please disconnect your lines.