1.What did you do before you joined Diamond? I was in public accounting for four years. Right out of college I worked for a few months in a gas station while I was looking for a job. Chuck [Parker], who I had worked with in public accounting, joined Diamond, and two years after he joined Diamond, he replaced himself as controller and came back to me to see if I was interested. Several months after he approached me I decided to take the job at Diamond. So, it's four years in public [accounting] and now thirteen plus at Diamond.
Did you work on Diamond's accounting when you were in public accounting? Or just know Chuck from... No, Chuck and I worked together on several jobs other than Diamond. I didn't, but you can see from the relationship that I ended up here.
2.I guess you answered my second question, which was how long you have been with Diamond. I think you said thirteen years? Just over thirteen years.
3.What was your career path inside Diamond, once you joined the company? Well, the reason I came to Diamond was because it was growing quickly and Chuck, who was the controller, was replacing himself when he moved up to the VP position. A year after I was hired, we continued our growth with the
So you have both titles [VP-Finance and CFO]? Yeah, we use them interchangeably here.
4.For those people who may not be familiar with what a person of that title does in an organization this size, could you describe your current responsibilities? In this organization (I'm not sure if it's like this in other organizations), but certainly in this organization the finance piece means I oversee and work with the financial departments. This includes general ledger, which produces the financial statements and incorporates the tax department, the credit and account receivables departments; and then the payables department. So all those financial departments report up through my area. In addition, the information technology departments report through finance--both programmers and hardware folks, which in this company are two separate departments.
5.As the CFO, how would you describe Diamond's current financial condition? Diamond is healthy and profitable. We've been in the black every year that we've been in existence. We currently are financially healthy and having a good year. We've had good years in the past. Very solid banking relationships for cash flow needs, deal needs, or what have you. So Diamond is healthy, you know that is what people rely on us for and we're pretty careful to maintain that health.
6.What trends are you seeing in retailer credit issues in 2000? Well I talked to our Director of Credit earlier and he thinks that things have been stable. We haven't seen a lot of change in the last few years within our retailer base. We've done the same things that we always have done and probably the same things that you did back when you guys were dealing with retailers [Capital City Distribution]. Retailers come to you from time to time to work out a payment plan over six to eight weeks because they're short for a particular week, or what have you, and we work with them. We haven't seen any meaningful increase in the requests for additional time or additional credit. The base that is here today is stable and relatively healthy.
7.Good, that was another question, which was the health of that base and it sounds like it's pretty good. [Yes]
8.I know for a number of years that there was a reduction in customer accounts, retailer accounts and probably also corresponding in recent average size. What have you seen over the last year in those two measures - the number of retailers and how big they are? The number of retailers has continued to diminish very slightly, one to three percentage points. In our industry that's about 50 to 150 retailers. While we've seen the loss of a number of full-line order form retailers, we've seen a shift in the type of accounts we service. We are servicing many more, I don't want to say infrequent, but not pure full-line order form type of accounts. These are accounts we service outside of our normal weekly shipping cycle. They order from us only occasionally and they're serviced in a different manner. Basically we can ship and pack as it comes in versus an every week shipment. We are more of a traditional type of supplier for some of these customers. So, as we have seen pure Previews accounts diminish a little bit, we've seen a pick-up in some of these kinds of out-of-industry accounts that we service a little bit differently.
9.We've talked a little about the retailer health from a financial point of view, what do you think is the key to improving the financial condition of the retailer base? Well, the key for them is mostly what they think is strong. It's what they do in their stores and how certain lines diminish in importance and how they replace them with other lines that are more profitable and lines that increase their traffic. What we do, and have been trying to do, is expand our product mix. As comics has become a smaller piece of our overall business, we as a distributor need to replace that volume. We've added product lines that we think are suitable for our retailers to grow their product mix so they can maintain their foot traffic and grow their volume. We've had quite a few very successful trips to Japan to create relationships with the Japanese toy and anime vendors. So our Japanese toy product selection has increased and certainly will continue to increase in the future. There are certain areas where we look for new product lines that will be appealing to the same consumer base. We try to offer those things through Previews and hopefully get the retailers to try them and see if they will work for their customer base.
So from the retailer's point of view earlier you were saying that their merchandise mix is the key to their financial health? I mean, from our perspective, that is really all we can ultimately control is offering products and doing what we can to help them with credit issues and those kinds of things--by offering a good mix of products and new products that they have a good opportunity to sell.
I was really focusing more from the retailer's point of view. Many of these are single outlet retailers and in terms of their financial health and well-being, I just want to make sure I was clear in what I was asking--that the right mix might still be the right answer. Well, it's tough to put myself in the retailer's shoes. Certainly paying attention to all of the typical financial issues and certainly being computerized couldn't hurt. This all takes a commitment. By this I mean if you want to computerize your store it takes a huge commitment of time to make sure the information in the system is accurate. I think a very common downfall is that if you buy a system and think it'll do all the work, it's not going to. You're going to have to do the work, it's just going to give you better information, so computerization is certainly helpful. Computerization is just one of the issues, because there's so much information out there. The key is picking the right pieces of information to focus on. Diamond supplies a lot of information to retailers and many times we find it's not used. The retailers need to find out what works for them and pay attention to what kind of information we do give that is important to how they conduct their business. We find that the folks who participate in the various programs that we offer, and we clearly see trends in many stores after the promotion is over, that it would certainly suit them to buy more of a particular product that we have been promoting because they sell through. It seems that they simply don't because they're probably not paying attention to some of these promotions. So, from my perspective, it's hard for me to speak for retailers, but certainly having access to information and discerning what information is most important is key on the financial side.
10.How about your suppliers. Are they giving more or less credit? I think it's about the same or better. They're probably giving more discount for shorter credit terms. I think we're a bank to many folks. On the credit side, from time to time, we're a financing mechanism in the short term for a number of retailers. On the vendor side we do many assignments to the printer to make sure...basically we pay their print bills so they can get the product printed and we work a number of deals that way. Also, we'll help out a vendor who says 'I'm in a pinch, can you pay this thing 10 days early, 20 days early?' It seems this year, especially around this time of year that we're not doing as many assignments as we used to. The phone calls haven't come in as much as in the previous years saying that 'I'm in a pinch can you wire me money tomorrow?' I talked with the payables manager earlier today and she commented that she's not getting as many phone calls and tells me the vendor health, for the folks that are out there now, is probably better than it was a year ago.
11.Distribution is very much an information business and Diamond's information systems have been critical to its success. What's the hardware and software infrastructure for Diamond's information systems? Our main server is a Unix-based server and the hardware is an NCR Unix box, but it could be any Unix box. Our main application software is written in COBOL. We bought the source code years ago, but at this point through 10 years of modification it's basically our own stuff. So that's our main application software. The application software is what the warehouses use via data line access, which basically traffics all of their information through here, so all the data is housed here. Then locally, (and soon at the warehouses), there are NT servers which support various networks which do a number of things. I would say there are five or six networks here in the home office, which support a variety of different departments and functions. For example, we need an e-mail server, a graphics/catalogue server; and a number of the larger departments are on their own servers in order to share information. We use the main application systems to do data analysis and what have you. So the main engine is a Unix box with COBOL programs and COBOL-structured data. Secondarily there are a number of network servers that use both replicated data pulled out of the main system and outside data, and finally we have other networks to handle things like e-mail.
12.What do you see as the greatest areas of future development for Diamond's information systems over the next year or so? What we have done, and we've spent a tremendous amount of time working on this, is create a technology which takes data directly from our core applications software directly to the Web. We decided to spend the time to do this instead of moving data in an intermediate step into an SQL or some other kind of Windows-friendly environment and then to the Web. We've done a lot of core level, nitty gritty, tough programming to reach into that application data, the COBOL data, and get it right to the Web. So a lot of development has gone into skipping this replication stuff because data replication is inherently a poor design. We've used it here for a number of years because it was our only option to have fast access to our data, but it's not the model we want to build on. So, as I've just described, one of the main focuses has been this new kind of methodology, or technology, to take data right from our core data to the Web for retailers, vendors and employees. Our other focus has been on the continuous development of our application software, the COBOL system. So, we're writing Web-specific stuff and continuing to develop the COBOL software.
What particular kinds of applications? What are you working on the most now? In its most detailed level we'll probably re-write our purchase order package next. Then on a global basis, one of the key things we started to focus on this year is eliminating the use of multiple codes for the same item. We have two main goals: one is Web-oriented and the other is application software-oriented. The Web goal is to take reorders on the Web--to give the retailers the ability to do a number of things including placing orders on the Web and in a secure environment. The other software goal is to eliminate the multiple item codes we maintain in our system, which was implemented years ago for the purpose of marketing. That all evolved because the best way for us to sell a product is to list it in Previews. To list an item in Previews, in our existing system, it needs a new code for each listing. The orders are tied to that code and so forth. These multiple order codes have perpetuated like a virus throughout our system; so to get rid of them is not easy. We have to basically start at the beginning and work our way through each application in the system and make sure as we rewrite the application it's backward-compatible with multiple item codes or the one. That's basically what we're doing. We've already started on the front end of the solicitation part and now we're going forward. It's going to be a long process, but as time goes on there will be fewer functions at Diamond that utilize two item codes. We'll start with purchase orders and probably go through the catalog cycle. To be honest with you, I couldn't tell you the details because I really don't know the details. It will be a staged process. Basically every program has to be rewritten or at least looked at. There are over 2,000 programs in the system and we have to look at each and every one of them. Several of them don't have item data in them, but they still need to be checked. So we have to go through the system and kind of weed out the logic that relies on multiple item codes.
We'll start to create some efficiency at every business level - our employees will become more efficient, and we'll see some efficiency at the retail level because they won't have to deal with a number of problems that multiple item codes create. In a year or two multiple codes will be gone for good, which we'll all be happy about. Also, we really can't effectively do business with our retailers on the Web if we leave the multi-item code complexity in the system. It's complex enough for someone that works with it every day to know what needs to be done because of a second code. All of the complexities that we've had built in the system here shouldn't be pushed off on a retailer, and then expect them to properly use the system. We have to convert. We have to start using one item code and get it out to the retailer. We'll be doing this in 2001.
13.You mentioned that your basic software infrastructure is packaged software for which you bought the source code long ago and it has been modified since. Have you thought about, or given any consideration to, changing that software infrastructure to a new package which might incorporate some of these new features on an out-of-the-box basis as opposed to a custom-written basis? We thought about it a lot over the years. I would have to say about two or three years ago to begin with, and then definitely more in the last two years. The out of the box solution would take a lot of modifications. Maybe every business thinks this, but I think we're in a fairly unique kind of niche market that has a lot of peculiarities with advance ordering, and so forth. So everything we looked would end up being more expensive. Instead of going through all of the recent work to make the COBOL data available on the Web it certainly would have been nice to simply buy a brand new package that already has Web front end links to it and modify and use it, but from our perspective there's a number of negatives to that. Cost would have been huge for a complete, viable system after all of the modifications we would have needed, and it would have taken our programmers a lot of time to develop the necessary modifications with an outside party. I think we came to the conclusion that we could write any required new features quicker and cheaper. Also, what you eliminate by modifying the existing system is all of the frustrations and errors involved in training on a new system. It doesn't really have to do with money; it has to do with the morale, the training, and all the productivity we'd lose. So we have a conversation every year about, '...here's a new product, should be look into this?' and we have looked into several, had several vendors out, but always come to the same conclusion. So at this point we've come to the conclusion that we're far more efficient to use what we know, which is what we wrote. Our programmers have been here for years and years so they have extensive experience in it. It's easier to modify a system from the back end and bring it to the Web than it would to buy something off the shelf and try to modify it.
14.I think we've talked through this unique product identifier issue pretty well, so I think retailers will be happy with the fact that this is going to change and will be interested to hear just how hard of a job it is. Actually, to begin to articulate the problem is difficult in itself. You just start talking about one of the issues and you realize how entrenched it is in everything. Everything springs from Previews, and when you have a new code number every month a single item could have twenty codes or more. It goes through payables to purchase orders to invoicing to ordering so until you get down to the details you don't realize how extensive it is. I mean, you're a warehouse guy and a book comes in and there are seven codes in the system but the book is the same on all seven codes. How do you know which one to receive?
15.Diamond has had a financial challenge in that some of its core markets are declining in size. How do you manage for earnings growth in that kind of environment? As a distributor one of the biggest cost challenges you have is overhead. We have a very large overhead because of all of the services we offer and the number of products, vendors and customers we deal with. In the finance area, we have several programmers on staff, several hardware people on staff, big payables and receivables departments and an accounting and tax department. If we buy and sell a comic book for example, our costs are the same whether we sell 1,000 copies or 10,000 copies. The product needs to be ordered, the bill needs to be audited and paid, the amount invoiced needs to be collected from our accounts, and we need to properly account for the transaction for both internal and governmental reporting. Maintaining a minimum sales volume as a company is very important to our economic health. So as a core product line, for example, declines, we must be able to find other offerings or expand into other markets. That's basically what we have been able to do. As comics have dropped somewhat, toys have picked up. And even within the toy category, Hasbro is substantially down this year for us, so as domestic toys start to fall off we find other outlets for toys, which is why we have had such growth in our Japanese toy business. This allows us to become a much more important distributor to many of the Japanese manufacturers. So we have to constantly look for new product lines to grow in order to maintain the volume necessary to keep us financially healthy. In the last several years our sales have been steady even though within our product categories we've seen meaningful fluctuations. It's all a function of maintaining a sales level to keep us healthy.
To keep the top line up? Sure.
16.You've been a big part of Steve's deal machine. How has the deal flow changed over the past couple of years? What do you mean? Like the number of deals?
I mean that Steve began by acquiring distributors and there are fewer distributors to buy out now, but you've found one to buy in the last year. I guess I'm interested in that at one time you built up this acquisition machine to build Diamond. Now it seems to have changed, the focus has broadened. You now have other criteria for what's being acquired and I think different corporate structures that you're employing so not everything comes into Diamond. So from the outside that's what I see. What is your perspective on it? Early on when there were several distributors and we were a much smaller percentage of the market share, an aggressive acquisition stance in this market is clearly how we grew. We looked for people who were having some challenges in the distribution area. Maybe they grew too fast or in contrast, they didn't have the volume they needed to maintain a good bottom line. These were the folks we would talk to about being acquired, and that's how we grew. We were already paying the overhead cost of maintaining a full service distributor, so other distributors' sales were more valuable to us than to the people we were acquiring. So that seemed like a natural progression--to grow through acquisition. When Marvel made their move in 1994-1995, the deals shifted from distributor acquisition to distribution deals with publishers. So there was a shift there to orchestrate a guaranteed flow of product from the publishers because again a distributor requires a certain critical mass of sales volume to survive. We're sizable in our existing core markets already. Therefore, we've begun to strategically look at other product lines, and who within those lines we may identify as a good business partner. This is how we got Alliance.
The gaming market is very similar in many respects, but dissimilar in others, to the comic market. We [Diamond] were not a good 'gaming distributor,' so as opposed to trying to build up the game expertise in-house and then go out and compete, we used the same strategy we used years ago--you know, go out and acquire the guy to get volume, and in this case, expertise also. So that's how we're focused now. It's all aimed at keeping a base of volume within the family of companies and giving us the opportunity to expand. The joint efforts of Diamond and Alliance will grow our presence in the gaming industry beyond just what Alliance is today.
17.So is that the future trend? Expanding into another product area? It tends to make sense. I wish I had a crystal ball...(laughter)...if you have any ideas I'm open to suggestions. It's still going both ways. We still have relationships with the Japanese toys, which I again keep harping over, but we are still developing relations with those folks to represent them in this market and that certainly helps. We're still trying to generate relationships on the vendor side as well as deals on the distribution side. The other thing I haven't talked about is that there are smaller licensors out there, which need expertise in getting merchandise manufactured and offered to our market. We have Diamond Select, which I don't see ever competing in a mass-market environment--they will never be competition for Todd McFarlane for example--looking to develop smaller properties that are important to our market. They're going to stick within their niche. If a publisher wanted to develop toys to roll out to this market, DST could help. It's good for the publisher, and it supplies this market with a new product which otherwise might not get made because people many people are not familiar with this marketplace. These products could increase our sales and increase retailers' sales. So we'll see how it works out in the next few years.
18.To what degree is your time devoted to Diamond as opposed to Steve's other enterprises? I have little interaction with any company outside of Diamond except with how they may impact Diamond. For example, if Diamond Select is bringing in a toy and Diamond is going to be one of the major purchasers, I'll be involved in the discussion of how many we might make, what their budget is relative to what we think we can sell through Diamond. Outside of that, Diamond is really the company I focus on.
19.What are the global trends in Diamond's business? I think you probably have a really good viewpoint by seeing the money that comes in from other countries and your businesses in other countries. Well, I think the international markets have been more stable and predictable than the U.S. markets with regard to comics and graphic novels. I think it's common knowledge that the European markets are more graphic novel-heavy than we have been. When we had big ups and downs in the 90s, a comic growth and then kind of bust, the European market was more stable. It was more of a gradual up trend line, and didn't have the spikes like we had the spikes. They have always been more graphic novel oriented, and I think they're continuing to grow all of those lines. This market [the U.S.] is now shifting and becoming more graphic novel oriented-than it has been in the past. From a country direct aspect, I don't see any huge growth in any one country in particular. Our UK operation has been steady and profitable.
20.For the international and the US are the growth rates the same? I haven't focused on it that much. My best point of reference is our UK facility and their growth has been steady in certain lines. They don't have the presence of toys that we do here because of some of the licensing issues. Purely in the comic-oriented lines they've grown or maintained their levels better than this market. But again, they don't have some of the other product lines as we do here. So from an overall perspective, it's hard to tell.
I guess my observation would be if there were huge differences in US trends and the international ones then you would have probably noticed them. I can't point out any that I'm aware of.
It's like as you mentioned that in the early 90's there was a period where the US market for periodical comics was like this hockey stick curve as where the international markets were slower. It sounds like there was nothing like that on that scale that's a difference between the US and international markets where they're out of sync right now. No, I think we ballooned in the early 90's, around 1992 and 1993, and they have never ballooned. We've come down quite a bit from there, so I think all of the markets are on a more even keel than during the early or mid-nineties.Thanks, Larry.