Memorandum

I'm pleased to inform you that we signed with Diamond yesterday. This deal has far-reaching benefits for DC, and although it was only possible in the wake of Marvel's acquisition of Heroes World it leaves us in a far superior position to theirs. Steve Ross, Bob Fisher and Gary Meisel have been both instrumental and invaluable in this deal.

Company profile-Diamond

• 190 million sales, approx. $8 million pretax ('94)
• Operations in U.S., Canada, U.K.
• Leading distributor of comics, trading cards, toys, etc. to comic shops -- market share 50% ('94)
• Strongest management group among our distributors
• Wholly~owned as subchapter S companies by Steve Gpppi, Baltimore

Key deal points

• Diamond goes from being a reseller of DC product to brokerage basis (see below for benefits)
• Brokerage fees on sliding scale from 6.25-7% of retail, plus incidental fees (all subject to strong and most favored nations or better than most favored nation clauses)
• 2 year term, renewable at DC's option in 2 year blocks to total of 16 yaars
• In addition to the right but not the the obligation to buy a minority holding in the company after the 7th year of the term, DC has the option to buy Diamond:
  

  i) outright beeseen the 10th and 16th year; or
  ii) in the event of the owner's death, disibility or departure from the company;
  iii) on a highly favorable formula ranging from 3 to 5 times EBIT, reduced proportionately for the portion of its sales derived from DC, which we anticipate will yield a final purchase price of 3 times EBIT or lesa if we decide to proceed.

Key benefits

• DC captures the benefits of exclusive distribution system without either cost of acquisition or cost of build up (both of which Marvel is experiencing), or the cost to build down from 29 facilities to an estimated 6-8 to reflect the market structural change and improved software (which Diamond bears)
• By shifting to brokerage (the first such arrangement in the direct market) instead of buy/resell we galn control of our wholesale pricing, and have the opportunity to ride what we anticipate will be a gradual escalation of net price to retail price over the next few years without sharing with Diamond
• The brokerage structure also improves our ability to handle reorder and backlist business, both significant engines for growth in a difficult sales period
• Diamond retains all credit risk from the accounts
• DC gets an immediate savings of $2 to $3 million annually on distribution fees, some of which can be used to combat Marvel's increased marketing push with retailers but much of which can be used to shore up our bottom line
• Diamond becomes available as a low cost supplier of distribution services which have potential economic benefits for our other distribution venues, including as leverage against the $2 million distribution fees we curently pay WPS
• DC is ensured having the prime influence over Diamond regardless of our future competitive position
• DC gets the top team in comics distribution, and the best system including a new generation of software just being rolled out (as compared to Marvel's acquisition of a weak team, and software requiring updating)
• Finally, we get the opportunity but not the obligation to purchase Diamond at a low priceat a later date if we feel their profitability makes it a desirable acquisition, or if we feel ownership/control is required as our market evolves.

We still have to implement this structure, and deal with the legal and financial issues attendant to terminating our other distributors, so the major benefits will not be solidly felt until 1996. However, we feel this countermove places us in an equal or superior competitive position to where we were before Marvel acted, with very real short and long term bottom line benefits.

Thank you for your support and for enabling us to receive immediate management attention and support on this matter, and I hope you're pleased with the results achieved.