Joel H. Amcrnic UNIVERSITY OF TORONTO
and
Russell J. Craig AUSTRALIAN NATIONAL UNIVERSITY
ACCOUNTABILITY AND RHETORIC DURING A CRISIS: WALT DISNEY’S 1940 LETTER TO STOCKHOLDERS
Abstract: In 1940, Walt Disney was faced with crafting a message of corporate accountability under duress. His company, the product of his creative genius, had been forced to submit to public accountability. It had a pressing need to raise preferred equity finance for a major expansion during a period of market uncertainty, war, and reported losses. This paper conducts a “close reading” of the “Letter to Stockholders” in Walt Disney Productions’ 1940 annual report, the first such letter signed by Walt Disney. The letter’s rhetorical features, including metaphor and ideology, are examined in the context of the times. What is revealed is an accountability document skillfully crafted with the exigencies faced by Disney’s company firmly in mind. The letter offers suggestive insight to the world as Disney made sense of it. The paper contributes to understanding the use of rhetoric by top management in activities related to aspects of financial accountability and reporting. It also helps to understand better a significant public persona of the 20th century, Walt Disnev.
Acknowledgment The authors wish to acknowledge the helpful comments of the reviewers.
SCOPE AND OBJECTIVES
Analysis of annual reports, including letters by CEOs to stockholders, has a long history in management and accounting literatures. Discourse by CEOs is important not only because of the power that corporate leaders wield in their own organizations, but also because of their political and cultural influence generally. Since such discourse may be viewed as a form of sense making [Weick, 1995], its study also has value because the CEO may be talking or writing at least partly to himself or herself, and in so doing creating, justifying, and reacting to the world thus fashioned. We think, talk, and write to help us learn and understand what we then know [Lakoff and Johnson, 1980; Lakoff, 1993; Weick, 1995]. CEOs are no different.
The many papers which have examined CEOs’ letters to shareholders included in corporate annual reports have had a focus other than exploring the metaphors and ideologies at play within such discourse (e.g.; Bettman and Weitz [1983]; Salancik and Meindl [1984J; Hager and Scheiber [1990]; Jones and Shoemaker [1994]; Abrahamson and Amir [1996]; Thomas [1997]; Courtis [1998]; Hyland [1998]; Devinney and Kabanoff [1999]). This paper follows a path largely untrodden in previous studies of stockholders’ letters in accounting annual reports. It explores, by means of a “close reading,” meaning in the narrative of the stockholders’ letter of the first public annual report of the global company which still bears Walt Disney’s name. Such accountability narrative merits close reading since it is part of the “battery of belief-forming institutions” [Tinker, 1985, p. 82] top management uses to define the language by means of which its self-accounts are to be written. Our close reading is performed with an interest not only in “examin[ing] the way discourses are constructed in order to achieve certain effects” [Eagleton, 1983, p. 205], but also to help reveal more about the author.
The close reading we conduct is similar to Slagell’s [1991, p. 155] “close textual analysis” of Abraham Lincoln’s second inaugural address during the American Civil War, in which she “considers the speech in relation to its historical setting” (pp. 155-156). Of course, in contrast to an American president’s inaugural address, CEOs’ annual letters to stockholders are mundane, common discourses of seemingly minor importance. It is perhaps because of their commonness and institutionalized, periodic, calendric role in the functioning of our socioeconomy that such common documents deserve scrutiny. Letters to stockholders, written by CEOs and published in corporate annual reports, are too important a part of the ideological paraphernalia of our society to be ignored or brushed aside as mere rhetoric.
The chosen text is the letter to stockholders included in the annual report of Walt Disney Productions, issued in respect of the financial year ended September 28, 1940, and signed by Walt Disney. Disney’s company had been compelled to seek outside capital to finance the expansion of its studio. Our analysis uncovers aspects of the public persona of the then very prominent Walt Disney, a person reputedly “the most significant figure in graphic arts since Leonardo” [Garraty and Carnes, 1988, p. 131, citing British cartoonist David Low]. He, or his alter ego, is revealed, inter alia, as a skillful financial and business rhetorician whose discourse reveals ways of thinking that accord with the ideology of the market [Carrier, 1997]. Such microanalysis of an accountability text prepared by top management is consistent with entreaties for accounting-related narratives in annual reports to be investigated “to better understand the motives and attitudes of management and the communication process” [Jones and Shoemaker, 1994, p. 174], and, more generally, with polemics in recent accounting literature encouraging ‘greater use of narratives in accounting and management research” [Llewellyn, 1999, p. 233]. The particular Disney stockholders’ letter we analyze deserves special study for three additional reasons:
• First, it is the initial stockholders’ letter of the Disney Company, a corporation that today has global importance in the entertainment and communications industries.
•Second, the letter was a public and permanent document signed and most likely substantially crafted by Walt Disney (perhaps with contributions from his brother Roy).1 Thus, it has potential to provide insight to Disney’s public persona at the time and seems likely to add to historical understanding of this acknowledgedly charismatic, yet complex business and cultural leader [Boje, 1995; Bryman, 19951. We cannot say with certainty (nor can anyone we expect) that Walt Disney physically drafted
‘Attributing authorship unequivocally to Walt Disney solely or substantially is difficult if not impossible. While acknowledging this lack of strong, unequivocal proof of authorship, we take some solace that it is the “metaphoric Walt,” as men-tioned in the next footnote, that may be of sustaining importance. As Schickel 11968/1997, p. 44] wrote: “In the last analysis, Walt Disney’s greatest creation was Walt Disney.” There is no doubt thai the “metaphoric Walt” signed and is accountable for the letter.
the 1940 stockholders’ letter. However, in view of his reputation for keeping “a sharp eye on financial arrangements” [Capodagli and Jackson, 1998, p. 185], his multi-skilling philosophy, his acute awareness of the “bottom line,” and his obsession with careful attention to small detail [Capodagli and Jackson, 1998, pp. 7, 181-185], it seems likely that he was strongly implicated. Watts [1997, p. 260], a Walt Disney biographer, referred to “Walt’s comments” in his brief reference to the company’s annual reports of the 1940s. In addition, Schickel’s [1968/97, p. 256] detailed descriptions supporting Walt Disney’s dominant role and “father figure” persona in regard to his company, provided strong, albeit circumstantial, evidence that Disney had at least some significant hand in the letter’s crafting.
•Third, since stockholders’ letters in recent Disney annu-al reports make explicit, favorable reference to “Walt” [Amernic, 1998], a “metaphoric Walt” may influence current-day Disney CEOs.
The paper proceeds as follows. The next section provides context for the letter and its analysis. The third section examines rhetorical qualities of the letter, except for metaphor, which is analyzed in section four. A final section contains concluding comments.
CONTEXTUALIZING THE DISNEY STOCKHOLDERS’ LETTER
The Stock Issue—Features, Reasons, Consequences: In 1940, Walt Disney Productions, as the company was then known, was a relatively small film production studio in terms of financial and tangible assets, but not in terms of reputation, expectations, and innovation. It had just gone public by issuing 155,000 shares of $25 par value, 6% cumulative, convertible preferred stock (see Exhibit 1). As a consequence, the Disney brothers’ company became publicly accountable. Its first annual report, for the fiscal year ended September 28, 1940, was issued in December 1940. That report is the focus of this paper. Of particular interest is the letter to stockholders, a text not only proffered to the public domain but also personally associated with the company’s chief executive. The letter to stockholders was signed by Walt Disney and was included as the first main component of the report.
2A reviewer has drawn attention to the prospect that a “metaphoric Walt” helps provide flexibility in justifying present business practices of the Disney corporation. He could be used in much the same way as Sam Walton might be used as an ongoing mythic figure at Wal-Mart Inc.
EXHIBIT 1
Selected Financial and Other Information About Walt Disney Productions in 1940
September 28. 1940′ A loss of $1,259,798
Tot;il assets reported on balance sheet as of September 28. 1940″ $8,562.13″. of which $4,926,557 represented costs associated wilh feature films and short subjects (in other words, “soft” assets)
Stockholders equity reported on balance sheet as of September 28. 1
Indeed, in any accountability document (such as a set of audited financial statements, a stockholders’ letter, a variance report, a corporate press release), there is a vast array of rhetorical choices available which the author might apply with greater or lesser degrees of awareness. Such choices, made even subconsciously by the author, influence the perceptions of the audience. Our analysis of some rhetoric features of Disney’s letter has merely touched the surface of possibilities; for example, we might have explored more deeply the argument schemes apparent in the letter [Warnick and Kline, 1992], examined -ways in which the letter dealt rhetorically with its composite audiences [Myers, 1999], analyzed text structure, and metadiscourse [Hyland, 1998], etc. Having established, we submit, that the letter -was crafted skillfully in a rhetorical sense, we now focus our attention on the nexus between rhetoric and ideology. We read Disney’s letter with metaphor uppermost in mind since it is largely through metaphor that “we might begin to understand a text’s “ideological agenda that is apt to be hidden from view” [Postman, 1993, p. 124].
METAPHOR IN THE 1940 LETTER
Metaphor is a central aspect of rhetoric. Among recent con-tributors to the extensive literature on metaphor, Eubanks [ 1999, p. 195] has made a case that:
…metaphor is rhetorically constituted. No metaphor is spoken or written except in the con-text of a sociohistorically bound communicative situation. Therefore, all metaphors are inflected by politics, economics, philosophy, social interests, professional commitments, and personal attitudes — in short by the whole of our cultural and con-ceptual repertoire. Because metaphors are inflect-ed, we cannot explain how they work unless we consider concrete instances of metaphor, taking into account how inflections constrain the way metaphors are uttered and understood.
Kubanks asserted that metaphors are “fundamentally respon-sive,” and thus cannot be understood by themselves (i.e., “atom-ized”), but rather only in relation to “metaphoric and literal con-cepts that are already in motion within a culture’s (or subculture’s) discourse.” As a consequence:
Because metaphors are concretely responsive and because competent speakers and writers are aware, consciously and unconsciously, of the interplay of metaphors and concepts, the utterance of a metaphor carries rhetorical benefits or costs…Speakers and writers build consensus and risk rhetorical capital when selecting and reen-voicing metaphors. However, they manage that risk complexly by claiming, ascribing, and shifting the metaphors they utter [Eubanks, 1999, pp. 195-196].
Metaphor theory has a long, rich, and unsettled history. Some contend that metaphor is simply flowery but unnecessary. But many scholars would agree with Postman [1996, p. 174] that “a metaphor is not an ornament. It is an organ of perception.” Others suggest intriguingly that thought itself is fundamentally metaphorical [Gibbs, 1994], and that metaphorical language is merely the surface manifestation of an underlying cognitive mapping between two domains—a target domain and a source domain [Lakoff and Johnson, 1980; Lakoff, 1993J. Considerable persuasive evidence, much of it summarized by Gibbs [1994], provides support for the view that metaphor is basic to thought, and that there are systematic relationships among metaphorical structures. For example, Lakoff [1993, pp. 222-224] wrote about a metaphorical mapping hierarchy whose highest level is the fundamental “event structure” metaphor.
Scholars in a wide variety of fields have taken up the seriousness of metaphor. Harrington [19951 argued persuasively that German race ideology was made more virulent through metaphoric processes; Dunn [1990] showed how the “root metaphor” of the new industrial relations has facilitated the erection of a new industrial relations paradigm; Miller and Fredericks [1990] argued that metaphors used in a major educational policy document revealed a particular ideological predisposition that foreclosed alternative recommendations; Daughton [1993] claimed that Franklin Delano Roosevelt’s use of metaphor of a holy war contributed to the immediate impact and enduring influence of his first inaugural speech; and Postman [1996, p. 174] pleaded rhetorically and, of course, metaphorically to educators by asking: “Do I exaggerate in saying that a student cannot under-stand what a subject is about -without some understanding of the metaphors that are its foundation?”
We suggest that the metaphor, “the company is a sentient being on a purposeful journey traversing an at-times hostile environment,” permeates the 1940 Disney stockholders’ letter, and that this metaphor is consistent with the fundamental and pervasive event-structure metaphor hierarchy described by Lakoff [1993]. Evidence supporting this contention includes the following metaphoric language from the section headed “NEW STUDIO”: (1) “…the Company was constructing and equipping its new studio,” (2) “…the Company’s production operations…,” (3) “…the Company has been able to augment its production…,” (4) “…the Company will be able to carry out its new policy…” These may be argued to be instances of verbal reification, but they are also instances of attributing sentience and purposiveness to the Company. Such -ways of talking and writing about companies are commonplace, and it is perhaps because they are commonplace that they are rhetorically important.
There are numerous other instances of reification of the com-pany as an active agent that has commercial “affairs” (e.g., “EFFECT OF THE WAR”: “The effect of the war in Europe upon the affairs of your Company…”); that takes action (e.g., “PRODUCT”: “…the Company delivered to RKO Radio Pictures, Inc.”); that enjoys benefits (e.g., “P1NOCCHIO”: “…there have accrued to the credit of the Company…”); that creates saleable names and characters (e.g., “SHORT SUBJECTS”); that has expectations about the future (e.g., “GENERAL”: “…the Company expects to have three new feature pictures in general release…”), etc. Perhaps the most important language manifestation of this metaphor is under the heading “PINOCCHIO” in which Disney writes: “…the transition period through which the Company passed when it changed its policy of making one feature in two years…to a policy of producing from two to four features a year.” Here, we have a company that not only pursues the sentient activity of changing a policy, but also has to endure passage through a transition period on its journey.
An obvious objection to this analysis might be that these are merely words, and besides, many managers talk and write about their company in similar ways. But that is the point; “managers work with words” [Jonsson, 1998, p. 411J. The modern theory of metaphor suggests strongly that words matter because they influence the way those uttering those words think and act.
Calling a company “a sentient being on a purposeful journey traversing an at-times hostile environment” has several implica-tions and entailments. The company, a sentient being, knows best through its means of cognition and decision making (i.e., its leadership) about its goals and how to achieve them; about which path through the at-times hostile environment to take; and how to adapt when circumstances change. Therefore, acknowledging the interests of other stakeholders is limited and perhaps utilitarian. These other stakeholders are not part of the being itself (i.e., the company) unless they submit to the authority of the company as a sentient being—a strongly managerialist view. Further, any obstacles in the path are adversaries and goals are non-negotiable.’^ To see the consistency of these ideas in Disney’s managerial discourse, we take a brief look at the 1941 stockholders’ letter (see Appendix 2).
In the section ‘LABOR RKLATIONS” in the 1941 stockholders’ letter, Disney describes the company’s journey as “beset by labor troubles” and ventures the observation that this obstacle to purposeful travel has occurred in 1941 “[fjor the first time in its history.” This section describes Disney’s view of the famous 1941 strike, a view in sharp contrast to Disney’s hostile, and perhaps at
“A reviewer, rightly in our view, proffered objections to a version of this metaphor which we called “the company is a sentient being on a purposeful journey” as follows: ‘Could there be an explanation that is a little less grand? Basic company law tells us that limited liability companies enjoy separate legal form. It could simply be that what is seen here is a playing out of that, with the company being accorded its own identity in the text as a consequence of this commonplace usage…” While undoubtedly this is true, a reader of Disney’s stockholders’ letter would be prudent not to ignore the strong, pervasive strain of Midwestern independence that several scholars have attributed to Walt Disney [Bryman, 1995; Schickel, 1968/1997; Watts, 1997] and which seems to have conditioned greatly his conception and attitudes towards his company, the product of his creative, emotional, and physical labors.
times illegal, anti-union activity summarized in Boje [1995], Schickel [1968/1997], and Watts [1997], If we think of a “company as a sentient being on a purposeful journey,” then what do we think of the people who attempt to unionize and impede the journey? Disney characterizes the 1941 cutbacks which led in part to the union activity and to a subsequent strike as a “program…designed to bring output in line with results reasonably to be anticipated from the distribution of the Company’s pictures under present world conditions.” He portrayed it as a technical problem that required a reasonable technical solution. Thus, the union advocates and strikers, who Boje [1995, pp. 1014-1015] pointed out had several complaints about their inequitable treatment by Disney, were the source of the “labor troubles” that “beset” the company. The impression is one of Big Labor and its goons ganging up on the company (the American Federation Of Labor is mentioned, as are “secondary boycotts” and “‘hot cargo’ activities”). The arbitration award is described as being “imposed” on the company (the word is used twice in the section). So the metaphor established in the 1940 stockholders’ letter is carried over to the 1941 letter and is consistent in its entailments: unreasonable employees joined a union and went on strike, preventing the company from implementing a reasonable program to help it on its journey. Then, despite “[r]epeated efforts by the Company to effect a settlement,” government came in and arbitrated a settlement, which imposed several bad things, further impeding the journey. However, everything “is now operating smoothly” in spite of these obstacles.
Despite these comforting words, Disney was apparently in no mood to have future journeys disrupted by what he regarded as ideologically perverted union behavior. The 1941 strike is said to have caused him to become “a militant anti-communist” and, in the 1950s, “a [secret] special FBI agent charged with passing on information about supposed communist infiltration” of Hollywood [New Internationalist, 1998, p. 8]. His embrace of a business structure of vertical integration in which, for example, his company controls not only the production of film and television programs, but also controls their distribution and associated product licensing and retail merchandising sales, points to the adoption of the metaphor of the uninterrupted journey as a tangible business goal.
Carrier [1997, p. 51] described “a public language” of “the Market model” which he alleged:
…provides the vocabulary and conceptual equip-ment that make it relatively easy to define certain sorts of things as problems and relatively hard to define other sorts of things that way. Just as it influences the sorts of problems that can be addressed, so it influences what is likely to appear as an acceptable, plausible solution.
Like a lingua franca, such a version of the “Market” helps create “an external reality that [people] have to adopt if they are to communicate with others” [Carrier, 1997, p. 49]. Carrier was concerned with the idea of the “Free Market” in the 1990s, and how such a richly complex metaphor affects people’s arguments, decisions, and public debates. He traced the most important historical roots of the “Market” to 18th and 19th century Britain. Importantly for purposes of this paper, he concluded that “…in popular consciousness the idea flourishes best in the United States, with its long traditions of that secular, acquisitive individualism and concern with equality of process rather than of outcome that form part of the Market” [Carrier, 1997, p. vii].
Disney’s ideological notion of his company is metaphorical in the same sense as Carrier’s notion of the “Market.” Disney’s company is related intimately to Carrier’s ‘Market,” for the company metaphorically pursues its life-journey largely by entering into transactions within the ambit of this metaphorical market. And since, as Carrier [1997] reminded us, such a metaphorical market is a “Free Market,” anything that interferes with such metaphorical freedom is to be treated with non-metaphorical hostility (e.g., the national labor union with which Disney’s striking employees allied themselves in 1941). Perhaps warfare was not restricted, metaphorically or otherwise, just to Europe in 1941.
Eubanks’ [1999, p. 195] contention that “all metaphors are inflected by politics, economics, philosophy, social interests, professional commitments, and personal attitudes” seems apt here since the fiercely independent and self-made Disney probably could conceive of his company in no way other than the metaphoric representation described above. His discourse in the 1940 and 1941 stockholders’ letters set out his ideology and philosophy of management and management control. Such discourse represented, in effect, the way he made sense of the world.
SUMMARY AND CONCLUSIONS
We have used the themes of rhetoric and metaphor to exam-ine the 1940 stockholders’ letter of Walt Disney Productions, the first such accountability document signed by Walt Disney, and, to a lesser extent, the 1941 letter. These letters provide an accounting, a story, that Disney intended to craft within the confines of the tensions between his company’s financial exigencies and his creative, iconic persona. Walt Disney was as skilled in designing financial reporting and accountability narrative and discourse as he was in creating animated cartoons and features. The letters seem crafted with the goal to forge allegiance with the new preferred stockholders firmly in mind in spite of his strong resentment. And if we take seriously the current literature of cognitive metaphor, the letters also reveal features of Disney’s thinking, especially about key social and economic institutions. In sum, although the narrative part of financial accounting examined here is rhetorically and linguistic complex, the analyses conducted expose the types of insights that help render management and the companies they lead more understandable. Disney as accountant was ever as complex as Disney the cultural icon.
An ongoing and important task addressed by historians is that of revealing and analyzing the character, personality, and behavior of corporations and their CEOs. In pursuing that task, important insights about corporations and individuals have been sourced from many quarters. But rarely have historians delved into the narrative discourse of CEOs in annual reports when seeking to add to the arsenal of information they marshal in support of biographic profiles, corporate histories, or other historical text. This paper provides an example of how analysis of narrative discourse by CEOs in annual reports can add to and enrich understanding of leading corporations and their chief executives.
The insights offered through adoption of a “close reading” of CEO text have been demonstrated clearly here. By focusing on the rhetorical, metaphorical, and ideological features of Walt Disney’s 1940 letter to stockholders, insight into the behavior and character of Walt Disney and the Disney Corporation is provided. Our analysis reveals Walt Disney to be a skillful, yet subtle rhetorician, whose rhetorical capabilities encompass a deft capacity to manipulate accounting data strategically. Disney was not only a master storyteller in the surreal surrounds of the cinema where he could exploit the glitz and glamor of visual and sound imagery. Perhaps somewhat surprisingly, he is revealed as very adept also in a grey and glamor-free domain with which few would remotely imagine associating him — financial reporting. Our analysis reveals Disney as a very clever storyteller in weaving rhetorical magic in the realm of the mundane — accountability narratives in an annual report.
By exploring Disney’s use of metaphor, we show how further perspectives can be developed and how this assists us in entering theoretical speculations about Disney’s ideological motivations. Our analysis yields results which, in the main, are contrary to the popular, ambient image of Walt Disney; that is, as the wholesome, friendly “Uncle Walt.” Somewhat perversely, we find evidence consistent with what we reported earlier as Walt Disney’s “darker side.” He is revealed as something of an enigma, the cultural icon who seemed almost as adept at crafting financial narrative in a hard-nosed business world as he was at fashioning animation.
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APPENDIX 1
Letter to Stockholders for the 1940 Walt Disney Productions Annual Report
To the Stockholders of Walt Disney Productions:
In April, 19^0, Walt Disney Productions sought and obtained the participation of the public in its business through the sale of 155,000 shares of 6% Cumulative Convertible Preferred Stock, and the Board of Directors herewith submits its first annual report to the Company’s new stockholders.
Included herein are financial statements of the Company for the fiscal year ended September 28, 1940, accompanied by the report of the Company’s auditors, Messrs. Price, Waterhouse & Co. We invite your attention to the notes which are attached to and constitute an integral part of the financial statements.
Your management believes that it will be of interest to our 1,800 stockholders to supplement the information shown in the financial statements with the following additional facts pertaining to the Company.
NEW STUDIO
At the time of the sale of tlie 6% Cumulative Preferred Stock, the Company was constructing and equipping its new studio. This studio was substantially completed and equipped and virtually all of the Company’s production operations were transferred thereto by the end of May, 1940. As a result of the increased facilities, the Company has been able to augment its production of completed footage by more than 100% and has succeeded in lowering the cost of production per foot substantially. Therefore, the Company will be able to carry out its new policy of releasing two or more feature subjects each year as well as a large number of short subjects. As a result of the reduction in costs, short subjects are now being produced at a figure which the management believes will result in profitable releases even though sources of income in certain foreign countries now at war are no longer available.
EFFECT OF THE WAR
The effect of the war in Europe upon the affairs of your Company has been serious and the full measure thereof cannot yet he determined. It has been impossible to effect an orderly release of the Company’s pictures in any of the countries at war and in many countries it has been impossible to effect any release whatsoever. In fact, in most of the territories dominated by the Axis Powers, the release of American pictures has been forbidden. In addition, currency restrictions and regulations, as well as fluctuations in foreign exchange rales, have served to reduce further the Company’s income from such pictures as were already released in foreign countries.
PRODUCT
During the year, the Company delivered to RKO Radio Pictures, Inc., the organization currently distributing our pictures, one feature picture and ten short subjects and has in current production a number of other features and short subjects. Developments in connection with the Company’s product are summarized as follows:
PINOCCHIO:
PINOCCHIO was first shown at tlie Center Theatre in New York on February 7, 1940, and at the Pantagcs and Hillstreet Theatres in Los Angeles on February 10, 1940. It was subsequently released for general exhibition on February 23, 1940. To the end of the Company’s fiscal year, September 28, 1940, this picture had earned gross world film rentals of $1,673,956.54 of which $1,627,33179 represented film rentals from the United States and Canada. The Company has received from its distributors as its net share of the world film rentals, $976,211.94. In addition, there have accrued to the credit of the Company, certain funds in (ircat Britain and Australasia amounting to £5818.7.5, which have been blocked by currency restrictions.
The Company has prepared Spanish and Portuguese language versions of this picture which are currently being shown in all the countries of Central and South America, as well as in the Philippine Islands and Portugal. No income from the Spanish and Portuguese language versions of PINOCCHIO is reflected in the above-mentioned film rentals as the picture was released in those countries too late for any such revenue to be included in the year ended September 28, 1940.
The total cost of producing PINOCCHIO was $2,595,379.66 and it is now anticipated that this amount will not be recouped under the conditions prevailing throughout the world. Accordingly, a charge of $ 1,000,000 has been made to provide for the excess of cost of this picture over the estimated total revenue.
The picture PINOCCHIO was planned and production was started prior- to the outbreak of the European war. Consequently, it was budgeted on a program contemplating income from all countries where SNOW WHITE AND THE SEVEN DWARFS had been released. In addition, this production suffered from excessive cost which was a direct result of the transition period through which the Company passed when it changed its policy of making one feature in two years (SNOW WHITE was released in January, 1938), to a policy of producing from two to four features a year as presently projected. These excessive costs cannot be segregated as they very largely represent discarded work of untrained personnel. PINOCCHIO was produced during a period of development and expansion. These factors which included the schooling and training of personnel to meet the increased production needs, together with inadequate plant facilities at the old studios, contributed in no small measure to the high cost of this production.
FANTASIA:
FANTASIA was exhibited for the first time at the Broadway Theatre in New York on November 13, 1940. This picture is an innovation in the field of entertainment, featuring Leopold Stokowski and the Philadelphia Orchestra in a program of music as interpreted by Walt Disney and the Company’s staff of artists and technicians. FAXTASIA is being presented by methods never before employed in the exhibition of motion pictures. The exhibition of this production requires special sound equipment and the Company has contracted to purchase sufficient equipment so that the picture can be distributed simultaneously in twelve theatres. It is now planned to distribute the picture by the “road show” method in the first-run cities of the United States, Canada and other large centers. The management believes this method of distribution will result in an eventual realization of revenue in excess of that which would be realized by ordinary methods of distribution. However, this method of distribution will require a longer period of time for the Company to recoup the cost of the picture.
OTHER FEATURES:
Three other feature length pictures currently in production arc planned for release during the fiscal year ending September 27, 1941. THE RELUCTANT DRAGON is a combination of animated cartoon and ‘live action” comedy, featuring the well-known humorist, Robert Bcnchlcy. KAMRI is a dramatization, through the medium of the animated cartoon, of the well-known book of the same name by Felix Saltcn. A distribution contract for both of the last-mentioned features has been entered into with RKO Radio Pictures, Inc. The name and basic story of the picture, DUMBO, THE FLYING ELEPHANT were purchased by the Company and are being developed by our staff into a feature length cartoon.
Among the features scheduled for release in 1942 arc PETKR PAN and WIND IN THE WILLOWS.
SHORT SUBJECTS:
During the fiscal year ended September 28, 1940 the Company delivered to RKO Radio Pictures, Inc. a total of ten short subjects and contemplates delivery of twenty short subjects during the fiscal year 1941. These pictures continue in high popular favor and should prove to be a profitable part of the Company’s business inasmuch as the increased efficiency made possible by the new plant has materially reduced production costs.
The Company has recently extended its releasing contract with RKO Radio Pictures, Inc. to cover a fourth series of eighteen short subjects.
The Company presently has twenty-eight short subjects in various stages of production.
OTHER ENDEAVORS
Names and characters created by the Company and licensed for use on merchandise, etc. continue to have a wide-spread appeal. Royalties from this source, from books and music, and revenue from comic strips and art sales, constitute a substantial portion of the income of the Company.
GENERAL
The inventory of pictures in process at the close of the fiscal year was the largest in the Company’s history. The total cost of the feature length and short subjects in production was $3,650,256.67. These pictures represented a total film length of 44,490 feet. In addition there were 149 stories in our inventory on which “we had spent $367,275.41. The system of budget control both as to cost and output was revised when the Company moved to the new studio, with the result thai both feature pictures and short subjects are presently being completed on schedule and at their budgeted costs.
Your management has reduced expenses and has taken aggressive steps toward lowering production costs by increasing efficiency and eliminating dispensable activities.
In considering the profit and loss statement of the Company, it is worth while to repeat the following statement made in the prospectus offering the 6% Convertible Preferred Stock:
“The Company’s principal income accrues according to the rapidity with which its features are exhibited in theatres and, accordingly, the relationship between dates of release and dates of accounting periods has in the past produced and will probably continue in the future to produce wide variations in earnings as they may from time to time be reported. This is made more pronounced by a program which contemplates the release of only one or two features per year. In connection with SNOW WHITE AND THE SEVEN DWARFS, the Company adopted a policy of writing off the entire cost of the picture against the first revenues received, and the Company may in the future follow this policy with respect to all of its feature productions. Consequently, if any given accounting period closes at a time when revenues have failed lo exceed the costs incurred in connection with the production of a feature released during such period, it is possible that a loss may be reported in such period notwithstanding the fact that an actual profit may eventually be realized on such feature.”
During the fiscal year ended September 28, 1940, the Company had only one new feature picture-PINOCCHIO-in release.
The Company also re-issued SNOW WHITE in the United States and Canada in July, 1940. This was released as the WALT DISNEY FESTIVAL in conjunction with four Walt Disney short subjects and is currently doing a satisfactory business.
During the next fiscal year ending September 27, 1941, the Company expects to have three new feature pictures in general release, in addition to its quota of new short subjects. These pictures should reflect the benefit accruing to the Company by reason of the training and skill acquired by the artists during the last three years. While the serious effect on the Company’s business caused by the loss of foreign markets cannot be minimized, nevertheless your management now believes it has adjusted the Company’s operations to a schedule of production and costs designed to be independent of those markets.
CAPITAL STOCK
At a meeting of the directors held on February 24, 1940, the capital stock of the Company was reclassified into 755,000 shares, of which 600,000 shares were designated as Common Stock (with a par value of $5 a share), and 155,000 shares were designated as 6% Cumulative Convertible Preferred Stock (with a par value of $25 per share). 300,000 shares of Common Stock ($ 5 par value) were thereupon issued in exchange for 150,000 shares of Common Stock
($10 par value) previously outstanding, and 45,000 shares of Common Stock were issued as a 15% slock dividend on the new amount of outstanding stock. 10,000 shares of Common Slock were issued to Walter E. Disney and Roy O. Disney in consideration of the cancellation of $200,000 indebtedness of the Company to them. 150,000 shares of preferred Stock were sold to the public through underwriters for net proceeds of $3,412,500 and 5,000 shares were sold to officers and employees for $125,000.
An initial dividend of 37 l/2c was paid July 1, 1940, to the Preferred stockholders of record June 15, 1940, and a regular quarterly dividend of 37 l/2c was paid October 1. 1940, to Preferred stockholders of record September 16, 1940. The regular quarterly dividend of 37 l’2c payable January 1, 1941, to Preferred stockholders of record December 16, 1940, was declared by the Board of Directors at a meeting held December 2, 1940. This dividend will be paid from the Company’s initial surplus. No dividends were paid on the Common Stock.
DIRECTORS
During the year, Edward M. Francis resigned as a director of the Company and in his place the board elected Jonathan B. Lovelace as the representative of the Preferred stockholders in anticipation of Paragraph 9 of Article 5 of the Articles of Incorporation, as amended, which provides that:
Holders of the Preferred Stock, voting separately as a class and entitled to one vote per share, shall be entitled at the first annual meeting of the Corporation after the close of the fiscal year ending September 28. 1940, and annually thereafter, to elect one Director of the Corporation to hold office for a term of one (1) year and until his successor shall have been elected.’
EMPLOYEES At September 28. 1940. the organization consisted of a total of 1 !79 employees.
The Directors want to take this opportunity of thanking all members of the organization, whose loyalty and co-operation have contributed in such large measure to the continued progress of the Company.
FOR THh BOARD OF DIRECTORS WALTER E. DISNEY. President.
APPENDIX 2 Letter to Stockholders for the 1941 Walt Disney Productions Annual Report
I’o the Stockholder*- of Walt Disney Productions:
We submil herewith as part of this annual report to stockholders financial statements of the Company for the fiscal year ended September 27. 1941, accompanied by the report of the Company’s auditors, Messrs. Price, Watcrhouse & Co. We direct your attention to the notes which are attached to and constitute an integral part of the financial statements.
FOREWORD
In our annual report to stockholders issued in December, 1940, and covering the fiscal year ended September 28, 1940, we stated, “the effect of the war in Europe upon the affairs of your Company has been serious and the full measure thereof cannot yet be determined.” It was evident that the loss of foreign markets necessitated a sharp lowering in production costs in order to assure a profit from the remaining markets. The Company immediately took steps toward that objective. Since the date of that report there has been a further deterioration in the foreign markets and the Company again found it necessary to reduce materially its operating expenses and personnel in order to consolidate its position. As this program was being placed in effect, a strike was called by a minority group of the Company’s employees. This development, discussed later in this report under the heading “Labor Relations,” resulted in a retardation of otir production schedule and interfered with the delivery and exhibition of
The comparative figures taken from the income account show the progress made in reduction of costs. The Company shows a profit, after all charges but before provision for excess cost of feature pictures over estimated net income therefrom, of $210,702.94 as compared with a loss of $259,798.05 in the fiscal year ended Scptemher 28. 1940. The income account does not reflect the reduction in costs of feature pictures as DUMBO was not released until after the close of the fiscal year. It does, however, reflect the working off of the inventory of high cost shorts and restoration of a satisfactory profit in that division. Last year the Company provided a reserve of $1,000,000 to write off the excess cost of PINOCCII1O. The Company has estimated its expectancy of return from all of its feature product, and as a result has set up a provision against a possible loss in the amount of $1,000,000.
The comparative figures taken from the Balance Sheet show that while pictures in process have decreased $1,210,406.51, the unamortized value of completed pictures has increased $3,040,569.50. giving a net increase in inventory (before reserve) of $1,830,162.99. This increase, which was largely financed by bank loans, is due primarily to the delay in the general release of FANTASIA, and to labor difficulties experienced at the time of release of THE RELUCTANT DRAGON. The Company now has two feature pictures ready for general release, DUMBO and FANTASIA. A third feature, BAMBI, is practically completed. With current operations reduced by f>0% from last year, a steady reduction of the bank loan is anticipated.
Blocked currencies are not included in the Company’s accounts until received. In October, 1941. the British Government entered into an agreement with the motion picture companies whereby 50% of the blocked currencies previously impounded in Great Britain was released. One-half of this amount was immediately payable and one-half is payable in April, 1942. The Company, since the date of this report, has received approximately S65.000 as part payment of its share of impounded funds. Australia and New Zealand have not yet released any of that portion of our revenue which those countries impounded.
PRODUCT
During the fiscal year under review the Company released its feature picture FANTASIA. Initially this picture was distributed directly by the Company through the medium of road shows using “Fanusound” rather than through normal distribution channels. The picture was presented in thirteen cities (New York, Boston, Los Angeles. Philadelphia, Detroit, Chicago, San Francisco, Pittsburgh, Cleveland, Buffalo, Minneapolis, Washington and Baltimore) and while a few of the engagements were disappointing, the aggregate results indicated a picture with wide appeal. The length of the New York and Los Angeles runs broke all existing records since the advent of sound.
Experience gained from the exhibition of FANTASIA in the above-mentioned cities demonstrated that a nation wide distribution of this picture with “Fantasound” was impractical. It was therefore decided to abandon “Fantasound” and generally release the picture through normal distribution channels. Our sound engineers succeeded in combining the various ‘Fantasound” tracks into one composite track, enabling the Company to present FANTASIA in motion pictures everywhere.
The company entered into an agreement with RKO Radio Pictures, Inc. for the distribution of FANTASIA throughout the world. Spanish and Portuguese versions have been prepared for the South American market, and the picture has already been released in Rio de Janeiro and Sao Paulo. Brazil; Montevideo, Uruguay and Buenos Aires, Argentina. FANTASIA is also being currently released in England and Australasia.
It is now planned to place FANTASIA in general distribution in the United States immediately following DUMBO. In preparation for this general release, test runs were made in representative small towns to guide in editing this picture.
THE RELUCTANT DRAGON
This picture was completed and delivered to UKO Radio Pictures, Inc. on April 17, 1941. It was first put into general release on June 20, 1941. Revenues obtained from this picture were seriously affected by the strike, due to picketing at various theatres throughout the country. It has been released in Great Britain and Australasia. Spanish and Portuguese versions have been prepared for the release of the picture in South America.
Although results to date have been disappointing, we are confident of the return to the Company of at least $500,000 and have provided in the inventory reserve for the balance of the cost.
DUMBO
DUMBO was completed and delivered to our distributor September 11, 1941. Because of selling conditions in the industry the picture was not generally released until the middle of December. The picture was prc-shown in the Broadway Theatre, New York, beginning October 23rd, and has been well received. In the trade and press it is getting excellent exploitation and publicity.
DUMBO is our first all-cartoon feature picture budgeted and produced subsequent to the outbreak of the European war and the loss of our foreign markets. The picture was produced at a cost well within present market possibilities and is of a quality that assures, in our opinion, a profitable return.
SHORT SUBJECTS
During the fiscal year ended September 27, 1941, the Company delivered to RKO Radio Pictures, Inc. a total of twenty-two short subjects. Our costs have been reduced to meet present market conditions and the pictures continue to be a profitable source of revenue.
Under date of April 11, 1941, the Company extended its releasing contract with RKO to cover a fifth series of eighteen short subjects.
The Company now has 22 short subjects in various stages of production.
BAMBI
The Company’s feature picture BAMBI has been in work for over three years and is now practically completed. As now scheduled it will be delivered to RKO Radio Pictures, Inc. on or about the first of February, 1942. Completion of this picture was delayed at least three months by the strike. It was the last of the feature pictures projected on the basis of the pre-war markets. Its cost will be substantially higher than DUMBO but will be approximately $1,000,000 less than the cost of PINOCCHIO. It is the consensus of opinion of those who have seen the picture that it is the best the Company has ever produced for entertainment value and quality of production.
FEATURES RELEASED IN PRIOR YEARS
During the fiscal year ended September 27, 1911, PINOCCHIO, which was first shown on February 7, 1940, returned a gross film rental of $554,730.74 of which the Company’s share amounted to S3S7,100.12. This brought the total gross film rental on September 27, 1941, to $2,228,687.28 of which the Company’s share was $1,363,312.06. The amount received in 1941 would seem to assure recoupment of the balance of the unamortized negative cost of $233,439.64 after giving effect to the reserve set up last year. The Company’s share of blocked currencies resulting from the showings of PINOCCHIO had a value at official rates of approximately $240,000 at September 27, 1941. This amount is not included in the figures quoted above.
SNOW WHITE AND THE SEVEN DWARFS which was first shown in December of 1937 returned to the Company the sum of $ 139.173.23 in the fiscal year ended September 27, 1911.
OTHER ENDEAVORS
The licensing of names and characters created by the Company continues to have universal commercial appeal but revenue has fallen off during the year mainly because FANTASIA did not lend itself readily to such exploitation. Certain of our licensees also were beginning to feel the effect of defense priorities. However, royalties from this source and from books, music, comic strips and art sales continue to be substantial sources of income.
LABOR RELATIONS
For the first time in its history the company was, during 1941, beset by labor troubles. Early in May the Studio launched a program of reducing operating expenses and personnel, designed to bring output in line with results reasonably to be anticipated from the distribution of the Company’s pictures under present world conditions. As this policy was being initiated, a strike was called (on May 28, 1941) by Screen Cartoonists Union, Local No. 852, an affiliate of the International Brotherhood of Painters. Paperhangers and Decorators of America (A. !•’. of L.). A majority of our employees stayed at work and during the nine weeks of the strike the Company’s production proceeded satisfactorily. However, due to secondary boycotts and “hot cargo” activities on the part of sympathetic unions it became impossible to deliver and exhibit our product.
Repeated efforts by the Company to effect a settlement were unavailing. Finally, a commissioner from the National Conciliator’s Office intervened; arbitration was agreed upon and an award was eventually rendered. Among other things, the award imposed the following: a close shop; reinstatement of all strikers; and 100 hours’ retroactive pay for strikers. In relation to our proposed reduction of personnel, the award also imposed a formula under which a certain percentage of strikers had to be retained pro rata to non-striking employees. However, it required the Union to take in as a body without prejudice and at a nominal initiation fee employees in its classification who had remained at work during the strike.
After a period of four weeks of complete shutdown, necessitated by protracted negotiations, the Company restimed operations on September 15. 1941. The Studio is now operating under the terms of the award which, unfortunately, is in many respects very ambiguous and is silent on several disputed issues. However, the plant is now operating smoothly.
DIVIDENDS AMI SINKING FUND RKQUI UEMENTS
In a letter addressed to the stockholders under date of June 14, 1941. you were advised of the reason for the omission of the preferred stock sinking fund payment due April 1, 1941, in the amount of S50.000 and of the deferment of the quarterly preferred dividend due July 1, 1941. The necessity for conserving working capital pending the orderly liquidation of the Company’s inventory of completed feature pictures caused omission of the S 100.000 preferred stock sinking fund payment due October 1. 1941, and deferment of the quarterly dividend on the preferred stock due on that date. Consideration will be given to resumption of payments when and as a comfortable working capital position has been re-established, but no prediction can be made in this respect at this time. The dividends on the preferred stock being cumulative, all arrearages in such dividends as well as fixed sinking fund payments must be paid before any dividends may be paid on the common stock.
GENERAL
Our principal problem now is one of orderly and satisfactory liquidation of feature product. Within the Studio production is going forward and costs are in keeping with present markets. The Company is operating with less than 50% of the personnel and pay roll of May, 1941 Our working capital position is strained because of the large amount of money tied up in feature negatives—DUMBO, FANTASIA and BAMBI. With proper liquidation of these three features, it is believed the Company will reduce its bank loan to a nominal figure or liquidate it completely and restore its working capital position to a satisfactory level. DUMBO and BAMBI are feature pictures which will have none of the problems of distribution presented by FAN TASIA. Both are excellent pictures and should do satisfactory business.
For the current year, the Company is continuing its production of short subjects and has three feature subjects available for production, of which one would ordinarily be completed during the 1942 fiscal year. However, your management is making its facilities and equipment available for Army, Navy and other Government films in connection with national defense. We are now working on short subjects in cooperation with our Government’s plans lo promote hemispheric solidarity and are also producing a series of short subjects for the II. S. Navy and five short subjects for the Canadian Government. New feature product is being curtailed in favor of federal defense work. The volume of defense film work required of us will determine the extent of work done on feature subjects during the current year.
In summary, we are still in an adjustment period brought about by world conditions and the consequent loss of markets, but we believe we have sustained the major shocks of this adjustment. Pictures being projected will be properly budgeted and produced for present restricted markets. Our experience with DUMBO and our short subjects gives us every confidence in our ability to meet these conditions satisfactorily with respect both to cost and quality of our product.
FOR THE BOARD OF DIRECTORS Walter E. Disney,
