Ever since Superman made his first appearance in 1938, Americans have led the world in churning out superheroes, supervillains, and all the cast of characters and deep lore that surround them. While their popularity has waxed and waned over the decades, the intellectual property around superheroes, owned mostly by multinational media giants, is worth tens of billions today.

I confess to never having been much of a superhero fan. But as a Millennial and a more or less active member of society, of COURSE I am familiar with Batman, the Avengers, Spiderman, Black Panther, etc. They were and are ubiquitous, even if the frenzy seems to have died down over the last decade. These heroes, and virtually all others of any relevance, are the property of Marvel Comics or DC Comics, the twin titans of the superhero and comic book industries.

Today I would like to present the 1993 annual report for Marvel Comics, Inc.

Marvel 1993

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First things first: this is the most beautiful annual report I have ever seen. The entire thing is lavishly illustrated, with page after page of Marvel characters commenting on the company’s results and initiatives. Any why not, when you employ dozens and dozens of highly talented artists? The back cover even includes four collectible Marvel trading cards. The whole things feels less like an annual report and more like something a kid would have begged his or her parents to buy at the comic store. Perhaps that was the point. Sure enough, the annual report has its own entry in the Marvel Comics Wiki.

Marvel is riding high in 1993. Revenues and profits are at record highs, as is the company’s share price. Management’s tone is optimistic, almost irresponsibly so. The company clearly has ambitions of ending the decade as a force in American and even world media, and it sees its recent investments as enabling this future. But this rapid expansion has left the company’s balance sheet stretched as it works to integrate disparate segments.

In the commentary section, management takes time to describe that while Marvel was once just a “funny book” business, it is no longer. Five years earlier, publishing accounted for 91% of revenues. But in 1992, Marvel acquired sports trading card company “Fleer.” Fleer’s trading card and candy businesses now made up more than half of Marvel’s revenue. Despite the change in revenue composition, the appearance and style of the annual report seem to be business as usual. Comic book heroes abound, but sports trading cards appear on only 3 pages out of more than 60. Perhaps this was an early sign of a bad cultural fit? It is difficult to imagine Marvel employees being all that excited about the foray into sports trading cards. Nerds vs. jocks, am I right? I can see a kind of logic, though. If Marvel was in the business of selling pictures and stories about fictional heroes to (mostly) kids, why not start selling cards of real-life sports heroes to the same audience?

As the report goes on, Marvel characters trumpet all the company’s exciting new products and projects, while of course, fighting and ultimately defeating the Bad Guy. Wolverine explains licensing while running through a Sega Genesis game. Apocalypse discusses advertising beside an X-Men promotion with Pizza Hut. Other panels show clothing, bedding, toys, candy, foreign publishing, and just about anything else that could fit Spiderman’s face on it. Marvel says its comics are being translated or reprinted in 75 countries and 22 languages. The popular X-Men cartoon has earned an order for 52 additional episodes, while new Iron Man, Fantastic Four, and Spider-Man animated shows are being developed. The report also mentions plans for a live-action X-Men movie in 1995 or 1996. The timing was optimistic, to put it nicely, but Marvel had correctly figured out that television and movies could expose its characters to a much larger audience than comic books ever could.

Fleer gets its own large section because it was not a small side business. Marvel had purchased the sports trading card and candy company in 1992 for $287 million, financing the entire purchase with debt. Fleer produced baseball, football, basketball, and hockey cards under brands such as Fleer, Ultra, Flair, GameDay, and NBA Jam Session. It also owned familiar candy brands including Dubble Bubble and Razzles.

In hindsight, the Fleer acquisition is where things began to fall apart for Marvel. The company was on a debt-fueled acquisition spree at almost the exact moment that the comic-book and trading-card booms were reaching their limits. It would later purchase rival card company SkyBox for about $150 million, only for both comics and cards to weaken sharply during the middle of the decade. Marvel filed for Chapter 11 in December 1996 and eventually sold Fleer/SkyBox in 1999 for about $26 million. Fleer itself stopped producing cards in 2005, and Upper Deck bought the company’s name and other assets for just $6.1 million.

An unexpected name appears on Marvel’s board of directors: Quincy Jones. He joined the board in December 1993 alongside Stan Lee, Ronald Perelman, former HBO chief Michael Fuchs, and ABC Sports commentator Frank Gifford. Marvel never gives a reason for his appointment, but the fit makes more sense than it seems. Jones has deep experience and connections in the entertainment world, from music to television and film. Given Marvel’s keen interest in expanding into media, Jones’s connections could have served the company well.

Near the end of the report, Marvel discusses its new investment in Toy Biz. In 1993, Marvel purchased a 46% interest in Toy Biz, previously one of its largest toy licensees. The report presents this as another step toward bringing profitable licensed products in house, with plans for new Spider-Man, X-Men, and preschool toy lines. Of all Marvel’s expansion ideas in this report: sports cards, candy, restaurants, video games, and foreign publishing, the toy company ended up mattering the most. Not enough, however, to save Marvel from bankruptcy.

That is what makes the 1993 report a fascinating read. Marvel correctly understands that its real assets are not printing presses or comic-book inventory, but characters that can be used across television, movies, toys, games, and consumer products. That basic idea would eventually make Marvel one of the most valuable entertainment brands in the world. At the same time, management is making a grave error, mistaking a wave of interest in comics and sports cards for durable demand growth and borrowing heavily to expand just as the wave crests. The report contains both the future of Marvel and the reasons it nearly disappeared, all wrapped up inside a comic book where Iron Man and less eminent heroes talk to shareholders.

I would like to extend a special thanks to our summer intern, Henry Wager, for his help with this write-up. Henry did great work putting together background information and identifying interesting tidbits in the annual report. Thank you, Henry!

Thanks for reading!

For our second entry in this passion project, we have another iconic American enterprise: 20th Century Fox. The company’s 1953 annual report reveals a company at a crossroads. The convenience of TV is keeping more and more people in their living rooms, taking a real toll on box office revenues. Fox is pinning its hopes on its latest innovation in movie technology: cinemascope.

20th Century Fox Annual Report 1953

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20th Century Fox was formed in 1935 from the merger of Fox Film Corporation and 20th Century Pictures. The combined firm was one of the “Big Five” of Hollywood’s Golden Era, and by the mid-1940s, the third most profitable. The 1940s were great years for the studios. In need of cheap, escapist entertainment against the backdrop of war and rationing, Americans flocked to theaters. The average American went to the movies more than 3 times per month, and that includes children, the elderly, and those without access to theaters. A young, urban dwelling man of average income might see more than 60 films in the course of a year. A little difficult to imagine today, isn’t it?

But the good times would not last. The war ended, and Americans did two things en masse: had babies and moved to the suburbs. Neither is conducive to a catching a flick on a whim. But the biggest factor behind the decline in movie-going was TV. At the start of the 1950s, fewer than one in ten American households owned a TV. By mid-century, almost two-thirds did, making television one of the fastest technological adoption stories in American history.

By the time of our 1953 annual report, movie attendance had fallen 50% from its peak. Studios were desperately searching for ways to reverse the decline. Some placed their bets on particular actors and actresses or trendy film genres. 20th Century Fox bet on technology: Cinemascope. The goal was to make movies feel bigger, wider, louder, and more exciting than anything television could offer.

CinemaScope used new Bausch & Lomb camera lenses, new projection systems, wider screens, stereophonic sound, and new filming techniques. The big proof was The Robe, released in 1953. It was a hit! More than 30 million people saw the film. Worldwide, it made around $29.5 million, roughly $360 million today. For the curious, The Robe was a Biblical epic starring Richard Burton. IMDB reviewers rate the film reasonably highly, but I probably will not be going out of my way to view it.

20th Century Fox spends the bulk of the 1953 annual report touting the benefits of Cinemascope. The report touts viewership figures for the first generation of Cinemascope films at 95% higher than conventional titles. With the benefit of hindsight, it seems obvious that while Cinemascope was more than a gimmick, it was less than a revolution, and unlikely to prevail against demographic changes and the ascent of television.

Despite the challenges of reduced movie attendance and the expenses of Cinemascope, 1953 was actually a decent year for 20th Century Fox. Revenue hit a record and earnings more than doubled from 1952. Film inventory (physical film!) declined, resulting in strong cash production. It is clear, however, that movie production is a difficult business. The company’s 1953 return on equity is just 5%. This mediocre result is a big improvement over 1952. The company’s balance sheet is strong, with a current ratio of 4.7. Cash on hand exceeds total current liabilities. This comfy liquidity position is sensible for an up-and-down business like film production, but it certainly contributes to the firm’s lackluster return on capital.

Ultimately, the uptick in attendance that Cinemascope created was to be short-lived. The 1960s found 20th Century Fox in difficult financial conditions, not least due to the famously expensive Cleopatra debacle. The studio regained its footing with 1965’s The Sound of Music. The 1970s saw 20th Century Fox attempt to escape the booms and busts of filmmaking by diversifying into movie theaters, resorts, beverages, and all manner of other ventures, including the famous Pebble Beach. The studio reached new heights in 1977 with the release of Star Wars, which resulted in its shares quadrupling. In 1981, 20th Century Fox began yet another colorful chapter when it was acquired by future international tax fugitive Marc Rich and oil and leisure magnate Marvin Davis.

Now that we’ve finished with the high-level overview, let me point out some of the facts and figures that drew my attention in the ‘53 report. (When referring to page numbers in the report, I refer to the actual printed page number, not whatever PDF page number it may be.)

• Cinemascope Hagiography - pages 3 and 4 describe Cinemascope in such grandiose terms that one might assume the technology would stop the advance of international communism and end the Cold War. Indeed, company president Spyros P. Skouras tells us that Cinemascope has been introduced in every country outside the Iron Curtain. (Mr. Skouras was an intriguing character himself, a Greek immigrant who also had shipping interests and oversaw the development of Century City.)

• Proofreading Matters - the company’s name is misspelled as “20th Centry-Fox” toward the end of page 4.

• “Exhibitors’ Resistance” - page 6 describes the difficulty in achieving Cinemascope buy-in from theater owners. It likens their reluctance to the transition from silent film to “talkies.” Convincing nervous partners of the value of major corporate initiatives is scarcely a new problem.

• “Print Difficulties Overcome” - page 7. A major challenge for movie studios of the era was distribution. Fragile and flammable celluloid copies of films had to be delivered to every theater, whether down the street or across the Atlantic. Cinemascope films were more technologically advanced, which created a production bottleneck that the company expected would improve.

• Book Value - While not quite a Benjamin Graham style bargain, page 10 reveals that as of April, 1954, 20th Century Fox shares traded at just 70% of book value. For all the company’s optimism, investors viewed the company’s prospects with a more skeptical eye.

• Share Repurchases - Page 11 discussed the company’s authorization to repurchase 100,000 company shares, or 3.6% of the outstanding. This strikes the modern reader as unusual for its time.

Oil & Gas! - Next, we read about the oil and gas wells being drilled on company property. It is often forgotten about today, but California was a major oil producer in the mid-20th century. Oil and gas royalties would become a major revenue source for the company in following years. I found a picture of an oil derrick on the company’s backlot. I have to laugh at the idea of a tender romantic scene in some pastoral setting being filmed while this industrial monster chugs and clangs away in the background.

• A Nod to the Hays Code - Page 17 is a full page acknowledgement of the studio’s commitment to producing wholesome, decent entertainment. I have to wonder if this commitment was not being affirmed with a wink, as apparently 20th Century Fox had a reputation for producing some of the era’s edgier films. Regardless, honoring the Hays Code was expected at the time, and affirming it, even if then proceeding to subvert it as often as possible, was good practice.

A Truly Global Organization - 20th Century Fox had at least a nominal presence in a surprising number of cities and countries around the world. Pages 25 and 26 list them all. For curiosity’s sake, I looked up the address in my own city of Pittsburgh. The building was part of Pittsburgh’s long-departed “film row.” A Paramount logo remains above the door of a neighboring address.

Thanks for reading!

American Airlines Annual Report 1976

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I don’t plan to go through these reports page by page here. Nobody needs that. Rather, I will highlight the most interesting data points, disclosures, and developments. I welcome readers to download and read the reports and respond with observations of their own. Hopefully we can get a good discussion going in the comments.

Financially, 1976 was a good year for American Airlines. Higher load factors (58.8% vs. 56.9%) drove margins, allowing the company to return to profitability. In his letter to shareholders, chairman Albert Casey highlights several positives, including continued market share growth, below-industry fuel costs thanks to judicious hedges, and planned route additions. He also highlights progress on efficiency, good labor relations, and improved financial footing.

Discussion eventually turns to Sky Chefs and the company’s chain of Americana Hotels. Sky Chefs was American’s in-house food service, catering, and gift shop operations, and a contributor to profit. The segment was eventually sold to private equity in 1986. The Americana Hotels segment offered travelers the chance to stay at 20 different properties. “Fly American. Stay Americana.” was the marketing slogan. Many airlines of the era saw integration with lodging and leisure properties as a natural extension of their business, but most eventually decided they were better off sticking with air travel. By 1979, American Airlines would divest most of its hotel operations.

Interestingly, Chairman Casey does not mention the most significant and tragic event of the year: the April 27, 1976 crash of American Airlines flight 625, which resulted in 39 deaths. While I suppose corporate legal counsel likely would have nixed a full-throated apology, some acknowledgement of the accident seems appropriate.

A two-page map provides a nice overview of American Airlines’ destinations, plus a look at the airline’s most popular routes. In 1976, American Airlines’ most-traveled route was New York-San Juan. This fascinates me. A little research reveals that after decades of net migration away from Puerto Rico, mostly to NYC, the troubled industrial economy of the 1970s caused net migration to decline to nearly zero, with many native Puerto Rican Americans repeatedly moving between NYC and Puerto Rico. No wonder the route was in such high demand.

This is all fine stuff, but the most engaging section of this annual report is the lengthy discussion of how the regulatory regime that governed domestic airlines affected the company’s profits. I was born after US airlines were deregulated, so I never fully appreciated the degree to which airlines were subject to price controls and mandated routes. In the report, American spends time impressing on readers how its ticket prices had not kept up with inflation (please don’t regulate us more), but also how its regulator was making it very difficult to operator profitably. Theoretically, under Civil Aeronautics Board rules, airlines were entitled to earn a normal return on capital. In practice, political pressure made regulators loathe to approve higher fares or route reductions. The result was that by 1976, airlines were facing $40 billion in needed capital expenditures, but as the airlines were only occasionally profitable, capital providers were hesitant to step up. Something had to give.

The letter hints at deregulation on the horizon. Sure enough, President Carter signed the Airline Deregulation Act in October, 1978.

The annual report continues to the financial statements and notes. These appear typical for an asset-heavy industrial, but a few things stick out to modern eyes. The first is the lack of leases. Modern aviation has shifted nearly entirely to a leasing model, where airlines do not own airframes or engines, but lease them from major lessors like AerCap or GECAS. In 1976, American Airlines leased only 1/3 of its aircraft, owning the others. And the tax rate, whew! American Airlines faced a statutory tax rate of 48%. In practice, investment tax credits reduced the effective rate to 22.9%. It’s a good reminder that high historical corporate tax rates are not always directly comparable to our modern rates. In practice, they were often reduced by various credits and provisions. A tax regime that encourages investment is likely a good thing.

Footnote 4, “Commitments” sheds light on what an aircraft cost in 1976: roughly $10.3 million for a brand new Boeing 727 (extended version) and related equipment. By comparison, a new Boeing 737 MAX starts at $99 million. The price of a new standard jet has increased at a 4.6% pace over five decades. Of course, the two aircraft differ radically in their capabilities, safety, and fuel efficiency. Still, as I read I found myself wondering if the greatly increased cost of modern aircraft shows as higher capital intensity for modern airlines. Turns out, not really. Depreciation expenses averaged 5-6% revenue for American Airlines in the 1970s. Today, it’s actually lower at 3.4%. Some of this is extended depreciation periods; in 1976, American used a 15 year life for its aircraft, today, it uses periods of up to 30 years for some assets. It is clear that while modern aircraft are gigantic investments, labor and fuel costs remain bigger challenges for airlines to navigate.

Ultimately, deregulation was a good thing for American, and the firm enjoyed a very successful decade following this report. American built off its momentum and introduced many of the concepts that still define the national airline industry including frequent flyer loyalty programs and the “hub-and-spoke” model. The following decades were tougher, and American declared bankruptcy in 2011 after years of escalating costs and emerging competition.

Thanks for reading our very first vintage annual report with us!

“"The past is a foreign country; they do things differently there" - L.P. Hartley in The Go-Between, 1953.

This quote has always intrigued me. Not because I think it is entirely true, but because it reveals the way in which we view the past: full of characters doing odd, inscrutable things, observing perplexing traditions and making choices based on some arcane logic. And yet, I have always believed that people of the past were not as different as they seem to us today. If we find the habits and decisions of people from bygone generations confusing, it is mostly because we lack understanding of their era and the complex sociocultural and economic environments they navigated. Decades from now, future generations will wonder at our lives in the same way.

The purpose of this publication is to present corporate annual reports from the past. To my knowledge, these reports have never been systematically studied. That task is not for me; I am no academic. What I am is an investor and a business enthusiast. I love thinking about the ways in which corporations and those leading them have left their mark on the world, in good ways and bad. These reports are illuminating and help us in framing our thoughts on modern challenges. After all, the issues that occupied the business executive in the 1940s or the 1980s, like globalization, rapid technological advances, and changes in consumer behavior, are all familiar to us. I don’t think it is possible to inhabit the minds of these historical executives fully, but reading their words can bring us closer to an understanding of their place in the history and a clearer assessment of their choices.

My name is Dave Waters. For twelve years, I have lead Alluvial Capital Management, an investment firm focused on finding opportunities in the overlooked and the obscure. I am obsessed with gathering information and input anywhere I can find it, and business records from various eras and epochs have been useful to me in understanding capital cycles, bubbles and manias, and the value of flexibility and optionality in an ever-changing world. Allow me to present some of my favorite examples of vintage annual reports!