Annual report

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Eastman Kodak Income Statement Analysis

Published December 13, 2013 by Mayrbear's Lair

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This blog is a continuation of my examination of Kodak’s 2007 Annual Report with focus on understanding the information contained in their income statement. A company’s income statement summarizes their revenue and expenditures to reveal whether the organization is operating at a profit or loss. The income statement is a significant financial document in Kodak’s Annual Report because it discloses the top and bottom line earnings which give shareholders more information about the company’s profitability (Understanding the income statement, 2011). By analyzing this statement closely, investors can determine whether the company is operating efficiently or whether they are struggling to keep their doors open. This research will take a closer look at the annual report’s income statement to understand Kodak’s financial condition during that time to determine whether they were operating effectively and to assess their future. The study will include an analysis of the net sales figures and cost of goods to help determine their gross profit ratios. In addition the research will examine the company’s operating profit figures to identify their source of revenues and assess their profit margin levels. The findings of this research will conclude that although Kodak continued to operate at a loss in 2005 and 2006, by 2007, they revealed they still had some life left in them when their records reflected that they finally had a profitable year.

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Understanding the Income Statement

As I mentioned, income statements are important to investors because they summarize a company’s revenue and expenditures. Fraser and Ormiston (2010) suggest that the information reported on income statements can help investors determine the financial performance of an organization, but points out it is only one of many components that comprise the financial statement package to help paint a true picture of how well a company is being managed (Fraser & Ormiston, 2010). Income statements are reported in two common formats: (a) a multi-step configuration that includes a variety of profit measures including gross revenue, operating profits, and before tax earnings; and (b) a single step format that combines all revenue items and expense deductions to reveal net income figures. In addition, special categories like discontinued operations and extraordinary transactions are also included on these documents so that analysts have more information to understand the broad landscape of an organization’s performance levels so that they can ascertain how efficiently the company is being managed.

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Kodak Income Statement Findings

Without income statements it is difficult for business owners to monitor and control expenditures. Ittelson (2009) postulates income statements are important because they reveal such information like how costs are spent for material and labor to create a product and whether the expenses that are allocated to develop, sell, and account for their products brings in enough revenue to cover the cost of their investments (Ittelson, 2009). For example, Kodak’s income statement (see Exhibit A) indicates that during the accounting period from 2005 to 2007 net sales continued to plummet. In 2005, they reported net sales figures of $11,395 (in the millions) which decreased by 7% in 2006 ($10,568) and dipped even lower in 2007 ($10,301) when figures dropped down another 3%. This means that during that three year accounting period, Kodak’s sale figures dropped a total of almost 10%. In the meantime, the net profit figure during that three year period showed significant changes. For instance, in 2005, net profit numbers indicate that Kodak experienced a loss of $1,261 (in the millions). In 2006, net profit outcomes still showed that the firm was operating at a loss ($601) however, the loss revealed a 52% increase from the loss they reported the previous year. That means that although the company was still losing money, it was not as significant as the prior year. Finally, in 2007, Kodak reported a profit for first time during that accounting period of $676. This indicates the Kodak Company experienced a 153% increase in net profits during that three year period. Those are impressive figures and at first glance can give shareholders hope. Upon closer examination, however, the income statement reveals that the increase in net profit was due to discontinued operations. This means that Kodak did not achieve their profit gains from net sales. In truth, their earnings were the result of selling off portions of the business, and in doing so by 2007 their bookkeeping records allowed them to report a net profit of $676.

Taking a closer look at Kodak’s gross profit figures in 2006, after the cost of goods were calculated, the numbers revealed a loss of 5% from that of 2005. In 2007, the gross profit amounts indicate an increase of about 4%, however the figures revealed Kodak earned a profit that year due to revenue they received from discontinued operations. In the meantime, the income statement disclosed their profit margins as well, which also help investors identify the real sources that contributed to the company’s revenue. For example, in 2005, Kodak’s profit margins for net sales were only 22%, rose slightly to 23% in 2006 and ended at 24% in 2007. This tells investors that the majority of net sales were allocated to honor Kodak’s debts and that the company was unable to achieve a large enough profit margin to make gains from net sales. The income statement also revealed that the reason Kodak reported a profit by 2007 was because of the revenue they received from discontinued operations. This scenario does not paint a stable operating picture of the company to help investors feel confident that Kodak could again become the highly profitable photo imaging giant it once was.

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Conclusion

Income statements reveal a company’s profits and overall financial condition. They help strategists determine whether a firm is operating in the red or in the black. Alvarez and Fridson (2011) explain that shareholders are looking to profit from their investments and maximize their wealth. Income statement analyses provide valuable information that determines whether a company is operating effectively by comparing the data from earlier periods. By examining the data on income statements investors can ascertain if a firm is stable enough to invest in. In addition, these statements provide information that lets analysts know whether a company’s profitability is highly sensitive to changes in material costs and labor that make up the cost of goods they sell (Alvarez & Fridson, 2011). Kodak’s income statements summarized the company’s revenue and expenditures during a three year period, providing ratio information that revealed it took the firm a few years to change their operating status from showing losses and that by the end of 2007, they finally experienced considerable gains in revenue to report a profit. However, a closer analysis of the income statement figures exposed that the revenue Kodak received was because of discontinued operations. In other words, the company showed a profit that year because they sold portions of the business and that during that accounting period, they did not report any operating profits. In conclusion, the findings of this research deduced that although the Kodak Company showed a profit in 2007, it was because the firm continued to sell off portions of the company not because of sales revenue. This suggests that the iconic organization wasn’t out of the woods financially during that time and still had a way to go before shareholders could consider it a profitable venture once again.

Exhibit A

 Assignment 3 Exhibit A

(Kodak, 2008)

References

(2008). Kodak. Washington: Securities and Exchange Commission.

Understanding the income statement. (2011, October 10). Retrieved November 15, 2013, from Investopedia.com: http://www.investopedia.com/articles/04/022504.asp

Alvarez, F., & Fridson, M. (2011). Financial statement analysis: A practioner’s guide. Hoboken, NJ: John Wiley & Sons, Inc.

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Ittelson, T. (2009). Financial statements: A step-by-step guide. Amazon Digital Services, Inc.

Understanding the Balance Sheet

Published November 25, 2013 by Mayrbear's Lair

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Making investments in a company’s stock is a significant event in an individual’s life because an uninformed decision can become quite costly. To make the most informed decisions, individuals should conduct extensive research to help them make choices they feel secure about. To achieve this, many people can look to a company’s annual report for more insight into their financial condition. Roth (2008) explains that a company’s financial statements contained within their annual report are a significant asset to help individuals who are looking to make a sound investment in a company’s stock. They help people make better assessments by learning about a company’s strategies, financial health, and even information about their behavioral and moral values (Roth, 2008).  For this blog post, we will address our fictitious friend Liz who is confused about the true state of the Target Corporation’s financial condition (See Exhibit A below). This is a brand she is considering investing in because of her emotional attachment to it. However, the figures her buddy Tom disclosed upon reviewing their balance sheet suggested that investing in Target was not a sound idea because of the substantial percentage amount (74%) they invested of their total assets as risky obligations. Tom’s percentage rate caused Liz confusion because her calculations arrived at a different figure which was lower and amounted to 65%.

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To help Liz with her confusion, we must explain how Tom arrived at his position. First, let’s analyze how Liz calculated her figures. For example, at the end of their fiscal year in February, 2008, the Target Corporation had liabilities (including current and long-term) that rounded off to about $29 million, while their asset totals came to about $45 million. To help Liz better understand these debt structure figures, she looked to a common-size balance sheet formula to translate these numbers into percentages. By taking the $29 million liabilities figure and dividing it by the $45 million asset figures, Liz came up with 65% as amount of debt Target has accrued. Tom, however, arrived at a figure that was nearly 10% higher which confused Liz because her math equations incontrovertibly added up.

Calculating-Percentages

What Liz did not take into consideration in her calculations, however, were the company’s commitments and contingencies contained within the notes of the report.  Fraser and Ormiston (2010) suggest that even though the balance sheet may not reflect a dollar amount in this category, this disclosure is intended to draw attention to the information that is located in the notes of the financial statements. These notes are significant because they list the commitments of a company’s contractual obligations that may still have an adverse effect on their financial outlook. Because companies engage in complicated financial reporting procedures that include such things as product financing, sales of receivables with recourse, limited partnerships and joint-ventures, that are not required to be included on the balance sheets, they are however, provided in the notes (Fraser & Ormiston, 2010). These are complicated components that are difficult to comprehend but play an important role in painting a full picture of the company’s operations. In other words, there are other factors that are not reported on a company’s balance sheet with unpredictable outcomes that can have an effect on Target’s future liabilities. In other words, Liz also needed to include in her calculations the figures provided in the commitments and contingency notes as well. These notes revealed for instance, that Target also had further contractual obligations and operating leases that extended beyond the year 2008 which included lease payments of $1,721 million with options that could extend the terms of the lease. Their contractual obligation payments also consisted of interest rates and a $98 million commitment in legally binding lease payments for the planned openings of future facilities that were scheduled to occur in 2008 or later. Tom arrived at his additional 10% figure because he factored in the information of these provisions to his equations and Liz did not.

Exhibit A

Target Example

References:

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.

The Eastman Kodak Company 2007 Annual Report – Initial Analysis Conclusion

Published November 20, 2013 by Mayrbear's Lair

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Part one revealed Kodak’s rise to success. In this post, we look into the components that altered that status. Snyder (2013) asserts that many believed Kodak’s problems began when digital technology was introduced, his research, however, disclosed that their problems developed further back. For example, when Kodak competitor Polaroid introduced a camera that developed photos in sixty seconds, Kodak focused the energy of their R&D engineers to come up with a similar product. Their attempt to mimic another company’s technology not only tarnished their image, it caused them to lose focus on the market. This allowed Japan’s Fuji Corporation to slowly dominate the industry when they released a 400-speed film product before Kodak. Later, when Kodak introduced their version of the Polaroid instamatic camera, this copy-cat strategy resulted in a costly lawsuit that was filed and won by the Polaroid company for patent infringement (Snyder, 2013). In short, Kodak’s blind ambition, poor investment choices, and an attitude that they were too big fail, ultimately clouded their judgment. Consequently, every attempt they made to salvage the company’s image in hopes of reclaiming their title as a dominant force in the marketplace only cost them more as they continued their downward spiral and evidenced from the data reflected in the financial statements of their annual reports.

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Annual Report Findings

Even though PR fluff can try to disguise the true nature of a company’s operational health, the financial statements contained in their annual reports can help analysts discover the truth about a company’s financial condition and overall performance. Mattioli and Spector (2011) postulate, that in spite of their financial hardships, Kodak was committed to meet their obligations to suppliers and creditors (Mattioli & Spector, 2011). For example, an initial assessment of the 2007 Annual Report’s financial statements which include the (a) balance sheet, (b) income statement, and (c) cash flow balances, (see Exhibit A below) indicate that for the period from 2005 to 2007 Kodak was making a genuine effort to salvage their firm even though profits continued to steadily decline. In 2007, the gross profit figures of $2,516 (represented in millions for instance), were not far off from the figures reported in 2005 ($2,531). In the meantime, the balance sheet indicates that their assets showed an increase in value which could suggest they felt confident enough make further investments to continue moving forward with day-to-day operations.

The net profit figures from the income statements, however, suggest a drastic fluctuation during that three year period beginning by showing a loss of $1,261 net profit in 2005 (in the millions), another loss of $601 in 2006. and finally in 2007 they showed a gain in the amount of $676. Although this indicates profit rather than loss during that three year period, it still did not give shareholders confidence in the company’s performance outcomes. In the meantime, the cash flow figures confirm a steady decrease during that time which further confirmed that the company was not performing well. Signs of trouble in the Kodak Company were further apparent in that their stock activity also fluctuated considerably during that time. For instance, at the end of 2005, Kodak’s stock price was valued at $72.24 a share. In 2006, the stock went up to $81.33, perhaps because of their attempts to seek out loans to help build shareholder confidence. However, by the end of 2007, Kodak’s shares dropped lower than they were in 2005 to a mere $70.23 per share. This indicates that in spite of their efforts to resurrect the company, they were still struggling considerably.

The information gathered from Kodak’s financial statements, such as: (a) assets that dropped to a value of $13,659 from $14,320, (b) accounts payable liabilities went from $12,932 to $10,630, and (c) shareholder equities that decreased from $14,320 to $13,659, revealed that incoming revenue and shareholders’ equity showed a steady decrease during that accounting period.  Based on the findings of this initial analysis, these figures divulge that during that time, the Kodak Company did not exhibit the performance levels of a healthy enterprise.

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Conclusion

Comprehensive financial analyses help forecast a company’s financial health from the information provided in their annual reports. The significant financial data and ratios that are contained in them help provide strategists key information to determine industry trends. Friedlob and Welton (2008) assert that the key to understanding an annual report is that they are designed to help satisfy the needs of many individuals including shareholders, creditors, economists, analysts, and suppliers (Friedlob & Welton, 2008). The findings of this study revealed that Kodak Eastman’s financial troubles began years ago because company leaders lost sight on the key component that made them a giant in their industry: to provide innovative high quality products. Synder (2013) submits there many more reasons that led to Kodak’s slow demise which included such factors as: (a) their focus on copying Polaroid’s innovations, (b) their abandonment of the 35mm camera market, and (c) making costly acquisitions like Sterling Drug for $5.1 billion with no experience in managing a pharmaceutical company (Snyder, 2013). These short sighted decisions cost them greatly in the long run and were reflected in their overall performance outcomes revealed in the 2007 Annual Report which confirmed their slow and steady decline in revenue and stock equity. In addition, the legal proceedings section of the notes contained in the report indicates that they were involved in a variety of investigations and in various stages of litigation which analysts knew could also produce adverse effects on Kodak’s future financial condition.

The initial examination and assessment from the findings of this research conclude that the Kodak Company was financially unstable during that time and is supported by the declining numbers disclosed from their annual report. In short, the financial figures revealed that the entrepreneurial decisions corporate leaders made at the firm yielded unimpressive performance outcomes due to many factors, including: (a) tunnel vision strategies that were focused on out-maneuvering competitors, (b) exorbitant acquisitions with no experience in how to manage them, and (c) a costly lawsuits from Polaroid and others that helped tarnish their image. In the meantime, Eastman Kodak has been working diligently to find ways to salvage the strategic errors of leadership that led to their bankruptcy after 120 years of public service. Mourdoukoutas (2013) explains that since that time, Kodak sold a large portion of the business, their patent portfolio, and laid-off most of their staff members to lighten the debt they carried. In addition, their R&D division is now focused on creating new products which is what the company excelled at when it was initially founded (Mourdoukoutas, 2013). In the long run it would appear that Kodak’s over confidence and lack of effective leadership with innovative decision making may have played a role that resulted in their empire systematically crumbling and hopefully they are on the road to a more prosperous venture.

Exhibit A 

Cover sheet exhibit A

(figures provided from Eastman Kodak Company 2007 Annual Report, 2008)

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References

(2008). Eastman Kodak Company 2007 Annual Report. U.S. Federal Government, Securities and Exchange Commission. Washington: Securities and Exchange Commission.

Eastman Kodak Company. (2013). Retrieved November 1, 2013, from cobrands.hoovers.com: http://cobrands.hoovers.com/company/Eastman_Kodak_Company/rfhiff-1-1njhxk.html

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Friedlob, G., & Welton, R. (2008). Keys to reading annual report. Hauppauge, NY: Barron’s Educational Series.

Mattioli, D., & Spector, M. (2011, October 25). Eastman Kodak Seeks Rescue Financing. The Wall Street Journal, 4.

Mourdoukoutas, P. (2013, November 2). Can Eastman Kodak rise again? Retrieved November 3, 2013, from forbes.com: http://www.forbes.com/sites/panosmourdoukoutas/2013/11/02/can-eastman-kodak-rise-again/

Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.

Snyder, P. (2013). Is this something George Eastman would have done? New York, NY: CreateSpace Independent Publishing.

The Eastman Kodak Company 2007 Annual Report – Initial Analysis Part 1

Published November 18, 2013 by Mayrbear's Lair

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A corporation’s annual report helps provide shareholders a glimpse into that company’s overall performance and financial effectiveness. Strategic analysts use this information to measure profit and loss as well as help forecast a company’s financial health by examining the significant data and financial ratios that are provided from these reports. Roth (2008) explains their purpose simply in that the job of a company’s annual report is to share their story as a unified message (Roth, 2008). To better comprehend a company’s financial health from their corporate annual reports, the focus of my ongoing research efforts throughout this six week journey will examine the various components contained within these financial tomes to help determine whether a company is sustainable or not. As an example to illustrate these concepts step-by-step, my analysis will include an ongoing examination of the 2007 Annual Report of the troubled Eastman Kodak Company – the photo imaging firm that was established in the late 1800s by George Eastman. To help present a clearer picture of the company’s activities and overall functionality, the study will draw information from the financial statements to evaluate such elements as assets, liabilities, and stockholders’ equity to help determine Kodak’s viability as a business. The findings of this research will disclose how the data obtained from the company’s annual report reveals significant information that can help strategists determine, plan, and forecast the firm’s overall performance and financial health.

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A Brief History of Kodak

The true nature of a company’s image can be ascertained through a comprehensive analysis that is provided by their annual reports. Fraser and Ormiston (2010) purport that in order to comprehend how to navigate through the vast amount of data provided in the annual reports, familiarity with accounting is helpful (Fraser & Ormiston, 2010). For the purpose of this research, to better understand where the Eastman Kodak company was headed, it is important to first understand how they emerged as a major player in the photo imaging industry. Kodak initially became successful when they introduced their first camera, a small easy-to-use device with film that took up to 100 photos. Soon after, they added the home movie camera, film, and projectors to their product line. By the early 1930s, Kodak dominated the marketplace when they introduced and released an innovative component called Kodachrome, a new technology that added the richness of color to their film products in 1935 (Eastman Kodak Company, 2013). This was a hugely successful entrepreneurial maneuver, one that secured their position at the top of their industry. Since that time they continued to expand with additional imaging technology items and services they added to their product line including inkjet printers, digital photo frames, printing kiosks, online imaging services, and scanners, to name a few.

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For many decades Kodak enjoyed enormous success and dominated the marketplace. However, over confident leadership, poor strategic planning, and a complacent attitude may have been the cause of their slow demise. Part two of this post will dive further into what may have caused Kodak’s financial problems and examine their report to give us clues.

Until then ….

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References

(2008). Eastman Kodak Company 2007 Annual Report. U.S. Federal Government, Securities and Exchange Commission. Washington: Securities and Exchange Commission.

Eastman Kodak Company. (2013). Retrieved November 1, 2013, from cobrands.hoovers.com: http://cobrands.hoovers.com/company/Eastman_Kodak_Company/rfhiff-1-1njhxk.html

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Friedlob, G., & Welton, R. (2008). Keys to reading annual report. Hauppauge, NY: Barron’s Educational Series.

Mattioli, D., & Spector, M. (2011, October 25). Eastman Kodak Seeks Rescue Financing. The Wall Street Journal, 4.

Mourdoukoutas, P. (2013, November 2). Can Eastman Kodak rise again? Retrieved November 3, 2013, from forbes.com: http://www.forbes.com/sites/panosmourdoukoutas/2013/11/02/can-eastman-kodak-rise-again/

Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.

Snyder, P. (2013). Is this something George Eastman would have done? New York, NY: CreateSpace Independent Publishing.

The Annual Report

Published November 13, 2013 by Mayrbear's Lair

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Today begins our six week adventure navigating through topics that will help us understand how business owners can make the most effective the financial decisions that help them run their companies more efficiently with higher profits. Dr. Felix Lao (2013) explains that:

“The measurement of accounting information is critical to the owners of the business to make judgments about the value of assets or liabilities owed by the business. It accurately measures profit or loss made by the business in a particular period. Shareholders can make decisions and evaluate about the future of an organization by looking at past and current financial data. It helps management actually manage the operation by looking at functional units as well as overall performance and effectiveness to plan. The information provides critical tools that reveal an accurate and true view of the financial position of the company to ensure that risks are adequately and appropriately taken and the resources are invested well.”

To give us a better understanding of the financial condition of a company, my research work will take a closer examination of the extensive financial information that is contained within a firm’s financial tome known as their Annual Report. Take for example a company like Target that does a fabulous job selling products to customers.  A good number of consumers are so pleased with this corporation’s performance in fact, that many consider buying shares in the company’s stock.

To find out more about their financial situation investors will look to their annual reports to help them determine how well the company is performing.  Unfortunately, more questions arise regarding the content of these reports because most individuals are not trained in deducing the information they contain to help them comprehend the true nature of the company’s financial health.  Technical questions about the firm’s financial condition and performance cannot easily be addressed unless the key elements in the annual report are understood. Investors must acknowledge that in order to figure out how well a company is doing they must look to the company’s financial statements because those are the documents that can provide details that address the following information: (a) where a company’s money came from, (b) how it was spent, and (c) where it currently stands.

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Typically, there are four kinds of financial statements in a company’s annual report: (a) the balance sheets that disclose what a company owns and owe, (b) the income statements that reveal incoming revenue and outgoing expenditures, (c) the cash flow statements which show the exchange of currency transactions, and (d) the statements of shareholders’ equity which reveal the changes in shareholder interests (Beginners guide to financial statements, 2007). Individuals who can comprehend the information these statements contain are in a better position to understand the company’s financial condition.

The financial statements in a company’s annual report are useful for many reasons. For example, Fraser and Ormiston (2010) explain that they not only reveal how well the firm is performing, they also show whether or not it is providing opportunities for growth and future advancements  (Fraser & Ormiston, 2010). The enormous volume of information in these reports can  be intimating to the untrained eye. To help with an overview of the most important aspects, each report contains a 10-K form which serves as a summary that highlight the report’s key components.

Smart investors will look to the contents of the firm’s annual report to help paint a clear picture of what a company is doing, what it claimed it was going to do, what it actually did, and most significantly, what it intends to do next. Roth (2008) also points out that annual reports are significantly more important in today’s economy because they have become a platform for which organizations use to expand their investments, launch new products, create more effective marketing strategies, address behavioral or morale issues, and can even alter a company’s strategic direction (Roth, 2008).  In other words, the information provided in them are beneficial to investors and creditors whose interpretation of the contents contained within these reports can help them assess the firm’s viability.

References:

Beginners guide to financial statements. (2007, February 5). Retrieved October 28, 2013, from U.S. Securities and Exchange Commission: http://www.sec.gov/investor/pubs/begfinstmtguide.htm

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Lao, F. (2013). Ashford University. Clinton, IA.

Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.