Charles Stevens, vice president for investment analysis at First National Bank of Florida,is looking for a company to recommend to the banks portfolio committee for inclusion in itsbuy list for the various trust funds managed by First Nationals trust department. Stevens

criteria for recommending a company were that it be a good, fundamentally sound, long termprospect and not a hot stock. Since the stock market crash, portfolio returns had been ratherweak. Stevens hoped to convince the portfolio committee to take a long term view of the marketrather than focus on short term price changes.

Stevens had recently read an article in the Wall Street Journal concerning HiTop Toys,Inc., a toy manufacturer. HiTop had posted a six month pretax profit margin of 10 percent. Whilethis was far below the 15% profit margins enjoyed before the market decline, it was far ahead ofother companies in the industry. Perhaps HiTop was a good long term investment. The toy industry depended on three main factors for growth: the economy, demographics,and new product innovations on a regular basis. The average life for new products in the toyindustry was only one or two Christmas seasons. Companies had two choices to maintain theirsales strengths. Either they came up with regular product innovations or they relied on strongstandby toys. HiTop had changed its marketing strategy during the past two years. Management wasconcentrating on its solid performing toys and moving away from the highly risky (yetpotentially very profitable) promotional, faddish toys that had dominated the toy market over themost of the past decade. However, for the past two years, shipments of the blockbuster toys hadsteadily declined, leaving the manufacturers with obsolete inventory and machinery. Two ofHiTops three primary competitors had put too much emphasis on blockbuster toys. One was inChapter 11 bankruptcy and the other had been forced to borrow to stay afloat. Its debt was now88% of its total capital. In contrast HiTop and the other major competitor had bitten the bullet. They had trimmedoverhead, written down inventories, and closed plants with excess capacity. HiTop was focusingon its traditional toy line of stable toys, board games, and preschool games. Today HiTop has three new hot prospects for the future. First, the company recentlyannounced the purchase of two operations that produced ride-on toys and outdoor furniture forchildren. These were expected to compliment HiTops solid array of preschool items. Second,HiTop had just signed the toy license on what was expected to be this summers hottest childrens movie. Third HiTop was rumored to be planning to enter the video game segment of theindustry. In preparation for the necessary analysis, Stevens had collected his financial statementsand industry data for the past five years. Exhibit 1 contains company income statements for thefive years xx01 through xx05. Exhibit 2 provides comparable balance sheets. Exhibit 3 contains industry average percentage income statements, balance sheets, and ratios as reported by RobertMorris and Associates.

Exhibit 1
HiTop Toys, Inc.
Income Statements
(thousands)
			xx01	xx02	xx03	xx04	xx05
Revenue			221,522	714,392	1,220,352	1,329,631	1,345,089
	Cost of Goods Sold		107,136	340,007	556,192	605,071	647,342
Gross Profit			114,386	374,385	664,160	724,560	697,747
Operating Expense
	General, Administrative,
	and Selling Expenses		71,871	206,652	382,271	437,221	443,713
	Research & Development		8,794	21,924	40,345	57,701	69,472
	Depreciation		5,100	14,100	19,467	34,009	52,077
Total Operating Expenses			85,765	242,676	442,083	528,931	565,262
Operating Profit			28,621	131,709	222,077	195,629	132,485
Other Income			3,343	6,048	10,499	25,828	171
Earnings Before Interest & Taxes			31,964	137,757	232,576	221,457	132,656
	Interest Expense		2,400	27,546	37,661	29,619	33,021
Earnings Before Taxes			29,564	110,211	194,915	191,838	99,635
	Income Taxes		14,334	57,823	95,946	92,679	51,412
Net Income			15,230	52,388	98,969	99,159	48,223
Preferred Dividends			0	0	2,769	2,559	2,817
Earnings Available to Common			15,230	52,388	96,200	96,600	45,406
	Common Dividend		1,628	2,774	3,858	4,740	4,757
Retained Earnings			13,602	49,614	92,342	91,860	40,649
Outstanding Shares			32,550	46,230	48,220	52,663	52,850
Earnings Per Share			$ 0.47	$ 1.13	$ 2.00	$ 1.83	$ 0.86
Average Price Per Share			$ 3.85	$ 8.55	$ 15.55	$ 23.75	$ 18.25

Exhibit 2
HiTop Toys, Inc.
Balance Sheets
(thousands)
			xx01	xx02	xx03	xx04	xx05
Assets
Current Assets
	Cash		$ 40,972	$ 62,786	$ 182,385	$ 116,061	$ 161,770
	Accounts Receivable		48,726	200,797	241,786	305,489	339,556
	Inventory		9,797	76,753	67,856	122,902	133,585
	Other Current Assets		7,906	23,757	38,407	57,010	57,721
Total Current Assets			107,401	364,093	530,434	601,462	692,632
Gross Fixed Assets			28,240	107,755	146,553	231,508	297,900
	Accum. Depreciation		13,850	18,136	37,233	70,038	121,647
Net Fixed Assets			14,390	89,619	109,320	161,470	176,253
Other Assets			9,468	211,810	205,879	218,928	207,107
Total Assets			131,259	665,522	845,633	981,860	1,075,992
Liabilities and Stockholders Equity
Current Liabilities
	Accounts Payable		$ 20,122	$ 30,349	$ 45,856	$ 91,142	$ 88,239
	Accrued Expenses		18,995	105,742	142,685	107,950	115,089
	Accrued Taxes		10,956	23,991	24,486	30,853	26,183
	Short Term Debt		1,303	83,404	26,687	42,475	74,397
Total Current Liabilities			51,376	243,486	239,714	272,420	303,908
Long Term Liabilities
	Long Term Debt		3,063	127,537	185,746	124,977	127,127
	Other Liabilities		1,035	1,524	2,240	4,191	3,414
Total Long Term Liabilities			4,098	129,061	187,986	129,168	130,541
Stockholders Equity
	Preferred Stock		2,051	35,728	3,517	3,517	3,517
	Common Stock		36,443	170,342	235,169	305,648	326,269
	Retained Earnings		37,291	86,905	179,247	271,107	311,757
Total Stockholders Equity			75,785	292,975	417,933	580,272	641,543
Total Liabilities and
	Stockholders Equity		131,259	665,522	845,633	981,860	1,075,992

Exhibit 3
Industry Averages and Ratios Toy Manufacturers
(Robert Morris & Associates, Annual Statement Studies)
		xx01	xx02	xx03	xx04	xx05
Percentage Income Statements
Revenue		100.0%	100.0%	100.0%	100.0%	100.0%
Gross Profit		34.7%	35.0%	34.6%	35.1%	35.0%
Operating Expenses		29.8%	28.2%	29.9%	28.3%	29.6%
Operating Profit		4.8%	6.8%	4.7%	6.8%	5.4%
All Other Expenses		3.0%	2.7%	2.1%	3.1%	2.0%
Profit Before Taxes		1.8%	4.1%	2.7%	3.7%	3.4%
Percentage Balance Sheet
Cash		9.5%	8.3%	7.4%	8.9%	8.5%
Accounts Receivable		29.0%	30.4%	28.7%	31.0%	28.0%
Inventory		34.1%	31.2%	33.7%	29.7%	33.1%
Other Current Assets		2.3%	3.2%	1.9%	3.4%	2.6%
Total Current Assets		74.9%	73.4%	71.7%	73.0%	72.2%
Net Fixed Assets		19.0%	19.7%	20.5%	19.1%	18.4%
Other Assets		6.1%	7.4%	7.7%	7.8%	9.3%
Total Assets		100.0%	100.0%	100.0%	100.0%	100.0%
Notes Payable		14.3%	12.2%	18.6%	14.5%	15.1%
Current Maturity - Long Debt		2.8%	2.8%	2.8%	4.6%	4.0%
Accounts Payable		13.0%	13.5%	14.6%	13.0%	13.3%
Accrued Taxes		0.0%	0.0%	0.7%	1.6%	1.7%
Other Current Liabilities		10.2%	11.6%	11.2%	8.7%	8.2%
Total Current Liabilities		40.3%	40.1%	47.9%	42.4%	42.3%
Long Term Debt		14.7%	16.2%	13.9%	13.5%	13.4%
Other Long Term Debt		4.7%	3.5%	3.4%	2.8%	3.1%
Stockholders Equity		40.5%	40.4%	34.0%	41.3%	41.0%
Total Liabilities and Equity		100.0%	100.0%	100.0%	100.0%	100.0%
Ratios
Current		1.9	1.9	1.6	1.8	1.8
Quick		0.9	1.0	0.8	1.0	1.0
Sales/Receivables		6.9	6.1	6.5	5.7	5.9
Cost of Sales/Inventory		3.7	3.4	3.8	4.5	4.1
Sales/Working Capital		6.0	5.1	6.7	5.3	5.5
EBIT/Interest		1.8	2.2	2.0	1.9	3.6
Total Debt/Net Worth		160.0%	150.0%	190.0%	150.0%	170.0%
% EBT/Equity		14.8%	20.2%	18.5%	17.1%	28.9%
%EBT/Total Assets		6.5%	5.9%	4.9%	6.7%	7.8%
Sales/Total Assets		1.9	1.6	1.7	1.7	1.6

Prepare a report/memo, with attached schedules that addresses the following questions:

1. Prepare a common size income statement and balance sheet for HiTop for each of the

years.

2. Calculate five years of relevant financial ratios for HiTop (including profitability ratios,efficiency ratios, liquidity ratios, debt ratios, dividend ratios, and growth rates) andidentify the relevant financial strengths, weaknesses, and trends of the company.3. Compare the financial results of HiTop with the industry and identify and discuss the

areas where HiTop is stronger or weaker than the industry.

4. Using the DuPont model analyze the return on equity for the past five years. Comment

on the strengths and weaknesses uncovered by this analysis.

5. Given this analysis would you recommend HiTop be included in First National Banks

buy list? Explain why?