The Topps Company, among other things discussed later, is in the business of manufacturing chewing gum and confections. According to the Business and Company Resource Center, the Topps is involved in ten different industry categories.
They are listed here with their respective SIC/NAICS codes: Commercial Printing (2759), Chewing Gum (2067), Candy and Other Confectionary products (2064), Periodicals Publishing and Printing (2721), Dolls and Stuffed Toys (3942), other Commercial Printing (323119), Confectionary Manufacturing from Purchased Chocolate (311330), Non-Chocolate Confectionary Manufacturing (311340), Doll and Stuffed Toy Manufacturing (339931), and Periodical Publishers (511120). All of these product industries allowed Topps to accumulate sales of $302. 9 million in fiscal year 2002.
Topps primarily manufactures sticker collections, confections, comic books, and collectible trading cards. These are the companys most popular and principally produced products within its international market. Most of Topps success has come from the production of the confections and trading cards. These two aspects of their overall industry are by far the most important and beneficial to the company as a whole. With all of the products that Topps produces, there are of course many raw materials that contribute to each entertainment product.
In fiscal year 2002, Topps spent $6,395 on their raw materials as compared to $2,860 spent in 2001. The companys sports cards are the most popular and require a few materials. Film must be on hand constantly, as photographs must be taken of each athlete before computerized technology adds graphic designs to be put on the cards. Other materials needed for their collectible trading cards include large sheets of paperboard for the photos to be printed on, and plastic coating or foil lining to add additional interest to each card.
These substrates are purchased in sheet form from specialty printers and are added to the paperboard before being placed on a pressing machine that cuts the paperboard into the individual cards. Raw materials for their confectionary products include many different types of sugars and both natural and artificial flavorings to be mixed in large vats before being processed through another pressing machine which cuts the candy into individual pieces. Eventually, each confectionary product is wrapped in paper or plastic to secure freshness.
Paper and adhesives are the primary materials used for the sticker collections produced by Topps. Inks and dyes are used on all products in some shape or form whether it be on a wrapper or on the collectible trading cards being printed up. Plastics are also used for confectionary containers issued to the public. Paper is by far the most used raw material for the Topps Company. The Topps Company is a large organization that stretches around the world. Although the hub of production is within the United States, Topps also has many different offices and distribution centers outside the U. S. in nations like the United Kingdom, Italy, Ireland, Argentina, and Brazil.
The Company enjoyed another successful fiscal year in 2002; although a the interest in their Pokemon products fell short of predictions and expectations based on 2001 sales, the companies staple products continued to do well in the overall marketplace. Total sales for 2002 amounted to more than $302. 9 million. Pokemon sales declined about $155. 5 million from 2001and when excluding those numbers; Topps still had a very positive year as compared with last years total sales of $439. illion. There was a $19. 1 million increase in sales in 2002 with the decrease in Pokemon interests worldwide. Topps still held strong assets in 2002 amounting to $258. 0 million although they were down from the 2001 numbers due to the Pokemon slump.
The employee base was as strong as it had ever been for Topps in 2002, as the company employed a high of 455 employees during the fiscal year. Employees have been involved in every aspect of the game when it came to running the company. Most of them handled U. S. les of sports and entertainment collectibles to around 2,100 category managers, hobby distributors, and hobby shops. Other U. S. employees manage a nationwide network of broker organizations to distribute confectionary products. Elsewhere around the world, employees are handling confectionary and trading card products to national accounts in Canada, the United Kingdom, Latin America, and most Asian markets. All together, Topps sales force and wholesalers interact with almost 30,000 confectionary outlets and retail outlets around the globe.
The Topps Company was founded in 1938 in Brooklyn, New York, first as a chewing gum manufacturer. Now Topps operates and is based out of New York City, New York, in a 60,000 square foot, leased facility where the executive offices are located. Other offices and warehouse distribution centers are located in Duryea, PA, Scranton, PA, Cork, Ireland, and Milton Keynes in Britain. The Company also leases offices in Canada, Brazil, Argentina, and Italy. Being a large international organization, Topps has many relationships with many other organizations and companies.
Most companies that Topps is involved with are subsidiaries of the company itself, but others are providers of materials and the like. In 1995, Topps acquired Merlin Publishing International Limited, which is a marketer of licensed sticker album collectibles based in the United Kingdom. Products are still sold under the Merlin name while Topps is the corporate parent. Topps also acquired thePit. com, Inc. in fiscal year 2001, which is an internet based sports card exchange. An agreement with Nintendo of America allowed Topps to obtain the rights to market products involving the Pokemon characters.
Through its international offices, Tops distributed their products in 25 dialects and in 44 nations around the world. The confectionary department created an association with another United States household brand name. The Hershey Food Corporation under a contract renewed annually for a five-year term manufactures Topps Bazooka bubble gum. Topps is required, by contract, to source all of its U. S. Bazooka production supplies from Hershey. The annual report for Topps represents a positive attitude directed towards a younger generation of clientele.
Most all of their products are designed for child entertainment. The annual report suggests a positive and organized outlook on the past year and for the future years to come. From the Topps Company annual report, one would gather that the company itself is moving in the right direction for all future endeavors. The annual report begins with an open letter to stockholders in the company. The letter explains how successful the year had been for Topps, along with any financial information that stockholders need to know about, like the years sales, net income, and other noteworthy financial information.
The letter also explains what is projected to happen with the company in the fiscal 2003 year. Each product is broken down in written format to allow the stockholders to grasp what happened financially to each department as the year went on. This breakdown explains sales and all other financial information about each individual product division and the international operations as the year progressed. The report then laid out the financial highlights from the past three fiscal years so they could be compared with each other.
Involved in this was managements discussion and analysis of the financial condition and results of operations for the year, as compared with 2001. The report showed the companies consolidated balance sheet for Topps itself and any subsidiaries that were involved with the company, along with notes explaining what goes into the balance sheet. Next there was a report from the companies Independent Public accountants about the companys current financial position, along with market and dividend information that related to year 2002.
Finally, Topps annual report listed the companys directors, officers, subsidiaries, and corporate information for the entire company worldwide. The Topps Company has a wide arrange of corporations in its industry, which is the Food Processing Industry, consumer/non-cyclical sector. Companies included in this sector are Del Monte Foods, General Mills, Hershey Foods, Kellogg and Tootsie Roll Industries. Even though these companies are different, they have similar factors that determine their success.
These corporations generally stay on the same movement, as the economy due to candy and other sorts of sweets are extras that are purchased only if there is disposable income. When people do not have money, this industry does suffer. When there is steep to beat ones competitors, two main factors are most important for this success; advertisement and quality of products. First, advertisement is extremely important in competition, especially in this time of economic state. Characters such as Tony the Tiger and Bazooka Joe enables a company to create a following for their product.
No matter how superior a product is to another, if no one knows about the product it is hard to make any money (for example in the 80s when IBM and Apple competed for computer business). The public when deciding on a purchase of a product typically will buy what they recognize. After this purchase, though, quality of the product comes into play. If one buys your product and does not like it then you will lose repeat purchasing by the customer causing losses in potential income for the future. In addition to these two factors, four other smaller factors affect this industry.
First, the state of the economy affects this industry due to the lack of disposible income. When the public starts hearing rumors about a recession, they are less likely to go buy items that they do not really need such as entertainment cards and candy. Second, parental control is a factor that affects this industry. If a bad situation comes out of a toy or other products, parents will likely boycott these products and companies until they change their stance causing huge losses. Third, technology is another factor that this industry has to worry about especially for Topps.
With all these smart toys and other electronic gadgets, entertainment cards are becoming the thing of the past and this is something that Topps and other companies have to remember and plan for. Last, the always changing culture is another factor that affects this industry. If a company is producing goods that were last years cool commodities, then they will probably out of date and will cause them to loose raw materials and revenue. With all these crucial factors, companies in this industry must stay on top of every event that occurs in the world to be profitable.
Even with quality products and eye-catching advertisement, companies in this industry have to be certain about how well accounting policies are running their business. This industry especially needs to make sure that there is little wastefulness in their raw materials when making their products. With strong competition from many numerous long-running successful companies and with a weak economy, if ones corporation is not doing a good job with their raw materials or management planning and spending, they will not be profitable.
Not only is wastefulness a concern, what you are selling is a bigger liability. Since this industry deals with edible products, numerous legal matters arise. If a product is contaminated or if materials foreign to the normal product get in to them then a company will have to deal with class action lawsuits and other legal matters causing a great deal of strain on the profit. The final matter that this industry must deal with is the social matters of the public, in other words, what will sell. These corporations must use different fads at each point in time so they can maximize their profits.
With different cartoons and movies sweeping the world every year, each company must decide which characters to use and which ones to drop. One can see how many choices and concerns go into this industry and Topps Company does not escape from any of these choices. As talked about above, Topps has the same decisions to make as its industry. They must pick their products and advertisements wisely. Topps, for example, saw an enormous increase in earnings when they decided to create pokmon products, but due to the ever-changing markets throughout the world, pokmon is not profitable anymore.
Therefore, Topps is using Star Wars Episode II and Lord of the Rings to sell their products. This is a smart decision due to the huge popularity with these characters and movies and leads to success in the business. Topps are also known for the quality in their products due to their longevity of their company as talked about earlier in this paper. One does not survive for long if their product is inferior. With these two factors and Topps successfulness with them, Topps stays in the top tier of their profitability in its industry. The Topps Company also has social concerns that they must be careful.
With their business aimed toward children such as candy, magic cards and entertainment cards, Topps has to make sure that their products are free from harm whether if it is physically or mentally. Magic card games are addictive to children and send messages that might not be suitable with parental control. In addition, no parent likes their children to eat too many sweets. Topps have to deal with these concerns and make sure they have disclosures to protect themselves from harsh actions. The Topps Company is in between stages in its life cycle. Topps is a mixture between the maturity stage and saturation stage.
The maturity stage is when a companys demand and supply are in balance while the saturation stage states that a company is replacing and creating new products. The reason why Topps is in this situation is the way their business is running. First, Topps has a long history of collection cards and candy that they have regular customers and know how much of these products they sell and have a balance production. At the same point in time and according to their letter to the shareholders in their annual report, they are creating new products to build more growth and profitability in their company.
In other words, they are maintaining their present income while looking to the future for more. Finally, The Topps Company, just like the industry, uses crucial accounting policies so the company is verifiable to its shareholders and to the public. Topps recognizes revenue when products are shipped as well as when the title and risk has passed to the customers. They also follow GAAP for estimates such as the conservation principle and follow consistent accounting policies through each reporting year. With these disclosures on the annual report, The Topps Company enables comparability and consistency to the public.
The Topps Company, despite a decrease in net income from fiscal 2001 to 2002, is financially powerful. It is an industry leader in many key financial ratios and analysis segments. With managements sound financial decision making, product innovation, and internet sales expansion, Topps is moving forward in the confectionery, collectible sports product, and entertainment product industries. Yearly and quarterly swings in earnings for Topps are often attributable to the fluctuation of demand for entertainment products.
Sometimes, these fluctuations have a material effect on the financial statements. One such case is the decline in sales revenue from $439. 3 million in 2001 to $302. 9 million in 2002, which in turn adversely affected earnings. The Company attributes much of this decline to the $155 million decrease in Pokemon entertainment product sales from 2001 to 2002. This type of period to period discrepancy reflects more upon the inconsistent nature of entertainment product demand than upon the Companys financial well-being. Topps continues to move forward as an industry leader into the future.
With managements implementation of current plans to add new products to core brands, expand distribution channels both domestically and internationally, increase domestic advertisement spending, and seek additional value adding subsidiaries (such as the newly acquired card trading web site, thePit. com), Topps is poised for growth. An effective way to analyze a companys progression is to examine recent past trends and determine how they will influence the companys future.
A key ratio that suggests Topps continued success in the industry is its five year average net profit margin of 11. compared to the scant industry average of 2. 6%. Another strong indicator that the Company has been successful in the past and will continue the trend is the five year average return on capital percentage. Topps dominates the industry percentage of 5. 5% with an average of 27. 3% return on capital over the past five years. With the combination of past financial momentum and innovative management tactics, Topps should continue to maintain forward progress in the future. The Topps Companys sources of capital include common stock, cash, anticipated cash from operations, and credit line availability.
The Company has not and does not plan to issue debt as a source of capital; therefore, its debt to equity ratio is 0. 00. As of the balance sheet date, March 2, 2002, the largest source of capital was made up of the $194 million dollars of stockholders equity. Topps had authorized 10 million shares of $. 01 per share par value preferred stock, but had not yet issued any preferred stock. Of the 100 million shares of $. 01 par value per share common stock authorized, 49,189,000 shares had been issued, representing $492,000.
Additional paid-in capital on these shares was $26. illion. Of the 49,189,000 shares issued, 7,143,000 were bought back by the company during 2001 and 2002 as treasury stock ($67. 4 million). Retained earnings represented $245. 9 million of the stockholders equity account. As of the balance sheet date, the Company had $121. 1 million in cash and cash equivalents. As for the line of credit availability, in June of 2000, Topps entered an agreement with Chase Manhattan Bank and Lasalle Bank National Association to receive a $35 million unsecured credit facility, expiring June 26, 2004.
The agreement limits the Companys repurchase of shares, selling of assets, and prohibits the payment of dividends. As of March 2, 2002, with the inclusion of all sources of capital, Topps total capital value was $350. 15 million. The capital marketplace has had a consistently positive reaction to the Topps Company. Since becoming publicly held in 1987, Topps has been listed on the Nasdaq Composite under the symbol TOPP. Recent per share stock prices for Topps have been hovering in the upper eight dollar range. In this price range, the total market capitalization is around $360 million.
The fifty-two week high is $12. 9 and the fifty-two week low is $7. 36. Average daily volume has recently been between 130,000 and 140,000 shares. The institutional sector of the capital market has responded especially well to the Company. Institutional ownership represents 76. 7% of Topps outstanding stock. Based in Ocala, FL, Private Capital Management is the Companys largest shareholder, owning nearly 20% of the stock.
With major institutional, long-term investors such as asset managers and mutual funds, the capital marketplace obviously sees Topps as a company with a definite probability for future appreciation. ww. msn/moneycentral. com) With the substantial decrease in net income largely due to the decline of Pokemon sales in 2002, the Topps Companys earnings suffered. Earnings per share fell from $1. 97 in 2001 to $. 66 in 2002, a 66% decrease. In 2001, Topps earnings outperformed the average of its peers, while in 2002, its earnings were below the average for the industry. For 2002, basic earnings per share were $. 66, and diluted earnings per share were $. 64. In addition, the Topps Companys current price to earnings ratio of 18. 7 is favorable because it is below the industry average.
In comparison with the rest of the Toys and Games industry, the Topps Companys key ratios show that in most cases, it outperforms the majority of its industry competitors. Topps net profit margin (which measures net profit before interest and taxes relative to revenue) of 6. 9% is above the industry average of 4. 4%. A higher than average net profit margin is often an indicator of good management. Since Topps has no debt instruments issued, its debt to equity ratio is 0. 00, whereas the industry average is . 48.
The Topps Companys current ratio (current assets divided by current liabilities) of 4. 1 indicates that it has a more than adequate asset base to meet its short-term financial commitments. The industry average current ratio is 1. 7:1. The return on capital is a popular ratio for measuring general management performance in relation to the capital invested in the business. The Toys and Games industry average is 6. 6 while Topps return on capital is 10. 0. These numbers show that the Topps Company has a superior ability to generate profit from its available assets. Topps consistently beats the industry averages for important financial statistics. (www. msn/moneycentral. com)
A common way to partition an audit is to keep related transactions and account balances in the same cycle. The cycle approach merges general ledger balances with the resulting transactions recorded in the various journals. Topps should involve all types of cycles when auditing the company. The sale and collection cycle involves the decisions and processes necessary for the transfer of the ownership of goods and services to customers after they are made available for sale. It begins with a request by a customer and ends with the conversion of material or service into an account receivable, and ultimately into cash.
The acquisition and payment cycles overall goal during the audit is to evaluate whether the accounts affected by the acquisitions of goods and services and the cash disbursements for those acquisitions are fairly presented in accordance with GAAP. The acquisition of goods and services includes such items as the acquisition of raw materials, equipment, supplies, maintainace and repairs and research. The payroll and personnel cycle involves the employment and payment of all employees. Labor is an important aspect in the valuation of inventory in manufacturing and the confectionary industry.
Like the sales and collection cycle, the payroll and personnel cycle of an audit includes gaining an understanding of internal control, tests of controls and substantive tests of transactions, assessment of control risk, analytical procedures, and tests of detailed balances. The inventory and warehouse cycle is unique because of its close relationships to other transaction cycles. Direct labor and raw materials enter the inventory and warehouse cycle from the payroll and personnel cycle and the acquisition and payment cycle, in turn.
The inventory and warehouse cycle ends with the sale of goods in the sales and collection cycle. The inventory and warehouse cycle can be thought of as comprising two separate but closely related systems, one involving the actual physical flow of goods and the other the related costs involved. Finally, the last cycle relates to the acquisition of the capital resources in the form of interest-bearing debt and owners equity and the repayment of the capital. The capital acquisition and repayment cycle also includes the payment of interest and dividends.
The cycle is important because it is the primary source of financing for most businesses. Auditors often learn about capital acquisition transactions while gaining an understanding of the clients business and industry. The auditor should help plan financial reporting issues for capital transactions. These auditors constantly identify business risk issues for capital acquisition activities early in the planning process that should be considered in the design of audit procedures for transactions and account balances in the capital acquisition and repayment cycle.
The accounts in a companys capital acquisition and repayment cycle depend on the type of business the company operates and how it is financed. High Risk Areas Risk of Fraud from Pressure / Incentives: This type of fraud risk is a threat when the stability or profitability of the company is threatened by economic, industry, or entity related conditions, such as a significant decline in customer demand. As the auditors of Topps, we must be aware that with the major decline in demand for Pokemon and entertainment products, there is pressure on employees to keep sales numbers in line with previous years.
We must pay careful attention to the existence of sales in the entertainment products sector of Topps. Classification and Allocation of Income (Loss): With the Topps Company, we feel that there is a high risk of material misstatement due to the misallocation of sales, income, and losses between the three main divisions (confectionery, collectible sports products, and entertainment products) of the Company. This would not necessarily be a misstatement of total net income, but rather a skewed representation of an underperforming business sector.
This information risk would mislead investors. Client Business Risk: One type of client business risk that we interpret as a high risk area for Topps deals with its entertainment products. For companies with short product life cycles (such as the entertainment products), there is a risk that production plans and inventory levels are not appropriate for current economic conditions. We will examine production and inventory levels for the Topps Company after estimating reasonable figures in order to assess this risk.
Low Risk Areas Sales Returns and Revenue Recognition: Under its current procedure, Topps records returnable sales in each division net of a provision for estimated returns. These estimates are later revised to reflect actual experience and market conditions. We have identified a low risk area associated with this policy. We must make sure primarily that the initial deducted estimates are in line with previous years actual numbers. But, our main concern is that the estimates are actually revised when the returns take place.
For instance, if the estimate is low and the actual returns are high, net income could be dramatically increased in the adjustment is not made. Pending Class Action Suit: The Company is involved with many routine legal suits which are not material threats; however, there is one class action suit in California that could have a material effect if it is reinstated on appeal and has an adverse outcome. We classify this situation as a low risk area because neither we the accountants nor Topps attorneys foresee an adverse outcome if appealed.
Client Business Risk: This type of client business risk deals with recent acquisitions. The risk involved with acquisitions is that if the planned synergies fail to develop, the fixed assets and goodwill may be impaired affecting the fair presentation of the financial statements. We classify this risk as low because the two most recent acquisitions by Topps (Merlin Publishing and thePit. com) seem to be integrating well into the Company. Our major concern is with thePit. m because the acquisition was in 2001 and its final position and outcome have not yet been determined. Control Risk is a measure of the auditors assessment of the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the companys internal control. Since the Topps Company is a smaller business compared to others, it is harder for their management to materially misstate their financial statement due to the smaller size of income.
However, an auditor still must make sure there is only tolerable control risk. Five main categories should be used to reduce control risk. First, an auditor should make sure that the transactions on the financial statement actually exist or occur. If a company has no pattern like numbers from year to year, an auditor should make sure the statements are accurate. Second, an auditor should make sure statements are complete, meaning they are not trying to hide any expenses or liabilities.
Third, an auditor should valuate the statements to accurately see if the company has a current value for each property, plant and equipment. Fourth, an auditor needs to verify that the companys property is actually theirs and does not belong to someone else causing a misstatement in the financial report. Last, an auditor needs to make sure that financial statements are combined or separately stated depending on if the corporation as subsidiaries.
Even though it is the responsibility of the management to give correct financial statements, an auditor must be certain that are correct so not as to certify them if they are not causing a great deal of liability on the auditor. These five categories should reduce assessed control risk. Due to Topps Company having an office and warehouse in Duryan, Pennsylvania; a manufacturing plant in Scranton, Pennsylvania; offices in New York City and Cork, Ireland and offices and warehouses in Milton Keynes, United Kingdom, the auditors would be allocated to these main cities.
Most of the work would be done in New York since that is where their main offices and records are located. The other cities would be visited to get a feel for the company and to confirm inventory and business procedures. After looking through the annual report and the 10-K and Deloite and Touche giving the Topps Company a unqualified standard opinion, we believe their financial statements have been sufficiently certified and would get a standard unqualified opinion, meaning that nothing was found materially incorrect in the audit.