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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number: 0-26580

AMERICAN COIN MERCHANDISING, INC.

5660 Central Avenue, Boulder, Colorado 80301
(Address of principal executive offices)
(Zip Code)

(303) 444-2559
(Registrant’s telephone number)

Securities registered under Section 12(b) of the Exchange Act:

Ascending Rate Cumulative Trust Preferred Securities, liquidation amount $10 per security

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]  No [  ]

     As of November 11, 2002, the registrant had 1,000 shares of its $0.01 par value common stock outstanding. None of the registrant’s common stock is held by non-affiliates of the registrant.

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AMERICAN COIN MERCHANDISING, INC.

INDEX

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PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS

AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(in thousands, except per share data)

See accompanying notes to consolidated condensed financial statements.

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AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
Consolidated Condensed Statements Of Operations
(in thousands, except per share data)

See accompanying notes to consolidated condensed financial statements.

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AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
Consolidated Condensed Statements Of Stockholders’ Equity
(in thousands, except per share data)

See accompanying notes to consolidated condensed financial statements.

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AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
Consolidated Condensed Statements Of Cash Flows
(In thousands)

See accompanying notes to consolidated condensed financial statements.

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AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.

Description of Business and Basis of Presentation

     American Coin Merchandising, Inc., d/b/a Sugarloaf Creations, Inc. and American Coin Merchandising Trust I (the “Company”) and its franchisees own and operate more than 26,000 coin-operated amusement vending machines. Over 14,000 of these machines dispense plush toys, watches, jewelry, novelties, and other items. The Company’s amusement vending machines are placed in supermarkets, mass merchandisers, bowling centers, truck stops, bingo halls, bars, restaurants, warehouse clubs and similar locations. At September 30, 2002, the Company had 35 field offices with operations in 48 states and Puerto Rico. The Company also sells products to franchisees. At September 30, 2002, there were 9 franchisees operating in 12 territories. All significant intercompany balances and transactions have been eliminated in consolidation.

     On February 11, 2002 the Company was acquired by ACMI Holdings, Inc., a newly formed corporation organized by two investment firms, Wellspring Capital Management LLC and Knightsbridge Holdings, LLC. The transaction was approved at a stockholders’ meeting held on February 5, 2002. Stockholders received $8.50 in cash for each outstanding share of the Company’s common stock. The Company’s common stock is no longer publicly traded. The Company’s mandatorily redeemable preferred securities remain outstanding and continue to trade on the American Stock Exchange. Periods prior to the acquisition (deemed to be February 1, 2002) are denoted as predecessor and those subsequent to the acquisition are denoted as successor.

     The accompanying consolidated condensed financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these consolidated condensed financial statements be read in connection with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2001.

     In the opinion of the Company, the accompanying consolidated condensed financial statements include all adjustments (consisting of normal recurring accruals and adjustments) required to present fairly the Company’s financial position at September 30, 2002 and December 31, 2001, and the results of its operations and cash flows for the three months and eight months ended September 30, 2002, one month ended January 31, 2002 and the three months and nine months ended September 30, 2001.

     The operating results for the periods in 2002 are not necessarily indicative of the results that may be expected for the 11-month period ended December 31, 2002.

2.

Acquisition

     On February 11, 2002, the Company was acquired by ACMI Holdings, Inc., a newly formed corporation organized by two investment firms, Wellspring Capital Management LLC and Knightsbridge Holdings, LLC for approximately $110.7 million. Of this amount, approximately $28 million was paid in cash. The Company has recorded approximately $61.4 million of costs in excess of assets acquired as a result of the ACMI Holdings acquisition that was accounted for using the purchase method of accounting.

     On September 3, 2002, the Company acquired certain assets and the business operations of a kiddie ride company for approximately $2,588,000. Of this amount, $1,463,000 was paid in cash with the balance to be paid over a three-year period in accordance with the terms of the promissory note issued in connection with the acquisition. The Company has recorded approximately $1,796,000 of costs in excess of assets acquired as a result of the acquisition that was accounted for using the purchase method of accounting.

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AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

3.

Supplemental Disclosures of Cash Flow Information

     A schedule of supplemental cash flow information follows (in thousands):

4.

Earnings (loss) per share

     Basic and diluted earnings (loss) per share are computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period and by all dilutive potential common shares outstanding during the period, respectively.

5.

Income taxes

     Income taxes for interim periods are computed using the anticipated effective tax rate for the year.

6.

Costs in excess of assets acquired and other intangible assets

     The Company periodically reviews and evaluates its costs in excess of assets acquired and other intangible assets for potential impairment. Effective January 1, 2002, the beginning of the Company’s fiscal year 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” under which costs in excess of assets acquired is no longer amortized but instead will be assessed for impairment at least annually.

     The following table reconciles net earnings for the three months and nine months ended September 30, 2001 to the pro forma net earnings excluding the amortization of costs in excess of assets acquired (in thousands, except share data).

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AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

7.

Long-term debt

     The Company’s $65.0 million senior secured credit facility is comprised of a $10.0 million revolving credit facility and $55.0 million of term loans comprised of a $25.0 million term loan A and a $30.0 million term loan B. Under the revolving credit facility, the Company may borrow up to $10.0 million through February 11, 2007, and at September 30, 2002, there was $6.9 million outstanding and $3.1 million available under the revolving credit facility. Under both term loans A and B, the Company is required to make quarterly principal installments that increase in amount through February 11, 2007 for term loan A and February 11, 2008 for term loan B. The revolving facility and the term loans bear interest at a floating rate at the Company’s option equal to either LIBOR plus the applicable margin or a base rate that is equal to the higher of the prime rate or the federal funds rate plus one-half percent plus the applicable margin. The effective rate of interest on both facilities at September 30, 2002 was 6.7%. The credit facility provides that certain financial ratios be met and places restrictions on, among other things, the incurrence of additional debt financing and certain payments to the Company’s parent company. The Company was in compliance with such financial ratios and restrictions at September 30, 2002.

     The Company has also issued $25.5 million of senior subordinated notes due in 2009. Interest on these notes is payable on a quarterly basis at the rate of 17% per annum; however, at the option of the Company the minimum cash interest due on these notes is 13% with the balance of interest due being paid in the form of additional notes or payment in kind notes in an aggregate amount equal to the amount of interest that would be payable with respect to the notes, if such interest were paid in cash. The note agreement provides that certain financial ratios be met and places restrictions on, among other things, the incurrence of additional senior subordinated indebtedness and certain restricted payments. The Company was in compliance with such financial ratios and restrictions at September 30, 2002.

8.

Interest Rate Collar

     The Company uses variable rate debt to finance its operations. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases.

     Management believes it is prudent to limit the variability of a portion of its interest payments, as well as the Company is obligated under terms of its debt agreements to limit the variability of a portion of its interest payments. To meet this objective, the Company entered into an interest rate collar instrument on March 28, 2002, with the Royal Bank of Scotland PLC. The Company paid $181,000 to obtain the agreement which hedges against increases in LIBOR rates through March 31, 2005. The initial notional amount is $27.5 million amortizing over a three-year period. The initial floor rate is 3.0% increasing 1.0% per year over the life of the agreement and the initial cap rate is 4.0% increasing 1.0% per year over the life of the agreement. The Company is the floor rate payee and the Royal Bank of Scotland PLC is the cap rate payee. No payments are made if LIBOR falls between the floor and cap rate. This agreement reduces the risk of interest rate increases to the Company.

     Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) requires that all derivative instruments be reported in the statement of financial position as assets or liabilities and measured at fair value. The Company’s interest rate collar instrument is not allowed hedge accounting treatment under SFAS 133, accordingly the Company records this instrument at fair value and recognizes realized and unrealized gains and losses in other expense in the statement of operations. The Company paid $81,000 during the quarter since LIBOR was below the floor rate under the interest rate collar. This amount is included in interest expense in the statement of operations. The Company does not speculate using derivative instruments.

     The fair value of the interest rate collar is obtained from bank quotes. These values represent the estimated amount the Company would receive or pay to terminate the agreement taking into consideration current interest rates. The fair value at September 30, 2002 is a liability of $1.1 million. The fair value recorded at the beginning of the quarter was a liability of $419,000. Accordingly, the change in fair value of this nonhedging derivative instrument is reflected as an expense during the quarter totaling $728,000.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Except for the historical information contained herein, the following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section and the Company’s Form 10-K for the year ended December 31, 2001.

     In order to provide a meaningful basis of comparing the Company’s operating results, the operating results for the eight months ended September 30, 2002 have been combined with the operating results for the one-month ended January 31, 2002. The combined Company results for the nine-month period ended September 30, 2002 are compared to the comparable period in 2001. The combining of successor and predecessor periods is not acceptable under accounting principles generally accepted in the United States of America. This combined financial data should not be viewed as a substitute for the Company’s results of operations determined in accordance with accounting principles generally accepted in the United States of America.

General

     Substantially all of the Company’s revenue and gross profit is derived from Company-owned Shoppes. The Company’s revenue and gross profit in a particular period is directly related to the number of Shoppes in operation during the period. Management believes that the Company’s business is somewhat seasonal, with average revenue per machine per week greater during the Easter and Christmas periods. Vending revenue represents cash receipts from customers using vending machines and is recognized when collected. The cost of vending revenue is comprised of the cost of vended products, location commissions, depreciation, and direct service cost.

     Franchise and other revenue represents the Company’s percentage of gross vending revenue generated by Shoppes owned and operated by franchisees, as well as product sold to franchisees and non-franchisee customers. Product sold to franchisees and non-franchisees consists of goods to vend in the Shoppes.

     On February 11, 2002 the Company was acquired by ACMI Holdings, Inc., a newly formed corporation organized by two investment firms, Wellspring Capital Management LLC and Knightsbridge Holdings, LLC. The transaction was approved at a stockholders’ meeting held on February 5, 2002. Stockholders received $8.50 in cash for each outstanding share of the Company’s common stock. The Company’s common stock is no longer publicly traded. The Company’s mandatorily redeemable preferred securities remain outstanding and continue to trade on the American Stock Exchange.

Revenue

     Total revenue for the first nine months of 2002 increased to $105.4 million from $104.4 million for the same period in 2001. For the third quarter of 2002, total revenue increased 2.2% to $35.8 million as compared to $35.0 million for the same period in 2001.

     Vending revenue increased $999,000 for the first nine months of 2002 to $103.7 million from $102.7 million for the comparable period in 2001, primarily as a result of a 7.4% increase in the average number of amusement vending equipment in place during the first nine months of 2002 compared to the average number in place during the same period in 2001. For the third quarter of 2002, vending revenue increased $727,000 to $35.2 million as compared to the same period in 2001. The average number of amusement vending equipment in place during the third quarter of 2002 increased 11.6% as compared to the third quarter of 2001. The increase in placements for the nine months ended September 30, 2002 and the third quarter of 2002 were offset by lower weekly skill crane averages in 2002 compared to 2001. The increase in placements during the third quarter results primarily from the acquisition of a kiddie ride company on September 3, 2002.

     The Company has recently experienced growth, however, there can be no assurance that the Company will continue to grow at historical rates or at all. The Company’s ability to generate increased revenue and achieve higher levels of profitability will depend upon its ability and the ability of its franchisees to place additional Shoppes as well as to maintain or increase the average financial performance of the Shoppes. The Company’s ability to place additional Shoppes depends on a number of factors beyond the Company’s control, including general business and economic conditions. Installation of additional Shoppes will also depend, in part, upon the Company’s ability to secure additional national and regional supermarket, mass merchandiser and restaurant chain accounts and to obtain approval to place additional Shoppes in individual locations of such accounts. The Company, its franchisees and their suppliers also may be unable to place and adequately service additional Shoppes.

     Franchise and other revenue was $1.7 million for the first nine months of 2002 and 2001. The Company anticipates franchise and other revenue to remain at this level or decrease in the future.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED).

Cost of Revenue and Gross Profit

     The cost of vending operations for the first nine months of 2002 increased $1.4 million or 1.8% to $78.7 million from $77.3 million for the comparable period in 2001. The vending operations’ contribution to gross profit for the first nine months of 2002 decreased $386,000 to $24.9 million compared to gross profit from vending operations realized in the same period in 2001. The vending gross profit achieved during the first nine months of 2002 was 24.1% of vending revenue, which represents a 0.6 percentage point decrease from the gross profit percentage achieved during the first nine months of 2001. For the third quarter of 2002, the cost of vending increased $259,000 to $26.4 million from $26.2 million for the comparable period in 2001. Vending gross profit realized during the third quarter of 2002 was $8.8 million or 24.9% of vending revenue as compared to $8.3 million or 24.1% for the third quarter of 2001. The decrease in vending margin for the nine months ended September 30, 2002 results primarily from increased machine related costs partially offset by lower cost of product vended for certain machine types. The increase in vending margin for the third quarter of 2002 results primarily from lower cost of product vended for certain machine types partially offset by increased machine related costs and placement fees.

     The cash vending gross profit (vending revenue minus cost of vended product, location commissions and direct service cost) achieved during the first nine months of 2002 was 33.2% of vending revenue, which is 0.2 percentage points lower than the cash vending gross profit achieved during the first nine months of 2001. The cash vending gross profit for the current quarter is 1.5 percentage points higher than the cash vending gross profit achieved during the second quarter of 2002. The Company attributes the decrease for the first nine months of 2002 primarily to increased machine related costs and direct labor.

     Substantially all the Company’s plush toys and other products dispensed from the Shoppes are produced by foreign manufacturers. A majority is purchased directly by the Company from manufacturers in China. The Company purchases its other products indirectly from vendors who obtain a significant percentage of such products from foreign manufacturers. As a result, the Company is subject to changes in governmental policies, the imposition of tariffs, import and export controls, transportation delays and interruptions, political and economic disruptions and labor strikes that could disrupt the supply of products from such manufacturers.

     Gross profit on franchise and other revenue for the first nine months of 2002 increased to $1.1 million or 65.1% of franchise and other revenue, as compared to $290,000 or 16.9% of franchise and other revenue for the first nine months of 2001. For the third quarter of 2002, gross profit on franchise and other revenue increased to $489,000, as compared to $201,000 for the third quarter of 2001. The increase in gross profit results primarily from reduced inbound freight related costs partially offset by increased service related payroll costs. The Company anticipates franchise and other revenue to remain at this level or decrease in the future.

Operating Expenses

     General and administrative expenses and depreciation and amortization increased $728,000 to $20.3 million for the first nine months of 2002, and increased as a percentage of total revenue to 19.2% as compared to 18.7% for the comparable period in 2001. For the third quarter of 2002, general and administrative expenses and depreciation and amortization decreased $566,000 to $6.1 million and decreased as a percentage of total revenue to 17.0% from 19.0%. The increase for the first nine months of 2002 is due primarily to costs related to the acquisition by ACMI Holdings, Inc. totaling $2.0 million. General and administrative expense and depreciation and amortization for the first nine months of 2002, excluding transaction related costs, decreased $1.3 million to $18.2 million or 17.3% as a percentage of revenue compared to the comparable period.

Operating Earnings

     Operating earnings for the first nine months of 2002 declined to $5.8 million, or 5.5% of total revenue, as compared to $6.1 million, or 5.8% of total revenue for the comparable period in 2001. The decrease in operating earnings results primarily from transaction related costs totaling $2.0 million. Operating earnings for the third quarter of 2002 increased to $3.2 million, or 8.9% of total revenue, as compared to $1.8 million, or 5.3% of total revenue for the comparable period in 2001. Operating earnings for the first nine months of 2002, excluding transaction related costs were $7.8 million or 7.4% of total revenue.

Interest Expense, Net

     Interest expense for the first nine months of 2002 increased $2.9 million to $7.9 million as compared to the same period in 2001. Interest expense for the third quarter of 2002 increased $1.4 million to $2.9 million as compared to the same period in 2001. The Company’s interest expense is directly related to its level of borrowings and changes in the underlying interest rates.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED).

Change in Fair Value of Interest Rate Collar

     The Company’s interest rate collar instrument is not allowed hedge accounting treatment under SFAS 133, accordingly the Company records this instrument at fair value and recognizes realized and unrealized gains and losses in other expenses in the statement of operations. The change in fair value on this interest rate collar totaled $1.3 million for the nine months ended September 30, 2002 and $728,000 for the third quarter of 2002.

Extraordinary Loss

     The extraordinary loss of $1.1 million, net of tax benefit, for the nine months ended September 30, 2002 relates to the refinancing of the Company’s $55.0 million credit facility in February 2002, which was scheduled to mature in December 2003. The extraordinary loss results from the write-off of loan origination fees related to the previous credit facility.

Net Earnings (Loss) and Net Earnings (Loss) Per Share

     The net loss for the first nine months of 2002 was $3.2 million as compared to net earnings of $665,000 for the comparable period in 2001. The net loss for the third quarter of 2002 was $285,000, as compared to net earnings of $218,000 for the comparable period in 2001. Net loss for the first nine months of 2002 excluding transaction related costs, change in fair value of interest rate collar and the extraordinary loss was $37,000. The net loss for the nine months ended September 30, 2002 excluding transaction related costs, change in fair value of interest rate collar and the extraordinary loss results primarily from increased interest expense.

Critical Accounting Policies

     Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

     On an on-going basis, management evaluates its estimates and judgments, including those related to income taxes, inventory, property and equipment and costs in excess of assets acquired and other intangible assets. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

     Deferred Taxes

     The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and has historically established valuation allowances based on its taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If the Company operates at a loss or is unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, the Company could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results. This could be mitigated by the reversal of future taxable temporary differences in property, plant and equipment that could create taxable income to help utilize the deferred tax assets.

     Inventory

     The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED).

     Property and Equipment

     Property and equipment is stated at cost. Major replacements and improvements are capitalized. When assets are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and the gain or loss is recognized. Repair and maintenance costs that do not extend the useful life are charged to expense as incurred. Vending machines are depreciated using the straight-line method over useful lives ranging from three to ten years.

     Valuation of long-lived and intangible assets and costs in excess of assets acquired

     The Company assesses the impairment of identifiable intangibles, long-lived assets and related costs in excess of assets acquired whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, changes in the manner of our use of the acquired assets and the strategy for our overall business and negative industry or economic trends.

     When the Company determines that the carrying value of costs in excess of assets acquired and other intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company measures any impairment based on the projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in the Company’s current business model.

     In 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” became effective and as a result, the Company ceased to amortize approximately $33.3 million of costs in excess of assets acquired. The Company has recorded approximately $2.0 million of amortization related to these assets during 2001 and would have amortized approximately $2.0 during 2002. In lieu of amortization, the Company is required to perform an initial impairment review of our costs in excess of assets acquired and an annual impairment review thereafter. The Company expects to complete its initial review during the first quarter of 2003.

     The Company currently does not expect to record an impairment charge upon completion of the initial impairment review. However, there can be no assurance that at the time the review is completed an impairment charge will not be recorded, which may be material.

Liquidity and Capital Resources

     The Company’s primary sources of liquidity and capital resources historically have been cash flows from operations, borrowings under the Company’s credit facilities and issuance of its equity securities. These sources of cash flows have been offset by cash used for acquisitions, investment in amusement vending equipment and payment of long-term borrowings.

     Net cash provided by operating activities was $1.2 million and $8.0 million for the nine months ended September 30, 2002 and 2001, respectively. The primary use of cash for operating activities was loan fees associated with refinancing the Company’s credit facility during the first quarter of 2002. The Company anticipates that cash will continue to be provided by operations as additional amusement vending equipment is placed in service. Cash required in the future is expected to be funded by existing cash and cash provided by operations and borrowings under the Company’s credit facility.

     Net cash used in investing activities was $11.3 million and $6.3 million for the nine months ended September 30, 2002 and 2001, respectively. Capital expenditures for the nine months ended September 30, 2002 and 2001 amounted to $6.9 million and $4.0 million, respectively, of which $6.3 million and $3.1 million, respectively, was for the acquisition of amusement vending equipment.

     Net cash provided by financing activities was $7.9 million for the nine months ended September 30, 2002 and net cash used in financing activities was $3.1 million for the nine months ended September 30, 2001. Financing activities consist primarily of borrowings and payments on the Company’s credit facility and purchase of common stock in conjunction with the acquisition by ACMI Holdings, Inc., and the repayment of the Company’s previous credit facility and other debt obligations.

     The Company’s $65.0 million senior secured credit facility is comprised of a $10.0 million revolving credit facility and $55.0 million of term loans comprised of a $25.0 million term loan A and a $30.0 million term loan B. Under the revolving credit facility, the Company may borrow up to $10.0 million through February 11, 2007, and at September 30, 2002, there was $6.9 million outstanding and $3.1 million available under the revolving credit facility. Under both term loans A and B, the Company is required to make quarterly principal installments that increase in amount through February 11, 2007 for term loan A and February 11, 2008 for term loan B. The revolving facility and the term loans bear interest at a floating rate at the Company’s option equal to either LIBOR plus the applicable margin or a base rate

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED).

that is equal to the higher of the prime rate or the federal funds rate plus one-half percent plus the applicable margin. The effective rate of interest on both facilities at September 30, 2002 was 6.7%. The credit facility provides that certain financial ratios be met and places restrictions on, among other things, the incurrence of additional debt financing and certain payments to the Company’s parent company. The Company was in compliance with such financial ratios and restrictions at September 30, 2002.

     The Company has also issued $25.5 million of senior subordinated notes due in 2009. Interest on these notes is payable on a quarterly basis at the rate of 17% per annum; however, at the option of the Company the minimum cash interest due on these notes is 13% with the balance of interest due being paid in the form of additional notes or payment in kind notes in an aggregate amount equal to the amount of interest that would be payable with respect to the notes, if such interest were paid in cash. The note agreement provides that certain financial ratios be met and places restrictions on, among other things, the incurrence of additional senior subordinated indebtedness and certain restricted payments. The Company was in compliance with such financial ratios and restrictions at September 30, 2002.

Interest Rate Collar

     As required under the Company’s current credit facility, on March 28, 2002 the Company entered into an amortizing interest rate collar agreement with the Royal Bank of Scotland PLC. The Company paid $181,000 to obtain the agreement which hedges against increases in LIBOR rates through March 31, 2005. The initial notional amount is $27.5 million amortizing over a three-year period. The initial floor rate is 3.0% increasing 1.0% per year over the life of the agreement and the initial cap rate is 4.0% increasing 1.0% per year over the life of the agreement. The Company is the floor rate payee and the Royal Bank of Scotland PLC is the cap rate payee. No payments are made if LIBOR falls between the floor and cap rate.

     Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) requires that all derivative instruments be reported in the statement of financial position as assets or liabilities and measured at fair value. The Company’s interest rate collar instrument is not allowed hedge accounting treatment under SFAS 133, accordingly the Company records this instrument at fair value and recognizes realized and unrealized gains and losses in other expense in the statement of operations. The Company paid $81,000 during the quarter since LIBOR was below the floor rate under the interest rate collar. This amount is included in interest expense in the statement of operations. The Company does not speculate using derivative instruments.

     The fair value of the interest rate collar is obtained from bank quotes. These values represent the estimated amount the Company would receive or pay to terminate the agreement taking into consideration current interest rates. The fair value at September 30, 2002 is a liability of $1.1 million. The fair value recorded at the beginning of the quarter was a liability of $419,000. Accordingly, the change in fair value of this nonhedging derivative instrument is reflected as an expense during the quarter totaling $728,000.

Other

     The Company may use a portion of its capital resources to effect acquisitions of franchisees, other companies or other amusement vending assets. Because the Company cannot predict the timing or nature of acquisition opportunities, or the availability of acquisition financing, the Company cannot determine the extent to which capital resources may be used. Company management believes that funds generated from operations, borrowings available under its credit facility, and the Company’s ability to negotiate additional and enhanced credit agreements will be sufficient to meet the Company’s foreseeable operating and capital expenditure requirements.

     The Company currently has no commitments or agreements with respect to any material acquisitions. However, if the Company concludes appropriate opportunities are available, it may attempt to acquire businesses, technologies, services or products that it believes are a strategic fit with its business. If the Company undertakes such acquisitions, the process of integrating the acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of its business. Moreover, the Company may fail to realize the anticipated benefits of any acquisition. Future acquisitions could also expose the Company to unexpected future liabilities and result in impairment charges related to intangible assets.

Impact of Recently Issued Accounting Standards

     In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 145 (SFAS 145), “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 updates, clarifies and simplifies existing accounting pronouncements, including the rescission of Statement 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as and extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. The Company does not expect the impact of adopting SFAS 145 to be significant.

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