Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(X)

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2002

OR

(   )

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File Number: 0-26580

AMERICAN COIN MERCHANDISING, INC.

397 S. Taylor Avenue, Louisville, Colorado 80027
(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 preceding 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 (   )

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (   )

     As of March 24, 2003, 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.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes (   ) No (X)

Table of Contents

AMERICAN COIN MERCHANDISING, INC.

Annual Report on Form 10-K

December 31, 2002

Table of Contents

2

Table of Contents

     Statements in this report that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements with respect to the financial condition and results of operations of the Company involve risks and uncertainties related to Shoppe performance and dependence on suppliers and foreign sourcing. These factors are more fully discussed later in this report under the heading “Risk Factors.” In addition, the Company’s results could also be affected by a number of other risks and uncertainties which are more fully discussed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report.

PART I

Item 1. Business

     American Coin Merchandising, Inc. (the “Company”) is the leading owner, operator and franchisor in the United States of coin-operated amusement vending equipment with more than 31,000 pieces of equipment on location. Over 14,600 of these machines are skill-crane machines (“Shoppes”) that dispense plush toys, watches, jewelry, novelties and other items. For up to 50¢ a play, customers maneuver the skill-crane into position and attempt to retrieve the desired item in the machine’s enclosed display area before play is ended. The Company’s Shoppes are placed in supermarkets, mass merchandisers, restaurants, bowling centers, truckstops, bingo halls, bars, warehouse clubs and similar locations (“Retail Accounts”) to take advantage of the regular customer traffic at these locations. The Company utilizes appealing displays of quality merchandise, new product introductions, including Company-designed products, licensed products and seasonal items, and other merchandising techniques to attract new and repeat customers. The Company also places supplementary amusement vending equipment generally at existing Shoppe locations, including kiddie rides, bulk vending (novelty items, candy, gum, etc.) and video games.

     On March 17, 2003 the Company announced that it had agreed with Folz Vending Co., Inc. and its subsidiary Folz Novelty Co., Inc. (“Folz”) to merge the business of Folz into a wholly owned subsidiary of the Company by acquiring substantially all of the assets of Folz, pursuant to an Asset Purchase Agreement dated March 14, 2003. The agreement is subject to various conditions to closing.

     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 Cadigan Investment Partners, Inc. (f/k/a 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.

Business Strategy

     The Company’s business strategy is to differentiate itself from traditional amusement vending operators and to strengthen its position as a leading owner and operator of amusement vending equipment in the U.S. The key elements of the Company’s business strategy are as follows:

Quality Products. The Company’s Shoppes offer a mix of products, including selected products of higher quality than the carnival-type products traditionally associated with skill-crane and other prize-dispensing equipment. The plush toys offered in the Company’s Shoppes are made with 100% polyester fiberfill and high-grade outer covers and the watches include dependable movements. In addition, the Company’s Shoppes offer licensed products featuring recognizable characters (such as Disney and Looney Tunes characters), regional-based and theme-based items (such as Christmas and Easter items). All products offered in the Shoppes must adhere to the Company’s safety and quality standards.

Machine Appearance, Merchandise and Merchandising Techniques. The Company’s Shoppes are distinctively marked with the SugarLoaf logo and other signage that is readily identifiable with the Company in order to create brand recognition. In addition, the Shoppes are well lit and are cleaned and serviced regularly to maintain their attractive appearance. The Shoppes contain an appealing mix of products arranged by size, color, shape and type. Products with higher perceived value are prominently displayed, and the Company frequently incorporates new items into the merchandise mix to maintain the Shoppes’ fresh appearance. Management believes the Shoppes’ appearance and the Company’s merchandising techniques are important factors in gaining acceptance of the Company’s Shoppes by retailers.

3

Table of Contents

Product Procurement and Company-Designed Product. The Company controls product cost by purchasing a significant portion of its products directly from manufacturers in large quantities and acquiring merchandise that has been discontinued or is subject to substantial “close-out” discounts. The Company also controls product cost by pre-packing products that it distributes to Company-owned offices and sells to its franchisees and non-franchisees for use in filling and merchandising the Shoppes. The Company believes that limited cost savings will be realized in 2003 as a result of the transition from its current fulfillment facility in Kent, Washington to a third party logistics center in Shanghai, China. See “Inventory Management and Distribution.” These pre-packed units include a predetermined mix or “recipe” of different types, sizes, shapes and colors of product, which achieve the Company’s merchandising objectives while also controlling average product cost. The Company is able to frequently introduce new product in its Toy Shoppes by designing a significant portion of the product and by purchasing licensed and other product from suppliers. Designing products at various price points furthers the Company’s objective of controlling product cost. See “Suppliers — Product.”

Vend Ratio and Revenue Management. The Company closely monitors the revenue per product dispensed, or the Vend Ratio, of each of its Shoppes to maintain customer satisfaction and to optimize Shoppe revenue and profitability. A lower than optimal vend frequency reduces customer satisfaction, resulting in less frequent plays and lower revenue at a given location, while a higher than optimal vend frequency reduces profitability. If the Vend Ratio falls outside of the Company’s target range, the route merchandiser can influence various factors affecting the Vend Ratio, including the mix of products by size and weight, the placement of products within the Shoppe’s display area, the number of products and the density of the products within the Shoppe. If a Shoppe’s weekly revenue consistently falls below the Company’s minimum weekly revenue goal, the Company will consider relocating the Shoppe.

Location Selection. The Company concentrates its sales efforts on placing Shoppes in Retail Accounts such as Wal-Mart, Kmart, Denny’s, Golden Corral, Shoney’s, Flying J Truckstop and Furrs Family Dining, which have good reputations for quality and attract a high level of foot traffic. Within these accounts, the Company seeks to secure sites with the greatest visibility and accessibility to potential customers. See “Operations — Account Acquisition, Sales and Marketing.”

	Timely Installation and National Operations. The Company provides Retail Accounts with an integrated system of Shoppe and vending installation, maintenance, service and an accounting of revenue and commissions on a local or national basis. Such services have been deployed rapidly across the country to large Retail Accounts.

Training. The Company conducts comprehensive training for new general managers through its “Sugarloaf University” program, which includes a five-day seminar and field training held at its corporate offices. It also provides operations manuals, training videos and other materials relating to office management and route merchandising to assure the achievement of the Company’s business objectives. See “Operations — Supervision, Training and Support.”

Shoppes

     The Company has sought to position its Shoppes as an entertaining way to “purchase” quality products. Management believes that the quality of the Shoppes’ products and the entertainment and amusement afforded by their skill-crane format have broad appeal to adults and adolescents. While skill-crane machines have been in operation for over 75 years, the Company has incorporated into its Shoppes several improvements and refinements. The Company increased the size of the Shoppes to enhance their visibility and to display and vend more products and created bright, distinctive signage, which is readily identifiable with the Company. The Company also added exterior lighting, brightened interior lighting and selected exterior colors of the machines to attract and focus customer attention on the products in the Shoppes. In addition, the Company has upgraded the Shoppes’ operating mechanisms to achieve consistency of play and reliability of performance.

     The SugarLoaf Toy Shoppe has been operated by the Company since its inception. The Company introduced the SugarLoaf Fun Shoppe in 1993, the SugarLoaf Treasure Shoppe in 1994, the SugarLoaf Bean Bag Shoppe in 1997 and the SugarLoaf Stop Shoppe in 1998. Management believes that the introduction of new types of skill-crane and other machines has enabled the Company to capitalize on its current routes and existing relationships by placing additional machines in existing locations, thereby increasing revenue at each location with little incremental service costs. The

4

Table of Contents

introductions of SugarLoaf Treasure Shoppes, SugarLoaf Fun Shoppes, SugarLoaf Bean Bag Shoppes and SugarLoaf Stop Shoppes are typically made in locations where a SugarLoaf Toy Shoppe is already located. Currently the Company operates five types of Shoppes as described below.

     The SugarLoaf Toy Shoppe. The SugarLoaf Toy Shoppe features a play price of 50¢ and dispenses plush toys and other toys. The estimated retail values of products offered in the SugarLoaf Toy Shoppe generally range from $4.00 to $30.00. As of December 31, 2002, the Company and its franchisees were operating 9,169 SugarLoaf Toy Shoppes.

     The SugarLoaf Treasure Shoppe. The SugarLoaf Treasure Shoppe features a play price of 50¢ and dispenses jewelry, watches, bolo ties and belt buckles. The SugarLoaf Treasure Shoppe improves upon traditional skill-crane machines of this type by dispensing products with estimated retail values ranging from $4.00 to $30.00 instead of carnival-type merchandise of low retail value. As of December 31, 2002, the Company and its franchisees were operating 2,501 SugarLoaf Treasure Shoppes, approximately 90% of which were placed within locations in which another Shoppe was already in operation.

     The SugarLoaf Bean Bag Shoppe. The SugarLoaf Bean Bag Shoppe features a play price of 50¢ and dispenses Bean-bag type stuffed toys with estimated retail values ranging from $3.00 to $6.00. As of December 31, 2002, the Company and its franchisees were operating 2,621 SugarLoaf Bean Bag Shoppes.

     The SugarLoaf Stop Shoppe. The SugarLoaf Stop Shoppe features a play price of 50¢ and dispenses key-chains featuring NASCAR, bean bags, licensed items and sports figures. The estimated retail values of products offered in the SugarLoaf Stop Shoppe generally range from $2.00 to $10.00. As of December 31, 2002, the Company and its franchisees were operating 1,229 SugarLoaf Stop Shoppes.

     The SugarLoaf Fun Shoppe. The SugarLoaf Fun Shoppe features a play price of 25¢ and dispenses small toys, novelties and candy. The SugarLoaf Fun Shoppe is designed to appeal primarily to adolescents and children. The estimated retail values of products offered in the SugarLoaf Fun Shoppe are generally under $5.00. As of December 31, 2002, the Company and its franchisees were operating 398 SugarLoaf Fun Shoppes.

     The following chart indicates the number of certain Company-owned amusement vending equipment in operation at the indicated date:

Operations

     Management believes that the Company’s operations program provides for efficient and cost-effective purchasing and distribution of product. In addition, the Company has a route-servicing system that facilitates the development of a good working relationship with location managers in regional and national chain accounts. During the third quarter of 2002, the Company distributed to its field organization electronic hand-held devices that are being used to collect and transmit to its centralized data base route management information system machine revenue and inventory utilization information, which was previously gathered using a paper-based process. The Company offers its franchisees the same training programs, product and machine purchasing programs used by the Company, and they are required to use substantially the same procedures, systems and methods the Company employs in its own operations.

5

Table of Contents

     Retail Accounts. Currently, the Company’s Shoppes are located, in order of prevalence, in supermarkets, mass merchandisers, restaurants, bingo halls and bowling centers, bars and similar locations. The Company is focusing on placing Shoppes in national and regional Retail Accounts to take advantage of the regular customer traffic of these locations. The following chart identifies some of the Company’s Retail Accounts:

     The Company or its franchisees provide the Shoppes and pay certain installation costs, while the retailer provides a site within the location and electrical power. The retailers are paid commissions based upon a percentage of gross revenue, which for the year ended December 31, 2002 generally ranged from 25% to 30%, depending on the dollar volume, number of Shoppes installed and total number of locations the retailer controls. Management believes that national and regional supermarket, mass merchandise and restaurant chain accounts are increasingly aware of the economic benefits of amusement vending equipment such as the Company’s Shoppes, which can provide retailers greater revenue per square foot than alternative uses of available floor space.

     In individual-location accounts, the Company and its franchisees generally place Shoppes pursuant to oral agreements with location managers. While the Company has written agreements with certain major Retail Accounts, the Company and its franchisees also have placed Shoppes in national and regional Retail Accounts pursuant to oral or other agreements, which may be terminated at any time. Management believes that the Company and its franchisees generally have good relations with their retail accounts.

     Account Acquisition, Sales and Marketing. The Company has an integrated sales and marketing effort, with the primary objective of contributing to annual revenue growth through acquiring new customers and keeping existing customers. The Company identifies targeted channels and accounts within those channels through a disciplined annual planning process. Through this process, regional sales representatives and sales directors develop call plans, channel penetration objectives, and annual sales goals. The Company further segments its sales efforts with a key account group responsible for its largest customers and by assigning management personnel to individual accounts as their corporate account. The assignment of accounts to individuals is intended to reduce turnover within our existing account base.

     Local offices pursue sales opportunities assisted by sales and marketing materials developed by corporate as well as with assistance from regional sales representatives, sales directors, key account personnel, and senior management. This approach expands the company’s ability to secure new locations.

     Marketing pursuits are integrated with selling efforts. The Company has embarked upon a four pronged marketing program: (i) obtaining consumer information within the amusement vending category, (ii) an educational process within targeted channels concerning the benefits of amusement vending to targeted customers, (iii) development of case studies detailing the interaction of multiple crane placements, price value initiatives, and use of increased licensed products, and (iv) maintenance of awareness and visibility through the attendance of trade and customer vendor shows.

     As of December 31, 2002, the Company had installed more than 12,209 amusement vending machines in 1,605 Wal-Mart stores nationwide. The Company’s largest account, Wal-Mart accounted for approximately 41.9% of total revenue in 2002. In March 2000, the Company signed a new three-year agreement with Safeway that designates the Company as Safeway’s principal operator of skill-cranes through April 1, 2003. As of December 31, 2002, the Company and its franchisees had installed more than 936 amusement vending machines in 578 Safeway stores nationwide. In May 2000, the Company signed a new four-year agreement with Denny’s that designates the Company as Denny’s exclusive skill-crane operator for its company-owned restaurants through June 30, 2005. As of December 31, 2002, the Company and its franchisees had installed 561 Shoppes in company-owned Denny’s restaurants nationwide. Other than Wal-Mart, no account represented 10% or more of the Company’s total revenue in 2002.

     The Company and its franchisees compete for limited sites within accounts with purveyors of seasonal and specialty items and with owners and operators of other amusement and vending machines, ATM machines and coin counting and redemption equipment. Competition for such sites is based primarily on the quality of the program and the amount of

6

Table of Contents

revenue to the location owner that can be generated by a particular use of a site. Management believes that the revenue potential of the Company’s amusement vending equipment compares favorably to that of competing uses for available sites within retail locations.

     Other Vending. The Company has introduced new types of complementary amusement vending machines at existing Shoppe locations which management believes will expand the potential customers for the Company. As of December 31, 2002, the Company and its franchisees had 2,318 kiddie rides installed in Retail Accounts nationwide. As of December 31, 2002, the Company and its franchisees had 11,640 pieces of bulk vending equipment in operation. Bulk vending refers to the sale of unsorted confections, nuts, gumballs, toys and novelty items (in or out of capsules) selected by the customer and dispensed through vending machines. As of December 31, 2002, the Company and its franchisees had 2,574 simulator and traditional video games in operation. From time to time, the Company has placed, and may continue to place in the future, other types of coin-operated vending machines in retail accounts in order to leverage the Company’s existing national distribution and service network.

     Supervision, Training and Support. The Company’s division vice presidents are primarily responsible for hiring and training the Company’s general managers and for on-going support and supervision of the Company’s field offices.

     Each Company field office is managed by an area general manager or general manager who is responsible for the management of the office, including inventory management, and training and monitoring route merchandisers. The Company has developed a comprehensive training program for area general managers, general managers and franchisees covering office management, new account acquisition, inventory control, route merchandising, site selection, machine servicing and all other aspects of the operation of the business. The area general managers and general managers attend training programs and receive ongoing field training. The Company considers its route merchandisers to be a key element of its merchandising efforts. The Company’s area general managers and general managers provide training of route merchandisers in all aspects of route management, machine servicing, revenue collection, Vend Ratio monitoring and product merchandising. See “Employees.”

     Route Merchandising. Frequent, regular and reliable service and support is an important element in the operation of the Company’s Shoppes and other amusement vending equipment. The Company’s route merchandisers and franchisee personnel are trained to perform regularly scheduled merchandising and service procedures. A route merchandiser has a route consisting of 10 to 33 locations, depending upon volume, which are visited and serviced two to ten times per week. The route merchandiser cleans and services the Shoppe, takes inventory of the Shoppe, replaces product as needed, monitors the Vend Ratio and arranges the product within the Shoppe in accordance with the Company’s merchandising techniques. The route merchandiser records the number of units of product placed in the Shoppes and the number of plays for both Shoppes and other amusement vending equipment from nonresettable meters. This paper-based process is being transitioned to an electronic based process with the introduction of hand-held devices that are being used to collect and transmit machine revenue and inventory utilization information. The meter readings are subsequently reconciled against actual collections. The Company is also in the early development stage of an infrared device that will be attached to its vending equipment allowing the hand-held devices to electronically read the meter readings that are currently entered manually into the hand-held devices. All collections are delivered to and verified by another employee at the field office for deposit.

     Inventory Management and Distribution. The Company’s distribution system is designed to allow efficient and cost-effective distribution of its product to Company field offices and franchise offices. Plush toys are sourced principally from six Chinese manufacturers. After the plush is procured from the Company’s suppliers, it is shipped to a third party logistics center in Shanghai, China where it is sorted and pre-packed. The pre-packing of the Company’s other products will transition from Kent, Washington to Louisville, Colorado during April 2003. During the second quarter of 2003, the Company plans to transition to direct shipments from the distribution center in Shanghai, China and its pre-pack operation in Louisville, Colorado to regional distribution centers in Atlanta, Georgia; Allentown, Pennsylvania; Chicago, Illinois, Dallas; Texas; Ontario, California; and Seattle, Washington. There can be no assurance these changes in the Company’s distribution operations will be successful in reducing the Company’s costs or will not result in disruption to the supply of the Company’s products. A disruption in the supply of the Company’s products would have a material adverse effect on the Company’s business and results of operations. The Company communicates appropriate product mix requirements to its warehouse employees on a weekly basis. Pre-packed product units are then shipped to Company field offices and franchises on a weekly basis.

7

Table of Contents

     At December 31, 2002, the Company was operating in 49 states through a national network of 35 offices. The field offices average approximately 4,138 square feet and comprise a small office area and a warehouse area where out-of-service Shoppes and other amusement vending equipment are repaired and product inventory is maintained. Part of the route merchandisers’ daily route servicing responsibilities is to distribute product to Shoppes. Pre-packing aids in controlling product cost and facilitates new product introductions. Pre-packing also substantially reduces the warehouse space required for inventory, allowing the Company-owned and franchise offices to service a greater number of Shoppes without a commensurate increase in warehouse space and significantly reduces the time general managers and franchise personnel spend on inventory management. The establishment of the six regional distribution centers will result in a reduction in the Company’s warehouse space and provide efficiencies in the utilization of inventory.

     Management Information Systems. In late 2000, the Company implemented new financial software and a new centralized data base route management information system that utilizes customized software for monitoring field office amusement vending equipment results. The software allows the Company to monitor individual amusement vending equipment placements, revenue, Vend Ratio for Shoppes and tax and commission payments through reports generated at the corporate offices. The software also allows the Company to monitor total vending revenue, average weekly revenue and equipment on location.

     During the third quarter of 2002, the Company distributed to its field organization electronic hand-held devices that are being used to collect and transmit to its centralized data base route management information system machine revenue and inventory utilization information, which were previously gathered using a paper-based process. The Company is also in the early development stage of an infrared device that will be attached to its vending equipment allowing the hand-held devices to electronically read the meter readings that are currently entered manually into the hand-held devices.

     Shoppe Production. During the first half of 2002, the Company relocated its machine repair and refurbishment facility to Lecanto, Florida to focus on the refurbishment and redeployment of its existing base of Shoppes. During 2002, 387 Toy Shoppe and Fun Shoppe units were refurbished and redeployed to operating offices. During the third quarter of 2002, the Company acquired certain of the operating assets, including trademarks, and hired certain key production employees of its principal supplier of Shoppes to begin the process of producing new Shoppes for the Company’s internal placement requirements as well as sales to outside third parties. During 2002, the Company produced and deployed 161 new Shoppes to operating offices.

Merchandising

     Merchandising Mix. The Company offers merchandise for the Shoppes in pre-pack bags and in bulk. The pre-pack bags include an assortment of exclusive SugarLoaf designs, along with licensed and other domestic product. The merchandise variety is regularly updated, and the Company offers at least 1,500 new items each year. Seasonal goods are placed in Shoppes for all major holidays. The Company also creates several theme product collectibles and many players attempt to retrieve all of the products in the series.

     Merchandise Sourcing and Vendor Relationships. The Company purchases product from several overseas factories and has developed good relationships with these suppliers over the past ten years. The Company also utilizes several domestic sources and attempts to take advantage of licensed and closeout merchandise.

Suppliers

     Product. The Company maintains a purchasing and development staff at its corporate headquarters and contracts with foreign and domestic manufacturers and outside vendors for its supply of products. The SugarLoaf Toy Shoppes offer a combination of Company-designed products that are manufactured to the Company’s specifications and “off the shelf” products available from foreign manufacturers and third-party vendors. Since 1988, all Company-designed toys have been manufactured to its specifications by foreign manufacturers. Currently, the Company relies on multiple manufacturers in China to produce its custom designs, each of whom has the capability to produce a range of the toys required by the Company. Decisions regarding the choice of manufacturer are based on price, quality of workmanship, reliability and the ability of a manufacturer to meet the Company’s delivery requirements.

8

Table of Contents

     Shoppes. The Company believes that sufficient capacity will be available in 2003 to produce sufficient quantities of Shoppes to meet its internal and external placement demands. See “Operations # Shoppe Production.” The Company historically has purchased Shoppes from three principal approved crane manufacturers. Management believes that suitable skill-crane machines are available from a number of domestic and foreign manufacturers.

Franchise Relations

     As of December 31, 2002, the Company had franchise agreements in effect with 8 franchisees covering 11 territories in the U.S. covering, in the aggregate, 1,301 pieces of amusement vending equipment. The Company does not currently intend to grant any additional franchises. In the event any franchisee proposes to transfer to any third party its SugarLoaf business or any rights or interests granted by the franchise agreement, the Company has up to 45 days to exercise a right of first refusal to purchase such business, rights or interests on the same terms and conditions as the franchisee’s proposed transfer of such business rights or interests.

Competition

     The Company competes with a number of regional and local operators of amusement vending equipment. Many of these competitors are engaged in aggressive expansion programs, several have begun their own programs of consolidation trying to establish needed scale, and the Company has experienced and expects to continue to experience intense competition for new locations. There can be no assurance that the Company will be able to compete effectively with these companies in the future. The Company’s amusement vending equipment also competes with other vending machines, coin-operated amusement devices, coin counting and redemption machines and seasonal and bulk merchandise for sites in retail locations. There can be no assurance that the Company will be able to maintain its current sites in retail locations or that it will be able to obtain sites in the future on attractive terms or at all. There also are few barriers to entry in the Company’s business, and it would be possible for well-financed vending machine manufacturers or other vending machine operators with existing relationships with supermarkets, mass merchandisers and other venues targeted by the Company to compete readily with the Company in certain markets.

Intellectual Property

     The Company has no patents or patent applications pending and relies primarily on a combination of trademark, trade dress and unfair competition laws, trade secrets, confidentiality procedures and agreements to protect its proprietary rights. The Company owns a number of trademarks that have been registered with the United States Patent and Trademark Office, including “Shoppe,” “SugarLoaf,” “Sugar Loaf,” “Toy Shoppe,” “Treasure Shoppe,” “Fun Shoppe,” “Shoppe of Stickers” and “Kid Shoppe.” In addition, the Company claims common law trademark protection for the mark “A Test of Skill,” “ACMI,” “American Coin,” “American Coin Merchandising,” and various ones of its logos and symbols. The Company considers its operations manual, training videos, and other related materials and portions of its licensed methods to be proprietary and confidential, and the terms of the Company’s franchise agreements require franchisees to maintain the confidentiality of such information and procedures and to adopt reasonable precautions to prevent unauthorized disclosure of these secrets and information. Despite the Company’s efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company’s amusement vending equipment and products or to obtain and use information that the Company regards as proprietary. The Company also may be involved from time to time in litigation to determine the enforceability, scope and validity of proprietary rights. The Company believes it has significant intellectual property protection for its business. Management believes that its success is likely to depend more upon merchandising skill, location selection and consumer support than on legal protection of the Company’s proprietary rights.

Government Regulation

     The Company’s business is subject to federal, state and local regulations relating to product labeling and safety, coin-operated games and franchising. The Federal Hazardous Substances Act, as amended by the Child Protection Act of 1966, the Child Protection and Toy Safety Act of 1969, the Toy Safety Act of 1984 and the Child Safety Protection Act of 1994 requires the labeling of articles that bear or contain a hazardous substance as defined in such statutes. In addition, the Consumer Product Safety Commission may, under these statutes, ban from the market toys or other articles intended for use by children which contain hazardous substances or present a public health or safety hazard, and require the repurchase and reimbursement of certain expenses by the manufacturer of such banned toys or other articles.

9

Table of Contents

     The distribution and operation of skill-crane machines may be subject to federal, state and local regulations, including gaming regulations, which vary from jurisdiction to jurisdiction. Certain jurisdictions may require licenses, permits and approvals to be held by companies and their key personnel in connection with the distribution or operation of skill-crane machines. Currently, the Company believes that it has obtained all necessary governmental licenses, permits and approvals necessary for the distribution or operation of Shoppes in Company-owned operations. However, no assurance can be given that such licenses, permits or approvals will be given or renewed in the future. Franchisees are responsible for their own regulatory compliance.

     As a franchisor, the Company is subject to various federal and state franchise and business opportunity laws and regulations. The Company does not currently intend to grant any additional franchises and it believes it is in material compliance with such laws in the states in which the Company has offered and sold franchises.

Insurance

     The Company carries property, liability, workers’ compensation and directors and officers liability insurance policies, which it believes are customary for businesses of its size and type. However, there can be no assurance that the Company’s insurance coverage will be adequate or that insurance will continue to be available to the Company at reasonable rates. The Company may be subject to claims for personal injuries resulting from the use of its Shoppes or from products and other merchandise dispensed from the Shoppes. To date, the Company has not experienced any material product liability claims or costs, and it currently maintains product liability insurance that it believes to be adequate. The Company’s product liability insurance coverage is limited, however, and there can be no assurance that such insurance would adequately cover future product liability costs or claims.

Employees

     As of February 28, 2003, the Company had a total of 751 employees, including 50 employees at its headquarters in Louisville, Colorado. None of the Company’s employees are represented by labor unions or are covered by any collective bargaining contract. Management believes it has a good relationship with the Company’s employees.

     Generally, each of the Company’s field offices employ approximately 10 to 45 persons, including a general manager, an office assistant and an adequate number of route merchandisers to properly service the Company’s Shoppes and other amusement vending equipment and equipment service managers. The general manager is responsible for the daily operations of the office, monitoring route merchandisers and acquiring new accounts. The area general managers oversee the operations of certain Company field offices and report directly to the Company’s division vice presidents.

     The Company has an incentive bonus program pursuant to which area general managers, general managers and field office personnel may be eligible to receive incentive compensation based on office and route profitability. Management believes that this program rewards excellence in management, gives field office personnel an incentive to improve operations and results in an overall reduction in the cost of operations. Corporate personnel are also eligible to receive incentive compensation based on overall Company performance.

Item 2. Properties

     The Company’s principal executive offices and a field operating office are located at 397 S. Taylor Avenue, Louisville, Colorado where the Company occupies approximately 31,000 square feet of office and warehouse space under a lease that expires February 28, 2013. The Company’s fulfillment warehouse in Kent, Washington occupies approximately 106,000 square feet under a lease that expires August 31, 2003. The Company’s machine repair and refurbishment facility in Lecanto, Florida occupies approximately 24,900 square feet under a lease that expires January 14, 2008. The Company also is a party to 51 other leases which are used for office and warehouse space which average approximately 4,100 square feet, provide for monthly rental payments ranging from $450 to $5,440 and expire at various times over the period April 30, 2002 to May 31, 2006.

Item 3. Legal Proceedings

     As of March 24, 2003, the Company was not party to any material legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

     The Company did not submit any matters to a vote of its stockholders during the fourth quarter of 2002.

10

Table of Contents

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     The Company’s common stock is no longer publicly traded. As of March 24, 2003, ACMI Holdings, Inc. owns all of the Company’s outstanding common stock. The Company has not declared or paid a cash dividend on its common stock. The payment of future dividends will be within the discretion of the Company’s Board of Directors and will depend on the earnings, capital requirements, and restrictions in current and future debt agreements, credit agreements and operating and financial condition of the Company, among other factors.

Item 6. Selected Financial Data

     The selected financial data set forth below has been derived from the consolidated financial statements of the Company. Periods following the month ended January 31, 2002 reflect the Company’s results of operations following its acquisition by ACMI Holdings, Inc. See “Business.”

11

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     In order to provide a meaningful basis of comparing the Company’s operating results, the operating results for the eleven months ended December 31, 2002 have been combined with the operating results for the one-month ended January 31, 2002. The combined Company results for the year ended December 31, 2002 are compared to the comparable periods in 2001 and 2000. 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

     The Company and its franchisees own and operate coin-operated amusement vending equipment with more than 31,000 pieces of equipment on location. Over 14,600 of these machines are Shoppes that dispense plush toys, watches, jewelry, novelties and other items. The Company’s Shoppes are placed in Retail Accounts and similar high traffic locations and the Company typically pays 25-30% of gross revenue to the location owner as a location commission. The Company has also introduced new types of supplementary vending and amusement machines at existing Shoppe locations. At December 31, 2002, the Company was operating in 49 states with a national network of 35 offices and there were 8 Company franchisees operating in 11 territories in the United States. The Company sells product vended in the machines to its franchisees and collects continuing royalties ranging from 2% to 5% of its franchisees’ gross machine revenue.

     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 Cadigan Investment Partners, Inc. (f/k/a 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.

     For the year ended December 31, 2002, approximately 85% of the Company’s revenue and gross profit were 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 historically higher during the Easter and Christmas periods. Vending revenue represents cash receipts from customers using amusement vending equipment 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 the franchisees and non-franchisee customers. Product sold to the franchisees and non-franchisee customers consists of goods to vend in Shoppes. The Company anticipates that franchise and other revenue will increase over 2002 levels with the third party sale of skill-cranes and kiddie rides.

     The Company anticipates a positive financial impact related to three initiatives implemented by the Company during 2002 dealing with (i) the transfer of the Company’s fulfillment facility in Kent, Washington to a third party logistics center in Shanghai, China, (ii) the introduction of hand-held devices to the Company’s route merchandisers and (iii) the internal production of skill-cranes during 2003. However, there can be no assurance that such positive financial impact will occur at all, and if it does occur that it will have a material beneficial impact on the Company’s financial performance. There may be unforeseen problems with these initiatives that have a negative impact on the Company’s financial results.

12

Table of Contents

Results of Operations

Year Ended December 31, 2002 vs. Year Ended December 31, 2001

Revenue

     The Company’s total revenue increased 1.8% from $141.9 million in 2001 to $144.4 million in 2002. Vending revenue increased $2.4 million or 1.8% in 2002 to $142.1 million, primarily as a result of an 11.0% increase in the average number of amusement vending equipment in use during 2002, over the average number of amusement vending equipment in use during 2001. The impact of increased amusement vending equipment in use during 2002 was offset by lower weekly skill crane averages in 2002 compared to 2001. The 2002 amusement vending equipment in use was also effected by the acquisition of a kiddie ride company in September 2002.

     Franchise and other revenue were consistent compared with 2001; however, the Company expects other revenue to increase in the future with the third party sale of skill-cranes and kiddie rides.

Cost of Revenue and Gross Profit

     The cost of vending operations increased $2.6 million in 2002 to $107.3 million. The vending operations’ contribution to 2002 gross profit of $34.8 million is comparable to gross profit from vending operations realized in 2001. The vending gross profit achieved in 2002 was 24.5% of vending revenue, which represents a .5 percentage point decrease from the gross profit percentage achieved in 2001. The cash vending gross profit (vending revenue minus cost of vended product, location commissions and direct service cost) achieved in 2002 was 33.4% of vending revenue, which is .2 percentage points lower than in 2001. The decrease in vending gross profit and cash gross profit is primarily attributable to higher direct labor and leased equipment expense. The cash vending gross profit achieved during the fourth quarter of 2002 was 34.0%, which is .1 percentage points lower than the comparable period in 2001.

     Gross profit on franchise and other revenue in 2002 increased to $1.6 million, or 67.9% of franchise and other revenue, which is 53.0 percentage points higher than the gross margin achieved in 2001. The increase in gross margin as a percentage of franchise and other revenue resulted primarily from lower freight-in costs associated with inbound inventory purchases.

Operating Expense

     General and administrative expenses including depreciation and amortization were 18.6% of revenue, which is .1 percentage points lower than in 2001. General and administrative expenses for the year ended December 31, 2002 include transaction related costs of approximately $2.2 million partially offset by the discontinuance of cost in excess of assets acquired amortization and tighter control on discretionary spending during the year.

Operating Earnings

     Operating earnings in 2002 were $9.5 million or 6.6% of total revenue as compared to operating earnings of $8.7 million in 2001 or 6.2% of total revenue. The increase in operating results is primarily attributable to tighter control on discretionary spending offset by transaction related costs.

Non Operating Income (Expense)

     Interest expense increased $4.7 million to $10.8 million in 2002 as compared to 2001. The Company’s interest expense is directly related to its level of borrowings and changes in the underlying interest rates.

Change in Fair Value of Interest Rate Collar

     The change in fair value on this interest rate collar totaled $1.4 million in 2002. 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 separately on its consolidated statement of operations.

13

Table of Contents

Extraordinary Loss

     The extraordinary loss of $1.1 million, net of tax benefits, 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 and Earnings Per Share

     The net loss for the year ended December 31, 2002 was $2.8 million, as compared to net earnings of $1.6 million for 2001. The net loss results primarily from transaction related costs, increased interest expense, changes in the fair value of the interest rate collar and the extraordinary loss resulting from the refinancing of the Company credit facility.

Year Ended December 31, 2001 vs. Year Ended December 31, 2000

Revenue

     The Company’s total revenue increased 9.4% from $129.8 million in 2000 to $141.9 million in 2001. Vending revenue increased $12.6 million or 9.9% in 2001 to $139.7 million, primarily as a result of a 7.1% increase in the average number of amusement vending equipment in use during 2001, over the average number of amusement vending equipment in use during 2000.

     Franchise and other revenue decreased $424,000 or 15.8% in 2001 as compared to 2000, due to the acquisition of a franchise during the second quarter of 2001.

Cost of Revenue and Gross Profit

     The cost of vending operations increased $11.4 million in 2001 to $104.8 million. The vending operations’ contribution to 2001 gross profit increased to $34.9 million, which represents a 3.4% increase over gross profit from vending operations realized in 2000. The vending gross profit achieved in 2001 was 25.0% of vending revenue, which represents a 1.6 percentage point decrease from the gross profit percentage achieved in 2000. The cash vending gross profit (vending revenue minus cost of vended product, location commissions and direct service cost) achieved in 2001 was 33.6% of vending revenue, which is .9 percentage points lower than in 2000. The decrease in cash vending gross profit is primarily attributable to higher location payments. The cash vending gross profit achieved during the fourth quarter of 2001 was 34.1%, which is .8 percentage points lower than the comparable period in 2000.

     Gross profit on franchise and other revenue in 2001 decreased to $336,000, or 14.9% of franchise and other revenue, which is 12.9 percentage points lower than the gross margin achieved in 2000. The decrease in gross margin as a percentage of franchise and other revenue resulted primarily from increased importing related costs partially offset by lower unit costs and lower product sales to franchisees and non-franchisees.

Operating Expense

     General and administrative expenses including depreciation and amortization as a percentage of revenue for 2001 decreased to 18.7%, as compared to 19.3% of revenue in 2000. The decrease in general and administrative expenses, as a percentage of revenue, resulted primarily from tighter control on discretionary spending during the year.

Operating Earnings

     Operating earnings in 2001 were $8.7 million or 6.2% of total revenue as compared to operating earnings of $9.4 million in 2000 or 7.3% of total revenue. The decrease in operating results is primarily attributable to increased location payments and placement fees.

Non Operating Income (Expense)

     Interest expense decreased $1.6 million to $6.1 million in 2001 as compared to 2000. The Company’s interest expense is directly related to its level of borrowings and changes in the underlying interest rates.

14

Table of Contents

Net Earnings and Earnings Per Share

     The net earnings for the year ended December 31, 2001 were $1.6 million, as compared to net earnings of $859,000 for 2000. Diluted net earnings per share for 2001 were $0.24, compared to diluted net earnings per share of $0.13 in 2000.

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, as discussed in Note 3 in the accompanying consolidated financial statements. 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, among others, 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.

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, unless they increase the life or utility of the equipment, are charged to expense as incurred. Vending machines are depreciated using the straight-line method over estimated useful lives ranging from three to ten years, which may be different from actual expense.

Valuation of Long-lived and Intangible Assets and Costs in Excess of Assets Acquired

     The Company assesses the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Costs in excess of assets acquired are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying value may

15

Table of Contents

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 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 in 2002 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 issuances 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 $5.2 million, $15.8 million and $23.4 million in 2002, 2001 and 2000, respectively. The decline in 2002 net cash provided by operating activities results primarily from the fees and expenses 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 skill-crane machines and other amusement devices are 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 $12.1 million, $7.6 million and $18.1 million in 2002, 2001 and 2000, respectively. Capital expenditures amounted to $8.0 million, $4.9 million and $15.6 million in 2002, 2001 and 2000, respectively, of which $7.3 million, $4.0 million and $15.0 million were used for the acquisition of amusement vending equipment. The acquisition of franchisees and others used $1.5 million and $273,000 in 2002 and 2001, respectively.

     Net cash provided by financing activities was $7.0 million in 2002. Net cash used in financing activities was $7.0 million and $3.0 million in 2001 and 2000, respectively, and consisted 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 December 31, 2002, there was approximately $6.3 million outstanding, a $670,000 letter of credit and $151,000 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 December 31, 2002 was 6.1%. 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 December 31, 2002.

16

Table of Contents

     The Company has also issued $25.8 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 December 31, 2002.

     The Company has noncancelable commitments for operating leases, debt and an employment contract. These commitments expire at various times over the next five years. Future minimum commitments as of December 31, 2002 are as follows (in thousands):

     The Company’s long-term debt as described above has materially changed since December 31, 2001 due to the acquisition of the Company by ACMI Holdings, Inc. and the Company’s incurrence of additional debt in the form of the $65.0 million senior secured credit facility and $25.0 million of senior subordinated notes.

     The Company may use a portion of its capital resources to effect acquisitions of franchisees. 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 expected to be generated from operations and 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 needs for the next twelve months. The Company’s liquidity through operating cash flows is subject to multiple risks associated with the Company’s operations including fluctuations in Shoppe performance, management of growth, payment of the Company’s indebtedness, dependence upon major accounts and competition, among others. The section entitled “Risk Factors” beginning on page 20 sets forth several of the risks associated with the Company’s operations and is incorporated herein by reference.

     On March 17, 2003 the Company announced that it had agreed with Folz Vending Co., Inc. and its subsidiary Folz Novelty Co., Inc. (“Folz”) to merge the business of Folz into a wholly owned subsidiary of the Company by acquiring substantially all of the assets of Folz, pursuant to an Asset Purchase Agreement dated March 14, 2003. The agreement is subject to various conditions to closing.

     As required under the Company’s current credit facility, on March 28, 2002 the Company entered into an 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.

     SFAS 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 consolidated statement of operations. The Company paid $148,000 during the year since LIBOR was below the floor rate under the interest rate collar. This amount is included in interest expense in the consolidated statement of operations for the eleven months ended December 31, 2002. The Company does not speculate using derivative instruments.

17

Table of Contents

     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 December 31, 2002 is a liability of approximately $1.2 million.

Impact of Recently Issued Accounting Standards

     In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which provides a single accounting model for long-lived assets to be disposed of and changes the criteria that would have to be met to classify an asset as held-for-sale. The statement also requires expected future operating losses from discontinued operations to be recognized in the periods in which the losses are incurred, which is a change from the current requirement of recognizing such operating losses as of the measurement date. The statement is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 in 2002, which did not have a material impact on the Company’s financial results.

     In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. SFAS No. 145 is not expected to have a material impact on the Company’s financial results.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Generally, SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized as incurred, whereas EITF Issue No. 94-3 required such a liability to be recognized at the time that an entity committed to an exit play. SFAS No. 146 is not expected to have a material impact on the Company’s financial results.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123.” This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is currently evaluating whether or not it will adopt the fair value based method, and accordingly has not determined the impact that this standard will have on its financial position or results of operations. The Company has adopted the expanded disclosure provisions of SFAS No. 148 in these financial statements for the year ended December 31, 2002.

     In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Interpretation No. 45 elaborates on the disclosures made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This interpretation does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the term of the related guarantee. This interpretation also incorporates, without change, the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others,” which is being superseded. The Company is required to apply the provisions of Interpretation No. 45 to exit or guarantees that are initiated or modified after December 31, 2002. The adoption of this standard is not expected to will not have a material impact on the Company’s financial position or results of its operations. This statement also requires expanded disclosures for certain types of obligations not covered by the accounting provisions of this interpretation, such as warranty obligations. The Company has adopted these disclosure requirements in its financial statements for the year ended December 31, 2002.

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” Interpretation No. 46 is an interpretation of Accounting Research Bulletin No. 51, and addresses consolidation by business enterprises of variable interest entities. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. The Company is required to apply the provisions of Interpretation No. 45 to variable interest entities created after January 31, 2003. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of its operations.

18

Table of Contents

Risk Factors

     This report contains forward-looking statements. Because such statements include risks and uncertainties, actual results could differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

     Shoppe Performance. A primary key to the financial success of the Company is the weekly revenue generated per Shoppe, which has a history of fluctuating. The Company has attributed some of this fluctuation to the effectiveness of its product mix and has taken steps to address this problem; however, there can be no assurance that such efforts will continue to have a positive impact on the performance of the Shoppes. The average weekly revenue generated per Shoppe may decline or fluctuate in the future, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

     Growth and Management of Growth. The Company has recently experienced growth. 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 in Retail Accounts 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 Retail 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, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

     There can be no assurance that the Company will be able to manage its expanding operations effectively or that it will be able to maintain or accelerate its growth. The Company’s growth has placed, and is expected to continue to place significant demands on all aspects of the Company’s business, including Shoppe servicing, merchandising, financial and administrative personnel and systems. The Company’s future operating results are substantially dependent upon the ability of the Company’s officers and key personnel to manage anticipated growth and increased demand effectively; to attract, train and retain additional qualified personnel; and to implement and improve technical, service, administrative, financial control and reporting systems. Either deterioration in Shoppe performance or the Company’s failure to manage growth effectively could adversely and materially affect the Company’s business, financial condition and results of operations.

     Integration of Acquisitions. The Company intends to acquire other businesses in the future. Acquisitions are likely to place, a significant strain on the Company’s managerial, operating, financial and other resources. The Company’s future performance will depend, in part, upon its ability to integrate its acquisitions effectively, which will require that the Company implement additional management information systems capabilities, further develop its operating, administrative and financial and accounting systems and controls, improve coordination among accounting, finance, marketing and operations, and hire and train additional personnel. Failure by the Company to develop adequate operational and control systems or to attract and retain additional qualified management, financial, sales and marketing and customer care personnel could materially adversely affect the Company’s ability to integrate the businesses it acquires. While the Company anticipates that it will recognize various economies and efficiencies of scale as a result of its acquisitions and the integration of the businesses it has acquired, the process of consolidating the businesses and implementing integrations, even if successful, may take a significant period of time, will place a significant strain on the Company’s resources and could subject the Company to additional expenses during the integration process. Furthermore, the Company’s performance will depend on the internal growth generated through acquired operations. As a result, there can be no assurance that the Company will be able to integrate the businesses it has acquired successfully or in a timely manner in accordance with its strategic objectives. Failure to effectively and efficiently integrate acquired businesses could have a material adverse effect on the Company’s business, financial condition and results of operations.

     Substantial Indebtedness; Effect of Financial Leverage. The Company intends to use funds available under its revolving credit facility for a number of purposes, including future acquisitions of franchisees. Further use of funds from the credit facility could result in the Company incurring additional indebtedness that is substantial in relation to its

19

Table of Contents

stockholders’ equity and cash flow available for debt service. As a result of the issuance of the Ascending Rate Cumulative Trust Preferred Securities and the amount the Company owes pursuant to its senior secured facilities and senior subordinated notes, fixed charges could exceed earnings for the foreseeable future. Substantial leverage poses the risk that the Company may not be able to generate sufficient cash flow to service its indebtedness, or to adequately fund its operations. There can be no assurance that the Company will be able to increase its revenue and leverage the acquisitions it has made to achieve sufficient cash flow to meet its potential debt service obligations. In particular, there can be no assurance that the Company’s operating cash flow will be sufficient to meet its debt service obligations under its senior secured facilities. The Company’s leverage also could limit its ability to effect future financings or may otherwise restrict the Company’s operations and growth.

     Trade Relations and Dependence on Major Accounts. The Company’s largest account, Wal-Mart, accounted for approximately 42% of total revenue in 2002. The loss of the Wal-Mart account, or the loss of a significant number of other major accounts, or a significant reduction in the number of Shoppes and other amusement vending equipment placed at such accounts, for any reason, could have a material adverse effect on the Company’s business, financial condition and results of operations.

     Competition. The Company competes with a number of regional and local operators of skill-crane machines. Many of these competitors are engaged in aggressive expansion programs, and the Company has experienced and expects to continue to experience intense competition for new locations and acquisition candidates. There can be no assurance that the Company will be able to compete effectively with these companies in the future. The Company’s amusement vending equipment also competes with other vending machines, coin-operated amusement devices, coin counting and redemption machines and seasonal and bulk merchandise for sites within retail locations. There can be no assurance that the Company will be able to maintain its current sites in the retail locations or that it will be able to obtain sites in the future on attractive terms or at all. There also are few barriers to entry in the Company’s business, and it would be possible for well-financed vending machine manufacturers or other vending machine operators with existing relationships with Retail Accounts targeted by the Company to compete readily with the Company in certain markets.

     Dependence on Suppliers and Foreign Sourcing. Substantially all of the 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. During 2003, the Company is also transitioning its product fulfillment operations to a third party distribution center in Shanghai, China. 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. Among other things, the loss of China’s “most favored nation” status under U.S. tariff laws could result in a substantial increase in the import duty of certain products manufactured in China, which could result in substantially increased costs for certain products purchased by the Company which could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company also could be affected by labor strikes in the sea shipping, trucking and railroad industries, all of which the Company utilizes to varying degrees. Although the Company believes that alternative means of transportation would be available for its products in the event of a labor strike affecting a particular mode of transportation, such a disruption could increase the Company’s transportation costs and thereby reduce its profit margins in a particular period.

     Seasonality and Variability of Results. The financial performance of amusement vending equipment is substantially dependent on the level of retail traffic at a particular location. Accordingly, the business, financial condition and results of operations of the Company can be materially and adversely affected by factors that reduce retail traffic at such locations. These include numerous factors beyond the Company’s control such as weather, labor strikes and other disruptions of the business at Retail Accounts and local and national business and economic conditions. The Company’s results are also linked to seasonal increases in foot-traffic at Retail Accounts, and disruptions of past trends, including traditional increases during holiday seasons, could decrease the Company’s revenue. As a result, the Company’s operating results may vary significantly over time. Accordingly, period-to-period comparisons of its results of operations are not necessarily meaningful and the Company’s past results should not be relied upon as an indication of future performance.

     Changing Consumer Trends; Technological Innovations. Consumer preferences are constantly changing and difficult to predict, and consumer interest in the Company’s Shoppes or the products dispensed could decline suddenly

20

Table of Contents

or other prize-dispensing equipment or amusement devices could replace the Shoppes in consumer preference. The Company’s success will depend in part on its ability to offer new and appealing products and on the continuing appeal of its Shoppes’ skill-crane format in both existing markets and in new markets into which the Company may expand. There can be no assurance that the use of skill-crane machines and the Company’s operating results will not be adversely affected by changing consumer trends. The Company’s business also is susceptible to advances in the design and manufacture of skill-crane machines and other vending technology. The Company’s failure to anticipate or respond adequately to such technological changes could adversely affect the Company’s business and results of operations.

     Dependence on Key Employees. The Company’s success to date has been dependent in part upon the efforts and abilities of Randall J. Fagundo (its Chief Executive Officer and President), W. John Cash (its Senior Vice President, Chief Financial Officer, Treasurer and Secretary), Robert A. Kaslon (its Senior Vice President of Merchandising) and certain other key personnel. The Company’s continued success will depend upon its ability to retain a number of its current key employees and to attract, train and retain new key management and operational personnel. There can be no assurance that the Company will be able to retain its existing key employees or attract and retain qualified employees in the future. The Company does maintain “key man” insurance on Randall J. Fagundo. In addition, executives or other employees with knowledge of the Company’s operations and policies may leave the Company and establish competitive businesses. There can be no assurance that the Company would be able to effectively enforce non-compete provisions against these individuals.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

     As described above, the Company entered into an interest rate collar instrument for 50% of the principal amount of the term debt outstanding or a notional amount of $27,500,000 for a three-year period ending March 31, 2005. If the 3 month LIBOR rates were to increase (decrease) by 100 basis points, then the additional interest payment related to the floor rate would increase (decrease) by $66,000 per year.

Item 8. Financial Statements and Supplementary Data

     The financial statements and related notes thereto required by this item are listed and set forth herein beginning on page 29.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None.

21

Table of Contents

PART III

Item 10. Directors and Executive Officers of the Registrant

     The following table sets forth certain information concerning the directors and executive officers of the Company as of March 24, 2003:

     William F. Dawson, Jr. has served as Chairman of the Board since February 2002. Mr. Dawson has been employed by Wellspring Capital Management LLC, a private equity firm, since May 2001. Mr. Dawson was employed by Whitney & Co., an investment management firm, where he served as Managing Director from May 2000 to April 2001. Prior to Whitney & Co., Mr. Dawson was employed by Donaldson, Lufkin & Jenrette, Inc., an investment banking firm, from September 1991 to April 2000.

     Randall J. Fagundo, a co-founder of the Company, has served as President and Chief Executive Officer since June 1999 and served as Senior Vice President and Chief Operating Officer from January 1999 to June 1999. Mr. Fagundo served as Secretary from May 1991 to June 1999 and as a director since February 2002. Mr. Fagundo served as Vice President of Operations from May 1991 to January 1999.

     Greg S. Feldman, has served as a director since February 2002. Mr. Feldman is co-founder and has been the Managing Partner of Wellspring Capital Management LLC since its inception in January 1995.

     Pericles Navab, has served as a director since February 2002. Mr. Navab is the founder and president of Cadigan Investment Partners, Inc. (f/k/a Knightsbridge Holdings, LLC), an investment firm specializing in management buyouts. Prior to Cadigan, Mr. Navab was a Principal at Arena Capital Partners, LLC, an investment holding company, from January 1999 to December 2000. Previously, Mr. Navab was a Principal at GarMark Partners, a private investment firm, from August 1996 to December 1998.

     Bruce W. Krysiak, has served as a director since February 2002. Mr. Krysiak has served as Chairman of EDABB, Inc., an investment firm, for ten years and Executive Partner with Arena Capital Partners, LLC, since October 1999. From April 1998 to March 1999, Mr. Krysiak served as the President, Chief Operating Officer and a director of Toys “R” Us, Inc. (NYSE:TOY), a toy retailing company. From January 1997 until April 1998, Mr. Krysiak served as the President and Chief Operating Officer of Dollar General Corporation (NYSE:DG), a large retail merchandise company, and from April 1995 until May 1996 he served as Chief Operating Officer of the Circle K Corporation, a convenience store operator.

     W.  John Cash, has served as Senior Vice President since January 1999, Secretary since June 1999 and Chief Financial Officer since July 1995. Prior to joining the Company he was Vice President and Chief Financial Officer of Kasler Holding Company, a diversified construction company, from May 1991 to March 1995. From July 1984 to April 1991, Mr. Cash served as a partner of KPMG LLP.

     Robert A. Kaslon, has served as a Senior Vice President since May 1999. Mr. Kaslon served as Vice President of Operations from May 1997 to May 1999. From May 1994 to May 1997 Mr. Kaslon served as Director of Operations and Franchisee Relations.

22

Table of Contents

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 (the “1934 Act”) requires the Company’s directors and executive officers, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. On February 12, 2002, the Company filed a Form 15 to terminate the registration of its equity securities under the 1934 Act.

     To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 2002, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with.

Item 11. Executive Compensation

Compensation of Directors

     Non-employee directors of the Company do not receive annual cash compensation; however the Company does reimburse for their reasonable out-of-pocket expenses related to attendance at Board meetings. See “Certain Relationships and Related Transactions.”

Summary Compensation Table

     The following table shows for the fiscal years ended December 31, 2002, 2001 and 2000, compensation awarded or paid to, or earned by, the Company’s Chief Executive Officer and its two other most highly compensated executive officers for the year ended December 31, 2002 (the “Named Executive Officers”):

23

Table of Contents

Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values

     The following table shows for the fiscal year ended December 31, 2002 certain information regarding options exercised and held at year-end by the Named Executive Officers:

Employment Agreement

     The Company entered into an employment agreement with its Chief Executive Officer and President, Randall J. Fagundo (the “Executive”) as of December 1, 2000. The employment agreement was amended on July 31, 2001 and further amended and restated on September 30, 2002 (the “Employment Agreement”). The term of the Employment Agreement runs through December 31, 2004 and is subject to automatic extension for successive one-year periods unless either party provides 90 days written notice of such party’s election not to extend the term. Under the Employment Agreement, Mr. Fagundo’s annual base salary for 2002 was $275,000. Mr. Fagundo’s annual base salary increased to $300,000 on January 1, 2003. The Employment Agreement further provides that Mr. Fagundo’s salary will be increased to $325,000 on January 1, 2004. Upon the achievement of certain performance goals as established by the Company’s Board of Directors, the Executive is also entitled to receive at the end of each calendar year an annual bonus in an amount equal to up to 100% of the base salary paid to him during such calendar year. In connection with the Employment Agreement, Mr. Fagundo received a stock option for 138,900 shares of the common stock of ACMI Holdings, Inc., the parent of the Company, pursuant to the ACMI Holdings, Inc. 2002 Stock Option Plan. This option has an exercise price of $8.50 per share, which was equal to the market price as of the date of grant. The option is subject to vesting over a five-year period and further subject to vesting upon the achievement of certain milestones. The Employment Agreement also provides that the Executive will be entitled to (i) participate in any employee benefits plans the Company makes available to its other employees in executive positions and (ii) use of an automobile provided by the Company and that the Company shall use its best efforts to cause the Executive to be elected to the board during the term of the Employment Agreement. The Employment Agreement also provides that the Company may terminate the Executive’s employment at any time for cause. If the Executive is terminated for cause or the Executive voluntarily terminates the Employment Agreement, the Company is obligated to pay (i) the Executive’s earned salary and (ii) any not yet paid accrued obligations under the Company’s applicable employee benefit plans and programs. If the Executive is terminated without cause, the Company is obligated to pay (i) the Executive’s earned salary; (ii) a cash amount equal to the Executive’s then-current annual base salary over the non-compete period (as defined therein); and (iii) any not yet paid accrued obligations under the Company’s applicable employee benefit plans and programs. The Employment Agreement also provides that if, in anticipation of, or within one year after, a change of control of the Company, the Executive is terminated without cause or the Executive terminates the Employment Agreement for good reason, then the Executive will be entitled to receive (i) the Executive’s earned salary; (ii) any not yet paid accrued obligations under the Company’s applicable employee benefit plans and programs and (iii) a cash amount equal to three times the then-current annual base salary, plus three times the greater of (x) the Executive’s actual annual discretionary bonus earned in the calendar year in which the termination occurs, (y) the Executive’s actual annual discretionary bonus earned in the calendar year immediately prior to the year in which the termination occurs, or (z) the average of the Executive’s annual discretionary bonus earned for the three calendar years immediately prior to the year in which the termination occurs. The amount of any payments upon a change of control is subject to reduction if such payments would constitute “excess parachute payments” under applicable federal tax laws. The Employment Agreement also contains confidentiality and noncompete provisions which prohibit the Executive from soliciting employees of the Company, engaging in business

24

Table of Contents

similar to the Company’s or disclosing confidential information without the specific authorization of the Company’s Board of Directors after the termination of the Executive’s employment with the Company.

Compensation Committee Interlocks and Insider Participation

     During the Company’s fiscal year ended December 31, 2002, the Company’s Compensation Committee consisted of Messrs. Dawson, Feldman and Krysiak. No member of the Compensation Committee of the Company serves as a member of the Board of Directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company’s Board of Directors or Compensation Committee.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The following table sets forth certain information regarding the ownership of the Company’s common stock as of March 24, 2003 by: (i) each director; (ii) each of the Named Executive Officers; (iii) all Named Executive Officers and directors of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more than five percent of its common stock. Unless otherwise indicated, the address for each of the persons listed in the table is c/o American Coin Merchandising, Inc. 397 S. Taylor Avenue, Louisville, Colorado 80027.

     Pursuant to the terms of the Guarantee and Collateral Agreement, dated as of February 11, 2002, made by the Company and ACMI Holdings, Inc., in favor of Madison Capital Funding LLC, as agent for the lenders under the Company’s senior secured credit facility, ACMI Holdings, Inc. has pledged all of the common stock of the Company as collateral to secure the Company’s obligations under the senior secured credit facility. Accordingly, upon the occurrence of an even of default under the senior secured credit facility, ACMI Holdings, Inc.’s ownership in the Company’s common stock would transfer to Madison Capital Funding LLC as agent for the lenders resulting in a change of control of the Company.

Item 13. Certain Relationships and Related Transactions

     In connection with the acquisition by ACMI Holdings, Inc., the Company entered into a Services and Fee Agreement with Wellspring Capital Management LLC (“Wellspring”) and Cadigan Investment Partners, Inc. (f/k/a Knightsbridge Holdings, LLC) (“Cadigan”) on February 11, 2002 (the “Fee Agreement”). The following discussion of the Fee Agreement is qualified in its entirety by reference to the actual Fee Agreement, which is incorporated by reference. Pursuant to the terms of the Fee Agreement, the Company will pay an annual consulting fee of $300,000 in

25

Table of Contents

arrears in equal monthly installments and reimburse Wellspring and Cadigan for all reasonable out-of-pocket costs and expenses incurred in connection with the performance of their consulting services. The consulting fee is allocated 66 2/3% to Wellspring and 33 1/3% to Cadigan. The Fee Agreement further provides that the Company will not pay any portion of the consulting fee to the extent that such payment conflicts with the Company’s covenants pursuant to its senior secured credit facility or senior subordinated notes. However, such unpaid fees will continue to accrue, without interest, and the Company will pay such fees if and when such payment is no longer prohibited under the senior secured credit facility or senior subordinated notes. Pursuant to the terms of the Fee Agreement, the Company has paid to date closing fees of $1,350,000 and $650,000 to Wellspring and Cadigan, respectively. The Fee Agreement further provides that the Company shall pay all fees and expenses payable to the lenders pursuant to the terms of the senior secured credit facility and senior subordinated notes. Any other consulting or similar fees that may be payable under the Fee Agreement are allocated 65% to Wellspring and 35% to Cadigan. Cadigan’s entitlement to the fees set forth in the Fee Agreement is contingent upon its continuous ownership of certain warrants to purchase shares of ACMI Holdings, Inc. and its maintenance of a representative on the Board of Directors of ACMI Holdings, Inc. Under the terms of the Fee Agreement, the Company agrees to indemnify Wellspring and Cadigan and their respective representatives in connection with any liabilities or judgments with respect to the Fee Agreement.

     William F. Dawson, Jr., a director of the Company following the Merger, is a partner at Wellspring. Greg S. Feldman, a director of the Company following the Merger, is the managing partner at Wellspring. Wellspring holds a majority interest in ACMI Holdings, of which the Company is a wholly owned subsidiary.

     Pericles Navab, a director of the Company following the Merger, holds an interest in and is the President of Cadigan. Cadigan holds an interest in ACMI Holdings, which is controlled by Wellspring Capital Management LLC.

Other Transactions

     The Company has also entered into an employment agreement with Randall J. Fagundo. A summary of the terms of the Company’s employment agreement with Mr. Fagundo is contained in Item 11. Executive Compensation — Employment is incorporated herein by reference.

     Messrs. Fagundo and Cash of the Company are members of a limited liability company, which has agreed to lease to the Company a building located in Louisville, Colorado. The terms of the agreement provide for a ten year lease term, commencing March 1, 2003, at annual monthly rental rates ranging from $25,353 for the first year to $33,076 for the tenth year, together with additional payments in respect of the tenant’s proportionate share of the maintenance and insurance costs and property tax assessments for the leased premises. The Company believes that the terms of this lease is comparable to those that would be entered into between unrelated parties on an arms’ length basis.

Item 14. Controls and Procedures

     Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures within 90 days of filing of this annual report on Form 10-K, and, based on their evaluation, the Company’s principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in the Company’s internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.

     Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

26

Table of Contents

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)

Exhibits

27

Table of Contents

(b)		Reports on Form 8-K.
		None.

28

Table of Contents

AMERICAN COIN MERCHANDISING, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Years Ended December 31, 2002

     All schedules are omitted because of the absence of conditions under which they are required or because the required information is provided in the financial statements or notes thereto.

29

Table of Contents

Independent Auditors’ Report

The Board of Directors and Stockholder
American Coin Merchandising, Inc.:

     We have audited the accompanying consolidated balance sheets of American Coin Merchandising, Inc. and subsidiaries (Company) as of December 31, 2002 (Successor) and 2001 (Predecessor), and the related consolidated statements of operations, stockholders’ equity, and cash flows for the eleven months ended December 31, 2002 (Successor) and the one month ended January 31, 2002 and the years ended December 31, 2001 and 2000 (Predecessor). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Coin Merchandising, Inc. and subsidiaries as of December 31, 2002 (Successor) and 2001 (Predecessor), and the results of their operations and their cash flows for the eleven months ended December 31, 2002 (Successor) and the one month ended January 31, 2002 and the years ended December 31, 2001 and 2000 (Predecessor), in conformity with accounting principles generally accepted in the United States of America.

     As described in note 4, American Coin Merchandising, Inc. and subsidiaries adopted the provisions of Statement of Financial Accounting Standards 142, Goodwill and Other Intangible Assets, effective on January 1, 2002.

KPMG LLP

Boulder, Colorado
February 14, 2003

F-1

Table of Contents

AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)