AMERICAN COIN MERCHANDISING INC - 10-Q Quarterly Report

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

397 South Taylor Avenue
Louisville, Colorado 80027
(Address of principal executive offices)
(Zip Code)

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 o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

As of November 10, 2003, the registrant had 1,000 shares of its $0.01 par value common stock outstanding.


		Page

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
	Condensed Consolidated Balance Sheets-September 30, 2003 and December 31, 2002		3
	Condensed Consolidated Statements of Operations-Three Months Ended September 30, 2003 (successor), Three Months Ended September 30, 2002 (successor), Nine Months Ended September 30, 2003 (successor), Eight Months Ended September 30, 2002 (successor), One Month Ended January 31, 2002 (predecessor)		4
	Condensed Consolidated Statements of Cash Flows-Nine Months Ended September 30, 2003 (successor), Eight Months Ended September 30, 2002 (successor), One Month Ended January 31, 2002 (predecessor)		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			23
Item 4. Controls and Procedures			23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K			24

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


					September 30,			December 31,
					2003			2002

				ASSETS
Current assets:
	Cash and cash equivalents				$	4,515		$	4,178
	Trade accounts and other receivables, net					2,062			1,069
	Inventories, net					20,937			11,512
	Prepaid expenses and other assets					5,143			3,035

		Total current assets				32,657			19,794

Property and equipment, at cost:
	Vending machines					64,852			40,738
	Vehicles					4,287			4,622
	Office equipment, furniture and fixtures					5,769			4,485

						74,908			49,845
	Less accumulated depreciation					(15,780	)		(7,870	)

		Property and equipment, net				59,128			41,975
Placement fees, net of accumulated amortization of $4,544 in 2003 and $2,599 in 2002						2,049			2,080
Costs in excess of assets acquired and other intangible assets, net of accumulated amortization of $356 in 2003 and $221 in 2002						83,248			65,693
Other assets, net of accumulated amortization of $2,634 in 2003 and $1,409 in 2002						8,848			6,831

		Total assets			$	185,930		$	136,373

			LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt				$	5,804		$	4,718
	Accounts payable					14,228			3,656
	Accrued commissions					3,345			3,392
	Other accrued expenses					3,026			1,961

		Total current liabilities				26,403			13,727
Long-term debt, net of current portion						104,741			79,593
Other liabilities						880			789
Fair value of interest rate collar agreement						1,114			1,248

		Total liabilities				133,138			95,357
Company obligated mandatorily redeemable preferred securities of subsidiary trust holding junior subordinated debentures						13,012			12,974
Stockholders’ equity:
	Common stock, $.01 par value; 1,000 shares authorized, issued and outstanding					—			—
	Additional paid-in capital					41,129			28,629
	Accumulated deficit					(1,349	)		(587	)

		Total stockholders’ equity				39,780			28,042

		Total liabilities and stockholders’ equity			$	185,930		$	136,373

AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)


			Successor												Predecessor

			Three			Three			Nine			Eight			One
			Months			Months			Months			Months			Month
			Ended			Ended			Ended			Ended			Ended
			September 30,			September 30,			September 30,			September 30,			January 31,
			2003			2002			2003			2002			2002

Revenue:
	Vending		$	55,293		$	35,207		$	140,852		$	92,792		$	10,880
	Franchise and other			1,239			573			3,141			1,521			199

		Total revenue		56,532			35,780			143,993			94,313			11,079

Cost of revenue:
	Vending, excluding related depreciation and amortization			37,728			23,154			97,740			61,447			7,650
	Depreciation and amortization			3,444			3,189			10,012			8,425			1,013

		Total cost of vending		41,172			26,343			107,752			69,872			8,663
	Franchise and other			910			169			2,041			682			110

		Total cost of revenue		42,082			26,512			109,793			70,554			8,773

		Gross profit		14,450			9,268			34,200			23,759			2,306
General and administrative expenses				9,372			5,854			24,390			15,844			3,617
Depreciation and amortization				291			246			781			699			96
Restructuring charge				—			—			320			—			—
Loss on debt refinancing				—			—			—			—			1,727

		Operating earnings (loss)		4,787			3,168			8,709			7,216			(3,134	)
Interest expense, net				3,748			2,897			10,064			7,684			390
Change in fair value of interest rate collar				(177	)		728			(133	)		1,147			—

		Earnings (loss) before income taxes		1,216			(457	)		(1,222	)		(1,615	)		(3,524	)
Income tax (expense) benefit				(466	)		172			460			617			1,339

		Net earnings (loss)	$	750		$	(285	)	$	(762	)	$	(998	)	$	(2,185	)

		Basic and diluted loss per share of common stock		N/A			N/A			N/A			N/A		$	(0.33	)
		Basic and diluted weighted average common shares		N/A			N/A			N/A			N/A			6,545

AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)


					Successor						Predecessor

					Nine			Eight			One
					Months			Months			Month
					Ended			Ended			Ended
					September 30,			September 30,			January 31,
					2003			2002			2002

Cash flows from operating activities:
	Net loss				$	(762	)	$	(998	)	$	(2,185	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities- Depreciation and amortization					11,389			10,151			1,146
		Change in fair value of interest rate collar, net of cash paid				(133	)		1,147			—
		Changes in operating assets and liabilities:
				Trade accounts and other receivables		(994	)		512			96
				Inventories		(2,690	)		(2,608	)		1,233
				Prepaid expenses and other assets		(4,047	)		(767	)		(5,468	)
				Accounts payable, accrued expenses and other liabilities		7,934			(695	)		(1,260	)

			Net cash provided by (used in) operating activities			10,697			6,742			(6,438	)

Cash flows from investing activities:
	Purchases of property and equipment, net					(12,128	)		(6,491	)		(436	)
	Acquisitions					(35,113	)		(1,463	)		—
	Placement fees					(1,853	)		(1,662	)		(300	)

			Net cash used in investing activities			(49,094	)		(9,616	)		(736	)

Cash flows from financing activities:
	Net borrowings on current credit facility					26,663			1,620			82,703
	Net payments on previous credit facility					—			—			(44,500	)
	Principal payments on long-term debt					(429	)		(132	)		(16	)
	Purchase of common stock net of offering costs					—			—			(31,825	)
	Equity contribution from parent					12,500			—			—

			Net cash provided by financing activities			38,734			1,488			6,362

			Net change in cash and cash equivalents			337			(1,386	)		(812	)
Cash and cash equivalents at beginning of period						4,178			3,254			4,066

Cash and cash equivalents at end of period					$	4,515		$	1,868		$	3,254

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

American Coin Merchandising, Inc., d/b/a Sugarloaf Creations, Inc., Folz Vending, Inc. and American Coin Merchandising Trust I (the “Company”) and its franchisees own and operate approximately 68,000 coin-operated amusement vending machines. Approximately 18,000 of these machines dispense plush toys, watches, jewelry, novelties, and other items, with the majority of the other machines dispensing bulk gum, candy and novelty items. The Company also operates kiddie rides, video games and other amusement equipment. The Company’s amusement vending machines are placed in supermarkets, mass merchandisers, bowling centers, truck stops, bingo halls, bars, restaurants, warehouse clubs and similar locations. At September 30, 2003, the Company had 37 field offices with operations in 49 states and Puerto Rico. The Company also sells products and amusement vending equipment to franchisees and third parties. At September 30, 2003, there were seven franchisees operating in 10 territories. All significant intercompany balances and transactions have been eliminated in consolidation.

On February 11, 2002, the Company was acquired by ACMI Holdings, Inc., a newly formed corporation organized by two investment firms, Wellspring Capital Management LLC and Cadigan Investment Partners, Inc. (f/k/a Knightsbridge Holdings, LLC) for approximately $110.7 million. Of this amount, approximately $28 million was paid in cash. The Company has recorded approximately $63.1 million of costs in excess of assets acquired as a result of the ACMI Holdings, Inc. acquisition, that was accounted for using the purchase method of accounting. The transaction was approved at a stockholders’ meeting held on February 5, 2002. The Company’s common stock is no longer publicly traded. The Company’s mandatorily redeemable preferred securities remain outstanding and continue to trade on the American Stock Exchange. Periods prior to the acquisition (deemed to be February 1, 2002) are denoted as predecessor periods, with those subsequent to the acquisition denoted as successor periods.

The accompanying condensed consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Certain amounts for prior periods have been reclassified to conform to the September 30, 2003 presentation. These condensed consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2002.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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, valuation of long-lived and intangible assets, costs in excess of assets acquired, and placement fees and other 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 could differ significantly from those estimates.

In the opinion of the Company, the accompanying condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals and adjustments) required to present fairly the Company’s financial position at September 30, 2003 and December 31, 2002, and the results of its operations and cash flows for the three months ended September 30, 2003, the three months ended September 30, 2002, the nine months ended September 30, 2003, the eight months ended September 30, 2002 and the one month ended January 31, 2002.

The operating results for the periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

The components of the purchase price and its preliminary allocation to the assets and liabilities are as follows:


Sources of funding:
	Borrowings under credit facility				$	3,289
	Issuance of senior subordinated notes					6,500
	Equity contribution					12,500

				Total purchase price		22,289
	Allocation of purchase price:
		Assets acquired Inventories				6,147
			Prepaid expenses and other assets			319
			Property and equipment			9,211
			Other assets			187
			Customer relationship intangible asset			5,346
		Liabilities assumed Accounts payable				(2,745	)
			Accrued commissions			(838	)
			Other accrued expenses			(1,181	)

Costs in excess of assets acquired					$	5,843

The allocation of the purchase price was based on preliminary estimates of the fair value of the assets acquired. During the most recent quarter, the Company completed its valuation of costs in excess of assets acquired and other untangible assets and has allocated $5.3 million of purchase price to customer relationships in accordance with Emerging Issues Task Force Issue 02-17, “Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination.” The Company will amortize the customer relationship intangible asset over an eight-year period.

The following pro forma information is presented for illustrative purposes only and is not necessarily indicative of future operating results. Such information is subject to the assumptions set forth in the notes to the pro forma financial statements.

AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(Amounts in thousands)


				Consolidated						Elimination
				American Coin						of			Adjustments
				Merchandising,			Historical			Operations			for the
				Inc.,			Combined			Not			Acquisition			Pro
				As Reported			Folz			Acquired			of Folz			Forma

				(a)			(b)			(c)
Total revenue				$	143,993		$	14,527		$	(1,153	)	$	—		$	157,367

Cost of revenue:
		Vending			97,740			11,634			(958	)		—			108,416
		Depreciation			10,012			541			(36	)		(133	) (d)		10,384

			Total cost of vending		107,752			12,175			(994	)		(133	)		118,800
		Franchise and other			2,041			—			—			—			2,041

			Total cost of revenue		109,793			12,175			(994	)		(133	)		120,841

Gross profit					34,200			2,352			(159	)		133			36,526

General and administrative					24,390			2,254			(234	)		—			26,410
Depreciation and amortization					781			103			—			475	(d)		1,359
Restructuring					320			—			—			—			320

			Operating earnings (loss)		8,709			(5	)		75			(342	)		8,437
Interest expense					10,064			136			—			267	(e)		10,467
Change in fair value of collar					(133	)		—			—			—			(133	)

	(Loss) earnings before income tax				(1,222	)		(141	)		75			(609	)		(1,897	)
Income tax (benefit) expense					460			(10	)		—			271	(f)		721

Net earnings (loss)				$	(762	)	$	(151	)	$	75		$	(338	)	$	(1,176	)

AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(Amounts in thousands)


								Elimination
			Consolidated					of			Adjustments
			American Coin			Historical		Operations			for the
			Merchandising,			Combined		Not			Acquisition			Pro
			Inc.			Folz		Acquired			of Folz			Forma

			(a)					(b)
Total revenue			$	105,392		$	41,732	$	(3,053	)	$	—		$	144,071

Cost of revenue:
	Vending			69,097			31,951		(2,366	)		—			98,682
	Depreciation			9,438			1,615		(128	)		(530	) (c)		10,395

		Total cost of vending		78,535			33,566		(2,494	)		(530	)		109,077
	Franchise and other			792			—		—			—			792

		Total cost of revenue		79,327			33,566		(2,494	)		(530	)		109,869

Gross profit				26,065			8,166		(559	)		530			34,202

General and administrative				19,461			5,894		(334	)		—			25,021
Depreciation and amortization				795			305		—			394	(c)		1,494
Loss on debt refinancing				1,727			—		—			—			1,727

		Operating earnings (loss)		4,082			1,967		(225	)		136			5,960
Interest expense				8,074			621		(4	)		418	(d)		9,109
Change in fair value of collar				1,147			—		—			—			1,147

(Loss) earnings before income tax				(5,139	)		1,346		(221	)		(282	)		(4,296	)
Income tax benefit (expense)				1,956			—		—			(323	) (e)		1,633

Net (loss) earnings			$	(3,183	)	$	1,346	$	(221	)	$	(605	)	$	(2,663	)

The Company also made several smaller acquisitions during the second quarter of 2003. On May 30, 2003, the Company purchased certain amusement vending assets from, and assumed certain liabilities of, GamePlan, Inc. and Pinball Wizard, Inc. (collectively “GamePlan”) for $8.6 million. On May 30, 2003, the Company acquired certain amusement vending assets from a former franchisee for $709,000. On June 19, 2003, the Company purchased certain assets consisting of kiddie rides from another operator for $1.4 million. The Company utilized its credit facility to fund all of these acquisitions. Based on the preliminary estimates of the fair value of the assets acquired in these acquisitions, the Company has allocated $6.5 million of the $10.7 million total acquisition cost to costs in excess of assets acquired and other intangible assets.

In June 2003, the Company recorded a restructuring charge associated with the termination of certain administrative and sales employees that resulted from reorganizing certain functions after the acquisition of Folz. The restructuring accrual is included in other accrued expenses in the accompanying condensed consolidated balance sheets and follows the guidance of Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its plans. No stock-based employee compensation cost has been recognized, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for the Company’s stock-based compensation plans been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net (loss) earnings and basic and diluted (loss) earnings per share would have been increased or reduced to the pro forma amounts indicated below (amounts in thousands, except per share data):


		Successor											Predecessor

		Three		Three			Nine			Eight			One
		Months		Months			Months			Months			Month
		Ended		Ended			Ended			Ended			Ended
		September 30,		September 30,			September 30,			September 30,			January 31,
		2003		2002			2003			2002			2002

Net (loss) earnings
	As reported	$	750	$	(285	)	$	(762	)	$	(998	)	$	(2,185	)
	Pro forma	$	724	$	(313	)	$	(839	)	$	1,081	)	$	(2,400	)
Basic and diluted loss per share
	As reported		N/A		N/A			N/A			N/A		$	(0.33	)
	Pro forma		N/A		N/A			N/A			N/A		$	(0.37	)

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

The Company periodically reviews and evaluates its cost in excess of assets acquired and other intangible assets for potential impairment. Effective January 1, 2002, the beginning of the Company’s 2002 fiscal year, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” under which cost in excess of assets acquired is no longer amortized but instead is assessed for impairment at least annually. In accordance with SFAS No. 142, the Company evaluated its costs in excess of assets acquired and other intangible assets for possible impairment during 2003 and concluded that there were no indications of impairment.

The Company amended and restated its senior secured credit facility on April 15, 2003, in conjunction with the acquisition of Folz. The amended senior secured credit facility is comprised of a $12.0 million revolving credit facility and provides for up to $70.0 million of term debt. The $70.0 million term debt facility is comprised of a $26.3 million term loan A, a $37.2 million term loan B, a $2.7 million term loan C and a $3.8 million term loan D. As of September 30, 2003, there was $68.7 million of total term loans outstanding. As of September 30, 2003, there was $8.7 million outstanding on the revolver, $1.2 million utilized by letters of credit, and $2.1 million available under the revolving credit facility. The revolving credit facility expires on March 31, 2007. Under the term loan facilities, the Company is required to make quarterly principal installments that increase in amount until the March 31, 2008 termination of the facilities. 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 the credit facility at September 30, 2003 was 6.0%.

In connection with the Folz acquisition, the Company also issued an additional $6.5 million of senior subordinated notes due in 2009. Interest on these notes is payable on a quarterly basis at the rate of 17% per annum; provided however, the minimum cash interest payable on these notes is 13% with the balance of interest payable in the form of additional payment in kind notes. As of September 30, 2003, total senior subordinated notes outstanding were $33.2 million including $1.7 million of payment in kind notes the Company issued in lieu of cash interest on these notes.

In September 1998, American Coin Merchandising Trust I (the “Trust”), the Company’s wholly owned subsidiary trust, completed a public offering of $17 million of Ascending Rate (10.5% at December 31, 1998 increasing to 12.0% at September 16, 2005) Cumulative Trust Preferred Securities (the “Trust Preferred Securities”). The Company recognizes periodic interest using the effective interest method over the outstanding term of the debt. The sole assets of the Trust are American Coin Merchandising, Inc. Ascending Rate Junior Subordinated Debentures (the “Subordinated Debentures”) due September 15, 2028. The obligations of the Trust related to the Trust Preferred Securities are fully and unconditionally guaranteed by the Company. Distribution on the Trust Preferred Securities are payable quarterly by the Trust. The Trust Securities are subject to mandatory redemption upon the repayment of the Subordinated Debentures at their stated maturity at $10 per Trust Preferred Security.

The Company may cause the Trust to defer the payment of distributions for successive periods up to eight consecutive quarters. During such periods, accrued distributions on the Trust Preferred Securities will compound quarterly and the Company may not declare or pay distributions on its common stock or debt securities that rank equal or junior to the Trust Preferred Securities.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” (“SFAS No. 150”). This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective at the beginning of the first interim period beginning after June 15, 2003. For financial instruments created before the issuance date, transition shall be achieved by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value. In November 2003, the FASB deferred certain provisions of SFAS No. 150 through FASB Position (FSP) 150-3. The Company’s mandatorily redeemable preferred securities fall under the guidance of FSP 150-3 and consequently the Company has not adopted the proposed classification of measurement requirements of SFAS No. 150. The mandatorily redeemable preferred securities are currently being accreted to their $17 million stated amount.

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

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

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” 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 does not qualify for hedge accounting treatment under SFAS No. 133. Accordingly the Company records this instrument at fair value and recognizes realized and unrealized gains and losses in other expense in the condensed consolidated statements of operations. The Company paid $183,000 during the third quarter and $461,000 for the nine months ended September 30, 2003 since LIBOR was below the floor rate under the interest rate collar. This amount is included in interest expense in the condensed consolidated statements of operations. The fair value of the interest rate collar is obtained from bank quotes. These values represent the estimated amount the Company would receive or pay to terminate the agreement taking into consideration current interest rates. The fair value at September 30, 2003 is a liability of $1.1 million. The fair value recorded at December 31, 2002 was a liability of $1.2 million. Accordingly, the change in fair value of this non-hedging derivative instrument is included as a net expense reduction of $133,000 for the nine months ending September 30, 2003. The Company does not speculate using derivative instruments.

This Quarterly Report contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including, without limitation, the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements.” Forward-looking statements may include the words “believes,” “expects,” “plans,” “intends,” “anticipates,” “continues” or other similar expressions. These statements are based on the Company’s current expectations of future events and are subject to a number of risks and uncertainties that may cause the Company’s actual results to differ materially from those described in the forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. These risks and uncertainties are disclosed from time to time in the Company’s filings with the Securities and Exchange Commission and in oral statements made by or with the approval of authorized personnel. The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments.

In order to provide a meaningful basis of comparing the Company’s operating results for the nine months ended September 30, 2003 with the comparable period from the prior year, the operating results for the eight months ended September 30, 2002 have been combined with the operating results for the one month ended January 31, 2002. The 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. The combined Company results for the three-month period ended September 30, 2003 are comparable to the three-month period ended September 30, 2002.

The Company and its franchisees own and operate coin-operated amusement vending equipment. The majority of the Company’s revenues are derived from skill-crane machines (“Shoppes”) that dispense plush toys, watches, jewelry, novelties and other items. Subsequent to the acquisition of Folz as defined below, the Company now operates a significant number of machines that dispense bulk gum, candy and novelty items. The Company also operates kiddie rides, video games and other amusement equipment. A large portion of the Company’s revenue and gross profit is derived from Company-owned Shoppes. The Company’s revenue and gross profit in a particular period is directly related to the number of Shoppes and bulk vending equipment in operation during the period. Management believes that the Company’s business is seasonal, with average revenue per machine per week greater during the Easter and Christmas periods. Vending revenue represents cash receipts from customers using vending machines and is recognized when collected. The cost of vending revenue is comprised of the cost of vended products, location commissions, depreciation, and direct service costs.

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.

On April 15, 2003, the Company, through a wholly owned subsidiary, completed the acquisition of substantially all of the assets of Folz Vending Co., Inc. and its wholly owned subsidiary Folz Novelty Co., Inc. (collectively “Folz”) for $22.3 million. The acquisition was funded through additional borrowings under the Company’s amended and restated credit facility, the issuance of $6.5 million of additional senior subordinated notes and a $12.5 million equity contribution received from the Company’s parent, ACMI Holdings, Inc. In addition to the Folz acquisition, the Company made a number of other smaller asset acquisitions during the second quarter of 2003 in the aggregate amount of $10.7 million, all funded through the Company’s credit facility.

Franchise and other revenue represent the Company’s percentage of gross vending revenue generated by Shoppes owned and operated by franchisees. Franchise and other revenue also includes product to vend in the Shoppes and amusement vending equipment sold to franchisees and non-franchisees, and sales of amusement vending equipment to third parties.

The following table is presented to complement the analysis below (amounts in thousands):


			Three Months Ended September 30,												Change

						% of						% of
			2003			Revenue			2002			Revenue			$			%

Revenue:
	Vending		$	55,293			97.8	%	$	35,207			98.4	%	$	20,086			57.1	%
	Franchise and other			1,239			2.2	%		573			1.6	%		666			116.2	%

		Total revenue		56,532			100.0	%		35,780			100.0	%		20,752			58.0	%

Cost of revenue:
	Vending, excluding depreciation and amortization			37,728			66.7	%		23,154			64.7	%		14,574			62.9	%
	Depreciation and amortization			3,444			6.1	%		3,189			8.9	%		255			8.0	%

		Total cost of vending		41,172			72.8	%		26,343			73.6	%		14,829			56.3	%
	Franchise and other			910			1.6	%		169			0.5	%		741			438.5	%

		Total cost of revenue		42,082			74.4	%		26,512			74.1	%		15,570			58.7	%

		Gross profit		14,450			25.6	%		9,268			25.9	%		5,182			55.9	%
General and administrative expenses				9,372			16.6	%		5,854			16.4	%		3,518			60.1	%
Depreciation and amortization				291			0.5	%		246			0.7	%		45			18.3	%

		Operating earnings		4,787			8.5	%		3,168			8.9	%		1,619			51.1	%
Interest expense, net				3,748			6.6	%		2,897			8.1	%		851			29.4	%
Change in fair value of interest rate collar				(177	)		(0.3	)%		728			2.0	%		(905	)		(124.3	)%

	Earnings (loss) before income taxes			1,216			2.2	%		(457	)		(1.3	)%		1,673			(366.1	)%
Income tax (expense) benefit				(466	)		(0.8	)%		172			0.5	%		(638	)		(370.9	)%

Net earnings (loss)			$	750			1.3	%	$	(285	)		(0.8	)%	$	1,035			363.2	%

Vending revenue			$	55,293					$	35,207					$	20,086			57.1	%
Cost of goods sold excluding depreciation and amortization				37,728						23,154						14,574			62.9	%

Gross profit-vending				17,565			31.8	%		12,053			34.2	%		5,512			45.7	%
Depreciation and amortization				3,444						3,189						255			8.0	%

Gross margin-vending				14,121			25.5	%		8,864			25.2	%		5,257			59.3	%
Franchise and other revenue			$	1,239					$	573					$	666			116.2	%
Cost of goods sold				910						169						741			438.5	%

Gross profit-franchise and other				329			26.6	%		404			70.5	%		(75	)		(18.6	)%

Total revenue for the three months ended September 30, 2003 increased 58.0% to $56.5 million from $35.8 million for the same period in 2002.

Vending revenue increased $20.1 million or 57.1% for the three months ended September 30, 2003 to $55.3 million from $35.2 million for the comparable period in 2002, primarily as a result of an increase in the number of coin operated amusement vending machines in place. Total amusement vending equipment in place increased from approximately 29,800 machines at September 30, 2002 to approximately 68,000 machines at September 30, 2003, including an increase in Shoppes from 14,400 to 17,800. These increases are the result of the Folz, GamePlan and other asset acquisitions completed during the quarter ended June 30, 2003 and internal growth.

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

Franchise and other revenue increased $666,000 or 116.2% for the third quarter of 2003 to $1.2 million from $573,000 for the same period in 2002, due primarily to increased sales of amusement vending equipment to third parties. The Company acquired certain skill-crane and kiddie ride manufacturing assets during the third quarter of 2002. The Company anticipates franchise and other revenue will vary in the future based upon demand and production availability.

The cost of vending operations (including depreciation and amortization) for the three months ended September 30, 2003 increased $14.8 million or 56.3% to $41.2 million from $26.3 million for the comparable period in 2002 primarily due to the Company’s acquisition activities. The vending operations’ contribution to gross profit for the third quarter of 2003 increased $5.3 million to $14.1 million compared to the comparable period in 2002. The vending gross profit achieved during the third quarter of 2003 was 25.5% of vending revenue, which represents a 0.3 percentage point increase over the gross profit percentage achieved during the third quarter of 2002. Vending gross margin before depreciation and amortization decreased 2.4 percentage points to 31.8% for the quarter ended September 30, 2003 compared to the same period in the prior year. The decrease in vending gross margin percentage is due primarily from the change in the Company’s sales mix. The Company now has a higher percentage of lower margin bulk vending revenues after the Folz acquisition.

Substantially all the Company’s plush toys and other products dispensed from the Shoppes are produced by foreign manufacturers. A majority is purchased directly by the Company from manufacturers in China. The Company purchases its other such products from third-party vendors. 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. While the Company believes that there are a sufficient number of alternative sources of supply, no assurance can be given that in the event of any such disruption, alternative sources will be available, or that the Company will be able to obtain favorable pricing from such sources.

For the third quarter of 2003, gross profit on franchise and other revenue decreased to $329,000 as compared to $404,000 for the third quarter of 2002. The decrease in gross profit dollars results from the sale of amusement vending equipment to third parties during 2003. The Company had no third-party equipment sales during the third quarter of 2002.

General and administrative expenses (including depreciation and amortization) increased $3.6 million to $9.7 million for the three months ended September 30, 2003. General and administrative expenses were 17.1% of revenue in the third quarter of 2003 and 2002. The increase in general and administrative expenses for the third quarter of 2003 as compared to 2002 was primarily due to the addition of personnel to support the acquired operations, additional personnel in the sales and marketing and logistics and support areas to better manage the Company’s current and expected future operations and travel and related costs incurred to integrate acquired operations.

Operating earnings for the three months ended September 30, 2003 were $4.8 million, or 8.5% of total revenue, as compared to operating earnings of $3.2 million or 8.9% of total revenue for the comparable period in 2002.

Interest expense for the third quarter of 2003 increased $851,000 to $3.7 million as compared to the same period in 2002. The Company’s interest expense is directly related to a higher level of borrowings after the ACMI Holdings, Inc. transaction in February of 2002, the Folz and GamePlan acquisitions during the second quarter of 2003 and changes in the underlying interest rates.

Net earnings for the third quarter of 2003 were $750,000 compared to a net loss of $285,000 for the comparable period in 2002.

The following table is presented to complement the analysis below (amounts in thousands):


			Nine Months Ended September 30,												Change

						% of						% of
			2003			Revenue			2002			Revenue			$			%

Revenue:
	Vending		$	140,852			97.8	%	$	103,672			98.4	%	$	37,180			35.9	%
	Franchise and other			3,141			2.2	%		1,720			1.6	%		1,421			82.8	%

		Total revenue		143,993			100.0	%		105,392			100.0	%		38,601			36.6	%

Cost of revenue:
	Vending, excluding depreciation and amortization			97,740			67.9	%		69,097			65.6	%		28,643			41.5	%
	Depreciation and amortization			10,012			7.0	%		9,438			9.0	%		574			6.1	%

		Total cost of vending		107,752			74.8	%		78,535			74.5	%		29,217			37.2	%
	Franchise and other			2,041			1.4	%		792			0.8	%		1,249			157.7	%

		Total cost of revenue		109,793			76.2	%		79,327			75.3	%		30,466			38.4	%

		Gross profit		34,200			23.8	%		26,065			24.7	%		8,135			31.2	%
General and administrative expenses				24,390			16.9	%		19,461			18.5	%		4,929			25.3	%
Depreciation and amortization				781			0.5	%		795			0.8	%		(14	)		(1.8	)%
Restructuring charge				320			0.2	%		—			0.0	%		320			0.0	%
Loss on debt refinancing				—			0.0	%		1,727			1.6	%		(1,727	)		(100.0	)%

		Operating earnings		8,709			6.0	%		4,082			3.9	%		4,627			113.5	%
Interest expense, net				10,064			7.0	%		8,074			7.7	%		1,990			24.6	%
Change in fair value of interest rate collar				(133	)		(0.1	)%		1,147			1.1	%		1,280			(111.6	)%

	Earnings (loss) before income taxes			(1,222	)		(0.8	)%		(5,139	)		(4.9	)%		3,917			(76.2	)%
Income tax (expense) benefit				460			0.3	%		1,956			1.9	%		(1,496	)		(76.5	)%

Net earnings (loss)			$	(762	)		(0.5	)%	$	(3,183	)		(3.0	)%	$	2,421			76.1	%

Vending revenue			$	140,852					$	103,672					$	37,180			35.9	%
Cost of goods sold without depreciation and amortization				97,740						69,097						28,643			41.5	%

Gross margin-vending				43,112			30.6	%		34,575			33.4	%		8,537			24.7	%
Depreciation and amortization				10,012						9,438						574			6.1	%

Gross profit-vending				33,100			23.5	%		25,137			24.2	%		7,963			31.7	%
Franchise and other revenue			$	3,141					$	1,720					$	1,421			82.8	%
Cost of goods sold				2,041						792						1,249			157.7	%

Gross profit-franchise and other				1,100			35.0	%		928			53.9	%		172			18.8	%

For the nine months ended September 30, 2003, total revenues increased 36.6% to $144.0 million from $105.4 million in the prior year period.

For the nine months ended September 30, 2003, vending revenue increased to $140.9 million compared to $103.7 million for the prior year period, primarily as a result of the increase in the number of coin operated amusement vending machines in place. As a result of the Folz, GamePlan and other asset acquisitions, and internal growth during the period, total equipment placed increased from approximately 29,800 machines at September 30, 2002 to approximately 68,000 machines at September 30, 2003 including an increase in Shoppes from 14,400 to 17,800.

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

Franchise and other revenues increased 82.8% to $3.1 million for the nine months ended September 30, 2003 compared to $1.7 million for the same period in 2002 due primarily to increased sales of amusement vending equipment to third parties. The Company acquired certain skill-crane and kiddie ride manufacturing assets during the third quarter of 2002. The Company anticipates franchise and other revenue will vary in the future based upon demand and production availability.

The cost of vending operations (including depreciation and amortization) for the nine months ended September 30, 2003 increased $29.2 million or 37.2% to $107.8 million from $78.5 million for the comparable period in 2002 primarily due to the Company’s acquisition activities. The vending operations’ contribution to gross profit for the nine months ended September 30, 2003 increased $8.0 million to $33.1 million compared to the comparable period in 2002. The vending gross profit achieved during the nine months ended September 30, 2003 was 23.5% of vending revenue, which represents a 0.7 percentage point decrease from the gross profit percentage achieved during the nine months ended September 30, 2002. Vending gross margin before depreciation and amortization decreased 2.8 percentage points to 30.6% for the nine months ended September 30, 2003 compared to the prior year. The decrease in vending gross margin percentage results primarily from the change in the Company’s sales mix. The Company now has a higher percentage of lower margin bulk vending revenues after the Folz acquisition.

For the nine months ended September 30, 2003, gross profit on franchise and other revenue increased to $1.1 million compared to $928,000 for the nine months ended September 30, 2002. The increase in gross profit results from the addition of amusement vending equipment sales to third parties.

General and administrative expenses (including depreciation and amortization) increased $4.9 million to $25.2 million for the nine months ended September 30, 2003, and decreased as a percentage of revenue to 17.4% as compared to 19.3% for the comparable period in 2002. General and administrative expense for the nine months ended September 30, 2002, excluding $1.9 million of transaction related costs, were $18.4 million or 17.5% as a percentage of revenue. The increase in general and administrative expenses for the nine months ended September 30, 2003 as compared to 2002, excluding transaction expenses, was primarily due to the addition of personnel to support the acquired operations, additional personnel in the sales and marketing, logistics and support areas to better manage the Company’s current and expected future operations and costs incurred to integrate acquired operations

In June 2003, the Company recorded a restructuring charge associated with the termination of certain administrative and sales employees that resulted from reorganizing certain functions after the acquisition of Folz. As of September 30, 2003, $103,000 had been charged against the $320,000 restructuring accrual. The restructuring accrual is included in other accrued expenses in the accompanying condensed consolidated balance sheet.

Operating earnings for the nine months ended September 30, 2003 increased $4.6 million to $8.7 million, or 6.0% of total revenue, as compared to operating income of $4.1 million or 3.9% of total revenue for the comparable period in 2002. Operating earnings in 2003 include $320,000 of restructuring charges. The operating earnings in 2002 include transaction related costs totaling $1.9 million and the loss on debt refinancing of $1.7 million.

Interest expense for the nine months ended September 30, 2003 increased $2.0 million to $10.1 million as compared to the same period in 2002. The Company’s interest expense is directly related to a higher level of borrowings after the ACMI Holdings, Inc. transaction in February of 2002, the Folz and GamePlan acquisitions during the second quarter of 2003 and changes in the underlying interest rates.

For the nine months ended September 30, 2003, the net loss was $762,000 compared to a net loss of $3.2 million for the comparable period in 2002. The 2003 net loss included $320,000 for restructuring. The 2002 net loss resulted primarily from transaction related costs and the loss on debt refinancing.

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. 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, valuation of long-lived and intangible assets, and costs in excess of assets acquired. 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.

Income 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 generally 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 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 fair value of the projected discounted cash flows using a discount rate determined by our management to be commensurate with the risk inherent in the Company’s current business model.

In 2002, SFAS No. 142, “Goodwill and Other Intangible Assets,” became effective and, as a result, the Company ceased to amortize costs in excess of assets acquired. In lieu of amortization, the Company is required to perform an annual impairment review of costs in excess of assets acquired.

The Company’s primary sources of liquidity and capital resources historically have been cash flows from operations, borrowings under the Company’s credit facilities and issuance of its equity and debt 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 $10.7 million for the nine months ended September 30, 2003 and $304,000 for the nine months ended September 30, 2002. The Company anticipates that cash will continue to be provided by operations as additional amusement vending equipment is placed in service. Cash required in the future is expected to be funded by existing cash and cash provided by operations and borrowings under the Company’s credit facility.

Net cash used in investing activities was $49.1 million for the nine months ended September 30, 2003 and $10.4 million for the nine months ended September 30, 2002. Capital expenditures for the nine months ended September 30, 2003 and 2002 were $12.1 million and $6.9 million, respectively, of which $12.0 million and $6.3 million, respectively, was for the acquisition of amusement vending equipment.

Net cash provided by financing activities was $38.7 million for the nine months ended September 30, 2003 and $7.9 million for the nine months ended September 30, 2002. Financing activities consist primarily of borrowing on the Company’s current 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, other debt obligations and equity contributions of ACMI Holdings, Inc.

At September 30, 2003, the Company had an $82.0 million senior secured credit facility comprised of a $12.0 million revolving credit facility and $70.0 million of term loans comprised of a $26.3 million term loan A, a $37.2 million term loan B, a $2.7 million term loan C and a $3.8 million term loan D. As of September 30, 2003, there was $67.8 million of total term loans outstanding. The Company can borrow up to $12.0 million through March 31, 2007 under the terms of the revolving credit facility. As of September 30, 2003, there was $8.7 million of revolving loans outstanding, $1.2 million of letters of credit outstanding, and $2.1 million available under the revolving credit facility. Under the term loan facilities, the Company is required to make quarterly principal installments that increase in amount until the March 31, 2008 termination of the facilities. The revolving facility and the term loans bear interest at a floating rate at the Company’s option, equal to either LIBOR plus the applicable margin or a base rate that is equal to the higher of the prime rate or the federal funds rate plus one-half percent plus the applicable margin. The effective rate of interest on both facilities at September 30, 2003 was 6.0%. The credit agreement governing the Company’s senior secured credit facility requires certain financial ratios to be met and places restrictions on, among other things, the incurrence of additional debt financing and certain payments to the Company’s parent company.

As required under the Company’s senior secured credit facility, on March 28, 2002 the Company entered into an amortizing interest rate collar agreement with the Royal Bank of Scotland PLC. The Company paid $181,000 to obtain the agreement which hedges against increases in LIBOR rates through March 31, 2005. The initial notional amount was $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.

The Company has issued $33.2 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; provided however, the minimum cash interest payable on these notes is 13% with the balance of interest payable in the form of payment in kind notes. Included in the $33.2 million total for the senior subordinated notes is $1.7 million of payment in kind notes issued in lieu of interest. The note purchase agreement requires certain financial ratios to be met and places restrictions on, among other things, the incurrence of additional senior subordinated indebtedness and certain restricted payments.

In September 1998, American Coin Merchandising Trust I (the “Trust”), the Company’s wholly owned subsidiary trust, completed a public offering of $17 million of Ascending Rate (10.5% at December 31, 1998 increasing to 12.0% at September 16, 2005) Cumulative Trust Preferred Securities (the “Trust Preferred Securities”). The Company recognized periodic interest using the interest method over the outstanding term of the debt. The sole assets of the Trust are American Coin Merchandising, Inc. Ascending Rate Junior Subordinated Debentures (the “Subordinated Debentures”) due September 15, 2028. The obligations of the Trust related to the Trust Preferred Securities are fully and unconditionally guaranteed by the Company. Distribution on the Trust Preferred Securities are payable quarterly by the Trust. The Trust Securities are subject to mandatory redemption upon the repayment of the Subordinated Debentures at their stated maturity at $10 per Trust Preferred Security.

The Company may cause the Trust to defer the payment of distributions for successive periods up to eight consecutive quarters. During such periods, accrued distributions on the Trust Preferred Securities will compound quarterly and the Company may not declare or pay distribution on its common stock or debt securities that rank equal or junior to the Trust Preferred Securities.

In conjunction with the acquisition of Folz on April 15, 2003, the Company received a $12.5 million equity contribution by its parent company ACMI Holdings, Inc. to fund a portion of the acquisition.

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

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

On January 1, 2003, the Company adopted SFAS No. 145, “Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which rescinded the required classification of gains and losses from extinguishments of debt as an extraordinary item, net of tax, and eliminated inconsistency between required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The adoption of this pronouncement resulted in a reclassification of $1.7 million from an extraordinary item to operations.

On January 1, 2003, the Company adopted 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 requires such a liability to be recognized at the time that an entity committed to an exit plan. In accordance with SFAS No. 146, the Company recorded $320,000 of restructuring costs in the second quarter of 2003.

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 SFAS No. 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 has adopted the expanded disclosure provisions of SFAS No. 148.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective at the beginning of the first interim period beginning after June 15, 2003. For financial instruments created before the issuance date, transition shall be achieved by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value. For manditorily redeemable financial instruments, “dividends” and other amounts paid or accrued prior to reclassification of the instrument as a liability shall not be reclassified as interest cost upon transition.

Restatement of financial statements for earlier years presented is not permitted. In November 2003, the FASB deferred certain provisions of SFAS No. 150 through FASB Position (FSP) 150-3. The Company’s mandatorily redeemable preferred securities fall under the guidance of FSP 150-3 and consequently the Company has not adopted the proposed classification of measurement requirements of SFAS No. 150. The mandatorily redeemable preferred securities are currently being accreted to their $17 million stated amount.

In April 2003, the FASB decided to require all companies to expense the fair value of employee stock options by no later than 2005. While the FASB has decided in principle to measure compensation at the date of grant, no guidance has been given as to how the cost of employee stock options should be measured. SFAS No. 123 requires use of an option-pricing model to determine fair value, such as Black-Scholes. This FASB plans to issue an exposure draft later this year that will provide more guidance. Until a final pronouncement is issued by the FASB, management cannot determine what impact expensing stock options will have on its results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires a liability to be recognized at the time a company issues a guarantee for the fair value of the obligations assumed under certain guarantee agreements. Additional disclosures about guarantee agreements are also required in the interim and annual financial statements, including a roll forward of the entity’s product warranty liabilities to the extent they are material. The provisions for initial recognition and measurement of guarantee agreements are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The adoption of FIN 45 had no impact on the Company’s consolidated financial statements.

On January 1, 2003, the Company adopted FASB 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 dispense 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 provision of Interpretation No. 46 to variable interest entities created after July 1, 2003. The adoption of this standard did not have an impact on the Company’s financial position or results of its operations.

As required under the Company’s senior secured credit facility, on March 28, 2002, the Company entered into an amortizing interest rate collar agreement with the Royal Bank of Scotland PLC. The Company paid $181,000 to obtain the agreement which hedges against increases in LIBOR rates through March 31, 2005. The initial notional amount was $27.5 million amortizing over a three-year period. The initial floor rate of 3.0% increases 1.0% per year over the life of the agreement and the initial cap rate of 4.0% increases 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. If the three-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 $62,000 per quarter. The Company’s outstanding debt obligations are at variable interest rates and consequently the fair value approximates the carrying value.

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. As of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer evaluated, with the participation of the Company’s management, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


PART I. FINANCIAL INFORMATION
	Item 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	(1) Description of Business and Basis of Presentation
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
INDEX TO EXHIBITS
EX-31.1 Certification Pursuant to Section 302
EX-31.2 Certification Pursuant to Section 302
EX-32 Certification Pursuant to Section 906


Balance, December 31, 2002		$	—
	Expense		320
	Payments		(105	)

Balance, September 30, 2003		$	215


Exhibit No.		Description

31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


		AMERICAN COIN MERCHANDISING, INC.
		(Registrant)

Date: November 14, 2003		By: /s/ RANDALL J. FAGUNDO

		Randall J. Fagundo
		Chief Executive Officer

Date: November14, 2003		By: /s/ KENNETH W. EDIC

		Kenneth W. Edic
		Senior Vice President and Chief Financial Officer


Exhibit No.		Description

31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Delaware (State or other jurisdiction of incorporation or organization)		84-1093721 (I.R.S. Employer Identification No.)

(a)		Includes the Folz operations from the April 15, 2003 acquisition date.

(b)		Reflects Folz historical operations from January 1, 2003 through April 15, 2003, the date of the Folz acquisition.

(c)		Represents the elimination of financial information related to Folz operations that were not part of the purchase transaction but were included in the historical combined Folz financial statements.

(d)		Represents the adjustments to depreciation expense as a result of the impact of conforming the depreciation lives to those of the Company and recalculating depreciation based on the estimated fair value, which approximates the net book value of the assets and the amortization of acquisition related intangible assets.

(e)		Represents the elimination of historical Folz interest expense and the increase in interest expense as a result of the increased borrowings under the Company’s credit facilities to finance the purchase. Interest expense on such borrowings is calculated using as assumed weighted average rate of 12.5%.

(f)		Represents additional income tax expense for (i) the income of Folz, as no federal income tax expense has historically been included in the Folz financial statements because Folz’s primary operating entity has elected to be treated as an S Corporation for tax purposes, and (ii) the tax benefits of increased interest expense. Income tax expense is computed using the Company’s historical statutory income tax rate of 38.0%.

(a)		The Company’s historical condensed statement of operations for the nine months ended September 30, 2002 provided herein combines the operating results for the eight months ended September 30, 2002 with the operating results for the one month ended January 31, 2002. The combining of successor and predecessor periods is not acceptable under accounting principles generally accepted in the United States of America; however, the Company believes that this presentation is meaningful in the context of this pro forma presentation.

(b)		Represents the elimination of financial information related to Folz entities that were not part of the purchase transaction but were included in the historical combined Folz financial statements.

(c)		Represents the adjustments to depreciation expense as a result of the impact of conforming the depreciation lives to those of the Company and recalculating depreciation based on the estimated fair value, which approximates the net book value of the assets and the amortization of acquisition related intangible assets.

(d)		Represents the elimination of historical Folz interest expense and the increase in interest expense as a result of the increased borrowings under the Company’s credit facilities to finance the purchase. Interest expense on such borrowings is calculated using an assumed weighted average rate of 12.5%.

(e)		Represents additional income tax expense for (i) the income of Folz, as no federal income tax expense has historically been included in the Folz financial statements because Folz’s primary operating entity has elected to be treated as an S Corporation for tax purposes, and (ii) the tax benefits of increased interest expense. Income tax expense is computed using the Company’s historical statutory income tax rate of 38.0%.


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