UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended March 31, 2004

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: 001-14780

American Coin Merchandising, Inc.

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

(303) 444-2559
(Registrant’s telephone number, including area 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 [   ]

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

As of May 10, 2004, the registrant had 1,000 shares of its $0.01 par value common stock outstanding.

AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of Business and Basis of Presentation

     American Coin Merchandising, Inc., d/b/a Sugarloaf Creations, Inc. and Folz Vending, Inc. (the “Company”) owns and operates approximately 167,300 coin-operated amusement vending machines. Approximately 18,700 of these machines are “Shoppes” that dispense plush toys, watches, jewelry, novelties, and other items. In addition to Shoppes, the Company operates an extensive line of bulk vending (gum, candy and novelty items), 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 March 31, 2004, 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 March 31, 2004, there were six franchisees operating in 7 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) (the “Acquisition”). As a result of the Acquisition, 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.

     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 March 31, 2004 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, 2003.

     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 March 31, 2004 and December 31, 2003, and the results of its operations and cash flows for the three months ended March 31, 2004 and 2003, respectively. The operating results for the periods ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

     The Company adopted Financial Accounting Standards Board Interpretation No. 46 “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51”, as revised, (“FIN No. 46R”) during the quarter ended March 31, 2004. As a result of the adoption of FIN No. 46, the Company no longer consolidates its wholly owned subsidiary American Coin Merchandising Trust I (“the Trust”) and instead recognizes as debt the Ascending Rate Junior Subordinated Debentures issued by the Company and held by the Trust, as more fully discussed in Note 8.

(2) Acquisitions

     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 additional senior subordinated notes and an equity contribution received from its parent company, ACMI Holdings, Inc.

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     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. After allocating fair value to the assets acquired in these acquisitions, the Company allocated remaining amounts of $3.2 million to costs in excess of assets acquired and $3.3 million to other intangible assets.

     Results of operations for these acquisitions are included in the consolidated financial statements from the respective acquisition dates forward.

(3) Stock-Based Compensation

     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 would have been increased to the pro forma amounts indicated below (amounts in thousands).

(4) Supplemental Disclosures of Cash Flow Information

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

     The quarter ended March 31, 2004, included a $47,000 non-cash allocation of debt issuance costs from ACMI Holdings, Inc.

(5) Income Taxes

     The Company accounts for income taxes under the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Deferred tax assets and liabilities are measured using enacted rates expected to be in effect for the years in which those temporary differences are expected to be recovered or settled. The effects on deferred tax assets and liabilities of a change in tax rates are recognized in income in the period that includes the enactment date. The Company regularly reviews its deferred tax assets for recoverability and has 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 records a valuation allowance against all or a significant portion of our deferred tax

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assets resulting in an increase in our effective tax rate or reduction in benefit rate and a material adverse impact on our operating results. For the three months ended March 31, 2004, the company did not recognize any benefit for its operating losses but increased its valuation allowance to approximately $1.0 million. Should management conclude that its deferred tax assets are realizable in the future, the valuation allowance will be reversed to the extent of such realizability.

     The Company is also subject to examination of its income, sales and local use tax returns by the IRS and various other tax authorities. The Company periodically assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provisions and related accruals.

(6) Cost in Excess of Assets Acquired and Other Intangible Assets

     Costs in excess of assets acquired and other intangible assets represent the purchase amount paid in excess of the fair value of the tangible net assets acquired. The Company performs a fair value assessment of costs in excess of assets acquired and the other intangible assets on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important, which could trigger an impairment review, include significant underperformance relative to expected historical or projected future operating results, changes in the manner of use of the acquired assets or the strategy of the related business and negative industry or economic trends.

(7) Credit Facility and Long-Term Debt

     On February 13, 2004, the Company completed Amendment No. 1 to its amended and restated senior secured credit facility dated April 15, 2003. The amended senior secured credit facility is comprised of a $12.0 million revolving credit facility and provides for up to $78.5 million of term debt. The $78.5 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 $12.3 million term loan D. As of March 31, 2004, there was $74.1 million of total term loans outstanding. As of March 31, 2004, there was $4.0 million outstanding on the revolver, $1.1 million utilized by letters of credit, and $6.9 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 March 31, 2004 was 6.4%.

     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. The Company was in compliance with such financial ratios and restrictions at March 31, 2004.

     In February 2002 and April 2003, the Company issued $25.0 million and $6.5 million, respectively, 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 on these notes is 13% with the balance of interest payable in the form of additional payment in kind notes. Included in the $33.8 million of senior subordinated notes outstanding at March 31, 2004 is $2.3 million of payment in kind notes issued in lieu of interest. 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 March 31, 2004.

(8) Mandatorily Redeemable Preferred Securities

     In September 1998, the 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 Trust used the proceeds from the sale of the Trust Preferred Securities to purchase approximately $17 million of American Coin Merchandising, Inc. Ascending Rate (10.5% at December 31, 1998 increasing to 12.0% at September 16, 2005) Junior Subordinated Debentures (the “Subordinated Debentures”) due September 15, 2028. The sole assets of the Trust are the Subordinated Debentures.

     Prior to the deconsolidation of the Trust as required by FIN No. 46R, the Company reported the Trust Preferred Securities as “Company obligated mandatorily redeemable preferred securities of subsidiary trust holding junior subordinated debentures,” a mezzanine security on the condensed consolidated balance sheets. Under FIN No. 46R, the condensed consolidated financial statements reflect the deconsolidation of the Trust for all periods presented. Accordingly, long-term debt and interest expense reflect the obligation and interest cost, respectively of the Subordinated Debentures. Adoption of FIN No. 46R did not have a material effect on results of operations in the periods presented, as the fair value of the Subordinated Debentures approximates the fair value of the Trust Preferred Securities and the effective interest cost on the Trust Preferred Securities approximates the effective interest expense on the Subordinated Debentures.

     The Company may defer the payment of interest on the Subordinated Debentures for successive periods up to eight consecutive quarters. During such periods, accrued interest on the Subordinated Debentures 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 Subordinated Debentures.

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(9) Interest Rate Collar

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

     Management believes it is prudent to limit the variability of a portion of its interest payments, 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. The Company paid $170,000 during the quarter since LIBOR was below the floor rate under the interest rate collar. This amount is included in interest expense in the 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 December 31, 2003 was a liability of $911,000. The fair value recorded at March 31, 2004 was a liability of $824,000. Accordingly, the change in fair value of this non-hedging derivative instrument is included as a net expense reduction of $87,000 for the three months ending March 31, 2004. The Company does not speculate using derivative instruments.

(10) Restructuring Charge

     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.”

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     The activity in the restructuring accrual is as follows:

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

     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.

General

     The Company owns and operates coin-operated amusement vending equipment with more than 167,300 pieces of equipment on location. Over 18,700 of these machines are Shoppes that dispense plush toys, watches, jewelry, novelties and other items. In addition to Shoppes, the Company operates an extensive line of bulk vending (gum, candy and novelty items), kiddie rides, video games and other amusement equipment. The Company’s Shoppes, bulk vending and other amusement equipment are placed in supermarkets, mass merchandisers, restaurants, bowling centers, truck stops, bingo halls, warehouse clubs and similar “retail” locations to take advantage of the customer traffic at these locations. 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 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.

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     Franchise and other revenue are derived from the sale of Shoppes, kiddie rides and goods to vend in the Shoppes sold to third parties and franchisees, and royalties from franchisees.

RESULTS OF OPERATIONS

Three-Month Period Ended March 31, 2004 Compared to March 31, 2003

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

Revenue

     Total revenue for the three months ended March 31, 2004 increased 48.3% to $56.3 million from $38.0 million for the same period in 2003.

     Vending revenue increased $18.3 million or 49.2% for the three months ended March 31, 2004 to $55.4 million from $37.1 million for the comparable period in 2003, primarily as a result of an increase in the number of Shoppes bulk and amusement vending machines in place. Total amusement vending equipment in place increased from approximately 34,100 machines at March 31, 2003 to approximately 167,300 machines at March 31, 2004. 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

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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 $94,000 or 10.7% for the first quarter of 2004 to $974,000 from $880,000 for the same period in 2003, due primarily to increased sales of amusement vending equipment to third parties and franchisees. The Company anticipates franchise and other revenue will vary in the future based upon demand and production availability.

Cost of Revenue and Gross Profit

     The cost of vending operations (including depreciation and amortization) for the three months ended March 31, 2004 increased $13.6 million or 47.5% to $42.2 million from $28.6 million for the comparable period in 2003 primarily due to increased volume and machines added as a result of the Company’s acquisition activities. The vending operations’ contribution to gross profit for the quarter increased $4.7 million to $13.2 million compared to the comparable period in 2003. The vending gross margin achieved during the quarter was 23.8% of vending revenue, which represents a 0.9 percentage point increase over the gross profit percentage achieved during the first quarter of 2003. Vending gross profit before depreciation and amortization decreased 1.0 percentage points to 30.4% for the quarter ended March 31, 2004 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 bulk vending revenues after the Folz acquisition. Bulk vending typically has a lower gross margin than the Company’s other amusement vending offerings.

     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 first quarter of 2004, gross profit on franchise and other revenue increased to $384,000 as compared to $312,000 for the first quarter of 2003. The increase in gross profit dollars results from the sale of amusement vending equipment to third parties during 2004.

Operating Expenses

     General and administrative expenses (excluding depreciation and amortization) increased $3.0 million to $9.6 million for the three months ended March 31, 2004. General and administrative expenses were 17.0% of revenue in the first quarter of 2004 and 17.4% of revenue in the comparable period in 2003. The increase in general and administrative expenses for the first quarter of 2004 as compared to the comparable period in 2003 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

     Operating earnings for the three months ended March 31, 2004 were $3.4 million, or 6.0% of total revenue, as compared to operating earnings of $2.0 million or 5.2% of total revenue for the comparable period in 2003.

Interest Expense, Net

     Interest expense for the first quarter of 2004 increased $944,000 to $3.8 million as compared to the same period in 2003. The Company’s interest expense is directly related to a higher level of borrowings after the Folz and GamePlan acquisitions during the second quarter of 2003 and changes in the underlying interest rates.

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Net Loss

     Net loss for the first quarter of 2004 was $356,000 compared to a net loss of $595,000 for the comparable period in 2003.

Critical Accounting Policies

     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 a valuation allowance 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’s estimate of the appropriate valuation allowance may be revised and could result in an increase in our effective tax rate or reduction in benefit rate and a material adverse impact on our operating results.

     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 a 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 earlier if 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.

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     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.

     The Company has not recorded an impairment charge upon completion of previous impairment reviews. However, there can be no assurance that at the time of future reviews, an impairment charge will not be required, which may be material.

Liquidity and Capital Resources

     The Company’s primary sources of liquidity and capital resources historically have been cash flows from operations, borrowings under the Company’s credit facilities and issuance of its equity 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 used in operating activities was $2.0 million for the three months ended March 31, 2004. Net cash provided by operating activities was $3.7 million for the three months ended March 31, 2003. During the quarter ended March 31, 2004, the Company reduced its investment in inventory and utilized borrowings under its credit facility to reduce the outstanding balances of accounts payable, accrued expenses and other liabilities from December 31, 2003. The Company anticipates that cash will be provided by operations as additional amusement vending equipment is placed in service.

     Net cash used in investing activities was $2.5 million for each of the quarters ended March 31, 2004 and 2003. The acquisition of amusement vending equipment was the primary use of invested cash.

     Net cash provided by financing activities was $3.3 million for the three months ended March 31, 2004. For the three months ended March 31, 2003, financing activities used $2.2 million of cash. Financing activities consist primarily of borrowing or payments on the Company credit facility.

     At March 31, 2004, the Company had a $90.5 million senior secured credit facility comprised of a $12.0 million revolving credit facility and $78.5 million of term loans. As of March 31, 2004, there was $74.1 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 March 31, 2004, there was $4.0 million of revolving loans outstanding, $1.1 million of letters of credit outstanding, and $6.9 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, 2007 termination of the facilities. Total principal payments are expected to be $6.9 million during the next 12 months. 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 March 31, 2004 was 6.4%. 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.

     In February 2002 and April 2003, the Company issued $25.0 million and $6.5 million, respectively, 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 on these notes is 13% with the balance of interest payable in the form of additional payment in kind notes. Included in the $33.8 million of senior subordinated notes outstanding at March 31, 2004 is $2.3 million of payment in kind notes issued in lieu of interest. 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 March 31, 2004.

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     In accordance with FIN No. 46R, the Company deconsolidated the Trust for financial reporting purposes. As a result, the Company has included the Subordinated Debentures held by the Trust in long-term debt. Adoption of FIN No. 46R did not have a material effect on results of operations in the periods presented, as the fair value of the Subordinated Debentures approximates the fair value of the Trust Preferred Securities and the effective interest cost on the Trust Preferred Securities approximates the effective interest expense on the Subordinated Debentures.

     The Company may defer the payment of interest on the Subordinated Debentures for successive periods up to eight consecutive quarters. During such periods, accrued interest on the Subordinated Debentures 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 Subordinated Debentures.

     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. 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. Management believes such funds will be sufficient to meet the Company’s foreseeable operating and capital expenditure requirements.

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

Impact of Recently Issued Accounting Standards

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities: an Interpretation of ARB No. 51” (“FIN No. 46”). FIN No. 46 requires that all special-purpose entities be designated as either a voting-interest entity or a variable-interest entity (“VIE”). A VIE is an entity for which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the VIE to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary if it does not effectively disperse risks among parties involved. The primary beneficiary of a VIE is the party that absorbs a majority of the VIE’s expected losses or receives a majority of its expected residual returns.

     The implementation of FIN No. 46 was required for periods beginning after June 15, 2003. However, in October 2003, the FASB deferred the effective date for applying FIN No. 46 to VIEs created before February 1, 2003 until the end of the first interim period ending after December 15, 2003. In December 2003, the FASB revised FIN No. 46 (“FIN No. 46R”) to incorporate certain revisions, including the requirement to disregard certain rights in determining whether an entity is the primary beneficiary in a VIE. Under FIN No. 46R, the Company is not the primary beneficiary of American Coin Merchandising Trust I (the “Trust”), a wholly owned subsidiary, and the Company was therefore required to deconsolidate the Trust effective in the quarter ended March 31, 2004. Accordingly, the Company’s Subordinated Debentures held by the Trust have been included in long- term debt for all periods presented.

     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.

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     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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     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.

Item 4. CONTROLS AND PROCEDURES

     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

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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.

PART II. OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(b)

Reports on Form 8-K

     None.

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SIGNATURES

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.

	AMERICAN COIN MERCHANDISING, INC. (Registrant)
Date: May 17, 2004	By:	/s/RANDALL J. FAGUNDO
		Randall J. Fagundo
		Chief Executive Officer

Date: May 17, 2004	By:	/s/KENNETH W. EDIC
		Kenneth W. Edic
		Senior Vice President and Chief Financial Officer

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INDEX TO EXHIBITS