##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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 September 30, 2003

or

o 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.

(Exact name of Registrant as specified in its charter)


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


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 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.





---

TABLE OF CONTENTS



|                                              |                                                                                               |                                                      |  |  |  |  |  | 
|--------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|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  



---



##### Table of Contents



AMERICAN COIN MERCHANDISING, INC. AND SUBSIDIARIES

INDEX

PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets-September 30, 2003 and
December 31, 2002
    
    
    3Condensed 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)
    
    
    4Condensed 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)
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    
    
    24


2



---



##### Table of Contents









PART I. FINANCIAL INFORMATION







Item 1. FINANCIAL STATEMENTS







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

September 30,
    
    December 31,2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,515
    
    
    $
    4,178Trade accounts and other receivables, net
    
    
    2,062
    
    
    
    1,069Inventories, net
    
    
    20,937
    
    
    
    11,512Prepaid expenses and other assets
    
    
    5,143
    
    
    
    3,035Total current assets
    
    
    32,657
    
    
    
    19,794Property and equipment, at cost:Vending machines
    
    
    64,852
    
    
    
    40,738Vehicles
    
    
    4,287
    
    
    
    4,622Office equipment, furniture and fixtures
    
    
    5,769
    
    
    
    4,48574,908
    
    
    
    49,845Less accumulated depreciation
    
    
    (15,780
    )
    
    
    (7,870
    )Property and equipment, net
    
    
    59,128
    
    
    
    41,975Placement fees, net of accumulated amortization of $4,544 in 2003 and
$2,599 in 2002
    
    
    2,049
    
    
    
    2,080Costs in excess of assets acquired and other intangible assets, net
of accumulated amortization of $356 in 2003 and $221 in 2002
    
    
    83,248
    
    
    
    65,693Other assets, net of accumulated amortization of $2,634 in 2003 and
$1,409 in 2002
    
    
    8,848
    
    
    
    6,831Total assets
    
    $
    185,930
    
    
    $
    136,373LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    5,804
    
    
    $
    4,718Accounts payable
    
    
    14,228
    
    
    
    3,656Accrued commissions
    
    
    3,345
    
    
    
    3,392Other accrued expenses
    
    
    3,026
    
    
    
    1,961Total current liabilities
    
    
    26,403
    
    
    
    13,727Long-term debt, net of current portion
    
    
    104,741
    
    
    
    79,593Other liabilities
    
    
    880
    
    
    
    789Fair value of interest rate collar agreement
    
    
    1,114
    
    
    
    1,248Total liabilities
    
    
    133,138
    
    
    
    95,357Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding junior subordinated debentures
    
    
    13,012
    
    
    
    12,974Stockholders equity:Common stock, $.01 par value; 1,000 shares authorized, issued and
outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    41,129
    
    
    
    28,629Accumulated deficit
    
    
    (1,349
    )
    
    
    (587
    )Total stockholders equity
    
    
    39,780
    
    
    
    28,042Total liabilities and stockholders equity
    
    $
    185,930
    
    
    $
    136,373


See accompanying notes to condensed consolidated financial statements.

3



---



##### Table of Contents









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

Successor
    
    PredecessorThree
    
    Three
    
    Nine
    
    Eight
    
    OneMonths
    
    Months
    
    Months
    
    Months
    
    MonthEnded
    
    Ended
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,
    
    January 31,2003
    
    2002
    
    2003
    
    2002
    
    2002Revenue:Vending
    
    $
    55,293
    
    
    $
    35,207
    
    
    $
    140,852
    
    
    $
    92,792
    
    
    $
    10,880Franchise and other
    
    
    1,239
    
    
    
    573
    
    
    
    3,141
    
    
    
    1,521
    
    
    
    199Total revenue
    
    
    56,532
    
    
    
    35,780
    
    
    
    143,993
    
    
    
    94,313
    
    
    
    11,079Cost of revenue:Vending, excluding related depreciation
and amortization
    
    
    37,728
    
    
    
    23,154
    
    
    
    97,740
    
    
    
    61,447
    
    
    
    7,650Depreciation and amortization
    
    
    3,444
    
    
    
    3,189
    
    
    
    10,012
    
    
    
    8,425
    
    
    
    1,013Total cost of vending
    
    
    41,172
    
    
    
    26,343
    
    
    
    107,752
    
    
    
    69,872
    
    
    
    8,663Franchise and other
    
    
    910
    
    
    
    169
    
    
    
    2,041
    
    
    
    682
    
    
    
    110Total cost of revenue
    
    
    42,082
    
    
    
    26,512
    
    
    
    109,793
    
    
    
    70,554
    
    
    
    8,773Gross profit
    
    
    14,450
    
    
    
    9,268
    
    
    
    34,200
    
    
    
    23,759
    
    
    
    2,306General and administrative expenses
    
    
    9,372
    
    
    
    5,854
    
    
    
    24,390
    
    
    
    15,844
    
    
    
    3,617Depreciation and amortization
    
    
    291
    
    
    
    246
    
    
    
    781
    
    
    
    699
    
    
    
    96Restructuring charge
    
    
    
    
    
    
    
    
    
    
    320
    
    
    
    
    
    
    
    Loss on debt refinancing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,727Operating earnings (loss)
    
    
    4,787
    
    
    
    3,168
    
    
    
    8,709
    
    
    
    7,216
    
    
    
    (3,134
    )Interest expense, net
    
    
    3,748
    
    
    
    2,897
    
    
    
    10,064
    
    
    
    7,684
    
    
    
    390Change 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
    
    
    
    1,339Net 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


See accompanying notes to condensed consolidated financial statements.

4



---



##### Table of Contents









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

Successor
    
    PredecessorNine
    
    Eight
    
    OneMonths
    
    Months
    
    MonthEnded
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    January 31,2003
    
    2002
    
    2002Cash 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
    
    
    
    1,146Change 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
    
    
    
    96Inventories
    
    
    (2,690
    )
    
    
    (2,608
    )
    
    
    1,233Prepaid 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
    
    
    
    82,703Net 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
    
    
    
    6,362Net change in cash and cash equivalents
    
    
    337
    
    
    
    (1,386
    )
    
    
    (812
    )Cash and cash equivalents at beginning of period
    
    
    4,178
    
    
    
    3,254
    
    
    
    4,066Cash and cash equivalents at end of period
    
    $
    4,515
    
    
    $
    1,868
    
    
    $
    3,254


See accompanying notes to condensed consolidated financial statements.

5



---



##### Table of Contents









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., 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.

6



---



##### Table of Contents



(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.

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
    
    $
    3,289Issuance of senior subordinated notes
    
    
    6,500Equity contribution
    
    
    12,500Total purchase price
    
    
    22,289Allocation of purchase price:Assets acquired
Inventories
    
    
    6,147Prepaid expenses and other assets
    
    
    319Property and equipment
    
    
    9,211Other assets
    
    
    187Customer relationship intangible asset
    
    
    5,346Liabilities 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.

7



---



##### Table of Contents



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
    
    
    
    
    
    EliminationAmerican Coin
    
    
    
    
    
    of
    
    AdjustmentsMerchandising,
    
    Historical
    
    Operations
    
    for theInc.,
    
    Combined
    
    Not
    
    Acquisition
    
    ProAs Reported
    
    Folz
    
    Acquired
    
    of Folz
    
    Forma(a)
    
    (b)
    
    (c)Total revenue
    
    $
    143,993
    
    
    $
    14,527
    
    
    $
    (1,153
    )
    
    $
    
    
    
    $
    157,367Cost of revenue:Vending
    
    
    97,740
    
    
    
    11,634
    
    
    
    (958
    )
    
    
    
    
    
    
    108,416Depreciation
    
    
    10,012
    
    
    
    541
    
    
    
    (36
    )
    
    
    (133
    ) (d)
    
    
    10,384Total cost of vending
    
    
    107,752
    
    
    
    12,175
    
    
    
    (994
    )
    
    
    (133
    )
    
    
    118,800Franchise and other
    
    
    2,041
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,041Total cost of revenue
    
    
    109,793
    
    
    
    12,175
    
    
    
    (994
    )
    
    
    (133
    )
    
    
    120,841Gross profit
    
    
    34,200
    
    
    
    2,352
    
    
    
    (159
    )
    
    
    133
    
    
    
    36,526General and administrative
    
    
    24,390
    
    
    
    2,254
    
    
    
    (234
    )
    
    
    
    
    
    
    26,410Depreciation and amortization
    
    
    781
    
    
    
    103
    
    
    
    
    
    
    
    475
    (d)
    
    
    1,359Restructuring
    
    
    320
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    320Operating earnings (loss)
    
    
    8,709
    
    
    
    (5
    )
    
    
    75
    
    
    
    (342
    )
    
    
    8,437Interest expense
    
    
    10,064
    
    
    
    136
    
    
    
    
    
    
    
    267
    (e)
    
    
    10,467Change 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)
    
    
    721Net earnings (loss)
    
    $
    (762
    )
    
    $
    (151
    )
    
    $
    75
    
    
    $
    (338
    )
    
    $
    (1,176
    )




---

|(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%.

8



---



##### Table of Contents



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

EliminationConsolidated
    
    
    
    
    
    of
    
    AdjustmentsAmerican Coin
    
    Historical
    
    Operations
    
    for theMerchandising,
    
    Combined
    
    Not
    
    Acquisition
    
    ProInc.
    
    Folz
    
    Acquired
    
    of Folz
    
    Forma(a)
    
    
    
    
    
    (b)Total revenue
    
    $
    105,392
    
    
    $
    41,732
    
    
    $
    (3,053
    )
    
    $
    
    
    
    $
    144,071Cost of revenue:Vending
    
    
    69,097
    
    
    
    31,951
    
    
    
    (2,366
    )
    
    
    
    
    
    
    98,682Depreciation
    
    
    9,438
    
    
    
    1,615
    
    
    
    (128
    )
    
    
    (530
    ) (c)
    
    
    10,395Total cost of vending
    
    
    78,535
    
    
    
    33,566
    
    
    
    (2,494
    )
    
    
    (530
    )
    
    
    109,077Franchise and other
    
    
    792
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    792Total cost of revenue
    
    
    79,327
    
    
    
    33,566
    
    
    
    (2,494
    )
    
    
    (530
    )
    
    
    109,869Gross profit
    
    
    26,065
    
    
    
    8,166
    
    
    
    (559
    )
    
    
    530
    
    
    
    34,202General and administrative
    
    
    19,461
    
    
    
    5,894
    
    
    
    (334
    )
    
    
    
    
    
    
    25,021Depreciation and amortization
    
    
    795
    
    
    
    305
    
    
    
    
    
    
    
    394
    (c)
    
    
    1,494Loss on debt refinancing
    
    
    1,727
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,727Operating earnings (loss)
    
    
    4,082
    
    
    
    1,967
    
    
    
    (225
    )
    
    
    136
    
    
    
    5,960Interest expense
    
    
    8,074
    
    
    
    621
    
    
    
    (4
    )
    
    
    418
    (d)
    
    
    9,109Change 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)
    
    
    1,633Net (loss) earnings
    
    $
    (3,183
    )
    
    $
    1,346
    
    
    $
    (221
    )
    
    $
    (605
    )
    
    $
    (2,663
    )




---

|(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%.                                                                                                        

9



---



##### Table of Contents



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.

(3) 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.

The activity in the restructuring accrual is as follows:

Balance, December 31, 2002
    
    $
    Expense
    
    
    320Payments
    
    
    (105
    )Balance, September 30, 2003
    
    $
    215


(4) 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) 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
    
    PredecessorThree
    
    Three
    
    Nine
    
    Eight
    
    OneMonths
    
    Months
    
    Months
    
    Months
    
    MonthEnded
    
    Ended
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,
    
    January 31,2003
    
    2002
    
    2003
    
    2002
    
    2002Net (loss) earningsAs reported
    
    $
    750
    
    
    $
    (285
    )
    
    $
    (762
    )
    
    $
    (998
    )
    
    $
    (2,185
    )Pro forma
    
    $
    724
    
    
    $
    (313
    )
    
    $
    (839
    )
    
    $
    1,081
    )
    
    $
    (2,400
    )Basic and diluted loss per shareAs reported
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    $
    (0.33
    )Pro forma
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    $
    (0.37
    )


10



---



##### Table of Contents



(5) Supplemental Disclosures of Cash Flow Information

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

Successor
    
    PredecessorNine
    
    Eight
    
    OneMonths
    
    Months
    
    MonthEnded
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    January 31,2003
    
    2002
    
    2002Cash paid during the period:Interest paid
    
    $
    7,764
    
    
    $
    5,833
    
    
    $
    560Income taxes paid
    
    $
    94
    
    
    $
    85
    
    
    $
    3


(6) Income Taxes

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

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

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.

(8) Long-Term Debt

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.

11



---



##### Table of Contents



(9) Mandatorily Redeemable Preferred Securities

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.

(10) 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 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.

12



---



##### Table of Contents









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.

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.

General

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.

13



---



##### Table of Contents



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.

RESULTS OF OPERATIONS

Three-Month Period Ended September 30, 2003 Compared to September 30, 2002

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

Three Months Ended September 30,
    
    Change% of
    
    
    
    
    
    % of2003
    
    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
    )%


14



---



##### Table of Contents



Revenue

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.

Cost of Revenue and Gross Profit

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.

15



---



##### Table of Contents



Operating Expenses

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

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, Net

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 (Loss)

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.

16



---



##### Table of Contents



Nine-Month Period Ended September 30, 2003 Compared to September 30, 2002

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

Nine Months Ended September 30,
    
    Change% of
    
    
    
    
    
    % of2003
    
    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
    %


17



---



##### Table of Contents



Revenue

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.

Cost of Revenue and Gross Profit

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.

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 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.

18



---



##### Table of Contents



Operating Expenses

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

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. 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

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, Net

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.

Net Earnings (Loss)

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.

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.

19



---



##### Table of Contents



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.

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.

20



---



##### Table of Contents



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.

21



---



##### Table of Contents



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.

Impact of Recently Issued Accounting Standards

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.

22



---



##### Table of Contents



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.







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
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.

23



---



##### Table of Contents









PART II. OTHER INFORMATION







Item 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------

Exhibit No.
    
    Description31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002




| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------

None.

24



---



##### Table of Contents









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: November 14, 2003
    
    By: /s/ RANDALL J. FAGUNDORandall J. FagundoChief Executive OfficerDate: November14, 2003
    
    By: /s/ KENNETH W. EDICKenneth W. EdicSenior Vice President and Chief Financial Officer


25



---



##### Table of Contents









INDEX TO EXHIBITS

Exhibit No.
    
    Description31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002


26