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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1997

                                       OR

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

               For the transition period from _________to_________

                         Commission File Number: 0-26580

                        AMERICAN COIN MERCHANDISING, INC.
             (Exact name of registrant as specified in its charter)

       DELAWARE                                          84-1093721
(State or other jurisdiction of             (IRS Employer Identification Number)
incorporation or organization)

                  5660 CENTRAL AVENUE, BOULDER, COLORADO 80301
                    (Address of principal executive offices)
                                   (Zip Code)

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

       Securities registered under Section 12(b) of the Exchange Act: NONE

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

                     COMMON STOCK, PAR VALUE $0.01 PER SHARE
                                (Title of class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  X  No
                                              ---    ---

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

     The aggregate market value of the registrant's voting stock held as of
February 27, 1998 by non-affiliates of the registrant was $59,210,000.

     As of February 27, 1998, issuer had 6,455,904 shares of its $0.01 par value
common stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     The information required by Part III (Items 9, 10, 11, and 12) is
incorporated by reference to portions of the registrant's definitive proxy
statement for the 1998 Annual Meeting of Stockholders which will be filed with
the Securities and Exchange Commission within 120 days after the close of the
1997 year.



<PAGE>   2



                        AMERICAN COIN MERCHANDISING, INC.

                           ANNUAL REPORT ON FORM 10-K

                                DECEMBER 31, 1997

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                         Page
<S>      <C>                                                                                             <C>
                                                 PART I

Item     1     Business................................................................................... 3

Item     2     Properties.................................................................................11

Item     3     Legal Proceedings..........................................................................12

Item     4     Submission of Matters to a Vote of Security Holders........................................12

                                                PART II

Item     5     Market for Registrant's Common Equity and Related Stockholder Matters......................12

Item     6     Selected Financial Data....................................................................13

Item     7     Management's Discussion and Analysis of Financial Condition and Results of
               Operations.................................................................................14

Item     8     Financial Statements and Supplementary Data................................................19

Item     9     Changes in and Disagreements with Accountants on Accounting
                  and Financial Disclosure................................................................19

                                               PART III

Item     10    Directors and Executive Officers of the Registrant.........................................19

Item     11    Executive Compensation.....................................................................20

Item     12    Security Ownership of Certain Beneficial Owners and Management.............................20

Item     13    Certain Relationships and Related Transactions.............................................20

                                                PART IV

Item     14    Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................20
</TABLE>




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    Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the sections entitled "Risk
Factors," and those discussed in the Company's "Management's Discussion and
Analysis of Financial Condition and Results of Operation." and the Company's
Prospectus dated October 28, 1997.

                                     PART I

ITEM 1.    BUSINESS

    American Coin Merchandising, Inc. (the "Company") is a leading owner,
operator and franchisor of coin-operated skill-crane machines that dispense
stuffed animals, plush toys, watches, jewelry and other items through a national
network of more than 10,000 machines operated by the Company and its
franchisees. For up to 50(cent) a play, customers maneuver the skill-crane into
position and attempt to retrieve the desired item in the machine's enclosed
display area before play is ended. The Company's Shoppes are placed in
supermarkets, mass merchandisers, bowling centers, bingo halls, bars,
restaurants, warehouse clubs and similar locations ("Retail Accounts") to take
advantage of the regular customer traffic at these locations. The Company
utilizes appealing displays of quality merchandise, new product introductions,
including Company-designed products, licensed products and seasonal items, and
other merchandising techniques to attract new and repeat customers. In November
1997, the Company began operating bulk vending equipment and kiddie rides that
are primarily located in supermarkets and mass merchandisers.

    The Company was formed in Colorado in July 1988 and was reincorporated in
Delaware in July 1995. At the time the Company was founded, certain of the
Founders owned and operated entities that operated skill-crane machines. A
wholly owned company of one of the Founders also had licensed the rights to
operate similar businesses through license, sale and set-up agreements that were
assigned to the Company. The Company was formed to support the license, sale and
set-up agreements and to offer additional license, sale and set-up arrangements
and franchises in new territories. Shortly after the Company was formed, it
began combining the buying power of the affiliated businesses to purchase
products and skill-crane machines at lower prices. In 1990, the Company began
developing its own territories by directly owning and operating skill-crane
machines.

    To continue to expand its operations, on August 31, 1995 the Company
purchased substantially all of the inventory, property and equipment and assumed
certain facilities leases and contracts of the Affiliated Entities for an
aggregate purchase price of approximately $9.0 million. All of the Affiliated
Entities previously were franchisees of the Company and all, except Sugarloaf
Marketing, were under common control with the Company.

BUSINESS STRATEGY

    The Company's business strategy is to differentiate itself from traditional
skill-crane operators and to strengthen its position as a leading owner and
operator of skill-crane machines in the U.S. The key elements of the Company's
business strategy are as follows:

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

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


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        Product Procurement and Company-Designed Product. The Company controls
    product cost by purchasing a significant portion of its products directly
    from manufacturers in large quantities and acquiring merchandise that has
    been discontinued or is subject to substantial "close-out" discounts. The
    Company also controls product cost by pre-packing products that it
    distributes to Company-owned offices and sells to its franchisees for use in
    filling and merchandising the Shoppes. These pre-packed units include a
    predetermined mix or "recipe" of different types, sizes, shapes and colors
    of product which achieve the Company's merchandising objectives while also
    controlling average product cost. The Company is able to frequently
    introduce new product in its Toy Shoppes by designing a significant portion
    of the product and by purchasing licensed and other product from suppliers.
    Designing products at various price points furthers the Company's objective
    of controlling product cost. See "Suppliers -- Product."

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

        Location Selection. The Company concentrates its sales efforts on
    placing Shoppes in Retail Accounts such as Wal-Mart and Safeway which have
    good reputations for quality and attract a high level of foot traffic.
    Within these accounts, the Company seeks to secure sites with the greatest
    visibility and accessibility to potential customers. See "Operations --
    Account Acquisition, Location Selection and Shoppe Placement."

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

        Training. The Company employs a comprehensive training program,
    including seminars and field training, for its regional managers, general
    managers and franchisees. It also provides operations manuals, training
    videos and other materials relating to office management and route
    merchandising to assure the achievement of the Company's business
    objectives. See "Operations -- Supervision, Training and Support."

SHOPPES

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

    The SugarLoaf Toy Shoppe has been operated by the Company since its
inception. The Company introduced the SugarLoaf Fun Shoppe in 1993 and the
SugarLoaf Treasure Shoppe in 1994. Management believes that the introduction of
new types of skill-crane machines has enabled the Company to capitalize on its
current routes and existing relationships by placing additional machines in
existing locations, thereby increasing revenue at each location with little
incremental service costs. The introductions of SugarLoaf Treasure Shoppes and
SugarLoaf Fun Shoppes are typically made in locations where a SugarLoaf Toy
Shoppe is already located. Currently the Company operates four types of Shoppes
as described below.



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    The SugarLoaf Toy Shoppe. The SugarLoaf Toy Shoppe features a play price of
50(cent) and dispenses stuffed animals, plush toys and other toys. The estimated
retail values of products offered in the SugarLoaf Toy Shoppe generally range
from $4.00 to $30.00. As of December 31, 1997, the Company and its franchisees
were operating approximately 6,786 SugarLoaf Toy Shoppes.

    The SugarLoaf Treasure Shoppe. The SugarLoaf Treasure Shoppe features a play
price of 50(cent) and dispenses jewelry, watches, bolo ties and belt buckles.
The SugarLoaf Treasure Shoppe improves upon traditional skill-crane machines of
this type by dispensing products with estimated retail values ranging from $4.00
to $30.00 instead of carnival-type merchandise of low retail value. As of
December 31, 1997, the Company and its franchisees were operating approximately
1,310 SugarLoaf Treasure Shoppes, approximately 90% of which were placed within
locations in which another Shoppe was already in operation.

    The SugarLoaf Beanie Bag Shoppe. During 1997 the Company converted a
substantial portion of its SugarLoaf Fun Shoppes and purchased additional
SugarLoaf Beanie Bag Shoppes that feature a play price of 50(cent) and dispenses
beanie-bag type stuffed toys with estimated retail values ranging from $3.00 to
$6.00. As of December 31, 1997, the Company and its franchisees were operating
1,283 SugarLoaf Beanie Bag Shoppes.

    The SugarLoaf Fun Shoppe. The SugarLoaf Fun Shoppe features a play price of
25(cent) and dispenses small toys, novelties and candy. The SugarLoaf Fun Shoppe
is designed to appeal primarily to adolescents and young adults. The estimated
retail values of products offered in the SugarLoaf Fun Shoppe are generally
under $5.00. Because the retail value of the products offered in the SugarLoaf
Fun Shoppe are generally lower than the products offered in the SugarLoaf Toy
Shoppe and the SugarLoaf Treasure Shoppe, the SugarLoaf Fun Shoppe dispenses
more frequently than the Company's other Shoppes, including certain SugarLoaf
Fun Shoppes which operate until a player wins a prize. As of December 31, 1997,
the Company and its franchisees were operating approximately 739 SugarLoaf Fun
Shoppes.

    The following chart indicates the number of Shoppes the Company had in
operation at the indicated date:

<TABLE>
<CAPTION>
                      DECEMBER 31, 1997   DECEMBER 31, 1996   DECEMBER 31, 1995
                      -----------------   -----------------   -----------------
      TYPE            NUMBER    PERCENT   NUMBER    PERCENT   NUMBER    PERCENT
      ----            ------    -------   ------    -------   ------    -------
<S>                   <C>       <C>       <C>       <C>       <C>       <C>  
Toy Shoppes.........   3,831      62.1%    2,699      68.0%    1,291      62.7%
Treasure Shoppes....   1,016      16.5       542      13.7       357      17.4
Beanie Bag Shoppes..   1,156      18.8        --        --        --        --
Fun Shoppes.........     163       2.6       726      18.3       409      19.9
                       -----     -----     -----     -----     -----     -----
          Total ....   6,166     100.0%    3,967     100.0%    2,057     100.0%
                       =====     =====     =====     =====     =====     =====
</TABLE>

OPERATIONS

    Management believes that the Company's operations program provides for
efficient and cost-effective purchasing and distribution of product. In
addition, the Company and its franchisees have a route-servicing system that
facilitates the development of a good working relationship with location
managers in regional and national chain accounts. The Company offers its
franchisees the same software management tools, training programs and product
and machine purchasing programs used by the Company, and they are required to
use substantially the same procedures, systems and methods the Company employs
in its own operations.

    Retail Accounts. Currently, the Company's Shoppes are located, in order of
prevalence, in supermarkets, mass merchandisers, bingo halls and bowling
centers, bars and similar locations. In the future, the Company intends to
attempt to place additional Shoppes in national and regional supermarket, mass
merchandise and restaurant chain accounts to take advantage of the regular
customer traffic of these locations. The following chart identifies some of the
Company's Retail Accounts:
                                 RETAIL ACCOUNTS
<TABLE>
<CAPTION>
  SUPERMARKETS          MASS MERCHANDISERS       RESTAURANTS               OTHER
  ------------          ------------------       -----------               -----
<S>                   <C>                      <C>                       <C>
Kroger                Wal-Mart                 Denny's (franchised)      AMF Bowling Centers
Safeway/Vons          Kmart                    Ponderosa Steak House     Brunswick Bowling Centers
Fred Meyer Stores                              Bonanza Steak Houses      Truckstops of America
Cub Foods                                                                Flying J Truckstop
                                                                         76 Truckstops
</TABLE>



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    The Company or its franchisees provide the Shoppes and pay for certain
installation costs, while the retailer provides a site within the location and
electrical power. The retailers are paid commissions based upon a percentage of
gross revenue generally ranged from 20% to 30%, depending on the dollar volume,
number of Shoppes installed and total number of locations the retailer controls.
Management believes that national and regional supermarket, mass merchandise and
restaurant chain accounts are increasingly aware of the economic benefits of
amusement and vending machines such as the Company's Shoppes, which can provide
retailers greater revenue per square foot than alternative uses of available
floor space.

    In individual-location accounts, the Company and its franchisees generally
place Shoppes pursuant to oral agreements with location managers. While the
Company has written agreements with certain major Retail Accounts, the Company
and its franchisees also have placed Shoppes in national and regional Retail
Accounts pursuant to oral or other agreements, which may be terminated at
anytime. Management believes that the Company and its franchisees generally have
good relations with their retail accounts. The Company was awarded the "Wal-Mart
Other Income 1996 Crane Vendor of the Year" award.

    In August 1996, the Company entered into a contract with Wal-Mart that
expires on January 1, 2000. Although the Company has entered into a contract
with Wal-Mart, national and regional Retail Accounts generally do not enter into
long-term contracts with vendors. In individual-location accounts, the Company
and its franchisees generally place Shoppes pursuant to oral agreements with
location managers. The arrangements of the Company and its franchisees with most
of these accounts may be terminated at any time. In addition, Wal-Mart may
terminate its contract with the Company under certain limited circumstances. The
loss of the Wal-Mart account, or the loss of a significant number of other major
accounts, or a significant reduction in the number of Shoppes placed at such
accounts, for any reason, could have a material adverse effect on the Company's
business, financial condition and results of operations.

    Account Acquisition, Location Selection and Shoppe Placement. The Company
acquires new individual-location accounts for the placement of its Shoppes
through regional sales managers and field office general managers. To augment
its field office general managers' account acquisition activities, the Company
began a concerted marketing effort in August 1994 to national and regional chain
accounts and has entered into new agreements with national and regional
supermarket and mass merchandise chain accounts covering the placement of
Shoppes within the locations of such accounts. As of December 31, 1997, the
Company and its franchisees had installed more than 2,260 Shoppes in
approximately 1,120 Wal-Mart stores nationwide. Under the terms of the
agreement, an estimated 1,250 Wal-Mart stores will be installed with Shoppes by
the Company and its franchisees. In January 1997, the Company signed a
three-year agreement with Safeway that will make the Company and its franchisees
Safeway's domestic skill-crane operator. As of December 31, 1997, the Company
and its franchisees had installed more than 500 Shoppes in approximately 360
Safeway stores nationwide. In September 1997, the Company signed a three-year
agreement with AMF Bowling Centers, Inc. Under the terms of the agreement, an
estimated 170 of its 340 locations will be installed with Shoppes by the Company
and its franchisees. As of December 31, 1997, the Company and its franchisees
had installed more than 340 Shoppes in approximately 120 AMF bowling centers
nationwide.

    Once the Company enters into a national or regional chain account agreement,
it contacts each location manager to arrange for a review of the location to
confirm its suitability and to obtain the manager's agreement to the placement
of one or more Shoppes within the location. The Company and its regional sales
manager or franchisee work together to place Shoppes at national and regional
chain account locations.

    For accounts other than national chain accounts, the Company's regional
sales and general managers identify viable locations, contact the location's
owner or manager to confirm the suitability of the location and obtain the
owner's or manager's agreement to the placement of the Shoppes and related
compensation arrangements. The suitability of a location is based upon a
thorough assessment by the Company, including an analysis of the surrounding
trade area in order to determine the neighborhood demographics, local
regulations, the level of overall retail activity and the cost-effectiveness of
servicing the location through existing route merchandisers. The Company also
reviews each site within the location for its visibility and accessibility to
customers.

    The Company and its franchisees compete for limited sites within
supermarkets with purveyors of seasonal and specialty items and with owners and
operators of other amusement and vending machines. The Company's Shoppes also
compete with vending machine and coin-operated amusement device operators for
sites in mass merchandise and restaurant chains, bowling centers and other
locations. Competition for such sites is based primarily on the amount of



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

    Other Vending. The Company intends to introduce new types of vending and
amusement machines which management believes may expand the potential locations
and customers for the Company. Recently, the Company has begun to place a
limited number of kiddie rides in certain retail locations. In April 1997, the
Company signed a three-year agreement with Safeway that made the Company and its
franchisees Safeway's domestic coin-operated kiddie ride operator. As of
December 31, 1997, the Company and its franchisees had 68 kiddie rides in
approximately 45 Safeway stores nationwide. In September 1997, the Company
executed an agreement to purchase the assets of Quality Amusements Corp. and
Quality Entertainment Corp., operators of bulk vending machines and kiddie
rides. The Company began operating these additional machines in November 1997.
As of December 31, 1997, the Company was operating approximately 2,300 pieces of
bulk vending equipment. Bulk vending refers to the sale of unsorted confections,
nuts, gumballs, toys and novelties (in or out of capsules) selected at random by
the customer and dispensed through vending machines. From time to time, the
Company has placed, and may continue to place in the future, other types of
coin-operated vending machines in retail accounts in order to leverage the
Company's existing national distribution and service network.

    Supervision, Training and Support. The Company's area directors are
primarily responsible for training the Company's regional managers and the
regional managers are responsible for training the general managers and for
on-going support and supervision of the Company's field offices.

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

    Route Merchandising. Frequent, regular and reliable service and support is
an important element in the operation of the Company's Shoppes. The Company's
route merchandisers and franchisee personnel are trained to perform regularly
scheduled merchandising and service procedures. A route merchandiser has a route
consisting of 10 to 33 locations, depending upon volume, which are visited and
serviced two to ten times per week. The route merchandiser cleans and services
the Shoppe, takes inventory of the Shoppe, replaces product as needed, monitors
the Vend Ratio and arranges the product within the Shoppe in accordance with the
Company's merchandising techniques. The route merchandiser records the number of
units of product placed in the machines and the number of plays from
nonresettable meters. The meter readings are subsequently reconciled against
actual collections. All collections are delivered to and verified by a field
office for deposit.

    Inventory Management and Distribution. The Company's distribution system is
designed to allow efficient and cost-effective distribution of its product to
Company field offices and franchise offices. After the product is procured from
the Company's suppliers, it is shipped to one of two distribution centers where
it is sorted and readied for pre-packing. The Company maintains inventory for
the products offered through its Toy Shoppes and Beanie Bag Shoppes in a public
warehousing facility in Seattle, Washington. An inventory of products offered in
Treasure Shoppes and Fun Shoppes is maintained in the Company's warehouse in
Boulder, Colorado. The Company communicates appropriate product mix requirements
to the warehouses on a weekly basis. The warehouses sort the products according
to the Company's specified mix requirements and pack the product for each type
of Shoppe into pre-packed units for shipment to Company field offices and
franchises on a weekly basis.

    At December 31, 1997, the Company had 32 offices operating in 41 states. The
field offices average approximately 2,280 square feet and comprise a small
office area and a warehouse area where out-of-service Shoppes are repaired and
product inventory is maintained. Part of the route merchandisers' daily route
servicing responsibilities is to distribute product to Shoppes. Pre-packing aids
in controlling product cost and facilitates new product introductions.
Pre-packing also substantially reduces the warehouse space required for
inventory, allowing the Company-owned and franchise



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offices to service a greater number of Shoppes without a commensurate increase
in warehouse space. In addition, pre-packing significantly reduces the time
general managers and franchise personnel spend on inventory management, which
allows more time for acquiring new accounts and monitoring the quality of Shoppe
merchandising in the field.

    Management Information Systems. The Company's management information system
utilizes customized software for monitoring field office and franchisee Shoppe
results. The software allows the Company to monitor individual Shoppe
placements, Shoppe revenue, Vend Ratio and tax and commission payments through
reports generated at the Company field offices. The software also allows the
Company to monitor total Shoppe revenue, average Shoppe revenue, Shoppes on
location and Vend Ratio and to determine franchisee royalty payments for
franchise offices.

MERCHANDISING

    Merchandising Mix. The Company offers merchandise for the Shoppes in
pre-pack bags along with bulk merchandise. The pre-pack bags include an
assortment of exclusive SugarLoaf designs, along with licensed and other
domestic goods. The merchandise variety is regularly updated, and the Company
offers at least 1,500 new items each year. Seasonal goods are placed in Shoppes
for all major holidays.

    New Designs. The Company works with several free-lance designers and creates
at least 300 new, exclusive designs each year that can only be obtained through
the SugarLoaf Toy Shoppes. The Company also creates several theme product
collectibles and many players attempt to retrieve all of the products in the
series.

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

SUPPLIERS

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

    Shoppes. During 1997, approximately 79.9% of the 2,303 skill-crane machines
purchased by the Company were supplied by Rainbow; another 19.7% of such
purchases were supplied by Smart Industries, Inc. All three of the Company's
approved suppliers, including one of the leading manufacturers of skill-crane
machines, are located in the U.S. The Company is currently purchasing the
SugarLoaf Treasure Shoppe from one of the Company's three approved suppliers and
is currently purchasing the SugarLoaf Fun Shoppe and the SugarLoaf Toy Shoppe
from two of its approved suppliers. The Company intends to divide future
purchases of its skill-crane machines between at least two of its approved
suppliers and may seek to add new suppliers. Management believes that suitable
skill-crane machines are available from a number of domestic and foreign
manufacturers.

FRANCHISE RELATIONS

    As of December 31, 1997, the Company had franchise agreements in effect with
17 franchisees covering 22 territories in the U.S. and one territory in British
Columbia, Canada covering, in the aggregate, 3,952 Shoppes. The Company does not
currently intend to grant any additional franchises.

    The Company has entered into a franchise agreement with the franchisee for
each separate territory. The Company provides ongoing advice and assistance to
franchisees in connection with the operation and management of each franchise
through training sessions, meetings, seminars, and field training and operations
manuals. Franchisees are required to place a minimum number of Shoppes in each
territory depending on the population of the territory.



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Franchisees are under no minimum product purchase obligations and are required
to pay royalties equal to a percentage of vending revenue, with no fixed minimum
amount required.

    The Company requires its franchisees to meet certain minimum operational
standards in order to maintain consistent quality in the Shoppes. Franchisees
are required to service each Shoppe no less than two times per week, to respond
to service calls within a specified period of time and to maintain certain size,
type and quality standards for the products dispensed in the Shoppes. In
addition, franchisees are required to maintain certain average minimum Vend
Ratios.

    The Company offers franchisees a cost-effective means of purchasing both
products and Shoppes. The Company is able to purchase products and Shoppes in
quantity and thereby reduce equipment and product costs to the Company and its
franchisees. The Company offers pre-packed units of product for each of the
Shoppes. The product mix in the pre-packed units is changed on a weekly basis to
maintain the Shoppes' fresh appearance. Franchisees also can create their own
mix of products by purchasing products in bulk from the Company or other
vendors. The Company must approve all products purchased from other vendors.

    Although the franchise agreements require franchisees to place a specified
minimum number of Shoppes within their territories and to pay franchise
royalties, franchisees are under no minimum product purchase or minimum annual
royalty payment obligations. There can be no assurance, therefore, that the
Company will continue to realize the same or greater revenue from its
franchisees. The Company also cannot require franchisees to expand operations
within their territories or preclude them from taking actions inconsistent with
the Company's expansion or business strategy.

TERMS OF FRANCHISE AGREEMENT

    Following is a summary of certain terms of the Company's franchise
agreements currently in effect:

    Fee and Royalty Payments. Current franchise agreements typically provide for
payment of an initial franchise fee that depends on the population of the
franchised territory. A reduced initial fee is available to qualified current
franchisees who purchase rights to operate in a new territory contiguous to
their respective current territories. Initial franchise fees are not a material
source of the Company's revenue. In addition, the franchisee must pay a royalty
fee based on gross machine revenue, subject to quarterly adjustments, a cap on
fees paid annually and a fee reduction program, as described below. The royalty
may be adjusted up or down at the end of each quarter based on that quarter's
average weekly gross revenue from the territory and such adjustment will remain
in effect until adjusted at the end of the next succeeding calendar quarter. The
annual royalties payable on gross revenue from the SugarLoaf Toy Shoppes and
SugarLoaf Treasure Shoppes in a territory are capped at $125,000. There is no
cap on the annual royalty payable on gross revenue from the SugarLoaf Fun
Shoppe. A franchisee is entitled to a reduction in the royalty rate on gross
revenue from the SugarLoaf Treasure Shoppe and the SugarLoaf Toy Shoppe of one
percentage point on gross revenue for a future six-month period based on the
franchisee meeting certain standards during the most recently completed
six-month period.

    Purchase Requirements. New franchisees are required to make certain minimal
initial purchases of Shoppes from the Company. Additional machines and spare
parts may be purchased from the Company or any Company-approved alternative
sources. Product may be ordered from the Company or from Company-approved
suppliers. The Company offers products through both its pre-packing programs and
a bulk-purchase program whereby volume purchases of certain designated products
are made by the Company.

    Territory Requirements. Franchise agreements generally provide for an area
of exclusivity defined by counties. The Company retains certain rights under the
franchise agreements to operate other types of amusement devices and vending
machines.

    Quality Standards. All of the Company's franchise agreements require that
the franchisee comply with the Company's standards and specifications for
products, machines, distribution of products, inventory standards, service,
placement, appearance and maintenance of the machines, product ordering
procedures, installation, minimum average player return, product mix and
customer relations and service calls.

    Financing Assistance. The Company has established a third-party
equipment-leasing program for qualified franchisees. The leasing program permits
qualified franchisees to lease the machines for their territories. If the



                                       9
<PAGE>   10

franchisee defaults on the lease, the Company has agreed to purchase the
machines from the leasing company at an agreed upon price. If the Company agrees
to guarantee the lease, the franchisee must pay to the leasing company a fee of
less than one percent of the lease amount, which amount is then remitted to the
Company by the leasing company.

    Right of First Refusal. In the event any franchisee proposes to transfer to
any third party its SugarLoaf business or any rights or interests granted by the
franchise agreement, the Company has up to 45 days to exercise a right of first
refusal to purchase such business, rights or interests on the same terms and
conditions as the franchisee's proposed transfer of such business rights or
interests.

COMPETITION

    The majority of skill-crane operators are privately owned "mom and pop"
operations each owning and operating on average less than 20 skill-crane
machines. However, the Company also competes with a number of regional and local
operators of skill-crane machines. Many of these competitors are engaged in
aggressive expansion programs, and the Company has experienced and expects to
continue to experience intense competition for new locations. There can be no
assurance that the Company will be able to compete effectively with these
companies in the future. The Company's Shoppes compete with other vending
machines and coin-operated amusement devices and seasonal and bulk merchandise
for sites in retail locations. Competition for sites in retail locations is
based primarily on the amount of revenue that can be generated by a particular
use of a site. There can be no assurance that the Company will be able to
maintain its current sites in the retail locations or that it will be able to
obtain sites in the future on attractive terms or at all. There also are few
barriers to entry in the Company's business, and it would be possible for
well-financed vending machine manufacturers or other vending machine operators
with existing relationships with supermarkets and other venues targeted by the
Company to compete readily with the Company in certain markets.

INTELLECTUAL PROPERTY

    The Company has no patents or patent applications pending and relies
primarily on a combination of trademark and unfair competition laws, trade
secrets, confidentiality procedures and agreements to protect its proprietary
rights. The Company seeks to protect its product names under trademark and
unfair competition laws. The Company owns a number of trademarks that have been
registered with the United States Patent and Trademark Office, including
"SugarLoaf," "Toy Shoppe," "Treasure Shoppe" and "Fun Shoppe." In addition, the
Company claims common law trademark protection for the mark "A Test of Skill."
The Company considers its operations manual, training videos, and other related
materials and portions of its licensed methods to be proprietary and
confidential and the terms of the Company's franchise agreements require
franchisees to maintain the confidentiality of such information and procedures
and to adopt reasonable precautions to prevent unauthorized disclosure of these
secrets and information. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's Shoppes and products or to obtain and use information that the Company
regards as proprietary. The Company also may be involved from time to time in
litigation to determine the enforceability, scope and validity of proprietary
rights. The Company does not have significant intellectual property protection
for its business. Management believes that its success is likely to depend more
upon merchandising skill, location selection and consumer support than on legal
protection of the Company's proprietary rights.

GOVERNMENT REGULATION

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

    The distribution and operation of skill-crane machines may be subject to
federal, state, provincial and local regulations, including gaming regulations,
which vary from jurisdiction to jurisdiction. Certain jurisdictions may require
licenses, permits and approvals to be held by companies and their key personnel
in connection with the distribution or



                                       10


<PAGE>   11

operation of skill-crane machines. Management believes that Washington is the
only state in which the Company currently operates Shoppes that requires the
Company to maintain a license with the state's gambling commission. Currently,
the Company believes that it has obtained all necessary governmental licenses,
permits and approvals necessary for the distribution or operation of the Shoppes
in the Company-owned operations. However, no assurance can be given that such
licenses, permits or approvals will be given or renewed in the future.
Franchisees are responsible for their own regulatory compliance.

    The U.S. Federal Trade Commission and certain states require a franchisor to
transmit specified disclosure statements to potential franchisees upon entering
into negotiations to grant a franchise. Additionally, some states require the
franchisor to register its franchise with the state before it may offer a
franchise. The Company believes it is in material compliance with such laws in
the states in which the Company has offered or sold franchises and does not
currently intend to grant any additional franchises.

INSURANCE

    The Company carries property, liability, workers' compensation and directors
and officers liability insurance policies, which it believes are customary for
businesses of its size and type. However, there can be no assurance that the
Company's insurance coverage will be adequate or that insurance will continue to
be available to the Company at reasonable rates. Franchisees are required to
maintain certain minimum standards of insurance pursuant to their franchise
agreements. Under the current form of franchise agreement, such insurance must
be issued by a responsible insurance company or companies acceptable to the
Company and must include fire and extended coverage insurance, comprehensive
general liability insurance, general liability motor vehicle insurance on all
vehicles used in the operation of the business and workers' compensation
insurance. The Company must be named as an additional insured on appropriate
policies.

    The Company may be subject to claims for personal injuries resulting from
the use of its Shoppes or from products and other merchandise dispensed from the
Shoppes. To date, the Company has not experienced any material product liability
claims or costs, and it currently maintains product liability insurance which it
believes to be adequate. The Company's product liability insurance coverage is
limited, however, and there can be no assurance that such insurance would
adequately cover future product liability costs or claims.

EMPLOYEES

    As of February 27, 1998, the Company had a total of 487 employees, including
43 employees at its headquarters in Boulder, Colorado. None of the Company's
employees are represented by labor unions or covered by any collective
bargaining contract. Management believes it has a good relationship with the
Company's employees.

    Generally, each of the Company's field offices employs approximately 5 to 35
persons, including a general manager, an office assistant and an adequate number
of route merchandisers to properly service the Company's Shoppes. The general
manager is responsible for the daily operations of the office, monitoring route
merchandisers and acquiring new accounts. The regional managers oversee the
operations of the Company field offices and report directly to the Company's
area directors.

    The Company has an incentive bonus program pursuant to which regional
managers and field office personnel may be eligible to receive incentive
compensation based on office and route profitability. Management believes that
this program rewards excellence in management, gives field office personnel an
incentive to improve operations and results in an overall reduction in the cost
of operations. In addition, regional field managers and other corporate
personnel are eligible to receive options to purchase shares of Common Stock
subject to ongoing service requirements.

ITEM 2.    PROPERTIES

    The Company's principal executive offices are located at 5660 Central
Avenue, Boulder, Colorado, where the Company, its Treasure and Fun Shoppe
fulfillment warehouse facilities and the Denver, Colorado operation occupy
approximately 28,000 square feet of office and warehouse space under a lease
that expires February 28, 2003. The Company also is a party to 38 other leases
which are used for office and warehouse space which average approximately



                                       11
<PAGE>   12

2,100 square feet, provide for monthly rental payments ranging from $275 to
$3,930 and expire at various times over the period May 31, 1998 to September 30,
2000.

ITEM 3.    LEGAL PROCEEDINGS

    None

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    A Special Meeting of Stockholders was held on November 12, 1997, at which
the stockholders approved (i) an increase in the authorized number of shares of
Common Stock from 7 million to 20 million shares, approved (ii) an increase in
the aggregate number of shares of Common Stock reserved for issuance under the
Company's Amended and Restated Stock Option Plan from 856,132 to 1.4 million
shares, and (iii) approved an increase in the aggregate number of shares of
Common Stock reserved for issuance under the Company's 1995 Non-Employee
Director Stock Option Plan from 42,000 to 100,000 shares. Votes were cast as
follows:

<TABLE>
<CAPTION>
                                                           Votes Against
                                              Votes For     Or Withheld     Votes Abstained     Broker Non-Votes
                                              ---------    -------------    ---------------     ----------------
<S>                                           <C>          <C>              <C>                 <C>
Increase in authorized number of
  shares of Common Stock from 7
  million to 20 million..................     3,534,345       868,307           850,000          Not Applicable

Increase in aggregate number of
  shares of Common Stock reserved
  for issuance under the Company's
  Amended and Restated Stock Option
  Plan from 856,132 to 1.4 million
  shares.................................     3,489,995       912,657           850,000          Not Applicable

Increase in aggregate number of
  shares of Common Stock reserved
  for issuance under the Company's
  1995 Non-Employee Director Stock
  Option Plan from 42,000 to 100,000.....     3,539,695       863,807              None          Not Applicable
</TABLE>


                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
           MATTERS

    Common Stock Data. The Company's Common Stock began trading publicly in the
over-the-counter market through the Nasdaq National Market on October 16, 1995
under the symbol "AMCN". Prior to that date, there was no public market for the
Common Stock. On February 27, 1998, the number of record holders was 44 and the
Company estimates that on that date there were an additional 1,900 beneficial
owners. On February 27, 1998, the closing price reported on the NASDAQ National
Market for the Common Stock was $16.50. The following table sets forth for the
periods indicated the high and low closing sale quotations for the Common Stock
as reported on the Nasdaq National Market. The prices reported do not include
retail mark-up, mark down or commissions and may not reflect actual
transactions.
<TABLE>
<CAPTION>
                                                                  HIGH      LOW
                                                                  ----      ---
<S>                                                              <C>      <C>   
For the Fiscal Year Ended December 31, 1996:
  First Quarter...............................................   $ 6.63   $ 4.88
  Second Quarter..............................................     6.25     4.50
  Third Quarter...............................................     6.50     4.00
  Fourth Quarter..............................................     6.25     4.75
For the Fiscal Year Ended December 31, 1997:
  First Quarter...............................................     8.88     5.00
  Second Quarter..............................................    11.63     6.88
  Third Quarter...............................................    17.63     9.63
  Fourth Quarter..............................................    18.38    14.63
</TABLE>



                                       12
<PAGE>   13

    Common Stock Dividends. The Company has not declared or paid a cash dividend
on its Common Stock. The payment of future dividends will be within the
discretion of the Company's Board of Directors and will depend on the earnings,
capital requirements, and restrictions in current and future credit agreements
and operating and financial condition of the Company, among other factors. The
Company's current credit facility limits its payment of dividends while the
credit facility is in place. Prior to October 1995, the Company made S
corporation distributions to its respective owners. See "Certain Relationships
and Related Transactions."

ITEM 6.    SELECTED FINANCIAL DATA

    The selected financial data set forth below with respect to the Company's
statements of earnings for each of the years in the five-year period ended
December 31, 1997, have been derived from the financial statements of the
Company.


<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31
                                                                 ------------------------------------------------------------
                                                                   1997         1996         1995         1994         1993
                                                                 --------     --------     --------     --------     --------
                                                                     (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S>                                                              <C>          <C>          <C>          <C>          <C>     
STATEMENT OF EARNINGS DATA:
Revenue:
  Vending ..................................................     $ 52,866     $ 30,439     $ 17,031     $ 11,651     $  6,258
  Franchise and other ......................................        6,218        7,828        8,683        5,963        4,250
                                                                 --------     --------     --------     --------     --------
        Total revenue ......................................       59,084       38,267       25,714       17,614       10,508
                                                                 --------     --------     --------     --------     --------
Cost of revenue:
  Vending ..................................................       37,506       21,283       11,701        8,399        4,368
  Franchise and other ......................................        3,967        5,659        6,054        4,207        2,737
                                                                 --------     --------     --------     --------     --------
        Total cost of revenue ..............................       41,473       26,942       17,755       12,606        7,105
                                                                 --------     --------     --------     --------     --------
        Gross profit .......................................       17,611       11,325        7,959        5,008        3,403
General and administrative expense .........................       10,314        7,053        4,565        3,607        2,854
                                                                 --------     --------     --------     --------     --------
Operating earnings .........................................        7,297        4,272        3,394        1,401          549
Interest expense ...........................................          612          375          383          228          115
Minority interest ..........................................           --           --           80           62           89
Share of loss of equity affiliate ..........................           --           --           27           29           24
                                                                 --------     --------     --------     --------     --------
Earnings before income taxes ...............................        6,685        3,897        2,904        1,082          321
Income tax expense .........................................        2,256        1,311          329           --           --
                                                                 --------     --------     --------     --------     --------
        Net earnings .......................................     $  4,429     $  2,586     $  2,575     $  1,082     $    321
                                                                 ========     ========     ========     ========     ========

Basic earnings per share(2) ................................     $   0.80     $   0.51
Diluted earnings per share(2) ..............................     $   0.78     $   0.48
Basic weighted average common shares(2) ....................        5,565        5,092
Diluted weighted average common shares(2) ..................        5,694        5,417
Pro forma information:
  Historical net earnings before income taxes ..............                               $  2,904     $  1,082     $    321
  Pro forma adjustments to earnings before taxes ...........                                  1,207
                                                                                           --------
  Pro forma earnings before income taxes ...................                                  4,111
  Pro forma income tax expense .............................                                  1,562          411          122
                                                                                           --------     --------     --------
  Pro forma net earnings(1)(2) .............................                               $  2,549     $    671     $    199
                                                                                           ========     ========     ========
NUMBER OF SHOPPES(3):
Company operations .........................................        6,166        3,967        2,057        1,019          743
Franchise operations .......................................        3,952        3,981        3,455        3,008        2,148
                                                                 --------     --------     --------     --------     --------
        Total ..............................................       10,118        7,948        5,512        4,027        2,891
                                                                 ========     ========     ========     ========     ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,
                                                                 ------------------------------------------------------------
                                                                   1997         1996         1994         1995         1993
                                                                 --------     --------     --------     --------     --------
                                                                                        (IN THOUSANDS)
<S>                                                              <C>          <C>          <C>          <C>          <C>     
BALANCE SHEET DATA:
Working capital ............................................     $  3,626     $  2,914     $  2,896     $    220     $    350
Total assets ...............................................       37,077       19,758       13,702        5,539        3,750
Total short-term debt and current portion of
  long-term debt ...........................................        1,619        1,109          557        1,380        1,157
Total long-term debt, excluding current portion ............        1,292        5,059        1,632        1,640        1,078
Total stockholders' equity .................................       30,092       11,676        9,007        1,214          833
</TABLE>

----------
(1)  During the years 1993 through August 1995, the Company and each of the
     Chicago Toy Company,  the Georgia Toy Company, Inland Merchandising, Inc.,
     Lehigh Valley Toy Company, Performance Merchandising, Inc., Southwest Coin
     Company, 



                                       13
<PAGE>   14

     Sugarloaf, Ltd. and Sugarloaf Marketing Inc. (the "Affiliated Entities"),
     were organized as either S corporations or a partnership and the taxable
     income of the Company and the Affiliated Entities was attributable directly
     to their respective stockholders or partners during such periods.
     Accordingly, net earnings have been adjusted to reflect federal and state
     income taxes as if such taxes had been incurred for such period at an
     estimated effective rate of 38%. See Note 1 of Notes to the Financial
     Statements included herein.

(2)  Net earnings per share and weighted average common shares are not presented
     for 1993 through 1995 because the Company and each of the Affiliated
     Entities were organized as S corporations or a partnership. On a pro forma
     basis, basic and diluted net earnings per share would have been $0.59 and
     $0.55 and basic and diluted weighted average common shares would have been
     4,299,000 and 4,669,000 respectively, for 1995. See Note 14 of Notes to the
     Financial Statements included herein.

(3)  Shoppes previously owned and operated by the Affiliated Entities, other
     than Sugarloaf Marketing, are included in Company operations. Shoppes
     previously owned and operated by Sugarloaf Marketing are included in
     franchise operations on an historical basis. The number of Shoppes is as of
     the end of the indicated period.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS.

    The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below in the section "Risk
Factors" and the Company's Prospectus dated October 28, 1997. The information
presented below should be read in conjunction with the financial statements,
including notes thereto, included elsewhere in this Report.

GENERAL

    The Company and its franchisees own and operate Shoppes that dispense
stuffed animals, plush toys, watches, jewelry and other items. The Company's
Shoppes are placed in Retail Accounts and similar high traffic locations, and
for the year ended December 31, 1997 typically paid 20-30% of gross revenue to
the location owner as a location commission. At December 31, 1997, the Company
had a national network of 32 offices operating in 41 states and there were 17
Company franchisees operating in 23 territories. The Company sells both machines
and product vended in the machines to its franchisees and collects continuing
royalties ranging from 2% to 5% of its franchisees' gross machine revenue.

    For the year ended December 31, 1997, over 85% of the Company's revenue and
gross profit were derived from Company-owned Shoppes. The Company's revenue and
gross profit in a particular period is directly related to the number of Shoppes
in operation during the period. Management believes that the Company's business
is somewhat seasonal, with average revenue per machine per week greater during
the Easter and Christmas periods. Vending revenue represents cash receipts from
customers using vending machines and is recognized when collected. The cost of
vending revenue is comprised of the cost of vended products, location
commissions, depreciation, and direct service cost.

    Franchise and other revenue represents the Company's percentage of gross
vending revenue generated by Shoppes owned and operated by franchisees, as well
as product sold to the franchisees. Initial franchise fees have not been
material, and the Company currently does not plan to expand its franchise
network. Product sold to the franchisees consists of goods to vend in Shoppes.
Equipment sales to the franchisees have been done on a pass-through basis from
the Company's main suppliers. The Company anticipates that franchise and other
revenue will decline in the future as a result of the Company's acquisition of
franchises.

    In 1995, the Company terminated its S corporation status. In conjunction
with its initial public offering in October 1995, the Company reorganized by
acquiring substantially all of the inventory, property and equipment and
assuming certain facilities leases and contracts of the Affiliated Entities (the
"Reorganization"). All of the Affiliated Entities previously were franchisees of
the Company and all except Sugarloaf Marketing, were controlled by one or more
of Greg Theisen, Abbe Stutsman, Richard Jones and Randall Fagundo and their
respective spouses (the "Founders").

    The number of Company owned and operated Shoppes has risen from 743 to 6,166
from 1993 to 1997, representing a compound annual growth rate of 69.7%. In 1997,
the Company had record revenue and operating earnings of $59.1 million and $7.3
million, respectively. The Company has experienced 54.0% and 90.9% compound
annual growth rates in total revenue and operating earnings, respectively,
between 1993 and 1997.



                                       14
<PAGE>   15


    The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed an implementation plan to resolve any issues. Considering the nature
of the Company's computer systems, and modifications to be made, if any, as a
result of the implementation plan, management believes the Year 2000 issue will
not pose significant operational problems for the Company.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996

Revenue

    The Company's total revenue increased 54.4% from $38.3 million in 1996 to
$59.1 million in 1997. Vending revenue increased $22.4 million or 73.7% in 1997
to $52.9 million, primarily as a result of an increase in the average number of
Shoppes in use during 1997, which increased 68.2% over the average number of
Shoppes in use during 1996.

    Franchise and other revenue decreased $1.6 million or 20.6% in 1997 as
compared to 1996 due primarily to the acquisition of Company franchises.

Cost of Revenue and Gross Profit

    The cost of vending operations increased $16.2 million in 1997 to $37.5
million. The vending operations' contribution to 1997 gross profit increased to
$15.4 million, which represents a 67.8% increase over gross profit from vending
operations realized in 1996. The vending gross profit achieved in 1997 was 29.1%
of vending revenue, which represents a decrease from the 30.1% of vending
revenue achieved in 1996. The decline in vending margin in 1997 results
primarily from a higher commission rate paid to locations in 1997.

    Gross profit on franchise and other revenue in 1997 increased to $2.3
million, or 36.2% of franchise and other revenue, which is 8.5 percentage points
higher than the gross margin achieved in 1996. The increase in gross margin as a
percentage of franchise and other revenue resulted primarily from lower 1997
equipment sales to franchisees that are at lower margins.

Operating Expense

    General and administrative expense as a percentage of revenue decreased to
17.5%, as compared to 18.4% of revenue in 1996. The $3.3 million increase in
general and administrative expense results primarily from the additional
operating and satellite offices opened by the Company during the past year.

Operating Earnings

    Operating earnings in 1997 increased 70.8% to $7.3 million or 12.4% of total
revenue, which are, as a percentage of total revenue, 1.2 percentage points
higher than the operating earnings achieved in 1996. The increase in operating
earnings results primarily from the 68.2% increase in the average number of
Shoppes in place during 1997 compared to average number in place in 1996. The
effect of the increase in Shoppes is offset by the 46.2% increase in general and
administrative expense experienced in 1997 compared to 1996.

Non Operating Income (Expense)

    Interest expense increased $237,000 to $612,000 in 1997 as compared to 1996.
The Company's interest expense is directly related to its level of borrowings
and changes in the underlying interest rates.

Net Earnings and Earnings Per Share

      Net earnings for the year ended December 31, 1997 were $4.4 million, or
7.5% of total revenue, as compared to net earnings of $2.6 million during 1996.
Diluted earnings per share for 1997 increased 62.5% to $0.78, as compared to
$0.48 per share in 1996.


                                       15

<PAGE>   16


YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995

Revenue

    The Company's total revenue increased 48.8% from $25.7 million in 1995 to
$38.3 million in 1996. Vending revenue increased $13.4 million or 78.7% in 1996
to $30.4 million as a result of an increase in the average number of Shoppes in
use during 1996, which increased 95.8% over the average number of Shoppes in use
during 1995. Franchise and other revenue decreased $855,000 or 9.8% in 1996 as
compared to 1995 due primarily to the acquisition of Company franchises.

Cost of Revenue and Gross Profit

    The cost of vending operations increased $9.6 million in 1996 to $21.3
million. The vending operations' contribution to 1996 gross profit increased to
$9.2 million, which represents a 71.8% increase over gross profit from vending
operations realized in 1995. The vending gross profit achieved in 1996 was 30.1%
of vending revenue, which represents a decrease from the 31.3% of vending
revenue achieved in 1995. The decrease in vending margin in 1996 results
primarily from a higher commission rate paid to locations. Gross profit on
franchise and other revenue in 1996 decreased to $2.2 million, or 27.7% of
franchise and other revenue, which is 2.6 percentage points lower than the gross
margin achieved in 1995. The decrease in gross margin resulted primarily from
lower margins realized on equipment sales to franchisees.

Operating Expense

    General and administrative expense increased $2.5 million in 1996 to $7.1
million or 18.4% of revenue, as compared to $4.6 million or 17.8% of revenue in
1995. The increase in general and administrative expense results primarily from
the acquisition of SugarLoaf Marketing and other franchisees, additional
operating and satellite offices opened during 1996, the accelerated placement of
machines during 1996 and the additional payroll and other costs associated with
being a public company. In 1995, general and administrative expense includes
$232,000 of commissions paid to the Company's two major stockholders.

Operating Earnings

    Operating earnings in 1996 increased to $4.3 million or 11.2% of total
revenue, which are, as a percentage of total revenue, 2 percentage points lower
than the operating earnings achieved in 1995. The decrease in operating earnings
results primarily from the additional operating and satellite offices opened
during 1996, the accelerated placement of machines during 1996 and the
additional payroll and other costs associated with being a public company.

Non Operating Income (Expense)

    Interest expense decreased $8,000 to $375,000 in 1996 as compared to 1995.
The Company's interest expense is directly related to its level of borrowings
and changes in the underlying interest rates.

Net Earnings and Earnings Per Share

    Net earnings for the year ended December 31, 1996 were $2.6 million, or 6.8%
of total revenue. Diluted earnings per share diluted for the year ended December
31, 1996 were $0.48. Prior to October 13, 1995 the Company had elected tax
treatment as an S corporation, while the combined affiliates were each organized
as S corporations, except for Southwest Coin Company which was organized as a
partnership. Accordingly, through October 12, 1995, no provisions were made for
income taxes since all income, deductions, gains, losses and credits were
reported on the tax returns of the owners.

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 bank credit facility and issuances of its common stock. These sources
of cash flows have been offset by cash used for investment in skill-crane
machines and payment of long-term borrowings.



                                       16
<PAGE>   17

    Net cash provided by operating activities was $8.4 million, $4.2 million and
$2.9 million in 1997, 1996 and 1995, respectively. The Company anticipates that
cash will continue to be provided by operations as additional skill-crane
machines are placed in service. Cash required in the future is expected to be
funded by existing cash and cash provided by operations, borrowings under the
Company's credit facility or sale of equity securities.

    Net cash used by investing activities was $16.1 million, $7.4 million and
$5.5 million in 1997, 1996 and 1995, respectively. Capital expenditures amounted
to $12.2 million, $6.1 million and $2.2 million in 1997, 1996 and 1995,
respectively, of which $7.2 million, $4.8 million and $1.6 million were
represented by the acquisition of skill-crane machines. The acquisition of
franchisees, other than through the Reorganization in 1995, used $2.6 million,
$1.2 million and $160,000 in 1997, 1996 and 1995, respectively. Payments to the
non-control group in the Reorganization were $3.1 million in 1995.

    Net cash provided by financing activities was $8.9 million, $2.4 million and
$3.9 million in 1997, 1996 and 1995 respectively. In 1997 the issuance of Common
Stock primarily in connection with the Company's follow-on offering, provided
$13.9 million. The issuance of Common Stock primarily in connection with the
Company's initial public offering, provided $10.1 million in 1995 of which $4.5
million was used to pay distributions to the Control Group in connection with
the Reorganization. Cash of $326,000 was retained by the combined affiliates in
the Reorganization. Other financing activities consist of advances and
repayments on the Company's credit facility and other debt obligations and S
corporation distributions to owners. Financing activities also includes advances
and repayments on the Company's credit facility and other debt obligations.

    Under the Revolving Line, the Company may borrow up to $15.0 million at the
bank's prime interest rate (8.5% at December 31, 1997) or, at the Company's
option, an interest rate based on the current LIBOR rate. The Revolving Line is
available through July 5, 1999 and at December 31, 1997 there was no principal
amount outstanding. The Revolving Line provides that certain financial ratios be
met and places restrictions on, among other things, the occurrence of additional
debt financing and the payment of dividends. The Company was in compliance with
such financial ratios and restrictions at December 31, 1997.

    On November 3, 1997, the Company completed a follow-on public offering of
its common stock, whereby the Company sold 1,000,000 shares at $15 per share.
Total proceeds, net of underwriting commission and other expenses of $1.1
million, were approximately $13.9 million.

    The Company may use a portion of its capital resources to effect
acquisitions. Because the Company cannot predict the timing or nature of
acquisition opportunities, or the availability of acquisition financing, the
Company cannot determine the extent to which capital resources may be used.

    Company management believes the Company's financial condition is strong and
that funds generated from operations and borrowings available under its credit
agreement and the Company's ability to negotiate additional and enhanced credit
agreements will be sufficient to meet the Company's foreseeable operating and
capital expenditure needs.

RECENT ACCOUNTING PRONOUNCEMENTS

    In June of 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards, No. 130, Reporting Comprehensive Income,
(Statement No. 130), and No. 131, Disclosures About Segments of an Enterprise
and Related Information, (Statement No. 131), effective for years beginning
after December 15, 1997. Statement No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not yet adopted Statement
No. 130. The Company will comply with the reporting and display requirements
under this statement when required. Statement No. 131 establishes standards for
reporting information about operating segments and the methods by which such
segments were determined. The Company has not yet adopted Statement No. 131. As
the Company operates within one industry segment, the reporting of such
information is not expected to be significant.



                                       17

<PAGE>   18

                                  RISK FACTORS

    This report contains forward-looking statements. Because such statements
include risks and uncertainties, actual results could differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below and in the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" as
well as those discussed elsewhere in this Report and the Company's Prospectus
dated October 28, 1997.

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

    Acquisition Related Risks. The Company may use a portion of its capital
resources to effect acquisitions. 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. The Company is unable to predict whether or when any prospective
acquisition candidates will become available or the likelihood of a material
transaction being completed should any negotiations commence. If the Company
proceeds with any such transaction, no assurance can be given that the Company
can effectively integrate the acquired operations with its own. The Company also
may seek to finance any such acquisition through debt financings or issuances of
equity and there can be no assurance that any such financing will be available
on acceptable terms or at all.

    Trade Relations and Dependence on Major Accounts. The Company's largest
major account, Wal-Mart, accounted for approximately 33.5% and 11.4% of total
revenue for fiscal 1997 and 1996, respectively. In August 1996, the Company
entered into a contract with Wal-Mart that expires on January 1, 2000. Although
the Company has entered into a contract with Wal-Mart, national and regional
Retail Accounts generally do not enter into long-term contracts with vendors. In
individual-location accounts, the Company and its franchisees generally place
Shoppes pursuant to oral agreements with location managers. The arrangements of
the Company and its franchisees with most of these accounts may be terminated at
any time. In addition, Wal-Mart may terminate its contract with the Company
under certain limited circumstances. The loss of the Wal-Mart account, or the
loss of a significant number of other major accounts, or a significant reduction
in the number of Shoppes placed at such accounts, for any reason, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

    Dependence on Suppliers and Foreign Sourcing. Substantially all the
Company's plush toys and other products dispensed from the Shoppes are produced
by foreign manufacturers. A majority are purchased directly by the Company from
manufacturers in the People's Republic of China ("China"). The Company purchases
its other products indirectly from vendors who obtain a significant percentage
of such products from foreign manufacturers. As a result, the Company is subject
to changes in governmental policies, the imposition of tariffs, import and
export controls, transportation delays and interruptions, political and economic
disruptions and labor strikes which could disrupt the supply of products from
such manufacturers. Among other things, the loss of China's "most favored
nation" status under U.S. tariff laws could result in a substantial increase in
the import duty of certain products manufactured in China, which could result in
substantially increased costs for certain products purchased by the Company
which could have a material adverse effect on the Company's financial
performance.

    Nature of Franchise Relations. For the year ended December 31, 1997, the
Company derived approximately 10.5% of its total revenue from franchise and
other revenue. The Company expects to continue to derive revenue from its
franchisees in the future. Franchise and other revenue consists primarily of
product sales to franchisees and royalties from franchisees. The Company's
franchise agreements generally grant franchisees an exclusive geographic
territory in which the Company generally may not place or operate the same type
of Shoppes. Although the franchise agreements require franchisees to place a
specified minimum number of Shoppes within their territories and to pay
franchise royalties, franchisees are under no minimum product purchase or
minimum annual royalty payment obligations. There



                                       18
<PAGE>   19

can be no assurance, therefore, that the Company will continue to realize the
same or greater revenue from its franchisees. The Company also cannot require
franchisees to expand operations within their territories or preclude them from
taking actions inconsistent with the Company's expansion plans or business
strategy.

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

    Dependence on Key Employees. The Company's success to date has been
dependent in part upon the efforts and abilities of Jerome M. Lapin (its
President, Chief Executive Officer and Chairman), W. John Cash (its Vice
President, Chief Financial Officer and Treasurer), Randall J. Fagundo (its Vice
President of Operations and Secretary), Abbe M. Stutsman (its Vice President of
Purchasing and Product Development), and certain other key personnel. The
Company's continued success will depend upon its ability to retain a number of
its current key employees and to attract, train and retain new key management
and operational personnel. There can be no assurance that the Company will be
able to retain its existing key employees or attract and retain qualified
employees in the future. The Company does not maintain any "key man" insurance.
In addition, executives or other employees with knowledge of the Company's
operations and policies may leave the Company and establish competitive
businesses. There can be no assurance that the Company would be able to
effectively enforce non-compete provisions against these individuals.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The financial statements and related notes thereto required by this item are
listed and set forth herein beginning on page 23.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

    None.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Directors of Registrant. Information as to the names, ages, positions and
offices with the Company, terms of office, periods of service, business
experience during the past five years and other directorships held by each
director of the Company is set forth under the caption ELECTION OF DIRECTORS
appearing in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders which will be filed with the Securities and Exchange
Commission within 120 days after the close of the 1997 year.

     Executive Officers of the Registrant. At the meeting of the Board of
Directors of the Registrant, which immediately follows the annual meeting of
stockholders, the Board of Directors elects officers of the Registrant. Such
officers hold office until death, resignation, removal from office or until
their successors are chosen and qualified. The names and ages of all executive
officers of the Registrant are set forth under the caption EXECUTIVE OFFICERS
appearing in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders which will be filed with the Securities and Exchange
Commission within 120 days after the close of the 1997 year.

     Compliance with Section 16(a) of the Exchange Act. Section 16(a) of the
Securities Exchange Act of 1934 requires the Company's officers and directors
and persons who own more than ten percent of the Company's outstanding common
stock to file reports of ownership and changes in ownership with the Securities
and Exchange Commission. Officers, directors and greater than ten percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.



                                       19
<PAGE>   20

     To the Company's knowledge, during the fiscal year ended December 31, 1997,
all directors, officers or more than ten percent shareholders timely filed their
Form 3's and Form 4's.

ITEM 11.   EXECUTIVE COMPENSATION

     Information concerning remuneration received by the Company's directors and
executive officers and stock options is set forth under the caption EXECUTIVE
COMPENSATION appearing in the Company's definitive proxy statement for the 1998
Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the close of the 1997 year.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information as to the security ownership of certain beneficial owners of
the Company and by each of its directors and officers as of March 23, 1998, and
the amount of such shares with respect to which certain of the directors and
officers have the right to acquire beneficial ownership, is set forth under the
caption SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT appearing
in the Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission
within 120 days after the close of the 1997 year.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information concerning transactions with management and others and certain
business relationships is set forth under the caption CERTAIN TRANSACTIONS
appearing in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders which will be filed with the Securities and Exchange
Commission within 120 days after the close of the 1997 year.

                                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (a)    EXHIBITS

            2.1+     -- Memorandum of Terms for the Purchase of Assets between
                        the Registrant and Chicago Toy Company, Inc., dated July
                        17, 1995.
            2.2+     -- Memorandum of Terms for the Purchase of Assets between
                        the Registrant and Georgia Toy Company, dated July 21,
                        1995.
            2.3+     -- Memorandum of Terms for the Purchase of Assets between
                        the Registrant and Inland Merchandising, Inc., dated
                        July 21, 1995.
            2.4+     -- Memorandum of Terms for the Purchase of Assets between
                        the Registrant and Lehigh Valley Toy Company, dated July
                        21, 1995.
            2.5+     -- Memorandum of Terms for the Purchase of Assets between
                        the Registrant and Performance Merchandising, Inc.,
                        dated July 21, 1995.
            2.6+     -- Memorandum of Terms for the Purchase of Assets between
                        the Registrant and Southwest Coin Company, dated July
                        21, 1995.
            2.7+     -- Memorandum of Terms for the Purchase of Assets between
                        the Registrant and Sugarloaf, Ltd. and Sugarloaf
                        Marketing, Inc., dated May 31, 1995.
            2.8+     -- Asset Purchase Agreement among the Registrant, certain
                        persons and Chicago Toy Company, Inc., dated August 31,
                        1995.
            2.9+     -- Asset Purchase Agreement among the Registrant, certain
                        persons and Georgia Toy Company, dated August 31, 1995.
            2.10+    -- Asset Purchase Agreement among the Registrant, certain
                        persons and Inland Merchandising, Inc., dated August 31,
                        1995.
            2.11+    -- Asset Purchase Agreement among the Registrant, certain
                        persons and Lehigh Valley Toy Company, dated August 31,
                        1995.
            2.12+    -- Asset Purchase Agreement among the Registrant, certain
                        persons and Performance Merchandising, Inc., dated
                        August 31, 1995.
            2.13+    -- Asset Purchase Agreement among the Registrant, certain
                        persons and Sugarloaf Ltd. and Sugarloaf Marketing,
                        Inc., dated August 31, 1995.


                                       20
<PAGE>   21


            3.1+     -- Certificate of Incorporation of the Registrant.
            3.2+     -- Bylaws of the Registrant.
            4.1+     -- Reference is made to Exhibits 3.1 and 3.2.
            4.2+     -- Specimen Stock Certificate.
            10.1+    -- Form of Indemnity Agreement to be entered into between
                        the Registrant and its directors and executive officers.
            10.2+    -- Amended and Restated Stock Option Plan of the Registrant
                        (the "Option Plan").
            10.3+    -- Form of Incentive Stock Option under the Option Plan.
            10.4+    -- Form of Nonstatutory Stock Option under the Option Plan.
            10.5+    -- 1995 Non-Employee Director Stock Option Plan (the
                        "Director Plan").
            10.6+    -- Form of Nonstatutory Stock Option under the Director
                        Plan.
            10.7+    -- Stockholder Agreement between the Registrant and the
                        Founders, certain of their spouses and Jerome M. Lapin,
                        dated as of January 6, 1994, as amended July 21, 1995
            10.8+    -- Letter Agreement between the Registrant and Norwest Bank
                        Colorado, N.A., dated as of October 11, 1995.
            10.9+    -- Registrant's Uniform Franchise Offering Circular, dated
                        August 31, 1995, including forms of the Franchise
                        Agreement, the National Account Program Agreement, Pre-
                        Pack Program Agreement and the Bulk Purchasing
                        Agreement.
            10.10+   -- Amended and Restated Term Loan and Credit Agreement,
                        including exhibits thereto, between the Registrant and
                        Norwest Bank Colorado, N.A., dated as of May 1, 1995, as
                        amended on July 21, 1995.
            10.11+   -- Amended and Restated Promissory Notes between the
                        Registrant and each of the parties set forth within,
                        dated as of August 31, 1995.
            10.12+   -- Modification Agreement, dated August 25, 1995, between
                        the Registrant and Norwest Bank Colorado, N.A.
            10.13+   -- Form of Representative's Warrant.
            10.14+   -- Form of Uniform Commercial Code Security Agreement
                        between the Registrant and each of the parties listed on
                        the attached schedule, dated as of August 31, 1995.
            10.15+   -- Form of Noncompetition Agreement between the Registrant
                        and each of the parties listed on the attached schedule,
                        dated as of August 31, 1995.
            10.16+   -- Form of Promissory Note between the Registrant and each
                        of the parties listed on the attached schedule, dated as
                        of August 31, 1995.
            10.17+   -- Form of Promissory Note between the Registrant and each
                        of the parties listed on the attached schedule, dated as
                        of August 31, 1995.
            10.18+   -- Form of Promissory Note between the Registrant and each
                        of the parties listed on the attached schedule, dated as
                        of August 31, 1995.
            10.19+   -- Subordination Agreement between the Registrant and
                        Georgia Toy Company, dated as of August 31, 1995.
            10.20+   -- Subordination Agreement between the Registrant and
                        Inland Merchandising, Inc., dated as of August 31, 1995.
            10.21+   -- Subordination Agreement between the Registrant and
                        Lehigh Valley Toy Company, dated as of August 31, 1995.
            10.22+   -- Subordination Agreement between the Registrant and
                        Performance Merchandising, Inc., dated as of August 31,
                        1995.
            10.23+   -- Subordination Agreement between the Registrant,
                        Sugarloaf Ltd., Sugarloaf Marketing, Inc. and Southwest
                        Coin Company, dated as of August 31, 1995.
            10.24+   -- Subordination Agreement between the Registrant and
                        Chicago Toy Company, Inc., Chicago Toy Company, Inc.,
                        dated as of August 31, 1995.
            10.25+   -- Agreement to Purchase Assets and Release among Pleasant
                        Valley Toy Company, Inc., Robert G. Kittridge and the
                        Registrant dated as of September 6, 1995.
            10.26++  -- Employment Agreement dated as of June 1, 1996, between
                        the Registrant and Jerome M. Lapin.
            10.27++  -- Employment Agreement dated as of June 1, 1996, between
                        the Registrant and Abbe M. Stutsman.
            10.28++  -- Employment Agreement dated as of June 1, 1996, between
                        the Registrant and W. John Cash.
            10.29++* -- Other Income Vendor Agreement, dated as of July 31,
                        1996, between the Registrant and Wal-Mart Stores, Inc.



                                       21
<PAGE>   22

            10.30++  -- Credit Agreement, including exhibits thereto, between
                        the Registrant and Wells Fargo Bank (Colorado), N.A.,
                        dated as of September 23, 1996.
            10.31++  -- Revolving Line of Credit Note, between the Registrant
                        and Wells Fargo Bank, N.A., dated as of September 23,
                        1996.
            10.32++  -- Continuing Security Agreement: Equipment, Rights to
                        Payment and Inventory, between the Registrant and Wells
                        Fargo Bank, N.A., dated September 23, 1996.
            10.33++  -- Commercial Lease Agreement, between the Registrant and
                        Technical Building Company, dated as of January 28,
                        1997.
            10.34#   -- Second Modification Agreement, between the Registrant
                        and Wells Fargo Bank, N.A., dated as of September 29,
                        1997.
            10.35    -- Commercial Lease Amendment Agreement, between the
                        Registrant and Technical Building Company, dated as of
                        November 20, 1997.
            11.1     -- Computation of Per Share Earnings.
            23.1     -- Consent of KPMG Peat Marwick LLP.
            27       -- Financial Data Schedule.


+ Incorporated by reference to the Company's Registration Statement on Form
SB-2, File No. 33-95446-D.

++ Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996.

# Incorporated by reference to the Company's Registration Statement on Form S-1,
File No. 333-35947.

* An order seeking confidential treatment for certain portions of the exhibit
has been granted.



                                       22

<PAGE>   23



                        AMERICAN COIN MERCHANDISING, INC.

                          INDEX TO FINANCIAL STATEMENTS

                   FOR THE THREE YEARS ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                          PAGE
<S>                                                                         <C>
Independent Auditors' Report...........................................   F-1

Financial Statements:

     Balance Sheets....................................................   F-2

     Statements of Earnings............................................   F-3

     Statements of Stockholders' Equity................................   F-4

     Statements of Cash Flows..........................................   F-5

     Notes to Financial Statements.....................................   F-6
</TABLE>

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



                                       23
<PAGE>   24

                          INDEPENDENT AUDITORS' REPORT


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

    We have audited the accompanying balance sheets of American Coin
Merchandising, Inc. (formerly American Coin Merchandising, Inc. and affiliates
through August 31, 1995) as of December 31, 1997 and 1996, and the related
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Coin
Merchandising, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.




                                                   KPMG Peat Marwick LLP




Boulder, Colorado
February 20, 1998

                                      F-1
<PAGE>   25



                       AMERICAN COIN MERCHANDISING, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                      --------------------
                                                                                      1997            1996
                                                                                      ----            ----

                                    ASSETS
<S>                                                                             <C>             <C>         
Current assets:

   Cash and cash equivalents ................................................   $  1,929,000    $    771,000
   Trade accounts and other receivables .....................................        979,000         673,000
   Inventories ..............................................................      5,625,000       4,329,000
   Prepaid expenses and other assets ........................................        365,000         164,000
                                                                                ------------    ------------
       Total current assets .................................................      8,898,000       5,937,000
                                                                                ------------    ------------

Property and equipment, at cost:
   Vending machines .........................................................     22,829,000      12,446,000
   Vehicles .................................................................      4,652,000       2,095,000
   Office equipment, furniture and fixtures .................................      1,242,000         527,000
                                                                                ------------    ------------
                                                                                  28,723,000      15,068,000
   Less accumulated depreciation ............................................     (7,557,000)     (4,697,000)
                                                                                ------------    ------------
       Property and equipment, net ..........................................     21,166,000      10,371,000
                                                                                ------------    ------------

Placement fees, net of accumulated amortization .............................        281,000         183,000
Deferred income taxes .......................................................             --          42,000
Cost in excess of assets acquired, net of accumulated amortization ..........      6,682,000       3,209,000
Other assets ................................................................         50,000          16,000
                                                                                ------------    ------------

       Total assets .........................................................   $ 37,077,000    $ 19,758,000
                                                                                ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Current portion of long-term debt ........................................   $    945,000    $    435,000
   Current portion of notes payable to Control Group ........................        674,000         674,000
   Income taxes payable .....................................................        317,000         279,000
   Accounts payable .........................................................      1,680,000         544,000
   Accrued commissions ......................................................      1,001,000         747,000
   Other accrued expenses ...................................................        655,000         344,000
                                                                                ------------    ------------
       Total current liabilities ............................................      5,272,000       3,023,000

Long-term debt, net of current portion ......................................      1,292,000       4,384,000
Notes payable to Control Group ..............................................             --         675,000
Deferred income taxes .......................................................        421,000              --
                                                                                ------------    ------------
       Total liabilities ....................................................      6,985,000       8,082,000
                                                                                ------------    ------------

Stockholders' equity:
   Preferred stock, $.10 par value (Authorized 500,000 shares; none issued) .             --              --
   Common stock, $.01 par value (Authorized 20,000,000 shares; issued and
     outstanding 6,452,904 shares in 1997 and 5,123,274 shares in 1996) .....         65,000          51,000
   Additional paid-in-capital ...............................................     22,352,000       8,407,000
   Unearned stock option compensation .......................................        (21,000)        (49,000)
   Retained earnings ........................................................      7,696,000       3,267,000
                                                                                ------------    ------------
       Total stockholders' equity ...........................................     30,092,000      11,676,000
                                                                                ------------    ------------
Commitments
       Total liabilities and stockholders' equity ...........................   $ 37,077,000    $ 19,758,000
                                                                                ============    ============

</TABLE>



                See accompanying notes to financial statements.

                                      F-2
<PAGE>   26



                     AMERICAN COIN MERCHANDISING, INC. (a)
                             STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>

                                                                               YEAR ENDED DECEMBER 31,
                                                                         -------------------------------------
                                                                         1997            1996           1995
                                                                         ----            ----           ----
<S>                                                                 <C>             <C>            <C>
Revenue:
   Vending ......................................................   $ 52,866,000    $ 30,439,000   $ 17,031,000
   Franchise and other ..........................................      6,218,000       7,828,000      8,683,000
                                                                    ------------    ------------   ------------
       Total revenue ............................................     59,084,000      38,267,000     25,714,000
                                                                    ------------    ------------   ------------

Cost of revenue:
   Vending ......................................................     37,506,000      21,283,000     11,701,000
   Franchise and other ..........................................      3,967,000       5,659,000      6,054,000
                                                                    ------------    ------------   ------------
       Total cost of revenue ....................................     41,473,000      26,942,000     17,755,000
                                                                    ------------    ------------   ------------

       Gross profit .............................................     17,611,000      11,325,000      7,959,000

General and administrative expenses .............................     10,314,000       7,053,000      4,218,000
Commissions and royalties, related parties ......................             --              --        347,000
                                                                    ------------    ------------   ------------
       Operating earnings .......................................      7,297,000       4,272,000      3,394,000
                                                                    ------------    ------------   ------------

Interest expense, related parties ...............................         76,000         108,000        224,000
Interest expense, other .........................................        536,000         267,000        159,000
Minority interest in income of combined affiliates ..............             --              --         80,000
Share of loss of equity affiliate ...............................             --              --         27,000
                                                                    ------------    ------------   ------------

       Earnings before taxes ....................................      6,685,000       3,897,000      2,904,000

Provision for income taxes ......................................      2,256,000       1,311,000        329,000
                                                                    ------------    ------------   ------------

       Net earnings .............................................   $  4,429,000    $  2,586,000   $  2,575,000
                                                                    ============    ============   ============

       Basic earnings per share of common stock .................   $       0.80    $       0.51
       Diluted earnings per share of common stock ...............           0.78            0.48
       Basic weighted average common shares .....................      5,565,000       5,092,000
       Diluted weighted average common shares ...................      5,694,000       5,417,000

Pro forma information:
     Historical earnings before taxes ...........................                                  $  2,904,000
     Pro forma adjustments to earnings before taxes .............                                     1,207,000
                                                                                                   ------------
     Pro forma earnings before taxes ............................                                     4,111,000
     Pro forma income tax expense ...............................                                    (1,562,000)
                                                                                                   ============
     Pro forma net earnings .....................................                                  $  2,549,000
                                                                                                   ============

Pro forma earnings per common and common equivalent share:
     Pro forma basic earnings per share .........................                                  $       0.59
     Pro forma diluted earnings per share .......................                                          0.55
     Pro forma basic weighted average common shares .............                                     4,299,000
     Pro forma diluted weighted average common shares ...........                                     4,669,000

</TABLE>




(a)  Through August 31, 1995, represents combined financial statements of
     American Coin Merchandising, Inc. and Affiliates (see note 1).

                See accompanying notes to financial statements.

                                      F-3
<PAGE>   27



                     AMERICAN COIN MERCHANDISING, INC. (a)
                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                            UNEARNED
                                                                             STOCK                                          TOTAL
                                                           ADDITIONAL       OPTION                          EQUITY          STOCK-
                                              COMMON        PAID-IN         COMPEN-        RETAINED           OF            HOLDERS'
                                               STOCK        CAPITAL         SATION         EARNINGS       AFFILIATES        EQUITY

<S>                                     <C>            <C>             <C>             <C>             <C>             <C>         
DECEMBER 31, 1994 ....................  $     31,000   $     34,000    $         --    $    443,000    $    706,000    $  1,214,000

   Issuance of 1,700,000 common
     stock in public offering, net ...        17,000     10,034,000              --              --              --      10,051,000
   Issuance of employee
     stock options ...................            --         80,000         (80,000)             --              --              --
   Exercise of employee stock
     options .........................         2,000          3,000              --              --              --           5,000
   Conversion of stockholder loans ...         1,000        675,000              --              --              --         676,000
   Net earnings ......................            --             --              --       2,072,000         503,000       2,575,000
   Distributions .....................            --             --              --        (634,000)       (420,000)     (1,054,000)
   Distribution to Control Group
     in conjunction with
     Reorganization ..................            --             --              --      (4,162,000)       (789,000)     (4,951,000)
   Deferred tax asset established
     in Reorganization ...............            --        491,000              --              --              --         491,000
   Termination of S corporation
     tax status ......................            --     (2,962,000)             --       2,962,000              --              --
                                        ------------   ------------    ------------    ------------    ------------    ------------

DECEMBER 31, 1995 ....................        51,000      8,355,000         (80,000)        681,000              --       9,007,000

   Amortization of deferred
     compensation ....................            --             --          26,000              --              --          26,000
   Tax benefit related to
     employee stock options ..........            --         57,000              --              --              --          57,000
   Exercise of employee stock
     options .........................            --          1,000              --              --              --           1,000
   Termination of employee
     stock options ...................            --         (6,000)          5,000              --              --          (1,000)
   Net earnings ......................            --             --              --       2,586,000              --       2,586,000
                                        ------------   ------------    ------------    ------------    ------------    ------------

DECEMBER 31, 1996 ....................        51,000      8,407,000         (49,000)      3,267,000              --      11,676,000

   Issuance of 1,000,000 common
     stock in public offering, net ...        10,000     13,915,000              --              --              --      13,925,000
   Amortization of deferred
     compensation ....................            --             --          22,000              --              --          22,000
   Exercise of employee stock
     options .........................         4,000         39,000              --              --              --          43,000
   Termination of employee
     stock options ...................            --         (9,000)          6,000              --              --          (3,000)
   Net earnings ......................            --             --              --       4,429,000              --       4,429,000
                                        ------------   ------------    ------------    ------------    ------------    ------------

DECEMBER 31, 1997 ....................  $     65,000   $ 22,352,000    $    (21,000)   $  7,696,000    $         --    $ 30,092,000
                                        ============   ============    ============    ============    ============    ============
</TABLE>


(a)  Through August 31, 1995, represents combined financial statements of
     American Coin Merchandising, Inc. and Affiliates (see note 1).

                See accompanying notes to financial statements.


                                      F-4
<PAGE>   28



                     AMERICAN COIN MERCHANDISING, INC. (a)
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                            YEAR ENDED DECEMBER 31,
                                                                                            -----------------------
                                                                                     1997            1996            1995
                                                                                     ----            ----            ----
<S>                                                                             <C>             <C>             <C>         
   Operating activities:
   Net earnings .............................................................   $  4,429,000    $  2,586,000    $  2,575,000
   Adjustments to reconcile net earnings to net cash provided
     by operating activities:
       Depreciation and amortization ........................................      3,292,000       1,891,000         930,000
       Affiliate losses .....................................................             --              --          72,000
       Compensation expense related to stock options ........................         19,000          25,000              --
       Deferred income tax expense ..........................................        463,000         308,000         141,000
       Changes in operating assets and liabilities, net of Reorganization and
         acquisitions:
           Trade accounts and other receivables .............................       (332,000)         53,000        (206,000)
           Inventories ......................................................     (1,026,000)       (756,000)     (1,650,000)
           Prepaid expenses and other assets ................................       (233,000)         10,000        (182,000)
           Income taxes payable .............................................         38,000         148,000         188,000
           Accounts payable and accrued expenses ............................      1,701,000         (49,000)        994,000
                                                                                ------------    ------------    ------------
         Net cash provided by operating activities ..........................      8,351,000       4,216,000       2,862,000
                                                                                ------------    ------------    ------------

Investing activities:
   Acquisitions of property and equipment, net ..............................    (12,168,000)     (6,052,000)     (2,234,000)
   Acquisitions of franchisees and other ....................................     (3,669,000)     (1,224,000)       (160,000)
   Acquisition of non-Control Group interests in Reorganization .............             --              --      (3,125,000)
   Placement fees ...........................................................       (242,000)       (192,000)        (20,000)
   Change in notes receivable ...............................................             --          20,000          31,000
                                                                                ------------    ------------    ------------
         Net cash used in investing activities ..............................    (16,079,000)     (7,448,000)     (5,508,000)
                                                                                ------------    ------------    ------------

Financing activities:
   Net borrowings (payments) on revolving line of credit ....................     (3,787,000)      3,381,000        (121,000)
   Principal payments on notes payable to related parties ...................             --              --        (167,000)
   Proceeds from issuance of notes payable to related parties ...............             --              --          22,000
   Principal payments on long-term debt .....................................       (620,000)     (1,559,000)     (1,172,000)
   Principal payments on notes payable to Control Group .....................       (675,000)             --              --
   Proceeds from issuance of long-term debt .................................             --       1,224,000         516,000
   Distributions ............................................................             --        (634,000)       (420,000)
   Payments to Control Group in Reorganization ..............................             --              --      (4,509,000)
   Cash retained by combined affiliates in Reorganization ...................             --              --        (326,000)
   Issuance of common stock, net of offering costs ..........................     13,968,000           1,000      10,056,000
                                                                                ------------    ------------    ------------
         Net cash provided by financing activities ..........................      8,886,000       2,413,000       3,879,000
                                                                                ------------    ------------    ------------

         Net increase (decrease) in cash and cash equivalents ...............      1,158,000        (819,000)      1,233,000

Cash and cash equivalents at beginning of year ..............................        771,000       1,590,000         357,000
                                                                                ------------    ------------    ------------

Cash and cash equivalents at end of year ....................................   $  1,929,000    $    771,000    $  1,590,000
                                                                                ============    ============    ============
</TABLE>






(a)  Through August 31, 1995, represents combined financial statements of
     American Coin Merchandising, Inc. and Affiliates (see note 1).

                See accompanying notes to financial statements.


                                      F-5
<PAGE>   29



                       AMERICAN COIN MERCHANDISING, INC.
                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995



1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

     American Coin Merchandising, Inc., d/b/a Sugarloaf Creations, Inc. (the
"Company") and its franchisees own and operate coin-operated skill-crane
machines ("Shoppes") that dispense stuffed animals, plush toys, watches,
jewelry and other items. The Company's Shoppes are placed in supermarkets, mass
merchandisers, bowling centers, bingo halls, bars, restaurants, warehouse clubs
and similar locations. The Company also operates bulk vending equipment and
kiddie rides that are located primarily in supermarkets and mass merchandisers.
At December 31, 1997, the Company has 32 field offices operating in 41 states.
The Company also sells products to franchisees. At December 31, 1997 there were
23 Company franchises in operation.

     Prior to August 31, 1995, the date of the Reorganization described below,
certain stockholders of the Company, who collectively own a controlling
interest of the Company (the "Control Group"), owned interests in the eight
affiliated entities (the "Affiliated Entities") which were franchisees of the
Company. Except as noted below, each of the Affiliated Entities began
operations prior to January 1, 1993. The Control Group owned greater than 50%
of the outstanding common stock or partnership interests of seven of the
Affiliated Entities and less than 50% of the eighth, as follows:

     Affiliated Entities:
         Combined affiliates:
                  Chicago Toy Company
                  Georgia Toy Company
                  Inland Merchandising, Inc. (began operations in June 1993)
                  Lehigh Valley Toy Company
                  Performance Merchandising, Inc.
                  Southwest Coin Company
                  Sugarloaf, Ltd. (began operations in January 1993)
         Equity affiliate:
                  Sugarloaf Marketing, Inc.

     Due to the common controlling ownership, the accompanying financial
statements include the accounts of the Company and the combined affiliates
(collectively referred to as the "Combined Companies") through August 31, 1995.
All material intercompany balances and transactions have been eliminated.
Through August 31, 1995 the Control Group's interest has been accounted for as
equity of affiliates and the other stockholders' interests have been reflected
as minority interest. As such, the assets and liabilities of the Combined
Companies have been accounted for in the financial statements based upon their
historical costs through August 31, 1995. The financial statements account for
the Control Group ownership interest in Sugarloaf Marketing, Inc. using the
equity method of accounting through August 31, 1995.

     On August 31, 1995, the Company acquired substantially all of the
inventories, property and equipment, and assumed certain facilities leases,
which are operating leases, and contracts of the Affiliated Entities in
exchange for promissory notes in the principal amount of $8,983,000 (the
"Reorganization"), of which $7,634,000 was paid from the proceeds of the
Company's initial public offering in October 1995. The remaining promissory
notes in the principal amount of $674,000 are payable in 1998. As a result of
the Reorganization, assets attributable to the Control Group's interest have
been accounted for similar to the pooling-of-interests method of accounting for
business combinations. Assets and liabilities included in the financial
statements which were retained by the combined affiliates in the Reorganization
have been accounted for as distributions to the combined affiliates. Amounts
paid to the combined affiliates attributed to the Control Group interest have
been accounted for as a distribution for financial reporting purposes. Assets
transferred attributable to the non-Control Group members (the minority
interest in the combined affiliates and the majority interest in the equity
affiliate) have been accounted for using the purchase method of accounting for
business combinations. The Company has recorded approximately $1,964,000 of
costs in excess of assets acquired as a result of the transfer of assets
attributable to the non-Control Group. The Reorganization was a taxable
transaction for income tax purposes, and accordingly, the Company has a tax
basis in the transferred assets in excess of that for financial reporting.



                                      F-6
<PAGE>   30



                       AMERICAN COIN MERCHANDISING, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

2.    ACQUISITIONS

     During 1997, the Company acquired in July, October and December certain
assets and the business operations of three of its franchisees and also
acquired the operating assets of a bulk vending and kiddie ride company in
November for approximately $5,494,000. Of this amount, $3,669,000 was paid in
cash with the balance to be paid over a three-year periods in accordance with
the terms of the promissory notes issued in connection with the acquisitions.
The Company has recorded approximately $3,685,000 of costs in excess of assets
acquired as a result of these acquisitions that were accounted for using the
purchase method of accounting.

     During 1996, the Company acquired in January, July and August certain
assets and the business operations of three of its franchisees and also
acquired the operating assets of a skill-crane service company in May for
approximately $2,103,000. Of this amount, $1,224,000 was paid in cash with the
balance to be paid over two to three year periods in accordance with the terms
of the promissory notes issued in connection with the acquisitions. The Company
has recorded approximately $1,239,000 of costs in excess of assets acquired as
a result of these acquisitions that were accounted for using the purchase
method of accounting.

     In September 1995, the Company acquired certain assets and the business
operation of one of its franchisees for approximately $346,000. Of this amount,
$158,000 was paid in cash with the balance to be paid over a three-year period
in accordance with the terms of a promissory note issued in connection with the
acquisition. The Company has recorded approximately $187,000 of costs in excess
of assets acquired as a result of this acquisition that was accounted for using
the purchase method of accounting.

     The pro forma effect of these acquisitions is not material to assets,
revenue or net earnings for the years ended December 31, 1997, 1996 and 1995.

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     VENDING
     Vending revenue represents cash receipts from customers using vending
machines and is recognized when collected. The cost of vending is comprised
primarily of the cost of products vended through the machines, the servicing of
machines and commissions paid to retail locations.

     FRANCHISE ROYALTIES AND FEES
     Typically, franchisees are required to pay continuing royalties ranging
from 2% to 5% of gross machine revenue. Franchisees are required to pay an
initial nonrefundable franchise fee. Initial franchise fees are recognized as
revenue when the franchise opens. Included in franchise and other revenue are
continuing franchise royalties and initial franchise fee revenue of $86,000 for
1995.

     INCOME TAXES
     Prior to October 13, 1995 the Company had elected tax treatment as an S
corporation, and the combined affiliates were each organized as S corporations,
except for Southwest Coin Company which was organized as a partnership.
Accordingly, through October 12, 1995, no provisions were made for income taxes
since all income, deductions, gains, losses and credits were reported on the
tax returns of the stockholders or partners. The S corporation status of the
Company terminated on October 12, 1995 and, accordingly, the Company became a
taxable entity.

     Effective October 13, 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards Statement No. 109, "Accounting for
Income Taxes" (SFAS 109). Under the asset and liability method of accounting
for income taxes, as prescribed by SFAS 109, deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and amounts used for income
tax purposes. Deferred tax assets and liabilities are measured using enacted
tax rates expected to be in effect for the year in which those temporary
differences are expected to be recovered or settled. The effects on deferred
tax assets and liabilities of a change in tax rates are recognized in income in
the period that includes the enactment date.

     ESTIMATES
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.



                                      F-7
<PAGE>   31

                       AMERICAN COIN MERCHANDISING, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


     CASH EQUIVALENTS
     The Company considers as cash equivalents all highly liquid investments
with an original maturity of three months or less.

     INVENTORIES
     Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories consist of purchased items
ready for resale or use in vending operations.

     PROPERTY AND EQUIPMENT
     Property and equipment are stated at cost. Depreciation is calculated on
the straight-line and accelerated methods over the estimated useful lives of
the assets that range from 3 to 7 years.

     COST IN EXCESS OF ASSETS ACQUIRED
     Cost in excess of assets acquired represents the purchase amount paid in
excess of the fair market value of the tangible net assets acquired and is
amortized using the straight-line method over a 20-year period.

     IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
     The Company reviews its long-lived assets and intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the asset to the
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets.

     EARNINGS PER SHARE
     In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(Statement No. 128) effective for periods ending after December 15, 1997.
Statement No. 128 changes the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held common
stock or potential common stock. Under such requirements the Company is
required to present both basic earnings per share and diluted earnings per
share. Basic earnings and diluted earnings per share are computed by dividing
earnings available to common stockholders by the weighted average number of
common shares outstanding during the period and by all dilutive potential
common shares outstanding during the period, respectively. The Company adopted
the provisions of Statement No. 128 as of December 31, 1997. As prescribed by
Statement No. 128, the Company has restated prior periods' earnings per share
of common stock, including interim earnings per share of common stock, in the
period of adoption. Such amounts are as follows:
<TABLE>
<CAPTION>
                                                                                                                YEAR
                                                           QUARTER ENDED (UNAUDITED)                           ENDED
                                                           -------------------------                           -----

                                    SEPT. 30   JUNE 30    MAR. 31   DEC. 31   SEPT. 30   JUNE 30    MAR. 31   DEC. 31
                                      1997       1997      1997       1996      1996       1996      1996       1996
                                      ----       ----      ----       ----      ----       ----      ----       ----
<S>                                  <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>   
Earnings per share of common stock
   as previously reported........... $ 0.18     $ 0.16    $ 0.16     $ 0.21    $ 0.11     $ 0.07    $ 0.09     $ 0.48

Basic earnings per share of common
   stock............................ $ 0.18     $ 0.16    $ 0.17     $ 0.22    $ 0.11     $ 0.07    $ 0.10     $ 0.51

Diluted earnings per share of
   common stock..................... $ 0.18     $ 0.16    $ 0.16     $ 0.21    $ 0.11     $ 0.07    $ 0.09     $ 0.48
</TABLE>

     Net earnings per share have been omitted for 1995 because through August
31, 1995 the Combined Companies were not a single entity with its own capital
structure.

     RECLASSIFICATIONS
     Certain amounts for prior periods have been reclassified to conform to the
December 31, 1997 presentation.



                                      F-8
<PAGE>   32

                       AMERICAN COIN MERCHANDISING, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)



     SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

     A schedule of supplemental cash flow information follows:
<TABLE>
<CAPTION>

     YEAR ENDED DECEMBER 31,                                               1997         1996        1995
                                                                           ----         ----        ----  

<S>                                                                    <C>         <C>         <C>
     Cash paid during the year:
       Interest paid.................................................. $  640,000  $   372,000 $    370,000
       Income taxes paid..............................................  1,755,000      858,000           --
     Significant noncash investing and financing activities:
       Equipment purchases financed with debt.........................         --       54,000      241,000
       Notes payable issued for acquisitions of franchisees...........  1,825,000      879,000      188,000
       Distribution payable...........................................         --           --      634,000
       Deferred tax asset established in Reorganization...............         --           --      491,000
       Conversion of stockholder loans into common stock..............         --           --      676,000

     Cash paid in Reorganization:
       Value of tangible assets acquired..............................                         $    983,000
       Costs in excess of assets acquired.............................                            1,964,000
       Net liabilities retained by combined affiliates,
         excluding cash retained......................................                            1,310,000
       Notes payable to Control Group.................................                           (1,349,000)
       Net elimination of investment in equity affiliate
         and minority interest........................................                              101,000
       Distribution to Control Group..................................                            4,951,000
                                                                                               -------------
           Cash paid and retained (1).................................                         $  7,960,000
                                                                                               =============
</TABLE>

     (1) Includes $326,000 of cash retained by the combined affiliates.

4.   INVESTMENT IN EQUITY AFFILIATE

     Prior to the Reorganization, investment in equity affiliate consisted of a
48% interest in 1995 in Sugarloaf Marketing, Inc. (Sugarloaf Marketing) which
was accounted for using the equity method (see note 1). On August 31, 1995, in
connection with the Reorganization, the Company acquired the remaining 52%
ownership in Sugarloaf Marketing. The acquisition has been accounted for using
the purchase method of accounting for business combinations. The operating
results of Sugarloaf Marketing are included in the Company's earnings statement
from the date of the acquisition. Pro forma results of operations for 1995 as
if the Reorganization, including the acquisition of Sugarloaf Marketing, had
occurred on January 1, 1995 are presented in note 14.

     For the eight months ended August 31, 1995, Sugarloaf Marketing had
revenue and a net loss of $3,941,000 and $57,000, respectively. Included in
1995 franchise and other revenue is $712,000 representing product and service
sales and franchise royalties for the eight months ended August 31, 1995.
Transactions with Sugarloaf Marketing were conducted on a basis consistent with
that of unaffiliated franchisees.

5.   BANK REVOLVING LINE OF CREDIT

     Under its current revolving credit agreement, the Company may borrow up to
$15.0 million at the bank's prime interest rate (8.5% at December 31, 1997) or,
at the Company's option, an interest rate based on the current LIBOR rate. The
revolving line of credit is available through July 5, 1999. At December 31,
1997 there was no principal amount outstanding. The credit agreement provides
that certain financial ratios be met and places restrictions on, among other
things, the occurrence of additional debt financing and the payment of
dividends. The Company was in compliance with such financial ratios and
restrictions at December 31, 1997.

     At December 31, 1997 approximately $161,000 of the credit facility was
committed on open letters of credit for inventory on order but not yet
received.

                                      F-9
<PAGE>   33
                       AMERICAN COIN MERCHANDISING, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)



6.   LONG-TERM DEBT AND NOTES PAYABLE TO CONTROL GROUP

     Long-term debt and notes payable to control group consists of the
following:
<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                              ------------
                                                                                           1997          1996
                                                                                           ----          ----
<S>                                                                                   <C>            <C>        
LONG-TERM DEBT:
Bank revolving line of credit (see note 5) ........................................   $        --    $ 3,787,000
Notes payable to former franchisees and others, due in monthly and quarterly
  installments with interest ranging from 8% to 8.5%; final payments at various
  dates through October 2000, secured by certain property and equipment ...........     2,181,000        871,000
Notes payable to banks, due in monthly installments with interest ranging
  from 8.25% to 12.95%; final payments at various dates through
  August 2000; secured by certain property and equipment ..........................        56,000        161,000
                                                                                      -----------    -----------
   Total long-term debt ...........................................................     2,237,000      4,819,000
Less current portion ..............................................................      (945,000)      (435,000)
                                                                                      -----------    -----------
   Long-term debt, net of current portion .........................................   $ 1,292,000    $ 4,384,000
                                                                                      ===========    ===========


NOTES PAYABLE TO CONTROL GROUP:
Promissory notes to Affiliated Entities, due in semi-annual principal payments
  with interest at 8%; notes are secured by assets exchanged (see note 1) .........   $   674,000    $ 1,349,000
Less current portion ..............................................................      (674,000)      (674,000)
                                                                                      -----------    -----------
   Notes payable to Control Group, net of current portion .........................   $        --    $   675,000
                                                                                      ===========    ===========
</TABLE>

     The carrying amount of long-term debt and notes payable to control group
approximates its fair value.

     Maturities of long-term debt and notes payable to Control Group as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>

                  YEAR ENDING DECEMBER 31,

                         <S>                                                   <C>          
                         1998................................................. $   1,619,000
                         1999.................................................       793,000
                         2000.................................................       499,000
                                                                               =============
                                                                               $   2,911,000
                                                                               =============
</TABLE>

7.   INCOME TAXES

     Prior to October 13, 1995, the Company was an S corporation and was not
subject to income taxes. The S corporation status of the Company terminated on
October 12, 1995. As a result of the termination of the Company's S corporation
status, the Company incurred a one-time deferred tax expense of $141,000.

     The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                  1997        1996        1995
                                                         ----        ----        ---- 
<S>                                                <C>             <C>       <C>        
   CURRENT
     Federal...................................... $   1,507,000   $ 869,000 $   160,000
     State .......................................       286,000     134,000      28,000
                                                   -------------   ---------   ---------
                                                       1,793,000   1,003,000     188,000
                                                   -------------   ---------   ---------
   DEFERRED
     Federal .....................................       393,000     267,000     119,000
     State .......................................        70,000      41,000      22,000
                                                   -------------   ---------   ---------
                                                         463,000     308,000     141,000
                                                   -------------   ---------   ---------
                                                   $   2,256,000 $ 1,311,000 $   329,000
                                                   ============= =========== ===========
</TABLE>

                                     F-10
<PAGE>   34
                       AMERICAN COIN MERCHANDISING, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

     A reconciliation of the expected tax expense, assuming income before taxes
is taxed at the statutory federal tax rate of 34%, and the Company's actual
provision for income taxes is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                         1997             1996               1995
                                                                ----             ----               ----

<S>                                                         <C>             <C>                <C>       
Expected tax expense at the federal statutory rate ....     $ 2,273,000     $  1,325,000       $  987,000
State income taxes, net of federal taxes ..............         265,000          116,000           33,000
Change in valuation allowance .........................        (292,000)        (171,000)              --
Termination of S corporation status ...................              --               --          141,000
S corporation income ..................................              --               --         (811,000)
Other .................................................          10,000           41,000          (21,000)
                                                            -----------     ------------       ----------
                                                            $ 2,256,000     $  1,311,000       $  329,000
                                                            ===========     ============       ==========
</TABLE>

     The sources and tax effects of temporary differences between financial
statement carrying amounts and the tax bases of assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,                                               1997           1996
                                                           ----           ----

<S>                                                   <C>             <C>        
DEFERRED TAX ASSETS:
     Costs in excess of assets acquired-basis
       and amortization differences ..............    $ 1,034,000     $ 1,157,000
     Valuation allowance .........................        540,000         832,000
                                                      -----------     -----------
                                                          494,000         325,000

DEFERRED TAX LIABILITIES:
     Property and equipment-basis and
       depreciation differences ..................       (915,000)       (283,000)
                                                      -----------     -----------
                                                      $  (421,000)    $    42,000
                                                      ===========     ===========
</TABLE>

8.   COMMISSIONS AND ROYALTIES TO RELATED PARTIES

     The Company recognized commission expense of $232,000 in 1995 for services
provided by two other corporations whose stockholders were the majority
stockholders of the Company. In addition, the Company recognized royalty expense
of $115,000 in 1995 to a trust controlled by a stockholder of one of the
combined affiliates.

9.   RETIREMENT PLAN

     The Company maintains a 401(k) profit sharing plan, which covers
substantially all employees. Employees are permitted to contribute up to 15% of
their eligible compensation. The Company makes contributions to the plan
matching 50% of the employees' contribution up to 10% of compensation. The
Company's matching contributions totaled $113,000, $49,000 and $17,000 in 1997,
1996 and 1995, respectively.

10.  COMMITMENTS

     LEASES

     The Company has several noncancelable operating leases, primarily for
office and warehouse facilities and certain types of equipment. These leases
expire at various times over the next five years. Rent expense under these
leases totaled $489,000, $275,000 and $190,000 for the years ended December 31,
1997, 1996 and 1995, respectively.

     Future minimum commitments under operating leasing arrangements as of
December 31, 1997 are as follows:

<TABLE>
<S>                                          <C>       
1998 ...................................     $  599,000
1999 ...................................        452,000
2000 ...................................        332,000
2001 ...................................        215,000
2002 and thereafter ....................        250,000
                                             ==========
  Total ................................     $1,848,000
                                             ==========
</TABLE>



                                      F-11
<PAGE>   35

                       AMERICAN COIN MERCHANDISING, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


11.  STOCK OPTIONS

     The Company has two fixed option plans. Under the terms of the amended and
restated stock option plan (the "Option Plan"), the Company may grant to
employees, consultants and advisors up to 1,400,000 shares of common stock.
Under the Option Plan, the Company may grant both incentive stock options and
non-statutory stock options, and the maximum term is ten years. Non-statutory
options may be granted at no less than 85% of the fair market value of the
common stock at the date of grant. Stock options granted under the Option Plan
vest over a three to five year period.

     Under terms of the amended 1995 Non-Employee Directors' Stock Option Plan
(the "Directors Plan"), the Company may grant to non-employee directors options
to purchase up to 100,000 shares of common stock. Under the Directors Plan,
options granted vest over a three-year period and have a maximum term of ten
years.

     The Company applies APB Opinion No. 25 and the related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for options granted at fair market value under the plans. The compensation cost
that has been charged against income for options granted at a price less than
fair market value was $19,000 in 1997 and $25,000 in 1996. Had compensation cost
for the Company's stock-based compensation plans been determined consistent with
SFAS No. 123, the Company's net earnings and diluted earnings per share would
have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                  1997           1996           1995
                                                  ----           ----           ----

<S>                                            <C>            <C>            <C>       
Net earnings                    As reported    $4,429,000     $2,586,000     $2,575,000
                                Pro forma       4,234,000      2,489,000      2,559,000

Diluted earnings per share      As reported          0.78           0.48            N/A
                                As restated           N/A           0.48            N/A
                                Pro forma            0.74           0.46            N/A
</TABLE>

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995: no dividend yield; expected
volatility of 60 percent for 1997 and 81 percent for 1996 and 1995; risk-free
interest rates of 6.0 percent; and expected lives of six years.

     The effect of applying SFAS No. 123, in the above pro forma disclosure,
does not purport to be representative of the effect on net earnings for future
years.

     A summary of the status of the Company's two fixed stock option plans as of
December 31, 1997, 1996 and 1995, and changes during the years ended on those
dates is presented below:

<TABLE>
<CAPTION>
                                                              1997                      1996                     1995
                                                   ------------------------   -----------------------  ------------------------
                                                                 WEIGHTED-                 WEIGHTED-                   WEIGHTED-
                                                                  AVERAGE                   AVERAGE                    AVERAGE
                                                                  EXERCISE                 EXERCISE                    EXERCISE
                  FIXED OPTIONS                     SHARES         PRICE       SHARES        PRICE       SHARES         PRICE
                  -------------                     ------         -----       ------        -----       ------         -----

<S>                                                <C>          <C>           <C>          <C>           <C>          <C>     
         Outstanding at beginning
            of year .........................      440,797      $   1.51      488,463      $   1.44      548,132      $    .02
         Granted ............................      215,500          8.73           --            --      123,500          5.61
         Exercised ..........................     (329,630)          .13      (41,666)          .02     (183,169)          .02
         Forfeited ..........................      (10,667)         5.53       (6,000)         5.53           --            --
                                                 ---------                 ----------                 ----------
         Outstanding at end of year .........      316,000          7.75      440,797          1.51      488,463          1.44
                                                 =========                 ==========                 ==========
         Options exercisable at
            year-end ........................       63,667                    360,797                    364,943
         Weighted average fair value
            of options granted during
            the year ........................    $    5.38                         --                 $     4.68
</TABLE>



                                      F-12
<PAGE>   36

                       AMERICAN COIN MERCHANDISING, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


     The following table summarizes information about fixed stock options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                           OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                             ---------------------------------------------------   --------------------------------
                RANGE                      WEIGHTED AVERAGE
                 OF             NUMBER         REMAINING        WEIGHTED AVERAGE     NUMBER        WEIGHTED AVERAGE
          EXERCISE PRICES    OUTSTANDING   CONTRACTUAL LIFE      EXERCISE PRICE    EXERCISABLE      EXERCISE PRICE
          ---------------    -----------   ----------------      --------------    -----------      --------------

<S>                            <C>              <C>                  <C>               <C>             <C>  
           $4.00 to 7.00        100,500          7.8                  $5.63             63,667          $5.69
           7.50 to 10.00        215,500          9.4                   8.73                 --             --
                            -----------                                            -----------
           4.00 to 10.00        316,000          8.9                   7.75             63,667           5.69
                            ===========                                            ===========
</TABLE>

12.  STOCKHOLDERS' EQUITY

     COMMON STOCK
     The Company was originally incorporated in Colorado in 1988 and was
reincorporated in Delaware effective July 1995. In October 1995, the Company
completed a public offering of 1,700,000 shares of its common stock at $7.00 per
share. Total proceeds, net of underwriting commission and other offering costs
of $1,849,000, were $10,051,000. In November 1997, the Company completed a
follow-on public offering of its common stock, whereby the Company sold
1,000,000 shares at $15 per share. Total proceeds, net of underwriting
commission and other expenses of $1,075,000, were $13,925,000.

     PREFERRED STOCK
     The Board of Directors has the authority to issue up to 500,000 shares of
$.10 par value preferred stock in one or more series and to fix the rights,
preferences, privileges and distributions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the
designation of such series, without any further vote or action by stockholders.
No shares of preferred stock have been issued.

     WARRANTS
     In conjunction with the Company's initial public offering, a warrant to
purchase 125,000 shares of common stock at a purchase price of $8.40 per share
was sold to the Company's underwriter for a nominal amount. The warrant expires
on October 18, 1999.

13.  CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES

     CERTAIN SIGNIFICANT ESTIMATES
     At December 31, 1997 the Company has recorded a deferred tax asset of
$494,000, net of a $540,000 valuation allowance, as a result of the benefit
associated with the difference between the tax and financial statement basis of
assets acquired by the Company on August 31, 1995 in connection with the
Reorganization. Realization is dependent on generating sufficient taxable income
prior to the expiration of the benefit. Although realization is not assured,
management believes it is more likely than not that a portion of the deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be increased in the near term if estimates of future
taxable income are increased.

     CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
     SUPPLIERS
     Substantially all of the plush toys and other products dispensed from the
Shoppes are produced by foreign manufacturers. A majority are purchased directly
by the Company from manufacturers in the People's Republic of China ("China").
The Company purchases its other products indirectly from vendors who obtain a
significant percentage of such products from foreign manufacturers. As a result,
the Company is subject to changes in governmental policies, the imposition of
tariffs, import and export controls, transportation delays and interruptions,
political and economic disruptions and labor strikes which could disrupt the
supply of products from such manufacturers. Among other things, the loss of
China's "most favored nation" status under U.S. tariff laws could result in a
substantial increase in the import duty of certain products manufactured in
China, which could result in substantially increased costs for certain products
purchased by the Company which could have a material adverse effect on the
Company's financial performance.





                                      F-13
<PAGE>   37

                       AMERICAN COIN MERCHANDISING, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

     CUSTOMERS
     The Company has made available to its franchisees a fee reduction program
whereby a franchisee is entitled to a reduction in the royalty rate on gross
revenue from the Sugarloaf Toy and Treasure Shoppes of one percentage point on
gross revenue for a future six-month period based upon the franchisee meeting
certain performance standards during the most recently completed six-month
period. One of the performance standards relates to the purchase of 30%, up to a
maximum of $250,000, of product used in the Sugarloaf Toy Shoppe program from
the Company. Three franchisees represent 17.7% of the Company's product sales to
franchisees, which is included in franchise and other revenue in 1997.

     During 1997, one customer accounted for 33.5% of the Company's revenue.

14.  UNAUDITED PRO FORMA INFORMATION

     The computation of pro forma total revenue, net earnings and earnings per
share for the year ended December 31, 1995 were prepared on the basis as if the
Reorganization had occurred on January 1, 1995 with an adjustment in the level
of commissions and royalties to related parties that were not paid after the
Reorganization, an adjustment for interest expense related to shareholder loans
converted to common stock in conjunction with the Company's initial public
offering of common stock on October 12, 1995 and the recording of income tax
expense to reflect the conversion of the Company from an S corporation to a
taxable entity on October 12, 1995 follows:

<TABLE>
<S>                                                                                        <C>         
                  Historical total revenue ...........................................     $ 25,714,000
                  Revenue of Sugarloaf Marketing through
                    the date of acquisition ..........................................        3,941,000
                  Pro forma adjustment to eliminate intercompany revenue .............         (712,000)
                                                                                           ============
                  Pro forma total revenue ............................................     $ 28,943,000
                                                                                           ============

                  Historical earnings before income taxes ............................     $  2,904,000
                  Pro forma adjustments:
                    Net loss of Sugarloaf Marketing through
                      the date of acquisition ........................................          (57,000)
                    Adjust for change in level of commissions and
                      royalties to related parties ...................................        1,182,000
                    Adjust for interest related to stockholder loans
                      converted to equity ............................................           61,000
                    Eliminate minority interest and equity interest through
                      the date of acquisition as a result of acquiring remaining
                      ownership interest in affiliated entities ......................          107,000
                    Record amortization of cost in excess of
                      assets acquired ................................................          (68,000)
                    Increase depreciation for assets acquired from
                      non-control group ..............................................          (18,000)
                                                                                           ------------
                      Total adjustments to earnings before taxes .....................        1,207,000
                                                                                           ------------
                  Pro forma earnings before income taxes .............................        4,111,000
                  Pro forma earnings tax expense at 38% ..............................        1,562,000
                                                                                           ============
                  Pro forma net earnings .............................................     $  2,549,000
                                                                                           ============
                  Pro forma basic earnings per share .................................     $       0.59
                                                                                           ============
                  Pro forma diluted earnings per share ...............................     $       0.55
                                                                                           ============
                  Pro forma basic weighted average shares outstanding(1) .............        4,299,000
                  Pro forma diluted weighted average shares outstanding (1) ..........        4,669,000
</TABLE>

-----------------

(1)  Shares used in computing pro forma earnings per share are based upon
     3,503,120 weighted average shares outstanding, common equivalent shares of
     370,332, and 96,571 shares issued in connection with the conversion of
     certain stockholder loans at the initial public offering price of $7.00
     per share and 699,149 shares issued to pay distributions in conjunction
     with the Reorganization. Common equivalent shares consist of stock
     options, determined using the treasury stock method. Pursuant to the
     Securities and Exchange Commission Staff Accounting Bulletins, common and
     common equivalent shares issued at prices below the anticipated public
     offering price during a 12-month period prior to the proposed offering
     have been included in the calculation as if they were outstanding for the
     entire year (using the treasury stock method and the average price of the
     common stock from October 16, 1995 through December 31, 1995) and the
     shares issued in the initial public offering whose proceeds were used to
     pay distributions to Control Group stockholders in connection with the
     Reorganization have been included in the calculation (using the initial
     public offering price) as if they were outstanding for the entire year.




                                      F-14
<PAGE>   38

                       AMERICAN COIN MERCHANDISING, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


15.  UNAUDITED QUARTERLY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                         QUARTER ENDED
                                   -------------------------------------------------------------------------------------------
                                   DEC. 31     SEPT. 30    JUNE 30     MAR. 31     DEC. 31     SEPT. 30    JUNE 30     MAR. 31
                                     1997        1997        1997        1997        1996        1996        1996        1996
                                     ----        ---         ----        ----        ----        ----        ----        ----
                                                                         (IN THOUSANDS)

<S>                                <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>    
Total revenue ................     $18,261     $14,676     $13,790     $12,357     $12,216     $ 9,634     $ 8,403     $ 8,014
Total cost of revenue ........      12,780      10,342       9,800       8,551       8,489       6,743       6,085       5,625
                                   -------     -------     -------     -------     -------     -------     -------     -------
  Gross profit ...............       5,481       4,334       3,990       3,806       3,727       2,891       2,318       2,389
General and administrative 
  expenses ...................       3,066       2,523       2,429       2,296       2,023       1,827       1,671       1,532
                                   -------     -------     -------     -------     -------     -------     -------     -------
  Operating earnings .........       2,415       1,811       1,561       1,510       1,704       1,064         647         857
Interest expense .............         128         217         156         111         148         136          45          46
                                   -------     -------     -------     -------     -------     -------     -------     -------
  Earnings before income
    taxes ....................       2,287       1,594       1,405       1,399       1,556         928         602         811
Provision for income
  taxes ......................         629         588         521         518         422         352         229         308
                                   -------     -------     -------     -------     -------     -------     -------     -------
  Net earnings ...............     $ 1,658     $ 1,006     $   884     $   881     $ 1,134     $   576     $   373     $   503
                                   =======     =======     =======     =======     =======     =======     =======     =======
 Basic weighted average
   common shares .............       6,158       5,450       5,394       5,251       5,123       5,094       5,082       5,082
                                   =======     =======     =======     =======     =======     =======     =======     =======
 Diluted weighted
   average common shares .....       6,388       5,633       5,452       5,425       5,449       5,460       5,449       5,449
                                   =======     =======     =======     =======     =======     =======     =======     =======
</TABLE>






                                      F-15
<PAGE>   39


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.

                                  AMERICAN COIN MERCHANDISING, INC.

                                  By      /s/  JEROME M. LAPIN      
                                          --------------------------
                                          Jerome M. Lapin
                                          Chairman of the Board, President
                                          and Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
        SIGNATURE                                 TITLE                            DATE      
        ---------                                 -----                            ----      
<S>                                  <C>                                       <C>           
/s/      JEROME M. LAPIN             Chairman of the Board, President,         March 16, 1998
----------------------------         Chief Executive Officer (Principal                             
         Jerome M. Lapin             Executive Officer)                                      
                                                                                             
/s/      W. JOHN CASH                Vice President, Chief Financial           March 16, 1998
----------------------------         Officer and Treasurer (Principal                             
         W. John Cash                Financial and Accounting Officer)                       
                                                                                             
                                                                                             
/s/      RANDALL J. FAGUNDO          Vice President of Operations,             March 16, 1998
----------------------------         Secretary and Director                                  
         Randall J. Fagundo                                                                  
                                                                                             
/s/      ABBE M. STUTSMAN            Vice President of Product Development     March 16, 1998
----------------------------         and Purchasing and Director                             
         Abbe M. Stutsman                                                                    
                                                                                             
                                                                                             
/s/      J. GREGORY THEISEN          Director                                  March 16, 1998
----------------------------                                                                 
         J. Gregory Theisen                                                                  
                                                                                             
/s/      RICHARD D. JONES            Director                                  March 16, 1998
----------------------------                                                                 
         Richard D. Jones                                                                    
                                                                                             
/s/      JIM D. BALDWIN              Director                                  March 16, 1998
----------------------------                                                                 
         Jim D. Baldwin                                                                      
                                                                                             
/s/      JOHN A. SULLIVAN            Director                                  March 16, 1998
----------------------------                                                           
         John A. Sullivan        
</TABLE>                         
<PAGE>   40
                                 EXHIBIT INDEX


Exhibit No.                       Description                            Page
-----------                       -----------                            ----

  10.35               Commercial Lease Amendment Agreement

  11.1                Computation of Per Share Earnings

  23.1                Consent of KPMG Peat Marwirk LLP

  27                  Financial Data Schedule