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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1997
REGISTRATION NO. 333-35947
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO THE
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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AMERICAN COIN MERCHANDISING, INC.
d/b/a SUGARLOAF CREATIONS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 5962 84-1093721
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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5660 CENTRAL AVENUE
BOULDER, COLORADO 80301
(303) 444-2559
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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JEROME M. LAPIN
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMERICAN COIN MERCHANDISING, INC.
5660 CENTRAL AVENUE
BOULDER, COLORADO 80301
(303) 444-2559
FAX: (303) 443-2264
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
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JAMES C.T. LINFIELD, ESQ. CARLA W. SLEDGE, ESQ. ALVIN G. SEGEL, ESQ.
COOLEY GODWARD LLP HUTCHINSON BLACK & COOK LLC IRELL & MANELLA LLP
2595 CANYON BOULEVARD, SUITE 250 1215 SPRUCE STREET, SUITE 100 1800 AVENUE OF THE STARS, SUITE 900
BOULDER, CO 80302 BOULDER, COLORADO 80302 LOS ANGELES, CA 90067-4276
(303) 546-4000 (303) 442-6514 (310) 277-1010
FAX: (303) 546-4099 FAX: (303) 442-6593 FAX: (310) 203-7199
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 2, 1997
2,000,000 SHARES
[AMERICAN COIN LOGO]
COMMON STOCK
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Of the 2,000,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock") of American Coin Merchandising, Inc., d/b/a SugarLoaf Creations,
Inc. (the "Company") offered hereby, 1,000,000 shares are being sold by the
Company and 1,000,000 shares are being sold by certain stockholders of the
Company (the "Selling Stockholders"). See "Principal and Selling Stockholders."
The Company will not receive any of the proceeds from the sale of the Common
Stock offered by the Selling Stockholders. The Company's Common Stock is traded
on the Nasdaq National Market under the symbol "AMCN." The last sale of the
Company's Common Stock, as reported on the Nasdaq National Market, occurred on
September 29, 1997 at a price of $16.125 per share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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========================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO SELLING
PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
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Per Share....................... $ $ $ $
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Total........................... $ $ $ $
========================================================================================================================
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters by the Company and the Selling Stockholders and other matters.
(2) Before deducting certain expenses estimated at $400,000 payable on a
pro-rata basis by the Company and the Selling Stockholders.
(3) The Selling Stockholders have granted the Underwriters a 30-day
over-allotment option to purchase up to 300,000 shares of Common Stock at
the Price to Public less Underwriting Discounts and Commissions, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Selling Stockholders will be $ , $ , and $ ,
respectively. See "Underwriting."
------------------------
The shares of Common Stock are being offered by the Underwriters named
herein, subject to prior sale, when, as and if issued by the Company and
delivered to and accepted by the Underwriters and subject to certain prior
conditions, including the right of the Underwriters to reject any order in whole
or in part. It is expected that delivery of the shares of Common Stock will be
made at the offices of EVEREN Clearing Corporation in New York, New York or
through the facilities of The Depository Trust Company in New York, New York, on
or about , 1997.
EVEREN SECURITIES, INC.
LADENBURG THALMANN & CO. INC.
THE SEIDLER COMPANIES
INCORPORATED
The date of this Prospectus is October 2, 1997
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First Foldout Page: Picture of Toy Shoppe which shows Toy Shoppe containing
stuffed animals and plush toys and list of major Retail Accounts including
Kroger, Safeway/Vons, Fred Meyer Stores, Cub Foods, Wal-Mart, Kmart, Denny's
(franchised), Ponderosa Steak House, Bonanza Steak Houses, AMF Bowling Centers,
Brunswick Bowling Centers, Truckstops of America, Flying J Truckstop and 76
Truckstops.
Inside Foldout Page: Pictures of Treasure Shoppe and Fun Shoppe showing
Treasure Shoppe containing jewelry and watches and Fun Shoppe containing small
toys and candy; Banner picture of various Company items in Shoppes.
Inside Page: Picture of map of the United States marked to show location of
Company offices, franchise offices and corporate headquarters; graph of Machine
Growth showing increase of number of Shoppes owned by the Company and its
franchisees from 1992 through 1996; Banner picture of various Company items in
Shoppes.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING
STOCKHOLDERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
related notes thereto appearing elsewhere in this Prospectus. Information
contained in this Prospectus includes "forward-looking statements" (as such term
is defined in the Private Securities Litigation Reform Act of 1995) which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "plans" or "anticipates" or variations
thereon or comparable terminology or by a discussion of strategy. Because such
statements include risks and uncertainties, actual results could differ
materially from those expressed or implied by such forward-looking statements.
This Prospectus also contains important cautionary statements identifying
factors which may affect such future results. See "Risk Factors" for a
discussion of certain of these factors and risks associated with an investment
in the Common Stock. Except as noted otherwise, all information in this
Prospectus assumes that the Underwriters' over-allotment option is not
exercised. Unless the context otherwise requires, the term the "Company" refers
to American Coin Merchandising, Inc., a Delaware corporation, or prior to August
31, 1995, American Coin Merchandising, Inc. and affiliates.
THE COMPANY
The Company is a leading owner, operator and franchisor of coin-operated
skill-crane machines ("Shoppes") that dispense stuffed animals, plush toys,
watches, jewelry and other items through a national network of more than 9,000
machines operated by the Company and its franchisees. For up to 50c 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
Shoppes are located 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.
Shoppes are currently located in Wal-Mart, Kmart, Safeway, Denny's, Kroger, and
many other well-known Retail Accounts. The Company utilizes displays of quality
merchandise, new product introductions, including Company-designed products,
licensed products and seasonal items, and other merchandising techniques to
attract new and repeat customers. The Company is beginning to expand into
complementary vending businesses, including kiddie rides and bulk vending
(candy, gum, novelty items, etc.).
The number of Company owned and operated Shoppes has risen from 743 to
3,967 from 1993 to 1996, representing a compound annual growth rate of 74.8%. In
1996, the Company had record revenue and operating earnings of $38.3 million and
$4.3 million. The Company's growth continued during the six month period ended
June 30, 1997, when the Company had six month revenue and operating earnings of
$26.1 million and $3.1 million, an increase of 59.3% and 104.2% over the
comparable 1996 period. This growth resulted primarily from an increase in the
installed base of Company owned and operated Shoppes from 2,904 as of June 30,
1996 to 4,792 as of June 30, 1997, or an increase of 65%. In 1996, Shoppes owned
by the Company and its franchisees vended more than 7.25 million toys.
The Company plans to increase the number of Shoppes it owns and operates by
an average of at least 1,400 for 1997 and 1998 through a combination of
acquisitions and new Shoppe placements. The Company believes that the Shoppes'
potential economic return, visual appeal, product quality and the Company's high
operational standards are important factors in gaining acceptance of the
Company's Shoppes by Retail Accounts. The Company operates three types of
Shoppes: (i) the Toy Shoppe which primarily dispenses stuffed animals and plush
toys, (ii) the Treasure Shoppe which dispenses items such as jewelry and
watches, and (iii) the Fun Shoppe which dispenses small toys and candy. Over 60%
of the Company's Shoppe placements have been Toy Shoppes, which the Company
purchases for an average price of $3,600. In 1996, a Toy Shoppe averaged $12,000
in revenue and over $4,200 in cash profit contribution (revenue minus cost of
vended products, location commissions and direct service cost).
The skill-crane industry has been in existence for over 75 years and is
highly fragmented. Based on analysis of certain industry publications, the
Company believes that there are approximately 50,000 units of prize-dispensing
equipment in operation nationwide, of which skill-cranes are the most prevalent
type, with the average skill-crane business operating 16 machines. With over
5,000 Company owned and operated
3
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Shoppes as of August 31, 1997, management believes the Company is the largest,
and only national, owner and operator of skill-crane machines. The Company
believes that supermarkets, mass merchandisers, bowling centers, bingo halls,
bars, restaurants, warehouse clubs and similar locations, representing over
100,000 potential crane locations, are becoming increasingly aware of the
economic benefits of amusement and vending machines, such as the Company's
Shoppes, which can provide retailers greater revenue and profits per square foot
than alternative uses of available floor space, with minimal expense.
BUSINESS STRATEGY
The Company's business strategy is to differentiate itself from traditional
skill-crane operators by (i) offering products of higher quality than the
carnival-type products that have been associated with skill-crane and other
prize-dispensing equipment; (ii) utilizing appealing merchandise displays,
frequent new product introductions, including Company-designed products,
licensed products and seasonal items, and other merchandising techniques
designed to attract customers; (iii) controlling product cost by purchasing
products in large quantities directly from manufacturers; (iv) closely
monitoring Shoppe revenue per product dispensed (the "Vend Ratio") to maintain
customer satisfaction and optimize Shoppe revenue and profitability; (v)
concentrating the placement of its Shoppes in Retail Accounts; (vi) providing
major Retail Accounts with the timely installation and operation of an
integrated system of Shoppes that can exceed 1,000 machines on a national basis;
and (vii) providing comprehensive training for the Company's field office
personnel and franchisees to assure the achievement of the Company's business
objectives. The Company intends to focus on owning and operating Shoppes and
does not currently intend to grant any additional franchises.
GROWTH STRATEGY
- Further penetration of existing geographic markets. As of August 31,
1997, the Company owned and operated over 5,000 Shoppes from a national
network of 30 offices with operations in 40 states, which management
believes makes the Company the largest, and only national, owner and
operator of skill-crane machines. The Company believes this network is
well positioned to serve the skill-crane operations of supermarkets, mass
merchandisers, bowling centers, bingo halls, bars, restaurants, warehouse
clubs and similar locations, which the Company estimates represent over
100,000 potential crane locations.
- Increase penetration of existing Retail Accounts. The Company and its
franchisees are designated skill-crane operators for many regional and
national Retail Accounts including Wal-Mart, Safeway, Kroger and
franchised Denny's. The Company believes opportunities exist to increase
penetration within its existing Retail Accounts. For example, while the
Company already owned and operated 1,465 Shoppes in Wal-Mart as of August
31, 1997, over 250 stores have yet to be installed under the Wal-Mart
contract.
- Target marketing efforts towards new large Retail Accounts. The Company
believes the attractive economic returns its Shoppes offer and its
demonstrated success with installing and operating a significant number
of Shoppes in Retail Accounts such as Wal-Mart and Safeway will allow it
to successfully target new national and regional Retail Accounts. In only
twelve months (ended June 30, 1997), the Company installed over 1,200
Shoppes in Wal-Mart stores.
- Capitalize on relationships with existing Retail Accounts. The Company
believes it can capitalize on its existing relationships with Retail
Accounts to expand the number and type of amusement and vending machines
its employees service at each location. Already the Company has
introduced multiple Shoppes at individual locations and is beginning to
introduce kiddie rides and bulk vending into its system.
- Acquire franchisees and other complementary vending businesses. The
Company has undertaken six (6) acquisitions since January 1, 1996 (see
"Recent Acquisitions") acquiring over 600 Shoppes, significant franchised
territories and a bulk vending and kiddie ride business. The Company
plans to pursue acquisition opportunities in order to increase the number
of Company owned machines and to acquire franchised territories and other
complementary businesses.
4
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RECENT ACQUISITIONS
As part of the Company's growth strategy, since January 1996 it has
undertaken the following six (6) acquisitions:
- Hoosier Coin Company. The Company's former franchisee for Indiana,
including 156 Shoppes, was purchased in January 1996 for consideration of
approximately $0.5 million.
- Northern Coin Company. The Company's former licensee for portions of
Colorado, including 40 Shoppes, was purchased in May 1996 for
consideration of approximately $0.5 million.
- Sugarloaf of Utah. The Company's former franchisee for Utah, including
213 Shoppes, was purchased in July 1996 for consideration of
approximately $0.9 million.
- Sugarloaf West. The Company's former franchisee for portions of Colorado,
including 37 Shoppes, was purchased in August 1996 for consideration of
approximately $0.2 million.
- Sugarloaf, Inc. The Company's former franchisee for the states of
Louisiana and Oklahoma and portions of Missouri, Illinois and Texas,
including 202 Shoppes, was purchased in July 1997 for consideration of
approximately $1.7 million.
- Quality Amusements Corp. and Quality Entertainment Corp. On September 12,
1997, the Company executed an agreement to purchase the assets of these
operators of bulk vending machines and kiddie rides for consideration of
approximately $1.8 million, which is scheduled to close November 1, 1997.
The Company was incorporated in Colorado in July 1988 and was
reincorporated in Delaware in July 1995. The Company's principal executive
offices are located at 5660 Central Avenue, Boulder, Colorado 80301 and its
telephone number is (303) 444-2559.
THE OFFERING
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Common Stock Offered by the Company.................. 1,000,000 shares
Common Stock Offered by the Selling Stockholders..... 1,000,000 shares(1)
Common Stock Outstanding after the Offering.......... 6,449,904 shares(2)
Use of Proceeds...................................... To repay bank debt, purchase additional
Shoppes, fund acquisitions and for working
capital and other general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol........................ "AMCN"
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(1) Excludes 300,000 shares of Common Stock which is subject to the
Underwriters' over-allotment option. See "Underwriting."
(2) Excludes (i) 329,500 shares of Common Stock issuable upon exercise of stock
options at a weighted average exercise price of $7.76 per share outstanding
as of August 31, 1997, and (ii) 125,000 shares of Common Stock issuable upon
exercise of certain warrants which have an exercise price of $8.40 per
share. See "Management -- Stock Option Plan" and " -- Non-Employee
Directors' Stock Option Plan."
5
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SUMMARY FINANCIAL AND OPERATING DATA
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SIX MONTHS TWELVE
ENDED MONTHS
YEAR ENDED DECEMBER 31, JUNE 30, ENDED
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1992 1993 1994 1995 1996 1996 1997 1997
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(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
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STATEMENT OF EARNINGS DATA:
Revenue........................................ $7,784 $10,508 $17,614 $25,714 $38,267 $16,417 $26,147 $47,997
Gross profit................................... 2,557 3,403 5,008 7,959 11,325 4,707 7,796 14,414
General and administrative expense............. 2,098 2,854 3,607 4,565 7,053 3,203 4,725 8,575
Operating earnings............................. 459 549 1,401 3,394 4,272 1,504 3,071 5,839
Net earnings................................... 516 321 1,082 2,575 2,586 876 1,765 3,475
Pro forma net earnings(1)...................... 320 199 671 2,549
Net earnings per share(2)...................... $ 0.48 $ 0.16 $ 0.33 $ 0.64
Weighted average common shares(2).............. 5,417 5,449 5,381 5,447
COMPANY OPERATING DATA:
Revenue growth................................. -- 35.0% 67.6% 46.0% 48.8% 37.9% 59.3%
Operating earnings growth...................... -- 19.6 155.2 142.3 25.9 0.7 104.2
Gross margin................................... 32.9% 32.4 28.4 31.0 29.6 28.7 29.8
Operating earnings margin...................... 5.9 5.2 8.0 13.2 11.2 9.2 11.7
Pro forma net earnings margin(3)............... 4.1 1.9 3.8 9.9 6.8 5.3 6.8
NUMBER OF SHOPPES(4):
Company operations............................. 284 743 1,019 2,057 3,967 2,904 4,792
Franchise operations........................... 1,788 2,148 3,008 3,455 3,981 3,522 4,195
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Total.................................. 2,072 2,891 4,027 5,512 7,948 6,426 8,987
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JUNE 30, 1997
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ACTUAL AS ADJUSTED(5)
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Working capital............................................. $ 1,958 $10,881
Total assets................................................ 24,695 33,618
Total short-term debt and current portion of long-term
debt...................................................... 1,101 1,101
Total long-term debt, excluding current portion............. 6,760 725
Total stockholders' equity.................................. 13,467 28,425
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(1) During the years 1992 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, 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 income has 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 1992 through 1995 because the Company and each of the Affiliated
Entities were organized as S corporations or a partnership. On a pro forma
basis, net earnings per share and weighted average common shares would have
been $0.55 and 4,669,000 respectively, for 1995. See Note 14 of Notes to the
Financial Statements included herein.
(3) Net earnings margin for 1992 through 1995 is based on pro forma net
earnings.
(4) 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 a historical basis. The number of Shoppes is as of the end of
the indicated period.
(5) Adjusted to give effect to the sale of the 1,000,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $16.125
per share and after deduction of underwriting discounts and commissions and
estimated offering expenses and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
6
<PAGE> 8
RISK FACTORS
The following principal risk factors should be considered carefully in
addition to the other information contained in this Prospectus before purchasing
the Common Stock offered hereby. This Prospectus contains forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995), which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," "plans" or "anticipates"
or variations thereon or comparable terminology or by a discussion of strategy.
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
Prospectus.
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 in Retail Accounts as well as to
maintain or increase the average financial performance of the Shoppes. The
Company's ability to place additional Shoppes depends on a number of factors
beyond the Company's control, including general business and economic
conditions. Installation of additional Shoppes will also depend, in part, upon
the Company's ability to secure additional national and regional Retail Accounts
and to obtain approval to place additional Shoppes in individual locations of
such accounts. The Company, its franchisees and their suppliers also may be
unable to place and adequately service additional Shoppes, which could have a
material adverse effect on the Company's financial performance.
In addition, the Company has limited experience with product offerings
beyond skill-cranes and new product offerings (including kiddie rides and bulk
vending) may involve risks and operational requirements different from those of
the Shoppes. Accordingly, there can be no assurance that any additional Company
product offerings will meet with success or generate significant additional
revenue.
There can be no assurance that the Company will be able to manage its
expanding operations effectively or that it will be able to maintain or
accelerate its growth. The Company's growth has placed, and is expected to
continue to place, significant demands on all aspects of the Company's business,
including Shoppe servicing, merchandising, financial and administrative
personnel and systems. The Company's future operating results are substantially
dependent upon the ability of the Company's officers and key personnel to manage
anticipated growth and increased demand effectively; to attract, train and
retain additional qualified personnel; and to implement and improve technical,
service, administrative, financial control and reporting systems. Either a
deterioration in Shoppe performance or the Company's failure to manage growth
effectively could adversely and materially affect the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Business Strategy" and "-- Growth Strategy."
ACQUISITION RELATED RISKS
Part of the Company's business strategy is to acquire other businesses or
assets that will complement its existing business and it is contemplated that
part of the proceeds from the Offering may be used for such acquisitions. 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. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Growth Strategy."
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<PAGE> 9
TRADE RELATIONS AND DEPENDENCE ON MAJOR ACCOUNTS
The Company's largest major account, Wal-Mart, accounted for approximately
1.9% of total revenue for the six month period ended June 30, 1996, 11.4% of
total revenue in all of fiscal 1996, and 28.2% of total revenue for the six
month period ended June 30, 1997. Although the Company has entered into a
contract with Wal-Mart (which expires on January 1, 2000), 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. See "Business -- Operations."
COMPETITION
The Company competes with a number of regional and local operators of
skill-crane machines. Many of these competitors are engaged in aggressive
expansion programs, and the Company has experienced and expects to continue to
experience intense competition for new locations. There can be no assurance that
the Company will be able to compete effectively with these companies in the
future. The Company's Shoppes also compete with other vending machines and
coin-operated amusement devices and seasonal and bulk merchandise for sites
within retail locations. There can be no assurance that the Company will be able
to maintain its current sites in the retail locations or that it will be able to
obtain sites in the future on attractive terms or at all. There also are few
barriers to entry in the Company's business, and it would be possible for
well-financed vending machine manufacturers or other vending machine operators
with existing relationships with supermarkets and other locations targeted by
the Company to compete readily with the Company in certain markets. See
"Business -- Competition."
DEPENDENCE ON SUPPLIERS AND FOREIGN SOURCING
Substantially all of the plush toys and other products dispensed from the
Shoppes are produced by foreign manufacturers. A majority 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. See "Business -- Operations" and
"-- Suppliers."
The Company also could be affected by labor strikes in the sea shipping,
trucking and railroad industries, all of which the Company utilizes to varying
degrees. Although the Company believes that alternative means of transportation
would be available for its products in the event of a labor strike affecting a
particular mode of transportation, such a disruption could increase the
Company's transportation costs and thereby reduce its profit margins.
The Company does not have a long-term supply agreement with any of its
crane suppliers. While the Company believes that it will continue to be able to
purchase skill-crane machines from existing or alternative suppliers, no
assurance can be given that skill-cranes will be available on a cost-efficient
basis or that shortages or other disruptions in the Company's sources of supply
for skill-crane machines and components would not have a material and adverse
effect on the Company's business, financial condition or results of operations.
See "Business -- Suppliers" and "-- Growth Strategy."
8
<PAGE> 10
NATURE OF FRANCHISE RELATIONS
For the fiscal year ended December 31, 1996 and the six months ended June
30, 1997, the Company derived approximately 20.5% and 13.4%, respectively, of
its total revenue from franchise and other revenue. The Company expects to
continue to derive significant 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 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. See "Business -- Franchise Relations" and "-- Terms of
Franchise Agreement."
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 which 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.
CHANGING CONSUMER TRENDS; TECHNOLOGICAL INNOVATIONS
Consumer preferences are constantly changing and difficult to predict, and
consumer interest in the Company's Shoppes or the products dispensed could
decline suddenly or other prize-dispensing equipment or amusement devices could
replace the Shoppes in consumer preference. The Company's success will depend in
part on its ability to offer new and appealing products and on the continuing
appeal of its Shoppes' skill-crane format in both existing markets and in new
markets into which the Company may expand. There can be no assurance that the
use of skill-crane machines and the Company's operating results will not be
adversely affected by changing consumer trends.
The Company's business also is susceptible to advances in the design and
manufacture of skill-crane machines and other vending technology. The Company's
failure to anticipate or respond adequately to such technological changes could
adversely affect the Company's business and results of operations.
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 require the
labeling of articles which bear or contain a hazardous substance as defined in
such statutes. In addition, the Consumer Product Safety Commission may, under
such statutes, ban from the market toys or other articles intended for use by
children which contain hazardous substances or present a public health or safety
hazard, and require the repurchase and reimbursement of certain expenses by the
manufacturer of such banned toys or articles. If plush toys or watches dispensed
by the Company's Shoppes were to be banned, permanently or temporarily, the
Company's operations and financial position could be adversely affected.
9
<PAGE> 11
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
companies and their key personnel to hold licenses, permits and approvals in
connection with the distribution or operation of skill-crane machines.
Currently, the Company has obtained all governmental licenses, permits and
approvals that it believes are necessary for the distribution and operation of
its skill-crane machines. However, no assurance can be given that such licenses,
permits or approvals will be given or renewed in the future. The Company's
franchisees are responsible for their own regulatory compliance. The rejection
or termination of the Company's or any of its franchisees' licenses, permits or
approvals may adversely affect the business of the Company.
Many states and local jurisdictions lack specific laws and regulations
relating to skill-crane machines, and there can be no assurance that existing
state or local laws and regulations, including gaming laws and regulations, will
not be construed or enforced in the future to prohibit the operation of Shoppes
in these jurisdictions or subject the Company and its franchisees to additional
regulations or licensing requirements. Also, there can be no assurance that new
laws and regulations that prevent or restrict the operation of Shoppes in
particular states or local jurisdictions will not be adopted. Any such actions
on the part of states or local jurisdictions could have a material adverse
effect on the Company's business and operations and on its expansion plans.
As a franchisor, the Company is subject to various federal and state
franchise and business opportunity laws and regulations. Although the Company
does not currently intend to grant any additional franchises and it believes it
is in material compliance with such laws in the states in which the Company has
offered and sold franchises, the promulgation of new franchising laws and
regulations could adversely affect the Company's business and operations.
PRODUCT LIABILITY
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. See
"Business -- Insurance."
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
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. 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. See
"Business -- Intellectual Property."
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
10
<PAGE> 12
competitive businesses. There can be no assurance that the Company would be able
to effectively enforce non-compete provisions against these individuals. See
"Business -- Employees," "Management."
CONTROL BY EXISTING STOCKHOLDERS
Upon the completion of this Offering, the current executive officers and
directors of the Company will beneficially own approximately 39% of the
outstanding Common Stock (approximately 35% if the Underwriters' over-allotment
option is exercised in full) and will hold vested and exercisable options and
warrants to acquire up to an additional 41,500 shares of Common Stock.
Accordingly, these stockholders may have the ability to control the election of
the Company's directors and the Company's other business and affairs. This
concentration of ownership may have the effect of delaying or preventing a
change in management or control of the Company. See "Description of Capital
Stock -- Delaware Anti-Takeover Law and Certain Charter Provisions."
LIMITED HISTORICAL TRADING VOLUME IN THE COMMON STOCK; POSSIBLE VOLATILITY OF
STOCK PRICE
The Common Stock has experienced low trading volumes due, in part, to
substantial holdings by executive officers, members of the Board of Directors
and greater than 5% stockholders who collectively have held a significant
portion of the outstanding shares. Following the Offering, approximately 53% of
the shares (approximately 46% if the Underwriters' over-allotment option is
exercised in full) will be held by the Company's executive officers, members of
the Board of Directors and greater than 5% stockholders. No assurance can be
given that an active trading market will develop following the Offering.
In addition, even if a more active market does develop, no assurance can be
given that the market price for the Common Stock will not be volatile. The
market price for the Common Stock may be significantly affected by a variety of
factors, including a relatively high price to earnings ratio, the Company's
operating results or changes in any earnings estimates publicly announced by the
Company or by securities analysts. In addition, the stock market from time to
time experiences extreme price and volume fluctuations that have particularly
affected the market price for many companies and that often have been unrelated
to the operating performance of these companies. These broad market fluctuations
may adversely affect the market price of the Common Stock. See "Price Range of
Common Stock."
POTENTIAL SALE INTO THE PUBLIC MARKET OF OUTSTANDING SHARES
Upon completion of the Offering, the Company will have approximately
6,449,904 shares of Common Stock outstanding. Of these shares, the 1,700,000
shares sold in the Company's initial public offering and the 2,000,000 shares
sold in the Offering will be freely tradable without restriction or further
registration under the Securities Act, unless purchased by "affiliates" of the
Company, as is defined under the Securities Act. The remaining 2,749,904 shares
of Common Stock are "Restricted Shares" and are subject to restrictions under
the Securities Act. Of these shares, 14,000, 1,148,627 and 1,227,246 are subject
to lock-up agreements under which the holders have agreed not to sell or
otherwise dispose of any of their shares for a period of 90, 180 and 270 days,
respectively, after the date of this Prospectus without the prior written
consent of EVEREN Securities, Inc. See "Shares Eligible for Future Sale."
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 500,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock.
Such issuance, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder,
11
<PAGE> 13
unless the business combination is approved in a prescribed manner. The
application of Section 203 also could have the effect of delaying or preventing
change of control of the Company. Furthermore, certain provisions of the
Company's Certificate of Incorporation may have the effect of delaying or
preventing changes in control or management of the Company, which could
adversely affect the market price of the Company's Common Stock. See
"Description of Capital Stock -- Delaware Anti-Takeover Law and Certain Charter
Provisions."
DILUTION
The public offering price is substantially higher than the tangible book
value per share of Common Stock at June 30, 1997. Investors purchasing shares of
Common Stock in the Offering will therefore incur immediate, substantial
dilution equal to $12.21 per share, based on as adjusted tangible book value per
share of Common Stock of $3.92, calculated assuming the sale of 1,000,000 shares
of Common Stock by the Company offered hereby at a public offering price of
$16.125 per share, less the underwriting discounts and estimated offering
expenses.
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock are estimated to be approximately $15.0 million after deducting the
estimated underwriting discounts and offering expenses. The Company will not
receive any proceeds from the sale of the 1,000,000 shares of Common Stock by
the Selling Stockholders. See "Principal and Selling Stockholders."
The net proceeds from the Offering will be used (i) to repay up to $8.5
million of the outstanding principal amount of the Company's credit facility
(the "Revolving Line") which bears interest at an annual rate of 8.5% and has a
final maturity of July 5, 1999, (ii) purchase additional skill-crane machines,
and (iii) fund acquisitions of other companies, technology or products that
complement the business of the Company, although the Company has no present
commitments or agreements with respect to any such acquisitions, other than the
acquisition of Quality Amusements Corp. and Quality Entertainment Corp. See
"Business -- Recent Acquisitions." The remaining proceeds will be used for
working capital and general corporate purposes. The amounts and timing of such
expenditures will depend upon the availability and terms of acquisitions and any
related financing and other factors, many of which are beyond the Company's
control. Pending such uses, the net proceeds of the Offering will be invested in
short-term, interest-bearing securities.
PRICE RANGE OF COMMON STOCK
The 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. 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, 1995:
Fourth Quarter (From October 16, 1995).................... $ 7.38 $6.00
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............................................. 9.00 4.88
Second Quarter............................................ 11.75 6.75
Third Quarter (through September 29, 1997)................ 17.63 9.63
</TABLE>
As of September 15, 1997 there were 30 holders of record of the Common
Stock. On September 29, 1997, the last reported sale price on the Nasdaq
National Market for the Common Stock was $16.125.
DIVIDEND POLICY
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,
restrictions in current and future credit agreements and operating and financial
condition of the Company, among other factors. The Revolving Line limits the
Company's payment of dividends while the Revolving Line is in place. Prior to
October 1995, certain of the Affiliated Entities made S corporation
distributions to their respective owners, including certain Selling
Stockholders. See "Certain Relationships and Related Transactions."
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997 on an actual basis and (ii) on an as adjusted basis to reflect the
receipt and application of the net proceeds from the sale of 1,000,000 shares of
the Common Stock offered by the Company hereby.
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Cash and cash equivalents................................... $ 826 $ 9,749
======= =======
Short-term debt and current portion of long-term debt....... $ 1,101 $ 1,101
======= =======
Long-term debt, excluding current portion................... $ 6,760 $ 725
Stockholders' equity:
Preferred Stock, $.10 par value; 500,000 shares
authorized, none issued actual and as adjusted......... -- --
Common Stock, $.01 par value, 7,000,000 shares authorized;
issued and outstanding 5,447,904 and 6,447,904, actual
and as adjusted(1)..................................... 54 64
Additional paid-in capital................................ 8,414 23,362
Unearned stock option compensation........................ (33) (33)
Retained earnings......................................... 5,032 5,032
------- -------
Total stockholders' equity........................ 13,467 28,425
------- -------
Total capitalization.............................. $20,227 $29,150
======= =======
</TABLE>
- ---------------
(1) Excludes (i) 210,500 shares of Common Stock issuable upon exercise of stock
options at a weighted average exercise price of $6.57 per share outstanding
as of June 30, 1997, and (ii) 125,000 shares of Common Stock issuable upon
exercise of certain warrants which have an exercise price of $8.40 per share
as of June 30, 1997. See "Management -- Stock Option Plan" and
"-- Non-Employee Directors' Stock Option Plan."
14
<PAGE> 16
SELECTED FINANCIAL AND OPERATING DATA
The selected financial data set forth below with respect to the Company's
statements of earnings for each of the years in the three-year period ended
December 31, 1996 and balance sheets at December 31, 1995 and 1996, have been
derived from the financial statements of the Company included elsewhere in this
Prospectus, that have been audited by KPMG Peat Marwick LLP, independent
auditors, as indicated in their report included elsewhere in this Prospectus.
The statement of earnings data for the years ended December 31, 1992 and 1993
and the balance sheet data as of December 31, 1993 and 1994, have been derived
from the financial statements audited by KPMG Peat Marwick LLP, which are not
included in this Prospectus. The financial data for the six months ended June
30, 1996 and 1997 have been derived from unaudited financial statements included
elsewhere in this Prospectus. The unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of financial position and results of
operations for these periods. Operating results for the six months ended June
30, 1997 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1997. The data set forth below should be
read in conjunction with the financial statements, including notes thereto,
included elsewhere in this Prospectus and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
TWELVE
SIX MONTHS MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30, ENDED
---------------------------------------------- ----------------- JUNE 30,
1992 1993 1994 1995 1996 1996 1997 1997
------ ------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenue:
Vending............................... $4,138 $ 6,258 $11,651 $17,031 $30,439 $12,192 $22,648 $40,895
Franchise and other................... 3,646 4,250 5,963 8,683 7,828 4,225 3,499 7,102
------ ------- ------- ------- ------- ------- ------- -------
Total revenue................... 7,784 10,508 17,614 25,714 38,267 16,417 26,147 47,997
------ ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Vending............................... 3,084 4,368 8,399 11,701 21,283 8,639 16,042 28,686
Franchise and other................... 2,143 2,737 4,207 6,054 5,659 3,071 2,309 4,897
------ ------- ------- ------- ------- ------- ------- -------
Total cost of revenue........... 5,227 7,105 12,606 17,755 26,942 11,710 18,351 33,583
------ ------- ------- ------- ------- ------- ------- -------
Gross profit.................... 2,557 3,403 5,008 7,959 11,325 4,707 7,796 14,414
General and administrative expense...... 2,098 2,854 3,607 4,565 7,053 3,203 4,725 8,575
------ ------- ------- ------- ------- ------- ------- -------
Operating earnings...................... 459 549 1,401 3,394 4,272 1,504 3,071 5,839
Interest expense........................ 89 115 228 383 375 91 267 551
Minority interest....................... 52 89 62 80 -- -- -- --
Share of (income) loss of equity
affiliate............................. (198) 24 29 27 -- -- -- --
------ ------- ------- ------- ------- ------- ------- -------
Earnings before income taxes............ 516 321 1,082 2,904 3,897 1,413 2,804 5,288
Income tax expense...................... -- -- -- 329 1,311 537 1,039 1,813
------ ------- ------- ------- ------- ------- ------- -------
Net earnings.................... $ 516 $ 321 $ 1,082 $ 2,575 $ 2,586 $ 876 $ 1,765 $ 3,475
====== ======= ======= ======= ======= ======= ======= =======
Net earnings per share(2)............... $ 0.48 $ 0.16 $ 0.33 $ 0.64
Weighted average common shares(2)....... 5,417 5,449 5,381 5,447
Pro forma information:
Historical net earnings before income
taxes............................... $ 516 $ 321 $ 1,082 $ 2,904
Pro forma adjustments to earnings
before taxes........................ 1,207
-------
Pro forma earnings before taxes....... 4,111
Pro forma income tax expense.......... 196 122 411 1,562
------ ------- ------- -------
Pro forma net earnings(1)(2).......... $ 320 $ 199 $ 671 $ 2,549
====== ======= ======= =======
COMPANY OPERATING DATA:
Revenue growth.......................... -- 35.0% 67.6% 46.0% 48.8% 37.9% 59.3%
Operating earnings growth............... -- 19.6 155.2 142.3 25.9 0.7 104.2
Gross margin............................ 32.9% 32.4 28.4 31.0 29.6 28.7 29.8
Operating earnings margin............... 5.9 5.2 8.0 13.2 11.2 9.2 11.7
Pro forma net earnings margin(3)........ 4.1 1.9 3.8 9.9 6.8 5.3 6.8
NUMBER OF SHOPPES(4):
Company operations...................... 284 743 1,019 2,057 3,967 2,904 4,792
Franchise operations.................... 1,788 2,148 3,008 3,455 3,981 3,522 4,195
------ ------- ------- ------- ------- ------- -------
Total........................... 2,072 2,891 4,027 5,512 7,948 6,426 8,987
====== ======= ======= ======= ======= ======= =======
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997
----------------------------------- ---------------------------------
AS
1993 1994 1995 1996 ACTUAL ADJUSTED(5)
------ ------ ------- ------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $ 350 $ 220 $ 2,896 $ 2,914 $ 1,958 $10,881
Total assets............................................ 3,750 5,539 13,702 19,758 24,695 33,618
Total short-term debt and current portion of long-term
debt.................................................. 1,157 1,380 557 1,109 1,101 1,101
Total long-term debt, excluding current portion......... 1,078 1,640 1,632 5,059 6,760 725
Total stockholders' equity.............................. 833 1,214 9,007 11,676 13,467 28,425
</TABLE>
- ---------------
(1) During the years 1992 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, 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 income has 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 1992 through 1995 because the Company and each of the Affiliated
Entities were organized as S corporations or a partnership. On a pro forma
basis, net earnings per share and weighted average common shares would have
been $0.55 and 4,669,000 respectively, for 1995. See Note 14 of Notes to the
Financial Statements included herein.
(3) Net earnings margin for 1992 through 1995 is based on pro forma net
earnings.
(4) 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 a historical basis. The number of Shoppes is as of the end of
the indicated period.
(5) Adjusted to give effect to the sale of the 1,000,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $16.125
per share and after deduction of underwriting discounts and commissions and
estimated offering expenses and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
16
<PAGE> 18
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 which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors including those set forth under "Risk Factors" and elsewhere in
this Prospectus. The information presented below should be read in conjunction
with the financial statements, including notes thereto, included elsewhere in
this Prospectus.
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 period ended June 30, 1997 typically paid 20-30% of gross revenue to the
location owner as a location commission. At June 30, 1997, the Company had a
national network of 29 offices operating in 39 states and there were 20 Company
franchisees operating in 27 territories. The Company sells both machines and
product vended in the machines to its franchisees and for the period ended June
30, 1997 collected continuing royalties ranging from 2% to 5% of its
franchisees' gross machine revenue.
For the period ended June 30, 1997, over 80% of the Company's revenue and
gross profit was 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. The Company plans to increase the number of
Shoppes it owns and operates by an average of at least 1,400 for 1997 and 1998
through a combination of acquisitions and new Shoppe placements. 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
3,967 from 1993 to 1996, representing a compound annual growth rate of 74.8%. In
1996, the Company had record revenue and operating earnings of $38.3 million and
$4.3 million. The Company's growth continued during the six month period ended
June 30, 1997, when the Company had six month revenue and operating earnings of
$26.1 million and $3.1 million, an increase of 59.3% and 104.2% over the
comparable 1996 period. This growth resulted primarily from an increase in the
installed base of Company owned and operated Shoppes from 2,904 as of June 30,
1996 to 4,792 as of June 30, 1997, an increase of 65%. The Company has
experienced 53.9% and 98.2% compound annual growth rates in total revenue and
operating earnings, respectively, between 1993 and 1996.
17
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain selected
statement of earnings data as a percentage of total revenue:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Vending...................................... 66.1% 66.2% 79.5% 74.3% 86.6%
Franchise and other.......................... 33.9 33.8 20.5 25.7 13.4
----- ----- ----- ----- -----
Total revenue........................ 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenue:
Vending...................................... 47.7 45.5 55.6 52.6 61.4
Franchise and other.......................... 23.9 23.5 14.8 18.7 8.8
----- ----- ----- ----- -----
Total cost of revenue................ 71.6 69.0 70.4 71.3 70.2
----- ----- ----- ----- -----
Gross profit......................... 28.4 31.0 29.6 28.7 29.8
General and administrative expense............. 18.4 16.4 18.4 19.5 18.1
Commissions and royalties, related parties..... 2.0 1.3 -- -- --
----- ----- ----- ----- -----
Operating earnings............................. 8.0 13.2 11.2 9.2 11.7
Interest expense............................... 1.3 1.5 1.0 0.6 1.0
Other expenses................................. 0.5 0.4 -- -- --
----- ----- ----- ----- -----
Earnings before income taxes......... 6.1 11.3 10.2 8.6 10.7
Provision for income taxes..................... -- 1.3 3.4 3.3 4.0
----- ----- ----- ----- -----
Net earnings......................... 6.1% 10.0% 6.8% 5.3% 6.8%
===== ===== ===== ===== =====
</TABLE>
- ---------------
The preceding table contains percentages of total revenue calculated from the
Company's financial statements. Due to rounding, some subtotals and totals may
not add.
SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED JUNE 30, 1996
Revenue
Total revenue for the first six months of 1997 increased 59.3% to $26.1
million from $16.4 million for the same period in 1996. Vending revenue
increased $10.5 million or 85.8% in the first half of 1997 to $22.6 million from
$12.2 million for the comparable period in 1996 as a result of a 76.6% increase
in the average number of Shoppes in place during the first half of 1997 compared
to the average number in place during the same period in 1996.
Franchise and other revenue decreased $726,000 or 17.2% to $3.5 million for
the first six months of 1997 as compared to the same period in 1996 due to the
acquisition of franchises by the Company.
Cost of Revenue and Gross Profit
The cost of vending operations for the first six months of 1997 increased
$7.4 million or 85.7% to $16.0 million from $8.6 million for the comparable
period in 1996. The vending operation's contribution to gross profit for the
first six months of 1997 increased to $6.6 million, which represents a 85.9%
increase over gross profit from vending operations realized in the same period
in 1996. The vending gross profit margin achieved in the first half of 1997 was
29.2% of vending revenue, as compared to 29.1% for the same period in 1996.
Gross profit on franchise and other revenue for the first six months of
1997 decreased to $1.2 million or 34% of franchise and other revenue, which is
6.7 percentage points higher than the gross margin achieved for the same period
in 1996.
18
<PAGE> 20
Operating Expense
General and administrative expense for the first six months of 1997
increased $1.5 million to $4.7 million or 18.1% of revenue, as compared to $3.2
million or 19.5% of revenue for the comparable period in 1996. The 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 for the first six months of 1997 increased 104.2% to
$3.1 million, or 11.7% of total revenue, as compared to $1.5 million, or 9.2% of
total revenue for the comparable period in 1996. The increase in operating
earnings results primarily from the 76.6% increase in the average number of
Shoppes in place during the first half of 1997 compared to the average number in
place for the comparable period in 1996.
Non Operating Income (Expense)
Interest expense for the first six months of 1997 increased $176,000 to
$267,000 as compared to the same period in 1996. The Company's interest expense
is directly related to its level of borrowings and changes in the underlying
interest rates.
Net Earnings and Net Earnings Per Share
Net earnings for the first half of 1997 increased 101.5% to $1.8 million,
or 6.8% of total revenue, as compared to net earnings of $876,000 in the first
six months of 1996. Net earnings per share for the first half of 1997 increased
106.3% to $0.33, as compared to $0.16 for the first six months of 1996.
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 primarily 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 operation's 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 decline 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 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. General and administrative expense for 1995 includes $232,000 of
commissions paid to the Company's two major stockholders.
19
<PAGE> 21
Operating Earnings
Operating earnings in 1996 increased to $4.3 million or 11.2% of total
revenue, which is, 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 Net Earnings Per Share
Net earnings for the year ended December 31, 1996 were $2.6 million, or
6.8% of total revenue. Net earnings per share 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.
YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994
Revenue
The Company's total revenue increased 46.0% from $17.6 million in 1994 to
$25.7 million in 1995. Vending revenue increased $5.4 million or 46.2% in 1995
to $17.0 million as a result of an increase in the average number of Shoppes in
use during 1995, which increased 74.6% over the average number of Shoppes in use
during 1994. Shoppes acquired in connection with the purchase of Sugarloaf
Marketing contributed $1.8 million in vending revenue from September 1, 1995 to
December 31, 1995 with 492 Shoppes added August 31, 1995. Franchise and other
revenue increased $2.7 million or 45.6% in 1995 as compared to 1994 primarily as
a result of an increase in the average franchisee machines on location in 1995
compared to 1994 and the new plush toy pre-pack program.
Cost of Revenue and Gross Profit
The cost of vending operations increased $3.3 million in 1995 to $11.7
million. The vending operations' contribution to 1995 gross profit increased to
$5.3 million, which represents a 63.9% increase over gross profit from vending
operations realized in 1994. The vending gross profit achieved in 1995 was 31.3%
of vending revenue, which represents an increase from the 27.9% of vending
revenue achieved in 1994. The increase is primarily attributable to lower
product costs realized by the Company's vending operation that result from the
significant increase in product procured for the Company's pre-pack program.
Gross profit on franchise and other revenue in 1995 increased to $2.6 million,
or 30.3% of franchise and other revenue, which is 0.9 percentage points higher
than the gross margin achieved in 1994. The increase in 1995 results from the
full implementation of the plush toy pre-pack program during the second quarter
of 1995 and the economies realized from a significant increase in the amount of
product procured for the program.
Operating Expense
General and administrative expense increased $958,000 in 1995 to $4.6
million, primarily as a result of the acquisition of SugarLoaf Marketing, but
decreased as a percentage of revenue to 17.8% in 1995 as compared to 20.5% in
1994 primarily as a result of higher revenue. General and administrative expense
includes $232,000 and $290,000 of commissions paid to the Company's two major
stockholders for 1995 and 1994, respectively.
Operating Earnings
Operating earnings in 1995 increased to $3.4 million or 13.2% of total
revenue, which is, as a percentage of total revenue, an increase of 5.2
percentage points higher than the operating earnings achieved in 1994.
20
<PAGE> 22
Non Operating Income (Expense)
Interest expense increased $155,000 to $383,000 in 1995 as compared to
1994. The Company's interest expense is directly related to its level of
borrowings and changes in the underlying interest rates.
QUARTERLY DATA AND SEASONAL VARIATION
The Company believes that its revenue tends to be somewhat seasonal, with
revenue per machine being higher during the Christmas and Easter holiday seasons
due to higher levels of foot traffic at Shoppe locations during those periods.
The following table contains selected unaudited quarterly financial data for
1995 and 1996 and the first six months of 1997. The unaudited information has
been prepared on the same basis as the audited financial statement appearing
elsewhere in this Prospectus and includes all normal recurring adjustments
necessary to present fairly, in all material respects, the information set forth
herein.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue.............. $5,596 $6,315 $6,206 $7,597 $8,014 $8,403 $9,634 $12,216 $12,357 $13,790
Total cost of revenue...... 3,815 4,411 4,318 5,211 5,625 6,085 6,743 8,489 8,551 9,800
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Gross profit............. 1,781 1,904 1,888 2,386 2,389 2,318 2,891 3,727 3,806 3,990
General and administrative
expenses................. 1,036 1,155 1,099 1,275 1,532 1,671 1,827 2,023 2,296 2,429
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Operating earnings....... 745 749 789 1,111 857 647 1,064 1,704 1,510 1,561
Interest expense........... 75 81 156 71 46 45 136 148 111 156
Other expense.............. 34 52 21 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Earnings before income
taxes.................. 636 616 612 1,040 811 602 928 1,556 1,399 1,405
Provision for income
taxes.................... -- -- -- 329 308 229 352 422 518 521
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Net earnings............. $ 636 $ 616 $ 612 $ 711 $ 503 $ 373 $ 576 $ 1,134 $ 881 $ 884
====== ====== ====== ====== ====== ====== ====== ======= ======= =======
Net earnings per
share(1)............... $ 0.09 $ 0.07 $ 0.11 $ 0.21 $ 0.16 $ 0.16
====== ====== ====== ======= ======= =======
Weighted average common
shares(1)................ 5,449 5,449 5,460 5,449 5,425 5,452
====== ====== ====== ======= ======= =======
Total revenue.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total cost of revenue...... 68.2 69.8 69.6 68.6 70.2 72.4 70.0 69.5 69.2 71.1
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Gross profit............. 31.8 30.2 30.4 31.4 29.8 27.6 30.0 30.5 30.8 28.9
General and administrative
expenses................. 18.5 18.3 17.7 16.8 19.1 19.9 19.0 16.6 18.6 17.6
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Operating earnings....... 13.3 11.9 12.7 14.6 10.7 7.7 11.0 13.9 12.2 11.3
Interest expense........... 1.3 1.3 2.5 0.9 0.6 0.5 1.4 1.2 0.9 1.1
Other expense.............. 0.6 0.8 0.3 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Earnings before income
taxes.................... 11.4 9.8 9.9 13.7 10.1 7.2 9.6 12.7 11.3 10.2
Provision for income
taxes.................... -- -- -- 4.3 3.8 2.7 3.7 3.5 4.2 3.8
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Net earnings............. 11.4% 9.8% 9.9% 9.4% 6.3% 4.4% 6.0% 9.3% 7.1% 6.4%
====== ====== ====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
- ---------------
(1) Net earnings per share and weighted average common shares are not presented
through 1995 because the Company and each of the Affiliated Entities were
organized as S corporations or a partnership.
The preceding table contains percentages of total revenue calculated from the
Company's financial statements. Due to rounding, some subtotals and totals may
not add.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources
historically have been cash flows from operations and borrowings under the
Company's bank credit facility. These sources of cash flows have been offset by
cash used for investment in skill-crane machines and payment of long-term
borrowings.
Net cash provided by operating activities was $4.2 million, $2.9 million
and $1.8 million in 1996, 1995 and 1994, respectively. Net cash provided by
operating activities was $4.1 million for the six months ended June 30, 1997.
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 or borrowings under the
Company's credit facility.
21
<PAGE> 23
Net cash used by investing activities was $7.4 million, $5.5 million and
$1.5 million in 1996, 1995 and 1994, respectively. Capital expenditures amounted
to $6.1 million, $2.2 million and $1.5 million in 1996, 1995 and 1994,
respectively, of which $4.8 million, $1.6 million and $1.4 million were
represented by the acquisition of skill-crane machines. The acquisition of
franchisees, other than through the Reorganization in 1995, used $1.2 million
and $160,000 in 1996 and 1995, respectively. Payments to the non-control group
in the Reorganization were $3.1 million in 1995. Additional investing activity
results primarily from collections on notes receivable generated through the
partial financing of machines purchased by franchisees, initial franchise fees
and additional notes issued to related parties. Net cash used by investing
activities was $5.8 million for the six months ended June 30, 1997. Capital
expenditures during that period were $5.6 million of which $4.1 million was
represented by the acquisition of skill-crane machines.
Net cash provided by financing activities was $2.4 million and $3.9 million
in 1996 and 1995 respectively, while financing activities in 1994 used $256,000.
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. Net cash provided by financing activities was $1.7 million for the six
months ended June 30, 1997. Financing activities consisted of 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 June 30, 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 June 30, 1997 there was a principal amount
of approximately $6.0 million 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 June
30, 1997.
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 so used.
RECENT ACCOUNTING PRONOUNCEMENTS
In February of 1997, the Financial Accounting Standards Board ("FASB")
issued Statements of Financial Accounting Standards No. 128, Earnings per Share
(Statement No. 128) and No. 129, Disclosures of Information about Capital
Structure (Statement No. 129), effective for years ending after December 15,
1997. Statement No. 128 specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. The Company will adopt Statement No. 128
in its December 31, 1997 financial statements. The effect of such adoption is
not expected to have a material impact on the earnings per share of the Company.
Statement No. 129 specifies and aggregates various disclosures which were
previously required for certain entities. The Company has complied with the
disclosure requirements under this statement.
In June of 1997, the FASB 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.
22
<PAGE> 24
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
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 9,000 machines operated
by the Company and its franchisees. For up to 50c 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 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.
Management believes that national and regional supermarket, mass
merchandise and restaurant chain accounts, representing over 100,000 potential
crane locations, are becoming increasingly aware of the economic benefits of
amusement and vending machines, such as the Company's Shoppes, which can provide
retailers greater revenue and profits per square foot than alternative uses of
available floor space with minimal expense. The Company believes that the
Shoppes' potential economic return, visual appeal, product quality, and the
Company's high operational standards are important factors in gaining acceptance
of the Company's Shoppes by Retail Accounts.
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.
INDUSTRY
The skill-crane industry has been in existence for over 75 years and is
highly fragmented, with the average operator owning 16 machines. Based on
analysis of certain industry publications, the Company believes that there are
approximately 50,000 units of prize-dispensing equipment in operation
nationwide, of which skill-cranes are the most prevalent type. The Company
believes that there are over 300,000 supermarkets, mass merchandisers, bowling
centers, bingo halls, bars, restaurants, warehouse clubs and similar locations,
of which over 100,000 are viable locations for skill-cranes. Total dollar
vending volume for 1996 was estimated at $31.4 billion, of which reported
prize-dispensing revenues were $240 million. Management believes that skill-
cranes in the past have been operated principally as amusement devices,
dispensing products of minimal retail value. As a result, these machines were
typically located in arcades, amusement parks and similar venues catering to
adolescents. Management believes that recent skill-crane placement outside of
amusement venues have resulted in greater revenue per machine for some industry
operators.
23
<PAGE> 25
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.
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 route
merchandiser can influence various factors affecting the Vend Ratio,
including the mix of products by size and weight, the placement of products
within the Shoppe's display area, the number of products and the density of
the products within the Shoppe. 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.
24
<PAGE> 26
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."
GROWTH STRATEGY
- Further penetration of existing geographic markets. As of August 31,
1997, the Company owned and operated over 5,000 Shoppes from a national
network of 30 offices with operations in 40 states, which management
believes makes the Company the largest, and only national, owner and
operator of skill-crane machines. The Company believes this network is
well positioned to serve the skill-crane operations of supermarkets, mass
merchandisers, bowling centers, bingo halls, bars, restaurants, warehouse
clubs and similar locations, which the Company estimates represent over
100,000 potential crane locations.
- Increase penetration of existing Retail Accounts. The Company and its
franchisees are designated skill-crane operators for many regional and
national Retail Accounts including Wal-Mart, Safeway, Kroger and
franchised Denny's. The Company believes opportunities exist to increase
penetration within its existing Retail Accounts. For example, while the
Company already owned and operated 1,465 Shoppes in Wal-Mart as of August
31, 1997, over 250 stores have yet to be installed under the Wal-Mart
contract.
- Target marketing efforts towards new large Retail Accounts. The Company
believes the attractive economic returns its Shoppes offer and its
demonstrated success with installing and operating a significant number
of Shoppes in Retail Accounts such as Wal-Mart and Safeway will allow it
to successfully target new national and regional Retail Accounts. In only
twelve months (ended June 30, 1997), the Company installed over 1,200
Shoppes in Wal-Mart stores.
- Capitalize on relationships with existing Retail Accounts. The Company
believes it can capitalize on its existing relationships with Retail
Accounts to expand the number and type of amusement and vending machines
its employees service at each location. Already the Company has
introduced multiple Shoppes at individual locations and is beginning to
introduce kiddie rides and bulk vending into its system.
- Acquire franchisees and other complementary vending businesses. The
Company has undertaken six (6) acquisitions since January 1, 1996 (see
"Recent Acquisitions") acquiring over 600 Shoppes, significant franchised
territories and a bulk vending and kiddie ride business. The Company
plans to pursue acquisition opportunities in order to increase the number
of Company owned machines and to acquire franchised territories and other
complementary businesses.
The Company plans to increase the number of Shoppes it owns and operates by
an average of at least 1,400 for 1997 and 1998 through a combination of
acquisitions and new Shoppe placements. The Company believes that the Shoppes'
potential economic return, visual appeal, product quality and the Company's high
operational standards are important factors in gaining acceptance of the
Company's Shoppes by Retail Accounts. The Company operates three types of
Shoppes: (i) the Toy Shoppe which primarily dispenses stuffed animals and plush
toys, (ii) the Treasure Shoppe which dispenses items such as jewelry and
watches, and (iii) the Fun Shoppe which dispenses small toys and candy. Over 60%
of the Company's Shoppe placements have been Toy Shoppes, which the Company
purchases for an average price of $3,600. In 1996, a Toy Shoppe averaged over
$12,000 in revenue and over $4,200 in cash profit contribution (revenue minus
cost of vended products, location commission and direct service cost).
Historically, skill-cranes are generally available for installation within two
to four weeks of ordering from the manufacturer, and can be quickly rolled out
on a national basis over a one year period, as was done with over 1,000 new
machine placements after the signing of the Wal-Mart contract.
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<PAGE> 27
RECENT ACQUISITIONS
As part of the Company's growth strategy, since January 1996 it has
undertaken the following six (6) acquisitions:
- Hoosier Coin Company. The Company's former franchisee for Indiana,
including 156 Shoppes, was purchased in January 1996 for consideration of
approximately $0.5 million.
- Northern Coin Company. The Company's former licensee for portions of
Colorado, including 40 Shoppes, was purchased in May 1996 for
consideration of approximately $0.5 million.
- Sugarloaf of Utah. The Company's former franchisee for Utah, including
213 Shoppes, was purchased in July 1996 for consideration of
approximately $0.9 million.
- Sugarloaf West. The Company's former franchisee for portions of Colorado,
including 37 Shoppes, was purchased in August 1996 for consideration of
approximately $0.2 million.
- Sugarloaf, Inc. The Company's former franchisee for the states of
Louisiana and Oklahoma and portions of Missouri, Illinois and Texas,
including 202 Shoppes, was purchased in July 1997 for consideration of
approximately $1.7 million.
- Quality Amusements Corp. and Quality Entertainment Corp. On September 12,
1997, the Company executed an agreement to purchase the assets of these
operators of bulk vending machines and kiddie rides for consideration of
approximately $1.8 million, which is scheduled to close November 1, 1997.
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 three types of Shoppes
as described below.
The SugarLoaf Toy Shoppe. The SugarLoaf Toy Shoppe features a play price of
50c 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 June 30, 1997, the Company and its franchisees were
operating approximately 6,177 SugarLoaf Toy Shoppes.
The SugarLoaf Treasure Shoppe. The SugarLoaf Treasure Shoppe features a
play price of 50c 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 June
30, 1997, the Company and its franchisees were operating approximately 1,312
SugarLoaf Treasure Shoppes, approximately 90% of which were placed within
locations in which another Shoppe was already in operation.
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<PAGE> 28
The SugarLoaf Fun Shoppe. The SugarLoaf Fun Shoppe features a play price of
25c 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 June 30, 1997, the
Company and its franchisees were operating approximately 1,498 SugarLoaf Fun
Shoppes, approximately 85% of which were placed within locations in which
another Shoppe was already in operation. The Company is currently converting a
substantial portion of its SugarLoaf Fun Shoppes into SugarLoaf Toy Shoppes
which are stocked with beanie-bag type stuffed toys.
The following chart indicates the number of Shoppes the Company had in
operation at the indicated date:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------- -----------------
TYPE NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
---- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Toy Shoppes........................... 1,291 62.7% 2,699 68.0% 3,313 69.1%
Treasure Shoppes...................... 357 17.4 542 13.7 766 16.0
Fun Shoppes........................... 409 19.9 726 18.3 713 14.9
----- ----- ----- ----- ----- -----
Total....................... 2,057 100.0% 3,967 100.0% 4,792 100.0%
===== ===== ===== ===== ===== =====
</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 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:
<TABLE>
<CAPTION>
RETAIL ACCOUNTS
- ----------------------------------------------------------------------------------------------------------
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>
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, which for the period ended June 30, 1997 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
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<PAGE> 29
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.
The Company's largest major account, Wal-Mart, accounted for approximately
1.9% of total revenue for the six month period ended June 30, 1996, 11.4% of
total revenue in all of fiscal 1996, and 28.2% of total revenue for the six
month period ended June 30, 1997. The Company has entered into a contract with
Wal-Mart which expires on January 1, 2000.
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. In August 1996, the Company
signed an agreement with Wal-Mart appointing the Company as the principal
operator of skill-crane vending machines for Wal-Mart through January 1, 2000.
At June 30, 1997, the Company had installed more than 1,460 Shoppes in
approximately 840 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. At June 30, 1997, the Company and its franchisees had
installed more than 450 Shoppes in approximately 340 Safeway stores 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
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. 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 will begin operating these additional
machines in November 1997. 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.
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<PAGE> 30
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 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 June 30, 1997, the Company had 29 offices operating in 39 states. The
field offices average approximately 2,100 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 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
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<PAGE> 31
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 which 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 1996, all of the 1,430 skill-crane machines purchased by
the Company were supplied by Rainbow Crane, Inc. During the first six months of
1997, approximately 83.6% of the 1,107 skill-crane machines purchased by the
Company were supplied by Rainbow; another 16.4% 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 June 30, 1997, the Company had franchise agreements in effect with 20
franchisees covering 26 territories in the U.S. and one territory in British
Columbia, Canada covering, in the aggregate, 4,195 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, 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. 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
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<PAGE> 32
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
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.
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<PAGE> 33
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 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
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<PAGE> 34
approvals will be given or renewed in the future. Franchisees are responsible
for their own regulatory compliance. See "Risk Factors -- Government
Regulation."
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 August 31, 1997, the Company had a total of 372 employees, including
31 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
15 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.
PROPERTY
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 18,000 square feet of office and warehouse space under a lease
that expires January 28, 2002. The Company also is a party to 29 other leases
which are used for office and warehouse space which average approximately 2,100
square feet, provide for monthly rental payments ranging from $350 to $3,930 and
expire at various times over the period September 30, 1997 to August 31, 2000.
The Company believes that its facilities are adequate for its current needs and
for the anticipated expansion of its business.
33
<PAGE> 35
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of August 31, 1997 were
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jerome M. Lapin................ 67 President, Chief Executive Officer and Chairman of
the Board of Directors
W. John Cash................... 50 Vice President, Chief Financial Officer and
Treasurer
Randall J. Fagundo............. 37 Vice President of Operations, Secretary and
Director
Abbe M. Stutsman(1)............ 45 Vice President of Purchasing and Product
Development and Director
Richard D. Jones(2)............ 56 Director
J. Gregory Theisen............. 51 Director
Jim D. Baldwin(1).............. 65 Director
John A. Sullivan(1)(2)......... 43 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Jerome M. Lapin has served as President, Chief Executive Officer and a
Director since January 1994 and as chairman of the Board since July 1995. Prior
to joining the Company, he was the Managing Director for World Hosts Pty. Ltd.,
a restaurant leasing consulting business, from July 1991 to January 1994. From
June 1989 to June 1990, Mr. Lapin was the President of Sanwa Foods, Inc., a soup
manufacturer and marketer ("Sanwa"), and from June 1990 to June 1991 he was a
consultant for Sanwa. Mr. Lapin was a co-founder of the International House of
Pancakes, Inc. in 1958.
W. John Cash has served as Vice President and Chief Financial Officer since
July 1995. Prior to joining the Company he was Vice President and Chief
Financial Officer of Kasler Holding Company, a diversified construction company,
from May 1991 to March 1995. From July 1984 to April 1991, Mr. Cash served as a
partner of KPMG Peat Marwick LLP.
Randall J. Fagundo, a co-founder of the Company, has served as Vice
President of Operations and Secretary since May 1991 and as a Director since
August 1988. Prior to joining the Company, he was one of the founders of
Southwest Coin Company.
Abbe M. Stutsman, a co-founder of the Company, has served as a Vice
President since January 1994 and as a Director since December 1989. Ms. Stutsman
served as the Company's Secretary from August 1988 until May 1991, Treasurer
from January 1994 until July 1995 and President from May 1991 until January
1994. Prior to joining the Company, she was the Business Manager of Colorado
Coin from April 1988 to August 1988.
Richard D. Jones, a co-founder of the Company, has served as a Director
since August 1988 and served as Chairman of the Board from August 1988 to July
1995 and as President of the Company from August 1988 to April 1991. Mr. Jones
has served as President of T.R. Baron & Associates, Inc., a marketing and
consulting business, since May 1975. Mr. Jones was a co-founder of Colorado Coin
in 1987.
J. Gregory Theisen, a co-founder of the Company, has served as a Director
since August 1988. Mr. Theisen has served as a Vice President of Lorac, Inc., an
investment consulting company, since December 1989. Mr. Theisen served as Vice
President of the Company from August 1988 to December 1993. Prior to joining the
Company, Mr. Theisen was a co-founder of Colorado Coin and served as its
Operations Manager from January 1987 to October 1988.
34
<PAGE> 36
Jim D. Baldwin, has served as a Director since October 1995. Mr. Baldwin
served as President and Chief Executive Officer of King Soopers, a
supermarket/combination store retailer, from 1979 until his retirement in
February 1990. Mr. Baldwin served as a consultant with Knight, Roth and
Associates, a consulting firm, from February 1990 to July 1994. Mr. Baldwin also
serves as a director of Grease Monkey Holding Corp.
John A. Sullivan, has served as a Director since October 1995. Mr. Sullivan
has been employed by Batchelder & Partners, Inc., an investment advisory and
consulting firm, since May 1996. Mr. Sullivan also served as a Senior Vice
President of The Seidler Companies Incorporated, the underwriter of the
Company's initial public offering, from August 1993 to April 1996. Prior to
being elected Senior Vice President at The Seidler Companies Incorporated, Mr.
Sullivan served as a Vice President from October 1990 to August 1993. Mr.
Sullivan also serves as a director of the Farr Company.
BOARD COMMITTEES
The standing committees of the Board of Directors include an Audit
Committee and a Compensation Committee.
The Audit Committee is comprised of Messrs. Baldwin and Sullivan and Ms.
Stutsman. The functions performed by the Audit Committee include recommending to
the Board of Directors independent auditors to serve the Company for the ensuing
year, reviewing with the independent auditors and management, the scope and
results of the audit, assuring that the independent auditors act independently,
reviewing and approving any substantial change in the Company's accounting
policies and practices, reviewing with management and the independent auditors
the adequacy of the Company's system of internal controls and reviewing the
Company's annual report.
The Compensation Committee is comprised of Messrs. Jones and Sullivan. The
functions performed by the Compensation Committee include reviewing and
approving management's recommendations as to executive compensation and
reviewing, approving and administering the Company's executive compensation and
stock option plans.
DIRECTORS' COMPENSATION
Each non-employee director of the Company, other than Messrs. Jones and
Theisen, receives $2,500 for each regular or special meeting of the Board of
Directors or committee meeting that is held on a date other than the date of a
board meeting. All Directors also receive reimbursement for their reasonable
out-of-pocket expenses related to such attendance.
Each non-employee director of the Company, other than Messrs. Jones and
Theisen, are eligible to receive stock option grants under the 1995 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). Only non-employee
directors of the Company or an affiliate of such directors as defined in the
Internal Revenue Code of 1986, as amended (the "Code") are eligible to receive
options under the Directors' Plan. Options granted under the Directors' Plan are
intended by the Company not to qualify as incentive stock options under the
Code. Option grants under the Directors' Plan are non-discretionary. See
"-- Non-Employee Directors' Stock Option Plan."
During 1996, the Company did not grant options to non-employee directors of
the Company.
35
<PAGE> 37
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows for the fiscal years ended December 31, 1996,
1995 and 1994, compensation awarded or paid to, or earned by, the Company's
Chief Executive Officer and its three other most highly compensated executive
officers for the year ended December 31, 1996 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------------
-------------------- SECURITIES
SALARY BONUS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) OPTIONS COMPENSATION
--------------------------- ---- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Jerome M. Lapin........................... 1996 $ 155,833 -- -- $ 6,757(2)
President and Chief Executive 1995 156,250 -- -- 7,074(2)
Officer 1994 143,750 -- 548,132 $16,689(3)
W. John Cash(4)........................... 1996 112,320 -- -- 9,128(6)
Vice President, Chief Financial 1995(5) 50,416 -- 20,000 1,860(6)
Officer and Treasurer
Randall J. Fagundo........................ 1996 111,837 -- 9,550(6)
Vice President of Operations 1995 80,411 $ 98,469(7) -- 6,445(6)
and Secretary 1994 64,005 144,819(7) -- 2,030(6)
Abbe M. Stutsman.......................... 1996 111,837 -- 9,824(6)
Vice President of Purchasing 1995 79,167 203,870(7) -- 2,918(6)
and Product Development 1994 60,000 255,224(7) -- 1,200(6)
</TABLE>
- ---------------
(1) Includes amounts deferred pursuant to Section 401(k) of the Internal Revenue
Code of 1986, as amended.
(2) Consists of value of Company provided automobile and health insurance
premiums paid by the Company.
(3) Includes value of Company provided automobile, health insurance premiums
paid by the Company and relocation reimbursement of $9,683.
(4) On April 30, 1997, W. John Cash was granted an option to purchase 100,000
shares of Common Stock at an exercise price of $7.63 per share under the
Company's Stock Option Plan.
(5) Mr. Cash joined the Company in July 1995.
(6) Includes value of Company provided automobile, health insurance premiums
paid by the Company and funds contributed by the Company as matching
contributions to the Named Executive Officers' 401(k) Plan account.
(7) Consists of S corporation distributions.
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Option Plan") was originally adopted
by the Board of Directors and approved by its stockholders as of November 1993
and was amended and restated by the Board of Directors and approved by the
stockholders in July 1995. The purpose of the Option Plan is to attract and
retain qualified personnel, to provide additional incentives to employees,
officers, directors, consultants and advisors of the Company and its
subsidiaries and to promote the success of the Company's business. The Option
Plan covers a total of 856,132 shares of Common Stock. At August 31, 1997,
552,465 shares of Common Stock had been issued pursuant to the exercise of
options previously granted under the Option Plan and the Company had outstanding
options to purchase 308,500 shares of Common Stock, of which 4,833 shares are
subject to stockholder approval of an increase in the shares authorized for
issuance under the Option Plan, at exercise prices ranging from $4.50 to $9.69
per share. The Board of Directors has approved an increase in the shares of
Common Stock reserved for issuance under the Option Plan from 856,132 to
1,400,000, and the Company intends to seek stockholder approval of the increase
at a special stockholders' meeting to be held in November 1997. The Option Plan
will terminate in October 2003 unless sooner terminated by the Board of
Directors.
36
<PAGE> 38
The Option Plan provides for the grant of both incentive stock options
intended to qualify as such under Section 422 of the Code and non-statutory
stock options. The Board may delegate administration of the Option Plan to a
Stock Option Committee, which would be comprised of disinterested directors.
Subject to the limitations set forth in the Option Plan, the Board or the Stock
Option Committee has the authority to select the persons to whom grants are to
be made, to designate the number of shares to be covered by each option, to
determine whether an option is to be an incentive stock option or a
non-statutory stock option, to establish vesting schedules, and, subject to
certain restrictions, to specify the type of consideration to be paid upon
exercise and to specify other terms of the options.
The maximum term of options granted under the Option Plan is ten years
(five years for an option granted to a person who at that time owns 10% of the
total combined voting power of all classes of stock.) The aggregate fair market
value of the stock with respect to which incentive stock options are first
exercisable in any calendar year may not exceed $100,000 per optionee; portions
in excess of such amount shall be treated as non-statutory stock options.
Options granted under the Option Plan are non-transferable and generally expire
upon the earlier of the stated expiration date or three months after the
termination of an optionee's service to the Company (18 months in the event the
optionee's employment terminates by reason of death and 12 months in the event
the optionee's employment terminates due to disability).
The Board has discretion in connection with a merger or consolidation where
the Company is the surviving corporation to prescribe the terms and conditions
for the modification of the options granted under the Option Plan. In the event
of a dissolution or liquidation of the Company, or a merger or consolidation in
which the Company is not the surviving corporation, all outstanding options will
terminate unless assumed by another corporation.
No specific vesting schedule is required under the Option Plan. The
exercise price of incentive stock options must equal at least the fair market
value of the Common Stock on the date of grant, except that the exercise price
of incentive stock options granted to any person who at the time of grant owns
stock possessing more than 10% of the total combined voting power of all classes
of stock must be at least 110% of the fair market value of such stock on the
date of grant. The exercise price of non-statutory stock options under the
Option Plan may be no less than 85% of the fair market value of the Common Stock
on the date of grant.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In July 1995, the Company adopted the Directors' Plan to provide for the
automatic grant of options to purchase shares of Common Stock to directors of
the Company who are not, and never have been, its employees or consultants. The
Directors' Plan is intended to meet the requirements of Rule 16b-3(c)(2)(i)
under the Securities Exchange Act of 1934 and, accordingly, is to be entirely
self-executing. At August 31, 1997, the Company had 21,000 options outstanding
to purchase shares of Common Stock at an exercise price of $7.00 per share.
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 42,000. The Board of Directors has
approved an increase in the shares of Common Stock reserved for issuance under
the Directors' Plan from 42,000 to 100,000, and the Company intends to seek
stockholder approval of the increase at a special stockholders' meeting to be
held in November 1997. Pursuant to the terms of the Directors' Plan, each
director of the Company who is not otherwise employed by the Company and is
first appointed or elected after the date of adoption of the Directors' Plan,
automatically will be granted an option to purchase 10,500 shares of Common
Stock. Such options will vest in three equal annual installments with the first
installment vesting on the first anniversary of the date of grant.
In the event of a merger, consolidation, reverse merger or reorganization
of the Company, the surviving corporation must assume any options outstanding
under the Directors' Plan or substitute similar options for those outstanding
under the Directors' Plan or, if the Company is the surviving corporation, such
options will continue in full force and effect.
37
<PAGE> 39
No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. Unless otherwise
terminated by the Board, the Directors' Plan automatically terminates in June
2005.
OPTION GRANTS IN LAST FISCAL YEAR
During the fiscal year ended December 31, 1996 there were no options
granted to the Named Executive Officers.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table shows for the fiscal year ended December 31, 1996
certain information regarding options exercised and held at year-end by the
Named Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT 12/31/96(#) 12/31/96
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($)(1) UNEXERCISABLE(#) UNEXERCISABLE($)(2)
---- -------------- -------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Jerome M. Lapin.......... 41,666 $263,287 323,297/0 $ 1,608,726/0
W. John Cash............. -- -- 5,000/15,000 $ 2,500/7,500
Randall J. Fagundo....... -- -- --/-- --/--
Abbe M. Stutsman......... -- -- --/-- --/--
</TABLE>
- ---------------
(1) Based on the fair market value of the Common Stock as of the date of
exercise, minus the exercise price, multiplied by the number of shares
acquired.
(2) Based on the fair market value of the Common Stock as of December 31, 1996
of $5.00 per share, minus the exercise price of "in-the-money" unexercised
options, multiplied by the number of shares represented by such options.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with Jerome M. Lapin, W.
John Cash and Abbe Stutsman (each an "Executive") as of June 1, 1996 (the
"Employment Agreements"). The Employment Agreement with Mr. Lapin, as updated by
the Compensation Committee, provides that he will receive an annual salary of
$185,000 as of April 1, 1997, increasing to $200,000 on April 1, 1998 and to
$215,000 on April 1, 1999. The Employment Agreements with Mr. Cash and Ms.
Stutsman, as updated by the Compensation Committee, provide that they will each
receive an annual salary of $129,470. Additionally, each Executive is eligible
to receive a bonus or salary increase as determined by the Compensation
Committee. Mr. Lapin also is entitled to a minimum bonus of $60,000 and $45,000
during the years beginning April 1, 1998 and April 1, 1999, respectively. The
Employment Agreements also provide that each Executive will be entitled to (i)
participate in any employee benefits plans the Company makes available to its
other employees, (ii) four weeks vacation, and (iii) use of an automobile
provided by the Company. The Employment Agreement with Mr. Lapin expires on
December 31, 1999 and the Employment Agreements with Mr. Cash and Ms. Stutsman
expire on December 31, 1998. Each Employment Agreement also provides that the
Company may terminate the Executive's employment at any time for cause and with
60 days' written notice without cause. If the Executive is terminated without
cause, the Company is obligated to pay the Executive's salary for 12 months
after the termination date. The Employment Agreements provide that after a
change of control of the Company, if the Executive is terminated without cause,
required to move outside the Boulder, Colorado area or experiences a material
reduction in his other responsibilities then the Executive will be entitled to
receive the salary set forth in the respective Employment Agreement for the
remaining term of the Agreement. The Employment Agreements also contain
confidentiality and noncompete provisions which prohibit the Executives from
soliciting employees of the Company, engaging in business similar to the
Company's or disclosing confidential information for a period of three years
after the termination of the Executive's employment with the Company.
38
<PAGE> 40
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent not prohibited by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, the Company has
entered into indemnity agreements with each of its directors and executive
officers and has purchased a directors and officers liability insurance policy
covering each of its directors and executive officers.
In addition, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty of
care to the Company or its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
nonmonetary relief would remain available under Delaware law. Each director will
continue to be subject to liability for breach of the director's duty of loyalty
to the Company or its stockholders, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the director derived an improper personal benefit and for
improper distributions to stockholders. This provision also does not affect a
director's responsibilities under any other laws, such as the federal securities
laws or state or federal environmental laws.
There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REORGANIZATION
On August 31, 1995, the Company acquired 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. The Company paid the purchase price by issuing
promissory notes which were secured by the acquired assets. The Founders, as
owners of significant ownership interests in the Affiliated Entities, received a
portion of the proceeds of the promissory notes upon their repayment by the
Company as described below. The Company entered into a five-year non-competition
agreement with each Founder and Gary Kraft in connection with the
Reorganization.
Sugarloaf Marketing and Sugarloaf, Ltd. (the "Kraft Entities") were owned
principally by Gary Kraft, Messrs. Jones and Theisen. The Kraft Entities
received promissory notes in an aggregate principal amount of $5.6 million. The
terms of the purchase of the Kraft Entities' assets were determined as a result
of negotiations between the Company and Gary Kraft, the principal stockholder of
Sugarloaf Marketing. The Kraft Entities retained their cash and accounts
receivable, trade names and trademarks. In connection with the Reorganization,
Gary Kraft was granted three additional franchises covering the states of
Louisiana and Oklahoma and portions of Missouri, Illinois and Texas which were
acquired in September 1997. See "Business -- Recent Acquisitions."
The Affiliated Entities were owned in varying percentages by the Founders
and certain past and present employees of the Affiliated Entities. The purchase
price of the assets acquired from such Affiliated Entities was determined by the
Founders, and not as a result of arm's-length negotiation, by multiplying the
income, as adjusted, of each such Affiliated Entity for the six-month period
January through June 1995 by six and adding the book value of the acquired
inventory as of the closing. The Affiliated Entities received promissory notes
in an aggregate principal amount of $1.3 million. Promissory notes representing
the remaining fifty percent of the aggregate purchase price is being paid
semi-annually over a three-year period with interest only due for the first year
and principal and interest due in the second and third years.
39
<PAGE> 41
As a result of their ownership interests in the Affiliated Entities, the
Founders received the following amounts, subject to certain adjustments to be
made in connection with the acquisition of the transferred assets, from the
Affiliated Entities described above:
<TABLE>
<CAPTION>
AMOUNT RECEIVED
---------------
<S> <C>
Richard D. Jones............................................ $2,001,786
J. Gregory Theisen.......................................... 1,924,920
Randall J. Fagundo.......................................... 601,142
Abbe M. Stutsman............................................ 1,329,543
</TABLE>
The purchase price for the Affiliated Entities was paid with cash in the
amount of $2.0 million and three year promissory notes with an aggregate
principal amount of $1.3 million with an interest rate on the principal amount
of 8% per annum (the "Notes"). During the fiscal year ended December 31, 1996,
the Company made the following interest payments on the Notes held by the
Founders:
<TABLE>
<CAPTION>
AMOUNT RECEIVED
---------------
<S> <C>
Richard D. Jones............................................ $19,090
J. Gregory Theisen.......................................... 16,169
Randall J. Fagundo.......................................... 22,709
Abbe M. Stutsman............................................ 49,921
</TABLE>
As of August 31, 1997, the Company had made the following interest and
principal payments on the Notes held by the Founders during 1997:
<TABLE>
<CAPTION>
AMOUNT RECEIVED
---------------
<S> <C>
Richard D. Jones............................................ $136,018
J. Gregory Theisen.......................................... 115,207
Randall J. Fagundo.......................................... 161,801
Abbe M. Stutsman............................................ 355,688
</TABLE>
PRODUCT PURCHASES AND ROYALTY PAYMENTS
The Affiliated Entities, as franchisees of the Company, purchased equipment
and inventory and made certain royalty and other payments to the Company in the
following amounts in the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Performance Merchandising, Inc.............................. $717,246 $416,925
Inland Merchandising, Inc................................... 178,554 413,499
Chicago Toy Company, Inc.................................... 414,616 344,967
Georgia Toy Company......................................... 117,815 108,328
Lehigh Valley Toy Company................................... 125,207 94,346
Southwest Coin Company...................................... 209,825 187,118
Sugarloaf Marketing, Inc.................................... 662,856 708,197
Sugarloaf, Ltd.............................................. 382,744 460,420
</TABLE>
Southwest Coin Company and the Kraft Entities had no written agreement with
the Company. Chicago Toy Company, Inc., Southwest Coin Company and the Kraft
Entities had not paid royalties on certain vending revenue from Shoppes owned
and operated by them. Southwest Coin Company and Sugarloaf Marketing (in certain
geographic areas) had not paid royalties on vending revenue from SugarLoaf Toy
Shoppes as such entities were in existence prior to the Company's formation.
Chicago Toy Company, Inc. did not pay royalties on vending revenue from
SugarLoaf Treasure Shoppes through a special arrangement with Gary Kraft, the
controlling shareholder of Sugarloaf, Ltd., related to the services Mr. Kraft
rendered to the Company in connection with the development of the SugarLoaf
Treasure Shoppe concept.
40
<PAGE> 42
STOCKHOLDER LOANS
Between December 1989 and December 1993, Messrs. Jones and Theisen each
loaned the Company an aggregate amount equal to $297,250, Mr. Fagundo loaned the
Company an amount equal to $38,250 and Ms. Stutsman loaned the Company an
aggregate amount equal to $43,250. In addition, during such period Mr. Fagundo
loaned the Company $33,000 and the Company loaned Mr. Fagundo $33,000 and in
June 1995 such amounts were repaid. All of the outstanding loans had simple
interest rates of 12% per annum which the Company paid on a quarterly basis. All
of the loans were amended on August 31, 1995 to provide for the automatic
conversion of the entire principal amount into shares of Common Stock of the
Company upon the closing of the Company's initial public offering at a price per
share equal to the price per share of the shares of Common Stock offered to the
public. The following shares were issued at the closing of the initial public
offering:
<TABLE>
<CAPTION>
SHARES RECEIVED
---------------
<S> <C>
Richard D. Jones............................................ 42,464
J. Gregory Theisen.......................................... 42,464
Randall J. Fagundo.......................................... 5,465
Abbe M. Stutsman............................................ 6,178
</TABLE>
S CORPORATION DISTRIBUTIONS
The Company paid to the Founders the following amounts as S corporation
distributions for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
--------- ---------
<S> <C> <C>
Richard D. Jones............................................ $91,000 --
J. Gregory Theisen.......................................... 91,000 --
Randall J. Fagundo.......................................... 38,999 --
Abbe M. Stutsman............................................ 38,999 --
</TABLE>
The Affiliated Entities paid to the Founders the following amounts either
as S corporation or partnership distributions for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Richard D. Jones............................................ $ 70,522 $ 65,322
J. Gregory Theisen.......................................... 53,172 52,522
Randall J. Fagundo.......................................... 105,820 98,469
Abbe M. Stutsman............................................ 216,225 203,870
</TABLE>
During the fiscal year ended December 31, 1996, the Company paid the
following distributions to the former S corporation shareholders of the Company,
representing 40% of the estimated amount of net income of the Company from
January 1, 1995 through October 12, 1995:
<TABLE>
<CAPTION>
AMOUNT RECEIVED
---------------
<S> <C>
Richard D. Jones............................................ $228,519
J. Gregory Theisen.......................................... 228,519
Randall J. Fagundo.......................................... 85,550
Jerome M. Lapin............................................. 24,499
Abbe M. Stutsman............................................ 66,433
</TABLE>
41
<PAGE> 43
COMMISSIONS
Mr. Jones, through T.R. Baron & Associates, Inc., and Mr. Theisen, through
Lorac, Inc., received as commission payments from the Company and the Affiliated
Entities, the following amounts during the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Richard D. Jones............................................ $355,000 $311,384
J. Gregory Theisen.......................................... 355,000 311,384
</TABLE>
OTHER TRANSACTIONS
John A. Sullivan, a Director of the Company, served as a Senior Vice
President with The Seidler Companies Incorporated, the underwriter of the
Company's initial public offering. As compensation for serving as the Company's
underwriter, The Seidler Companies Incorporated received warrants exercisable
for 125,000 shares of Common Stock at an exercise price of $8.40 per share which
are exercisable until October 18, 1999. See "Principal and Selling
Stockholders."
Management believes the terms of the foregoing transactions were fair to
the Company. All future transactions with affiliates will be subject to the
approval of the Company's disinterested directors and will be on terms believed
by such directors to be no less favorable to the Company than those available
from unaffiliated third parties.
42
<PAGE> 44
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 31, 1997, and as
adjusted to reflect the sale of the Common Stock being offered hereby (assuming
no exercise of the Underwriters' over-allotment option) by (i) each person (or
group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers, (iv) all directors and executive officers
of the Company as a group, and (v) the Selling Stockholders. Except as otherwise
noted, the persons or entities in this table have sole voting and investing
power with respect to all the shares of Common Stock owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) NUMBER OFFERING(1)(2)
------------------- OF SHARES -------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED(2) NUMBER PERCENT
---------------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Richard D. and Melinda K. Jones(3)......... 1,128,623 20.71% 500,000 628,623 9.75%
5660 Central Avenue
Boulder, CO 80301
J. Gregory Theisen(4)...................... 1,098,623 20.16 500,000 598,623 9.28
5660 Central Avenue
Boulder, CO 80301
SAFECO Asset Management Company(5)......... 886,800 16.27 -- 886,800 13.75
601 Union Street
Seattle, WA 98101
Jerome M. Lapin(6)......................... 523,132 9.60 -- 523,132 8.11
5660 Central Avenue
Boulder, CO 80301
Abbe M. Stutsman(7)........................ 368,104 6.75 -- 368,104 5.71
5660 Central Avenue
Boulder, CO 80301
Randall J. Fagundo......................... 367,391 6.74 -- 367,391 5.70
5660 Central Avenue
Boulder, CO 80301
W. John Cash(8)............................ 10,000 * -- 10,000 *
Jim D. Baldwin(9).......................... 12,000 * -- 12,000 *
John A. Sullivan(10)....................... 33,500 * -- 33,500 *
All directors and executive officers as
group (8 persons) (3)-(4) and (6)-(10)... 3,541,373 64.98% 1,000,000 2,541,373 39.40%
</TABLE>
- ---------------
* Less than one percent.
(1) Percentage of beneficial ownership is based on 5,449,904 shares of Common
Stock outstanding as of August 31, 1997 and 6,449,904 shares of Common
Stock outstanding after this offering. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of Common Stock subject to options or warrants currently exercisable
or exercisable within 60 days of August 31, 1997, are deemed outstanding
for computing the percentage of the person or entity holding such
securities, but are not outstanding for computing the percentage of any
other person or entity. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
43
<PAGE> 45
(2) Amounts indicated reflect actual number of shares offered and assumes no
exercise of the Underwriters' over-allotment option. In the event such
option is exercised in full, (i) Richard D. and Melinda K. Jones will sell
125,000 shares and will beneficially own 503,623 shares, or 7.81% of the
Common Stock outstanding after the Offering, (ii) J. Gregory Theisen will
sell an additional 125,000 shares and will beneficially own 473,623 shares,
or 7.34% of the Common Stock outstanding after the Offering, (iii) Abbe M.
Stutsman will sell 25,000 shares and will beneficially own 343,104 shares,
or 5.32% of the Common Stock outstanding after the Offering, and (iv)
Randall J. Fagundo will sell 25,000 shares and will beneficially own
342,391 shares, or 5.31% of the Common Stock outstanding after the
Offering.
(3) Includes (i) 42,464 shares held by T.R. Baron and Associates, Inc. Defined
Benefit Pension Plan, of which Mr. Jones is the Trustee, (ii) 500,000
shares held by the Jones Family Charitable Trust Number 1, of which Mr.
Jones is the Trustee, and (iii) 293,079 held by Ms. Jones. The 500,000
shares to be sold in the Offering are held by the Jones Family Charitable
Trust Number 1.
(4) Includes 12,464 shares held by Colorado Coin Company Defined Benefit Keogh
Plan of which Mr. Theisen is the Trustee.
(5) SAFECO Asset Management Company is a subsidiary of SAFECO Corporation and
holds such shares on behalf of its clients, including SAFECO Common Stock
Trust, which holds 500,000 shares and SAFECO Resource Series Trust, which
holds 386,800 shares. SAFECO Corporation and SAFECO Asset Management
Company disclaim beneficial ownership of all shares held by SAFECO Common
Stock Trust and SAFECO Resource Series Trust.
(6) Includes 161,648 shares of Common Stock held jointly with Mr. Lapin's
spouse.
(7) Includes 50,519 shares of Common Stock held jointly with Ms. Stutsman's
spouse.
(8) Consists of options to purchase Common Stock exercisable within 60 days of
August 31, 1997 by Mr. Cash.
(9) Includes options to purchase 7,000 shares of Common Stock granted under the
Directors' Plan which are exercisable within 60 days of August 31, 1997.
(10) Includes 9,000 shares of Common Stock held jointly with Mr. Sullivan's
spouse, options to purchase 7,000 shares of Common Stock granted under the
Directors' Plan which are exercisable within 60 days of August 31, 1997 and
a warrant held by Mr. Sullivan exercisable to purchase 17,500 shares of
Common Stock.
44
<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 6,449,904 shares of
Common Stock outstanding. Of these shares, the 1,700,000 shares sold in the
Company's initial public offering and the 2,000,000 shares sold in the Offering
will be freely tradable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company, as is defined
under the Securities Act. The remaining 2,749,904 shares of Common Stock are
"Restricted Shares" and are subject to restrictions under the Securities Act. Of
these shares, 14,000, 1,148,627 and 1,227,246 are subject to lock-up agreements
under which the holders have agreed not to sell or otherwise dispose of any of
their shares for a period of 90, 180 and 270 days, respectively, after the date
of this Prospectus without the prior written consent of EVEREN Securities, Inc.
In general, under Rule 144, a person (or person whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year,
including a person who may be deemed an affiliate of the Company, is entitled to
sell within any three-month period a number of shares of Common Stock that does
not exceed the greater of 1% of the then-outstanding shares of Common Stock
(approximately 64,500 shares after giving effect to the Offering) or the average
weekly trading volume of the Common Stock on the Nasdaq National Market during
the four calendar weeks preceding such sale. Sales under Rule 144 are subject to
certain restrictions relating to manner of sale, notice and the availability of
current public information about the Company. A person who has not been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned shares for at least two years, would be entitled to
sell such shares without regard to the volume limitations, manner of sale
provisions and other requirements of Rule 144.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement, of which this Prospectus is a part.
GENERAL
The Company's Certificate of Incorporation currently provides that the
Company is authorized to issue 7,000,000 shares of Common Stock, $.01 par value
per share. As of August 31, 1997, the Company had 5,449,904 shares of Common
Stock outstanding. Upon completion of the Offering, there will be 6,449,904
shares of Common Stock outstanding. The Company also is authorized to issue
500,000 shares of Preferred Stock, $.10 par value per share. No shares of
Preferred Stock are currently issued and outstanding. In addition, an aggregate
of 345,667 shares of Common Stock are reserved for issuance under the Option
Plan and the Directors' Plan. The Board of Directors has approved an amendment
to the Company's Certificate of Incorporation to increase the authorized number
of shares of Common Stock from 7,000,000 shares to 20,000,000 shares, and the
Company intends to seek stockholder approval of the increase at a special
stockholders meeting to be held in November 1997.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any shares of Preferred Stock issued in
the future, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefore. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any then outstanding Preferred Stock. Holders
of Common Stock have no preemptive rights and no right to convert their Common
Stock into any other securities. There are no redemption or sinking fund
provisions
45
<PAGE> 47
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of the Offering
will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 500,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions 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. The issuance of Preferred Stock could adversely
affect the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plan to issue any shares of Preferred Stock.
WARRANTS
As of August 31, 1997, the Company had outstanding warrants to purchase
125,000 shares of Common Stock. The exercise price for the warrants is $8.40 per
share which expire on October 18, 1999. None of the warrants have any voting
rights, dividend rights or preferences until such time as the warrant is
exercised and converted to Common Stock. The term of the warrants, including the
exercise prices may be changed by written agreement of the Company and the
holders of the respective warrants.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's voting stock.
The Company's Certificate of Incorporation and Bylaws also require that any
action required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of the stockholders and may
not be effected by a consent in writing. In addition, special meetings of the
stockholders of the Company may be called only by the Board of Directors, the
Chairman of the Board or the Chief Executive Officer. The Company's Certificate
of Incorporation also provides that the authorized number of directors may be
changed only by resolution of the Board of Directors. These provisions may have
the effect of deterring hostile takeovers or delaying changes in control or
management of the Company.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A. is the transfer agent and registrar for the
Common Stock.
46
<PAGE> 48
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
for whom EVEREN Securities, Inc., Ladenburg Thalmann & Co. Inc. and The Seidler
Companies Incorporated are acting as representatives (the "Representatives"),
have severally agreed to purchase an aggregate of 2,000,000 shares of Common
Stock from the Company and the Selling Stockholders. The number of shares of
Common Stock that each Underwriter has agreed to purchase is set forth opposite
its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
EVEREN Securities, Inc. ....................................
Ladenburg Thalmann & Co. Inc. ..............................
The Seidler Companies Incorporated..........................
-------
Total.............................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to certain conditions. If any of the shares of Common
Stock are purchased by the Underwriters pursuant to the Underwriting Agreement,
all such shares of Common Stock (other than the shares of Common Stock covered
by the over-allotment option described below) must be so purchased.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the Common Stock to the
public initially at the price to the public set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not to exceed
$ per share. The Underwriters may allow, and such dealers may re-allow,
discounts not to exceed $ per share to certain other dealers. After the
initial public offering of the shares of Common Stock offered hereby, the public
offering price and the other selling terms may be changed by the
Representatives.
The Selling Stockholders have granted to the Underwriters an option to
purchase up to an aggregate of 300,000 additional shares of Common Stock at the
price to the public set forth on the cover page of this Prospectus, less
underwriting discounts and commissions, solely to cover over-allotments, if any.
Such option may be exercised at any time until 30 days after the date of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
the number of option shares proportionate to such Underwriter's initial
commitment as indicated in the preceding table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the Act,
or to contribute payments that the Underwriters may be required to make in
respect thereof.
The public offering price for the Common Stock set forth on the cover page
of this Prospectus was determined by negotiations among the Company, the Selling
Stockholders and the Representatives. The factors considered in determining the
public offering price include the information set forth in this Prospectus and
otherwise available to the Representatives, the trading history of the Common
Stock on the Nasdaq National Market, the history of and prospects for the
industry in which the Company competes, the ability of the Company's management,
the past and present operations of the Company, the prospects for future
earnings of the Company, the general condition of the securities market at the
time of the Offering and the recent market prices of securities of generally
comparable companies. Prior to the Offering, trading in the Company's Common
Stock has been thinly traded. There can be no assurance as to the liquidity of
any market
47
<PAGE> 49
that may develop for the Common Stock or the ability of holders to sell their
Common Stock, nor can there be any assurance that the price at which holders are
able to sell their Common Stock will not be lower than the price at which the
Common Stock is sold to the public by the Underwriters. See "Risk
Factors -- Limited Historical Trading Volume in the Common Stock; Possible
Volatility of Stock Price."
The Company, each Company director and officer and each Selling Stockholder
has agreed with the Underwriters not to (other than in connection with the
Offering or in connection with certain transfers to entities organized for the
exclusive benefit of family members of such persons), directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, any shares of Common Stock of the
Company or issue any securities convertible into or exercisable or exchangeable
(except pursuant to the terms of the Company's existing employee or director
stock plans) for Common Stock, or enter into any swap or other agreement to do
any of the foregoing, for periods ranging between 90 and 270 days after the date
of this Prospectus (subject to a limited exception in one case in connection
with the satisfaction of certain personal tax liabilities related to the
exercise of Company stock options) without the written consent of EVEREN
Securities, Inc. (the "Lock-Up Agreement"). These "lock-up" restrictions may not
apply to the estate of any person described above in the event such person dies
during the "lock-up" period and do not prohibit any person from exercising
options (but would prohibit the sale during the "lock-up" period of shares of
Common Stock purchased upon the exercise of such options). As part of the
Lock-Up Agreement, the Company also has agreed with the Underwriters that it
will not, without the written consent of EVEREN Securities, Inc., file a
registration statement relating to shares of capital stock (including Common
Stock), or securities convertible into or exercisable or exchangeable for, or
warrants, options or rights to purchase or acquire, capital stock (including
Common Stock), during the 90-day period following the date of this Prospectus,
excepting the filing of registration statements on Form S-8 with respect to the
Company's employee or director stock plans.
In connection with the Offering, the Representatives and certain
Underwriters and selling group members and their respective affiliates may, in
accordance with Regulation M under the Securities Exchange Act of 1934 (the
"Exchange Act"), engage in over-allotment, stabilizing transactions, syndicate
covering transactions, penalty bids and other transactions that stabilize,
maintain or otherwise affect the market price for the Common Stock.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position, in which case the Underwriters may engage in
a syndicate covering transaction or may exercise the Underwriters'
over-allotment option described above. Syndicate covering transactions involve
the purchase of Common Stock in the open market following completion of the
offering to cover all or a portion of a syndicate short position. Penalty bids
permit the Representatives, on behalf of the Underwriters, to reclaim a selling
concession from a syndicate member when Common Stock originally sold by such
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
minimum. Any of the transactions described in this paragraph may cause the price
of Common Stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
Certain of the shares of Common Stock offered hereby are already listed on
the Nasdaq National Market, and application has been made to Nasdaq National
Market to so list the other shares of Common Stock offered hereby.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Cooley Godward LLP, Boulder,
Colorado. Certain legal matters in connection with the Common Stock will be
passed on for the Underwriters by Irell & Manella LLP, Los Angeles, California.
48
<PAGE> 50
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996,
and for each of the years in the three-year period ended December 31, 1996, have
been included herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, of which this Prospectus is a part, as well as such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices
located a 7 World Trade Center, New York, New York 10048 and Northwest Atrium,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission also maintains a Worldwide Web site (address: http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The Common
Stock is traded on the Nasdaq National Market. Reports and other information
concerning the Company may also be inspected at the offices of the Nasdaq Stock
Market, 1725 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1, including amendments thereto, under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit or incorporated by reference to the Registration Statement
of which this Prospectus forms a part, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. Copies of the
Registration Statement and the exhibits and schedules thereto may be inspected,
without charge, at the offices of the Commission, or obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549.
49
<PAGE> 51
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements:
Balance Sheets............................................ F-3
Statements of Earnings.................................... F-4
Statements of Stockholders' Equity........................ F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 52
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, 1996 and 1995, and the related
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boulder, Colorado
February 25, 1997
F-2
<PAGE> 53
AMERICAN COIN MERCHANDISING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,590 $ 771 $ 826
Trade accounts and other receivables...................... 748 673 726
Inventories............................................... 3,411 4,329 4,559
Current portion of trade notes receivable................. 20 -- --
Prepaid expenses and other assets......................... 190 164 315
------- ------- -------
Total current assets.............................. 5,959 5,937 6,426
------- ------- -------
Property and equipment, at cost:
Vending machines.......................................... 7,051 12,446 16,590
Vehicles.................................................. 938 2,095 3,102
Office equipment, furniture and fixtures.................. 306 527 909
------- ------- -------
8,295 15,068 20,601
Less accumulated depreciation............................. (3,037) (4,697) (5,859)
------- ------- -------
Property and equipment, net....................... 5,258 10,371 14,742
------- ------- -------
Placement fees, net of accumulated amortization............. 20 183 322
Deferred income taxes....................................... 350 42 42
Cost in excess of assets acquired, net of accumulated
amortization.............................................. 2,115 3,209 3,125
Other assets................................................ -- 16 38
------- ------- -------
Total assets...................................... $13,702 $19,758 $24,695
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank revolving line of credit............................. $ 406 $ -- $ --
Current portion of long-term debt......................... 151 435 427
Current portion of notes payable to Control Group......... -- 674 674
Income taxes payable...................................... 188 279 227
Accounts payable.......................................... 1,055 544 1,820
Accrued commissions....................................... 525 747 728
Other accrued expenses.................................... 104 344 592
Distribution payable...................................... 634 -- --
------- ------- -------
Total current liabilities......................... 3,063 3,023 4,468
Long-term debt, net of current portion...................... 283 4,384 6,423
Notes payable to Control Group, net of current portion...... 1,349 675 337
------- ------- -------
Total liabilities................................. 4,695 8,082 11,228
------- ------- -------
Stockholders' equity:
Preferred stock, $.10 par value (Authorized 500,000
shares; none issued)................................... -- -- --
Common stock, $.01 par value (Authorized 7,000,000 shares;
issued and outstanding 5,081,608 and 5,123,274 in 1995
and 1996, respectively, 5,447,904 at June 30, 1997).... 51 51 54
Additional paid-in-capital................................ 8,355 8,407 8,414
Unearned stock option compensation........................ (80) (49) (33)
Retained earnings......................................... 681 3,267 5,032
------- ------- -------
Total stockholders' equity.................................. 9,007 11,676 13,467
------- ------- -------
Commitments
Total liabilities and stockholders' equity........ $13,702 $19,758 $24,695
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 54
AMERICAN COIN MERCHANDISING, INC. (A)
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Vending.................................. $11,651 $17,031 $30,439 $12,192 $22,648
Franchise and other...................... 5,963 8,683 7,828 4,225 3,499
------- ------- ------- ------- -------
Total revenue.................... 17,614 25,714 38,267 16,417 26,147
------- ------- ------- ------- -------
Cost of revenue:
Vending.................................. 8,399 11,701 21,283 8,639 16,042
Franchise and other...................... 4,207 6,054 5,659 3,071 2,309
------- ------- ------- ------- -------
Total cost of revenue............ 12,606 17,755 26,942 11,710 18,351
------- ------- ------- ------- -------
Gross profit..................... 5,008 7,959 11,325 4,707 7,796
General and administrative expenses........ 3,247 4,218 7,053 3,203 4,725
Commissions and royalties, related
parties.................................. 360 347 -- -- --
------- ------- ------- ------- -------
Operating earnings............... 1,401 3,394 4,272 1,504 3,071
------- ------- ------- ------- -------
Interest expense, related parties.......... 144 224 108 54 45
Interest expense, other.................... 84 159 267 37 222
Minority interest in income of combined
affiliates............................... 62 80 -- -- --
Share of loss of equity affiliate.......... 29 27 -- -- --
------- ------- ------- ------- -------
Earnings before taxes............ 1,082 2,904 3,897 1,413 2,804
Provision for income taxes................. -- 329 1,311 537 1,039
------- ------- ------- ------- -------
Net earnings..................... $ 1,082 $ 2,575 $ 2,586 $ 876 $ 1,765
======= ======= ======= ======= =======
Net earnings per share of common stock..... $ 0.48 $ 0.16 $ 0.33
Weighted average common shares............. 5,417 5,449 5,381
Pro forma information:
Historical earnings before taxes......... $ 2,904
Pro forma adjustments to earnings before
taxes................................. 1,207
-------
Pro forma earnings before taxes.......... 4,111
Pro forma income tax expense............. (1,562)
-------
Pro forma net earnings................... $ 2,549
=======
Pro forma earnings per common and common
equivalent share
Pro forma net earnings per share......... $ 0.55
Weighted average common shares........... 4,669
</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> 55
AMERICAN COIN MERCHANDISING, INC. (A)
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL UNEARNED EQUITY STOCK-
COMMON PAID-IN STOCK OPTION RETAINED OF HOLDERS'
STOCK CAPITAL COMPENSATION EARNINGS AFFILIATES EQUITY
------ ---------- ------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1993........................... $31 $ 34 $ -- $ 101 $ 667 $ 833
Issuance of common stock.................... -- -- -- -- 4 4
Net earnings................................ -- -- -- 602 480 1,082
Distributions............................... -- -- -- (260) (445) (705)
--- ------- ---- ------- ----- -------
DECEMBER 31, 1994........................... 31 34 -- 443 706 1,214
Issuance of 1,700,000 common stock in public
offering, net............................. 17 10,034 -- -- -- 10,051
Issuance of employee stock options.......... -- 80 (80) -- -- --
Exercise of employee stock options.......... 2 3 -- -- -- 5
Conversion of stockholder loans............. 1 675 -- -- -- 676
Net earnings................................ -- -- -- 2,072 503 2,575
Distributions............................... -- -- -- (634) (420) (1,054)
Distribution to Control Group in conjunction
with Reorganization....................... -- -- -- (4,162) (789) (4,951)
Deferred tax asset established in
Reorganization............................ -- 491 -- -- -- 491
Termination of S corporation tax status..... -- (2,962) -- 2,962 -- --
--- ------- ---- ------- ----- -------
DECEMBER 31, 1995........................... 51 8,355 (80) 681 -- 9,007
Amortization of deferred compensation....... -- -- 26 -- -- 26
Tax benefit related to employee stock
options................................... -- 57 -- -- -- 57
Exercise of employee stock options.......... -- 1 -- -- -- 1
Termination of employee stock options....... -- (6) 5 -- -- (1)
Net earnings................................ -- -- -- 2,586 -- 2,586
--- ------- ---- ------- ----- -------
DECEMBER 31, 1996........................... 51 8,407 (49) 3,267 -- 11,676
Amortization of deferred compensation....... -- -- 12 -- -- 12
Exercise of employee stock options.......... 3 12 -- -- -- 15
Termination of employee stock options....... -- (5) 4 -- -- (1)
Net earnings................................ -- -- -- 1,765 -- 1,765
--- ------- ---- ------- ----- -------
JUNE 30, 1997 (UNAUDITED)................... $54 $ 8,414 $(33) $ 5,032 $ -- $13,467
=== ======= ==== ======= ===== =======
</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> 56
AMERICAN COIN MERCHANDISING, INC. (A)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net earnings................................... $ 1,082 $ 2,575 $ 2,586 $ 876 $ 1,765
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization............... 688 930 1,891 762 1,359
Affiliate losses............................ 34 72 -- -- --
Compensation expense related to stock
options................................... -- -- 25 13 11
Deferred income tax expense................. -- 141 308 -- --
Changes in operating assets and liabilities,
net of Reorganization and acquisitions:
Trade accounts and other receivables,
net.................................... (147) (206) 53 (212) (53)
Inventories............................... (573) (1,650) (756) (157) (230)
Prepaid expenses and other assets......... 56 (182) 10 (95) (173)
Income taxes payable...................... -- 188 148 27 (52)
Accounts payable and accrued expenses..... 632 994 (49) 669 1,505
------- ------- ------- ------- -------
Net cash provided by operating
activities........................... 1,772 2,862 4,216 1,883 4,132
------- ------- ------- ------- -------
Investing activities:
Acquisitions of property and equipment, net.... (1,471) (2,234) (6,052) (3,242) (5,570)
Acquisitions of franchisees.................... -- (160) (1,224) (613) --
Acquisition of non-Control Group interests in
Reorganization.............................. -- (3,125) -- -- --
Placement fees................................. -- (20) (192) (113) (215)
Change in notes receivable..................... 3 31 20 7 --
------- ------- ------- ------- -------
Net cash used in investing
activities........................... (1,468) (5,508) (7,448) (3,961) (5,785)
------- ------- ------- ------- -------
Financing activities:
Net borrowings (payments) on revolving line of
credit...................................... (153) (121) 3,381 1,283 2,248
Principal payments on notes payable to related
parties..................................... (247) (167) -- -- --
Proceeds from issuance of notes payable to
related parties............................. 444 22 -- -- --
Principal payments on long-term debt........... (397) (1,172) (1,559) (185) (217)
Principal payments on notes payable to Control
Group....................................... -- -- -- -- (338)
Proceeds from issuance of long-term debt....... 802 516 1,224 24 --
Distributions.................................. (705) (420) (634) (634) --
Payments to Control Group in Reorganization.... -- (4,509) -- -- --
Cash retained by combined affiliates in
Reorganization.............................. -- (326) -- -- --
Issuance of common stock, net of offering
costs....................................... -- 10,056 1 -- 15
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities................. (256) 3,879 2,413 488 1,708
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................... 48 1,233 (819) (1,590) 55
Cash and cash equivalents at beginning of
period......................................... 309 357 1,590 1,590 771
------- ------- ------- ------- -------
Cash and cash equivalents at end of period....... $ 357 $ 1,590 $ 771 $ -- $ 826
======= ======= ======= ======= =======
</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-6
<PAGE> 57
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
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. At June 30, 1997, the Company has 29 offices operating in
39 states. The Company also sells products to franchisees. At June 30, 1997
there were 26 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
in 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' interest has 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 $1,349,000 are payable in 1997 and 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
F-7
<PAGE> 58
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
2. ACQUISITIONS
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.
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 and 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.
The pro forma effect of these acquisitions is not material to revenue or
net earnings for the years ended December 31, 1995 and 1996.
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 equipment sales and other revenue is initial franchise fee revenue
of $53,000, $86,000 and none during 1994, 1995 and 1996 and none for the six
months ended June 30, 1997, respectively.
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, thereafter, 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
F-8
<PAGE> 59
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Quarterly income taxes are computed using the anticipated effective tax
rate for the year.
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.
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, equipment and capital leases 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. Amortization expense
related to capital leases is calculated on the straight-line method over the
estimated useful lives of the leased assets which is 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.
NET EARNINGS PER SHARE
Net earnings per share is computed based on the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares include the dilution from the potential exercise of stock
options when the effect is dilutive. Primary and fully diluted earnings per
share are the same. Net earnings per share has been omitted for 1994 and 1995
because through August 31, 1995 the Combined Companies were not a single entity
with its own capital structure.
F-9
<PAGE> 60
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The financial statements as of June 30, 1997 and for the six months ended
June 30, 1996 and 1997 are unaudited but, in the opinion of management, include
all adjustments, consisting of normal recurring adjustments, which are necessary
for a fair presentation of the financial condition, results of operations, and
cash flows. The operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
RECLASSIFICATIONS
Certain amounts for prior periods have been reclassified to conform to the
June 30, 1997 presentation.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
A schedule of supplemental cash flow information follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------
1994 1995 1996 1996 1997
----- -------- ----- ------ --------
<S> <C> <C> <C> <C> <C>
Cash paid during the period:
Interest paid............................... $240 $ 370 $372 $ 95 $ 282
Income taxes paid........................... -- -- 858 510 1,092
Significant noncash investing and financing
activities:
Equipment purchases financed with debt...... 336 241 54 54 --
Notes payable issued for acquisitions of
franchisees.............................. -- 188 879 363 --
Distribution payable........................ -- 634 -- -- --
Deferred tax asset established in
Reorganization........................... -- 491 -- -- --
Conversion of stockholder loans into common
stock.................................... -- 676 -- -- --
Cash paid in Reorganization:
Value of tangible assets acquired........... $ 983
Cost in excess of assets acquired........... 1,964
Net liabilities retained by combined
affiliates,
excluding cash retained..................... 1,310
Notes payable to Control Group.............. (1,349)
Net elimination of investment in equity
affiliate
and minority interest....................... 101
Distribution to Control Group............... 4,951
-------
Cash paid and retained (1).......... $ 7,960
=======
</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
48.5% and 48.0% interest in 1994 and 1995, respectively, 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% interest 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
F-10
<PAGE> 61
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for 1995, as if the Reorganization, including the acquisition of Sugarloaf
Marketing, had occurred on January 1, 1995 is presented in note 14.
Summarized financial information of Sugarloaf Marketing is as follows (in
thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, AUGUST 31,
1994 1995
------------ ------------
<S> <C> <C>
Revenue.................................................. $5,078 $3,941
Net loss................................................. (59) (57)
</TABLE>
Included in revenue are the following amounts with Sugarloaf Marketing (in
thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, AUGUST 31,
1994 1995
------------ ------------
<S> <C> <C>
Product and service sales................................ $603 $660
Franchise royalties...................................... 60 52
</TABLE>
Transactions with Sugarloaf Marketing were conducted on a basis consistent
with that of unaffiliated franchisees.
5. BANK REVOLVING LINE OF CREDIT
The Company has a bank revolving line of credit, which expires July 5,
1999. Interest is payable monthly at the bank's prime rate (8.25% at December
31, 1996 and 8.50% at June 30, 1997). Maximum borrowings on this line cannot
exceed the lesser of $9,000,000 or a borrowing base defined in the agreement. At
December 31, 1996 and June 30, 1997, there was a principal amount of
approximately $3,787,000 and $6,035,000, respectively outstanding on this
facility that is reflected in long-term debt on the accompanying balance sheet.
The credit facility is secured by all business assets, including accounts
receivable, inventories, property and equipment and an assignment of franchise
fees. The line of credit agreement requires that, among other things, the
Company maintain a minimum net worth, meet certain ratios, and limits the
Company's ability to pay dividends and incur additional indebtedness.
At December 31, 1996 and June 30, 1997, approximately $59,000 and $287,000,
respectively, of the credit facility was committed on open letters of credit for
inventory on order but not yet received.
F-11
<PAGE> 62
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
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------ ------ --------
<S> <C> <C> <C>
LONG-TERM DEBT:
Bank revolving line of credit (see note 5)................. $ -- $3,787 $6,035
Notes payable to former franchisees, in monthly
installments with interest at 8%; final payments at
various dates through August 1999, secured by certain
property and equipment................................... 178 871 689
Capitalized lease obligations.............................. 107 -- --
Notes payable to banks, in monthly installments with
interest ranging from 7% to 12.95%; final payments at
various dates through August 2000; secured by certain
property and equipment................................... 149 161 126
------ ------ ------
Total long-term debt............................. 434 4,819 6,850
Less current portion....................................... (151) (435) (427)
------ ------ ------
Long-term debt, net of current portion........... $ 283 $4,384 $6,423
====== ====== ======
NOTES PAYABLE TO CONTROL GROUP:
Promissory notes to Affiliated Entities, semi-annual
principal payments to commence February 1997 with
interest at 8%; notes are secured by the assets exchanged
(see note 1)............................................. $1,349 $1,349 $1,011
Less current portion....................................... -- (674) (674)
------ ------ ------
Notes payable to Control Group, net of current
portion........................................ $1,349 $ 675 $ 337
====== ====== ======
</TABLE>
The carrying amount of long-term debt and notes payable to control group
approximates fair value.
Maturities of long-term debt and notes payable to Control Group as of
December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $1,109
1998........................................................ 4,855
1999........................................................ 195
2000........................................................ 9
2001........................................................ --
------
$6,168
======
</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.
F-12
<PAGE> 63
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1995 1996
---- ------
<S> <C> <C>
Current
Federal................................................... $160 $ 869
State..................................................... 28 134
---- ------
188 1,003
---- ------
Deferred
Federal................................................... 119 267
State..................................................... 22 41
---- ------
141 308
---- ------
$329 $1,311
==== ======
</TABLE>
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 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1995 1996
----- ------
<S> <C> <C>
Expected tax expense at the federal statutory rate.......... $ 987 $1,325
State income taxes, net of federal taxes.................... 33 116
Change in valuation allowance............................... -- (171)
Termination of S corporation status......................... 141 --
S corporation income........................................ (811) --
Other....................................................... (21) 41
----- ------
$ 329 $1,311
===== ======
</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 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1996
------ ------
<S> <C> <C>
DEFERRED TAX ASSETS:
Property and equipment-basis and depreciation differences... $ 98 $ --
Costs in excess of assets acquired-basis and amortization
differences............................................... 1,255 1,157
------ ------
1,353 1,157
Valuation allowance......................................... 1,003 832
------ ------
350 325
DEFERRED TAX LIABILITIES:
Property and equipment-basis and depreciation differences... -- (283)
------ ------
$ 350 $ 42
====== ======
</TABLE>
F-13
<PAGE> 64
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMISSIONS AND ROYALTIES TO RELATED PARTIES
The Company recognized commission expense of $290,000 and $232,000 in 1994
and 1995, respectively, for services provided by two other corporations whose
stockholders are also the majority stockholders of the Company. In addition, the
Company recognized royalty expense of $70,000 and $115,000 in 1994 and 1995,
respectively, 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%. The Company's matching
contributions totaled $8,000, $17,000 and $49,000, in 1994, 1995 and 1996 and
totaled $18,000 and $54,000 for the six months ended June 30, 1996 and 1997,
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 four years. Rent expense under these
leases totaled $173,000, $190,000 and $275,000 in 1994, 1995 and 1996 and
totaled $131,000 and $243,000 for the six months ended June 30, 1996 and 1997,
respectively.
Future minimum commitments under operating leasing arrangements as of
December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997.................................................. $253
1998.................................................. 122
1999.................................................. 43
2000.................................................. 8
2001 and thereafter................................... --
----
Total....................................... $426
====
</TABLE>
GUARANTEES
The Company has established, with a bank, a vending machine leasing program
for qualified franchisees. Under terms of the program, the Company has agreed to
purchase machines from the bank at an agreed upon price for franchisees who
default on their leases with the bank. At December 31, 1996 and June 30, 1997,
franchisees had $30,000 and $7,000, respectively, in outstanding leases
guaranteed by the Company.
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 856,132 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 three to four year periods.
Under the 1995 Non-Employee Directors' Stock Option Plan (the "Directors
Plan"), the Company may grant to non-employee directors options to purchase up
to 42,000 shares of common stock. Under the Directors Plan, options granted vest
over a three year period and have a maximum term of ten years.
F-14
<PAGE> 65
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 earnings for options granted at a price less than
fair market value was $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 earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------- --------------
1995 1996 1996 1997
------ ------ ----- ------
<S> <C> <C> <C> <C>
Net earnings
As Reported........................................... $2,575 $2,586 $ 876 $1,765
Pro forma............................................. $2,559 $2,471 $ 817 $1,693
Primary earnings per share
As Reported........................................... $ N/A $ 0.48 $0.16 $ 0.33
Pro forma............................................. $ N/A $ 0.46 $0.15 $ 0.31
</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 1995, 1996 and 1997: no dividend yield; expected
volatility of 81 percent for 1995 and 1996 and 60 percent for 1997; 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 and
changes during the related periods is presented below:
<TABLE>
<CAPTION>
DECEMBER 31, SIX MONTHS ENDED
------------------------------------------ JUNE 30,
1995 1996 1997
-------------------- ------------------- --------------------
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
period..................... 548,132 $ .02 488,463 $1.44 440,797 $1.51
Granted...................... 123,500 5.61 -- -- 100,000 7.63
Exercised.................... (183,169) .02 (41,666) .02 (324,630) 0.05
Forfeited.................... -- -- (6,000) 5.53 (5,667) 5.53
-------- ------- --------
Outstanding at end of
period..................... 488,463 1.44 440,797 1.51 210,500 6.57
======== ======= ========
Options exercisable at end of
period..................... 364,943 360,797 35,167
Weighted-average fair value
of options granted during
the period................. $ 4.68 -- 4.70
</TABLE>
F-15
<PAGE> 66
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about fixed stock options
outstanding:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------------------------------
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
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <C> <C> <C> <C>
$.02 323,297 2.0 $ .02 323,297 $ .02
4.00 to 7.00 117,500 8.9 5.62 37,500 5.67
------- -------
.02 to 7.00 440,797 3.8 1.51 360,797 .61
======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------------------------------------------
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
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <C> <C> <C> <C>
4.00 to 8.00 210,500 9.1 $6.57 35,167 $5.68
</TABLE>
12. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company was originally incorporated in Colorado in 1988 and was
reincorporated in Delaware effective July 1995. In July 1995, the Company
effectuated a 2525.9515-for-1 stock split of its common stock. Common stock
information has been restated to give effect to the stock split. 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. Two of the principal
stockholders of the Company and the majority stockholder of Sugarloaf Marketing
acquired 300,000 shares of the Company's common stock at the initial public
offering price of $7.00 per share. In conjunction with the Company's public
offering, $676,000 in notes payable to related parties were converted into
96,571 shares of common stock.
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, 1996 the Company has recorded a deferred tax asset of
$325,000, net of a $832,000 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.
F-16
<PAGE> 67
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 the Company's plush toys and certain other products
dispensed in the Company's SugarLoaf Toy Shoppes are produced by foreign
manufacturers and a majority are purchased directly by the Company from
manufacturers in the People's Republic of China ("China"). China currently
enjoys "most favored nation" ("MFN") status under U.S. tariff laws, which allows
for the most favorable category of U.S. import duties. The loss of MFN status
for China 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. Although the Company would
attempt to mitigate any such increased cost by procuring its product from other
countries, it would likely incur substantially higher costs and temporary
disruptions in supply in the event that it becomes necessary to do so.
The Company also purchases a substantial portion of the products for its
other Shoppes from vendors who obtain product from domestic and foreign
manufacturers. As a result, the Company is subject to changes in governmental
policies, the imposition of tariffs and import and export controls,
transportation delays and interruptions, political and economic disruptions and
labor strikes which could disrupt the Company's supply of products from foreign
manufacturers.
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.
During the year ended December 31, 1996 and the six months ended June 30,
1997, one customer accounted for 11.4% and 28.2%, respectively, of the Company's
revenue.
14. UNAUDITED PRO FORMA INFORMATION
The computation of pro forma total revenue, net earnings and net 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 (in thousands):
F-17
<PAGE> 68
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Historical total revenue.................................... $25,714
Revenue of Sugarloaf Marketing through the date of
acquisition............................................... 3,941
Pro forma adjustment to eliminate intercompany revenue...... (712)
-------
Pro forma total revenue..................................... $28,943
=======
Historical earnings before income taxes..................... $ 2,904
Pro forma adjustments:
Net loss of Sugarloaf Marketing through the date of
acquisition............................................ (57)
Adjust for change in level of commissions and royalties to
related parties........................................ 1,182
Adjust for interest related to stockholder loans converted
to equity.............................................. 61
Eliminate minority interest and equity interest through
the date of acquisition as a result of acquiring
remaining ownership interest in affiliated entities.... 107
Record amortization of cost in excess of assets
acquired............................................... (68)
Increase depreciation for assets acquired from non-control
group.................................................. (18)
-------
Total adjustments to earnings before taxes........ 1,207
-------
Pro forma earnings before income taxes...................... 4,111
Pro forma earnings tax expense at 38%....................... 1,562
-------
Pro forma net earnings...................................... $ 2,549
=======
Weighted average shares outstanding(1)...................... 4,669
Pro forma net earnings per share............................ $ 0.55
=======
</TABLE>
- ---------------
(1) Shares used in computing pro forma net earnings per share are based upon
3,503,102 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.
15. UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue.............. $5,596 $6,315 $6,206 $7,597 $8,014 $8,403 $9,634 $12,216 $12,357 $13,790
Total cost of revenue...... 3,815 4,411 4,318 5,211 5,625 6,085 6,743 8,489 8,551 9,800
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Gross profit............. 1,781 1,904 1,888 2,386 2,389 2,318 2,891 3,727 3,806 3,990
General and administrative
expenses................. 1,036 1,155 1,099 1,275 1,532 1,671 1,827 2,023 2,296 2,429
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Operating earnings....... 745 749 789 1,111 857 647 1,064 1,704 1,510 1,561
Interest expense........... 75 81 156 71 46 45 136 148 111 156
Other expense.............. 34 52 21 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Earnings before income
taxes.................. 636 616 612 1,040 811 602 928 1,556 1,399 1,405
Provision for income
taxes.................... -- -- -- 329 308 229 352 422 518 521
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Net earnings............. $ 636 $ 616 $ 612 $ 711 $ 503 $ 373 $ 576 $ 1,134 $ 881 $ 884
====== ====== ====== ====== ====== ====== ====== ======= ======= =======
Net earnings per
share(1)............... $ 0.09 $ 0.07 $ 0.11 $ 0.21 $ 0.16 $ 0.16
====== ====== ====== ======= ======= =======
Weighted average common
shares(1)................ 5,449 5,449 5,460 5,449 5,425 5,452
====== ====== ====== ======= ======= =======
</TABLE>
- ---------------
(1) Net earnings per share and weighted average common shares are not presented
through 1995 because the Company and each of the Affiliated Entities were
organized as S corporations or a partnership.
F-18
<PAGE> 69
Back Page: Pictures of two kiddie rides and picture of a bulk vending rack;
text reading "The Company intends to expand into bulk vending through the
pending acquisition of Quality Amusements Corp. and Quality Entertainment Corp."
<PAGE> 70
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 13
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Capitalization........................ 14
Selected Financial and
Operating Data...................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 23
Management............................ 34
Executive Compensation................ 36
Certain Relationships and Related
Transactions........................ 39
Principal and Selling Stockholders.... 43
Shares Eligible for Future Sale....... 45
Description of Capital Stock.......... 45
Underwriting.......................... 47
Legal Matters......................... 48
Experts............................... 49
Additional Information................ 49
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
2,000,000 SHARES
[AMERICAN COIN LOGO]
AMERICAN COIN
MERCHANDISING, INC.
D/B/A SUGARLOAF CREATIONS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
EVEREN SECURITIES, INC.
LADENBURG THALMANN & CO. INC.
THE SEIDLER COMPANIES
INCORPORATED
OCTOBER , 1997
======================================================
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Company (the "Registrant") in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee............................................ $ 12,200
NASD filing fee............................................. 4,500
NASDAQ National Market System fee........................... 17,500
Blue sky qualification fee and expenses..................... 10,000
Printing and engraving expenses............................. 135,000
Legal fees and expenses..................................... 100,000
Accounting fees and expenses................................ 40,000
Transfer agent and registrar fees........................... 3,000
Miscellaneous............................................... 77,800
--------
Total............................................. $400,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws also
provide that the Registrant will indemnify its directors and officers and may
indemnify its employees and other agents to the fullest extent not prohibited by
Delaware law.
The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty of
care to the Registrant and its stockholders. These provisions do not eliminate
the directors' duty of care and, in appropriate circumstances, equitable
remedies such an injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or officer of the
Registrant or any of its affiliated enterprises, provided such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The indemnity agreements also set forth certain procedures that will
apply in the event of a claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its Officers and directors for certain liabilities arising under the Securities
Act or otherwise.
II-1
<PAGE> 72
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since September 1, 1994, the Registrant has sold and issued the following
unregistered securities:
(1) In January 1995, the Registrant sold to one of the officers and
directors of the Registrant 181,869 shares of Common Stock pursuant to the
exercise of a stock option at an exercise price of $.02 per share for cash
in the aggregate amount of $4,320.
(2) In July 1995, the Registrant granted to one of the officers of the
Registrant an option to purchase 20,000 shares of Common Stock under the
Option Plan at an exercise price of $4.50 per share.
(3) In August 1995, the Registrant amended certain promissory notes of
the Registrant held by the Founders to provide for the automatic conversion
of the entire principal amount into 96,571 shares of Common Stock of the
Registrant upon the closing of its initial public offering.
The sales and issuances of securities in the transaction described in
paragraph (1) above were issued in transactions that were deemed to be exempt
from registration under the Securities Act by virtue of Rule 701 promulgated
thereunder in that they were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to a written contract relating to
compensation, as provided by Rule 701.
The sales and issuances of securities in the transaction described in
paragraph (2) above were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2).
The issuance of securities in the transaction described in paragraph (3)
above will be exempt from registration under the Securities Act by virtue of
Section 3(a)(9).
Appropriate legends are affixed to the Stock Certificates representing the
shares issued in transactions covered by paragraphs (1)-(3) above. All
recipients either received adequate information about the Registrant or had
access, through employment or other relationships, to such information.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
<C> <S>
1.1 -- Form of Underwriting Agreement.
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.
</TABLE>
II-2
<PAGE> 73
<TABLE>
<CAPTION>
<C> <S>
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.
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.
5.1 -- Opinion of Cooley Godward LLP.
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.
</TABLE>
II-3
<PAGE> 74
<TABLE>
<CAPTION>
.20+ 10 -- Subordination Agreement between the Registrant and Inland Merchandising, Inc.,
dated as of August 31, 1995.
<C> <S>
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.,
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.
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 as of 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.
16.1+ -- Letter of Gallant & Company, P.C. to the Securities and Exchange Commission
pursuant to the requirements of Item 304(a) (3) of Regulation S-B.
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2 -- Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1+++ -- Power of Attorney. Reference is made to page II-6.
</TABLE>
- ---------------
+ 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.
* An order seeking confidential treatment for certain portions of the exhibit
has been granted.
+++ Previously Filed.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 15 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission
II-4
<PAGE> 75
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act of 1933, the information omitted from the
form of prospectus as filed as part of the registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective; (2) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and (3) for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement No. 333-35947 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Boulder, State of Colorado, on the 2nd day of October 1997.
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 Act of 1933, this Amendment
No. 1 to Registration Statement No. 333-35947 has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <C>
/s/ JEROME M. LAPIN Chairman of the Board, President, October 2, 1997
- ----------------------------------------------------- Chief Executive Officer (Principal
Jerome M. Lapin Executive Officer)
/s/ W. JOHN CASH* Vice President, Chief Financial October 2, 1997
- ----------------------------------------------------- Officer and Treasurer (Principal
W. John Cash Financial and Accounting Officer)
/s/ RANDALL J. FAGUNDO* Vice President of Operations, October 2, 1997
- ----------------------------------------------------- Secretary and Director
Randall J. Fagundo
/s/ ABBE M. STUTSMAN* Vice President of Product Development October 2, 1997
- ----------------------------------------------------- and Purchasing and Director
Abbe M. Stutsman
/s/ J. GREGORY THEISEN* Director October 2, 1997
- -----------------------------------------------------
J. Gregory Theisen
/s/ RICHARD D. JONES* Director October 2, 1997
- -----------------------------------------------------
Richard D. Jones
/s/ JIM D. BALDWIN* Director October 2, 1997
- -----------------------------------------------------
Jim D. Baldwin
/s/ JOHN A. SULLIVAN* Director October 2, 1997
- -----------------------------------------------------
John A. Sullivan
*By: /s/ JEROME M. LAPIN
------------------------------------------------
Jerome M. Lapin
Attorney-In-Fact
</TABLE>
II-6
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement
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
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
5.1 -- Opinion of Cooley Godward LLP
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
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
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., 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
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------- --------------------------------------------------------------------------------------- -------------
<C> <S> <C>
10.29++* -- Other Income Vendor Agreement, dated as of July 31, 1996, between the Registrant and
Wal-Mart Stores, Inc.
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 as of 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.
16.1+ -- Letter of Gallant & Company, P.C. to the Securities and Exchange Commission pursuant
to the requirements of Item 304(a) (3) of Regulation S-B
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1+++ -- Power of Attorney. Reference is made to page II-6
</TABLE>
- ---------------
+ 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.
* An order seeking confidential treatment for certain portions of the exhibit
has been granted.
+++ Previously Filed.
<PAGE> 1
EXHIBIT 1.1
- --------------------------------------------------------------------------------
2,000,000 Shares
-------------------------
Common Stock
October ___, 1997
UNDERWRITING AGREEMENT
EVEREN Securities, Inc.
Ladenburg Thalmann & Co. Inc.
The Seidler Companies Incorporated
- --------------------------------------------------------------------------------
<PAGE> 2
2,000,000 Shares
-------------------------
Common Stock
($0.01 par value)
UNDERWRITING AGREEMENT
October ___, 1997
EVEREN Securities, Inc.
Ladenburg Thalmann & Co. Inc.
The Seidler Companies Incorporated
As Representatives of
the Several Underwriters
c/o EVEREN Securities, Inc.
77 West Wacker Drive
Chicago, Illinois 60601-1994
Ladies and Gentlemen:
American Coin Merchandising, Inc., a Delaware corporation (the
"Company"), and the stockholders of the Company listed on Schedule I hereto
(collectively referred to as the "Selling Stockholders"), confirm their
agreement with each other and the several underwriters listed in Schedule II
hereto (the "Underwriters"), for whom EVEREN Securities, Inc., Ladenburg
Thalmann & Co. Inc. and The Seidler Companies Incorporated (collectively, the
"Representatives") have been duly authorized to act as representatives, as
follows:
1. The Shares. Subject to the terms and conditions set forth in
this agreement (the "Agreement"), the Company and the Selling Stockholders
propose to sell 2,000,000 shares of the Company's Common Stock, $0.01 par value
(the "Common Stock"), to the several Underwriters, of which 1,000,000 of the
Company's authorized but unissued shares are to be issued and sold by the
Company and an aggregate of 1,000,000 shares are to be sold by the Selling
Stockholders. Such 2,000,000 shares of Common Stock proposed to be sold by the
Company and the Selling Stockholders are hereinafter referred to as the "Firm
Shares." The Selling Stockholders also propose to grant to the Underwriters an
option to purchase an aggregate of up to 300,000 additional shares of Common
Stock (the "Additional
<PAGE> 3
Shares") if requested by the Underwriters as provided in Section 3 hereof. The
Firm Shares and the Additional Shares are herein collectively called the
"Shares."
The Company and each of the Selling Stockholders hereby confirm their
respective agreements with the Underwriters as follows:
2. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1 (File No.
333-35947) including a prospectus, relating to the Shares, and certain
amendments to such registration statement. The registration statement, as
amended at the time when it became or becomes effective, including all
financial schedules and exhibits thereto and all of the information (if any)
deemed to be part of the registration statement at the time of its
effectiveness pursuant to Rule 430A under the Act ("Rule 430A"), is hereinafter
referred to as the "Registration Statement"; the prospectus in the form first
provided to the Underwriters by the Company in connection with the offering and
sale of the Shares (whether or not required to be filed pursuant to Rule 424(b)
under the Act ("Rule 424(b)")) is hereinafter referred to as the "Prospectus,"
provided that in the event any revised prospectus shall be provided to the
Underwriters by the Company for use in connection with the offering of the
Shares that differs from the Prospectus (whether or not any such revised
prospectus is required to be filed by the Company pursuant to Rule 424(b) under
the Act), the term "Prospectus" shall refer to the revised prospectus from and
after the time it is first provided to the Underwriters for such use; and each
preliminary prospectus included in the Registration Statement prior to the time
it became or becomes effective is herein referred to as a "Preliminary
Prospectus."
3. Agreements to Sell and Purchase. (a) On the basis of the
representations and warranties contained in this Agreement, and subject to the
terms and conditions hereof, (i) the Company agrees to issue and sell to the
Underwriters, at a price of $_____ per Share (the "Purchase Price"), 1,000,000
Firm Shares; (ii) each Selling Stockholder agrees to sell to the Underwriters,
at the Purchase Price, the number of Firm Shares set forth next to such Selling
Stockholder's name on Schedule I; and (iii) each Underwriter agrees, severally
and not jointly, to purchase from the Company and the Selling Stockholders, at
the Purchase Price, the aggregate number of Firm Shares set forth opposite the
name of such Underwriter in Schedule II hereto. Each of the Underwriters, the
Company and the Selling Stockholders agrees that, prior to or simultaneously
with the purchase of Additional Shares from the other Selling Stockholders
pursuant to Section 4(b) hereof, the Underwriters shall purchase from Selling
Stockholders Randall J. Fagundo ("Fagundo") and Abbe M. Stutsman ("Stutsman")
pursuant to Section 4(b) hereof all of the Additional Shares to be sold by
Fagundo and Stutsman; provided that the foregoing purchase priorities shall not
-2-
<PAGE> 4
apply to the extent Fagundo or Stutsman, as the case may be, are in breach of
their obligations to sell Additional Shares to the Underwriters pursuant to
this Agreement.
(b) On the basis of the representations and warranties contained
in this Agreement, and subject to the terms and conditions hereof, (i) each
Selling Stockholder agrees to sell to the Underwriters, at the Purchase Price,
the number of Additional Shares set forth next to such Selling Stockholder's
name on Schedule I (such that the Selling Stockholders together agree to so
sell an aggregate of up to 300,000 Additional Shares); and (ii) the
Underwriters shall have the right to purchase, severally and not jointly, from
time to time as provided in Section 4(b) below, up to an aggregate of up to
300,000 Additional Shares at the Purchase Price. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If
any Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the Representatives may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule II bears to the total number of Firm Shares.
(c) The Company is advised by you that the Underwriters propose to
make a public offering of their prospective portions of the Shares as soon
after the Registration Statement and this Agreement become effective as in your
judgment is advisable. The Company is further advised that the Underwriters
propose to offer the Shares to the public initially at $_____ per share and to
certain dealers selected by you at a price that represents a concession not in
excess of $____ a share under the Public Offering Price, and that any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $____ a share, to any Underwriter or to certain other dealers. The Company
is further advised that after the initial public offering, the price to the
public, the concession and the discount to dealers may be changed.
(d) For a period of 90 days from the date this Agreement becomes
effective, the Company will not, without the prior written consent of EVEREN
Securities, Inc. on behalf of the Underwriters (1)(a) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or (b) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the Common
Stock (whether any such transaction described in subclause (a) or (b) of this
clause (1) is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise); or (2) publicly disclose its intention to
make or enter into any such offer, pledge, sale, contract, purchase, grant,
transfer, disposition or transaction described in clause (1); provided,
however, that the foregoing clauses (1) and (2) shall not apply to the
transactions expressly contemplated hereby and the granting of options for
shares of Common Stock and involving the Shares the sales of shares of
-3-
<PAGE> 5
Common Stock to the Company's directors, officers or employees pursuant to the
exercise of options under the Company stock plans described in the Prospectus.
(e) For a period of 90 days from the date this Agreement becomes
effective, the Company will not, without the prior written consent of EVEREN
Securities, Inc. on behalf of the Underwriters, file a registration statement
relating to shares of capital stock (including the Common Stock) or securities
convertible into or exercisable or exchangeable for, capital stock or warrants,
options or rights to purchase or acquire, capital stock, with the exception of
the filing of Registration Statements on Form S-8 with respect to the Company
stock plans described in the Prospectus.
(f) For a period of 270 days (180 days in the case of Fagundo and
Stutsman) from the date this Agreement becomes effective, each Selling
Stockholder agrees that he or she will not, without the prior written consent
of EVEREN Securities, Inc. on behalf of the Underwriters (1)(a) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or (b) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the Common
Stock (whether any such transaction described in subclause (a) or (b) of this
clause (1) is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise); or (2) publicly disclose his or her
intention to make or enter into any such offer, pledge, sale, contract,
purchase, grant, transfer, disposition or transaction described in clause (1);
provided, however, that the foregoing clauses (1) and (2) shall not apply to
the transactions expressly contemplated hereby involving the Shares or to
transfers of Common Stock to partnerships, limited liability companies, trusts
or similar entities organized for the exclusive benefit of family members of
Selling Stockholders for financial and estate planning purposes so long as (x)
any transferee that receives Common Stock as a result of such transfer shall
agree, in writing delivered to EVEREN Securities, Inc. prior to such transfer,
to be bound by the restrictions set forth in this Agreement and (y) shall be
capable of being, and shall in fact be, so bound.
4. Agreements of the Company and the Selling Stockholders as to
Delivery and Payment. The Company and each Selling Stockholder agrees with
each Underwriter that:
(a) Delivery to the Underwriters of and payment for the
Firm Shares shall be made at 10:00 A.M., New York City time, on the
third full business day (such time and date being referred to as the
"Closing Date") following the date of the initial public offering of
the Firm Shares pursuant to this Agreement as advised to you by the
Company, at such place as you shall designate.
(b) Delivery to the Underwriters of and payment for any
Additional Shares to be purchased by the Underwriters shall be made at
such place as the
-4-
<PAGE> 6
Representatives shall designate, at 10:00 A.M., New York City time, on
such date or dates (individually, an "Option Closing Date" and
collectively, the "Option Closing Dates"), which may be the same as
the Closing Date but shall in no event be earlier than the Closing
Date, as shall be specified in a written notice from the
Representatives to the Company of the Underwriters' determination to
purchase a number, specified in said notice, of Additional Shares.
Any such notice may be given at any time within 30 days after the date
of this Agreement. In connection with any such purchase of Additional
Shares, each of the Underwriters, the Company and the Selling
Stockholders acknowledge and agree that (i) the Underwriters shall
purchase Additional Shares from the Selling Stockholders according to
the priorities set forth in Section 3 above (if applicable), and (ii)
an Option Closing Date may be after the expiration of 30 days after
the date of this Agreement.
(c) The Company and the Selling Stockholders shall
deliver, against payment of the Purchase Price for the Shares so
purchased, such Shares in the form of one or more permanent global
securities in definitive form deposited with Norwest Bank Minnesota,
N.A. (the "Transfer Agent") acting as custodian for The Depositary
Trust Company ("DTC") and registered in the name of Cede & Co., as
nominee for DTC. Payment of the Purchase Price for such Shares shall
be made by the Underwriters to the Company or the Selling Stockholders
(as the case may be), by wire transfer in federal or same day funds,
against delivery of such Shares to the Transfer Agent as custodian for
DTC.
5. Further Agreements of the Company and the Selling
Stockholders.
(I) The Company covenants and agrees with each Underwriter that:
(a) it will, if the Registration Statement has not
heretofore become effective under the Act, file an amendment to the
Registration Statement or, if necessary pursuant to Rule 430A under
the Act, a post- effective amendment to the Registration Statement, as
soon as practicable after the execution and delivery of this
Agreement, and will use its best efforts to cause the Registration
Statement or such post-effective amendment to become effective at the
earliest possible time; and the Company will comply fully and in a
timely manner with the applicable provisions of Rule 424(b) and Rule
430A under the Act;
(b) it will advise you promptly and, if requested by you,
confirm such advice in writing, (i) when the Registration Statement
has become effective, if and when the Prospectus is sent for filing
pursuant to Rule 424 under the Act and when any post-effective
amendment to the Registration Statement becomes effective, (ii) of the
receipt of any comments from the Commission that relate to the
Registration Statement or requests by the Commission for amendments to
the Registration Statement or amendments or supplements to the
Prospectus or for additional information, (iii) of the issuance by the
-5-
<PAGE> 7
Commission of any stop order suspending the effectiveness of the
Registration Statement, or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction, or the initiation or,
to the best knowledge of the Company, threat of any proceedings for
such purpose by the Commission or any state securities commission or
other regulatory authority, and (iv) of the happening of any event or
information becoming known during the period referred to in paragraph
(e) below that makes any statement of a material fact made in the
Registration Statement untrue or that requires the making of any
additions to or changes in the Registration Statement (as amended or
supplemented from time to time) in order to make the statements
therein not misleading or that makes any statement of a material fact
made in the Prospectus (as amended or supplemented from time to time)
untrue or that requires the making of any additions to or changes in
the Prospectus (as amended or supplemented from time to time) in order
to make the statements therein, not misleading; if at any time the
Commission shall issue or institute proceedings (or threaten to
institute any such proceedings) to issue any stop order suspending the
effectiveness of the Registration Statement, or any state securities
commission or other regulatory authority shall issue or institute
proceedings (or threaten to institute proceedings) to issue an order
suspending the qualification or exemption of the Shares under any
state securities or Blue Sky laws, the Company shall use its best
efforts to obtain the withdrawal or lifting of such order at the
earliest possible time;
(c) it will furnish to you without charge one signed copy
of the Registration Statement as first filed with the Commission and
of each amendment to it, including all exhibits filed therewith, and
will furnish to you and each Underwriter designated by you such number
of conformed copies of the Registration Statement as so filed and of
each amendment to it, without exhibits, as you may reasonably request;
(d) it will not file any amendment or supplement to the
Registration Statement, whether before or after the time when it
becomes effective, or make any supplement to the Prospectus of which
you shall not previously have been advised and provided a copy a
reasonable period of time prior to the filing thereof or to which you
or your counsel shall reasonably object; and it will prepare and file
with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or supplement to the
Prospectus that may be necessary or advisable in connection with the
distribution of the Shares by you in your or your counsel's opinion,
and will use its best efforts to cause the same to become effective as
promptly as possible;
(e) promptly after the Registration Statement becomes
effective, and from time to time thereafter for such period as a
prospectus is required by the Act to be delivered in connection with
the sales by an underwriter or a dealer (in the opinion of your
counsel), it will furnish to each Underwriter and dealer without
charge as many copies of the Prospectus (and any amendment or
supplement of the Prospectus) as such Underwriter or dealer may
reasonably
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<PAGE> 8
request for the purposes contemplated by the Act; the Company consents
to the use of the Prospectus and any amendment or supplement thereto
by any Underwriter or any dealer, both in connection with the offering
or sale of the Shares and for such period of time thereafter as the
Prospectus is required by the Act to be delivered in connection
therewith;
(f) if during the period specified in paragraph (e) any
event shall occur or information become known as a result of which in
the opinion of your counsel it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in
light of the circumstances existing as of the date the Prospectus is
delivered to a purchaser, not misleading, or it is necessary to amend
or supplement the Prospectus to comply with any law, it will forthwith
prepare and, subject to paragraph 5(d) above, file with the Commission
at the sole expense of the Company an appropriate amendment or
supplement to the Prospectus so that the statements of any material
facts in the Prospectus, as so amended and supplemented, will not in
light of the circumstances when it is so delivered, be misleading, or
so that the Prospectus will comply with the Act and it will furnish to
the Underwriters and to such dealers as the Underwriters shall
specify, at the sole expense of the Company, such number of copies
thereof as such Underwriters or dealers may reasonably request;
(g) Without limiting the generality of the foregoing
clause (f), the Company acknowledges and agrees that if, prior to the
exercise in full or termination or expiration of the option to
purchase the Additional Shares, the Company incurs any liability or
obligation, direct or contingent, or enters into any material
transaction, or otherwise takes any action or experiences any change
in situation or circumstances which may render the Prospectus (as it
then exists) misleading, the Company shall (i) promptly notify EVEREN
Securities, Inc. in writing of such event, such notice to explain the
nature and scope of such event in reasonable detail insofar as
possible, and (ii) forthwith prepare and, subject to paragraph 5(d)
above, file with the Commission at the sole expense of the Company an
appropriate amendment to the Registration Statement or supplement to
the Prospectus, and (iii) at the sole expense of the Company,
reproduce and distribute such amendment or supplement to such persons
or institutions as EVEREN Securities, Inc. shall request;
(h) prior to any public offering of the Shares, it will
cooperate with you and counsel for the Underwriters in connection with
the filing of notices of the offer and sale of the Shares by the
several Underwriters and by dealers under the state securities or Blue
Sky laws of such jurisdictions as you may request (provided, that the
Company shall not be obligated to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified or to take any action
which would subject it to general consent to service of process in any
jurisdiction in which it is not now so subject);
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<PAGE> 9
(i) it will not acquire any capital stock of the Company
prior to the exercise in full or termination or expiration of the
option to purchase the Additional Shares nor will the Company declare
or pay any dividend or make any other distribution upon the Common
Stock payable to stockholders of record on a date prior to the
exercise in full or termination or expiration of the option to
purchase the Additional Shares, except in either case as contemplated
by the Prospectus;
(j) no later than the 90th day after then end of the
Company's fourth fiscal quarter beginning after the date of this
Agreement, the Company will make generally available to its security
holders and furnish to the Underwriters (i) a copy of its Form 10K for
its fiscal year ended with such quarter, or (ii) an earnings statement
covering a period of at least 12 months beginning after the "effective
date" (as defined in Rule 158 under the Act) of the Registration
Statement (but in no event commencing later than 90 days after such
date) that will satisfy the provisions of Section 11(a) of the Act and
Rule 158 thereunder;
(k) during the period of five years after the date of
this Agreement, it will furnish to you a copy (i) as soon as
practicable after the filing thereof, of each report filed by the
Company with the Commission, any securities exchange or the National
Association of Securities Dealers, Inc. ("NASD"); (ii) as soon as
practicable after the release thereof, of each material press release
in respect of the Company; (iii) as soon as available, of each report
of the Company mailed to stockholders; and (iv) as soon as available,
such other publicly available information concerning the Company as
you may reasonably request;
(l) whether or not the transactions contemplated hereby
are consummated or this Agreement becomes effective as to all of its
provisions or is terminated, to pay all costs, fees, expenses and
taxes incident to the performance by the Company of its obligations
hereunder, including (i) the preparation, printing, filing and
distribution under the Act of the Registration Statement (including
financial statements and exhibits), each preliminary Prospectus and
all amendments and supplements to any of them prior to or during the
period specified in paragraph (e) above of this Section 5, (ii) the
word processing, reproduction and distribution of the Blue Sky Survey
and any related memoranda, correspondence and other documents prepared
and delivered by the Underwriters or their counsel (including in each
case any disbursements of counsel for the Underwriters relating to
such preparation and delivery), (iii) the filing of notices of the
offer and sale of the Shares by the several Underwriters and by
dealers under the securities or Blue Sky laws of the several states
(including in each case the fees and disbursements of counsel for the
Underwriters relating to such filings), (iv) the filings and clearance
with the NASD in connection with the offering and sale of the Shares
(but excluding the fees, but not disbursements, of counsel for the
Underwriters relating to such filings and clearance), (v) the listing
of the Shares on the Nasdaq National
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<PAGE> 10
Market ("Nasdaq Stock Market") to the extent not already so listed,
(vi) furnishing such copies of the Registration Statement, each
Preliminary Prospectus, the Prospectus and all amendments and
supplements thereto as may reasonably be requested for use in
connection with the offering or sale of the Shares by the Underwriters
or by dealers to whom the Shares may be sold, (vii) obtaining the
opinions to be provided pursuant to Sections 8(f) and 8(g) of this
Agreement and (viii) the performance by the Company of all of its
other obligations under this Agreement; if the sale of the Shares
provided for herein is not consummated because the Underwriters
exercise their right to terminate this Agreement pursuant to Section 9
hereof and any of the following have occurred during the term of this
Agreement: (a) there has been any material adverse change in the
condition (financial or otherwise), earnings, affairs or business of
the Company, or any event or events that could reasonably be expected
to result in such a material adverse change, (b) the Company or any of
the Selling Stockholders shall refuse or be unable to comply with any
provision hereof (except as the result of a breach of this Agreement
by the Underwriters), the Company will promptly reimburse the
Underwriters upon demand for all reasonable out-of-pocket expenses
(including the fees and disbursements of counsel for the Underwriters)
that shall have been incurred by the Underwriters in connection with
the proposed purchase and sale of Shares;
(m) it will use all of the net proceeds received by it
from the sale of the Shares in the manner specified in the Prospectus;
(n) if, at the time of effectiveness of the Registration
Statement, any information shall have been omitted therefrom in
reliance upon Rule 430A, then immediately following the execution and
delivery of this Agreement, it will prepare, and file or transmit for
filing with the Commission in accordance with such Rule 430A and Rule
424(b), copies of an amended prospectus, or, if required by such Rule
430A, a post-effective amendment to the Registration Statement
(including an amended prospectus), containing all information so
omitted;
(o) it will cause the Shares to be listed, subject to
notice of issuance or sale, on the Nasdaq Stock Market; it will comply
with all registration, filing and reporting requirements of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") and
the Nasdaq Stock Market; and
(p) it will use its best efforts to do and perform all
things required to be done and performed under this Agreement by it
prior to or after the Closing Date or any Option Closing Date, as the
case may be, and to satisfy all conditions precedent to the delivery
of the Shares.
(II) Each Selling Shareholder covenants and agrees with each
Underwriter and the Company that:
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<PAGE> 11
(a) he or she will advise you promptly and, if requested
by you, confirm such advice in writing, of the happening of any event
or information becoming known during the period referred to in
paragraph (e) above that makes any statement of a material fact made
in the Registration Statement with respect to his or her ownership of
Shares untrue or that requires the making of any additions to or
changes in the Registration Statement (as amended or supplemented from
time to time) with respect to his or her ownership of Shares in order
to make the statements therein with respect to his or her ownership of
Shares not misleading or that makes any statement of a material fact
made in the Prospectus (as amended or supplemented from time to time)
untrue or that requires the making of any additions to or changes in
the Prospectus (as amended or supplemented from time to time) in order
to make the statements therein with respect to his or her ownership of
Shares, not misleading;
(b) he or she will cooperate with you and counsel for the
Underwriters in connection with the filing of notices for offer and
sale of the Shares by the several Underwriters and by dealers under
the state securities or Blue Sky laws of such jurisdictions as you may
request;
(c) he or she will reimburse the Company for a portion of
the Company's costs and expenses described in clause (l) above
(including reimbursement by the Company of certain costs and expenses
incurred by the Underwriters) pro rata in proportion to the number of
Shares being sold by him or her in the Offering;
(d) prior to or contemporaneously with the execution of
this Agreement, he or she will (i) execute and deliver a custody
agreement, power of attorney, stock power, stockholder certificate,
payment authorization and such other documents as may reasonably be
required by the Company or the Underwriters in connection with the
sale of Shares by the Selling Stockholders pursuant hereto, and (ii)
deliver the certificates evidencing all of the Shares to be sold by
him or her pursuant to this Agreement, duly endorsed in blank, into
the custody of the Transfer Agent to hold pending the consummation of
the transactions contemplated hereby; and
(e) he or she will use his or her best efforts to do and
perform all things required to be done and performed under this
Agreement by it prior to or after the Closing Date or any Option
Closing Date, as the case may be, and to satisfy all conditions
precedent to the delivery of the Shares.
6. Representations and Warranties.
(a) the Company represents and warrants to each
Underwriter as of the date hereof, the Closing Date and each Option
Closing Date that:
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<PAGE> 12
(i) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus
relating to the proposed offering of the Shares nor instituted
or threatened any proceedings for that purpose. The
Registration Statement, on the date it became or becomes
effective, each Preliminary Prospectus, on the date of the
filing thereof with the Commission, and the Prospectus and any
amendment or supplement thereto, on the date of filing thereof
with the Commission (or if not filed, on the date provided by
the Company to the Underwriters in connection with the
offering and sale of the Shares) and at the Closing Date and
each Option Closing Date conformed or will conform with the
requirements of the Act. The Registration Statement, on the
date it became or becomes effective, did not or will not
contain an untrue statement of material fact or omit to state
a material fact required to be stated therein or necessary to
make the statements therein not misleading. Each Preliminary
Prospectus, on the date of the filing thereof with the
Commission, and the Prospectus and any amendment or supplement
thereto, on the date of filing thereof with the Commission (or
if not filed, on the date provided by the Company to the
Underwriters in connection with the offering and sale of the
Shares) and at the Closing Date and each Option Closing Date
did not and will not include an untrue statement of material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading. The foregoing shall not apply to statements in or
omissions from the Registration Statement and the Prospectus
made or omitted in reliance upon, and in conformity with,
information relating to the Underwriters furnished in writing
to the Company by or on behalf of the Underwriters with your
consent expressly for use therein. The Company and the
Selling Stockholders hereby acknowledge for all purposes under
this Agreement that the written information furnished to the
Company by or on behalf of the Underwriters for use in the
preparation of the Registration Statement or the Prospectus or
any amendment or supplement thereto ("Underwriters'
Information") consists only of (A) the statements set forth
under the caption "Underwriting" in the Prospectus, and (B)
the stabilization and passive market- making legends on the
gate-fold of the Prospectus and (C) footnotes 1 and 3 and the
last paragraph of text on the cover page of the Prospectus.
(ii) The Company has been duly incorporated and is
a validly existing corporation in good standing under the laws
of Delaware, with full corporate power and authority to own or
lease its properties and assets and to conduct its business as
described in the Registration Statement and the Prospectus and
is duly qualified to do business in each jurisdiction in which
it owns or leases real property or in which the conduct of its
business or the ownership or leasing of property requires such
qualification, except where the failure to be so qualified,
either individually or in the aggregate, would not have a
material adverse effect
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<PAGE> 13
on the condition (financial or otherwise), business, assets,
prospects, net worth or results of operations of the Company
taken as a whole (a "Material Adverse Effect"). Other than
ACMI Canada, Inc., a Colorado corporation ("ACMI Canada"), the
Company has no subsidiaries and has never had a subsidiary.
All of the issued and outstanding capital stock of ACMI Canada
is owned directly by the Company. ACMI Canada does not now
conduct, and never has conducted, any business and does not
now own, and never has owned, any material assets.
(iii) The capitalization of the Company is, and
upon consummation of the transactions contemplated hereby will
be, as set forth in the Registration Statement and the
Prospectus under the caption "Capitalization." All of the
outstanding shares of capital stock of the Company have been
duly authorized and are validly issued, are fully paid and
non-assessable and conform to the description thereof in the
Registration Statement and the Prospectus and were not issued
in violation of any preemptive rights or other rights to
subscribe for or purchase securities. Except as set forth in
the Registration Statement and the Prospectus with respect to
the Option Plan and Directors' Plan (as defined in the
Prospectus) and the 125,000 shares of Common Stock issuable
upon the exercise of those certain warrants described in
clause (ii) of footnote 1 under the caption "Capitalization"
in the Prospectus (the "Warrants"), no options, warrants or
other rights to purchase from the Company, agreements or other
obligations of the Company to issue or other rights to convert
any obligation into, or exchange any securities for, shares of
capital stock of or ownership interests in the Company are
outstanding. The description of the Option Plan, the
Directors' Plan, the Warrant and the other options or rights
granted and exercised thereunder, as set forth in the
Registration Statement and the Prospectus, accurately and
fairly presents the information required to be shown under the
Act with respect to such options, warrants and rights.
(iv) Subsequent to the respective dates as of
which information is given in the Registration Statement and
Prospectus, and except as described therein, (A) the Company
has not incurred any material liabilities or obligations,
direct or contingent, or entered into any material
transactions not in the ordinary course of business, (B) the
Company has not purchased any of its outstanding capital stock
or declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock or otherwise and
(C) there has not been any material adverse change in the
Company's condition (financial or otherwise), business,
affairs, prospects or results of operations or any material
change in the Company's capital stock, short-term debt or
long-term debt.
(v) The Shares to be sold by the Company pursuant
to this Agreement have been duly and validly authorized and,
when issued,
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<PAGE> 14
delivered and paid for pursuant to this Agreement, will be
validly issued, fully paid and nonassessable, and will conform
to the description thereof contained in the Prospectus.
(vi) This Agreement has been duly authorized,
executed and delivered by the Company and is a legal, valid
and binding agreement of the Company enforceable in accordance
with its terms, except (i) as the enforceability hereof may be
limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting creditors' rights generally
and by general equity principles, and (ii) that rights to
indemnity or contribution hereunder may be limited by federal
or state laws or the public policy underlying such laws.
(vii) The Company is not in violation of its
Certificate of Incorporation or by-laws. The Company is not
in violation of or in breach of or in default in (nor has any
event occurred that with notice or lapse of time, or both,
would be a breach of or a default in) the performance of any
obligation, agreement or condition contained in any agreement,
lease, contract, permit, license, franchise agreement,
mortgage, loan agreement, debenture, note, deed of trust,
bond, indenture or other evidence of indebtedness or any other
instrument or obligation (collectively, "Obligations and
Instruments") by which it or any of its properties or assets
is bound or affected (except for such contraventions or
defaults as would not, individually or in the aggregate, have
a Material Adverse Effect). The Company is not in violation
of any statute, judgment, decree, order, Rule or regulation
(collectively, "Laws") applicable to the Company or any of its
properties or assets that, alone or together with other
violations of Laws, would result in a Material Adverse Effect.
The Company has not been charged with and, to the best
knowledge of the Company (it being understood that, for the
purposes of this Agreement, the "knowledge" of the Company
includes the actual knowledge of Jerome M. Lapin, W. John
Cash, Randall J. Fagundo and Abbe M. Stutsman), is not under
investigation with respect to any material violation of any
such Laws. To the best knowledge of the Company, no other
party under any contract or other agreement to which the
Company is a party is in material default thereunder except
for such defaults as would not, individually or in the
aggregate, result in a Material Adverse Effect.
(viii) The execution, delivery and performance of
this Agreement and delivery of the Shares by the Company and
compliance by the Company with all the provisions hereof and
the consummation of the transactions contemplated hereby and
as described in the Prospectus under the caption "Use of
Proceeds" will not, alone or upon notice or the passage of
time or both (A) require any consent, approval, authorization
or other order of any court, regulatory body, administrative
agency or other governmental body or third party (except such
as may be required
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<PAGE> 15
under the Act and the securities or Blue Sky laws of the
various states or by the NASD), (B) result in the creation or
imposition of any lien, charge or encumbrance upon any of the
properties or assets of the Company pursuant to the terms and
provisions of any Obligation or Instrument, (C) conflict with
or constitute a breach or default under any Obligation or
Instrument to which the Company is a party or by which the
Company or any of its properties or assets is bound, (except
for such conflicts, breaches or defaults as would not,
individually or in the aggregate, have a Material Adverse
Effect), or (D) assuming compliance with the Act and all
applicable state securities or Blue Sky laws, violate or
conflict with any Laws applicable to the Company or any of its
properties or assets (except for such violations or conflicts
as could not, individually or in the aggregate, have a
Material Adverse Effect). No action, suit or proceeding
before any court or arbitrator or any governmental body,
agency or official (domestic or foreign) is pending against
or, to the knowledge of the Company, threatened against the
Company, that, if adversely determined, could reasonably be
expected to in any manner invalidate this Agreement.
(ix) Except as set forth in the Prospectus, there
is no action, suit, proceeding, inquiry or investigation,
governmental or otherwise before any court, arbitrator or
governmental agency or body (collectively, "Proceedings")
pending to which the Company is a party or to which any of its
properties or assets are subject, that, if determined
adversely to the Company, might, individually or in the
aggregate, result in a Material Adverse Effect, or that might
materially and adversely affect the properties or assets
thereof, or that seeks to restrain, enjoin, prevent the
consummation of or otherwise challenge the issuance or sale of
any of the Shares to be sold hereunder, and, to the best
knowledge of the Company after due inquiry of appropriate
Company personnel, no such Proceedings are threatened. There
is no contract, document, agreement or transaction to which
the Company is a party, or that (to the Company's knowledge)
involved or involves the Company or any of its properties or
assets that are required to be described in or filed as
exhibits to the Registration Statement or the Prospectus by
the Act that have not been so described or filed. No action
has been taken with respect to the Company, and, to the best
knowledge of the Company, no statute, Rule or regulation or
order has been enacted, adopted or issued by any governmental
agency that suspends the effectiveness of the Registration
Statement, prevents or suspends the use of any Preliminary
Prospectus or the Prospectus or suspends the sale of the
Shares in any jurisdiction referred to in Section 5(g) hereof.
No injunction, restraining order or order of any nature by a
federal or state court of competent jurisdiction has been
issued with respect to the Company that might prevent the
issuance of the Shares, in any manner invalidate this
Agreement, suspend the effectiveness of the Registration
Statement, prevent or suspend the use of any Preliminary
Prospectus or
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<PAGE> 16
the Prospectus or suspend the sale of the Shares in any
jurisdiction referred to in Section 5(g) hereof. Every
request of the Commission, or any securities authority or
agency of any jurisdiction, for additional information (to be
included in the Registration Statement or the Prospectus or
otherwise) has been complied with in all material respects.
(x) The Company has not violated any foreign,
federal, state or local law or regulation relating to the
protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), nor any foreign, Federal,
state or local law relating to discrimination in the hiring,
promotion or pay of employees nor any applicable foreign,
Federal or state wages and hours laws, nor any provisions of
the Employee Retirement Income Security Act of 1974, as
amended or the rules and regulations promulgated thereunder or
similar foreign laws, that, in each case or in the aggregate,
might result in a Material Adverse Effect. None of the
property leased by the Company is contaminated with any waste
or hazardous substances (except that certain leased locations
may contain asbestos or certain cleaning materials, the
presence of which will not result in a Material Adverse
Effect), nor may the Company be deemed an "owner or operator"
of a "facility" or "vessel" that owns, possesses, transports,
generates, discharges or disposes of a "hazardous substance"
as those terms are defined in Section 9601 of the
Comprehensive Response Compensation and Liability Act of 1980,
U.S.C. Section 9601 et seq. (except that the Company disposes
in the ordinary course of its business ordinary household
products that may be classified as or contain "hazardous
substances". The disposal of such products (A) is in material
compliance with all applicable laws as of the date hereof and
(B) has not and will not result in a Material Adverse Effect).
(xi) The Company has such permits, licenses,
franchises and authorizations of governmental or regulatory
authorities or third parties ("Permits"), including, without
limitation, under any applicable Environmental Laws, as are
necessary to own, lease and operate its properties and assets
and to conduct its businesses, except where such failures to
have any such Permit which would not, individually or in the
aggregate, have a Material Adverse Effect. The Company has
fulfilled and performed all of its material obligations with
respect to such Permits and no event has occurred that allows,
or after notice or lapse of time, or both would allow,
revocation or termination thereof or result in any other
material impairment of the rights of the holder of any such
Permit. Except as described in the Prospectus, such Permits
contain no restrictions that are materially burdensome to the
Company.
(xii) The Company is not, and does not intend to
conduct its business in a manner in which it would become, an
"investment company" or (to the Company's best knowledge) a
company
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<PAGE> 17
"controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended (the
"Investment Company Act").
(xiii) Except as otherwise set forth in the
Prospectus, the Company has good and marketable title, free
and clear of all liens, claims, encumbrances and restrictions
(except liens for taxes not yet due and payable) to all
property and assets described in the Registration Statement as
being owned by it. All leases to which the Company is a party
are subsisting, valid and binding and no default of the
Company or, as applicable, any of the Selling Stockholders or
their respective affiliates or, to the best knowledge of the
Company and the Selling Stockholders, any other person has
occurred or is continuing thereunder that might result in a
Material Adverse Effect. The Company enjoys peaceful and
undisturbed possession under all such leases to which the
Company is a party as lessee with such exceptions as do not
materially interfere with the use made thereof by the Company.
(xiv) The Company maintains reasonably adequate
insurance for the conduct of its business in accordance with
prudent business practices (and the insurance maintained by
retailers generally) with reputable third-party insurers.
(xv) The Company is not in violation of any
foreign, Federal, state or local law relating to
discrimination in the hiring, promotion or pay of employees
nor any applicable foreign, Federal or state wages and hours
laws, nor any provisions of the Employee Retirement Income
Security Act of 1974, as amended, or the rules and regulations
promulgated thereunder ("ERISA") or similar foreign laws, the
violation of which in each case or in the aggregate would
result in a Material Adverse Effect. No "reportable event"
(as defined in ERISA) has occurred with respect to any
"pension plan" (as defined in ERISA) which in each case or in
the aggregate would result in a Material Adverse Effect. The
Company has not incurred any material liability under (i)
Title IV of ERISA with respect to the termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended.
(xvi) Except as disclosed in the Registration
Statement and the Prospectus, no labor dispute with the
employees of the Company exists, or to the best knowledge of
the Company, is imminent, that could result in a Material
Adverse Effect. The Company does not know of any existing or
imminent labor disturbance by the employees of any of its
principle suppliers, customers, manufacturers or contractors
that could reasonably be expected to result in a Material
Adverse Effect.
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<PAGE> 18
(xvii) To the best knowledge of the Company, KPMG
Peat Marwick LLP is an independent public accounting firm
with respect to the Company as required by the Act.
(xviii) The financial statements of the Company,
together with related notes of the Company included in the
Registration Statement and the Prospectus, are accurate and
present fairly the financial position, results of operations
and cash flows of the Company at the indicated dates and for
the indicated periods. Such financial statements have been
prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied throughout the
periods involved, and all adjustments necessary for a fair
presentation of results for such periods have been made and
any unaudited financial statements have been prepared on a
basis substantially consistent with that of the audited
financial statements included in the Registration Statement
and the Prospectus. The summary and selected financial and
operating data included in the Registration Statement and the
Prospectus presents fairly the information shown therein and
have been compiled on a basis consistent with the audited and
any unaudited financial statements, as the case may be,
included therein. The pro forma information included in the
Prospectus present fairly the information shown therein, have
been prepared in accordance with GAAP and the Commission's
rules and guidelines with respect to pro forma financial
statements and other pro forma information, and has been
properly compiled on the pro forma basis described therein,
and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate
under the circumstances.
(xix) No holder of any security of the Company has
any right to require inclusion of any such security in the
Registration Statement (except for the holder of the Warrants
which did not perfect its registration rights after due notice
from the Company). There are no preemptive rights with
respect to the offering being made by the Prospectus.
(xx) The Company has filed or caused to be filed,
or has properly filed extensions for, all foreign, federal,
state and local income, value added and franchise tax returns
and has paid all taxes and assessments shown thereon as due,
except for such taxes and assessments as are disclosed or
adequately reserved against and that are being contested in
good faith by appropriate proceedings, promptly instituted and
diligently conducted. All material tax liabilities are
adequately provided for on the books of the Company, and there
is no material tax deficiency that has been or might be
asserted against the Company that is not so provided for.
During the time the Company has elected to be treated as an
"S" Corporation under the Internal Revenue Code, as amended
from time to time (the "Code"), and any applicable
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<PAGE> 19
state law, the Company's election of such status was validly
made, and at all times until October 12, 1995 the Company
qualified continuously for treatment as an S Corporation under
the Code. Prior to October 12, 1995, the Company never (A)
was an ineligible corporation as defined in Section 1361(b)(2)
of the Code (i.e., the Company never was (1) a member of an
affiliated group (determined under Code Section 1504 without
regard to the exceptions contained in subsection (b) thereof,
(2) a financial institution to which Code section 585 applies
(or would apply but for subsection (c) thereof) or to which
Code section 593 applies, (3) an insurance company subject to
tax under subchapter L of the Code, (4) a corporation to which
an election under Code Section 936 applies, or (5) a DISC or
former DISC); (B) had more than 35 stockholders; (C) had as a
stockholder (other than an estate and other than domestic
trusts described in Code section 1361(c)(2), including a
domestic qualified Subchapter S trust) a person who is not an
individual; (D) had a nonresident alien as a stockholder; or
(E) had more than one class of stock outstanding or authorized
or issued debt convertible into capital stock or debt on which
the payment of interest is contingent on profits of the
Company or on the Company's discretion. Prior to October 12,
1995, there was no agreement to redeem or purchase stock of
the Company at the time of a stockholder's death, divorce,
disability or termination of employment (such as buy-sell
agreements among the stockholders or similar option
arrangements) that establishes a purchase price that, at the
time the agreement was entered into, was significantly in
excess of or below the fair market value of the stock of the
Company. A Form 2553 was properly completed and filed with
the Internal Revenue Service within the 15th day of the 3rd
month of the Company's first taxable year; and such Form 2553
was signed by a duly-authorized signatory of the Company's
Form 1120S and all stockholders of the Company (including all
spouses of the stockholders) consented to the Company's S
corporation election by duly executing the Form 2553 filed
with the Internal Revenue Service. The Selling Stockholders
have no claims against the Company with respect to taxes paid
by them on the Company's income during the time the Company
elected to receive "S" corporation treatment under the Code.
(xxi) The Company owns or possesses, or can acquire
on reasonable terms, the patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and
other unpatented and or unpatentable proprietary or
confidential information, systems or procedures), trademarks,
service marks and trade names (collectively, "Patents and
Proprietary Rights") currently employed by it in connection
with the business it now operates except where the failure to
so own, possess or acquire such Patents and Proprietary Rights
would not have a Material Adverse Effect. The Company has not
received any notice and is not otherwise aware of any
infringement of or conflict with asserted rights of
others with respect to any Patent or Proprietary Rights
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<PAGE> 20
that, if the subject of any unfavorable decision, ruling or
finding, singly or in the aggregate, could result in a
Material Adverse Effect.
(xxii) The Company has not taken and will not take,
directly or indirectly, any action designed to or which has
constituted or that might reasonably be expected to cause or
result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.
(xxiii) Neither the Company nor, to the best
knowledge of the Company and the Selling Stockholders, any
employee or agent of the Company has made any payment of funds
of the Company or received or retained any funds in violation
of any law, Rule or regulation (including, without limitation,
the Foreign Corrupt Practices Act) or of a character required
by the Act to be disclosed in the Prospectus. The Company has
not, at any time during the past five years, (1) made any
unlawful contributions to any candidate for any political
office, or failed fully to disclose any contribution in
violation of law, or (2) made any unlawful payment to state,
federal or foreign government officer or officers, or other
person charged with similar public or quasi-public duty.
(xxiv) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with
management's authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with
management's authorization, and (iv) the recorded
accountability for inventory is compared with the existing
inventory at reasonable intervals and appropriate action is
taken with respect to any differences.
(xxv) There is no material contract, document,
agreement, transaction or relationship of a character required
by the Act to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described or filed as
required.
(xxvi) Other than as contemplated in this Agreement,
the Company has not incurred any liability for any finder's or
broker's fee or agent's commission in connection with the
execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby.
(xxvii) The Company has been subject to the
requirements of Section 12 or 15(d) of the Exchange Act and
has filed in a timely
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<PAGE> 21
manner all reports and other the material required to be filed
pursuant to Sections 13, 14 or 15(d) of the Exchange Act since
October 12, 1995 and, if the Company has used Rule 12b-25(b)
under the Exchange Act with respect to a report or a portion
of any such report, that report or portion thereof has
actually been filed within the time period prescribed by that
rule. All such reports and other materials filed pursuant to
the Exchange Act were, at the time of their filing, complete
and accurate in all material respects.
(xxviii) The Company has not, since the end of its
last fiscal year for which certified financial statements of
the Company were included in a report filed pursuant to
Section 13(a) or 15(d) of the Exchange Act: (a) failed to pay
any dividend or sinking fund installment on preferred stock;
or (b) defaulted (i) on any installment or installments of
indebtedness for borrowed money, or (ii) on any rental on one
or more long term leases which defaults in the aggregate are
material to the financial position of the Company.
(b) Each Selling Stockholder severally, but not jointly,
represents and warrants to, and agrees with, the Underwriters and the
Company that:
(i) Such Selling Stockholder has all requisite
power to enter into this Agreement and to sell, assign,
transfer and deliver to the Underwriters the Shares to be sold
by such Selling Stockholder hereunder in accordance with the
terms of this Agreement. This Agreement has been duly
executed and delivered by such Selling Stockholder and
constitutes and will constitute the legal, valid and binding
obligation of such Selling Stockholder enforceable against
such Selling Stockholder in accordance with its terms, except
(i) as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the creditors' rights generally and by
general equity principles and (ii) that rights to indemnity or
contribution hereunder may be limited by federal or state laws
or the public policy underlying such laws.
(ii) Certificates in negotiable form, endorsed in
blank or accompanied by blank stock powers duly executed, with
signatures appropriately guaranteed, representing the Shares
to be sold by such Selling Stockholder hereunder have been
deposited with the Transfer Agent for the purpose of delivery
pursuant to this Agreement. Such Selling Stockholder agrees
that each of the Shares represented by the certificates on
deposit with the Transfer Agent is subject to the interests of
the Underwriters hereunder, that the arrangements made for
such custody and that the obligations of such Selling
Stockholder hereunder shall not be terminated, except as
provided in this Agreement, by any act of such Selling
Stockholder, by operation of law or otherwise, whether in the
case of a trust or estate which is a Selling Stockholder by
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<PAGE> 22
the death of the trustee or trustees or the executor or
executors or any beneficiary or the termination of such trust
or estate, or in the case of a foundation which is a Selling
Stockholder by its liquidation or dissolution or by the
occurrence of any other event. If any trustee, executor or
beneficiary should die or become incapacitated or any such
trust should be terminated, or if any foundation Selling
Stockholder shall liquidate or dissolve, or if any other event
should occur, before the delivery of such Shares hereunder,
the certificates for such Shares deposited with the Transfer
Agent shall be delivered by the Transfer Agent in accordance
with the respective terms and conditions of this Agreement as
if such death, incapacity, termination, liquidation or
dissolution or other event had not occurred, regardless of
whether or not the Transfer Agent shall have received notice
thereof.
(iii) Such Selling Stockholder is the lawful record
and beneficial owner of the Shares to be sold by such Selling
Stockholder hereunder. Upon sale and delivery of, and payment
for, such Shares, as provided herein, such Selling Stockholder
will convey good and marketable title to such Shares, free and
clear of any security interests, liens, encumbrances,
equities, claims, options, rights of third parties or other
defects.
(iv) Such Selling Stockholder has reviewed the
Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) and the Registration
Statement, and the information regarding such Selling
Stockholder set forth therein under the caption "Principal and
Selling Stockholders" is complete and accurate.
(v) The sale by such Selling Stockholder of
Shares pursuant hereto is not prompted by any adverse
information concerning the Company that is not set forth in
the Registration Statement or the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus). Such Selling Stockholder has not taken and will
not take, directly or indirectly, any action designed to, or
that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares
pursuant to the distribution contemplated by this Agreement
and, other than as permitted by the Act, such Selling
Stockholder has not distributed, nor will such Selling
Stockholder distribute, any prospectus or other offering
material in connection with the offering and sale of the
Shares.
(vi) The sale of the Shares to the Underwriters by
such Selling Stockholder pursuant to this Agreement, the
compliance by such Selling Stockholder with the other
provisions of this Agreement and the consummation of the other
transactions herein contemplated do not (A) require the
consent, approval, authorization, registration or
qualification
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<PAGE> 23
of or with any governmental authority, except such as have
been obtained, such as may be required under state and foreign
Blue Sky laws and, if the Registration Statement is not
effective under the Securities Act as of the time of execution
hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Securities Act and the
Exchange Act, or (B) result in a breach or violation of any of
the terms and provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any of such
Selling Stockholder's properties are bound, or any statute or
any judgment, decree, order, rule or regulation of any court
or other governmental authority or any arbitrator applicable
to such Selling Stockholder.
(vii) None of the Selling Stockholders nor any
trustee or beneficiary of the Selling Stockholders is
affiliated as a director, officer, partner, stockholder, or
otherwise with any securities broker or dealer which is a
member of the NASD or any other organization that owns or
controls any member of the NASD.
(c) Any certificate signed by any officer of the Company
and delivered to you or to counsel for the Underwriters shall be
deemed a representation and warranty made by the Company to each
Underwriter as to the matters covered thereby and shall be deemed
incorporated herein in its entirety and shall be effective as if such
representation and warranty were made herein; and any certificate
signed by any Selling Stockholder as such and delivered to you or to
counsel for the Underwriters shall also be deemed a representation and
warranty by such Selling Stockholder to each Underwriter as to the
matters covered thereby and shall also be deemed incorporated herein
in its entirety and shall be effective as if such representation and
warranty were made herein.
7. Indemnification.
(a) The Company agrees and, subject to Section 7(e)
below, the Selling Stockholders, severally and not jointly agree, to
indemnify and hold harmless each of the Underwriters and each person,
if any, who controls each of the Underwriters within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act (the
"indemnified parties") from and against any and all losses, claims,
damages, liabilities and judgments caused by, arising out of, related
to or based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), including the information deemed to be part of
the Registration Statement at the time of effectiveness pursuant to
Rule 430A, if applicable, or the Prospectus or any Preliminary
Prospectus or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading;
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<PAGE> 24
provided, however, that neither the Company nor any Selling
Stockholder shall be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon
an untrue statement or omission made or omitted in reliance upon and
in conformity with any of the Underwriters' Information. In addition
and without limitation of the foregoing, the Company agrees to
indemnify and hold harmless each of the Underwriters and each such
indemnified party from and against any and all losses, claims,
damages, liabilities and judgments caused by, arising out of, related
to or based upon (i) any breach of this Agreement by Selling
Stockholders Fagundo or Stutsman, or (ii) any breach of Sections 3(b)
or 4(b) of this Agreement by any other Selling Stockholder.
(b) In case any action shall be brought against any of
the indemnified parties, based upon any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or
supplement thereto and with respect to which indemnity may be sought
against the Company or any Selling Stockholder, such indemnified
parties shall promptly notify the Company (and the Selling
Stockholders, care of the Company) in writing (but the failure so to
notify shall not relieve the Company or the Selling Stockholders of
any liability that they may otherwise have to such indemnified parties
under this Section 7 (although the Company's and the Selling
Stockholders' liability to an indemnified party may be reduced on a
monetary basis to the extent, but only to the extent, they have been
prejudiced by such failure on the part of such indemnified party)) and
the Company and the Selling Stockholders shall promptly assume the
defense thereof, including the employment of counsel satisfactory to
such indemnified party and payment of all fees and expenses. The
indemnified parties shall each have the right to employ separate
counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
indemnified parties unless (i) the employment of such counsel shall
have been specifically authorized by the Company, (ii) the Company and
the Selling Stockholders shall have failed to assume promptly the
defense or to employ counsel reasonably satisfactory to such
indemnified party or (iii) the named parties to any such action
(including any impleaded parties) include both the indemnified parties
and the Company or the Selling Stockholders, and an indemnified party
shall have been advised by counsel that there may be one or more legal
defenses available to one or more of the indemnified parties that are
different from or additional to those available to the Company or the
Selling Stockholders (in which case the Company and the Selling
Stockholders shall not have the right to assume the defense of such
action on behalf of such indemnified party, it being understood,
however, that the Company and the Selling Stockholders shall not, in
connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the
same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to
any local counsel) for the indemnified parties, which firm shall be
designated in writing by EVEREN Securities, Inc., and that all such
fees and expenses shall be reimbursed
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<PAGE> 25
promptly as they are incurred). The Company and the Selling
Stockholders shall not be liable for any settlement of any such action
effected without their written consent, which consent shall not be
unreasonably withheld, but if settled with the written consent of the
Company and the Selling Stockholders, the Company and the Selling
Stockholders agree to indemnify and hold harmless the indemnified
parties from and against any and all loss or liability by reason of
such settlement. Notwithstanding the foregoing sentence, if at any
time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second sentence of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement
of any proceeding effected without its written consent if (i) such
settlement is entered into more than 10 business days after delivery
by registered or certified mail to the proper address for notice to
such indemnifying party of the aforesaid request (whether or not such
delivery is accepted) and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior
to the date of such settlement. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which
any indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional and complete release in
writing of such indemnified party from any and all liability on claims
that are the subject matter of such proceeding, which such settlement
shall be in form and substance satisfactory to the indemnified party.
The indemnification provided in this Section 7 will be in addition to
any liability which the Company and the Selling Stockholders may
otherwise have.
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<PAGE> 26
(c) The Underwriters agree, severally and not jointly, to
indemnify and hold harmless the Selling Stockholders, the Company, its
directors, its officers who sign the Registration Statement and any
person controlling the Company within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, to the same extent as the
foregoing indemnity from the Company and the Selling Stockholders to
the Underwriters but only with reference to information stated in or
omitted from the Registration Statement, the Prospectus or any
Preliminary Prospectus in reliance upon, and in conformity with,
information relating to the Underwriters furnished in writing to the
Company by or on behalf of the Underwriters with your consent
expressly for use in the Registration Statement, the Prospectus or any
Preliminary Prospectus. In case any action shall be brought against
the Company, any of the Selling Stockholders, any of the Company's
directors, any such officers or any person controlling the Company
based on the Registration Statement, the Prospectus or any Preliminary
Prospectus and in respect of which indemnity may be sought against the
Underwriters, the Underwriters shall have the rights and duties given
to the Company and the Selling Stockholders by Section 7(b) hereof
(except that if the Company and the Selling Stockholders shall have
assumed the defense thereof, such Underwriter shall not be required to
do so, but may employ separate counsel therein and participate in the
defense thereof but the fees and expenses of such counsel shall be at
the expense of such Underwriter), and the Selling Stockholders, the
Company, its directors, any such officers and any person controlling
the Company shall have the rights and duties given to the "indemnified
parties" by Section 7(b) hereof.
(d) If the indemnification provided for in this Section 7
is for any reason unavailable to an indemnified party or insufficient
to hold such indemnified party harmless in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages,
liabilities and judgments (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other from
the offering of the Shares or (ii) if the allocation provided in
clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or
omissions or alleged statements or omissions that resulted in such
losses, claims, damages, liabilities or judgments, as well as any
other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering and sale of the
Shares (before deducting expenses) received by the Company and the
Selling Stockholders on the one hand, and the total underwriting
discounts and commissions received by the Underwriters on the other,
bears to the total price to the public of the Shares,
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<PAGE> 27
in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company, the Selling
Stockholders and the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of
a material fact or the omission or the alleged omission to state a
material fact relates to information supplied by the Company, the
Selling Stockholders or the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant
to this Section 7(d) were determined by pro rata allocation (even if
the Underwriters or the Selling Stockholders were treated as one
entity for such purpose) or by any other method of allocation that
does not take account of the equitable considerations referred to in
the immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages,
liabilities or judgments referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section
7, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has
otherwise paid or been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, and the
Selling Stockholders shall not be required to contribute, more in the
aggregate than the Maximum Amount (as defined below), net of all
amounts reimbursed (for any reason) by the Company or through
insurance policies paid for or held by the Company. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters'
obligation in this Section 7(d) to contribute are several in
proportion to the respective amount of Shares purchased hereunder by
each Underwriter and not joint.
(e)(i) The liability of each Selling Stockholder under this
Section 7, together with any liability for any breach of any
representation, warranty, covenant or other provision of this
Agreement, shall be limited to the proceeds received by such Selling
Stockholder from the sale of such Selling Stockholder's Shares
pursuant to this Agreement, net of (A) underwriting discounts and
commissions paid by such Selling Stockholder to the Underwriters in
connection with such sale, and (B) federal and state income taxes paid
by such Selling Stockholder on the proceeds received by such Selling
Stockholder as a consequence of such sale. The foregoing limitation
for each Selling Stockholder is referred to as the "Maximum Amount."
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<PAGE> 28
(ii) In addition, the liability of each Selling
Stockholder under this Section 7, together with any liability for any
breach of any representation, warranty, covenant or other provision of
this Agreement, shall be proportional based on the ratio that the
number of Shares being sold by such Selling Stockholder bears to the
total number of Shares being sold by all Selling Stockholders;
provided, however, that with respect to the breach of any
representation or warranty in Section 6(b), such liability shall not
be so proportional, no Selling Stockholder shall be liable for the
breach of any such representation or warranty by any other Selling
Stockholder, and each Selling Stockholder shall be liable in full (not
to exceed the Maximum Amount) with respect to any breach thereof by
such Selling Stockholder.
(iii) In addition, in the case of Selling Stockholders
Richard D. Jones and The Jones Family Charitable Trust Number 1
(collectively, "Jones") and J. Gregory Theisen ("Theisen"), the
liability of such Selling Stockholder under Section 7(a) above shall
be limited to information relating to such Selling Stockholder
furnished to the Company or the Underwriters by or on behalf of such
Selling Stockholder and incorporated into the Registration Statement,
the Prospectus or any Preliminary Prospectus.
8. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Shares
on the Closing Date and the Additional Shares on any Option Closing Date are
subject to the fulfillment of each of the following conditions on or prior to
the Closing Date and each Option Closing Date:
(a) All the representations and warranties of the
Company and the Selling Stockholders contained in this
Agreement and in any certificate delivered hereunder shall be
true and correct in all material respects on the Closing Date
and each Option Closing Date with the same force and effect as
if made on and as of the Closing Date or Option Closing Date,
as applicable. The Company and the Selling Stockholders shall
not have failed at or prior to the Closing Date or Option
Closing Date, as applicable, to perform or comply in all
respects with any of the agreements herein contained and
required to be performed or complied with by the Company at or
prior to the Closing Date.
(b) If the Registration Statement is not
effective at the time of the execution and delivery of this
Agreement, the Registration Statement shall have become
effective (or, if a post- effective amendment is required to
be filed pursuant to Rule 430A under the Act, such
post-effective amendment shall have become effective) not
later than 9:30 A.M., New York City time, on the date of this
Agreement or such later time as you may approve in writing or,
if the Registration Statement has been declared effective
prior to the execution and delivery hereof in reliance on Rule
430A, the Prospectus shall have been filed as required
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<PAGE> 29
hereby, if necessary; and at the Closing Date and each
applicable Option Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been
commenced or shall be pending before or, to the best knowledge
of the Underwriters, the Company or the Selling Stockholders,
threatened by the Commission; every request for additional
information on the part of the Commission shall have been
complied with to the Underwriters' satisfaction.
(c) The legality and sufficiency of the
authorization, issuance and sale or transfer and sale of the
Shares hereunder, the validity and form of the certificates
representing the Shares, the execution and delivery of this
Agreement and all corporate proceedings and other legal
matters incident thereto, and the form of the Registration
Statement and the Prospectus (except financial statements)
shall have been approved by counsel for the Underwriters
exercising reasonable judgment, and no Underwriter shall have
advised the Company that the Registration Statement or the
Prospectus, or any amendment or supplement thereto, contains
an untrue statement of material fact, or omits to state a fact
that in your opinion is material and is required to be stated
therein or is necessary to make the statements therein not
misleading.
(d) Subsequent to the execution and delivery of
this Agreement, there shall not have occurred any material
change, or any material development involving a prospective
change, in or affecting particularly the business or
properties of the Company, whether or not arising in the
ordinary course of business, that, in the judgment of the
Representatives, makes it impractical or inadvisable to
proceed with the public offering or purchase of the Shares as
contemplated hereby.
(e) You shall have received an agreement from
each of the officers and directors of the Company who are not
Selling Stockholders (the "Additional Stockholders"), whereby
each such Additional Stockholder agrees to be bound by an
agreement to substantially the same effect as the covenants
set forth in the last paragraph of Section 3 of this Agreement
(the "Lock-Up Agreements"); it being understood that the
Lock-Up Agreement relating to certain of such Additional
Stockholders may, in the discretion of EVEREN Securities, Inc.
on behalf of the Underwriters (i) cover a period of time not
to exceed 90 days in the case of John A. Sullivan and James D.
Baldwin, 180 days in the case of Jerome M. Lapin and W. John
Cash and 270 days in the case of any other Additional
Stockholder, or (ii) contain limited exceptions for
transactions relating to the satisfaction of personal tax
obligations.
(f) You shall have received an opinion
(satisfactory to you and your counsel) dated the Closing Date
or the Option Closing Date, as the
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<PAGE> 30
case may be, of Cooley Godward LLP, legal counsel for the
Company and the Selling Stockholders.
(g) You shall have received an opinion
(satisfactory to you and your counsel) dated the Closing Date
or the Option Closing Date, as the case may be, of Hutchinson,
Black & Cook, LLC, legal counsel for the Company and the
Selling Stockholders.
(h) You shall have received an opinion of Irell &
Manella LLP, counsel for the Underwriters, dated the Closing
Date or the Option Closing Date, as the case may be, in form
and substance reasonably satisfactory to you.
(j) You shall have received, in connection with
the execution of this Agreement and on the Closing Date and
each Option Closing Date, a "cold comfort" letter from KPMG
Peat Marwick LLP, dated as of each such date in form and
substance satisfactory to you with respect to the financial
statements and certain financial information contained in the
Registration Statement and the Prospectus.
(k) You shall have received from the Company a
certificate, signed by Jerome M. Lapin and W. John Cash in
their capacities as Chief Executive Officer and Chief
Financial Officer of the Company, respectively, addressed to
the Underwriters and dated the Closing Date or Option Closing
Date, as applicable to the effect that:
(i) such officer does not know of any
Proceedings instituted, threatened or contemplated
against the Company of a character required to be
disclosed in the Prospectus that are not so
disclosed; such officer does not know of any material
contract required to be filed as an exhibit to the
Registration Statement which is not so filed;
(ii) such officer has carefully examined
the Registration Statement and the Prospectus and all
amendments or supplements thereto and, in such
officer's opinion, such Registration Statement or
such amendment as of its effective date and as of the
Closing Date, and the Prospectus or such supplement
as of its date and as of the Closing Date, did not
contain an untrue statement of material fact or omit
to state a material fact required to be stated
therein or necessary in order to make the statements
therein not misleading and, in such officer's
opinion, since the effective date of the Registration
Statement, no event has occurred or information
become known that should have been set forth in an
amendment to the Registration Statement or a
supplement to the Prospectus which has not been so
set forth in such amendment or supplement;
-29-
<PAGE> 31
(iii) the representations and warranties
of the Company set forth in Section 6(a) of this
Agreement are true and correct as of the date of this
Agreement and as of the Closing Date or the Option
Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all
the conditions on its part to be performed or
satisfied at or prior to such Closing Date; and
(iv) the Commission has not issued an
order preventing or suspending the use of the
Prospectus or any preliminary prospectus filed as a
part of the Registration Statement or any amendment
thereto; no stop order suspending the effectiveness
of the Registration Statement has been issued; and,
to the best knowledge of the respective signers, no
proceedings for that purpose have been instituted or
are pending or contemplated under the Act.
The delivery of the certificate provided for in this
subparagraph shall be and constitute a representation and
warranty of the Company as to the facts required in the
immediately foregoing clauses (iii) and (iv) of this
subparagraph to be set forth in said certificate.
(l) You shall have received from each Selling
Stockholder a certificate, signed by such Selling Stockholder,
addressed to the Underwriters and dated the Closing Date or
Option Closing Date, as applicable, to the effect that the
representations and warranties of the Selling Stockholder set
forth in Section 6 of this Agreement are true and correct as
of the date of this Agreement and as of the Closing Date or
the Option Closing Date, as the case may be, and the Selling
Stockholder has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at
or prior to such Closing Date.
(m) You and Irell & Manella LLP, counsel for the
Underwriters, shall have received on or before the Closing
Date or the Option Closing Date, as the case may be, such
further documents, opinions, certificates and schedules or
instruments relating to the business, corporate, legal and
financial affairs of the Company as you and they shall have
reasonably requested from the Company.
9. Effective Date of Agreement, Termination and Defaults. This
Agreement shall become effective upon, and shall not be deemed delivered until,
the later of (i) execution of this Agreement and (ii) when notification of the
effectiveness of the Registration Statement has been released by the
Commission.
This Agreement may be terminated at any time prior to the Closing Date
and any exercise of the option to purchase Additional Shares may be canceled at
any time
-30-
<PAGE> 32
prior to any Option Closing Date by the Underwriters by written notice to the
Company if any of the following has occurred: (i) since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, any material adverse change or development involving a prospective
material adverse change in the condition, financial or otherwise, of the
Company or the earnings, affairs, management, or business of the Company, or
any event or events that could reasonably be expected to result in such a
material adverse change (in any such case, whether or not arising in the
ordinary course of business) that would, in the Representatives' sole judgment,
make it impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus, (ii) any outbreak or escalation of hostilities
or other national or international calamity or crisis or change in economic
conditions or in the financial markets of the United States that, in the
Representatives' judgment, is material and adverse and would, in the
Representatives' judgment, make it impracticable to market the Shares on the
terms and in the manner contemplated in the Prospectus, (iii) the suspension or
material limitation of trading in securities on the Nasdaq Stock Market, or
limitation on prices for securities on either such exchange or the Nasdaq Stock
Market, (iv) the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of any court or other
governmental authority that in the Representatives' opinion materially and
adversely affects, or will materially and adversely affect, the business or
operations of the Company, (v) the declaration of a banking moratorium by
either federal or New York, California, Illinois or Colorado state authorities,
(vi) the taking of any action by any Federal, state or local government or
agency in respect of its monetary or fiscal affairs that in the
Representatives' opinion has a material adverse effect on the financial markets
in the United States or (vii) there shall be any change in financial markets or
in political, economic or financial conditions which, in the opinion of the
Representatives, either renders it impracticable or inadvisable to proceed with
the offering and sale of the Shares on the terms set forth in the Prospectus or
materially adversely affects the market for the Shares.
If on the Closing Date or on any Option Closing Date, as the case may
be, any of the Underwriters shall fail or refuse to purchase the Firm Shares or
Additional Shares, as the case may be, which it has agreed to purchase
hereunder on such date, and the aggregate number of Firm Shares or Additional
Shares, as the case may be, that such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase does not exceed, in the aggregate, 10%
of the total number of Shares that all Underwriters are obligated to purchase
on such date, each non-defaulting Underwriter shall be obligated, in the
proportion which the number of Firm Shares set forth opposite its name in
Schedule II hereto bears to the total number of Firm Shares or Additional
Shares, as the case may be, that all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, that such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the Closing Date or on the Option Closing Date, as the case may
be, any of the Underwriters shall fail or refuse to purchase the Firm Shares or
Additional Shares, as the case may be, in an amount that exceeds, in the
aggregate, 10% of the total number of the Shares, and arrangements satisfactory
to you and the Company for the
-31-
<PAGE> 33
purchase of such Shares are not made within 48 hours after such default, this
Agreement shall terminate without liability on the part of the non-defaulting
Underwriters, the Company and the Selling Stockholders, except as otherwise
provided in this Section 9. In any such case that does not result in
termination of this Agreement, either you or the Company may postpone the
Closing Date or the Option Closing Date, as the case may be, for not longer
than seven (7) days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve a defaulting Underwriter from liability in respect of any default of
any such Underwriter under this Agreement.
The indemnity and contribution provisions and other agreements,
representations and warranties of the Company, the Selling Stockholders and the
Company's officers and directors set forth in or made pursuant to this
Agreement shall remain operative and in full force and effect, and will survive
delivery of and payment for the Shares, regardless of (i) any investigation, or
statement as to the results thereof, made by or on behalf of any of the
Underwriters or by or on behalf of the Company or any Selling Stockholder or
the officers or directors of the Company or any controlling person of the
Company, (ii) acceptance of the Shares and payment therefor hereunder or (iii)
termination of this Agreement. Notwithstanding any termination of this
Agreement, the Company shall be liable for and shall pay all expenses it has
agreed to pay pursuant to Section 5.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of, and shall be binding upon, the Company, the Selling
Stockholders, the Underwriters, any indemnified person referred to herein and
their respective successors and assigns, all as and to the extent provided in
this Agreement, and no other person shall acquire or have any right under or by
virtue of this Agreement. The terms "successors and assigns" shall not include
a purchaser of any of the Shares from any of the several Underwriters merely
because of such purchase.
10. Effectiveness of Registration Statement. You, the Company
and the Selling Stockholders will use your, its and their best efforts to cause
the Registration Statement to become effective, if it has not yet become
effective, and to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
11. Miscellaneous. All communications hereunder will be in
writing and, if sent to the Underwriters will be mailed, delivered or
telegraphed and confirmed to you c/o EVEREN Securities, Inc., 77 West Wacker
Drive, Chicago, Illinois 60601-1994, Attention: Syndicate Department, with a
copy to Irell & Manella LLP, 1800 Avenue of the Stars, Suite 900, Los Angeles,
California 90067, Attention: Alvin G. Segel, Esq.; if sent to the Company
will be mailed, delivered or telegraphed and confirmed to the Company at its
corporate headquarters with a copy to Cooley
-32-
<PAGE> 34
Godward LLP, 2595 Canyon Blvd., Suite 250, Boulder, Colorado 80302, Attention:
James C.T. Linfield, Esq.; and if sent to the Selling Stockholders will be
mailed, delivered or telegraphed care of the Company, with a copy to, or in any
case to such other address as the person to be notified may have requested in
writing.
THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF
LAW THEREOF.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters,
including you.
Very truly yours,
AMERICAN COIN MERCHANDISING, INC.,
a Delaware corporation
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
-33-
<PAGE> 35
Selling Stockholders:
------------------------------------
------------------------------------
------------------------------------
------------------------------------
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
EVEREN Securities, Inc.
Acting as Representatives of the
several Underwriters named in Schedule II.
By: EVEREN Securities, Inc.
By:
-----------------------------
Todd Jadwin
-34-
<PAGE> 36
SCHEDULE I
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Number of Number of
Selling Stockholder Firm Shares Additional Shares
- ----------------------------- ----------- -----------------
<S> <C> <C>
TOTAL...............................................
</TABLE>
-35-
<PAGE> 37
SCHEDULE II
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
TO BE
UNDERWRITER PURCHASED
- ----------- -----------
<S> <C>
EVEREN Securities, Inc. . . . . . . . . . . . . . . . . . . . . .
Ladenburg Thalmann & Co. Inc. . . . . . . . . . . . . . . . . . .
The Seidler Companies Incorporated . . . . . . . . . . . . . . .
TOTAL
===========
</TABLE>
-36-
<PAGE> 1
EXHIBIT 5.1
[COOLEY GODWARD LLP LETTERHEAD]
October 2, 1997
American Coin Merchandising, Inc.
5660 Central Avenue
Boulder, Colorado 80301
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by American Coin Merchandising, Inc., a Delaware corporation
(the "Company") of a Registration Statement on Form S-1 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission"),
including a prospectus to be filed with the Commission pursuant to Rule 424(b)
of Regulation C promulgated under the Securities Act of 1933, as amended, and
the underwritten public offering of up to 2,300,000 shares of the Company's
Common Stock (the "Shares"), including 1,000,000 shares of Common Stock to be
sold by certain stockholders of the Company (the "Selling Stockholders") and
300,000 shares for which the underwriters have been granted an over-allotment
option.
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement, (ii) reviewed the Company's Certificate of
Incorporation and Bylaws, as amended, and the originals or copies certified to
our satisfaction of such records, documents, certificates, memoranda and other
instruments as in our judgment were necessary or appropriate to enable us to
render the opinion expressed below, (iii) assumed that the Shares to be sold to
the underwriters by the Company will be sold at a price established by the
Board of Directors of the Company or the Pricing Committee thereof in
accordance with Section 153 of the Delaware General Corporation Law and (iv)
examined and relied upon a certificate executed by an officer of the Company to
the effect that consideration for the Shares being sold by the Selling
Stockholders pursuant to the Underwriting Agreement was received by the Company
in accordance with the applicable Board of Directors' resolutions and any plan
or agreement relating to the issuance of such Shares, and we have undertaken no
independent verification with respect thereto.
On the basis of the foregoing and in reliance thereon, we are of the opinion
that the Shares, when issued and sold in accordance with the Registration
Statement, will be validly issued, fully paid and nonassessable.
<PAGE> 2
[COOLEY GODWARD LLP LOGO]
American Coin Merchandising, Inc.
Page Two
We consent to the reference to our firm under the caption "Legal Matters" in
the prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ James C.T. Linfield
--------------------------------
James C. T. Linfield
<PAGE> 1
EXHIBIT 10.34
SECOND MODIFICATION AGREEMENT
BY THIS SECOND MODIFICATION AGREEMENT, made and entered into as of the
29th day of September, 1997, AMERICAN COIN MERCHANDISING, INC., a Delaware
corporation, d/b/a SUGARLOAF CREATIONS, INC., whose address is 5660 Central
Avenue, Boulder, Colorado 80301 (hereinafter called "Borrower"), and WELLS
FARGO BANK, NATIONAL ASSOCIATION, successor in interest to Wells Fargo Bank
(Colorado), National Association, whose address is 633 Seventeenth Street,
Denver, Colorado 80202 (hereinafter called "Lender"), confirm and agree as
follows:
SECTION 1. RECITALS.
1.1 Borrower and Lender entered into a Credit Agreement dated
September 23, 1996 (the "Credit Agreement"), which provides for a revolving
loan by Lender to Borrower in the maximum principal amount of $6,000,000.00
upon the terms and conditions contained therein (the "Loan").
1.2 The Loan is evidenced by a Revolving Line of Credit Note dated
September 23, 1996, executed by Borrower, payable to the order of Lender, in
the principal amount of $6,000,000.00 (the "Note").
1.3 The Loan is secured in part by a Continuing Security Agreement
dated September 23, 1996, executed by Borrower as the Debtor for the benefit of
Lender as the Secured Party (the "Security Agreement").
1.4 Borrower and Lender entered into a Modification Agreement
dated May 27, 1997 (the "Modification Agreement"), which provided for, among
other things, an increase in the maximum principal amount of the Loan to
$9,000,000.00.
1.5 The Credit Agreement, the Note, the Security Agreement, the
Modification Agreement, and all other documents and instruments executed and
delivered in connection with the Loan or that secure payment of the Loan, are
hereinafter called the "Loan Documents," and each reference herein to the Loan
Documents, or to any Loan Document, shall refer to the Loan Documents, or to
such Loan Document, as modified by the Modification Agreement.
1.6 The total principal and accrued interest outstanding under the
Loan Documents as of the date hereof is $9,034,092.45, comprised of principal
of $8,973,240.00 and interest of $50,852.45.
1.7 Borrower and Lender desire to make modifications to the Credit
Agreement and other Loan Documents as set forth herein.
<PAGE> 2
SECTION 2. CREDIT AGREEMENT.
2.1 The first sentence of subsection (a) of Section 1.1
of the Credit Agreement is hereby deleted in its entirety and the following
inserted in lieu thereof:
"(a) Revolving Line of Credit. Subject to the
terms and conditions of this Agreement, and including, the conversion
right set forth in Section 1.2 hereof, Bank hereby agrees to make
advances to Borrower from time to time up to and including July 5,
1999, not to exceed at any time the aggregate outstanding principal
amount of Fifteen Million Dollars ($15,000,000) ("Revolving Line of
Credit"), the proceeds of which shall be used for working capital,
equipment purchases, capital expenditures, acquisitions, letters of
credit and retirement of existing Bank debt."
2.2 Subsection (b) of Section 1.1 of the Credit Agreement
is hereby deleted in its entirety.
2.3 Subsections (a) through (d) of Section 1.3 of the
Credit Agreement are hereby deleted in their entirety and the following
inserted in lieu thereof:
"(a) Definitions. As used herein, the following
terms shall have the meanings set forth after each, and any other term
defined in this Agreement shall have the meaning set forth at the
place defined:
(i) "Business Day" means any day
except a Saturday, Sunday or any other day on which commercial banks
in Colorado are authorized or required by law to close.
(ii) "Fixed Rate Term" means a period
commencing on a Business Day and continuing for one (1), two (2) or
three (3) months, as designated by Borrower, during which all or a
portion of the outstanding principal balance of the Revolving Line of
Credit bears interest determined in relation to LIBOR; provided
however, that no Fixed Rate Term may be selected for a principal
amount less than Five Hundred Thousand Dollars ($500,000.00); and
provided further, that no Fixed Rate Term shall extend beyond the
scheduled maturity date hereof. If any Fixed Rate Term would end on a
day which is not a Business Day, then such Fixed Rate Term shall be
extended to the next succeeding Business Day.
(iii) "LIBOR" means the rate per annum
(rounded upward, if necessary, to the nearest whole 1/8 of 1%) and
determined pursuant to the following formula:
LIBOR = Base LIBOR
-------------------------------
100% - LIBOR Reserve Percentage
-2-
<PAGE> 3
(iv) "Base LIBOR" means the rate per
annum for United States dollar deposits quoted by Bank as the
Inter-Bank Market Offered Rate, with the understanding that such rate
is quoted by Bank for the purpose of calculating effective rates of
interest for loans making reference thereto, on the first day of a
Fixed Rate Term for delivery of funds on said date for a period of
time approximately equal to the number of days in such Fixed Rate Term
and in an amount approximately equal to the principal amount to which
such Fixed Rate Term applies. Borrower understands and agrees that
Bank may base its quotation of the Inter-Bank Market Offered Rate upon
such offers or other market indicators of the Inter-Bank Market as
Bank in its discretion deems appropriate including, but not limited
to, the rate offered for U.S. dollar deposits on the London Inter-Bank
Market.
(v) "LIBOR Reserve Percentage" means
the reserve percentage prescribed by the Board of Governors of the
Federal Reserve System (or any successor) for "Eurocurrency
Liabilities" (as defined in Regulation D of the Federal Reserve Board,
as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.
(vi) "Prime Rate" means at any time
the rate of interest most recently announced within Bank at its
principal office in Denver, Colorado as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and
serves as the basis upon which effective rates of interest are
calculated for those loans making reference thereto, and is evidenced
by the recording thereof after its announcement in such internal
publication or publications as Bank may designate. Each change in the
rate of interest shall become effective on the date each Prime Rate
change is announced within Bank. The Prime Rate is not necessarily
the best rate offered by the Bank and Bank may make loans at rates
greater than or less than the Prime Rate.
"(b) Interest. The outstanding principal balance
of the Revolving Line of Credit shall bear interest (computed on the
basis of a 360-day year, actual days elapsed) either (i) at a
fluctuating rate equal to the Prime Rate in effect from time to time,
or (ii) provided that the then current Debt Service Coverage Ratio
(hereinafter defined) is not greater than 1.5, at a fixed rate per
annum in relation to LIBOR in effect on the first day of the
applicable Fixed Rate Term, determined by Bank as follows:
(A) if the then current Debt Service
Coverage Ratio is greater than 1.0, but not greater than 1.5,
at a rate equal to LIBOR plus two and thirty-five one
hundredths percent (2.35%);
-3-
<PAGE> 4
(B) if the then current Debt Service
Coverage Ratio is greater than 0.5, but not greater than 1.0,
at a rate equal to LIBOR plus two and one tenth percent
(2.10%); and
(C) if the then current Debt Service
Coverage Ratio is not greater than 0.5, at a rate equal to
LIBOR plus one and eighty-five one hundredths percent (1.85%).
When interest is determined in relation to the Prime Rate, each change
in the rate of interest hereunder shall become effective on the date
each Prime Rate change is announced within Bank. With respect to each
LIBOR selection hereunder, Bank is hereby authorized to note the date,
principal amount, interest rate and Fixed Rate Term applicable thereto
and any payments made thereon on Bank's books and records (either
manually or by electronic entry) and/or on any schedule attached to
the Revolving Line of Credit Note, which notations shall be prima
facie evidence of the accuracy of the information noted.
"(c) Selection of Interest Rate Options. At any
time any portion of the Revolving Line of Credit bears interest
determined in relation to LIBOR, it may be continued by Borrower at
the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime
Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At
any time any portion of the Revolving Line of Credit bears interest
determined in relation to the Prime Rate, Borrower may convert all or
a portion thereof so that it bears interest determined in relation to
LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR
option for all or a portion of the outstanding principal balance of
the Revolving Line of Credit, and at the end of each Fixed Rate Term,
Borrower shall give Bank notice specifying: (i) the interest rate
option selected by Borrower; (ii) the principal amount subject
thereto; and (iii) for each LIBOR selection, the length of the
applicable Fixed Rate Term. Any such notice may be given by telephone
so long as, with respect to each LIBOR selection, (A) Bank receives
written confirmation from Borrower not later than three (3) Business
Days after such telephone notice is given, and (B) such notice is
given to Bank prior to 10:00 a.m., Colorado time, on the first day of
the Fixed Rate Term. For each LIBOR option requested hereunder, Bank
will quote the applicable fixed rate to Borrower at approximately
10:00 a.m., Colorado time, on the first day of the Fixed Rate Term.
If Borrower does not immediately accept the rate quoted by Bank, any
subsequent acceptance by Borrower shall be subject to a
redetermination by Bank of the applicable fixed rate; provided
however, that if Borrower fails to accept any such rate by 11:00 a.m.,
-4-
<PAGE> 5
Colorado time, on the Business Day such quotation is given, then the
quoted rate shall expire and Bank shall have no obligation to permit a
LIBOR option to be selected on such day. If no specific designation of
interest is made at the time any advance is requested hereunder or at
the end of any Fixed Rate Term, Borrower shall be deemed to have made
a Prime Rate interest selection for such advance or the principal
amount to which such Fixed Rate Term applied.
"(d) Additional LIBOR Provisions.
(i) If Bank at any time shall
determine that for any reason adequate and reasonable means do not
exist for ascertaining LIBOR, then Bank shall promptly give notice
thereof to Borrower. If such notice is given and until such notice
has been withdrawn by Bank, then (A) no new LIBOR option may be
selected by Borrower, and (B) any portion of the outstanding
principal balance hereof which bears interest determined in relation
to LIBOR, subsequent to the end of the Fixed Rate Term applicable
thereto, shall bear interest in relation to the Prime Rate.
(ii) If any law, treaty, rule,
regulation or determination of a court or governmental authority or
any change therein or in the interpretation or application thereof
(each, a "Change in Law") shall make it unlawful for Bank (A) to make
LIBOR options available hereunder, or (B) to maintain interest rates
based on LIBOR, then in the former event, any obligation of Bank to
make available such unlawful LIBOR options shall immediately be
cancelled, and in the latter event, any such unlawful LIBOR-based
interest rates then outstanding shall be converted, at Bank's option,
so that interest on the portion of the outstanding principal balance
subject thereto is determined in relation to the Prime Rate; provided
however, that if any such Change in Law shall permit any LIBOR-based
interest rates to remain in effect until the expiration of the Fixed
Rate Term applicable thereto, then such permitted LIBOR-based interest
rates shall continue in effect until the expiration of such Fixed Rate
Term. Upon the occurrence of any of the foregoing events, Borrower
shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any fines, fees, charges, penalties
or other costs incurred or payable by Bank as a result thereof and
which are attributable to any LIBOR options made available to Borrower
hereunder, and any reasonable allocation made by Bank among its
operations shall be conclusive and binding upon Borrower.
(iii) If any Change in Law or
compliance by Bank with any request or directive (whether or not
having the force of law) from any central bank or other governmental
authority shall:
-5-
<PAGE> 6
(A) subject Bank to any tax, duty or
other charge with respect to any LIBOR options, or change the
basis of taxation of payments to Bank of principal, interest,
fees or any other amount payable hereunder (except for changes
in the rate of tax on the overall net income of Bank); or
(B) impose, modify or hold applicable
any reserve, special deposit, compulsory loan or similar
requirement against assets held by, deposits or other
liabilities in or for the account of, advances or loans by, or
any other acquisition of funds by any office of Bank; or
(C) impose on Bank any other
condition;
and the result of any of the foregoing is to increase the cost to Bank
of making, renewing or maintaining any LIBOR options hereunder and/or
to reduce any amount receivable by Bank in connection therewith, then
in any such case, Borrower shall pay to Bank immediately upon demand
such amounts as may be necessary to compensate Bank for any additional
costs incurred by Bank and/or reductions in amounts received by Bank
which are attributable to such LIBOR options. In determining which
costs incurred by Bank and/or reductions in amounts received by Bank
are attributable to any LIBOR options made available to Borrower
hereunder, any reasonable allocation made by Bank among its operations
shall be conclusive and binding upon Borrower.
"(e) Payment of Interest. Interest shall be
payable at the times and place set forth in the Revolving Line of
Credit Note (the "Note").
"(f) Letter of Credit Fees. Borrower shall pay to
Bank fees upon the issuance of each Letter of Credit, upon the payment
or negotiation by Bank of each draft under any Letter of Credit and
upon the occurrence of any other activity with respect to any Letter
of Credit (including without limitation, the transfer, amendment or
cancellation of any Letter of Credit) determined in accordance with
Bank's standard fees and charges then in effect for such activity."
2.4 Subsection (c) of Section 4.3 of the Credit
Agreement is hereby deleted in its entirely and the following inserted in lieu
thereof:
"(c) not later than 45 days after and as of the
end of each fiscal quarter, a compliance certificate in the
form attached hereto as Exhibit A setting forth Borrower's
internally prepared ratios described in paragraph 4.9 hereof
and, immediately upon each request
-6-
<PAGE> 7
from Bank, a list of the names and addresses of all of
Borrower's account debtors;"
2.5 The clause "and the value of such vending machines is
not included in the Borrowing Base hereunder" is hereby deleted from Section
5.6 of the Credit Agreement.
2.6 Exhibit A to the Credit Agreement, the Borrowing Base
Certificate, is hereby deleted in its entirety and Exhibit A hereto inserted in
lieu thereof.
SECTION 3. NOTE.
3.1 The header and first paragraph of the Note are hereby
deleted in their entirety and the following is inserted in lieu thereof:
"$15,000,000.00 Denver, Colorado
September 23, 1996
FOR VALUE RECEIVED, the undersigned AMERICAN COIN
MERCHANDISING, INC. ("Borrower"), promises to pay to the order of
WELLS FARGO BANK, NATIONAL ASSOCIATION, successor in interest to
Wells Fargo Bank (Colorado), National Association ("Bank") at its
office at 633 Seventeenth Street, Denver, Colorado, or at such other
place as the holder hereof may designate, in lawful money of the
United States of America and in immediately available funds, the
principal sum of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00)
or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement (computed on the basis of a 360-day year, actual days
elapsed). Pursuant to the terms of that certain Credit Agreement
dated September 23, 1996 (as amended, "Credit Agreement"), the
principal balance of this Revolving Line of Credit Note shall bear
interest either (i) at a fluctuating rate per annum equal to the Prime
Rate in effect from time to time, or (ii) at a fixed rate per annum in
relation to LIBOR calculated as provided in the Credit Agreement
executed by Borrower and Bank. When interest is determined in
relation to the Prime Rate, each change in the rate of interest
hereunder shall become effective on the date each Prime Rate change
is announced within Bank."
SECTION 4. OTHER MODIFICATIONS, RATIFICATIONS AND AGREEMENTS.
4.1 All references to the Credit Agreement in the other
Loan Documents are hereby amended to refer to the Credit Agreement as amended
by this Agreement.
-7-
<PAGE> 8
4.2 All references to the Note in the other Loan
Documents are hereby amended to refer to the Note as amended by this Agreement.
4.3 All references to any other Loan Document in the
other Loan Documents are hereby amended to refer to that Loan Document as
amended by this Agreement.
4.4 Borrower acknowledges that the indebtedness evidenced
by the Note is just and owing, that the balance thereof is correctly shown in
Section 1.6 hereof, and Borrower agrees to pay the indebtedness evidenced by
the Note and secured by the Loan Documents, according to the terms thereof, as
modified by this Agreement.
4.5 Borrower reaffirms to Lender each of the
representations, warranties, covenants and agreements of Borrower set forth in
all the Loan Documents, with the same force and effect as if each were
separately stated herein and made as of the date of this Agreement.
4.6 Borrower ratifies, reaffirms, acknowledges, and
agrees that the Loan Documents, as amended by this Agreement, represent valid,
enforceable and collectible obligations of Borrower, and that there are no
existing claims, defenses, personal or otherwise, or rights of setoff
whatsoever with respect to any of these documents or instruments. In addition,
Borrower hereby expressly waives, releases and absolutely and forever
discharges Lender and its shareholders, directors, officers, employees and
agents, and their heirs, personal representatives, successors and assigns, from
any and all liability, claims, demands, damages, actions and causes of action
that Borrower may now have, or has had prior to the date hereof and, without
limiting the generality of the foregoing, from any and all liability, claims,
demands, damages, actions and causes of action arising out of, or in any way
connected with, the Loan. Borrower further acknowledges and represents that no
Event of Default (as defined in the Credit Agreement) or matter which, with the
giving of notice, passage of time, or both, would constitute an Event of
Default exists.
4.7 All terms, conditions and provisions of the Loan
Documents are continued in full force and effect and shall remain unaffected
and unchanged except as specifically amended by this Modification Agreement.
SECTION 5. GENERAL.
5.1 This Agreement in no way acts as a release or
relinquishment of those liens, security interests and rights securing payment
of the Loan, including, without limitation, the liens created by the Security
Agreement and the other Loan Documents. Such liens, security interests and
rights are hereby ratified, confirmed, renewed and extended by Borrower in all
respects.
-8-
<PAGE> 9
5.2 Borrower shall execute and deliver such additional
documents and do such other acts as Lender may reasonably require to fully
implement the intent of this Agreement, including, but not limited to, the
execution of such financing statements or amendments thereto as Lender may
require to reflect Borrower's doing business as Sugarloaf Creations, Inc.
5.3 Borrower shall pay all costs and expenses, including,
without limitation, recording fees and reasonable attorneys' fees incurred by
Lender in connection with this Agreement. Lender, at its option, but without
any obligation to do so, may advance funds to pay any such costs and expenses
that are the obligation of the Borrower, and all such funds advanced shall bear
interest at the Prime Rate provided in the Note, shall be due and payable upon
demand and shall be secured by all of the Loan Documents.
5.4 Notwithstanding anything to the contrary contained
herein or in any other instrument executed by Borrower or Lender or in any
other action or conduct undertaken by Borrower or Lender on or before the date
of this Agreement, the agreements, covenants and provisions contained herein
shall constitute the only evidence of Lender's consent to modify the terms and
provisions of the Loan Documents. Accordingly, no express or implied consent
to any further modifications involving any of the matters set forth in this
Agreement or otherwise shall be inferred or implied by Lender's execution of
this Agreement. Further, Lender's execution of this Agreement shall not
constitute a waiver (either express or implied) of the requirement that any
further modification of the Loan or of the Loan Documents shall require the
express written approval of Lender; no such approval (either express or
implied) has been given as of the date of this Agreement.
5.5 This Agreement shall be binding upon, and shall inure
to the benefit of, the parties hereto and their heirs, personal
representatives, successors and assigns.
5.6 This Agreement is made for the sole protection and
benefit of the parties hereto, and no other person or entity shall have any
right of action hereon.
5.7 This Agreement shall be governed by and construed
according to the laws of the State of Colorado.
[Signatures on Following Page]
-9-
<PAGE> 10
IN WITNESS WHEREOF, this Agreement is executed as of the date indicated above.
BORROWER:
AMERICAN COIN MERCHANDISING,
INC., a Delaware corporation,
d/b/a SUGARLOAF CREATIONS, INC.
By: /s/ JEROME M. LAPIN
------------------------------------
Title: President
---------------------------------
LENDER:
WELLS FARGO BANK, NATIONAL
ASSOCIATION, successor in
interest to Wells Fargo Bank
(Colorado), National Association
By: /s/ BLAKE PETERSON
-----------------------------------
Title: Vice President
--------------------------------
<PAGE> 11
STATE OF COLORADO )
) ss.
COUNTY OF DENVER )
The foregoing instrument was acknowledged before me this 30
day of September, 1997, by Jerome Lapin, the President of American Coin
Merchandising, Inc., a Delaware corporation.
My commission expires: June 14, 2000
--------------------------------
Witness my hand and official seal.
[SEAL]
/s/ DIANE C. WAGNER
-----------------------------
Notary Public
DIANE C. WAGNER
STATE OF COLORADO )
) ss.
COUNTY OF DENVER )
The foregoing instrument was acknowledged before me this 30
day of September, 1997, by Blake Peterson, the Vice President of Well Fargo
Bank, National Association, successor in interest to Wells Fargo Bank
(Colorado), National Association.
My commission expires: 6/14/2000
--------------------------------
Witness my hand and official seal.
/s/ DIANE C. WAGNER
-----------------------------
Notary Public
[SEAL]
<PAGE> 12
EXHIBIT A
American Coin Merchandising, Inc.
dba Sugarloaf Creations, Inc.
Compliance Certificate
As of:
--------------------------
<TABLE>
<CAPTION>
Required Actual
-------- ------
<S> <C> <C>
Current Ratio not less than 1.15/1 _______
Total Liabilities to Tangible Net Worth not 1.5/1 _______
greater than
Funded Debt to EBITDA not greater than 1.5/1 _______
</TABLE>
The undersigned represents that the above calculations are in accordance with
the Credit Agreement, as modified, and that the undersigned is in full
compliance with the terms of these agreements and other Loan Documents. The
undersigned further represents that the attached financial statements are
accurate and that there exists no Event of Default nor any condition, act or
event which with the giving of notice or the passage of time or both would
constitute an Event of Default.
American Coin Merchandising, Inc. dba Sugarloaf Creations, Inc.
(authorized agent)
By:
----------------------------
Title:
-------------------------
Date:
--------------------------
A-1
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
AMERICAN COIN MERCHANDISING, INC.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Boulder, Colorado
October 2, 1997
