<PAGE> 1
FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-60267
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 23, 1998)
1,700,000 TRUST PREFERRED SECURITIES
ASCENDING RATE CUMULATIVE TRUST PREFERRED SECURITIES (LIQUIDATION AMOUNT
$10 PER TRUST PREFERRED SECURITY) FULLY AND UNCONDITIONALLY GUARANTEED BY
[AMERICAN COIN LOGO]
American Coin Merchandising Trust I
---------------------
The Ascending Rate Cumulative Trust Preferred Securities (the "Trust
Preferred Securities") offered hereby represent undivided beneficial preferred
interests in the assets of American Coin Merchandising Trust I, a statutory
business trust created under the laws of the State of Delaware (the "Trust").
American Coin Merchandising, Inc., a Delaware corporation (the "Company"), will
be the owner of all the beneficial interests represented by common securities of
the Trust (the "Common Securities" and, collectively with the Trust Preferred
Securities, the "Trust
(continued on page S-3)
---------------------
The Trust Preferred Securities have been approved for listing, subject to
notice of issuance, on the American Stock Exchange, Inc. Trading of the Trust
Preferred Securities on the American Stock Exchange is expected to commence
within a 30-day period after the initial delivery of the Preferred Securities.
See "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE S-14 OF THIS PROSPECTUS SUPPLEMENT FOR
CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SECURITIES 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.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
THE PUBLIC AND COMMISSIONS(1) THE TRUST(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Trust Preferred Security.................. $10.00 (2) $10.00
- -------------------------------------------------------------------------------------------------------------------------
Total(3)...................................... $17,000,000 (2) $17,000,000
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriter by the Trust and the Company and other matters.
(2) In view of the fact that all of the proceeds of the sale of the Trust
Preferred Securities will be used to purchase the Junior Subordinated
Debentures, the Company has agreed to pay the Underwriter as compensation
for arranging the investment therein of such proceeds, $0.40 per Trust
Preferred Security or $680,000 in the aggregate, plus an advisory fee of
$0.10 per Trust Preferred Security or $170,000 in the aggregate. See
"Underwriting." The Company also has agreed to pay the expenses of the
Offering estimated to be $550,000.
(3) The Trust has granted to the Underwriter a 30-day option to purchase up to
an additional $2,550,000 aggregate liquidation amount of Trust Preferred
Securities on the same terms as set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to the Public and Proceeds to the Trust will be $19,550,000 and
$19,550,000, respectively, and the total compensation to be paid by the
Company to the Underwriter will be $977,500. See "Underwriting."
---------------------
The Trust Preferred Securities are being offered by the Underwriter named
herein, subject to prior sale, when, as and if issued by the Trust and delivered
to and accepted by the Underwriter and subject to certain prior conditions,
including the right of the Underwriter to reject any order in whole or in part.
It is expected that delivery of the Trust Preferred Securities will be made in
New York, New York in book-entry form only through the facilities of The
Depository Trust Company on or about September 28, 1998.
EVEREN SECURITIES, INC.
The date of this Prospectus Supplement is September 23, 1998
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS,
ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE, WHICH STABILIZE, MAINTAIN OR
OTHERWISE AFFECT THE MARKET PRICE OF THE TRUST PREFERRED SECURITIES.
SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE TRUST PREFERRED SECURITIES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Sugarloaf(R), Toy Shoppe(R), Fun Shoppe(R), Treasure Shoppe(R) and A Test
of Skill(R) are all trademarks of the Company.
<PAGE> 3
Gatefold containing the Company's logo, a picture of one of the Company's
SugarLoaf Beanie Bag Shoppes over the caption "Beanie Bag Shoppe" and a picture
of one of the Company's SugarLoaf Treasure Shoppes over the caption "Treasure
Shoppe."
<PAGE> 4
Gatefold containing a map of the United States (including Alaska and Hawaii)
and Canada indicating the locations of the Company's headquarters,
Company-owned offices and franchisees' offices. Under the map is a graph in a
box with two lines, one of which shows the number of Company-owned and
franchisee owned Shoppes and the other one which shows the number of
Company-owned Shoppes from 1993 through June 30, 1998. Under the chart is the
caption "The Company's owned and operated skill-cranes have grown at an average
69.7% compounded annual growth rate between 1993 and 1997.
<PAGE> 5
(Continued from cover page)
Securities"). The Trust exists for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in an equivalent amount of
Ascending Rate Junior Subordinated Deferrable Interest Debentures (the "Junior
Subordinated Debentures") to be issued by the Company. The Junior Subordinated
Debentures will mature on September 15, 2028, which date may be shortened (such
date, as it may be shortened, the "Stated Maturity") to a date not earlier than
September 15, 2001. The Trust Preferred Securities will have a preference under
certain circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Common Securities, which will be
held by the Company. See "Description of the Trust Preferred
Securities -- Subordination of Common Securities of the Trust Held by the
Company."
Holders of the Trust Preferred Securities will be entitled to receive
preferential cumulative cash distributions accruing from the date of original
issuance and payable quarterly in arrears on each March 15, June 15, September
15 and December 15 (subject to possible deferral as described below), commencing
December 15, 1998, at the annual rate of 10.5% of the Liquidation Amount (as
defined herein) until September 15, 2001, then at the annual rate of 11% of the
Liquidation Amount until September 15, 2003, then at the annual rate of 11.5% of
the Liquidation Amount until September 15, 2005 and then at the annual rate of
12% of the Liquidation Amount thereafter of $10.00 per Trust Preferred Security
("Distributions"). The amount of each Distribution due with respect to the Trust
Preferred Securities will include amounts accrued through the date such
Distribution payment is due (each, a "Distribution Date"). The Company will have
the right, so long as no Debenture Event of Default (as defined herein) has
occurred and is continuing, to defer payments of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding eight consecutive quarters with respect to each deferral period (each,
an "Extension Period"), provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures. Upon the termination of
any such Extension Period and the payment of all amounts then due, the Company
may elect to begin a new Extension Period subject to the requirements set forth
herein. If interest payments on the Junior Subordinated Debentures are so
deferred, Distributions on the Trust Preferred Securities will also be deferred
and the Company will not be permitted, subject to certain exceptions described
herein, to declare or pay any cash distributions with respect to its capital
stock or to make any payment with respect to its debt securities that rank pari
passu with or junior to the Junior Subordinated Debentures. During an Extension
Period, interest on the Junior Subordinated Debentures will continue to accrue
(and the amount of Distributions to which holders of the Trust Preferred
Securities are entitled will accumulate) at the rate of 10.5% per annum,
compounded quarterly, until September 15, 2001, then at the rate of 11% per
annum, compounded quarterly, until September 15, 2003, then at the rate of 11.5%
per annum, compounded quarterly, until September 15, 2005 and then at the rate
of 12% per annum, compounded quarterly, thereafter and holders of the Trust
Preferred Securities will be required to accrue income and will be required to
pay United States federal income tax on the accrued income. See "Description of
Junior Subordinated Debentures -- Option to Defer Interest Payment Period" and
"Material Federal Income Tax Consequences -- Interest Income and Original Issue
Discount."
The Company has, through the Guarantee Agreement, the Trust Agreement, the
Junior Subordinated Debentures, the Indenture and the Expense Agreement (each as
defined herein), taken together, fully, irrevocably and unconditionally
guaranteed all of the Trust's obligations under the Trust Preferred Securities.
See "Relationship Among the Trust Preferred Securities, the Junior Subordinated
Debentures and the Guarantee -- Full and Unconditional Guarantee." Under the
Guarantee (as defined herein), the Company guarantees the payment of
Distributions by the Trust and payments on liquidation of or redemption of the
Trust Preferred Securities (subordinate to the right to payment of Senior Debt
and Subordinated Debt of the Company, each as defined herein) to the extent of
funds held by the Trust. See "Description of Guarantee." If the Company does not
make required payments on the Junior Subordinated Debentures held by the Trust,
the Trust will have insufficient funds to pay Distributions on the Trust
Preferred Securities. The Guarantee does not cover payment of Distributions when
the Trust does not have sufficient funds to pay such Distributions. In such
event, a holder of the Trust Preferred Securities may institute a legal
proceeding directly against the Company pursuant to the terms of the Indenture
to enforce payment of the Junior Subordinated Debentures to the Trust. See
"Description of Junior Subordinated Debentures -- Enforcement of Certain Rights
by Holders of Trust Preferred Securities." The obligations of the Company under
the Guarantee and the Junior Subordinated Debentures are subordinate and junior
in right of payment to all Senior Debt and Subordinated Debt of the Company.
"See Description of Junior Subordinated Debentures -- Subordination."
The Trust Preferred Securities are subject to mandatory redemption, in
whole or in part, upon repayment of the Junior Subordinated Debentures at the
Stated Maturity or their earlier redemption, in each case at a
S-3
<PAGE> 6
redemption price equal to the aggregate liquidation preference ("Liquidation
Amount") of the Trust Preferred Securities plus any accumulated and unpaid
Distributions thereon to the date of redemption. The Junior Subordinated
Debentures are redeemable prior to maturity at the option of the Company (i) on
or after September 15, 2001, in whole at any time or in part from time to time,
or (ii) at any time, in whole (but not in part), within 90 days following the
occurrence of a Tax Event or an Investment Company Event (each as defined
herein), in each case at a redemption price equal to the accrued and unpaid
interest on the Junior Subordinated Debentures to the date fixed for redemption,
plus 100% of the principal amount thereof. See "Description of the Trust
Preferred Securities -- Redemption."
The Company will have the right at any time, subject to certain
limitations, to dissolve the Trust and, after satisfaction of liabilities to
creditors of the Trust as provided by applicable law, cause a Like Amount (as
defined herein) of the Junior Subordinated Debentures to be distributed to the
holders of the Trust Securities in liquidation of the Trust. See "Description of
the Trust Preferred Securities -- Liquidation Distribution Upon Dissolution."
In the event of the dissolution of the Trust, after satisfaction of
liabilities to creditors of the Trust as required by applicable law, the holders
of Trust Preferred Securities will be entitled to receive a Liquidation Amount
of $10.00 per Trust Preferred Security plus accumulated and unpaid Distributions
thereon to the date of payment, which may be in the form of a Distribution of
such Like Amount of Junior Subordinated Debentures, subject to certain
exceptions. See "Description of the Trust Preferred Securities -- Liquidation
Distribution Upon Dissolution."
The Junior Subordinated Debentures and the Guarantee are unsecured and
subordinated to all Senior Debt and Subordinated Debt of the Company (as each
term is defined in "Description of the Junior Subordinated
Debentures -- Subordination"). The terms of the Junior Subordinated Debentures
and the Guarantee place no limitation on the amount of Senior Debt and
Subordinated Debt that the Company can issue. Currently, the Company has a $50
million reducing revolving loan agreement (the "Credit Facility") which will
increase to $55 million upon completion of this Offering, subject to certain
financial ratios pursuant to the Credit Facility. The Company will apply the net
proceeds of this Offering to repay a portion of the outstanding balance under
the Credit Facility, which was approximately $41.8 million as of June 30, 1998.
The Company may cause additional trust preferred securities to be issued by
trusts similar to the Trust in the future, and there is no limit on the amount
of such securities that may be issued. In that event, the Company's obligations
under the junior subordinated debentures to be issued by such other trusts and
the Company's guarantees of the payments by such trusts will be pari passu with
the Company's obligations under the Junior Subordinated Debentures and the
Guarantee, respectively.
Each of the Trust Preferred Securities and, if the Junior Subordinated
Debentures are distributed to holders of Trust Preferred Securities, the Junior
Subordinated Debentures, will be represented by one or more global certificates
registered in the name of The Depository Trust Company (the "Depositary") or its
nominee. Beneficial interests in the Trust Preferred Securities and, in such
event, the Junior Subordinated Debentures, will be shown on, and transfers
thereof will be effected only through, records maintained by participants in the
Depositary. The Depositary and the Paying Agent (as defined herein) will be
responsible for interest and dividend payments to holders of the Trust Preferred
Securities and the Junior Subordinated Debentures. Except as described herein,
the Trust Preferred Securities in certificated form will not be issued in
exchange for global certificates. See "Book-Entry Issuance."
As used herein, (i) the "Indenture" means the Junior Subordinated
Indenture, as amended and supplemented from time to time, between the Company
and Wilmington Trust Company, as Trustee (the "Indenture Trustee"), under which
the Junior Subordinated Debentures will be issued, (ii) the "Trust Agreement"
means the Amended and Restated Trust Agreement relating to the Trust among the
Company, as depositor, Wilmington Trust Company, as Property Trustee (the
"Property Trustee"), Wilmington Trust Company, as Delaware Trustee (the
"Delaware Trustee"), the Administrative Trustees named therein (collectively,
with the Property Trustee and Delaware Trustee, the "Issuer Trustees") and the
holders, from time to time, of the trust securities, (iii) the "Guarantee
Agreement" means the Guarantee Agreement relating to the guarantee between the
Company and Wilmington Trust Company, as Guarantee Trustee (the "Guarantee
Trustee"), and (iv) the "Expense Agreement" means the Agreement as to Expenses
and Liabilities between the Company and the Trust.
S-4
<PAGE> 7
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 or incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus. Information contained in
this Prospectus Supplement and the accompanying 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
Supplement and the accompanying Prospectus also contain 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 securities offered hereby. Except as noted otherwise, all
information in this Prospectus Supplement assumes that the Underwriter's
over-allotment option is not exercised. Unless the context otherwise requires,
the term "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 the leading owner, operator and franchisor in the United
States 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 11,000 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 order of prevalence, in supermarkets, mass
merchandisers, restaurants, bowling centers, bingo halls, bars 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/Vons, Kroger, AMF Bowling Centers, Fred Meyer Stores, franchised Denny's
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 has recently begun
to place complementary vending machines at existing Shoppe locations, including
kiddie rides, bulk vending (candy, gum, novelty items, etc.) and video games.
The number of Company-owned and operated Shoppes has risen from 743 to
6,166 from 1993 to 1997, representing a compound annual growth rate of 69.7%.
During the same period, operating earnings as a percentage of total revenues
increased from 5.2% to 12.4%. In 1997, the Company had record revenue and
operating earnings of $59.1 million and $7.3 million, respectively.
The Company operates four types of Shoppes: (i) the Toy Shoppe which
primarily dispenses plush toys and other toys, (ii) the Treasure Shoppe which
dispenses items such as jewelry and watches, (iii) the Beanie Bag Shoppe which
dispenses beanie-bag type stuffed toys and (iv) the Fun Shoppe which dispenses
small toys, novelty items and candy. At June 30, 1998, over 60% of the Company's
Shoppe placements have been Toy Shoppes, which the Company purchases new for an
average price of $3,600. In 1997, a Toy Shoppe averaged approximately $12,100 in
revenue and over $4,100 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.
S-5
<PAGE> 8
BUSINESS STRATEGY
The Company plans to increase the number of Shoppes it owns and operates by
an average of at least 1,400 for 1999 and 2000 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'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
As of June 30, 1998, the Company owned and operated over 9,100 Shoppes from
a national network that consisted of 40 offices with operations in 40 states,
which management believes makes the Company the largest 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, restaurants, bowling centers, bingo halls, bars, and similar
locations, which the Company estimates represent over 100,000 potential crane
locations in the United States. The Company believes that owners and operators
of these 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's growth strategy
includes the following:
- 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/Vons, Kroger, AMF
Bowling Centers, Fred Meyer Stores and franchised Denny's. The Company
believes opportunities exist to increase penetration within its existing
Retail Accounts.
- 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, Safeway/Vons, AMF Bowling
Centers and Fred Meyer Stores will allow it to successfully target new
national and regional Retail Accounts.
- 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
it offers at each location. The Company has introduced multiple Shoppes
at individual locations. In addition, the Company has begun to place
complementary vending machines, including kiddie rides, bulk vending and
video games at existing locations.
- Acquire franchisees and other complementary vending businesses. The
Company has completed 14 acquisitions since January 1, 1996, including
nine acquisitions since October 1, 1997, acquiring over 2,600 Shoppes,
significant franchised territories and bulk vending and kiddie ride
businesses. See "-- Recent Acquisitions." The Company plans to pursue
acquisition opportunities in order to increase the number of
Company-owned machines, to acquire franchised territories and to add
other complementary businesses to the Company's product lines.
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<PAGE> 9
RECENT ACQUISITIONS
Since October 1, 1997, as part of the Company's growth strategy it has
completed the nine acquisitions described below:
- Three Rivers Toy Company. The Company's former franchisee for portions of
Pennsylvania, including 83 Shoppes, was purchased in October 1997 for
approximately $0.2 million.
- Quality Amusements Corp. and Quality Entertainment Corp. A bulk vending
and kiddie ride company with operations in Illinois, Indiana, Wisconsin,
Missouri and Iowa was purchased in November 1997 for approximately $2.0
million.
- Creative Coin of Arizona, Inc. The Company's former franchisee for
Arizona, including 159 Shoppes, was purchased in December 1997 for
approximately $1.5 million.
- Tejas Toy Corporation. The Company's former franchisee for portions of
Texas, including 327 Shoppes, was purchased in January 1998 for
approximately $2.4 million.
- McCathren Vending Co. A bulk vending company operating 4,521 pieces of
bulk vending equipment throughout Colorado, Utah and Wyoming was
purchased in March 1998 for approximately $1.2 million.
- American Coin Company of Minneapolis. A skill-crane company in Minnesota,
including 84 skill cranes and six other pieces of amusement equipment,
was purchased in May 1998 for approximately $0.3 million.
- Chilton Vending Co. An owner and operator of simulator and traditional
video games, skill-cranes and redemption equipment located in portions of
Kansas and Missouri was purchased in June 1998 for approximately $4.0
million.
- Suncoast Toys, Inc., NW Toys Co. and Oregon Coin Company
("Suncoast"). The Company's franchisees for portions of Washington,
Oregon and Florida, including 1,388 Shoppes, were purchased in June 1998
for approximately $30.0 million.
- R&T Marketing. The Company's franchisee for a portion of Northern
California, including 370 Shoppes, was purchased in September 1998 for
approximately $2.1 million.
RECENT DEVELOPMENTS
- Plush 4 Play Acquisition. In July 1998, the Company entered into a
definitive agreement (the "Plush 4 Play Agreement") to acquire Plush 4
Play, Inc. ("Plush 4 Play") for a base purchase price of $6.8 million and
a contingent earn-out of up to $2.7 million, subject to certain
adjustments. Plush 4 Play has skill-crane placement agreements with
several national Retail Accounts, including Shoney's, Inc. and Friendly's
Ice Cream Corporation. Presently, 614 skill-cranes are operated at such
Retail Accounts pursuant to agreements between Plush 4 Play and
independent third party operators. Plush 4 Play is a party to placement
agreements which cover an aggregate of 178 additional Retail Account
locations which do not currently have an installed skill-crane. Plush 4
Play also sells pre-packaged plush toys and animals to the skill-crane
industry. The Plush 4 Play Agreement contains certain closing conditions
which must be satisfied by Plush 4 Play and the Company before the
acquisition can occur. While the Company believes the Plush 4 Play
acquisition will close in September 1998, there can be no assurance that
the acquisition will close by such date, if at all. Pursuant to the terms
of the Plush 4 Play Agreement, the Company will (i) operate certain
skill-crane machines in certain Retail Accounts under the terms of
agreements between Plush 4 Play and such Retail Accounts prior to the
closing of the Plush 4 Play acquisition, and (ii) be assigned the rights
to place skill-crane machines in certain Retail Accounts if the Plush 4
Play acquisition does not close.
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<PAGE> 10
- Increased Credit Facility. Upon completion of this Offering, and the
application of the proceeds therefrom, the Company's Credit Facility will
increase from $50 million to $55 million, subject to certain financial
ratios pursuant to the Credit Facility. See "Management Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
- Shelf Registration of Trust Preferred Securities. In addition to the
Offering contemplated hereby, the Company has filed with the Securities
and Exchange Commission a shelf registration statement which registers up
to an aggregate of $100 million of trust preferred securities (including
the Trust Preferred Securities offered hereby). Such additional trust
preferred securities may be offered by the Company at any time.
GENERAL
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.
AMERICAN COIN MERCHANDISING TRUST I
The Trust is a statutory business trust created under Delaware law pursuant
to (i) the trust agreement of the Trust among the Company, as depositor, the
Delaware Trustee and an Administrative Trustee and (ii) the filing of a
Certificate of Trust with the Delaware Secretary of State on July 22, 1998. The
Trust's business and affairs are conducted by the Property Trustee, the Delaware
Trustee and two individual Administrative Trustees who are officers of the
Company. The Trust exists for the exclusive purposes of (i) issuing and selling
the Trust Securities, (ii) using the proceeds from the sale of the Trust
Securities to acquire the Junior Subordinated Debentures issued by the Company
and (iii) engaging in only those other activities necessary, advisable or
incidental thereto. The Junior Subordinated Debentures will be the sole assets
of the Trust and payments by the Company under the Junior Subordinate Debentures
and the Expense Agreement will be the sole revenues of the Trust. All of the
Common Securities will be owned by the Company. The Common Securities will rank
pari passu, and payments will be made thereon pro rata, with the Trust Preferred
Securities, except that upon the occurrence and during the continuance of an
event of default under the Trust Agreement resulting from an event of default
under the Indenture, the rights of the Company as holder of the Common
Securities to payment in respect of Distributions and payments upon liquidation,
redemption or otherwise will be subordinated to the rights of the holders of the
Trust Preferred Securities. See "Description of the Trust Preferred
Securities -- Subordination of Common Securities of the Trust Held by the
Company." The Company will acquire Common Securities in an aggregate liquidation
amount equal to approximately 3% of the total capital of the Trust. The Trust
has a term of 31 years, but may be terminated sooner as provided in the Trust
Agreement.
The Trust's principal offices are located at 5660 Central Avenue, Boulder,
Colorado 80301 and its telephone number is (303) 444-2559.
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<PAGE> 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The summary 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, 1997 and balance sheets at December 31, 1996 and 1997, have been
derived from the financial statements of the Company included elsewhere in this
Prospectus Supplement, that have been audited by KPMG Peat Marwick LLP,
independent auditors, as indicated in their report included elsewhere in this
Prospectus Supplement. The financial data for the six months ended June 30, 1997
and 1998 have been derived from unaudited financial statements included
elsewhere in this Prospectus Supplement. 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, 1998 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1998. The unaudited pro
forma financial data gives effect to the acquisition of Suncoast, accounted for
as a purchase, as if it had occurred on January 1, 1997 for statement of
earnings data. The unaudited pro forma data set forth below have been derived
from the Company's and Suncoast's financial statements. The summary pro forma
data is not necessarily indicative of the results that would have been achieved
had such transactions been consummated on such dates and should not be construed
as representative of future operations. Such pro forma data is subject to the
assumptions set forth in the notes to the unaudited pro forma financial
statements appearing elsewhere in this Prospectus Supplement. The information
presented below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
and pro forma financial statements, and the notes thereto, set forth elsewhere
in this Prospectus Supplement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------ -----------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
-------------------------------- ------------- ------------------- -------------
1995 1996 1997 1997 1997 1998 1998
-------- -------- --------- ------------- -------- -------- -------------
(IN THOUSANDS, EXCEPT PERCENTAGES, RATIOS, PER SHARE DATA AND NUMBER OF SHOPPES)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Total revenue............................ $25,714 $38,267 $ 59,084 $78,966 $26,147 $39,723 $48,419
Gross profit............................. 7,959 11,325 17,611 24,468 7,796 11,802 14,547
General and administrative expense....... 4,565 7,053 10,314 14,129 4,725 7,388 10,230(2)
Operating earnings....................... 3,394 4,272 7,297 10,339 3,071 4,414 4,317(2)
Net earnings............................. 2,575(3) 2,586 4,429 4,975 1,765 2,558 1,786(2)
Basic earnings per share................. (4) 0.51 0.80 0.89 0.33 0.40 0.28(2)
Diluted earnings per share............... (4) 0.48 0.78 0.87 0.33 0.38 0.27(2)
Basic weighted average common shares..... (4) 5,092 5,565 5,565 5,323 6,463 6,463
Diluted weighted average common shares... (4) 5,417 5,694 5,694 5,350 6,664 6,664
NUMBER OF SHOPPES:
Company operations....................... 2,057 3,967 6,166 7,553 4,792 9,157
Franchise operations..................... 3,455 3,981 3,952 2,565 4,195 2,355
------- ------- -------- ------- ------- -------
Total............................. 5,512 7,948 10,118 10,118 8,987 11,512
======= ======= ======== ======= ======= =======
OTHER DATA:
EBITDA(5)................................ $ 4,324 $ 6,163 $ 10,589 $ 4,430 $ 7,205
Interest expense, net.................... 383 375 612 267 479
Depreciation and amortization............ 930 1,891 3,292 1,359 2,791
Net cash provided by operating
activities.............................. 2,862 4,216 8,351 4,132 8,552
Net cash (used in) investing
activities.............................. (5,508) (7,448) (16,079) (5,785) (47,082)
Net cash provided by financing
activities.............................. 3,879 2,413 8,886 1,708 40,291
GROWTH RATES:
Revenue growth........................... 46.0% 48.8% 54.4% * 51.9%
EBITDA growth(5)......................... 107.0 42.5 71.8 * 62.9
Operating earnings growth................ 142.3 25.9 70.8 * 43.7
MARGINS:
EBITDA margin(5)(6)...................... 16.8% 16.1% 17.9% 16.9% 18.1%
Operating earnings margin(7)............. 13.2 11.2 12.4 11.7 11.1
Net earnings margin(8)................... 10.0 6.8 7.5 6.8 6.4
RATIOS:
EBITDA to interest expense, net(5)....... 11.3x 16.4x 17.3x 16.6x 15.0x
Earnings to fixed charges(9)............. 7.6x 9.3x 9.6x 9.0x 7.7x
Pro forma earnings to fixed
charges(9)(10).......................... 3.0x 2.3x
</TABLE>
S-9
<PAGE> 12
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
ACTUAL AS ADJUSTED(11)
------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 3,240 $ 3,240
Total assets................................................ 88,813 90,213
Total short-term debt and current portion of long-term
debt....................................................... 1,923 1,923
Total long-term debt, excluding current portion............. 45,181 29,581
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures(12)................................ -- 17,000
Total stockholders' equity.................................. 32,258 32,258
</TABLE>
- ---------------
(1) Pro forma data give effect to the Suncoast Acquisition, accounted for as a
purchase, as if it had occurred on January 1, 1997 for statement of
earnings data. See "Recent Acquisitions."
(2) Included in pro forma general and administrative expense is $567,000 of
employee bonuses, $407,000 of officers' salaries and $39,000 of additional
vacation pay paid or incurred by Suncoast to its officers and employees
prior to the acquisition on June 12, 1998 by the Company. These expenses
were incurred or accelerated due to the purchase by the Company and
management does not expect them to recur. Had such expenses not been
incurred, operating earnings would have been $5,330,000; net earnings would
have been $2,444,000; basic earnings per share would have been $0.38 a
share; and diluted earnings per share would have been $0.37 a share.
(3) During the years 1993 through August 1995, the Company and each of the
Chicago Toy Company, the Georgia Toy Company, Inland Merchandising, Inc.,
Lehigh Valley Toy Company, Performance Merchandising, Inc., Southwest Coin
Company, Sugarloaf, Ltd. and Sugarloaf Marketing Inc. (the "Affiliated
Entities") were organized as either S corporations or a partnership and the
taxable income of the Company and the Affiliated Entities was attributable
directly to their respective stockholders or partners during such periods.
Accordingly, net earnings for 1995 have been adjusted to reflect federal
and state income taxes as if such taxes had been incurred for such period
at an estimated effective rate of 38%. See Note 1 of Notes to the Company's
Financial Statements included herein.
(4) Net earnings per share and weighted average common shares are not presented
for 1995 because the Company and each of the Affiliated Entities were
organized as S corporations or a partnership. On a pro forma basis, basic
and diluted net earnings per share would have been $0.59 and $0.55 and
basic and diluted weighted average common shares would have been 4,299,000
and 4,669,000, respectively for 1995. See Note 14 of Notes to the Company's
Financial Statements included herein.
(5) EBITDA represents earnings before interest expense, income taxes and
depreciation and amortization. EBITDA is not intended to represent cash
flow from operations as defined by generally accepted accounting principles
and should not be considered as an alternative to cash flow or as a measure
of liquidity or as an alternative to net earnings as indicative of
operating performance. The Company's reported EBITDA may not be comparable
to similarly titled measures of other companies. EBITDA, EBITDA growth,
EBITDA margin and the ratio of EBITDA to interest expense, net are included
herein because management believes they are useful for measuring the
Company's ability to service its debt.
(6) EBITDA margin represents EBITDA divided by total revenue.
(7) Operating earnings margin represents operating earnings divided by total
revenue.
(8) Net earnings margin represents net earnings divided by total revenue.
(9) For purposes of calculating the ratio and pro forma ratio of earnings to
fixed charges, earnings consist of income before income taxes plus fixed
charges. Fixed charges consist of the interest expense on all indebtedness,
the estimated representative interest factor of rental expense and losses
of less than 50%-owned affiliates.
(10) The average outstanding debt balances for the year ended December 31, 1997
and the six-month period ended June 30, 1998 were approximately $7.6
million and $12.7 million, respectively, and gross interest expense was
approximately $0.6 million and $0.5 million, respectively. The pro forma
ratios assume the refinancing of a portion of this indebtedness with a
corresponding amount of Junior Subordinated Debentures on January 1, 1997.
(11) As adjusted to give effect to the issuance by the Trust of the 1,700,000
Trust Preferred Securities offered hereby and the receipt by the Company of
the proceeds, net of estimated underwriting compensation and other
estimated offering expenses, from the corresponding sale of the Junior
Subordinated Debentures to the Trust, and the application of the net
proceeds therefrom as described under "Use of Proceeds."
(12) The Trust's assets consist solely of an aggregate principal amount of
$17,526,000 of Junior Subordinated Debentures.
* Numbers are omitted as prior period has not been presented herein.
S-10
<PAGE> 13
THE OFFERING
Issuer of Trust Preferred
Securities............... American Coin Merchandising Trust I (the "Trust")
Securities Offered......... 1,700,000 Trust Preferred Securities having a
Liquidation Amount of $10 per Trust Preferred
Security. The Trust Preferred Securities represent
preferred undivided beneficial interests in the
Trust's assets, which will consist solely of the
Junior Subordinated Debentures and payments
thereunder.
Distributions.............. The Distributions payable on each Trust Preferred
Security will be at the annual rate of 10.5% of the
Liquidation Amount until September 15, 2001, then
at the annual rate of 11% of the Liquidation Amount
until September 15, 2003, then at the annual rate
of 11.5% of the Liquidation Amount until September
15, 2005 and then at the annual rate of 12% of the
Liquidation Amount thereafter of $10 per Trust
Preferred Security, will be cumulative, will accrue
from the date of issuance of the Trust Preferred
Securities, and will be payable quarterly in
arrears on each March 15, June 15, September 15 and
December 15, commencing December 15, 1998 (subject
to possible deferral as described below). The
amount of each Distribution due with respect to the
Trust Preferred Securities will include amounts
accrued through each Distribution Date. See
"Description of the Trust Preferred Securities."
Extension Periods.......... So long as no Debenture Event of Default (as
defined in "Description of the Junior Subordinated
Debentures -- Debenture Events of Default") has
occurred and is continuing, the Company will have
the right, at any time, to defer payments of
interest on the Junior Subordinated Debentures by
extending the interest payment period thereon for a
period not exceeding eight consecutive quarters
with respect to each deferral period (each an
"Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. If interest
payments are so deferred, Distributions on the
Trust Preferred Securities will also be deferred
and the Company will not be permitted, subject to
certain exceptions described herein, to declare or
pay any cash distributions with respect to the
Company's capital stock or future debt securities
that rank pari passu with or junior to the Junior
Subordinated Debentures. During an Extension
Period, Distributions will continue to accumulate
at the rate of 10.5% compounded quarterly until
September 15, 2001, then at the rate of 11%
compounded quarterly until September 15, 2003, then
at the rate of 11.5% compounded quarterly until
September 15, 2005 and then at the rate of 12%
compounded quarterly thereafter. Because interest
would continue to accrue and compound on the Junior
Subordinated Debentures, to the extent permitted by
applicable law, holders of the Trust Preferred
Securities will be required to accrue income for
United States federal income tax purposes and to
pay federal income tax thereon. See "Description of
the Junior Subordinated Debentures -- Option to
Defer Interest Payment Period" and "Material
Federal Income Tax Consequences -- Interest Income
and Original Issue Discount."
Maturity................... The Junior Subordinated Debentures will mature on
September 15, 2028, which date may be shortened
(such date, as it may be shortened, the "Stated
Maturity") to a date not earlier than September 15,
2001.
S-11
<PAGE> 14
The Company might, for example, exercise its right
to shorten the maturity of the Junior Subordinated
Debentures under the circumstances where a Tax
Event, Investment Company Event or other
undesirable event could be avoided simply by
shortening the maturity of the Junior Subordinated
Debentures. See "Description of the Junior
Subordinated Debentures -- General."
Redemption................. The Trust Securities are subject to mandatory
redemption upon repayment of the Junior
Subordinated Debentures at their Stated Maturity or
their earlier redemption at a redemption price
equal to the aggregate Liquidation Amount of the
Trust Securities plus accumulated and unpaid
Distributions thereon to the date of redemption.
The Junior Subordinated Debentures are redeemable
prior to Stated Maturity at the option of the
Company (i) on or after September 15, 2001 in whole
at any time or in part from time to time, or (ii)
at any time, in whole (but not in part), within 90
days following the occurrence of a Tax Event or an
Investment Company Event, in each case at a
redemption price equal to 100% of the principal
amount of the Junior Subordinated Debentures so
redeemed, together with any accrued but unpaid
interest to the date fixed for redemption. See
"Description of the Trust Preferred
Securities -- Redemption" and "Description of the
Junior Subordinated Debentures -- Redemption."
Distribution of Junior
Subordinated
Debentures............... The Company has the right, subject to certain
limitations, at any time to dissolve the Trust,
and, after satisfaction of creditors of the Trust
as required by applicable law, to cause the Junior
Subordinated Debentures to be distributed to
holders of Trust Preferred Securities in
liquidation of the Trust. See "Description of the
Trust Preferred Securities -- Distribution of
Junior Subordinated Debentures."
Guarantee.................. Taken together, the Company's obligations under the
various documents described herein, including the
Guarantee Agreement, provide a full and
unconditional guarantee (the "Guarantee") of
payments by the Trust of Distributions and other
amounts due on the Trust Preferred Securities.
Under the Guarantee Agreement, the Company
guarantees the payment of Distributions by the
Trust and payments on liquidation or redemption of
the Trust Preferred Securities (subordinate to the
right to payment of Senior Debt and Subordinated
Debt of the Company) to the extent of funds held by
the Trust. If the Trust has insufficient funds to
pay Distributions on the Trust Preferred Securities
(i.e., if the Company has failed to make required
payments under the Junior Subordinated Debentures),
a holder of the Trust Preferred Securities would
have the right to institute a legal proceeding
directly against the Company to enforce payment on
the Junior Subordinated Debentures. See
"Description of the Junior Subordinated
Debentures -- Enforcement of Certain Rights by
Holders of Trust Preferred Securities," and
"-- Debenture Events of Default" and "Description
of the Guarantee."
Ranking.................... The Trust Preferred Securities will rank pari
passu, and payments thereon will be made pro rata,
with the Common Securities of the Trust held by the
Company, except as described under "Description of
the Trust Preferred Securities -- Subordination of
Common Securities of the Trust Held by the
Company." The obligations of the Company under the
Guarantee, the Junior Subordinated Debentures and
other docu-
S-12
<PAGE> 15
ments described herein are unsecured and rank
subordinate and junior in right of payment to all
current and future Senior Debt and Subordinated
Debt of the Company, the amount of which is
unlimited. The Company will apply the net proceeds
of this Offering to repay a portion of the
outstanding balance under the Credit Facility,
which was approximately $41.8 million as of June
30, 1998. The Company may cause additional trust
preferred securities to be issued by trusts similar
to the Trust in the future, and there is no limit
on the amount of such securities that may be
issued. The Company has filed with the Securities
and Exchange Commission a shelf registration
statement which registers up to an aggregate of
$100 million of trust preferred securities,
including the Trust Preferred Securities offered
hereby. Such additional trust preferred securities
may be offered by the Company at any time. In that
event, the Company's obligations under the junior
subordinated debentures to be issued to such other
trusts and the Company's guarantees of the payments
by such trusts will rank pari passu with the
Company's obligations under the Junior Subordinated
Debentures and the Guarantee, respectively.
Voting Rights.............. The holders of the Trust Preferred Securities will
have no voting rights except in limited
circumstances. Except as provided below, the
affirmative consent of the holders of at least a
majority of the outstanding Trust Preferred
Securities will be required by the Trust for
amendments to the Trust Agreement that would affect
adversely the rights or privileges of the holders
of the Trust Preferred Securities. The Property
Trustee, the Administrative Trustees and the
Company may amend the Trust Agreement without the
consent of holders of the Trust Preferred
Securities to ensure that the Trust will be
classified for United States federal income tax
purposes as a grantor trust or to ensure that the
Trust will not be required to register as an
"investment company" under the Investment Company
Act, even if such action adversely affects the
interests of such holders. See "Description of the
Trust Preferred Securities -- Voting Rights;
Amendment of the Trust Agreement."
ERISA Considerations....... Prospective purchasers should carefully consider
the information set forth under the caption "ERISA
Considerations."
AMEX Symbol................ ACM.Pr.A
Use of Proceeds............ The proceeds to the Trust from the sale of the
Trust Preferred Securities offered hereby will be
invested by the Trust in the Junior Subordinated
Debentures of the Company. The Company will use the
approximate $15.6 million net proceeds of the
Offering to repay a portion of the indebtedness
outstanding under the Credit Facility. See "Use of
Proceeds."
S-13
<PAGE> 16
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained or incorporated by reference in this Prospectus
Supplement before purchasing the Trust Preferred Securities offered hereby.
RISK FACTORS RELATING TO THE OFFERING
RANKING OF THE COMPANY'S OBLIGATIONS UNDER THE JUNIOR SUBORDINATED DEBENTURES
AND THE GUARANTEE
All obligations of the Company under the Guarantee, the Junior Subordinated
Debentures and other documents described herein are unsecured and rank
subordinate and junior in right of payment to all current and future Senior Debt
and Subordinated Debt of the Company, the amount of which is unlimited.
None of the Indenture, the Guarantee, the Guarantee Agreement or the Trust
Agreement places any limitation on the amount of secured or unsecured debt,
including Senior Debt and Subordinated Debt, that may be incurred by the
Company. Further, there is no limitation on the Company's ability to issue
additional junior subordinated debentures in connection with any further
offerings of trust preferred securities, and such additional debentures would
rank pari passu with the Junior Subordinated Debentures. See "Description of the
Junior Subordinated Debentures -- Subordination" and "Description of the
Guarantee -- Status of the Guarantee."
OPTION TO DEFER INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default (as defined herein) has occurred
and is continuing, the Company has the right under the Indenture to defer
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding eight consecutive quarters with respect
to each Extension Period, provided that no Extension Period may extend beyond
the Stated Maturity of the Junior Subordinated Debentures. As a consequence of
any such deferral, quarterly Distributions on the Trust Preferred Securities by
the Trust will be deferred (and the amount of Distributions to which holders of
the Trust Preferred Securities are entitled will accumulate additional amounts
thereon at the rate of 10.5% per annum, compounded quarterly, until September
15, 2001, then at the rate of 11% per annum, compounded quarterly, until
September 15, 2003, then at the rate of 11.5% per annum, compounded quarterly,
until September 15, 2005 and then at the rate of 12% per annum, compounded
quarterly, thereafter for such Distributions) during any such Extension Period.
During any such Extension Period, the Company will be prohibited from making
certain payments or distributions with respect to the Company's capital stock
(including dividends on or redemptions of common or preferred stock) and from
making certain payments with respect to any future debt securities of the
Company that rank pari passu with or junior in interest to the Junior
Subordinated Debentures; however, the Company will not be restricted from (a)
paying dividends or distributions in capital stock of the Company, (b) redeeming
rights or taking certain other actions under a stockholders rights plan, (c)
making payments under the Guarantee or (d) making purchases of common stock
related to the issuance of common stock or rights under any of the Company's
benefit plans for its directors, officers, employees or consultants (in
connection with an optionee's or rightholder's use of Common Stock as
consideration for the exercise or purchase price of the related option or
right). Further, during an Extension Period, the Company would have the ability
to continue to make payments on its Senior Debt and Subordinated Debt, if any.
Prior to the termination of any Extension Period, the Company may further extend
such Extension Period provided that such extension does not cause such Extension
Period to exceed eight consecutive quarters or to extend beyond the Stated
Maturity. Upon the termination of any Extension Period and the payment of all
interest then accrued and unpaid (together with interest thereon at the annual
rate of 10.5%, compounded quarterly, until September 15, 2001, then at the rate
of 11% compounded quarterly until September 15, 2003, then at the rate of 11.5%
compounded quarterly until September 15, 2005 and then at the rate of 12%
compounded quarterly thereafter ), the Company may elect to begin a new
Extension Period subject to the above requirements. There is no limitation on
the number of times that the Company may elect to begin an Extension Period. As
a consequence of the Company's deferral of interest payments,
S-14
<PAGE> 17
holders of the Trust Preferred Securities will not receive cash distributions
during such deferral periods (although the Distributions to which holders of the
Trust Preferred Securities are entitled will continue to accumulate until
payment in full), and the market price of the Trust Preferred Securities is
likely to be adversely affected by such deferral. A holder that disposes of such
holder's Trust Preferred Securities during an Extension Period, therefore, might
not receive the same return on such holder's investment as a holder that
continues to hold Trust Preferred Securities. See "Description of the Trust
Preferred Securities -- Distributions," "Description of the Junior Subordinated
Debentures -- Option to Defer Interest Payment Period" and "-- Debenture Events
of Default."
TAX CONSEQUENCES OF OPTION TO DEFER INTEREST PAYMENT PERIOD AND OF A DEFERRAL OF
INTEREST PAYMENT
Because the Company has no current plan to exercise its option to defer
payments of interest and considers the likelihood of exercising the option to be
a remote contingency as of the issue date of the Junior Subordinated Debentures,
it is the Company's position that the Junior Subordinated Debentures will be
treated as issued without "original issue discount" for United States federal
income tax purposes. As a result, holders of Trust Preferred Securities will
include interest in taxable income under their own methods of accounting (i.e.,
cash or accrual). However, if the Internal Revenue Service (the "Service") were
to successfully challenge the Company's position, or if the Company exercises
its right to defer payments of interest, the holders of Trust Preferred
Securities will be required to include their pro rata share of original issue
discount in gross income as it accrues for United States federal income tax
purposes in advance of the receipt of cash. If the tax authorities successfully
asserted that, as of the issue date of the Junior Subordinated Debentures,
exercise of the deferment option is not a remote or incidental contingency,
interest would be reportable under the contingent payment debt rules of the
Treasury Regulations as of the issue date. See "Material Federal Income Tax
Consequences -- Interest Income and Original Issue Discount." Should the Company
elect to exercise its right to defer payments of interest in the future, the
market price of the Trust Preferred Securities is likely to be adversely
affected. A holder that disposes of such holder's Trust Preferred Securities
during an Extension Period, therefore, might not receive the same return on such
holder's investment as a holder that continues to hold Trust Preferred
Securities. See "Description of the Junior Subordinated Debentures -- Option to
Defer Interest Payment Period."
POSSIBLE TAX LAW CHANGES AFFECTING THE TRUST PREFERRED SECURITIES
There can be no assurance that future legislation will not affect the
ability of the Company to deduct interest on the Junior Subordinated Debentures.
Such a change could give rise to a Tax Event (as defined below), which may
permit the Company to cause a redemption of the Trust Preferred Securities. In
addition, the Service recently asserted that interest payable on a security with
characteristics and issued in circumstances similar to the characteristics and
issuance of the Junior Subordinated Debentures was not deductible for United
States federal income tax purposes. The taxpayer in that case has filed a
petition in the United States Tax Court challenging the Service's position on
this matter. If this matter is litigated and the Tax Court sustains the
Service's position, such judicial decision could give rise to a Tax Event which
could, in certain circumstances, require the dissolution of the Trust or permit
the Company to redeem the Junior Subordinated Debentures. See "Description of
the Trust Preferred Securities -- Redemption -- Tax Event Redemption, Investment
Company Event Redemption" and "Description of the Junior Subordinated
Debentures -- Redemption."
REDEMPTION PRIOR TO STATED MATURITY
The Company may, at its option, on or after September 15, 2001, redeem the
Junior Subordinated Debentures in whole at any time or in part from time to time
at 100% of the principal amount together with accrued but unpaid interest to the
date fixed for redemption and therefore cause a mandatory redemption of the
Trust Securities.
In addition, upon the occurrence and during the continuation of a Tax Event
or an Investment Company Event (whether occurring before or after September 15,
2001), the Company has the right, if certain conditions are met, to redeem the
Junior Subordinated Debentures in whole (but not in part) at 100% of the
principal amount together with accrued but unpaid interest to the date fixed for
redemption within 90 days
S-15
<PAGE> 18
following the occurrence of such Tax Event or Investment Company Event and
therefore cause a mandatory redemption of Trust Securities. See "Description of
the Trust Preferred Securities -- Redemption."
A "Tax Event" means the receipt by the Company and the Trust of an opinion
of counsel experienced in such matters to the effect that, as a result of any
amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such prospective change, pronouncement or decision is announced on or after the
original issuance of the Trust Preferred Securities, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days of the date
of such opinion, subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, (ii) interest
payable by the Company on the Junior Subordinated Debentures is not, or within
90 days of such opinion, will not be, deductible by the Company, in whole or in
part, for United States federal income tax purposes or (iii) the Trust is, or
will be within 90 days of the date of the opinion, subject to more than a de
minimis amount of other taxes, duties or other governmental charges.
An "Investment Company Event" means the receipt by the Company and the
Trust of an opinion of counsel experienced in such matters to the effect that,
as a result of any change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, the Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which change
becomes effective on or after the original issuance of the Trust Preferred
Securities.
If less than all of the Trust Securities issued by the Trust are to be
redeemed on a Redemption Date, then the aggregate Redemption Price for such
Trust Securities to be redeemed shall be allocated pro rata to the Trust
Preferred Securities and the Common Securities based upon the relative
Liquidation Amounts of such classes. The particular Trust Preferred Securities
to be redeemed shall be selected by the Property Trustee from the outstanding
Trust Preferred Securities not previously called for redemption, by such method
as the Property Trustee shall deem fair and appropriate and which may provide
for the selection for redemption of portions (equal to $10 or an integral
multiple thereof) of the Liquidation Amount of Trust Preferred Securities.
POSSIBLE DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF TRUST
PREFERRED SECURITIES; RISK OF TAXATION UPON A DISTRIBUTION
The Company will have the right at any time, subject to certain
limitations, to dissolve the Trust and, after satisfaction of liabilities to
creditors of the Trust as required by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Trust Preferred
Securities in liquidation of the Trust. Because holders of the Trust Preferred
Securities may receive Junior Subordinated Debentures in liquidation of the
Trust and because Distributions are otherwise limited to payments on the Junior
Subordinated Debentures, prospective purchasers of the Trust Preferred
Securities are also making an investment decision with regard to the Junior
Subordinated Debentures and should carefully review all the information
regarding the Junior Subordinated Debentures contained herein. See "Description
of the Trust Preferred Securities -- Liquidation Distribution Upon Dissolution"
and "Description of the Junior Subordinated Debentures." If a Tax Event were to
occur which would cause the Trust to be subject to United States federal income
tax with respect to income received or accrued on the Junior Subordinated
Debentures, a distribution of the Junior Subordinated Debentures by the Trust
could be a taxable event to the Trust and the holders of the Trust Preferred
Securities. See "Material Federal Income Tax Consequences -- Distribution of
Junior Subordinated Debentures to Holders of Trust Preferred Securities."
SHORTENING OF STATED MATURITY OF THE JUNIOR SUBORDINATED DEBENTURES
The Company will have the right at any time to shorten the maturity of the
Junior Subordinated Debentures to a date not earlier than three years from the
date of issuance and thereby cause the Trust Preferred Securities to be redeemed
on such earlier date. See "Description of the Junior Subordinated
Debentures -- Redemption."
S-16
<PAGE> 19
LIMITATIONS ON DIRECT ACTIONS AGAINST THE COMPANY AND ON RIGHTS UNDER THE
GUARANTEE
The Guarantee guarantees to the holders of the Trust Preferred Securities
the following payments, to the extent not paid by the Trust: (i) any accumulated
and unpaid Distributions required to be paid on the Trust Preferred Securities,
to the extent that the Trust has funds on hand available therefor at such time,
(ii) the redemption price with respect to any Trust Preferred Securities called
for redemption, to the extent that the Trust has funds on hand available
therefor at such time, and (iii) upon a voluntary or involuntary dissolution,
winding-up or liquidation of the Trust (unless the Junior Subordinated
Debentures are distributed to holders of the Trust Preferred Securities), the
lesser of (a) the aggregate of the Liquidation Amount and all accumulated and
unpaid Distributions to the date of payment to the extent that the Trust has
funds on hand available therefor at such time (the "Liquidation Distribution")
and (b) the amount of assets of the Trust remaining available for distribution
to holders of the Trust Preferred Securities after satisfaction of liabilities
to creditors of the Trust as required by applicable law. The holders of not less
than a majority in aggregate Liquidation Amount of the Trust Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee in respect of the
Guarantee or to direct the exercise of any trust power conferred upon the
Guarantee Trustee under the Guarantee Agreement. Any holder of the Trust
Preferred Securities may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person or
entity. If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Trust would lack funds for the
payment of Distributions or amounts payable on redemption of the Trust Preferred
Securities or otherwise, and, in such event, holders of the Trust Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. Instead, in the event a Debenture Event of Default shall have occurred
and be continuing and such event is attributable to the failure of the Company
to pay interest on or principal of the Junior Subordinated Debentures on the
date on which such payment is due and payable, then a holder of Trust Preferred
Securities may institute a legal proceeding directly against the Company for
enforcement of payment to such holder of the principal of or interest on such
Junior Subordinated Debentures having a principal amount equal to the aggregate
liquidation amount of the Trust Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Company will have a right
of set-off under the Indenture to the extent of any payment made by the Company
to such holder of Trust Preferred Securities in the Direct Action. Except as
described herein, holders of Trust Preferred Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures. See "Description of the Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of Trust Preferred
Securities" and "Description of the Guarantee." The Trust Agreement provides
that each holder of Trust Preferred Securities by acceptance thereof agrees to
the provisions of the Guarantee Agreement and the Indenture.
ABILITY TO MAKE PAYMENTS ON THE TRUST PREFERRED SECURITIES AND JUNIOR
SUBORDINATED DEBENTURES
The ability of the Trust to pay amounts due on the Trust Preferred
Securities is solely dependent upon the Company making payments on the Junior
Subordinated Debentures as and when required. The Company will have significant
interest expense under the Junior Subordinated Debentures. In addition, after
giving effect to the Offering and the application of net proceeds therefrom, the
Company will have approximately $33.0 million outstanding under the Credit
Facility and have approximately $19.8 million of unused availability under the
Credit Facility. The Indenture does not prohibit the Company from incurring
additional indebtedness including indebtedness secured by its assets or
properties. While the Company expects that its operating cash flow will be
sufficient to cover its expenses including interest costs, there can be no
assurance with respect thereto. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
S-17
<PAGE> 20
LIMITED COVENANTS; ABSENCE OF SINKING FUND
The covenants in the Indenture are limited. The Company is not required
under the Indenture to meet any financial tests that measure the Company's
working capital, interest coverage or net worth in order to comply with the
terms of the Indenture. There are no covenants relating to the Company in the
Trust Agreement. As a result, neither the Indenture nor the Trust Agreement
protects holders of Junior Subordinated Debentures, or Trust Preferred
Securities, respectively, in the event of a material adverse change in the
Company's financial condition or results of operations, or limits the ability of
the Company to incur additional indebtedness. Therefore, the provisions of these
governing instruments should not be considered a significant factor in
evaluating whether the Company will be able to comply with its obligations under
the Junior Subordinated Debentures or the Guarantee. Further, the Junior
Subordinated Debentures do not have the benefit of any sinking fund payments by
the Company.
LIMITED VOTING RIGHTS
The holders of the Trust Preferred Securities will have no voting rights
except in limited circumstances relating only to the modification of the Trust
Preferred Securities and the exercise of the rights of the Trust as holder of
the Junior Subordinated Debentures and the Guarantee. Except as provided below,
the affirmative consent of the holders of at least a majority of the outstanding
Trust Preferred Securities will be required by the Trust for amendments to the
Trust Agreement that would affect adversely the rights or privileges of the
holders of the Trust Preferred Securities. Holders of Trust Preferred Securities
will not be entitled to vote to appoint, remove or replace the Property Trustee
or the Delaware Trustee, and such voting rights are vested exclusively in the
holder of the Common Securities except upon the occurrence of certain events
described herein. In no event will the holders of the Trust Preferred Securities
have the right to vote to appoint, remove or replace the Administrative
Trustees; such voting rights are vested exclusively in the holder of the Common
Securities. The Property Trustee, the Administrative Trustees and the Company
may amend the Trust Agreement without the consent of holders of the Trust
Preferred Securities to cure any ambiguity or make other provisions not
inconsistent with the Trust Agreement or to ensure that the Trust will be
classified for United States federal income tax purposes as a grantor trust or
to ensure that the Trust will not be required to register as an "investment
company" under the Investment Company Act, even if such action adversely affects
the interests of such holders. See "Description of the Trust Preferred
Securities -- Voting Rights; Amendment of the Trust Agreement" and " -- Removal
of Trustees."
ABSENCE OF EXISTING PUBLIC MARKET; MARKET PRICES
There is no existing market for the Trust Preferred Securities. The Trust
Preferred Securities have been approved for listing, subject to notice of
issuance, on the American Stock Exchange. There can be no assurance, however,
that an active and liquid trading market for the Trust Preferred Securities will
develop or that continued listing of the Trust Preferred Securities will be
available on the American Stock Exchange. Although the Underwriter has informed
the Trust and the Company that the Underwriter intends to make a market in the
Trust Preferred Securities offered hereby, the Underwriter is not obligated to
do so and any such market making activity may be terminated at any time without
notice to the holders of the Trust Preferred Securities. Future trading prices
of the Trust Preferred Securities will depend on many factors including, among
other things, prevailing interest rates, the operating results and financial
condition of the Company, and the market for similar securities. As a result of
the existence of the Company's right to defer interest payments on or shorten
the Stated Maturity of the Junior Subordinated Debentures, the market price of
the Trust Preferred Securities may be more volatile than the market prices of
debt securities that are not subject to such optional deferrals or reduction in
maturity. There can be no assurance as to the market prices for the Trust
Preferred Securities or the listing, or market prices for, the Junior
Subordinated Debentures that may be distributed in exchange for the Trust
Preferred Securities if the Company exercises its right to dissolve and
liquidate the Trust. Accordingly, the Trust Preferred Securities that an
investor may purchase, or the Junior Subordinated Debentures that a holder of
the Trust Preferred Securities may receive in liquidation of the Trust, may
trade at a discount from the price that the investor paid to purchase the Trust
Preferred Securities offered hereby.
S-18
<PAGE> 21
RISK FACTORS RELATING TO THE COMPANY
GROWTH AND MANAGEMENT OF GROWTH
The Company has recently experienced substantial growth. There can be no
assurance that the Company will continue to grow at historical rates or at all.
The Company has completed 13 acquisitions since January 1, 1996, including eight
acquisitions since October 1, 1997. 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 business, financial
condition and results of operations.
In addition, the Company has limited experience with product offerings
beyond skill-cranes, and new product offerings (including kiddie rides, bulk
vending, redemption equipment and video games) 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."
SUBSTANTIAL INDEBTEDNESS; EFFECT OF FINANCIAL LEVERAGE
The Company intends to use a portion of the proceeds of this Offering to
repay a portion of the outstanding balance on its Credit Facility, which will
result in the Company having approximately $33.0 million outstanding under the
Credit Facility with an additional $19.8 million available for future borrowing.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." The
Company intends to use funds available under the Credit Facility for a number of
purposes, including future acquisitions. Further use of funds from the Credit
Facility could result in the Company incurring additional indebtedness that is
substantial in relation to its stockholders' equity and cash flow. As a result
of the issuance of the Subordinated Debentures and the amount the Company owes
pursuant to the Credit Facility, fixed charges could exceed earnings for the
foreseeable future. Substantial leverage poses the risk that the Company may not
be able to generate sufficient cash flow to service its indebtedness, or to
adequately fund its operations. There can be no assurance that the Company will
be able to increase its revenue and leverage the acquisitions it has made to
achieve sufficient cash flow to meet its potential debt service obligations. In
particular, there can be no assurance that the Company's operating cash flow
will be sufficient to meet its debt service obligations under the Credit
Facility. The Company's leverage also could limit its ability to effect future
financings or may otherwise restrict the Company's operations and growth.
S-19
<PAGE> 22
INTEGRATION OF ACQUISITIONS
The Company has recently completed a number of acquisitions and intends to
continue to acquire other businesses in the future. Acquisitions have placed,
and are likely to continue to place, a significant strain on the Company's
managerial, operating, financial and other resources. The Company's future
performance will depend, in part, upon its ability to integrate its acquisitions
effectively, which will require that the Company implement additional management
information systems capabilities, further develop its operating, administrative
and financial and accounting systems and controls, improve coordination among
accounting, finance, marketing and operations, and hire and train additional
personnel. Failure by the Company to develop adequate operational and control
systems or to attract and retain additional qualified management, financial,
sales and marketing and customer care personnel could materially adversely
affect the Company's ability to integrate the businesses it has acquired and
continues to acquire. While the Company anticipates that it will recognize
various economies and efficiencies of scale as a result of its acquisitions and
the integration of the businesses it has acquired, the process of consolidating
the businesses and implementing integrations, even if successful, may take a
significant period of time, will place a significant strain on the Company's
resources and could subject the Company to additional expenses during the
integration process. Furthermore, the Company's performance will depend on the
internal growth generated through acquired operations. As a result, there can be
no assurance that the Company will be able to integrate the businesses it has
acquired successfully or in a timely manner in accordance with its strategic
objectives. Failure to effectively and efficiently integrate acquired businesses
could have a material adverse effect on the Company's business, financial
condition and results of operations.
TRADE RELATIONS AND DEPENDENCE ON MAJOR ACCOUNTS
The Company's largest account, Wal-Mart, accounted for approximately 33.5%
of total revenue in 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 and acquisition candidates.
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 Retail Accounts
targeted by the Company to compete readily with the Company in certain markets.
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 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,
S-20
<PAGE> 23
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 business, financial condition and results of operations. 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 in a
particular period.
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 and results of operations.
See "Business -- Suppliers" and " -- Growth Strategy."
SEASONALITY AND VARIABILITY OF RESULTS
The financial performance of the Shoppes is substantially dependent on the
level of retail traffic at such Shoppes' particular location. Accordingly, the
business, financial condition and results of operations of the Company can be
materially and adversely affected by factors 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
S-21
<PAGE> 24
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 business, financial condition and results of operations could be
adversely affected.
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 Company's business, financial condition and
results of operations.
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, financial condition and results of 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, financial condition
and results of operations.
PRODUCT LIABILITY AND 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. 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.
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. The Company owns a number of trademarks that have been registered with
the United States Patent and Trademark Office and in Canada, including
"SugarLoaf," "Toy Shoppe," "Treasure Shoppe" and "Fun Shoppe" and has four
trademark applications pending. 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
S-22
<PAGE> 25
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 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" and "Management."
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. 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, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a 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.
S-23
<PAGE> 26
USE OF PROCEEDS
All of the proceeds to the Trust from the sale of the Trust Preferred
Securities offered by it hereby will be invested by the Trust in the Junior
Subordinated Debentures. The net proceeds to the Company from the sale of the
Junior Subordinated Debentures are estimated to be approximately $15.6 million
(approximately $18.0 million if the Underwriter's over-allotment option is
exercised in full) after deducting the estimated underwriting compensation and
offering expenses payable by the Company.
The net proceeds from the Offering will be used to repay a portion of the
outstanding principal amount of the Company's Credit Facility. The Credit
Facility bears interest at the bank's prime interest rate, or at the Company's
option, an interest rate based on the current LIBOR rate, and has a final
maturity of July 13, 2001. At June 30, 1998, the amount outstanding under the
Credit Facility was approximately $41.8 million. Upon the completion of the
Offering contemplated hereby and the application of the net proceeds therefrom,
the Company will have up to $19.8 million of unused availability based on
certain financial ratios pursuant to the Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Such unused availability,
together with the Company's other available cash resources, will be used to (i)
purchase additional skill-crane, bulk vending, kiddie ride and video game
equipment and (ii) fund complementary acquisitions of other companies,
technology or products. The Company does not presently have any commitments or
agreements with respect to any such acquisitions, other than the proposed
acquisition of Plush 4 Play. See "Business -- Recent Developments." 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.
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Company and, accordingly, the accounts of the Trust will be included in
the consolidated financial statements of the Company. The Trust Preferred
Securities will be presented as a separate line item in the consolidated balance
sheet of the Company under the caption "Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated
Debentures," and appropriate disclosures about the Trust Preferred Securities,
the Guarantee and the Junior Subordinated Debentures will be included in the
notes to consolidated financial statements. Estimated underwriting compensation
and other estimated offering expenses will be capitalized as a deferred
financing cost and amortized over the life of the Junior Subordinated
Debentures. For financial reporting purposes, the Company will record
Distributions payable on the Trust Preferred Securities and amortization of
deferred financing costs as interest expense in the consolidated statements of
operations.
Future reports of the Company filed under the Exchange Act will include a
footnote to the financial statements stating that (i) the Trust is wholly owned,
(ii) the sole assets of the Trust are the Junior Subordinated Debentures
(specifying the principal amount, interest rate and maturity date of such Junior
Subordinated Debentures) and (iii) the back up obligations, in the aggregate,
constitute a full and unconditional guarantee by the Company of the obligations
of the Trust under the Trust Preferred Securities. The Trust will not provide
separate reports under the Exchange Act.
S-24
<PAGE> 27
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 (a) on a historical basis as reported and (b) on an as adjusted basis
to give effect to (i) the issuance by the Trust of the 1,700,000 Trust Preferred
Securities offered hereby, (ii) the receipt by the Company of the proceeds, net
of estimated underwriting compensation and other estimated offering expenses,
from the corresponding sale of the Junior Subordinated Debentures to the Trust
and (iii) the application by the Company of the net proceeds therefrom as
described under "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Short-term debt and current portion of long-term debt....... $ 1,923 $ 1,923
======= =======
Long-term debt, excluding current portion................... 45,181 29,581
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures(1)................................ -- 17,000
Stockholders' equity:
Preferred Stock, $.10 par value; 500,000 shares
authorized, none issued actual, pro forma and pro forma
as adjusted............................................ -- --
Common Stock, $.01 par value, 20,000,000 shares
authorized; issued and outstanding 6,468,903, actual
and as adjusted(2)..................................... 65 65
Additional paid-in capital................................ 21,949 21,949
Unearned stock option compensation........................ (10) (10)
Retained earnings......................................... 10,254 10,254
------- -------
Total stockholders' equity........................ 32,258 32,258
------- -------
Total capitalization.............................. $77,439 $78,839
======= =======
</TABLE>
- ---------------
(1) The subsidiary trust is the Trust, which will hold an aggregate principal
amount of approximately $17.5 million of the Junior Subordinated Debentures
as its sole asset. The Trust Preferred Securities will be issued by the
Trust. The Junior Subordinated Debentures will bear interest at the rate of
10.5% per annum until September 15, 2001, then at the rate of 11% per annum
until September 15, 2003, then at the rate of 11.5% per annum until
September 15, 2005 and then at the rate of 12% per annum thereafter and will
mature on September 15, 2028, which date may be shortened to a date not
earlier than September 15, 2001 if certain conditions are met. The Junior
Subordinated Debentures are redeemable prior to maturity at the option of
the Company (i) on or after September 15, 2001, in whole at any time or in
part from time to time, or (ii) at any time, in whole (but not in part),
within 90 days following the occurrence and continuation of a Tax Event or
an Investment Company Event. See "Description of Junior Subordinated
Debentures -- Redemption." The Company will own all of the Common Securities
issued by the Trust.
(2) Excludes (i) 295,667 shares of Common Stock issuable upon exercise of stock
options at a weighted average exercise price of $7.86 per share outstanding
as of June 30, 1998 and (ii) 55,000 shares of Common Stock issuable upon
exercise of certain warrants which have an exercise price of $8.40 per
share.
S-25
<PAGE> 28
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, 1997 and balance sheets at December 31, 1996 and 1997, have been
derived from the financial statements of the Company included elsewhere in this
Prospectus Supplement, that have been audited by KPMG Peat Marwick LLP,
independent auditors, as indicated in their report included elsewhere in this
Prospectus Supplement. The statement of earnings data for the years ended
December 31, 1993 and 1994 and the balance sheet data as of December 31, 1993,
1994 and 1995, have been derived from the financial statements audited by KPMG
Peat Marwick LLP, which are not included in this Prospectus Supplement. The
financial data for the six months ended June 30, 1997 and 1998 are unaudited and
have been derived from unaudited financial statements included elsewhere in this
Prospectus Supplement. 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, 1998 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1998. The data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements, including
notes thereto, included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF SHOPPES)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenue:
Vending........................................ $ 6,258 $11,651 $17,031 $30,439 $52,866 $22,648 $37,709
Franchise and other............................ 4,250 5,963 8,683 7,828 6,218 3,499 2,014
------- ------- ------- ------- ------- ------- -------
Total revenue............................ 10,508 17,614 25,714 38,267 59,084 26,147 39,723
------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Vending........................................ 4,368 8,399 11,701 21,283 37,506 16,042 26,669
Franchise and other............................ 2,737 4,207 6,054 5,659 3,967 2,309 1,252
------- ------- ------- ------- ------- ------- -------
Total cost of revenue.................... 7,105 12,606 17,755 26,942 41,473 18,351 27,921
------- ------- ------- ------- ------- ------- -------
Gross profit............................. 3,403 5,008 7,959 11,325 17,611 7,796 11,802
General and administrative expense............... 2,854 3,607 4,565 7,053 10,314 4,725 7,388
------- ------- ------- ------- ------- ------- -------
Operating earnings....................... 549 1,401 3,394 4,272 7,297 3,071 4,414
Interest expense................................. 115 228 383 375 612 267 479
Minority interest................................ 89 62 80 -- -- -- --
Share of (income) loss of equity affiliate....... 24 29 27 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Earnings before income taxes............. 321 1,082 2,904 3,897 6,685 2,804 3,935
Income tax expense............................... -- -- 329 1,311 2,256 1,039 1,377
------- ------- ------- ------- ------- ------- -------
Net earnings............................. $ 321 $ 1,082 $ 2,575 $ 2,586 $ 4,429 $ 1,765 $ 2,558
======= ======= ======= ======= ======= ======= =======
Basic earnings per share(1)...................... $ 0.51 $ 0.80 $ 0.33 $ 0.40
Diluted earnings per share(1).................... 0.48 0.78 0.33 0.38
Basic weighted average common shares(1).......... 5,092 5,565 5,323 6,463
Diluted weighted average common shares(1)........ 5,417 5,694 5,350 6,664
PRO FORMA INFORMATION:
Historical net earnings before income taxes.... $ 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................... 122 411 1,562
------- ------- -------
Pro forma net earnings(1)(2)................... $ 199 $ 671 $ 2,549
======= ======= =======
NUMBER OF SHOPPES(3):
Company operations............................... 743 1,019 2,057 3,967 6,166 4,792 9,157
Franchise operations............................. 2,148 3,008 3,455 3,981 3,952 4,195 2,355
------- ------- ------- ------- ------- ------- -------
Total.................................... 2,891 4,027 5,512 7,948 10,118 8,987 11,512
======= ======= ======= ======= ======= ======= =======
</TABLE>
S-26
<PAGE> 29
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(4)...................................... $ 878 $ 2,089 $ 4,324 $ 6,163 $ 10,589 $ 4,430 $ 7,205
Interest expense, net.......................... 115 228 383 375 612 267 479
Depreciation and amortization.................. 329 688 930 1,891 3,292 1,359 2,791
Net cash provided by operating activities...... 774 1,772 2,862 4,216 8,351 4,132 8,552
Net cash (used in) investing activities........ (1,145) (1,468) (5,508) (7,448) (16,079) (5,785) (47,082)
Net cash provided by (used in) financing
activities................................... 531 (256) 3,879 2,413 8,886 1,708 40,291
GROWTH RATES:
Revenue growth................................. 35.0% 67.6% 46.0% 48.8% 54.4% * 51.9%
EBITDA growth(4)............................... 34.9 137.9 107.0 42.5 71.8 * 62.9
Operating earnings growth...................... 19.6 155.2 142.3 25.9 70.8 * 43.7
MARGINS:
EBITDA margin(4)(5)............................ 8.4% 11.9% 16.8% 16.1% 17.9% 16.9% 18.1%
Operating earnings margin(6)................... 5.2 8.0 13.2 11.2 12.4 11.7 11.1
Net earnings margin(7)......................... 3.1 6.1 10.0 6.8 7.5 6.8 6.4
RATIOS:
EBITDA to interest expense, net(4)............. 7.6x 9.2x 11.3x 16.4x 17.3x 16.6x 15.0x
Earnings to fixed charges(8)................... 3.5x 5.1x 7.6x 9.3x 9.6x 9.0x 7.7x
Pro forma earnings to fixed charges(8)(9)...... 3.0x 2.3x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
------ ------ ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 350 $ 220 $ 2,896 $ 2,914 $ 3,626 $ 3,240
Total assets................................................ 3,750 5,539 13,702 19,758 37,077 88,813
Total short-term debt and current portion of long-term
debt...................................................... 1,157 1,380 557 1,109 1,619 1,923
Total long-term debt, excluding current portion............. 1,078 1,640 1,632 5,059 1,292 45,181
Total stockholders' equity.................................. 833 1,214 9,007 11,676 30,092 32,258
</TABLE>
- ---------------
(1) Net earnings per share and weighted average common shares are not presented
for 1995 because the Company and each of the Affiliated Entities were
organized as S corporations or a partnership. On a pro forma basis, basic
and diluted net earnings per share would have been $0.59 and $0.55 and basic
and diluted weighted average common shares would have been 4,299,000 and
4,669,000, respectively, for 1995. See Note 14 of Notes to the Company's
Financial Statements included herein.
(2) During the years 1993 through August 1995, the Company and 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 Company's
Financial Statements included herein.
(3) Shoppes previously owned and operated by the Affiliated Entities, other than
Sugarloaf Marketing, are included in Company operations. Shoppes previously
owned and operated by Sugarloaf Marketing are included in franchise
operations on a historical basis. The number of Shoppes is as of the end of
the indicated period.
(4) EBITDA represents earnings before interest expense, income taxes and
depreciation and amortization. EBITDA is not intended to represent cash flow
from operations as defined by generally accepted accounting principles and
should not be considered as an alternative to cash flow or as a measure of
liquidity or as an alternative to net earnings as indicative of operating
performance. The Company's reported EBITDA may not be comparable to
similarly titled measures of other companies. EBITDA, EBITDA growth, EBITDA
margin and EBITDA to interest expense, net are included herein because
management believes they are useful for measuring the Company's ability to
service its debt.
(5) EBITDA margin represents EBITDA divided by total revenue.
(6) Operating earnings margin represents earnings from operations divided by
total revenue.
(7) Net earnings margin represents net earnings divided by total revenue.
S-27
<PAGE> 30
(8) For purposes of calculating the ratio and pro forma ratio of earnings to
fixed charges, earnings consist of income before income taxes, plus fixed
charges. Fixed charges consist of the interest expense on all indebtedness,
the estimated representative interest factor of rental expense and losses of
less than 50%-owned affiliates.
(9) The average outstanding debt balances for the year ended December 31, 1997
and the six-month period ended June 30, 1998 were approximately $7.6 million
and $12.7 million, respectively, and gross interest expense was
approximately $0.6 million and $0.5 million, respectively. The pro forma
ratios assume the refinancing of a portion of this indebtedness with a
corresponding amount of Junior Subordinated Debentures on January 1, 1997.
* Numbers are omitted as prior period has not been presented herein.
S-28
<PAGE> 31
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 Supplement. The information presented below should be read in
conjunction with the financial statements, including notes thereto, included
elsewhere in this Prospectus Supplement.
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 the
Company typically pays 20-30% of gross revenue to the location owner as a
location commission. At June 30, 1998, the Company was operating in 40 states
with a national network of 40 offices and there were Company franchisees
operating in 17 territories. The Company sells both machines and products vended
in the machines to its franchisees and collects continuing royalties ranging
from 2% to 5% of its franchisees' gross machine revenue.
For the year ended December 31, 1997, over 85% of the Company's revenue and
gross profit were derived from Company-owned Shoppes. The Company's revenue and
gross profit in a particular period is directly related to the number of Shoppes
in operation during the period. Management believes that the Company's business
is somewhat seasonal, with average revenue per machine per week higher during
the Easter and Christmas periods. Vending revenue represents cash receipts from
customers using vending machines and is recognized when collected. The cost of
vending revenue is comprised of the cost of vended products, location
commissions, depreciation and direct service cost.
Franchise and other revenue represents the Company's percentage of gross
vending revenue generated by Shoppes owned and operated by franchisees, as well
as product sold to the franchisees. Initial franchise fees have not been
material, and the Company currently does not plan to expand its franchise
network. Product sold to the franchisees consists of goods to vend in Shoppes.
Equipment sales to the franchisees have been done on a pass-through basis from
the Company's main suppliers. The Company anticipates that franchise and other
revenue will continue to decline in the future as a result of the Company's
acquisition of franchises.
In 1995, the Company terminated its S corporation status. In conjunction
with its initial public offering in October 1995, the Company reorganized by
acquiring substantially all of the inventory, property and equipment and
assuming certain facilities leases and contracts of the Affiliated Entities (the
"Reorganization"). All of the Affiliated Entities previously were franchisees of
the Company and all except Sugarloaf Marketing were controlled by one or more of
Greg Theisen, Abbe Stutsman, Richard Jones and Randall Fagundo and their
respective spouses (the "Founders").
The number of Company-owned and operated Shoppes has risen from 743 to
6,166 from 1993 to 1997, representing a compound annual growth rate of 69.7%. In
1997, the Company had revenue and operating earnings of $59.1 million and $7.3
million, respectively. The Company has experienced 54.0% and 90.9% compound
annual growth rates in total revenue and operating earnings, respectively,
between 1993 and 1997.
S-29
<PAGE> 32
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 VS. SIX MONTHS ENDED JUNE 30, 1997
Revenue
Total revenue for the first six months of 1998 increased 51.9% to $39.7
million from $26.1 million for the same period in 1997.
Vending revenue increased $15.1 million or 66.5% for the first six months
of 1998 to $37.7 million from $22.6 million for the comparable period in 1997 as
a result of a 74.9% increase in the average number of Shoppes in place during
the first six months of 1998 compared to the average number in place during the
same period in 1997. The average number of Shoppes in place during the six
months ended June 30, 1998 includes the acquisition of the operating assets
(including approximately 1,380 Shoppes) of a significant franchisee that
occurred on June 12, 1998.
Franchise and other revenue decreased $1.5 million or 42.4% to $2.0 million
for the first six months of 1998 as compared to the same period in 1997. The
decrease results from the acquisition of franchises by the Company and a
reduction in the number of machines sold to the franchisees.
Cost of Revenue and Gross Profit
The cost of vending operations for the first six months of 1998 increased
$10.6 million or 66.2% to $26.7 million from $16.0 million for the comparable
period in 1997. The vending operation's contribution to gross profit for the
first six months of 1998 increased to $11.0 million, which represents a 67.1%
increase over gross profit from vending operations realized in the same period
in 1997. Vending gross profit realized during the first six months of 1998 was
29.3% of vending revenue, as compared to 29.2% for the same period in 1997.
Gross profit on franchise and other revenue for the first six months of
1998 decreased to $762,000 or 37.8% of franchise and other revenue, which is 3.8
percentage points higher than the gross margin achieved for the same period in
1997. The increase in gross profit resulted primarily from a reduction in
equipment sales to franchisees.
Operating Expense
General and administrative expenses for the first six months of 1998
increased $2.7 million to $7.4 million or 18.6% of total revenue, as compared to
$4.7 million or 18.1% of total revenue for the comparable period in 1997. 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 1998 increased 43.7% to $4.4
million, or 11.1% of total revenue, as compared to $3.1 million, or 11.7% of
total revenue for the comparable period in 1997. The increase in operating
earnings results primarily from the 74.9% increase in the average number of
Shoppes in place during the first six months of 1998 compared to the average
number in place for the comparable period in 1997.
Non Operating Income (Expense)
Interest expense for the first six months of 1998 increased $212,000 to
$479,000 as compared to the same period in 1997, primarily as a result of the
increase in debt resulting from the acquisition of the operating assets of a
significant franchisee. 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 six months of 1998 increased 44.9% to $2.6
million, or 6.4% of total revenue, as compared to net earnings of $1.8 million
for the comparable period in 1997. Diluted earnings per share for the
S-30
<PAGE> 33
first six months of 1998 increased 15.2% to $0.38, as compared to $0.33 for the
comparable period in 1997. Diluted weighted average common shares for the first
six months of 1998 increased 24.6% to 6,663,652, as compared to 5,349,914 for
the comparable period in 1997.
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
Revenue
The Company's total revenue increased 54.4% from $38.3 million in 1996 to
$59.1 million in 1997. Vending revenue increased $22.4 million or 73.7% in 1997
to $52.9 million, primarily as a result of a 68.2% increase in the average
number of Shoppes in use during 1997 over the average number in use during 1996.
Franchise and other revenue decreased $1.6 million or 20.6% in 1997 as
compared to 1996 due primarily to the acquisition of Company franchises.
Cost of Revenue and Gross Profit
The cost of vending operations increased $16.2 million in 1997 to $37.5
million. The vending operations' contribution to 1997 gross profit increased to
$15.4 million, which represents a 67.8% increase over gross profit from vending
operations realized in 1996. The vending gross profit achieved in 1997 was 29.1%
of vending revenue, which represents a decrease from the 30.1% of vending
revenue achieved in 1996. The decline in vending margin in 1997 results
primarily from a higher commission rate paid to locations in 1997.
Gross profit on franchise and other revenue in 1997 increased to $2.3
million, or 36.2% of franchise and other revenue, which is 8.5 percentage points
higher than the gross margin achieved in 1996. The increase in gross margin as a
percentage of franchise and other revenue resulted primarily from lower 1997
equipment sales to franchisees that are at lower margins.
Operating Expense
General and administrative expense as a percentage of revenue decreased to
17.5%, as compared to 18.4% of revenue in 1996. The $3.3 million increase in
general and administrative expense results primarily from the additional
operating and satellite offices opened by the Company during the past year.
Operating Earnings
Operating earnings in 1997 increased 70.8% to $7.3 million or 12.4% of
total revenue, which are, as a percentage of total revenue, 1.2 percentage
points higher than the operating earnings achieved in 1996. The increase in
operating earnings results primarily from the 68.2% increase in the average
number of Shoppes in place during 1997 compared to average number in place in
1996. The effect of the increase in Shoppes is offset by the 46.2% increase in
general and administrative expense experienced in 1997 compared to 1996.
Non Operating Income (Expense)
Interest expense increased $237,000 to $612,000 in 1997 as compared to
1996. The Company's interest expense is directly related to its level of
borrowings and changes in the underlying interest rates.
Net Earnings and Earnings Per Share
Net earnings for the year ended December 31, 1997 were $4.4 million, or
7.5% of total revenue, as compared to net earnings of $2.6 million during 1996.
Diluted earnings per share for 1997 increased 62.5% to $0.78, as compared to
$0.48 per share in 1996.
S-31
<PAGE> 34
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Revenue
The Company's total revenue increased 48.8% from $25.7 million in 1995 to
$38.3 million in 1996. Vending revenue increased $13.4 million or 78.7% in 1996
to $30.4 million as a result of a 95.8% increase in the average number of
Shoppes in use during 1996 over the average number in use during 1995. Franchise
and other revenue decreased $855,000 or 9.8% in 1996 as compared to 1995 due
primarily to the acquisition of Company franchises.
Cost of Revenue and Gross Profit
The cost of vending operations increased $9.6 million in 1996 to $21.3
million. The vending operations' contribution to 1996 gross profit increased to
$9.2 million, which represents a 71.8% increase over gross profit from vending
operations realized in 1995. The vending gross profit achieved in 1996 was 30.1%
of vending revenue, which represents a decrease from the 31.3% of vending
revenue achieved in 1995. The decrease in vending margin in 1996 results
primarily from a higher commission rate paid to locations. Gross profit on
franchise and other revenue in 1996 decreased to $2.2 million, or 27.7% of
franchise and other revenue, which is 2.6 percentage points lower than the gross
margin achieved in 1995. The decrease in gross margin resulted primarily from
lower margins realized on equipment sales to franchisees.
Operating Expense
General and administrative expense increased $2.5 million in 1996 to $7.1
million or 18.4% of revenue, as compared to $4.6 million or 17.8% of revenue in
1995. The increase in general and administrative expense results primarily from
the acquisition of SugarLoaf Marketing and other franchisees, additional
operating and satellite offices opened during 1996, the accelerated placement of
machines during 1996 and the additional payroll and other costs associated with
being a public company. In 1995, general and administrative expense includes
$232,000 of commissions paid to two of the Company's founders.
Operating Earnings
Operating earnings in 1996 increased to $4.3 million or 11.2% of total
revenue, which are, as a percentage of total revenue, 2 percentage points lower
than the operating earnings achieved in 1995. The decrease in operating earnings
results primarily from the additional operating and satellite offices opened
during 1996, the accelerated placement of machines during 1996 and the
additional payroll and other costs associated with being a public company.
Non Operating Income (Expense)
Interest expense decreased $8,000 to $375,000 in 1996 as compared to 1995.
The Company's interest expense is directly related to its level of borrowings
and changes in the underlying interest rates.
Net Earnings and Earnings Per Share
Net earnings for the year ended December 31, 1996 were $2.6 million, or
6.8% of total revenue. Diluted earnings per share 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 Affiliated Entities 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.
S-32
<PAGE> 35
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.
However, the following table does not necessarily reflect seasonal
machine-revenue fluctuations because of the number of Shoppes added by the
Company during the periods. The following table contains selected unaudited
quarterly financial data for the last six months of 1996, 1997 and the first six
months of 1998. The unaudited information has been prepared on the same basis as
the audited financial statements appearing elsewhere in this Prospectus
Supplement and includes all normal recurring adjustments necessary to present
fairly, in all material respects, the information set forth herein.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1997 1997 1997 1997 1998 1998
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue................. $9,634 $12,216 $12,357 $13,790 $14,676 $18,261 $18,761 $20,962
Total cost of revenue......... 6,743 8,489 8,551 9,800 10,342 12,780 13,294 14,627
------ ------- ------- ------- ------- ------- ------- -------
Gross profit................ 2,891 3,727 3,806 3,990 4,334 5,481 5,467 6,335
General and administrative
expenses.................... 1,827 2,023 2,296 2,429 2,523 3,066 3,526 3,862
------ ------- ------- ------- ------- ------- ------- -------
Operating earnings.......... 1,064 1,704 1,510 1,561 1,811 2,415 1,941 2,473
Interest expense.............. 136 148 111 156 217 128 118 361
------ ------- ------- ------- ------- ------- ------- -------
Earnings before income
taxes..................... 928 1,556 1,399 1,405 1,594 2,287 1,823 2,112
Provision for income taxes.... 352 422 518 521 588 627 638 739
------ ------- ------- ------- ------- ------- ------- -------
Net earnings................ $ 576 $ 1,134 $ 881 $ 884 $ 1,006 $ 1,658 $ 1,185 $ 1,373
====== ======= ======= ======= ======= ======= ======= =======
Basic earnings per share...... $ 0.11 $ 0.22 $ 0.17 $ 0.16 $ 0.18 $ 0.27 $ 0.18 $ 0.21
Diluted earnings per share.... 0.11 0.21 0.16 0.16 0.18 0.26 0.18 $ 0.21
Basic weighted average common
shares...................... 5,094 5,123 5,251 5,394 5,450 6,158 6,457 6,469
Diluted weighted average
common shares............... 5,460 5,449 5,425 5,452 5,633 6,388 6,649 6,678
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources
historically have been cash flows from operations, borrowings under the
Company's bank credit facilities and issuances of its Common Stock. These
sources of cash flows have been offset by cash used for acquisitions, investment
in skill-crane machines and other amusement devices and payment of long-term
borrowings.
Net cash provided by operating activities was $8.4 million, $4.2 million
and $2.9 million in 1997, 1996 and 1995, respectively. Net cash provided by
operating activities was $8.6 million for the six months ended June 30, 1998.
The Company anticipates that cash will continue to be provided by operations as
additional skill-crane machines and other amusement devices are placed in
service. Cash required in the future is expected to be funded by existing cash
and cash provided by operations, borrowings under the Credit Facility, issuances
of Debt Securities or sale of equity securities.
Net cash used by investing activities was $16.1 million, $7.4 million and
$5.5 million in 1997, 1996 and 1995, respectively. Capital expenditures amounted
to $12.2 million, $6.1 million and $2.2 million in 1997, 1996 and 1995,
respectively, of which $7.2 million, $4.8 million and $1.6 million was used for
the acquisition of skill-crane machines. The acquisition of franchisees, other
than through the Reorganization in 1995, used $2.6 million, $1.2 million and
$160,000 in 1997, 1996 and 1995, respectively. Payments to the persons other
than the Founders in the Reorganization were $3.1 million in 1995. Net cash used
by investing activities was $47.1 million for the six months ended June 30, 1998
and capital expenditures during the period were $10.7 million, of which $8.7
million was used to acquire skill-crane machines and other amusement devices.
The Company also used $36.1 million to acquire the assets of certain franchisees
and other amusement vending businesses during the six months ended June 30,
1998.
S-33
<PAGE> 36
Net cash provided by financing activities was $8.9 million, $2.4 million
and $3.9 million in 1997, 1996 and 1995 respectively. The issuance of Common
Stock primarily in connection with the Company's follow-on offering in November
1997 provided $13.9 million. The issuance of Common Stock primarily in
connection with the Company's initial public offering in October 1995 provided
$10.1 million, of which $4.5 million was used to pay distributions to the
Founders in connection with the Reorganization. Cash of $326,000 was retained by
the Affiliated Entities in the Reorganization. Net cash provided by financing
activities was $40.3 million for the six months ended June 30, 1998. Other
financing activities consist of advances and, in 1995, repayments on the Credit
Facility and other debt obligations and S-corporation distributions to owners,
and the repurchase of warrants.
Under the Credit Facility, the Company may borrow up to $50 million at the
bank's prime interest rate or, at the Company's option, an interest rate based
on the current LIBOR rate. The Credit Facility is available through July 13,
2001 and at June 30, 1998 there was $41.8 million in principal outstanding. Upon
the completion of this Offering, the Company will be able to borrow up to $55
million under the Credit Facility, less an interest reserve of $2.2 million. The
interest reserve will be reduced quarterly, as interest payments are made on the
Trust Preferred Securities. The Credit Facility provides that certain financial
ratios be maintained and places restrictions on, among other things, the
occurrence of additional debt financing and the payment of dividends.
The Company may use a portion of its capital resources to effect
acquisitions. Because the Company cannot predict the timing or nature of
acquisition opportunities, or the availability of acquisition financing, the
Company cannot determine the extent to which capital resources may be used.
Management believes that funds generated from operations and borrowings
available under the Credit Facility and the Company's ability to negotiate
additional and enhanced credit agreements will be sufficient to meet the
Company's foreseeable operating and capital expenditure needs.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("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.
In February 1998, FASB issued Statement of Financial Accounting Standard
No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits
(Statement No. 132), effective for fiscal years beginning after December 15,
1997. Statement No. 132 revises disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. Statement No. 132 standardizes the disclosure requirements and
suggests combined formats for presentation of such disclosure. The Company has
not yet adopted Statement No. 132. The Company will comply with the reporting
requirements under this statement when required.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (Statement No.
133), effective for fiscal years beginning after June 15, 1999. Statement No.
133 establishes accounting and reporting standards for derivative instruments
and requires companies to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company has not yet adopted Statement No. 133. The Company
believes the accounting and reporting standards required by this statement will
not be significant. The Company will comply with the accounting and reporting
requirements under this statement when required.
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<PAGE> 37
YEAR 2000 COMPLIANCE
Certain management information systems use two-digit data fields which
recognize dates using the assumption that the first two digits are "19" (i.e.,
the number 98 is recognized as the year 1998). The Company has conducted a
comprehensive review of its computer systems to identify systems that are not
year 2000 compliant and has developed a plan to resolve any year 2000 issues.
The Company also is in the process of verifying whether its major suppliers,
service providers and financial institutions are year 2000 compliant. The
Company will make any necessary investments in its software and hardware systems
and applications to ensure that they are year 2000 compliant. The financial
impact to the Company is not anticipated to be material in any single year.
S-35
<PAGE> 38
BUSINESS
OVERVIEW
The Company is the leading owner, operator and franchisor in the United
States of coin-operated skill-crane machines that dispense stuffed animals,
plush toys, watches, jewelry and other items through a national network of more
than 11,000 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 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 owners and operators of national and regional
supermarket, mass merchandise and restaurant chain accounts are becoming
increasingly aware of the economic benefits of amusement and vending machines,
such as the Company's Shoppes, which can provide them 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 supermarkets, mass merchandisers, bowling centers, bingo halls,
bars, restaurants and similar locations represent over 100,000 viable locations
for skill-cranes in the United States. 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.
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-
S-36
<PAGE> 39
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/Vons 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/Vons.
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."
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<PAGE> 40
GROWTH STRATEGY
As of June 30, 1998, the Company owned and operated over 9,100 Shoppes from
a national network that consisted of 40 offices with operations in 40 states,
which management believes makes the Company the largest 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, restaurants, bowling centers, bingo halls, bars, and similar
locations, which the Company estimates represent over 100,000 potential crane
locations in the United States. The Company believes that owners and operators
of these 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's growth strategy
includes the following:
- 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/ Vons, Kroger, AMF
Bowling Centers, Fred Meyer Stores and franchised Denny's. The Company
believes opportunities exist to increase penetration within its existing
Retail Accounts.
- 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, Safeway/Vons, AMF Bowling
Centers and Fred Meyer Stores will allow it to successfully target new
national and regional Retail Accounts.
- 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
it offers at each location. The Company has introduced multiple Shoppes
at individual locations. In addition, the Company has begun to place
complementary vending machines, including kiddie rides, bulk vending and
video games at existing locations.
- Acquire franchisees and other complementary vending businesses. The
Company has completed 14 acquisitions since January 1, 1996, including
nine acquisitions since October 1, 1997 acquiring over 2,600 Shoppes,
significant franchised territories and bulk vending and kiddie ride
businesses. See "-- Recent Acquisitions." The Company plans to pursue
acquisition opportunities in order to increase the number of
Company-owned machines and to acquire franchised territories and to add
other complementary businesses to the Company's product lines.
The Company plans to increase the number of Shoppes it owns and operates by
an average of at least 1,400 for 1999 and 2000 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 four types of
Shoppes: (i) the Toy Shoppe which primarily dispenses plush toys and other toys,
(ii) the Treasure Shoppe which dispenses items such as jewelry and watches,
(iii) the Beanie Bag Shoppe which dispenses beanie-bag type stuffed toys and
(iv) the Fun Shoppe which dispenses small toys, novelty items and candy. Over
60% of the Company's Shoppe placements have been Toy Shoppes, which the Company
purchases new for an average price of $3,600. In 1997, a Toy Shoppe averaged
over approximately $12,100 in revenue and over $4,100 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 in
the first year after the signing of the Wal-Mart contract in 1996 with over
1,000 new skill-crane placements.
S-38
<PAGE> 41
RECENT ACQUISITIONS
Since October 1, 1997, as part of the Company's growth strategy, it has
completed the nine acquisitions described below:
- Three Rivers Toy Company. The Company's former franchisee for portions of
Pennsylvania, including 83 Shoppes, was purchased in October 1997 for
approximately $0.2 million.
- Quality Amusements Corp. and Quality Entertainment Corp. A bulk vending
and kiddie ride company with operations in Illinois, Indiana, Wisconsin,
Missouri and Iowa was purchased in November 1997 for approximately $2.0
million.
- Creative Coin of Arizona, Inc. The Company's former franchisee for
Arizona, including 159 Shoppes, was purchased in December 1997 for
approximately $1.5 million.
- Tejas Toy Corporation. The Company's former franchisee for portions of
Texas, including 327 Shoppes, was purchased in January 1998 for
approximately $2.4 million.
- McCathren Vending Co. A bulk vending company operating 4,521 pieces of
bulk vending equipment throughout Colorado, Utah and Wyoming was
purchased in March 1998 for approximately $1.2 million.
- American Coin Company of Minneapolis. A skill-crane company in Minnesota,
including 84 skill cranes and six other pieces of amusement equipment,
was purchased in May 1998 for approximately $0.3 million.
- Chilton Vending Co. An owner and operator of simulator and traditional
video games, skill-cranes and redemption equipment located in portions of
Kansas and Missouri was purchased in June 1998 for approximately $4.0
million.
- Suncoast. The Company's franchisees for portions of Washington, Oregon
and Florida, including 1,388 Shoppes, were purchased in June 1998 for
approximately $30.0 million.
- R&T Marketing. The Company's franchisee for a portion of Northern
California, including 370 Shoppes, was purchased in September 1998 for
approximately $2.1 million.
RECENT DEVELOPMENTS
- Plush 4 Play Acquisition. In July 1998, the Company entered into the
Plush 4 Play Agreement to acquire Plush 4 Play for a base purchase price
of $6.8 million and a contingent earn-out of up to $2.7 million, subject
to certain adjustments. Plush 4 Play has skill-crane placement agreements
with several national Retail Accounts, including Shoney's, Inc. and
Friendly's Ice Cream Corporation. Presently, 614 skill-cranes are
operated at such Retail Accounts pursuant to agreements between Plush 4
Play and independent third party operators. Plush 4 Play is a party to
placement agreements which cover an aggregate of 178 additional Retail
Account locations which do not currently have an installed skill-crane.
Plush 4 Play also sells pre-packaged plush toys and animals to the
skill-crane industry. The Plush 4 Play Agreement contains certain closing
conditions which must be satisfied by Plush 4 Play and the Company before
the acquisition can occur. While the Company believes the Plush 4 Play
acquisition will close in September 1998, there can be no assurance that
the acquisition will close by such date, if at all. Pursuant to the terms
of the Plush 4 Play Agreement, the Company will (i) operate certain
skill-crane machines in certain Retail Accounts under the terms of
agreements between Plush 4 Play and such Retail Accounts prior to the
closing of the Plush 4 Play acquisition, and (ii) be assigned the rights
to place skill-crane machines in certain Retail Accounts if the Plush 4
Play acquisition does not close.
- Increased Credit Facility. Upon completion of this Offering, and the
application of the proceeds therefrom, the Company's Credit Facility will
increase from $50 million to $55 million, subject to certain financial
ratios pursuant to the Credit Facility. See "Management Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
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<PAGE> 42
- Shelf Registration of Trust Preferred Securities. In addition to the
Offering contemplated hereby, the Company has filed with the Securities
and Exchange Commission a shelf registration statement which registers up
to an aggregate of $100 million of trust preferred securities (including
the Trust Preferred Securities offered hereby). Such additional trust
preferred securities may be offered by the Company at any time.
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, the
SugarLoaf Treasure Shoppe in 1994 and the SugarLoaf Beanie Bag Shoppe in 1997.
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, SugarLoaf Fun Shoppes and SugarLoaf
Beanie Bag Shoppes are typically made in locations where a SugarLoaf Toy Shoppe
is already located. Currently the Company operates four types of Shoppes as
described below.
The SugarLoaf Toy Shoppe. The SugarLoaf Toy Shoppe features a play price of
50c and dispenses 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, 1998, the Company and its franchisees were operating
approximately 7,560 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, 1998, the Company and its franchisees were operating approximately 1,648
SugarLoaf Treasure Shoppes, approximately 90% of which were placed within
locations in which another Shoppe was already in operation.
The SugarLoaf Beanie Bag Shoppe. During 1997 the Company converted a
substantial portion of its SugarLoaf Fun Shoppes into SugarLoaf Beanie Bag
Shoppes and purchased additional SugarLoaf Beanie Bag Shoppes. The SugarLoaf
Beanie Bag Shoppe features a play price of 50c and dispenses beanie-bag type
stuffed toys with estimated retail values ranging from $3.00 to $6.00. As of
June 30, 1998, the Company and its franchisees were operating 1,623 SugarLoaf
Beanie Bag Shoppes.
The SugarLoaf Fun Shoppe. The SugarLoaf Fun Shoppe features a play price of
25c and dispenses small toys, novelty items 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, the SugarLoaf Treasure Shoppe and the SugarLoaf Beanie Bag 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, 1998, the Company and its franchisees were operating
approximately 681 SugarLoaf Fun Shoppes.
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<PAGE> 43
The following chart indicates the number of Company-owned Shoppes in
operation at the indicated date:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997 1998
---------------- ---------------- ---------------- ----------------
TYPE NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
---- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Toy Shoppes........................... 1,291 62.7% 2,699 68.0% 3,831 62.1% 5,922 64.7%
Treasure Shoppes...................... 357 17.4 542 13.7 1,016 16.5 1,419 15.5
Beanie Bag Shoppes.................... -- -- -- -- 1,156 18.8 1,620 17.7
Fun Shoppes........................... 409 19.9 726 18.3 163 2.6 193 2.1
----- ----- ----- ----- ----- ----- ----- -----
Total........................ 2,057 100.0% 3,967 100.0% 6,166 100.0% 9,157 100.0%
===== ===== ===== ===== ===== ===== ===== =====
</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, restaurants, bingo halls, bars
and similar locations. The Company is focusing on placing Shoppes in national
and regional Retail Accounts to take advantage of the regular customer traffic
at these locations. The following chart identifies some of the Company's Retail
Accounts:
RETAIL ACCOUNTS
<TABLE>
<CAPTION>
SUPERMARKETS MASS MERCHANDISERS RESTAURANTS OTHER
------------ ------------------ ----------- -----
<S> <C> <C> <C>
Kroger Wal-Mart Denny's (franchised) AMF Bowling Centers
Safeway/Vons Kmart Ponderosa Steak House Brunswick Bowling Centers
Fred Meyer Stores Bonanza Steak Houses Truckstops of America
Cub Foods Flying J Truckstop
Smith's 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, 1998 generally ranged from
20% to 30%, depending on the dollar volume, number of Shoppes installed and
total number of locations the retailer controls. Management believes that
national and regional supermarket, mass merchandise and restaurant-chain
accounts are increasingly aware of the economic benefits of amusement and
vending machines such as the Company's Shoppes, which can provide retailers
greater revenue per square foot than alternative uses of available floor space.
In individual-location accounts, the Company and its franchisees generally
place Shoppes pursuant to oral agreements with location managers. While the
Company has written agreements with certain major Retail Accounts, the Company
and its franchisees also have placed Shoppes in national and regional Retail
Accounts pursuant to oral or other agreements, which may be terminated at
anytime. Management believes that the Company and its franchisees generally have
good relations with their retail accounts.
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
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<PAGE> 44
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,
1998, the Company had installed more than 2,670 Shoppes in approximately 1,370
Wal-Mart stores nationwide. The Company's largest account, Wal-Mart, accounted
for approximately 33.5% of total revenue in 1997. In January 1997, the Company
signed a three-year agreement with Safeway that designated the Company and its
franchisees as Safeway's domestic skill-crane operator. At June 30, 1998, the
Company and its franchisees had installed more than 729 Shoppes in approximately
500 Safeway stores nationwide. In September 1997, the Company signed a
three-year agreement with AMF Bowling Centers, Inc. As of June 30, 1998, the
Company and its franchisees had installed more than 480 Shoppes in approximately
160 AMF Bowling Centers nationwide.
Once the Company enters into a national or regional chain account
agreement, it contacts each location manager to arrange for a review of the
location to confirm its suitability and to obtain the manager's agreement to the
placement of one or more Shoppes within the location. The Company and its
regional sales manager or franchisee work together to place Shoppes at national
and regional chain account locations.
For accounts other than national chain accounts, the Company's regional
sales and general managers identify viable locations, contact the location's
owner or manager to confirm the suitability of the location and obtain the
owner's or manager's agreement to the placement of the Shoppes and related
compensation arrangements. The suitability of a location is based upon a
thorough assessment by the Company, including an analysis of the surrounding
trade area in order to determine the neighborhood demographics, local
regulations, the level of overall retail activity and the cost-effectiveness of
servicing the location through existing route merchandisers. The Company also
reviews each site within the location for its visibility and accessibility to
customers.
The Company and its franchisees compete for limited sites within
supermarkets with purveyors of seasonal and specialty items and with owners and
operators of other amusement and vending machines. The Company's Shoppes also
compete with vending machine and coin-operated amusement device operators for
sites in mass merchandise and restaurant chains, bowling centers and other
locations. Competition for such sites is based primarily on the amount of
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 has introduced new types of complementary
vending and amusement machines at existing Shoppe locations which management
believes will expand the potential customers for the Company. In April 1997, the
Company signed a three-year agreement with Safeway that made the Company and its
franchisees Safeway's domestic coin-operated kiddie ride operator. As of June
30, 1998, the Company and its franchisees had approximately 975 kiddie rides in
Retail Accounts nationwide. In November 1997, the Company purchased the assets
of Quality Amusements Corp. and Quality Entertainment Corp., operators of bulk
vending machines and kiddie rides. In March 1998, the Company purchased the
assets of McCathren Vending Co., another operator of bulk vending machines. Bulk
vending refers to the sale of unsorted confections, nuts, gumballs, toys and
novelty items (in or out of capsules) selected by the customer and dispensed
through vending machines. As of June 30, 1998, the Company and its franchisees
had approximately 6,990 pieces of bulk vending equipment in operation. In June
1998, the Company acquired the assets of Chilton Vending Co., an operator of
simulator and traditional video games, skill-cranes and redemption equipment. As
of June 30, 1998, the Company had approximately 830 simulator and traditional
video games in operation. From time to time, the Company has placed, and may
continue to place in the future, other types of coin-operated vending machines
in retail accounts in order to leverage the Company's existing national
distribution and service network.
Supervision, Training and Support. The Company's area directors are
primarily responsible for training the Company's regional managers and the
regional managers are responsible for training the general managers and for
on-going support and supervision of the Company's field offices.
Each Company field office is managed by a general manager who is
responsible for the management of the office, including inventory management,
and training and monitoring route merchandisers. The Company has developed a
comprehensive training program for office general managers and franchisees
covering office
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<PAGE> 45
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 10 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 pre-packed. The Company maintains inventory for the products
offered through its Toy Shoppes in a public warehousing facility in Seattle,
Washington and in its regional distribution warehouse centers in Atlanta,
Georgia, Chicago, Illinois and Allentown, Pennsylvania. 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, 1998, the Company was operating in 40 states through a national
network of 40 offices. The field offices average approximately 2,900 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 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.
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<PAGE> 46
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. The Company currently purchases Shoppes from three principal
approved crane manufacturers 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, 1998, the Company had franchise agreements in effect with
franchisees covering 16 territories in the U.S. and one territory in British
Columbia, Canada covering, in the aggregate, 2,355 Shoppes. The Company does not
currently intend to grant any additional franchises. 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.
EMPLOYEES
As of June 30, 1998, the Company had a total of 671 employees, including 56
employees at its headquarters in Boulder, Colorado. None of the Company's
employees are represented by labor unions or covered by any collective
bargaining contract. Management believes it has a good relationship with the
Company's employees.
Generally, each of the Company's field offices employs approximately 5 to
35 persons, including a general manager, an office assistant and an adequate
number of route merchandisers to properly service the Company's Shoppes. The
general manager is responsible for the daily operations of the office,
monitoring route merchandisers and acquiring new accounts. The regional managers
oversee the operations of the Company field offices and report directly to the
Company's area directors.
The Company has an incentive bonus program pursuant to which regional
managers and field office personnel may be eligible to receive incentive
compensation based on office and route profitability. Management believes that
this program rewards excellence in management, gives field office personnel an
incentive to improve operations and results in an overall reduction in the cost
of operations. In addition, regional field managers and other corporate
personnel are eligible to receive options to purchase shares of Common Stock
subject to ongoing service requirements.
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 28,000 square feet of office and warehouse space under a lease
that expires
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<PAGE> 47
January 28, 2003. The Company also is a party to 43 other leases which are used
for office and warehouse space which average approximately 2,900 square feet,
provide for monthly rental payments ranging from $275 to $3,930 and expire at
various times over the period August 31, 1998 to January 31, 2001. The Company
believes that its facilities are adequate for its current needs and for the
anticipated expansion of its business.
THE TRUST
The Trust is a statutory business trust created under Delaware law pursuant
to (i) the trust agreement of the Trust among the Company, as depositor, the
Delaware Trustee and an Administrative Trustee and (ii) the filing of a
Certificate of Trust with the Delaware Secretary of State on July 22, 1998. The
Trust's business and affairs are conducted by the Property Trustee, the Delaware
Trustee and two individual Administrative Trustees who are officers of the
Company. The Trust exists for the exclusive purposes of (i) issuing and selling
the Trust Securities, (ii) using the proceeds from the sale of the Trust
Securities to acquire the Junior Subordinated Debentures issued by the Company
and (iii) engaging in only those other activities necessary, advisable or
incidental thereto. The Junior Subordinated Debentures will be the sole assets
of the Trust and payments by the Company under the Junior Subordinate Debentures
and the Expense Agreement will be the sole revenues of the Trust. All of the
Common Securities will be owned by the Company. The Common Securities will rank
pari passu, and payments will be made thereon pro rata, with the Trust Preferred
Securities, except that upon the occurrence and during the continuance of an
event of default under the Trust Agreement resulting from an event of default
under the Indenture, the rights of the Company as holder of the Common
Securities to payment in respect of Distributions and payments upon liquidation,
redemption or otherwise will be subordinated to the rights of the holders of the
Trust Preferred Securities. See "Description of the Trust Preferred
Securities -- Subordination of Common Securities of the Trust Held by the
Company." The Company will acquire Common Securities in an aggregate liquidation
amount equal to approximately 3% of the total capital of the Trust. The Trust
has a term of 31 years but may be terminated sooner as provided in the Trust
Agreement.
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<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of June 30, 1998
were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jerome M. Lapin................. 68 President, Chief Executive Officer and Chairman of the
Board of Directors
W. John Cash.................... 51 Vice President, Chief Financial Officer and Treasurer
Randall J. Fagundo.............. 38 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)............. 57 Director
J. Gregory Theisen.............. 52 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, Chief Financial Officer and
Treasurer 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.
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
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<PAGE> 49
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 Relational Investors, LLC, an investment managing firm,
since March 1998. Mr. Sullivan was employed by Batchelder & Partners, Inc., an
investment advisory and consulting firm, from May 1996 to February 1998. Mr.
Sullivan also served as a Senior Vice President of The Seidler Companies
Incorporated ("Seidler"), the underwriter of the Company's initial public
offering, from August 1993 to April 1996. Prior to being elected Senior Vice
President at Seidler, 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.
COMPENSATION OF DIRECTORS
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. In the fiscal year ended
December 31, 1997, the total compensation paid to non-employee directors was
$10,000.
Each non-employee director of the Company, other than Messrs. Jones and
Theisen, are eligible to receive stock option grants under the 1995 Non-Employee
Director Stock Option Plan (the "Directors' Plan"). Only non-employee directors
of the Company or an affiliate of such directors (as defined in the Code) are
eligible to receive options under the Directors' Plan. Options granted under the
Directors' Plan are intended by the Company not to qualify as incentive stock
options under the Code.
During 1997, the Company did not grant options to non-employee directors of
the Company. As of June 30, 1998, no options had been exercised under the
Directors' Plan.
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<PAGE> 50
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table shows for the years ended December 31, 1997, 1996 and
1995, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its three other most highly compensated executive officers
for the year ended December 31, 1997 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ------------
------------------- SECURITIES
SALARY BONUS UNDERLYING ALL OTHER
NAME OF PRINCIPAL POSITION YEAR ($)(1) ($) OPTIONS COMPENSATION(2)
-------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Jerome M. Lapin...................... 1997 $178,750 -- -- $10,351
President and Chief Executive 1996 155,833 -- -- 6,757
Officer 1995 156,250 -- -- 7,074
W. John Cash......................... 1997 125,547 -- 100,000 10,025
Vice President, Chief Financial 1996 112,320 -- -- 9,128
Officer and Treasurer 1995(3) 50,416 -- 20,000 1,860
Randall J. Fagundo................... 1997 125,547 -- -- 10,779
Vice President of Operations 1996 111,837 -- -- 9,550
and Secretary 1995 80,411 $ 98,469(4) -- 6,445
Abbe M. Stutsman..................... 1997 125,547 -- -- 10,385
Vice President of Purchasing and 1996 111,837 -- -- 9,824
Product Development 1995 79,167 203,870(4) -- 2,918
</TABLE>
- ---------------
(1) Includes amounts deferred pursuant to Section 401(k) of the Internal Revenue
Code of 1986, as amended.
(2) 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 accounts.
(3) Mr. Cash joined the Company in July 1995.
(4) Consists of S corporation distributions.
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<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of July 20, 1998 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 and (iv) all directors and
executive officers of the Company as a group. 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>
NUMBER OF
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) OWNED(1)
------------------------ ------------ ------------
<S> <C> <C>
Merrill Lynch Asset Management, L.P.(2)..................... 833,600 12.89%
800 Scudders Mill Road
Plainsboro, NJ 08536
Richard D. and Melinda K. Jones(3).......................... 508,623 7.86
5660 Central Avenue
Boulder, CO 80301
J. Gregory Theisen(4)....................................... 473,623 7.32
5660 Central Avenue
Boulder, CO 80301
Jerome M. Lapin(5).......................................... 460,932 7.13
5660 Central Avenue
Boulder, CO 80301
SAFECO Asset Management Company(6).......................... 412,300 6.37
601 Union Street
Seattle, WA 98101
Abbe M. Stutsman(7)......................................... 314,354 4.86
Randall J. Fagundo.......................................... 294,091 4.55
W. John Cash(8)............................................. 35,000 *
Jim D. Baldwin(9)........................................... 9,300 *
John A. Sullivan(10)........................................ 24,500 *
All directors and executive officers as a group
(8 persons) (3)-(5) and (7)-(10).......................... 2,120,423 32.45
</TABLE>
- ---------------
* Less than one percent.
(1) Percentage of beneficial ownership is based on 6,468,903 shares of Common
Stock outstanding as of July 20, 1998. 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 July 20, 1998, 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.
(2) Merrill Lynch & Co., Inc. ("ML&Co."), Merrill Lynch Group, Inc. ("ML
Group"), Princeton Services, Inc. ("PSI") and Merrill Lynch Asset
Management, L.P. ("MLAM") have together filed a Schedule 13G/A with the
Commission on July 13, 1998, pursuant to which they reported sole or shared
voting and dispositive power over 833,600 shares owned. ML&Co. may be
deemed to be the beneficial owner of certain of the securities held by or
deemed to be beneficially owned by its wholly-owned
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<PAGE> 52
subsidiary, ML Group. ML Group may be deemed to be the beneficial owner of
certain of the securities by virtue of its control of its wholly-owned
subsidiary, PSI. PSI, may be deemed to be the beneficial owner of certain
of the securities by virtue of its being the general partner of MLAM. MLAM
is a registered investment adviser and may be deemed to be the beneficial
owner of the securities by virtue of its acting as investment adviser to
one or more investment companies registered pursuant to Section 8 of the
Investment Company Act.
(3) Includes (i) 46,464 shares held by T.R. Baron and Associates, Inc. Defined
Benefit Pension Plan, of which Mr. Jones is the Trustee, and (ii) 294,080
held by Ms. Jones.
(4) Includes 12,464 shares held by Colorado Coin Company Defined Benefit Keogh
Plan of which Mr. Theisen is the Trustee.
(5) Shares of Common Stock held jointly with Mr. Lapin's spouse.
(6) 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 250,000 shares and SAFECO Resource Series Trust, which
holds 162,300 shares. SAFECO Asset Management Company disclaims beneficial
ownership of all shares held by SAFECO Common Stock Trust and SAFECO
Resource Series Trust.
(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
July 20, 1998 by Mr. Cash.
(9) Includes 540 shares of Common Stock held jointly with Mr. Baldwin's spouse
and options to purchase 7,000 shares of Common Stock granted under the
Directors' Plan which are exercisable within 60 days of July 20, 1998.
(10) Includes options to purchase 35,000 shares of Common Stock granted under
the Option Plan which are exercisable within 60 days of July 20, 1998,
options to purchase 14,000 shares of Common Stock granted under the
Directors' Plan which are exercisable within 60 days of July 20, 1998 and a
warrant held by Mr. Sullivan exercisable to purchase 17,500 shares of
Common Stock.
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<PAGE> 53
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities will be issued pursuant to the terms of the
Trust Agreement. The Trust Agreement will be qualified as an indenture under the
Trust Indenture Act. Initially, Wilmington Trust Company will be the Delaware
Trustee and the Property Trustee. The Property Trustee is the independent
trustee whose sole responsibility is to fulfill the trustee obligations
specified in the Trust Indenture Act. The terms of the Trust Preferred
Securities will include those stated in the Trust Agreement and those made part
of the Trust Agreement by the Trust Indenture Act. This summary of certain terms
and provisions of the Trust Preferred Securities and the Trust Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Trust Agreement, including the
definitions therein of certain terms, and the Trust Indenture Act. Wherever
particular defined terms of the Trust Agreement (as amended or supplemented from
time to time) are referred to herein, such terms as defined therein are
incorporated herein by reference. The form of the Trust Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus Supplement
forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, the Administrative Trustees
on behalf of the Trust will issue the Trust Preferred Securities and the Common
Securities of the Trust (collectively, the "Trust Securities"). The Trust
Securities represent undivided beneficial interests in the assets of the Trust.
The holders of the Trust Preferred Securities will be entitled to a preference
over the Common Securities (which will be held by the Company) in certain
circumstances with respect to Distributions and amounts payable on redemption or
liquidation, as well as other benefits as described in the Trust Agreement.
The Trust Preferred Securities will rank pari passu, and payments will be
made thereon pro rata, with the Common Securities of the Trust, except as
described under "-- Subordination of Common Securities of the Trust Held by the
Company" below. Legal title to the Junior Subordinated Debentures will be held
by the Property Trustee in trust for the benefit of the holders of the Trust
Securities. The Guarantee executed by the Company for the benefit of the holders
of the Trust Preferred Securities (the "Guarantee") will be a guarantee on a
subordinated basis with respect to the Trust Preferred Securities but will not
guarantee payment of Distributions or amounts payable on redemption or on
liquidation of the Trust Preferred Securities if the Trust does not have funds
on hand available to make such payments. See "Description of Guarantee."
DISTRIBUTIONS
Payment of Distributions. Distributions on the Trust Preferred Securities
will be paid at the annual rate of 10.5% of the stated Liquidation Amount until
September 15, 2001, then at the annual rate of 11% of the Liquidation Amount
until September 15, 2003, then at the annual rate of 11.5% of the Liquidation
Amount until September 15, 2005 and then at the annual rate of 12% of the
Liquidation Amount thereafter of $10, payable quarterly in arrears on each March
15, June 15, September 15 and December 15 to the holders of the Trust Preferred
Securities on the relevant record dates (each date on which Distributions are
payable in accordance with the foregoing, a "Distribution Date"). The amount of
each Distribution due with respect to the Trust Preferred Securities will
include amounts accrued through the Distribution Date. Distributions on the
Trust Preferred Securities will be payable to the holders thereof as they appear
on the register of the Trust on the relevant record date which will be, so long
as such Securities remain in book-entry form, one Business Day (as defined
below) prior to the relevant Distribution Date or, in the event that the Trust
Preferred Securities are not then in book-entry form, the relevant record date
will be the date 15 days prior to the relevant Distribution Date. Distributions
will accrue from the date of original issuance and will accumulate whether or
not funds are available for payment. The first Distribution Date for the Trust
Preferred Securities will be December 15, 1998.
The amount of Distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. In the event that any date on
which Distributions are payable on the Trust Preferred Securities is not a
Business Day, payment of the Distribution payable on such date will be made on
the next Business Day (and without any interest or other payment in respect of
any such delay), with the same force
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<PAGE> 54
and effect as if made on the date such payment was originally payable. As used
in this Prospectus, a "Business Day" shall mean any day other than a Saturday or
a Sunday, or a day on which banking institutions in the State of Colorado are
authorized or required by law or executive order to remain closed or a day on
which the corporate trust office of the Property Trustee or the Indenture
Trustee is closed for business.
The funds of the Trust available for distribution to holders of its Trust
Preferred Securities will be limited to payments by the Company under the Junior
Subordinated Debentures in which the Trust will invest the proceeds from the
sale of its Trust Preferred Securities. See "Description of Junior Subordinated
Debentures." If the Company does not make interest payments on the Junior
Subordinated Debentures, the Property Trustee will not have funds available to
pay Distributions on the Trust Preferred Securities. The payment of
Distributions (if and to the extent the Trust has funds legally available for
the payment of such Distributions and cash sufficient to make such payments) is
guaranteed by the Company. See "Description of the Guarantee."
Extension Period. So long as no Debenture Event of Default has occurred and
is continuing, the Company has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding eight consecutive quarters with respect
to each such period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Junior Subordinated
Debentures. As a consequence of any such election, quarterly Distributions on
the Trust Preferred Securities will be deferred by the Trust during any such
Extension Period. Distributions to which holders of Trust Preferred Securities
are entitled will accumulate additional amounts thereon at the rate per annum of
10.5% thereof until September 15, 2001, then at the rate per annum of 11%
thereof until September 15, 2003, then at the rate per annum of 11.5% thereof
until September 15, 2005 and then at the rate per annum of 12% thereof
thereafter, compounded quarterly from the relevant Distribution Date, to the
extent permitted under applicable law. The term "Distribution," as used herein,
shall include any such additional accumulated amounts. During any such Extension
Period, the Company may not, and shall not permit any Subsidiary to, (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire, or make
a liquidation payment with respect to, any of the Company's capital stock (which
includes common and preferred stock), (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in interest to the
Junior Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debentures (other than (a) dividends or distributions in the
Company's capital stock (which includes common and preferred stock), (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee and (d) purchases of common stock related to the
issuance of common stock or rights under any of the Company's benefit plans for
its directors, officers, employees or consultants (in connection with an
optionee's or rightholder's use of Common Stock as consideration for the
exercise or purchase price of the related option or right)) or (iii) redeem,
purchase or acquire less than all of the Junior Subordinated Debentures or any
of the Trust Preferred Securities. Prior to the termination of any such
Extension Period, the Company may further extend such Extension Period, provided
that such extension does not cause such Extension Period to exceed eight
consecutive quarters or extend beyond the Stated Maturity. Upon the termination
of any such Extension Period and the payment of all amounts then due, and
subject to the foregoing limitations, the Company may elect to begin a new
Extension Period. Subject to the foregoing, there is no limitation on the number
of times that the Company may elect to begin an Extension Period. The Company
has no current intention of exercising its right to defer payments of interest
by extending the interest payment period on the Junior Subordinated Debentures.
REDEMPTION
Mandatory Redemption of Trust Preferred Securities. Upon the repayment or
redemption at any time, in whole or in part, of any Junior Subordinated
Debentures, the proceeds from such repayment or redemption shall be applied by
the Property Trustee to redeem a Like Amount (as defined below) of the Trust
Securities, upon not less than 30 nor more than 60 days' notice of a date of
redemption (the "Redemption Date"), at the
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Redemption Price (as defined below). See "Description of the Junior Subordinated
Debentures -- Redemption." If less than all of the Junior Subordinated
Debentures are to be repaid or redeemed on a Redemption Date, then the proceeds
from such repayment or redemption shall be allocated to the redemption of the
Trust Securities on a pro rata basis. The amount of premium, if any, paid by the
Company upon the redemption of all or any part of the Junior Subordinated
Debentures to be repaid or redeemed on a Redemption Date shall be allocated to
the redemption pro rata of the Trust Securities.
Optional Redemption of Junior Subordinated Debentures. The Company will
have the right to redeem the Junior Subordinated Debentures (i) on or after
September 15, 2001, in whole at any time or in part from time to time at a
redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof, or (ii) at any time, in whole (but not in
part), upon the occurrence of a Tax Event or an Investment Company Event at a
redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof. See "Description of the Junior Subordinated
Debentures -- Redemption."
Tax Event Redemption, Investment Company Event Redemption. If a Tax Event
or an Investment Company Event shall occur and be continuing, the Company has
the right to redeem the Junior Subordinated Debentures in whole (but not in
part) and thereby cause a mandatory redemption of the Trust Securities in whole
(but not in part) at the Redemption Price (as defined below) within 90 days
following the occurrence of such Tax Event or Investment Company Event. If a Tax
Event or an Investment Company Event has occurred and is continuing and the
Company does not elect to redeem the Junior Subordinated Debentures and thereby
cause a mandatory redemption of the Trust Securities or to dissolve the Trust
and cause the Junior Subordinated Debentures to be distributed to holders of the
Trust Securities in liquidation of the Trust as described below, such Trust
Securities will remain outstanding and Additional Sums (as defined below) may be
payable on the Junior Subordinated Debentures.
DEFINITIONS
"Additional Sums" means the additional amounts as may be necessary to be
paid by the Company with respect to the Junior Subordinated Debentures in order
that the amount of Distributions then due and payable by the Trust on the
outstanding Trust Securities of the Trust shall not be reduced as a result of
any additional taxes, duties and other governmental charges to which the Trust
has become subject as a result of a Tax Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Trust Preferred Securities based upon the relative
Liquidation Amounts of such classes and the proceeds of which will be used to
pay the Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution and liquidation of the Trust, Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Trust Securities of the holder to whom such Junior Subordinated Debentures are
distributed.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
"Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions to the Redemption Date, plus the related amount of the premium, if
any, paid by the Depositor upon the concurrent redemption of a Like Amount of
Debentures, allocated on a pro rata basis (based on Liquidation Amounts), among
the Trust Securities.
See "Risk Factors -- Redemption Prior to Stated Maturity" for definitions
of "Tax Event" and "Investment Company Event."
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DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
Subject to the Company and the Trust having received an opinion of counsel
to the effect that a proposed liquidating distribution will not be a taxable
event to the holders of the Trust Preferred Securities, the Company will have
the right at any time to dissolve the Trust and, after satisfaction of the
liabilities of creditors of the Trust as provided by applicable law, cause the
Junior Subordinated Debentures to be distributed to the holders of Trust
Securities in liquidation of the Trust. After the liquidation date fixed for any
distribution of Junior Subordinated Debentures for Trust Preferred Securities,
(i) such Trust Preferred Securities will no longer be deemed to be outstanding
and (ii) certificates representing Trust Preferred Securities that are not then
held by the Depositary or its nominee will be deemed to represent Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of such Trust Preferred Securities, and bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid Distributions on the Trust
Preferred Securities until such certificates are presented to the Administrative
Trustees or their agent for transfer or exchange.
There can be no assurance as to the market prices for the Trust Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Trust Preferred Securities if a dissolution and liquidation of
the Trust were to occur. Accordingly, the Trust Preferred Securities that an
investor may purchase, or the Junior Subordinated Debentures that the investor
may receive on dissolution and liquidation of the Trust, may trade at a discount
to the price that the investor paid to purchase the Trust Preferred Securities
offered hereby.
REDEMPTION PROCEDURES
Trust Preferred Securities redeemed on each Redemption Date shall be
redeemed at the Redemption Price with the applicable proceeds from the
contemporaneous redemption of the Junior Subordinated Debentures. Redemptions of
the Trust Preferred Securities shall be made and the Redemption Price shall be
payable on each Redemption Date only to the extent that the Trust has funds on
hand available for the payment of such Redemption Price. See " -- Subordination
of Common Securities of the Trust Held by the Company" herein and "Description
of the Guarantee."
If the Property Trustee gives a notice of redemption in respect of the
Trust Preferred Securities, then, by 12:00 noon, Eastern time on the Redemption
Date, to the extent funds are available and to the extent the Trust Preferred
Securities are no longer in book-entry form, the Property Trustee will deposit
with the Paying Agent for such Trust Preferred Securities funds sufficient to
pay the aggregate Redemption Price and will give such Paying Agent irrevocable
instructions and authority to pay the Redemption Price to the holders thereof
upon surrender of their certificates evidencing such Trust Preferred Securities.
If such Trust Preferred Securities are only in book-entry form, the Property
Trustee, to the extent funds are available, will deposit with the Depositary
funds sufficient to pay the aggregate Redemption Price and will give the
Depositary irrevocable instructions and authority to pay the Redemption Price to
the holders of such Trust Preferred Securities. Notwithstanding the foregoing,
Distributions payable on or prior to the Redemption Date shall be payable to the
holders of such Trust Preferred Securities on the relevant record dates for the
related Distribution Dates. If notice of redemption shall have been given and
funds deposited as required, then upon the date of such deposit, all rights of
the holders of the Trust Preferred Securities will cease, except the right of
the holders of the Trust Preferred Securities to receive the applicable
Redemption Price, but without interest on such Redemption Price, and such Trust
Preferred Securities will cease to be outstanding. In the event that any date
fixed for redemption of such Trust Preferred Securities is not a Business Day,
then payment of the Redemption Price payable on such date will be made on the
next succeeding Business Day (and without any interest or other payment in
respect of any such delay), with the same force and effect as if made on the
date such payment was originally payable. In the event that payment of the
Redemption Price in respect of Trust Preferred Securities called for redemption
is improperly withheld or refused and not paid either by the Trust or by the
Company pursuant to the Guarantee, Distributions on such Trust Preferred
Securities will continue to accrue at the then applicable rate, from the
Redemption Date originally established by the Trust for such Trust Preferred
Securities to the date such Redemption Price is actually paid, in which case the
actual
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payment date will be the date fixed for redemption for purposes of calculating
the Redemption Price. See "Description of the Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), and further provided that the Company is not then
exercising its right to defer interest payments on the Junior Subordinated
Debentures, the Company may at any time and from time to time purchase
outstanding Trust Preferred Securities by tender, in the open market or by
private agreement.
Payment of the Redemption Price on the Trust Preferred Securities and any
distribution of Junior Subordinated Debentures to holders of Trust Preferred
Securities shall be made to the applicable recordholders thereof as they appear
on the register for such Trust Preferred Securities on the relevant record date,
which date shall be, so long as such securities remain in book-entry form, one
Business Day prior to the Redemption Date or Liquidation Date, as applicable. In
the event that the Trust Preferred Securities are not in book-entry form, the
relevant record date for such Trust Preferred Securities shall be the date 15
days prior to the relevant Redemption Date.
If less than all of the Trust Securities issued by the Trust are to be
redeemed on a Redemption Date, then the aggregate Redemption Price for such
Trust Securities to be redeemed shall be allocated pro rata (based on
Liquidation Amounts) to the Trust Preferred Securities and Common Securities
based upon the relative Liquidation Amounts of such classes. The particular
Trust Preferred Securities to be redeemed shall be selected by the Property
Trustee from the outstanding Trust Preferred Securities not previously called
for redemption, by such method as the Property Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of portions
(equal to $10 or an integral multiple thereof) of the Liquidation Amount of
Trust Preferred Securities. The Property Trustee shall promptly notify the
Securities Registrar (as defined below) in writing of the Trust Preferred
Securities selected for redemption and, in the case of any Trust Preferred
Securities selected for partial redemption, the Liquidation Amount thereof to be
redeemed. For all purposes of the Trust Agreement, unless the context otherwise
requires, all provisions relating to the redemption of Trust Preferred
Securities shall relate to the portion of the aggregate Liquidation Amount of
Trust Preferred Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities at such
holder's registered address. Unless the Trust defaults in payment of the
applicable Redemption Price, on and after the Redemption Date, Distributions
will cease to accrue on such Trust Preferred Securities called for redemption.
SUBORDINATION OF COMMON SECURITIES OF THE TRUST HELD BY THE COMPANY
Payment of Distributions on, and the Redemption Price of, the Trust
Preferred Securities and Common Securities, as applicable, shall be made pro
rata based on the Liquidation Amounts of the Trust Preferred Securities and
Common Securities; provided, however, that if on any Distribution Date or
Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or applicable Redemption Price
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all of the outstanding Trust Preferred Securities for all Distribution
periods terminating on or prior thereto, or in the case of payment of the
applicable Redemption Price, the full amount of such Redemption Price on all of
the outstanding Trust Preferred Securities then called for redemption, shall
have been made or provided for, and all funds available to the Property Trustee
shall first be applied to the payment in full in cash of all Distributions on,
or the Redemption Price of, the Trust Preferred Securities then due and payable.
In the case of any Event of Default under the Trust Agreement resulting
from a Debenture Event of Default, the Company as holder of the Common
Securities will be deemed to have waived any right to act with respect to any
such Event of Default until the effect of all such Events of Default have been
cured, waived or otherwise eliminated. Until any such Events of Default have
been so cured, waived or otherwise eliminated, the Property Trustee shall act
solely on behalf of the holders of the Trust Preferred Securities and not on
behalf of the Company as holder of the Common Securities, and only the holders
of the Trust Preferred Securities will have the right to direct the Property
Trustee to act on their behalf.
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LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The Company will have the right at any time to dissolve the Trust, subject
to certain limitations, and, after satisfaction of liabilities to creditors of
the Trust as required by applicable law, cause the Junior Subordinated
Debentures to be distributed to the holders of the Trust Preferred Securities.
See " -- Distribution of Junior Subordinated Debentures" above. The Company
might exercise its right to dissolve the Trust under circumstances where a "Tax
Event," "Investment Company Event" or other undesirable event could be avoided
simply by dissolving the Trust and causing the Junior Subordinated Debentures to
be distributed to holders of the Trust Preferred Securities.
In addition, pursuant to the Trust Agreement, the Trust shall automatically
dissolve upon expiration of its term and shall earlier dissolve on the first to
occur of: (i) certain events of bankruptcy, dissolution or liquidation of the
Company; (ii) the distribution of a Like Amount of the Junior Subordinated
Debentures to the holders of its Trust Securities, if the Company, as Depositor,
has delivered written direction to the Property Trustee to dissolve the Trust
(which direction is optional and, except as described above, wholly within the
discretion of the Company, as Depositor); (iii) redemption of all of the Trust
Preferred Securities as described under "-- Redemption" and (iv) the entry of an
order for the dissolution of the Trust by a court of competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii), or (iv)
above, the Trust shall be liquidated by the Trustees as expeditiously as the
Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, to the
holders of such Trust Securities a Like Amount of the Junior Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practical, in which event such holders will be entitled to receive out of
the assets of the Trust available for distribution to holders, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, an amount equal to, in the case of holders of Trust Preferred Securities,
the aggregate of the Liquidation Amount plus accrued and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by the Trust on the
Trust Preferred Securities shall be paid on a pro rata basis. The holder(s) of
the Common Securities will be entitled to receive distributions upon any such
liquidation on a pro rata basis with the holders of the Trust Preferred
Securities, except that if a Debenture Event of Default has occurred and is
continuing, the Trust Preferred Securities shall have a priority over the Common
Securities.
Under current United States federal income tax law and interpretations, and
assuming that the Trust is treated as a grantor trust, a distribution of the
Junior Subordinated Debentures should not be a taxable event to holders of the
Trust Preferred Securities. Should there be a change in law, a change in
distribution, a Tax Event or other circumstances, however, the distribution
could be a taxable event to the Trust and to holders of the Trust Preferred
Securities. See "Material Federal Income Tax Consequences." If the Company
elects neither to redeem the Junior Subordinated Debentures prior to maturity
nor to liquidate the Trust and distribute the Junior Subordinated Debentures to
holders of the Trust Preferred Securities, the Trust Preferred Securities will
remain outstanding until the repayment of the Junior Subordinated Debentures.
If the Company elects to dissolve the Trust and thereby causes the Junior
Subordinated Debentures to be distributed to holders of the Trust Preferred
Securities in liquidation of the Trust, the Company shall continue to have the
right to shorten the Stated Maturity of such Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures -- General."
EVENTS OF DEFAULT; NOTICE
Any one of the following events that has occurred and is continuing
constitutes an "Event of Default" under the Trust Agreement (an "Event of
Default") with respect to the Trust Preferred Securities (whatever the reason
for such Event of Default and whether it shall be voluntary or involuntary or be
effected by
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operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description
of the Junior Subordinated Debentures -- Debenture Events of Default"); or
(ii) default by the Property Trustee in the payment of any
Distribution when it becomes due and payable, and continuation of such
default for a period of 30 days; or
(iii) default by the Property Trustee in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect,
of any covenant or warranty of the Property Trustee in the Trust Agreement
(other than a default or breach in the performance of a covenant or
warranty which is addressed in clause (ii) or (iii) above), and
continuation of such default or breach, for a period of 60 days after there
has been given, by registered or certified mail, to the defaulting Property
Trustee by the holders of at least 25% in aggregate Liquidation Amount of
the outstanding Trust Preferred Securities, a written notice specifying
such default or breach and requiring it to be remedied and stating that
such notice is a "Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Property Trustee and the failure by the
Company to appoint a successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to a Responsible Officer of the Property Trustee, the Property
Trustee shall transmit notice of such Event of Default to the holders of the
Trust Preferred Securities, the Administrative Trustees and the Company, as
Depositor, unless such Event of Default shall have been cured or waived. The
Company, as Depositor, and the Administrative Trustees are required to file
annually with the Property Trustee a certificate as to whether or not they are
in compliance with all the conditions and covenants applicable to them under the
Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the Trust
Preferred Securities shall have a preference over the Common Securities upon
dissolution of the Trust as described above. See "-- Liquidation Distribution
upon Dissolution" herein. Upon a Debenture Event of Default (other than with
respect to certain events in bankruptcy, insolvency or reorganization), unless
the principal of all the Junior Subordinated Debentures has already become due
and payable, either the Property Trustee or the holders of not less than 25% in
aggregate principal amount of the Junior Subordinated Debentures then
outstanding may declare all of the Junior Subordinated Debentures to be due and
payable immediately by giving notice in writing to the Company (and to the
Property Trustee, if notice is given by holders of the Junior Subordinated
Debentures). If the Property Trustee or the holders of the Junior Subordinated
Debentures fail to declare the principal of all of the Junior Subordinated
Debentures due and payable upon a Debenture Event of Default, the holders of at
least 25% in Liquidation Amount of the Trust Preferred Securities then
outstanding shall have the right to declare the Junior Subordinated Debentures
immediately due and payable. In either event, payment of principal and interest
on the Junior Subordinated Debentures shall remain subordinated to the extent
provided in the Indenture. In addition, holders of the Trust Preferred
Securities have the right in certain circumstances to bring a Direct Action (as
hereinafter defined). See "Description of the Junior Subordinated Debentures --
Enforcement of Certain Rights by Holders of Trust Preferred Securities."
If a Debenture Event of Default with respect to certain events in
bankruptcy, insolvency or reorganization occurs, the Junior Subordinated
Debentures shall automatically, and without any declaration or other action on
the part of the Property Trustee or the holders of the Junior Subordinated
Debentures, become immediately due and payable. In such event, payment of
principal and interest on the Junior Subordinated Debentures will also remain
subordinated to the extent provided in the Indenture.
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REMOVAL OF TRUSTEES
Unless a Debenture Event of Default has occurred and is continuing, any of
the Property Trustee, the Delaware Trustee or the Administrative Trustees may be
removed at any time by the holder of the Common Securities. For example, the
holder of the Common Securities may seek to remove such trustees upon
substandard performance or non-performance of their duties or upon a significant
increase in a trustee's fee. If a Debenture Event of Default has occurred and is
continuing, the Property Trustee and the Delaware Trustee also may be removed at
such time by the holders of a majority in Liquidation Amount of the outstanding
Trust Preferred Securities. In no event will the holders of the Trust Preferred
Securities have the right to vote to appoint, remove or replace the
Administrative Trustees, which voting rights are vested exclusively in the
Company as the holder of the Common Securities. No resignation or removal of an
Issuer Trustee and no appointment of a successor trustee shall be effective
until the acceptance of appointment by the successor trustee in accordance with
the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the Trust property may
at the time be located, the Company, as the holder of the Common Securities, and
the Administrative Trustees shall have power to appoint one or more persons
either to act as a co-trustee, jointly with the Property Trustee, of all or any
part of such Trust property, or to act as separate trustee of any such property,
in either case with such powers as may be provided in the instrument of
appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the Trust Agreement. In case a Debenture Event of Default has
occurred and is continuing, the Property Trustee alone shall have power to make
such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person (as defined in the Trust Agreement) into which the Property
Trustee and the Delaware Trustee may be merged or converted or with which it may
be consolidated, or any corporation resulting from any merger, conversion or
consolidation to which such relevant Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of such Issuer Trustee, shall be the successor of such Trustee under the Trust
Agreement, provided such corporation shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other body, except as
described below or as described in "-- Liquidation Distribution Upon
Dissolution." The Trust may, at the request of the Company, with the consent of
the Administrative Trustees and without the consent of the holders of the Trust
Preferred Securities, merge with or into, consolidate, amalgamate, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to a trust organized as such under the laws of any State;
provided, that (i) such successor entity either (a) expressly assumes all of the
obligations of the Trust with respect to the Trust Preferred Securities or (b)
substitutes for the Trust Preferred Securities other securities having
substantially the same terms as the Trust Preferred Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the Trust
Preferred Securities rank in priority with respect to distributions and payments
upon liquidation, redemption and otherwise, (ii) the Company expressly appoints
a trustee of such successor entity, possessing the same powers and duties as the
Property Trustee, as the holder of the Junior Subordinated Debentures, (iii) the
Successor Securities are listed or traded, or any Successor Securities will be
listed upon notification of issuance, on any national securities exchange,
national stock market or other organization on which the Trust Preferred
Securities are then listed or traded, if any, (iv) such merger, consolidation,
amalgamation, conveyance, transfer or lease does not cause the Trust Preferred
Securities (including any Successor Securities) to be downgraded by any
nationally recognized statistical rating organization, (v) such merger,
consolidation, amalgamation, replacement, conveyance,
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transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the Trust Preferred Securities (including any
Successor Securities) in any material respect, (vi) such successor entity has a
purpose substantially identical to that of the Trust, (vii) prior to such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease,
the Company has received an Opinion of Counsel to the effect that (a) such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease
does not adversely affect the rights, preferences and privileges of the holders
of the Trust Preferred Securities (including any Successor Securities) in any
material respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an investment company under the
Investment Company Act and (viii) the Company or any permitted successor or
designee owns all of the common securities of such successor entity and
guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee. Notwithstanding the
foregoing, the Trust shall not, except with the consent of holders of 100% in
Liquidation Amount of the Trust Preferred Securities, consolidate, amalgamate,
merge with or into, or be replaced by or convey, transfer or loan its properties
and assets substantially as an entirety to any other entity or permit any other
entity to consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or loan
would cause the Trust or the successor entity to be classified as other than a
grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of the
Guarantee -- Amendments and Assignment" and as otherwise required by law and the
Trust Agreement, the holders of the Trust Preferred Securities will have no
voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities, (i) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement, which shall not be inconsistent
with the other provisions of the Trust Agreement, or (ii) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as shall be
necessary to ensure that the Trust will be classified for United States federal
income tax purposes as a grantor trust at all times that any Trust Securities
are outstanding or to ensure that the Trust will not be required to register as
an "investment company" under the Investment Company Act; provided, however,
that in the case of clause (i), such action shall not adversely affect in any
material respect the interests of any holder of Trust Securities, and any such
amendments of the Trust Agreement shall become effective when notice thereof is
given to the holders of the Trust Securities. The Trust Agreement may be amended
by the Administrative Trustees and the Property Trustee with (i) the consent of
holders representing not less than a majority of the aggregate Liquidation
Amount of the outstanding Trust Securities, and (ii) receipt by such Trustees of
an Opinion of Counsel to the effect that such amendment or the exercise of any
power granted to the Issuer Trustees in accordance with such amendment will not
affect the Trust's status as a grantor trust for United States federal income
tax purposes or the Trust's exemption from registration as an "investment
company" under the Investment Company Act, provided that without the unanimous
consent of the holders of the Trust Securities to be affected thereby, the Trust
Agreement may not be amended to (i) change the amount or timing of any
Distribution on the Trust Securities or otherwise adversely affect the amount of
any Distribution required to be made in respect of the Trust Securities as of a
specified date or (ii) restrict the right of a holder of Trust Securities to
institute suit for the enforcement of any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee, or
executing any trust or power conferred on the Indenture Trustee with respect to
the Junior Subordinated Debentures, (ii) waive any past default that is waivable
under the Indenture, (iii) exercise any right to rescind or annul a declaration
that the principal of all the Junior Subordinated Debentures shall be due and
payable or (iv) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case,
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obtaining the prior approval of the holders of a majority in aggregate
Liquidation Amount of all outstanding Trust Preferred Securities; provided,
however, that where a consent under the Indenture would require the consent of
each holder of Junior Subordinated Debentures affected thereby, no such consent
shall be given by the Property Trustee without the prior consent of each holder
of the Trust Preferred Securities. The Issuer Trustees shall not revoke any
action previously authorized or approved by a vote of the holders of the Trust
Preferred Securities except by subsequent vote of the holders of the Trust
Preferred Securities. The Property Trustee shall notify each holder of the Trust
Preferred Securities of any notice of default with respect to the Junior
Subordinated Debentures. In addition to obtaining the foregoing approvals of
such holders of the Trust Preferred Securities, prior to taking any of the
foregoing actions, the Issuer Trustees shall obtain an Opinion of Counsel
experienced in such matters to the effect that such action will not cause the
Trust to fail to be classified as a grantor trust for United States federal
income tax purposes.
Any required approval of holders of the Trust Preferred Securities may be
given at a meeting of holders of Trust Preferred Securities convened for such
purpose or pursuant to written consent. The Property Trustee will cause a notice
of any meeting at which holders of the Trust Preferred Securities are entitled
to vote, or of any matter upon which action by written consent of such holders
is to be taken, to be given to each holder of record of the Trust Preferred
Securities in the manner set forth in the Trust Agreement.
No vote or consent of the holders of the Trust Preferred Securities will be
required for the Trust to redeem and cancel the Trust Preferred Securities in
accordance with the Trust Agreement.
Notwithstanding that holders of the Trust Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Trust Preferred Securities that are owned by the Company, the Issuer Trustees or
any affiliate of the Company or any Issuer Trustees, shall, for purposes of such
vote or consent, be treated as if they were not outstanding.
GLOBAL TRUST PREFERRED SECURITIES
The Trust Preferred Securities will be represented by one or more global
certificates registered in the name of the Depositary or its nominee ("Global
Trust Preferred Security"). Beneficial interests in the Global Trust Preferred
Security will be shown on, and transfers thereof will be effected only through,
records maintained by participants in the Depositary. Except as described below,
Trust Preferred Securities in certificated form will not be issued in exchange
for the Global Trust Preferred Securities. See "Book-Entry Issuance."
A Global Trust Preferred Security will be exchanged for Trust Preferred
Securities in certificated form registered in the names of persons other than
the Depositary or its nominee only if (i) the Depositary notifies the Company
that it is unwilling or unable to continue as a depositary for such Global Trust
Preferred Security and no successor depositary shall have been appointed, or if
at any time the Depositary ceases to be a clearing agency registered under the
Exchange Act, at a time when the Depositary is required to be so registered to
act as such depositary, and no successor depositary shall have been appointed,
(ii) the Company in its sole discretion determines that such Global Trust
Preferred Security shall be so exchangeable or (iii) there shall have occurred
and be continuing a Debenture Event of Default and the owners of beneficial
interests in such Global Trust Preferred Security aggregating at least a
majority in Liquidation Amount of the Trust Preferred Securities inform the
Property Trustee that the continuation of a book-entry registration system is no
longer in the best interests of the holders of Trust Preferred Securities. Any
Global Trust Preferred Security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for definitive certificates registered in such
names as the Depositary shall direct. It is expected that such instructions will
be based upon directions received by the Depositary with respect to ownership of
beneficial interests in such Global Trust Preferred Security. In the event that
Trust Preferred Securities are issued in definitive form, such Trust Preferred
Securities will be in denominations of $10 and integral multiples thereof and
may be transferred or exchanged at the corporate trust office of the Property
Trustee, or the offices of a paying or transfer agent appointed by the
Administrative Trustees.
Unless and until it is exchanged in whole or in part for the individual
Trust Preferred Securities represented thereby, a Global Trust Preferred
Security may not be transferred except as a whole by the
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Depositary to a nominee of such Depositary or by a nominee of the Depositary to
such Depositary or another nominee of such Depositary or by the Depositary or
any nominee to a successor Depositary or any nominee of such successor.
Payments on Global Trust Preferred Securities will be made to the
Depositary, as the record holder of the Trust Preferred Securities. In the event
the Trust Preferred Securities are issued in definitive form, Distributions will
be payable, the transfer of the Trust Preferred Securities will be registrable,
and Trust Preferred Securities will be exchangeable for Trust Preferred
Securities of other denominations of a like aggregate Liquidation Amount, at the
corporate trust office of the Property Trustee, or at the offices of any paying
agent or transfer agent appointed by the Administrative Trustees, provided that
payment of any Distribution may be made at the option of the Administrative
Trustees by check mailed to the address of the persons entitled thereto or by
wire transfer, provided that payments will be made by wire transfer if so
requested by a holder of more than $1 million aggregate Liquidation Amount. In
addition, if the Trust Preferred Securities are issued in definitive,
certificated form, the record dates for payment of Distributions will be the
first day of the month in which the relevant Distribution Date occurs. For a
description of the terms of the depositary arrangements relating to payments,
transfer, voting rights, redemptions and other notices and other matters, see
"Book-Entry Issuance."
Upon the issuance of a Global Trust Preferred Security, and the deposit of
such Global Trust Preferred Security with or on behalf of the Depositary, the
Depositary for such Global Trust Preferred Security or its nominee will credit,
on its book-entry registration and transfer system, the respective aggregate
Liquidation Amounts of the individual Trust Preferred Securities represented by
such Global Trust Preferred Securities to the accounts of Participants (as
defined below). Such accounts shall be designated by the dealers, underwriters
or agents with respect to such Trust Preferred Securities. Ownership of
beneficial interests in a Global Trust Preferred Security will be limited to
Participants or persons that may hold interests through Participants. Ownership
of beneficial interests in such Global Trust Preferred Security will be shown
on, and the transfer of that ownership will be effected only through, records
maintained by the applicable Depositary or its nominee (with respect to
interests of Participants) and the records of Participants (with respect to
interests of persons who hold through Participants). The laws of some states
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and such laws may impair the ability
to transfer beneficial interests in a Global Trust Preferred Security.
So long as the Depositary for a Global Trust Preferred Security, or its
nominee, is the registered owner of such Global Trust Preferred Security, such
Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Trust Preferred Securities represented by such Global
Trust Preferred Security for all purposes under the Trust Agreement governing
such Trust Preferred Securities. Except as provided herein, owners of beneficial
interests in a Global Trust Preferred Security will not be entitled to have any
of the individual Trust Preferred Securities represented by such Global Trust
Preferred Security registered in their names, will not receive or be entitled to
receive physical delivery of any such Trust Preferred Securities in definitive
form and will not be considered the owners or holders thereof under the Trust
Agreement.
None of the Company, the Property Trustee, any Paying Agent or the
Securities Registrar for such Trust Preferred Securities will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Global Trust
Preferred Security representing such Trust Preferred Securities or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of the Liquidation Amount or Distributions in respect of a permanent
Global Trust Preferred Security, will immediately credit Participants' accounts
with payments in amounts proportionate to their respective beneficial interest
in the aggregate Liquidation Amount of such Global Trust Preferred Security as
shown on the records of such Depositary or its nominee. The Company also expects
that payments by Participants to owners of beneficial interests in such Global
Trust Preferred Security held through such Participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name." Such payments will be the responsibility of such Participants.
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PAYMENT AND PAYING AGENT
Payments in respect of the Trust Preferred Securities shall be made to the
Depositary, which shall credit the relevant accounts at the Depositary on the
applicable Distribution Dates or, if any of the Trust Preferred Securities are
not held by the Depositary, such payments shall be made by check mailed to the
address of the holder entitled thereto as such address shall appear on the
Securities Register. The paying agent (the "Paying Agent") shall initially be
the Property Trustee and any co-paying agent chosen by the Property Trustee and
acceptable to the Administrative Trustees and the Company. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days' written notice to the
Administrative Trustees, the Property Trustee and the Company. In the event that
the Property Trustee shall no longer be the Paying Agent, the Administrative
Trustees shall appoint a successor (which shall be a bank or trust company
acceptable to the Administrative Trustees and the Company) to act as Paying
Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the Trust
Preferred Securities. Registration of transfers of the Trust Preferred
Securities will be effected without charge to the holder, but upon payment by
the holder of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. The Trust will not be required to
register or cause to be registered the transfer of the Trust Preferred
Securities after such Trust Preferred Securities have been called for
redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of Trust
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If the Property
Trustee is required to decide between alternative causes of action or to
construe ambiguous provisions in the Trust Agreement or is unsure of the
application of any provision of the Trust Agreement, and the matter is not one
on which holders of the Trust Preferred Securities are entitled under the Trust
Agreement to vote, then the Property Trustee shall take such action as is
directed by the Company and, if not so directed, shall take such action as it
deems advisable and in the best interests of the holders of the Trust Securities
and will have no liability except for its own bad faith, negligence or willful
misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or fail to be classified as a grantor trust for United
States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. In this connection, the Company and the
Administrative Trustees are authorized to take any action, not inconsistent with
applicable law, the certificate of trust of the Trust or the Trust Agreement,
that the Company and the Administrative Trustees determine in their discretion
to be necessary or desirable for such purposes, as long as such action does not
materially adversely affect the interests of the holders of the Trust Preferred
Securities. Holders of the Trust Preferred Securities have no preemptive or
similar rights.
The Trust may not borrow money, issue debt or mortgage or pledge any of its
assets.
The Trust Agreement is governed by Delaware law.
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
Concurrently with the issuance of the Trust Preferred Securities, the Trust
will invest the proceeds thereof, together with the consideration paid by the
Company for the Common Securities, in Junior Subordinated Debentures issued by
the Company. The Junior Subordinated Debentures will be issued as unsecured debt
under the Junior Subordinated Indenture, dated as of September 28, 1998 (the
"Indenture"), between the Company and the Indenture Trustee. The following
summary of the terms and provisions of the Junior Subordinated Debentures and
the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Indenture, which has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part, and to the Trust Indenture Act. The Indenture is qualified under the Trust
Indenture Act. Whenever particular defined terms of the Indenture are referred
to herein, such terms as defined therein are incorporated herein by reference.
GENERAL
The Junior Subordinated Debentures will bear interest at the annual rate of
10.5% until September 15, 2001, then at the annual rate of 11% until September
15, 2003, then at the annual rate of 11.5% until September 15, 2005 and then at
the annual rate of 12% thereafter of the principal amount thereof, payable
quarterly in arrears on each March 15, June 15, September 15 and December 15
(each, an "Interest Payment Date"), commencing December 15, 1998, to the person
in whose name each Junior Subordinated Debenture is registered, subject to
certain exceptions, at the close of business on the first day of the month in
which such payment is made. Notwithstanding the above, in the event that either
the (i) Junior Subordinated Debentures are held by the Property Trustee and the
Trust Preferred Securities are registered in book-entry only form or (ii) the
Junior Subordinated Debentures are represented by a Global Subordinated
Debenture (as defined herein), the record date for such payment shall be the
Business Day next preceding such Interest Payment Date. The amount of each
interest payment due with respect to the Junior Subordinated Debentures will
include amounts accrued through the date the interest payment is due. It is
anticipated that, until the liquidation, if any, of the Trust, each Junior
Subordinated Debenture will be held in the name of the Property Trustee, in
trust for the benefit of the holders of the Trust Preferred Securities. The
amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Junior Subordinated Debentures is not a Business Day,
then payment of the interest payable on such date will be made on the next
Business Day (and without any interest or other payment in respect of any such
delay), in each case with the same force and effect as if made on the date such
payment was originally payable. Accrued interest that is not paid on the
applicable Interest Payment Date will bear additional interest on the amount
thereof (to the extent permitted by law) at the rate per annum of 10.5% thereof
until September 15, 2001, then at the rate per annum of 11% thereof until
September 15, 2003, then at the rate per annum of 11.5% thereof until September
15, 2005 and then at the rate per annum of 12% thereof thereafter. The term
"interest" as used herein shall include quarterly interest payments, interest on
quarterly interest payments not paid on the applicable Interest Payment Date and
Additional Sums (as defined below), as applicable.
The Junior Subordinated Debentures will mature on September 15, 2028 (such
date, as it may be shortened as hereinafter described, the "Stated Maturity").
Such date may be shortened at any time by the Company to any date not earlier
than September 15, 2001. The Company might exercise its right to shorten the
maturity of the Junior Subordinated Debentures under circumstances where a Tax
Event, Investment Company Event or other undesirable event could be avoided
simply by shortening the maturity of the Junior Subordinated Debentures. In the
event that the Company elects to shorten the Stated Maturity of the Junior
Subordinated Debentures, it shall give notice to the Indenture Trustee, and the
Indenture Trustee shall give notice of such shortening to the holders of the
Junior Subordinated Debentures no less than 60 days prior to the effectiveness
thereof.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Debt and Subordinated Debt
of the Company. The Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of the Company, including Senior Debt and Subordinated
Debt, whether under the Indenture or any existing or other indenture that the
Company may enter into in the future or otherwise. See "-- Subordination" below.
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OPTION TO DEFER INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right under the Indenture at any time during the term of the
Junior Subordinated Debentures to defer the payment of interest at any time or
from time to time for a period not exceeding eight consecutive quarters (each
such period an "Extension Period"), provided that no Extension Period may extend
beyond the Stated Maturity. At the end of such Extension Period, the Company
must pay all interest then accrued and unpaid (together with interest thereon at
the annual rate of 10.5% until September 15, 2001, then at the annual rate of
11% until September 15, 2003, then at the annual rate of 11.5% until September
15, 2005 and then at the annual rate of 12% thereafter, compounded quarterly, to
the extent permitted by applicable law). During an Extension Period, interest
will continue to accrue and holders of Junior Subordinated Debentures will be
required to accrue interest income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences -- Interest Income and
Original Issue Discount." The default by the Company on any Senior Debt and
Subordinated Debt will not constitute a Debenture Event of Default. See
"-- Debenture Events of Default" below.
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock (which
includes common and preferred stock), or (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company (including other Junior Subordinated Debentures) that
rank pari passu with or junior in interest to the Junior Subordinated
Debentures, or make any guarantee payments with respect to any guarantee by the
Company of the debt securities of any subsidiary of the Company if such
guarantee ranks pari passu with or junior in interest to the Junior Subordinated
Debentures (other than (a) dividends or distributions in capital stock of the
Company (which includes common and preferred stock), (b) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
or the issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the Guarantee
and (d) purchases of common stock related to the issuance of common stock or
rights under any of the Company's benefit plans for its directors, officers or
employees (in connection with an optionee's or rightholder's use of Common Stock
as consideration for the exercise or purchase price of the related option or
right)) or (iii) redeem, purchase or acquire less than all of the Junior
Subordinated Debentures or any of the Trust Preferred Securities. Prior to the
termination of any such Extension Period, the Company may further extend such
Extension Period, provided that such extension does not cause such Extension
Period to exceed eight consecutive quarters or extend beyond the Stated
Maturity. Upon the termination of any such Extension Period and the payment of
all amounts then due on any Interest Payment Date, the Company may elect to
begin a new Extension Period subject to the above requirements. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Company must give notice to the Property Trustee, the Administrative
Trustees and the Indenture Trustee of its election of any Extension Period at
least one Business Day prior to the earlier of (i) the date the distributions on
the Trust Preferred Securities would have been payable but for the election to
begin or extend such Extension Period, (ii) the date the Administrative Trustees
are required to give notice to the American Stock Exchange, the New York Stock
Exchange, the Nasdaq Stock Market or any applicable stock exchange or automated
quotation system on which the Trust Preferred Securities are then listed or
quoted or to the holders of the Trust Preferred Securities on the record date or
(iii) the date such distributions are payable, but in any event not less than
one Business Day prior to such record date. There is no limitation on the number
of times that the Company may elect to begin an Extension Period.
Distributions on the Trust Preferred Securities will be deferred by the
Trust during any such Extension Period. See "Description of the Trust Preferred
Securities -- Distributions." For a description of certain federal income tax
consequences and special considerations applicable to any such Junior
Subordinated Debentures, see "Material Federal Income Tax Consequences."
ADDITIONAL SUMS
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the Junior Subordinated Debentures such amounts
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("Additional Sums") as shall be required so that the Distributions payable by
the Trust shall not be reduced as a result of any such additional taxes, duties
or other governmental charges.
REDEMPTION
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after September 15, 2001, in whole at any time
or in part from time to time, or (ii) at any time in whole (but not in part),
within 90 days following the occurrence of a Tax Event or an Investment Company
Event, in each case at a redemption price equal to the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed for
redemption, plus 100% of the principal amount thereof.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Junior Subordinated
Debentures to be redeemed at such holder's registered address. Unless the
Company defaults in payment of the redemption price, on and after the redemption
date interest will cease to accrue on such Junior Subordinated Debentures or
portions thereof called for redemption.
The Junior Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Trust Preferred
Securities -- Liquidation Distribution Upon Dissolution," under certain
circumstances involving the dissolution of the Trust, the Junior Subordinated
Debentures may be distributed to the holders of the Trust Preferred Securities
in liquidation of the Trust after satisfaction of liabilities to creditors of
the Trust as provided by applicable law. If the Junior Subordinated Debentures
are distributed to the holders of Trust Preferred Securities upon the
liquidation of the Trust, the Company will use its best efforts to list the
Junior Subordinated Debentures on the American Stock Exchange or such other
stock exchanges or automated quotation system, if any, on which the Trust
Preferred Securities are then listed or quoted. There can be no assurance that
the Company will be able to cause such listing or as to the market price of any
Junior Subordinated Debentures that may be distributed to the holders of Trust
Preferred Securities.
RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there shall have occurred a Debenture Event of Default,
(ii) the Company shall have given notice of its election of an Extension Period
as provided in the Indenture with respect to the Junior Subordinated Debentures
and shall not have rescinded such notice, or such Extension Period, or any
extension thereof, shall be continuing or (iii) while the Junior Subordinated
Debentures are held by the Trust, the Company shall be in default with respect
to its payment of any obligation under the Guarantee, then the Company will not
(1) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of the Company's
capital stock, (2) make any payment of principal, interest or premium, if any,
on or repay, repurchase or redeem any debt securities of the Company (including
other Junior Subordinated Debt) that rank pari passu with or junior in interest
to the Junior Subordinated Debentures or make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any subsidiary
of the Company if such guarantee ranks pari passu with or junior in interest to
the Junior Subordinated Debentures (other than (a) dividends or distributions in
capital stock of the Company, (b) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Guarantee and (d) purchases of
common stock related to issuances of common stock or rights under any of the
Company's benefit plans for its directors, officers, employees or consultants
(in connection with an optionee's or rightholder's use of Common Stock as
consideration for the exercise or purchase price of the related option or
right)) or (3) redeem, purchase or acquire less than all of the Junior
Subordinated Debentures or any of the Trust Preferred Securities.
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SUBORDINATION
The Indenture provides that the Junior Subordinated Debentures are
subordinated and junior in right of payment to all Senior Debt and Subordinated
Debt whether now existing or hereafter incurred. Senior Debt and Subordinated
Debt may include indebtedness of the Company which is subordinated to other
indebtedness of the Company but nevertheless senior to the Junior Subordinated
Debentures. No payment of principal of (including redemption payments, if any),
premium, if any, or interest on, the Junior Subordinated Debentures may be made
if any event of default with respect to any Senior Debt and Subordinated Debt
shall have occurred and be continuing and the Company and the Trustee receive
notice of such default from any person permitted to give such notice. Upon any
payment by the Company or distribution of assets of the Company to creditors
upon any dissolution, winding-up, liquidation or reorganization of the Company,
whether voluntary or involuntary or in bankruptcy, insolvency, receivership or
other proceedings, all amounts due on all Senior Debt and Subordinated Debt must
be paid in full before the holders of the Junior Subordinated Debentures are
entitled to receive or retain any payment. Upon payment in full of all amounts
due on the Senior Debt and Subordinated Debt then outstanding, the rights of the
holders of the Junior Subordinated Debentures will be subrogated to the rights
of the holders of Senior Debt and Subordinated Debt to receive payments or
distributions applicable to such Senior Debt and Subordinated Debt until all
amounts owing on the Junior Subordinated Debentures are paid in full.
In the event of the acceleration of the maturity of any Junior Subordinated
Debentures by reason of a Debenture Event of Default, the holders of all Senior
Debt and Subordinated Debt outstanding at the time of such acceleration will
first be entitled to receive payment in full of all amounts due thereon
(including any amounts due upon acceleration) before the holders of Junior
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the Junior Subordinated Debentures.
"Debt" means, with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent: (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such Person; (vi) all
indebtedness of such Person whether incurred on or prior to the date of the
Indenture or thereafter incurred, for claims in respect of derivative products
including interest rate, foreign exchange rate and commodity forward contracts,
options and swaps and similar arrangements; and (vii) every obligation of the
type referred to in clauses (i) through (vi) of another Person and all dividends
of another Person the payment of which, in either case, such Person has
guaranteed or is responsible or liable for, directly or indirectly, as obligor
or otherwise.
"Senior Debt and Subordinated Debt" means the principal of (and premium, if
any) and interest, if any (including interest accruing on or after the filing of
any petition in bankruptcy or for reorganization relating to the Company whether
or not such claim for post-petition interest is allowed in such proceeding), on
Debt of the Company whether incurred on or prior to the date of the Indenture or
thereafter incurred, unless, in the instrument creating or evidencing the same
or pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Junior Subordinated
Debentures or to other Debt which is pari passu with, or subordinated to, the
Junior Subordinated Debentures; provided, however, that Senior Debt and
Subordinated Debt shall not be deemed to include (i) any Debt of the Company
which when incurred and without respect to any election under Section 1111(b) of
the United States Bankruptcy Code of 1978, as amended, was without recourse to
the Company, (ii) any Debt of the Company to any of its subsidiaries, (iii) Debt
to any employee of the Company and (iv) any other debt securities issued
pursuant to the Indenture.
The Indenture places no limitation on the amount of additional Senior Debt
and Subordinated Debt that may be incurred by the Company. The Company expects
from time to time to incur additional indebtedness constituting Senior Debt and
Subordinated Debt.
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REGISTRATION, DENOMINATION AND TRANSFER
The Junior Subordinated Debentures will initially be registered in the name
of the Property Trustee. If the Junior Subordinated Debentures are distributed
to holders of Trust Preferred Securities, it is anticipated that the depository
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Trust Preferred Securities. See
"Description of the Trust Preferred Securities -- Global Trust Preferred
Securities" and "Book-Entry Issuance."
Although the Depositary has agreed to the procedures described above, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If the Depositary is at any time
unwilling or unable to continue as depositary and a successor depositary is not
appointed by the Company within 90 days of receipt of notice from the Depositary
to such effect, the Company will cause the Junior Subordinated Debentures to be
issued in definitive form.
Payments on Junior Subordinated Debentures represented by a global
certificate will be made to Cede & Co., the nominee for the Depositary as the
registered holder of the Junior Subordinated Debentures, as described under
"Description of the Trust Preferred Securities -- Global Trust Preferred
Securities." If Junior Subordinated Debentures are issued in certificated form,
principal and interest will be payable, the transfer of the Junior Subordinated
Debentures will be registrable, and Junior Subordinated Debentures will be
exchangeable for Junior Subordinated Debentures of other authorized
denominations of a like aggregate principal amount, at the corporate trust
office of the Indenture Trustee in Wilmington, Delaware or at the offices of any
paying agent or transfer agent appointed by the Company, provided that payment
of interest may be made at the option of the Company by check mailed to the
address of the persons entitled thereto.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations and of a
like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar (the "Securities
Registrar") appointed under the Indenture or at the office of any transfer agent
designated by the Company for such purpose without service charge and upon
payment of any taxes and other governmental charges as described in the
Indenture. The Company will appoint the Indenture Trustee as Securities
Registrar under the Indenture. The Company may at any time designate additional
transfer agents with respect to the Junior Subordinated Debentures.
In the event of any redemption, neither the Company nor the Indenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the date of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior Subordinated Debentures so selected for redemption, except
in the case of any Junior Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
PAYMENT AND PAYING AGENTS
Payment of principal (and premium, if any) and interest on the Junior
Subordinated Debentures will be made at the office of the Indenture Trustee,
except that at the option of the Company payment of any interest may be made (i)
except in the case of Global Junior Subordinated Debentures, by check mailed to
the address of the person entitled thereto as such address shall appear in the
securities register, (ii) by transfer to an account maintained by the person
entitled thereto as specified in the Securities Register, provided that proper
transfer instructions have been received by the regular record date or (iii) if
the Junior Subordinated Debentures are held by the Property Trustee, by
agreement between the Company and the Property Trustee. Payment of any interest
on Junior Subordinated Debentures will be made to the person in whose name such
Junior Subordinated Debenture is registered at the close of business on the
regular record date for such interest. The Company may at any time designate
additional Paying Agents or rescind the designation of any Paying Agent; however
the Company will at all times be required to maintain a Paying Agent in each
place of payment for the Junior Subordinated Debentures. Any moneys deposited
with the Indenture Trustee or any
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Paying Agent, or then held by the Company in trust, for the payment of the
principal of (and premium, if any) or interest on the Junior Subordinated
Debentures and remaining unclaimed for two years after such principal or
interest has become due and payable shall, at the request of the Company, be
repaid to the Company and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
MODIFICATION OF INDENTURE
From time to time the Company and the Indenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies (provided that any such action
does not materially adversely affect the interests of the holders of the Junior
Subordinated Debentures or the Trust Preferred Securities so long as they remain
outstanding) and qualifying, or maintaining the qualification of, the Indenture
under the Trust Indenture Act. The Indenture contains provisions permitting the
Company and the Indenture Trustee, with the consent of the holders of not less
than a majority in principal amount of the outstanding Junior Subordinated
Debentures, to modify the Indenture in a manner affecting the rights of the
holders of the Junior Subordinated Debentures; provided, that no such
modification may, without the consent of the holder of each outstanding Junior
Subordinated Debenture affected thereby, (i) change the Stated Maturity of the
Junior Subordinated Debentures, or reduce the principal amount thereof, or
reduce the rate or extend the time of payment of interest thereon or (ii) reduce
the percentage of principal amount of Junior Subordinated Debentures, the
holders of which are required to consent to any such modification of the
Indenture; provided that so long as any of the Trust Preferred Securities remain
outstanding, no such modification may be made that adversely affects the holders
of such Trust Preferred Securities in any material respect, and no termination
of the Indenture may occur, and no waiver of any Debenture Event of Default or
compliance with any covenant under the Indenture may be effective, without the
prior consent of the holders of at least a majority of the aggregate Liquidation
Amount of the Trust Preferred Securities unless and until the principal of the
Junior Subordinated Debentures and all accrued and unpaid interest thereon have
been paid in full and certain other conditions have been satisfied. Where a
consent under the Indenture would require the consent of each holder of Junior
Subordinated Debentures, no such consent shall be given by the Property Trustee
without the prior consent of each holder of Trust Preferred Securities. In
addition, the Company and the Indenture Trustee may execute, without the consent
of any holder of Junior Subordinated Debentures, any supplemental Indenture for
the purpose of creating any new series of Junior Subordinated Debentures.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default" with respect to the
Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures when due (subject to the deferral of any due date in the case of
an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated
Debentures when due, whether at maturity, upon redemption, by declaration
or otherwise; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Indenture for 90 days after written notice
to the Company from the Indenture Trustee or to the Company and the
Indenture Trustee by the holders of at least 25% in aggregate outstanding
principal amount of the Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate
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outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon a Debenture Event of Default. If
the Indenture Trustee or such holders of such Junior Subordinated Debentures
fail to make such declaration, the holders of at least 25% in aggregate
Liquidation Amount of the Trust Preferred Securities shall have such right. The
holders of a majority in aggregate outstanding principal amount of the Junior
Subordinated Debentures may annul such declaration and waive the default if the
default (other than the non-payment of the principal of the Junior Subordinated
Debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Indenture Trustee.
Should the holders of the Junior Subordinated Debentures fail to annul such
declaration and waive such default, the holders of a majority in aggregate
Liquidation Amount of the Trust Preferred Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of
Junior Subordinated Debentures affected thereby may, on behalf of the holders of
all the Junior Subordinated Debentures, waive any past default, except a default
in the payment of principal or interest (unless such default has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Indenture Trustee) or
a default in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the holder of each outstanding
Junior Subordinated Debenture.
In case a Debenture Event of Default shall occur and be continuing as to
the Junior Subordinated Debentures, the Property Trustee, as holder of the
Junior Subordinated Debentures, will have the right to declare the principal of
and the interest on such Junior Subordinated Debentures, and any other amounts
payable under the Indenture, to be forthwith due and payable and to enforce its
other rights as a creditor with respect to such Junior Subordinated Debentures.
The Company is required to file annually with the Indenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest or principal
on the Junior Subordinated Debentures on the date such interest or principal is
otherwise payable, a holder of Trust Preferred Securities may institute a legal
proceeding directly against the Company for enforcement of payment to such
holder of the principal of or interest on such Junior Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the Trust
Preferred Securities of such holder (a "Direct Action"). The Company may not
amend the Indenture to remove the foregoing right to bring a Direct Action
without the prior written consent of the holders of all of the Trust Preferred
Securities outstanding. The Company shall have the right under the Indenture to
set off any payment made to such holder of Trust Preferred Securities by the
Company in connection with a Direct Action.
The holders of the Trust Preferred Securities will not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures unless there
shall have been an Event of Default under the Trust Agreement. See "Description
of the Trust Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, and no Person shall consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless (i) in case the Company
consolidates with or merges into another Person or conveys, transfers or leases
its properties and assets substantially as an entirety to any Person, the
successor Person is organized under the laws of the United States or any state
or the District of Columbia, and such successor Person expressly assumes the
Company's obligations on the Junior Subordinated Debentures
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issued under the Indenture; (ii) immediately after giving effect thereto, no
Debenture Event of Default, and no event which, after notice or lapse of time or
both, would become a Debenture Event of Default, shall have occurred and be
continuing; and (iii) certain other conditions as prescribed in the Indenture
are met.
The general provisions of the Indenture do not afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged or other
similar transaction involving the Company that may adversely affect holders of
the Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Indenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their Stated Maturity within one year, and the Company deposits or causes to
be deposited with the Indenture Trustee funds, in trust, for the purpose and in
an amount in the currency or currencies in which the Junior Subordinated
Debentures are payable sufficient to pay and discharge the entire indebtedness
on the Junior Subordinated Debentures not previously delivered to the Indenture
Trustee for cancellation, for the principal and interest to the date of the
deposit or to the Stated Maturity, as the case may be, then the Indenture will
cease to be of further effect (except as to the Company's obligations to pay all
other sums due pursuant to the Indenture and to provide the officers'
certificates and opinions of counsel described therein), and the Company will be
deemed to have satisfied and discharged the Indenture.
COVENANTS OF THE COMPANY
The Company will covenant in the Indenture, as to the Junior Subordinated
Debentures, that if and so long as (i) the Property Trustee on behalf of the
Trust is the holder of all such Junior Subordinated Debentures, (ii) a Tax Event
in respect of the Trust has occurred and is continuing and (iii) the Company has
elected, and has not revoked such election, to pay Additional Sums (as defined
under "Description of the Trust Preferred Securities -- Redemption") in respect
of the Trust Preferred Securities, the Company will pay to the Trust such
Additional Sums. The Company will also covenant, as to the Junior Subordinated
Debentures, (i) to maintain directly or indirectly 100% ownership of the Common
Securities of the Trust to which Junior Subordinated Debentures have been
issued, provided that certain successors which are permitted to do so pursuant
to the Indenture may succeed to the Company's ownership of the Common
Securities, (ii) not to voluntarily dissolve, wind up or liquidate the Trust,
except (a) in connection with a distribution of Junior Subordinated Debentures
to the holders of the Trust Preferred Securities in liquidation of the Trust or
(b) in connection with certain mergers, consolidations, or amalgamations
permitted by the Trust Agreement and (iii) to use its reasonable efforts,
consistent with the terms and provisions of the Trust Agreement, to cause the
Trust to remain classified as a grantor trust and not an association taxable as
a corporation for United States federal income tax purposes.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of the State of California, except
that the immunities and standard of care of the Indenture Trustee will be
governed by Delaware law.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
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BOOK-ENTRY ISSUANCE
The Depositary will act as securities depositary for all of the Trust
Preferred Securities and, if the Junior Subordinated Debentures are distributed
to holders of Trust Preferred Securities, the Junior Subordinated Debentures.
The Trust Preferred Securities and, in such event, the Junior Subordinated
Debentures will be issued only as fully-registered securities registered in the
name of Cede & Co. (the Depositary's nominee). One or more fully-registered
global certificates will be issued for the Trust Preferred Securities and the
Junior Subordinated Debentures and will be deposited with the Depositary.
The Depositary is a limited purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds securities that its Participants deposit with the
Depositary. The Depositary also facilitates the settlement among Participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
"Direct Participants" include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. The Depositary
is owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc. Access to the Depositary system is also available to
others such as securities brokers and dealers, banks and trust companies that
clear through or maintain custodial relationships with Direct Participants,
either directly or indirectly ("Indirect Participants"). The rules applicable to
the Depositary and its Participants are on file with the Commission.
Purchases of Trust Preferred Securities or Junior Subordinated Debentures
within the Depositary system must be made by or through Direct Participants,
which will receive a credit for the Trust Preferred Securities or Junior
Subordinated Debentures on the Depositary's records. The ownership interest of
each actual purchaser of each Trust Preferred Security and each Junior
Subordinated Debenture ("Beneficial Owner") will be recorded on the Direct and
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from the Depositary of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased Trust Preferred
Securities or Junior Subordinated Debentures. Transfers of ownership interests
in the Trust Preferred Securities or Junior Subordinated Debentures are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in Trust Preferred Securities or Junior Subordinated
Debentures, except in the event that use of the book-entry system for the Trust
Preferred Securities or Junior Subordinated Debentures is discontinued.
The Depositary has no knowledge of the actual Beneficial Owners of the
Trust Preferred Securities or Junior Subordinated Debentures; the Depositary's
records reflect only the identity of the Direct Participants to whose accounts
such Trust Preferred Securities or Junior Subordinated Debentures are credited,
which may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
If less than all of the Trust Preferred Securities or the Junior
Subordinated Debentures are being redeemed, the Depositary has informed the
Trust and the Company that its practice is to determine by lot the amount of the
Trust Preferred Securities of each Direct Participant to be redeemed.
Although voting with respect to the Trust Preferred Securities or the
Junior Subordinated Debentures is limited to the holders of record of the Trust
Preferred Securities or Junior Subordinated Debentures, as applicable, in those
instances in which a vote is required, neither the Depositary nor Cede & Co.
will itself
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consent or vote with respect to Trust Preferred Securities or Junior
Subordinated Debentures. Under its usual procedures, the Depositary would mail
an omnibus proxy (the "Omnibus Proxy") to the relevant Trustee as soon as
possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts such
Trust Preferred Securities or Junior Subordinated Debentures are credited on the
record date (identified in a listing attached to the Omnibus Proxy).
Distribution and Redemption Price payments on the Trust Preferred
Securities or, if applicable, interest payments on the Junior Subordinated
Debentures will be made to Cede & Co., as nominee of the Depositary. The
Depositary's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on the
Depositary's records. Payments by Participants to Beneficial Owners will be
governed by standing instructions and customary practices and will be the
responsibility of such Participant and not of the Depositary, the relevant
Trustee, the Trust or the Company, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of Distributions,
Redemption Price payments or interest, as applicable, to Cede & Co. is the
responsibility of the relevant Trustee, disbursement of such payments to Direct
Participants is the responsibility of Cede & Co., and disbursements of such
payments to the Beneficial Owners is the responsibility of Direct and Indirect
Participants.
Under certain circumstances set forth in the Trust Agreement, the Global
Trust Preferred Security will be exchangeable for definitive certificated Trust
Preferred Securities. See "Description of the Trust Preferred
Securities -- Global Trust Preferred Securities."
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Trust and
the Company believe to be accurate, but the Trust and the Company assume no
responsibility for the accuracy thereof. Neither the Trust nor the Company has
any responsibility for the performance by the Depositary or its Participants of
their respective obligations as described herein or under the rules and
procedures governing their respective operations.
DESCRIPTION OF THE GUARANTEE
The Guarantee Agreement will be executed and delivered by the Company
concurrently with the issuance of the Trust Preferred Securities for the benefit
of the holders of the Trust Preferred Securities. Wilmington Trust Company will
act as Guarantee Trustee under the Guarantee Agreement for the purposes of
compliance with the Trust Indenture Act, and the Guarantee Agreement will be
qualified as an indenture under the Trust Indenture Act. The following summary
of certain provisions of the Guarantee does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Guarantee Agreement, including the definition therein of certain terms,
and the Trust Indenture Act. The form of the Guarantee Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus Supplement
forms a part. The Guarantee Trustee will hold the Guarantee for the benefit of
the holders of the Trust Preferred Securities.
GENERAL
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Trust's obligations under the Trust Preferred Securities, but will apply
only to the extent that the Trust has funds sufficient to make such payments,
and is not a guarantee of collection.
The Company will irrevocably unconditionally agree to pay in full on a
subordinated basis, to the extent set forth therein, the Guarantee Payments (as
defined below) to the holders of the Trust Preferred Securities, as and when
due, regardless of any defense, right of set-off or counterclaim that the Trust
may have or assert, other than the defense of payment. The following payments
with respect to the Trust Preferred Securities, to the extent not paid by or on
behalf of the Trust (the "Guarantee Payment"), will be subject to the Guarantee:
(i) any accumulated and unpaid Distributions required to be paid on the Trust
Preferred Securities, to the extent that the Trust has funds on hand available
therefor at such time, (ii) the redemption price with respect to any Trust
Preferred Securities called for redemption, to the extent that the Trust has
funds on hand
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available therefor at such time and (iii) upon a voluntary or involuntary
dissolution, winding up or liquidation of the Trust (unless the Junior
Subordinated Debentures are distributed to holders of the Trust Preferred
Securities), the lesser of (a) the Liquidation Distribution and (b) the amount
of assets of the Trust remaining available for distribution to holders of Trust
Preferred Securities, after satisfaction of liabilities to creditors of the
Trust as required by law. The Company's obligation to make a Guarantee Payment
may be satisfied by direct payment of the required amounts by the Company to the
holders of the Trust Preferred Securities or by causing the Trust to pay such
amounts to such holders.
If the Company does not make interest payments on the Junior Subordinated
Debentures held by the Trust, the Trust will not be able to pay Distributions on
the Trust Preferred Securities and will not have funds legally available
therefor. The Guarantee will rank subordinate and junior in right of payment to
all Senior Debt and Subordinated Debt of the Company. See "-- Status of the
Guarantee" below. Except as otherwise described herein, the Guarantee does not
limit the incurrence or issuance of other secured or unsecured debt of the
Company, including Senior Debt and Subordinated Debt whether under the
Indenture, any other indenture that the Company may enter into in the future, or
otherwise. The Company has, through the Guarantee Agreement, the Trust
Agreement, the Junior Subordinated Debentures, the Indenture and the Expense
Agreement, taken together, fully, irrevocably and unconditionally guaranteed all
of the Trust's obligations under the Trust Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations under the Trust Preferred
Securities. See "Relationship Among the Trust Preferred Securities, the Junior
Subordinated Debentures and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Debt and
Subordinated Debt in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection.
For example, the guaranteed party may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity. The Guarantee
will be held for the benefit of the holders of the Trust Preferred Securities.
The Guarantee will not be discharged except by payment of the Guarantee Payment
in full to the extent not paid by the Trust or upon distribution of the Junior
Subordinated Debentures to the holders of the Trust Preferred Securities. The
Guarantee does not place a limitation on the amount of additional Senior Debt
and Subordinated Debt that may be incurred by the Company. The Company expects
from time to time to incur additional indebtedness constituting Senior Debt and
Subordinated Debt.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Trust Preferred Securities (in which case no vote
will be required), the Guarantee Agreement may not be amended without the prior
approval of the holders of not less than a majority of the aggregate Liquidation
Amount of such outstanding Trust Preferred Securities. See "Description of the
Trust Preferred Securities -- Voting Rights; Amendment of the Trust Agreement."
All guarantees and agreements contained in the Guarantee Agreement shall bind
the successors, assigns, receivers, trustees and representatives of the Company
and shall inure to the benefit of the holders of the Trust Preferred Securities
then outstanding.
EVENTS OF DEFAULT
An Event of Default under the Guarantee Agreement will occur upon the
failure of the Company to perform any of its payment or other obligations
thereunder and, except for a default in payment of a Guarantee Payment, the
Guarantor shall have received notice of default and shall not have cured such
default within 90 days after receipt of such notice. The holders of not less
than a majority in aggregate Liquidation
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Amount of the Trust Preferred Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Guarantee
Agreement. Any holder of the Trust Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee Agreement.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
an Event of Default, and after curing all Events of Default that shall have
occurred under the Guarantee Agreement, has undertaken to perform only such
duties as are specifically set forth in the Guarantee Agreement and, after the
occurrence of an Event of Default under the Guarantee Agreement, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by the
Guarantee Agreement at the request of any holder of the Trust Preferred
Securities unless it is offered adequate security and indemnity as would satisfy
a reasonable person in the position of the Guarantee Trustee against the costs,
expenses and liabilities that might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Trust Preferred Securities, upon
full payment of the amounts payable upon liquidation of the Trust or upon
distribution of Junior Subordinated Debentures to the holders of the Trust
Preferred Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Trust Preferred
Securities must restore payment of any sums paid under the Trust Preferred
Securities or the Guarantee.
GOVERNING LAW
The Guarantee Agreement will be governed by and construed in accordance
with the laws of the State of California.
EXPENSE AGREEMENT
Pursuant to the Expense Agreement to be entered into between the Company
and the Trust under the Trust Agreement, the Company will irrevocably and
unconditionally guarantee to each person or entity to whom the Trust becomes
indebted or liable, the full payment of any costs, expenses or liabilities of
the Trust (including, without limitation, expenses relating to the Offering of
the Trust Preferred Securities and any expenses the Property Trustee may incur
relating to the enforcement of the rights of the holders of the Trust Preferred
Securities or the Junior Subordinated Debentures pursuant to the Trust Agreement
and the Indenture, respectively), other than obligations of the Trust to pay to
the holders of the Trust Preferred Securities or other similar interests in the
Trust the amounts due such holders pursuant to the terms of the Trust Preferred
Securities or such other similar interests, as the case may be. The Expense
Agreement may be enforced against the Company by any person or entity to whom
the Trust is or becomes indebted or liable.
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RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Trust Preferred
Securities (to the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of the Guarantee." Taken together, the Company's
obligations under the Junior Subordinated Debentures, the Indenture, the Trust
Agreement, the Expense Agreement and the Guarantee Agreement provide, in the
aggregate, a full, irrevocable and unconditional guarantee of payments of
distributions and other amounts due on the Trust Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations under the Trust Preferred
Securities. If and to the extent that the Company does not make payments on the
Junior Subordinated Debentures, the Trust will not pay Distributions or other
amounts due on the Trust Preferred Securities. The Guarantee does not cover
payment of Distributions when the Trust does not have sufficient funds to pay
such Distributions. In such event, the remedy of a holder of the Trust Preferred
Securities is to institute a legal proceeding directly against the Company for
enforcement of payment on the Junior Subordinated Debentures. The obligations of
the Company under the Guarantee are subordinate and junior in right of payment
to all Senior Debt and Subordinated Debt of the Company.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Trust Preferred Securities,
primarily because: (i) the aggregate principal amount of the Junior Subordinated
Debentures will be equal to the sum of the aggregate Liquidation Amount of the
Trust Preferred Securities and Common Securities; (ii) the interest rate and
interest and other payment dates on the Junior Subordinated Debentures will
match the Distribution rate and Distribution and other payment dates for the
Trust Preferred Securities; (iii) the Company shall pay for all and any costs,
expenses and liabilities of the Trust, except the Trust's obligations to holders
of Trust Preferred Securities; and (iv) the Trust Agreement further provides
that the Trust will not engage in any activity that is not consistent with its
limited purposes.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set off any payment it is otherwise required to make thereunder to
the extent the Company has theretofore made, or is concurrently on the date of
such payment making, a payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF THE TRUST PREFERRED SECURITIES UNDER THE
GUARANTEE
A holder of any of the Trust Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Guarantee
Trustee, the Trust or any other person or entity.
A default or event of default under any Senior Debt and Subordinated Debt
would not constitute a default or Event of Default under the Guarantee. However,
in the event of a default under Senior Debt and Subordinated Debt, the
subordination provisions of the Indenture provide that no payments may be made
in respect of the Junior Subordinated Debentures from and after the time that
the Company and the Indenture Trustee receive notice of such default and while
such default is continuing. Failure to make required payments on Junior
Subordinated Debentures would constitute an Event of Default.
LIMITED PURPOSE OF THE TRUST
The Trust Preferred Securities evidence a beneficial interest in the Trust,
and the Trust exists for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in Junior Subordinated Debentures. A principal
difference between the rights of a holder of the Trust Preferred Securities and
a holder of a Junior
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Subordinated Debenture is that a holder of a Junior Subordinated Debenture is
entitled to receive from the Company the principal amount of and interest
accrued on Junior Subordinated Debentures held, while a holder of the Trust
Preferred Securities is entitled to receive Distributions from the Trust (or
from the Company under the Guarantee) if and to the extent the Trust has funds
available for the payment of such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
the Trust involving the liquidation of the Junior Subordinated Debentures, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, the holders of Trust Preferred Securities will be entitled to receive, out
of assets held by the Trust, the Liquidation Distribution in cash. See
"Description of the Trust Preferred Securities -- Liquidation Distribution Upon
Dissolution." Upon any voluntary or involuntary liquidation or bankruptcy of the
Company, the Property Trustee, as holder of the Junior Subordinated Debentures,
would be a subordinated creditor of the Company, subordinated in right of
payment to all Senior Debt and Subordinated Debt as set forth in the Indenture,
but entitled to receive payment in full of principal and interest, before any
stockholders of the Company receive payments or distributions. Since the Company
is the guarantor under the Guarantee and has agreed to pay for all costs,
expenses and liabilities of the Trust (other than the Trust's obligations to the
holders of its Trust Preferred Securities), the positions of a holder of the
Trust Preferred Securities and a holder of Junior Subordinated Debentures
relative to other creditors and to stockholders of the Company in the event of
liquidation or bankruptcy of the Company are substantially the same.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
It is the opinion of Cooley Godward LLP, counsel to the Company
("Counsel"), that the following is accurate in all material respects and,
subject to the limitations stated herein, describes the material federal income
tax consequences to holders of the Trust Preferred Securities arising from the
purchase, ownership and disposition thereof. The following discussion assumes
the accuracy of the facts set forth in the Prospectus and Prospectus Supplement.
The discussion set forth in this section, unless otherwise stated, deals only
with Trust Preferred Securities held as capital assets by United States Persons
(defined below) who purchase the Trust Preferred Securities upon original
issuance at their original offering price. As used herein, a "United States
Person" means a person that is (i) a citizen or resident of the United States as
determined for United States federal income tax purposes, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is subject to United States federal income taxation regardless of its
source or (iv) a trust if a U.S. court is able to exercise primary supervision
over the administration of such trust and one or more United States persons have
the authority to control all substantial decisions of such trust or an electing
trust that was existing on August 19, 1996 and treated as a domestic trust on
such date. The tax treatment of holders may vary depending on their particular
situation. The following discussion does not address all the tax consequences
that may be relevant to a particular holder or to holders who may be subject to
special tax treatment, such as banks, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or currencies,
tax-exempt investors, foreign investors, investors that hold the Trust Preferred
Securities as part of a hedging, straddle, constructive sale, or conversion or
other risk reduction transaction or whose functional currency is not the U.S.
dollar. In addition, the following discussion does not include any description
of any alternative minimum tax consequences or the tax laws of any state, local
or foreign government that may be applicable to a holder of Trust Preferred
Securities. The discussion set forth herein is based on the Internal Revenue
Code of 1986, as amended (the "Code"), the Treasury Regulations promulgated
thereunder and administrative and judicial interpretations thereof, as of the
date hereof, all of which are subject to change, possibly on a retroactive
basis.
The following discussion does not address the tax consequences that might
be relevant to persons that are not United States Persons ("non-United States
Persons"). Non-United States Persons should consult their own tax advisors as to
the specific United States federal income and other tax consequences of the
purchase, ownership and disposition of Trust Preferred Securities.
The authorities on which the discussion set forth herein is based are
subject to various interpretations, and opinions of counsel are not binding on
the Internal Revenue Service ("Service") or the courts, either of which could
take a contrary position. Moreover, no rulings have been or will be sought from
the Service with respect to the transactions described herein. Accordingly,
there can be no assurance that the Service will not challenge the tax
consequences discussed herein or that a court would not sustain such a
challenge.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE TRUST
PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL
OR OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE TRUST
PREFERRED SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS, SEE "DESCRIPTION
OF THE TRUST PREFERRED SECURITIES -- REDEMPTION."
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Trust Preferred Securities, Counsel
will render its opinion that, under current law and assuming compliance with the
terms of the Trust Agreement, and based on certain facts and assumptions
contained in such opinion, the Trust will be classified as a grantor trust and
not as a partnership or an association taxable as a corporation for United
States federal income tax purposes. As a result, each beneficial owner of the
Trust Preferred Securities (a "Securityholder") will be treated as owning
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an undivided beneficial interest in the Junior Subordinated Debentures.
Accordingly, each Securityholder will be required to include in its gross income
its pro rata share of the interest income or original issue discount ("OID")
that is paid or accrued on the Junior Subordinated Debentures. See "-- Interest
Income and Original Issue Discount" herein.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Company intends to take the position that the Junior Subordinated
Debentures will be classified for United States federal income tax purposes as
indebtedness of the Company under current law, and, by acceptance of a Trust
Preferred Security, each holder covenants to treat the Junior Subordinated
Debentures as indebtedness and the Trust Preferred Securities as evidence of an
indirect beneficial ownership interest in the Junior Subordinated Debentures.
Counsel has not delivered any opinion relating to the classification of the
Junior Subordinated Debentures as indebtedness and no assurance can be given
that such position of the Company will not be challenged by the Service or, if
challenged, that such a challenge will not be successful. The remainder of this
"Material Federal Income Tax Consequences" section assumes that the Junior
Subordinated Debentures will be classified for United States federal income tax
purposes as indebtedness of the Company. No amount included in income with
respect to the Junior Subordinated Debentures and Trust Preferred Securities
will be eligible for the dividends received deduction.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Except as set forth below, stated interest on the Junior Subordinated
Debentures generally will be included in income by a Securityholder at the time
such interest income is paid or accrued in accordance with such Securityholder's
regular method of tax accounting. The Company intends to take the position that
the Junior Subordinated Debentures will be issued without OID for federal income
tax purposes. Under the applicable Treasury Regulations, it is presumed that the
Junior Subordinated Debentures will be redeemed by the Company immediately prior
to any increase in the stated interest rate. Accordingly, for purposes of
testing the Junior Subordinated Debentures under the OID rules, the Junior
Subordinated Debentures will be treated as 3-year notes with a fixed stated
interest rate of 10.5%. As a result, the Junior Subordinated Debentures will
have adequate stated interest and no OID. If the Junior Subordinated Debentures
are not redeemed prior to an increase in the stated interest rate, the
debentures will be deemed to be reissued at par and similarly tested under the
OID rules at such times.
In addition, under the applicable Treasury Regulations, the Junior
Subordinated Debentures will not be considered to have been issued with OID
within the meaning of Section 1273(a) of the Code, so long as the Junior
Subordinated Debentures have terms and conditions that render the likelihood of
the Company's exercising its right to defer payments of interest on the Junior
Subordinated Debentures to be remote. The Company believes that the terms and
conditions of the Junior Subordinated Debentures (including the restrictions on
other payments during the Extension Period) are such that the likelihood of its
exercising such right is remote, and intends to take the position that the
Junior Subordinated Debentures are not issued with OID. Because this issue is
inherently factual, Counsel is unable to express any opinion regarding whether
the Junior Subordinated Debentures are issued with OID. If, however, the Company
exercises its right to defer payments of interest on the Junior Subordinated
Debentures, the Junior Subordinated Debentures will become OID instruments at
such time and all Securityholders will be required to accrue the stated interest
on the Junior Subordinated Debentures as it accrues on a daily basis during the
Extension Period, even though the Company will not pay such interest until the
end of the Extension Period, and even though some Securityholders otherwise may
use the cash method of tax accounting. Moreover, if the Company exercises such
right, the Junior Subordinated Debentures thereafter will be taxed as OID
instruments for as long as they remain outstanding. Thus, even after the end of
the Extension Period, all Securityholders will be required to continue to
include the stated interest on the Junior Subordinated Debentures in income on a
daily economic accrual basis, regardless of their method of tax accounting and
in advance of receipt of the cash attributable to such interest income. Under
the economic accrual rules, a Securityholder is required to accrue an amount of
interest income each year that approximates the stated interest payments called
for under the Junior Subordinated Debentures, and actual cash payments of
interest on the Junior Subordinated Debentures are
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not reported separately as taxable income. A Securityholder's basis in Trust
Preferred Securities will be increased by any OID includible in income.
The Company's determination that there is a remote likelihood of exercising
its right to defer the payment of interest on the Junior Subordinated Debentures
is binding on each Securityholder unless the holder explicitly discloses in the
manner required by applicable Treasury Regulations that its determination is
different from the Company's. The Company's determination is not, however,
binding on the Service.
The Treasury Regulations described above have not yet been addressed in any
definitive interpretations by the Service, and it is possible that the Service
could take a contrary position. If the Service were to assert successfully that
the stated interest on the Junior Subordinated Debentures was OID regardless of
whether the Company exercises its right to defer payments of interest on such
debentures, all Securityholders will be required to include such stated interest
in income on a daily economic accrual basis as described above.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF TRUST PREFERRED
SECURITIES
Under current law, a distribution by the Trust of the Junior Subordinated
Debentures as described under the captions "Description of the Trust Preferred
Securities -- Distribution of Junior Subordinated Debentures" and "Liquidation
Distribution Upon Dissolution" will be non-taxable and will result in the
Securityholder receiving directly its pro rata share of the Junior Subordinated
Debentures previously held indirectly through the Trust, with a holding period
and aggregate tax basis equal to the holding period and aggregate tax basis such
Securityholder had in its Trust Preferred Securities before such distribution. A
Securityholder would continue to recognize interest income in respect of Junior
Subordinated Debentures received from the Trust in the manner described above
under "-- Interest Income and Original Issue Discount" herein. If, however, the
Trust is characterized for United States federal income tax purposes as an
association taxable as a corporation at the time of its dissolution, the
distribution of Junior Subordinated Debentures to Securityholders by the Trust
could be a taxable event to the Trust and each Securityholder, and a
Securityholder could be required to recognize gain or loss as if the
Securityholder had exchanged its Trust Preferred Securities for the Junior
Subordinated Debentures it received upon the liquidation of the Trust, and the
Securityholder's holding period for the Junior Subordinated Debentures received
would not include the holding period for the Trust Preferred Securities
surrendered in the liquidation.
SALES OR REDEMPTION OF TRUST PREFERRED SECURITIES
Gain or loss will be recognized by a Securityholder on a sale of Trust
Preferred Securities (including a redemption for cash) in an amount equal to the
difference between the amount realized (which for this purpose, will exclude
amounts attributable to accrued interest or OID not previously included in
income) and the Securityholder's adjusted tax basis in the Trust Preferred
Securities sold or so redeemed. Gain or loss recognized by a Securityholder on
Trust Preferred Securities held for more than one year will generally be taxable
as long-term capital gain or loss and any such long-term capital gain recognized
by a noncorporate Securityholder generally will be taxed at a rate of 20
percent.
Amounts attributable to accrued interest or OID with respect to a
Securityholder's pro rata share of the Junior Subordinated Debentures not
previously included in income will be taxable as ordinary income.
MARKET DISCOUNT
Securityholders acquiring Trust Preferred Securities should note that the
resale of Trust Preferred Securities may be adversely affected by the market
discount provisions of Section 1276 through 1278 of the Code. To the extent a
subsequent Securityholder acquires its Trust Preferred Securities at a price
that is less than the adjusted issue price of such holder's share of the Junior
Subordinated Debentures (which generally should approximate par plus accrued but
unpaid interest), the Securityholder will be deemed to have acquired its
interest in the Trust Preferred Securities with market discount. Such
Securityholders are advised to consult their tax advisors as to the income tax
consequences of the acquisition, ownership and disposition of the Trust
Preferred Securities.
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A Securityholder acquiring Trust Preferred Securities at a market discount
generally will be required to recognize ordinary income to the extent of accrued
market discount upon the retirement of the underlying Junior Subordinated
Debentures or, to the extent of any gain, upon disposition of the Trust
Preferred Securities. Such market discount would accrue ratably, or, at the
election of the Securityholder, under a constant yield method, over the
remaining term of the Junior Subordinated Debentures. A Securityholder also will
be required, in the absence of the election described in the next sentence, to
defer the deduction of a portion of the interest paid or accrued on indebtedness
incurred to purchase or carry Trust Preferred Securities acquired with market
discount. In lieu of the foregoing, a Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in the taxable year of the election or thereafter, in
which case the interest deduction deferral rule will not apply.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Income on the Trust Preferred Securities held of record by United States
Persons (other than certain exempt Securityholders), if any, will be reported to
the Service and to such holders. "Backup" withholding at a rate of 31% will
apply to distributions and other payments on, and proceeds from the sale of,
Trust Preferred Securities paid to non-exempt United States Persons unless the
Securityholder furnishes its taxpayer identification number in the manner
prescribed in applicable Treasury Regulations, certifies that such number is
correct, certifies as to no loss of exemption from backup withholding and meets
certain other conditions. Any amounts withheld from a Securityholder under the
backup withholding rules will be allowed as a refund or a credit against such
Securityholder's United States federal income tax liability, provided the
required information is timely furnished to the Service.
POSSIBLE TAX LAW CHANGES AFFECTING THE TRUST PREFERRED SECURITIES
There can be no assurance that future legislation will not affect the
ability of the Company to deduct interest on the Junior Subordinated Debentures.
Such a change could give rise to a Tax Event, which may permit the Company to
cause a redemption of the Trust Preferred Securities. In addition, the Service
recently asserted that interest payable on a security with characteristics and
issued in circumstances similar to the characteristics and issuance of the
Junior Subordinated Debentures was not deductible for United States federal
income tax purposes. The taxpayer in that case has filed a petition in the
United States Tax Court challenging the Service's position on this matter. If
this matter is litigated and the Tax Court sustains the Service's position, such
judicial decision could give rise to a Tax Event which could, in certain
circumstances, require the dissolution of the trust or permit the Company to
redeem the Junior Subordinated Debentures. See "Description of the Trust
Preferred Securities -- Redemption -- Tax Event Redemption, Investment Company
Event Redemption" and "Description of the Junior Subordinated
Debentures -- Redemption."
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ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), should consider the fiduciary standards of ERISA in the context of
the plan's particular circumstances before authorizing an investment in the
Trust Preferred Securities. Among other factors, the fiduciary should consider
whether such an investment is in accordance with the documents governing the
plan and whether an investment is appropriate for the plan in view of its
overall investment policy and the composition and diversification of its
portfolio. Other provisions of ERISA and the Code prohibit an employee benefit
plan subject to either ERISA or Section 4975 of the Code (which generally
includes individual retirement accounts and so-called "Keogh" plans as well as
other employer-sponsored plans) from engaging in certain transactions involving
"plan assets" with parties which are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the plan. Therefore, a
fiduciary of an employee benefit plan should also consider whether an investment
in the Trust Preferred Securities might constitute or give rise to a prohibited
transaction under ERISA and the Code.
If the assets of the Trust were deemed to be plan assets of employee
benefit plans that are holders of the Trust Preferred Securities (including
holders who are not employee benefit plans themselves but are investing "plan
assets" of an employee benefit plan), the plan's investment in the Trust
Preferred Securities might be deemed to constitute a delegation under ERISA of
the duty to manage plan assets by an ERISA plan fiduciary investing in Trust
Preferred Securities, and certain transactions involving the operation of the
Trust might be deemed to constitute prohibited transactions under ERISA and the
Code.
The U.S. Department of Labor (the "DOL") has issued a regulation with
regard to whether the underlying assets of an entity in which employee benefit
plans acquire equity investments would be deemed to be plan assets. The
regulation provides that the underlying assets of an entity will not be
considered to be plan assets if the interests of the entity acquired by the
employee benefit plan are "publicly offered securities" -- that is, they are (1)
widely held (i.e., owned by more than 100 investors independent of the entity
and of each other), (2) freely transferable and (3) sold as part of an offering
pursuant to an effective registration statement under the Securities Act and
timely registered under Section 12(b) or 12(g) of the Exchange Act. It is
expected that the Trust Preferred Securities will meet the criteria of "publicly
offered securities" above. The Underwriters expect that the Trust Preferred
Securities will be held by at least 100 independent investors at the conclusion
of the Offering. There are no restrictions imposed on the transfer of the Trust
Preferred Securities and the Trust Preferred Securities will be sold as part of
an offering pursuant to an effective registration statement under the Securities
Act, and will be timely registered under the Exchange Act.
Even if the assets of the Trust were deemed to be "plan assets" of employee
benefit plans that are holders of the Trust Preferred Securities, there are five
class exemptions issued by the DOL which could apply to except certain
transactions involving assets of the Trust from the prohibited transaction
provisions of ERISA and the Code -- Prohibited Transaction Exemption 84-14, for
certain transactions determined by qualified professional asset managers;
Prohibited Transaction Exemption 90-1, for certain transactions involving
insurance company pooled separate accounts; Prohibited Transaction Exemption
91-38, for certain transactions involving bank collective investment funds;
Prohibited Transaction Exemption 95-60, for certain transactions involving
insurance company general accounts; and Prohibited Transaction Exemption 96-23,
for certain transactions determined by in-house asset managers.
Even if the assets of the Trust are not deemed "plan assets" of employee
benefit plans that hold Trust Preferred Securities, one or more the Trustees of
the Trust might be considered a party in interest or a disqualified person with
respect to certain such employee benefit plans by reason of pre-existing
relationships, such as plans for which that Trustee or one of its affiliates
serves as trustee. Therefore, before such employee benefit plans purchase Trust
Preferred Securities, they should determine that (a) none of the Trustees nor
any affiliate is a party in interest or disqualified person with respect to such
plan or (b) one of the class exemptions referred to in the preceding paragraph
or any other exemption from the prohibited transaction rules under ERISA and the
Code is applicable to their purchase and holding of the Trust Preferred
Securities.
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Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is important that an employee benefit
plan considering the purchase of Trust Preferred Securities consult with its
counsel regarding the consequences under ERISA of the acquisition and ownership
of Trust Preferred Securities. Employee benefit plans which are governmental
plans (as defined in Section 3(32) of ERISA) and certain church plans (as
defined in Section 3(33) of ERISA) generally are not subject to ERISA
requirements of the prohibited transaction provisions of the Code.
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UNDERWRITING
Subject to the terms and certain conditions of the Underwriting Agreement
(the "Underwriting Agreement"), EVEREN Securities, Inc. (the "Underwriter"), has
agreed to purchase an aggregate of 1,700,000 Trust Preferred Securities from the
Trust.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions. If any of the Trust Preferred Securities are
purchased by the Underwriter pursuant to the Underwriting Agreement, all of such
Trust Preferred Securities (other than the Trust Preferred Securities covered by
the over-allotment option described below) must be so purchased.
The Trust and the Company have been advised by the Underwriter that it
proposes to offer the Trust Preferred Securities to the public initially at the
price to the public set forth on the cover page of this Prospectus Supplement
and to certain dealers at such price less a concession not to exceed $0.40 per
Trust Preferred Security. The Underwriter may allow, and such dealers may
reallow, discounts not to exceed $0.25 per Trust Preferred Security to certain
other dealers. After the initial public offering of the Trust Preferred
Securities, the public offering price and the other selling terms may be changed
by the Underwriter. In view of the fact that the proceeds of the sale of the
Trust Preferred Securities will be used to purchase the Junior Subordinated
Debentures of the Company, the Underwriting Agreement provides that the Company
will pay as compensation to the Underwriter for arranging the investment therein
of such proceeds, an amount in immediately available funds of $0.40 per Trust
Preferred Security (or $680,000 in the aggregate) plus an advisory fee of $0.10
per Trust Preferred Security (or $170,000 in the aggregate) for the account of
the Underwriter.
The Trust has granted to the Underwriter an option to purchase up to an
additional $2,550,000 aggregate liquidation amount of Trust Preferred Securities
at the price to the public set forth on the cover page of this Prospectus
Supplement, solely to cover over-allotments, if any.
The Trust and the Company have agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Act, or to contribute to
payments that the Underwriter may be required to make in respect thereof.
The Trust Preferred Securities are a new issue of securities with no
established trading market. The Trust Preferred Securities have been approved
for listing on the American Stock Exchange, subject to notice of issuance. In
order to meet the listing requirements of the American Stock Exchange, the
Underwriter has undertaken to distribute the Trust Preferred Securities to a
minimum of 400 public stockholders. The Underwriter has advised the Trust and
the Company that the Underwriter presently intends to make a market in the Trust
Preferred Securities after the commencement of trading on the American Stock
Exchange, but no assurances can be made as to the liquidity of the Trust
Preferred Securities or that an active and liquid trading market will develop
or, if developed, that it will continue. The offering price and distribution
rate have been determined by negotiations between representatives of the Company
and the Underwriter, and the Offering price of the Trust Preferred Securities
may not be indicative of the market price following the Offering. The
Underwriter will have no obligation to make a market in the Trust Preferred
Securities, however, and may cease market-making activities, if commenced, at
any time.
The Trust and the Company have agreed with the Underwriter not to (other
than in connection with this Offering), 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 issue any Trust Preferred Securities or Junior Subordinated
Debentures, any securities convertible into or exercisable or exchangeable for
Trust Preferred Securities, or any securities substantially similar to the Trust
Preferred Securities or Junior Subordinated Debentures, enter into any swap or
other agreement to do any of the foregoing, or file any registration statement
relating to any of the foregoing on behalf of itself or any other person, for a
period of 90 days after the date of this Prospectus Supplement, without the
written consent of EVEREN Securities, Inc.
In connection with the Offering, the Underwriter may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Trust
Preferred Securities. Such transactions may include stabilization
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transactions effected in accordance with the Securities Exchange Act pursuant to
which the Underwriter may bid for or purchase Trust Preferred Securities for the
purpose of stabilizing its market price. The Underwriter also may create a short
position for the account of the Underwriter by selling more Trust Preferred
Securities in connection with this Offering than it is committed to purchase
from the Trust, and in such case may purchase Trust Preferred Securities in the
open market following completion of the Offering to cover all or a portion of
such Trust Preferred Securities or may exercise the Underwriter's over-allotment
option referred to above.
Because NASD Regulation, Inc. may view the Trust Preferred Securities as
interests in a direct participation program, the Offering is being made in
compliance with the applicable provisions of Rule 2810 of the NASD's Conduct
Rules.
LEGAL MATTERS
The validity of the Guarantee and the Junior Subordinated Debentures will
be passed upon for the Company by Cooley Godward LLP, counsel to the Company.
Certain legal matters relating to the Offering will be passed upon for the
Underwriter by Gibson, Dunn & Crutcher LLP. Certain matters of Delaware law
relating to the validity of the Trust Preferred Securities, the enforceability
of the Trust Agreement and the creation of the Trust will be passed upon by
Richards, Layton & Finger, P.A., Wilmington, Delaware, special Delaware counsel
to the Company and the Trust. Richards, Layton & Finger, P.A., will also pass on
certain matters on behalf of Wilmington Trust Company in connection with the
Offering. Cooley Godward LLP and Gibson, Dunn & Crutcher LLP will rely on the
opinions of Richards, Layton & Finger, P.A. as to certain matters of Delaware
law. Certain matters relating to United States federal income tax considerations
will be passed upon for the Company by Cooley Godward LLP.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997
and for each of the years in the three-year period ended December 31, 1997 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.
The Combined Balance Sheets of Suncoast Toys, Inc., NW Toys Co. and Oregon
Coin Company as of December 31, 1996 and 1997 and the Combined Statements of
Income, Stockholders' Equity and Cash Flows for each of the three years in the
period ended December 31, 1997 included in the Prospectus Supplement have been
included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
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----
<S> <C>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Pro forma statements of earnings for the year ended December
31, 1997 and for the six months ended June 30, 1998....... F-3
Notes to pro forma financial statements..................... F-4
AMERICAN COIN MERCHANDISING, INC
Independent Auditors' Report................................ F-5
Financial Statements:
Balance sheets as of December 31, 1996 and 1997 and June
30, 1998 (unaudited)................................... F-6
Statements of earnings for the years ended December 31,
1995, 1996 and 1997 and for the six months ended June
30, 1997 and 1998 (unaudited).......................... F-7
Statements of stockholders' equity for the years ended
December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1998 (unaudited)........................ F-8
Statements of cash flows for the years ended December 31,
1995, 1996 and 1997 and for the six months ended June
30, 1997 and 1998 (unaudited).......................... F-9
Notes to financial statements............................. F-10
SUNCOAST TOYS, INC., NW TOYS CO., OREGON COIN COMPANY
Report of Independent Accountants........................... F-23
Combined Financial Statements:
Combined balance sheets as of December 31, 1996 and 1997
and June 12, 1998 (unaudited).......................... F-24
Combined statements of income for the years ended December
31, 1995, 1996 and 1997, for the six months ended June
30, 1997 and the period from January 1, 1998 to June
12, 1998 (unaudited)................................... F-25
Combined statements of stockholders' equity for the years
ended December 31, 1995, 1996 and 1997 and the period
ended June 12, 1998 (unaudited)........................ F-26
Combined statements of cash flows for the years ended
December 31, 1995, 1996 and 1997, for the six months
ended June 30, 1997 and the period from January 1, 1998
to June 12, 1998 (unaudited)........................... F-27
Notes to combined financial statements.................... F-28
Report of Independent Accountants on Supplemental
Information............................................... F-31
Combining balance sheet as of December 31, 1997........... F-32
Combining statement of income for the year ended December
31, 1997............................................... F-33
</TABLE>
F-1
<PAGE> 88
PRO FORMA FINANCIAL DATA
The pro forma data set forth below have been derived from the Company's
financial statements. The unaudited pro forma financial data set forth below
gives effect to the acquisition of Suncoast, accounted for as a purchase, as if
it had occurred (i) on January 1, 1997 for the year ended December 31, 1997
statement of earnings data and January 1, 1998 for the six months ended June 30,
1998 statement of earnings data. The pro forma data is not necessarily
indicative of the results that would have been achieved had such transaction
been consummated on such dates and should not be construed as representative of
future operations. Such pro forma data is subject to the assumptions set forth
in the notes hereto.
F-2
<PAGE> 89
AMERICAN COIN MERCHANDISING, INC.
PRO FORMA FINANCIAL STATEMENTS
STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
HISTORICAL COMBINED THE ACQUISITION OF
HISTORICAL SUNCOAST TOYS, INC., SUNCOAST TOYS, INC.,
AMERICAN COIN NW TOYS CO. AND NW TOY CO. AND
MERCHANDISING, INC. OREGON TOY COMPANY OREGON TOY COMPANY PRO FORMA
------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C>
Revenue:
Vending........................ $52,866 $18,726 $71,592
Franchise and other............ 6,218 1,156 7,374
------- ------- -------
Total revenue.......... 59,084 19,882 78,966
------- ------- -------
Cost of revenue:
Vending........................ 37,506 12,795 $ (792)(a) 50,040
531(a)
Franchise and other............ 3,967 491 4,458
------- ------- -------- -------
Total cost of
revenue.............. 41,473 13,286 (261) 54,498
Gross profit........... 17,611 6,596 261 24,468
General and administrative
expenses....................... 10,314 2,523 1,292(b) 14,129
------- ------- -------- -------
Operating earnings..... 7,297 4,073 (1,031) 10,339
Interest expense, related
parties........................ 76 -- 76
Interest expense (income), other,
net............................ 536 (336) 2,554(c) 2,754
------- ------- -------- -------
Earnings before
taxes................ 6,685 4,409 (3,585) 7,509
Provision for income taxes....... 2,256 -- 278(d) 2,534
------- ------- -------- -------
Net earnings........... $ 4,429 $ 4,409 $ (3,863) $ 4,975
======= ======= ======== =======
</TABLE>
F-3
<PAGE> 90
AMERICAN COIN MERCHANDISING, INC.
PRO FORMA FINANCIAL STATEMENTS
STATEMENT OF EARNINGS
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
HISTORICAL COMBINED THE ACQUISITION OF
HISTORICAL SUNCOAST TOYS, INC., SUNCOAST TOYS, INC.,
AMERICAN COIN NW TOYS CO. AND NW TOY CO. AND
MERCHANDISING, INC. OREGON TOY COMPANY* OREGON TOY COMPANY PRO FORMA
------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C>
Revenue:
Vending..................... $37,709 $8,567 $46,276
Franchise and other......... 2,014 129 2,143
------- ------ -------
Total revenue....... 39,723 8,696 48,419
Cost of revenue:
Vending..................... 26,669 5,980 $ (363)(a) 32,529
243(a)
Franchise and other......... 1,252 91 1,343
------- ------ ------- -------
Total cost of
revenue........... 27,921 6,071 (120) 33,872
Gross profit........ 11,802 2,625 120 14,547
General and administrative
expenses.................... 7,388 2,196(e) 646(b) 10,230
------- ------ ------- -------
Operating
earnings.......... 4,414 429 (526) 4,317
Interest expense, related
parties..................... 19 -- 19
Interest expense (income),
other, net.................. 460 (187) 1,277(c) 1,550
------- ------ ------- -------
Earnings before
taxes............. 3,935 616 (1,803) 2,748
Provisions for income taxes... 1,377 -- 416(d) 1,793
------- ------ ------- -------
Net earnings........ $ 2,558 $ 616 $(1,388) $ 1,786
======= ====== ======= =======
</TABLE>
- ---------------
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(a) Represents adjustments to depreciation expense as a result of the impacts
of presenting the property and equipment at fair value and conforming the
method of depreciation from an accelerated method used by Suncoast Toys,
Inc., NW Toys Co. and Oregon Toy Company ("Suncoast") to the straight-line
method used by the Company.
(b) Represents the amortization of costs in excess of assets acquired.
Amortization expense is computed on a straight-line basis over 20 years.
(c) Represents interest expense as a result of the increased borrowings under
the Company's credit facility to finance the purchase. Interest expense on
such borrowings is calculated using an assumed interest rate of 8.5%
(d) Represents additional income tax expense for: (i) the income of Suncoast,
as no income tax expense has historically been included in the financial
statements of Suncoast as the Suncoast companies are S Corporations, and
(ii) the tax effects of the pro forma adjustments above. Income tax expense
is computed using the Company's statutory income tax rate.
(e) Included in general and administrative expenses for Suncoast for the period
from January 1, 1998 to June 12, 1998 is $567 of employee bonuses, $407 of
officers' salaries and $39 of additional vacation pay related to the
acquisition of Suncoast. These expenses were incurred or accelerated due to
the purchase by the Company and management does not expect them to recur.
* The historical combined Suncoast information is for the period from January
1, 1998 to June 12, 1998.
F-4
<PAGE> 91
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
American Coin Merchandising, Inc.:
We have audited the accompanying balance sheets of American Coin
Merchandising, Inc. (formerly American Coin Merchandising, Inc. and affiliates
through August 31, 1995) as of December 31, 1997 and 1996, and the related
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Coin Merchandising,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boulder, Colorado
February 20, 1998
F-5
<PAGE> 92
AMERICAN COIN MERCHANDISING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 771 $ 1,929 $ 3,690
Trade accounts and other receivables...................... 673 979 660
Inventories............................................... 4,329 5,625 8,704
Prepaid expenses and other assets......................... 164 365 1,139
------- ------- -------
Total current assets............................... 5,937 8,898 14,193
------- ------- -------
Property and equipment, at cost:
Vending machines.......................................... 12,446 22,829 35,824
Vehicles.................................................. 2,095 4,652 6,218
Office equipment, furniture and fixtures.................. 527 1,242 1,994
------- ------- -------
15,068 28,723 44,036
Less accumulated depreciation............................. (4,697) (7,557) (9,909)
------- ------- -------
Property and equipment, net........................ 10,371 21,166 34,127
------- ------- -------
Placement fees, net of accumulated amortization............. 183 281 459
Deferred income taxes....................................... 42 -- --
Cost in excess of assets acquired, net of accumulated
amortization.............................................. 3,209 6,682 39,343
Other assets................................................ 16 50 691
------- ------- -------
Total assets....................................... $19,758 $37,077 $88,813
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long -- term debt...................... $ 435 $ 945 $ 1,586
Current portion of notes payable to Control Group......... 674 674 337
Income taxes payable...................................... 279 317 384
Accounts payable.......................................... 544 1,680 6,777
Accrued commissions....................................... 747 1,001 1,221
Other accrued expenses.................................... 344 655 648
------- ------- -------
Total current liabilities.......................... 3,023 5,272 10,953
Long-term debt, net of current portion...................... 4,384 1,292 45,181
Notes payable to Control Group, net of current portion...... 675 -- --
Deferred Income Taxes....................................... -- 421 421
------- ------- -------
Total liabilities.................................. 8,082 6,985 56,555
------- ------- -------
Stockholders' equity:
Preferred stock, $.10 par value (Authorized 500,000
shares; none issued).................................... -- -- --
Common stock, $.01 par value (Authorized 20,000,000
shares; issued and outstanding 5,123,274 and 6,452,904
in 1996 and 1997, respectively, 6,468,903 at June 30,
1998)................................................... 51 65 65
Additional paid-in-capital................................ 8,407 22,352 21,949
Unearned stock option compensation........................ (49) (21) (10)
Retained earnings......................................... 3,267 7,696 10,254
------- ------- -------
Total stockholders' equity......................... 11,676 30,092 32,258
------- ------- -------
Commitments
Total liabilities and stockholders' equity......... $19,758 $37,077 $88,813
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 93
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,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Vending.................................... $17,031 $30,439 $52,866 $22,648 37,709
Franchise and other........................ 8,683 7,828 6,218 3,499 2,014
------- ------- ------- ------- -------
Total revenue...................... 25,714 38,267 59,084 26,147 39,723
------- ------- ------- ------- -------
Cost of revenue:
Vending.................................... 11,701 21,283 37,506 16,042 26,669
Franchise and other........................ 6,054 5,659 3,967 2,309 1,252
------- ------- ------- ------- -------
Total cost of revenue.............. 17,755 26,942 41,473 18,351 27,921
------- ------- ------- ------- -------
Gross profit....................... 7,959 11,325 17,611 7,796 11,802
General and administrative expenses.......... 4,218 7,053 10,314 4,725 7,388
Commissions and royalties, related parties... 347 -- -- -- --
------- ------- ------- ------- -------
Operating earnings................. 3,394 4,272 7,297 3,071 4,414
------- ------- ------- ------- -------
Interest expense, related parties............ 224 108 76 45 19
Interest expense, other...................... 159 267 536 222 460
Minority interest in income of combined
affiliates................................. 80 -- -- -- --
Share of loss of equity affiliate............ 27 -- -- -- --
------- ------- ------- ------- -------
Earnings before taxes.............. 2,904 3,897 6,685 2,804 3,935
Provision for income taxes................... 329 1,311 2,256 1,039 1,377
------- ------- ------- ------- -------
Net earnings....................... $ 2,575 $ 2,586 $ 4,429 $ 1,765 2,558
======= ======= ======= ======= =======
Basic earnings per share of common stock..... $ 0.51 $ 0.80 $ 0.33 0.40
Diluted earnings per share of common stock... 0.48 0.78 0.33 0.38
Basic weighted average of common shares...... 5,092 5,565 5,323 6,463
Diluted weighted average of common shares.... 5,417 5,694 5,350 6,664
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 basic earnings per share......... $ 0.59
Pro forma diluted earnings per share....... 0.55
Pro forma basic weighted average common
share................................... 4,299
Pro forma diluted weighted average common
share................................... 4,669
</TABLE>
- ---------------
(a) Through August 31, 1995, represents combined financial statements of
American Coin Merchandising, Inc. and the Affiliates Entities (see note 1).
See accompanying notes to financial statements.
F-7
<PAGE> 94
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, 1994................ $31 $ 34 $ -- $ 443 $ 706 $ 1,214
Issuance of 1,700,000 shares of
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
Issuance of 1,000,000 shares of
common stock in public
offering, net.................. 10 13,915 -- -- -- 13,925
Amortization of deferred
compensation................... -- -- 22 -- -- 22
Exercise of employee stock
options........................ 4 39 -- -- -- 43
Termination of employee stock
options........................ -- (9) 6 -- -- (3)
Net earnings..................... -- -- -- 4,429 -- 4,429
--- ------- ---- ------- ----- -------
DECEMBER 31, 1997................ 65 22,352 (21) 7,696 -- 30,092
Acquisition of 70,000 warrants to
purchase common stock.......... -- (492) -- -- -- (492)
Amortization of deferred
compensation................... -- -- 10 -- -- 10
Exercise of employee stock
options........................ -- 90 -- -- -- 90
Termination of employee stock
options........................ -- (1) 1 -- -- --
Net earnings..................... -- -- -- 2,558 -- 2,558
--- ------- ---- ------- ----- -------
JUNE 30, 1998 (unaudited)........ $65 $21,949 $(10) $10,254 $ -- $32,258
=== ======= ==== ======= ===== =======
</TABLE>
- ---------------
(a) Through August 31, 1995, represents combined financial statements of
American Coin Merchandising, Inc. and the Affiliates Entities (see note 1).
See accompanying notes to financial statements.
F-8
<PAGE> 95
AMERICAN COIN MERCHANDISING, INC. (A)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
------ ------ -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net earnings......................................... $2,575 $2,586 $ 4,429 $ 1,765 $ 2,558
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization...................... 930 1,891 3,292 1,359 2,791
Affiliate losses................................... 72 -- -- -- --
Compensation expense related to stock options...... -- 25 19 11 10
Deferred income tax expense........................ 141 308 463 -- --
Changes in operating assets and liabilities, net of
Reorganization and acquisitions:
Trade accounts and other receivables, net........ (206) 53 (332) (53) 319
Inventories...................................... (1,650) (756) (1,026) 230 (1,144)
Prepaid expenses and other assets................ (182) 10 (233) (173) (1,359)
Income taxes payable............................. 188 148 38 (52) 67
Accounts payable and accrued expenses............ 994 (49) 1,701 1,505 5,310
------ ------ -------- ------- --------
Net cash provided by operating activities..... 2,862 4,216 8,351 4,132 8,552
------ ------ -------- ------- --------
Investing activities:
Acquisitions of property and equipment, net.......... (2,234) (6,052) (12,168) (5,570) (10,668)
Acquisitions of franchisees and other................ (160) (1,224) (3,669) -- (36,147)
Acquisition of non-Control Group interests in
Reorganization..................................... (3,125) -- -- -- --
Placement fees....................................... (20) (192) (242) (215) (267)
Change in notes receivable........................... 31 20 -- -- --
------ ------ -------- ------- --------
Net cash used in investing activities......... (5,508) (7,448) (16,079) (5,785) (47,082)
------ ------ -------- ------- --------
Financing activities:
Net borrowings (payments) on revolving line of
credit............................................. (121) 3,381 (3,787) 2,248 41,795
Principal payments on notes payable to related
parties............................................ (167) -- -- -- --
Proceeds from issuance of notes payable to related
parties............................................ 22 -- -- -- --
Principal payments on long-term debt................. (1,172) (1,559) (620) (217) (765)
Principal payments on notes payable to Control
Group.............................................. -- -- (675) (338) (337)
Proceeds from issuance of long-term debt............. 516 1,224 -- -- --
Distributions........................................ (420) (634) -- -- --
Payments to Control Group in Reorganization.......... (4,509) -- -- -- --
Cash retained by combined affiliates in
Reorganization..................................... (326) -- -- -- --
Acquisition of warrants.............................. -- -- -- -- (492)
Issuance of common stock, net of offering costs...... 10,056 1 13,968 15 90
------ ------ -------- ------- --------
Net cash provided by (used in) financing
activities.................................. 3,879 2,413 8,886 (1,708) 40,291
------ ------ -------- ------- --------
Net increase (decrease) in cash and cash equivalents... 1,233 (819) 1,158 (55) 1,761
Cash and cash equivalents at beginning of period....... 357 1,590 771 771 1,929
------ ------ -------- ------- --------
Cash and cash equivalents at end of period............. $1,590 $ 771 $ 1,929 $ 826 $ 3,690
====== ====== ======== ======= ========
</TABLE>
- ---------------
(a) Through August 31, 1995, represents combined financial statements of
American Coin Merchandising, Inc. and the Affiliates Entities (see Note 1).
See accompanying notes to financial statements.
F-9
<PAGE> 96
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 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. The Company also operates bulk vending equipment and
kiddie rides that are located primarily in supermarkets and mass merchandisers.
At June 30, 1998, the Company has 40 field offices operating in 40 states. The
Company also sells products to franchisees. At December 31, 1997 there were 17
Company franchises in operation.
Prior to August 31, 1995, the date of the Reorganization described below,
certain stockholders of the Company, who collectively owned a controlling
interest in the Company at such time (the "Control Group"), owned interests in
the eight affiliated entities (the "Affiliated Entities") which were franchisees
of the Company. Except as noted below, each of the Affiliated Entities began
operations prior to January 1, 1993. The Control Group owned greater than 50% of
the outstanding common stock or partnership interests of seven of the Affiliated
Entities and less than 50% of the eighth, as follows:
Affiliated Entities:
Combined affiliates:
Chicago Toy Company
Georgia Toy Company
Inland Merchandising, Inc. (began operations in June 1993)
Lehigh Valley Toy Company
Performance Merchandising, Inc.
Southwest Coin Company
Sugarloaf, Ltd. (began operations in January 1993)
Equity affiliate:
Sugarloaf Marketing, Inc.
Due to the common controlling ownership, the accompanying financial
statements include the accounts of the Company and the combined affiliates
(collectively referred to as the "Combined Companies") through August 31, 1995.
All material intercompany balances and transactions have been eliminated.
Through August 31, 1995 the Control Group's interest has been accounted for as
equity of affiliates and the other stockholders' interests have been reflected
as a minority interest. As such, the assets and liabilities of the Combined
Companies have been accounted for in the financial statements based upon their
historical costs through August 31, 1995. The financial statements account for
the Control Group ownership interest in Sugarloaf Marketing, Inc. using the
equity method of accounting through August 31, 1995.
On August 31, 1995, the Company acquired substantially all of the
inventories, property and equipment, and assumed certain facilities leases,
which are operating leases, and contracts of the Affiliated Entities in exchange
for promissory notes in the principal amount of $8,983,000 (the
"Reorganization"), of which $7,634,000 was paid from the proceeds of the
Company's initial public offering in October 1995. The remaining promissory
notes in the principal amount of $674,000 are payable in 1998. As a result of
the Reorganization, assets attributable to the Control Group's interest have
been accounted for similar to the pooling-of-interests method of accounting for
business combinations. Assets and liabilities included in the financial
statements which were retained by the combined affiliates in the Reorganization
have been accounted for as distributions to the combined affiliates. Amounts
paid to the combined affiliates attributed to the Control Group interest have
been accounted for as a distribution for financial reporting purposes. Assets
F-10
<PAGE> 97
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
transferred attributable to the non-Control Group members (the minority interest
in the combined affiliates and the majority interest in the equity affiliate)
have been accounted for using the purchase method of accounting for business
combinations. The Company has recorded approximately $1,964,000 of costs in
excess of assets acquired as a result of the transfer of assets attributable to
the non-Control Group. The Reorganization was a taxable transaction for income
tax purposes, and accordingly, the Company has a tax basis in the transferred
assets in excess of that for financial reporting.
2. ACQUISITIONS
During the six months ended June 30, 1998, the Company acquired certain
assets and the operations of one of its franchisees (Suncoast Toys, Inc., N.W.
Toys Co. and Oregon Coin Company, collectively "Suncoast"), one other
franchisee, the operating assets of a video game, skill-crane and redemption
company, a bulk vending company and certain assets of a kiddie ride company for
approximately $39,647,000. Of this amount, $36,147,000 was paid in cash with the
balance to be paid over a three-year period in accordance with the terms of the
promissory notes issued in connection with the acquisition. The Company has
recorded approximately $32,942,000 of cost in excess of assets acquired as a
result of the acquisitions that were accounted for using the purchase method of
accounting.
During 1997, the Company acquired in July, October and December certain
assets and the business operations of three of its franchisees and also acquired
the operating assets of a bulk vending and kiddie ride company in November for
approximately $5,494,000. Of this amount, $3,669,000 was paid in cash with the
balance to be paid over a three-year periods in accordance with the terms of the
promissory notes issued in connection with the acquisitions. The Company has
recorded approximately $3,685,000 of costs in excess of assets acquired as a
result of these acquisitions that were accounted for using the purchase method
of accounting.
During 1996, the Company acquired in January, July and August certain
assets and the business operations of three of its franchisees and also acquired
the operating assets of a skill-crane service company in May for approximately
$2,103,000. Of this amount, $1,224,000 was paid in cash with the balance to be
paid over two to three year periods in accordance with the terms of the
promissory notes issued in connection with the acquisitions. The Company has
recorded approximately $1,239,000 of costs in excess of assets acquired as a
result of these acquisitions that were accounted for using the purchase method
of accounting.
In September 1995, the Company acquired certain assets and the business
operation of one of its franchisees for approximately $346,000. Of this amount,
$158,000 was paid in cash with the balance to be paid over a three-year period
in accordance with the terms of a promissory note issued in connection with the
acquisition. The Company has recorded approximately $187,000 of costs in excess
of assets acquired as a result of this acquisition that was accounted for using
the purchase method of accounting.
Other than the acquisition of the assets of Suncoast, the pro forma effect
of these acquisitions is not material to assets, revenue or net earnings for the
six months ended June 30, 1998 and the years ended December 31, 1995, 1996 and
1997.
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.
F-11
<PAGE> 98
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Franchise Royalties and Fees
Typically, franchisees are required to pay continuing royalties ranging
from 2% to 5% of gross machine revenue. Franchisees are required to pay an
initial nonrefundable franchise fee. Initial franchise fees are recognized as
revenue when the franchise opens. Included in franchise and other revenue are
continuing franchise royalties and initial franchise fee revenue of $86,000 for
1995.
Income Taxes
Prior to October 13, 1995 the Company had elected tax treatment as an S
corporation, and the combined affiliates were each organized as S corporations,
except for Southwest Coin Company which was organized as a partnership.
Accordingly, through October 12, 1995, no provisions were made for income taxes
since all income, deductions, gains, losses and credits were reported on the tax
returns of the stockholders or partners. The S corporation status of the Company
terminated on October 12, 1995 and, accordingly, the Company became a taxable
entity.
Effective October 13, 1995, the Company adopted the provisions of Statement
of Financial Accounting Standards Statement No. 109, "Accounting for Income
Taxes" (SFAS 109). Under the asset and liability method of accounting for income
taxes, as prescribed by SFAS 109, deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for income tax
purposes. Deferred tax assets and liabilities are measured using enacted tax
rates expected to be in effect for the year in which those temporary differences
are expected to be recovered or settled. The effects on deferred tax assets and
liabilities of a change in tax rates are recognized in income in the period that
includes the enactment date.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers as cash equivalents all highly liquid investments
with an original maturity of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories consist of purchased items
ready for resale or use in vending operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on
the straight-line and accelerated methods over the estimated useful lives of the
assets that range from 3 to 10 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.
F-12
<PAGE> 99
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company reviews its long-lived assets and intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to the future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (Statement No.
128) effective for periods ending after December 15, 1997. Statement No. 128
changes the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock or potential common
stock. Under such requirements the Company is required to present both basic
earnings per share and diluted earnings per share. Basic earnings and diluted
earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period and by all dilutive potential common shares outstanding during the
period, respectively. The Company adopted the provisions of Statement No. 128 as
of December 31, 1997. As prescribed by Statement No. 128, the Company has
restated prior periods' earnings per share of common stock, including interim
earnings per share of common stock, in the period of adoption. Such amounts are
as follows:
<TABLE>
<CAPTION>
YEAR QUARTER ENDED (UNAUDITED)
ENDED ---------------------------------------------------------------------
DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
1996 1996 1996 1996 1996 1997 1997 1997
------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings per share of common stock as
previously reported................. $0.48 $0.09 $0.07 $0.11 $0.21 $0.16 $0.16 $0.18
Basic earnings per share of common
stock............................... $0.51 $0.10 $0.07 $0.11 $0.22 $0.17 $0.16 $0.18
Diluted earnings per share of common
stock............................... $0.48 $0.09 $0.07 $0.11 $0.21 $0.16 $0.16 $0.18
</TABLE>
Net earnings per share have been omitted for 1995 because through August
31, 1995 the Combined Companies were not a single entity with its own capital
structure.
Interim Financial Statements
The financial statements as of June 30, 1998 and for the six months ended
June 30, 1997 and 1998 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, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
Reclassifications
Certain amounts for prior periods have been reclassified to conform to the
June 30, 1998 presentation.
F-13
<PAGE> 100
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental Disclosures of Cash Flow Information
A schedule of supplemental cash flow information follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- -----------------------
1995 1996 1997 1997 1998
----------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash paid during the year:
Interest paid....................... $ 370,000 $372,000 $ 640,000 $ 282,000 $ 335,000
Income taxes paid................... -- 858,000 1,755,000 1,092,000 1,309,000
Significant noncash investing and
financing activities:
Equipment purchases financed with
debt.............................. 241,000 54,000 -- -- --
Notes payable issued for
acquisitions of franchisees and
others............................ 188,000 879,000 1,825,000 -- 3,500,000
Distribution payable................ 634,000 -- -- -- --
Deferred tax asset established in
Reorganization.................... 491,000 -- -- -- --
Conversion of stockholder loans into
common stock...................... 676,000 -- -- -- --
Cash paid in Reorganization:
Value of tangible assets acquired... 983,000
Costs in excess of assets
acquired.......................... 1,964,000
Net liabilities retained by combined
affiliates, excluding cash
retained.......................... 1,310,000
Notes payable to Control Group...... (1,349,000)
Net elimination of investment in
equity affiliate and minority
interest.......................... 101,000
Distribution to Control Group....... 4,951,000
Cash paid and retained(1).... 7,960,000
</TABLE>
- ---------------
(1) Includes $326,000 of cash retained by the combined affiliates.
4. INVESTMENT IN EQUITY AFFILIATE
Prior to the Reorganization, investment in equity affiliate consisted of a
48% interest in 1995 in Sugarloaf Marketing, Inc. (Sugarloaf Marketing) which
was accounted for using the equity method (see note 1). On August 31, 1995, in
connection with the Reorganization, the Company acquired the remaining 52%
ownership in Sugarloaf Marketing. The acquisition has been accounted for using
the purchase method of accounting for business combinations. The operating
results of Sugarloaf Marketing are included in the Company's earnings statement
from the date of the acquisition. Pro forma results of operations for 1995 as if
the Reorganization, including the acquisition of Sugarloaf Marketing, had
occurred on January 1, 1995 are presented in note 14.
For the eight months ended August 31, 1995, Sugarloaf Marketing had revenue
and a net loss of $3,941,000 and $57,000, respectively. Included in 1995
franchise and other revenue is $712,000 representing product and service sales
and franchise royalties for the eight months ended August 31, 1995. Transactions
with Sugarloaf Marketing were conducted on a basis consistent with that of
unaffiliated franchisees.
5. BANK REVOLVING LINE OF CREDIT
As of June 30, 1998, under the reducing revolving loan agreement (the
"Credit Facility"), the Company may borrow up to $50.0 million at the bank's
prime interest rate (8.5% at December 31, 1997 and June 30, 1998) or, at the
Company's option, an interest rate based on the current LIBOR rate. The Credit
Facility is
F-14
<PAGE> 101
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
available through July 13, 2001. At December 31, 1997 there was no principal
amount outstanding. At June 30, 1998, there was a principal amount of
approximately $41,795,000 outstanding on this facility that is reflected in
long-term debt on the accompanying balance sheet. The credit agreement provides
that certain financial ratios be met and places restrictions on, among other
things, the occurrence of additional debt financing and the payment of
dividends. The Company was in compliance with such financial ratios and
restrictions at June 30, 1998.
At December 31, 1997 and June 30, 1998, approximately $161,000 and
$271,000, respectively, of the credit facility was committed on open letters of
credit for inventory on order but not yet received.
6. LONG-TERM DEBT AND NOTES PAYABLE TO CONTROL GROUP
Long-term debt and notes payable to control group consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Long-term debt:
Bank revolving line of credit (see note 5).... $3,787,000 $ -- $41,795,000
Notes payable to former franchisees and
others, due in monthly and quarterly
installments with interest ranging from 8%
to 8.5%; final payments at various dates
through October 2000, secured by certain
property and equipment..................... 871,000 2,181,000 4,969,000
Notes payable to banks, due in monthly
installments with interest ranging from
8.25% to 12.95%; final payments at various
dates through August 2000; secured by
certain property and equipment............. 161,000 56,000 3,000
---------- ---------- -----------
Total long-term debt.................. 4,819,000 2,237,000 46,767,000
Less current portion.......................... (435,000) (945,000) (1,586,000)
---------- ---------- -----------
Long-term debt, net of current
portion............................. $4,384,000 $1,292,000 $45,181,000
========== ========== ===========
Notes payable to Control Group:
Promissory notes to Affiliated Entities, due
in semi-annual principal payments with
interest at 8%; notes are secured by assets
exchanged (see note 1)..................... 1,349,000 674,000 337,000
Less current portion.......................... (674,000) (674,000) (337,000)
---------- ---------- -----------
Notes payable to Control Group, net of
current portion..................... $ 675,000 $ -- $ --
========== ========== ===========
</TABLE>
The carrying amount of long-term debt and notes payable to control group
approximates its fair value.
Maturities of long-term debt and notes payable to Control Group as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, --------------------------------
<S> <C>
1998..................................................... $1,619,000
1999..................................................... 793,000
2000..................................................... 499,000
----------
$2,911,000
==========
</TABLE>
F-15
<PAGE> 102
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Prior to October 13, 1995, the Company was an S corporation and was not
subject to income taxes. The S corporation status of the Company terminated on
October 12, 1995. As a result of the termination of the Company's S corporation
status, the Company incurred a one-time deferred tax expense of $141,000.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Current
Federal......................................... $160,000 $ 869,000 $1,507,000
State........................................... 28,000 134,000 286,000
-------- ---------- ----------
188,000 1,003,000 1,793,000
-------- ---------- ----------
Deferred
Federal......................................... 119,000 267,000 393,000
State........................................... 22,000 41,000 70,000
-------- ---------- ----------
141,000 308,000 463,000
-------- ---------- ----------
$329,000 $1,311,000 $2,256,000
======== ========== ==========
</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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Expected tax expense at the federal statutory
rate........................................... $ 987,000 $1,325,000 $2,273,000
State income taxes, net of federal taxes......... 33,000 116,000 265,000
Change in valuation allowance.................... -- (171,000) (292,000)
Termination of S corporation status.............. 141,000 -- --
S corporation income............................. (811,000) -- --
Other............................................ (21,000) 41,000 10,000
--------- ---------- ----------
$ 329,000 $1,311,000 $2,256,000
========= ========== ==========
</TABLE>
The sources and tax effects of temporary differences between financial
statement carrying amounts and the tax bases of assets and liabilities are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Costs in excess of assets acquired -- basis and
amortization differences............................... $1,157,000 $1,034,000
Valuation allowance....................................... 832,000 540,000
---------- ----------
325,000 494,000
Deferred tax liabilities:
Property and equipment -- basis and depreciation
differences............................................ (283,000) (915,000)
---------- ----------
$ 42,000 $ (421,000)
========== ==========
</TABLE>
F-16
<PAGE> 103
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMISSIONS AND ROYALTIES TO RELATED PARTIES
The Company recognized commission expense of $232,000 in 1995 for services
provided by two other corporations whose stockholders were the majority
stockholders of the Company. In addition, the Company recognized royalty expense
of $115,000 in 1995 to a trust controlled by a stockholder of one of the
combined affiliates.
9. RETIREMENT PLAN
The Company maintains a 401(k) profit sharing plan, which covers
substantially all employees. Employees are permitted to contribute up to 15% of
their eligible compensation. The Company makes contributions to the plan
matching 50% of the employees' contribution up to 10% of compensation. The
Company's matching contributions totaled $17,000, $49,000 and $113,000 in 1995,
1996 and 1997, and totaled $54,000 and $86,000 for the six months ended June 30,
1997 and 1998, respectively.
10. COMMITMENTS
Leases
The Company has several noncancelable operating leases, primarily for
office and warehouse facilities and certain types of equipment. These leases
expire at various times over the next five years. Rent expense under these
leases totaled $190,000, $275,000 and $489,000 for the years ended December 31,
1995, 1996 and 1997, and totaled $243,000 and $380,000 for the six months ended
June 30, 1997 and 1998, respectively.
Future minimum commitments under operating leasing arrangements as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.................................................... $ 599,000
1999.................................................... 452,000
2000.................................................... 332,000
2001.................................................... 215,000
2002 and thereafter..................................... 250,000
----------
Total......................................... $1,848,000
==========
</TABLE>
11. STOCK OPTIONS
The Company has two fixed option plans. Under the terms of the amended and
restated stock option plan (the "Option Plan"), the Company may grant to
employees, consultants and advisors up to 1,400,000 shares of common stock.
Under the Option Plan, the Company may grant both incentive stock options and
non-statutory stock options, and the maximum term is ten years. Non-statutory
options may be granted at no less than 85% of the fair market value of the
common stock at the date of grant. Stock options granted under the Option Plan
vest over a three to five year period.
Under terms of the amended 1995 Non-Employee Directors' Stock Option Plan
(the "Directors Plan"), the Company may grant to non-employee directors options
to purchase up to 100,000 shares of common stock. Under the Directors Plan,
options granted vest over a three-year period and have a maximum term of ten
years.
The Company applies APB Opinion No. 25 and the related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for options granted at fair market value under the plans. The compensation cost
that has been charged against income for options granted at a price less than
fair market value was $25,000 in 1996 and $19,000 in 1997. Had compensation cost
for the Company's stock-
F-17
<PAGE> 104
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
based compensation plans been determined consistent with SFAS No. 123, the
Company's net earnings and diluted earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net earnings
As reported............ $2,575,000 $2,586,000 $4,429,000 $1,765,000 $2,558,000
Pro forma.............. 2,559,000 2,489,000 4,234,000 1,693,000 2,398,000
Diluted earnings per
share
As reported............ N/A 0.48 0.78 0.33 0.38
As restated............ N/A 0.48 N/A N/A N/A
Pro forma.............. N/A 0.46 0.74 0.32 0.36
</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 60 percent for 1997 and 81 percent for 1995 and 1996; 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>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------- SIX MONTHS ENDED
1995 1996 1997 JUNE 30, 1998
------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period................... 548,132 $ .02 488,463 $1.44 440,797 $1.51 316,000 $7.75
Granted.................... 123,500 5.61 -- -- 215,500 8.73 -- --
Exercised.................. (183,169) .02 (41,666) .02 (329,630) .13 (15,999) 5.53
Forfeited.................. -- -- (6,000) 5.53 (10,667) 5.53 (4,334) 7.93
-------- ----- -------- ----- -------- ----- -------- -----
Outstanding at end of
period................... 488,463 1.44 440,797 1.51 316,000 7.75 295,667 7.86
======== ===== ======== ===== ======== ===== ======== =====
Options exercisable at end
of period................ 364,943 360,797 63,667 71,778
Weighted average fair value
of options granted during
period................... $ 4.68 -- $ 5.38 --
</TABLE>
The following table summarizes information about fixed stock options
outstanding:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$4.00 to 7.00.............. 100,500 7.8 $5.63 63,667 $5.69
7.50 to 10.00.............. 215,500 9.4 8.73 -- --
------- ------
4.00 to 10.00.............. 316,000 8.9 7.75 63,667 5.69
======= ======
</TABLE>
F-18
<PAGE> 105
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$4.00 to 7.00.............. 82,667 7.3 $5.65 51,778 $5.73
7.50 to 10.00.............. 213,000 8.9 8.72 20,000 7.63
------- ------
4.00 to 10.00.............. 295,667 8.5 7.86 71,778 6.26
======= ======
</TABLE>
12. STOCKHOLDERS' EQUITY
Common stock
The Company was originally incorporated in Colorado in 1988 and was
reincorporated in Delaware effective July 1995. In October 1995, the Company
completed a public offering of 1,700,000 shares of its common stock at $7.00 per
share. Total proceeds, net of underwriting commission and other offering costs
of $1,849,000, were $10,051,000. In November 1997, the Company completed a
follow-on public offering of its common stock, whereby the Company sold
1,000,000 shares at $15 per share. Total proceeds, net of underwriting
commission and other expenses of $1,075,000, were $13,925,000.
Preferred stock
The Board of Directors has the authority to issue up to 500,000 shares of
$.10 par value preferred stock in one or more series and to fix the rights,
preferences, privileges and distributions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the
designation of such series, without any further vote or action by stockholders.
No shares of preferred stock have been issued.
Warrants
In March 1998, the Company repurchased for $492,000, including acquisition
costs, warrants exercisable for 70,000 shares of its Common Stock from an
underwriter. The Company initially issued warrants to purchase 125,000 shares of
its Common Stock with an exercise price of $8.40 per share as partial
compensation for acting as the Company's underwriter in its initial public
offering in October 1995. After this purchase, the underwriter retains warrants
exercisable for 55,000 shares of the Company's Common Stock. The warrant expires
on October 18, 1999.
13. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Certain Significant Estimates
At December 31, 1997 the Company has recorded a deferred tax asset of
$494,000, net of a $540,000 valuation allowance, as a result of the benefit
associated with the difference between the tax and financial statement basis of
assets acquired by the Company on August 31, 1995 in connection with the
Reorganization. Realization is dependent on generating sufficient taxable income
prior to the expiration of the benefit. Although realization is not assured,
management believes it is more likely than not that a portion of the deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be increased in the near term if estimates of future
taxable income are increased.
F-19
<PAGE> 106
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Current Vulnerability Due to Certain Concentrations
Suppliers
Substantially all of the plush toys and other products dispensed from the
Shoppes are produced by foreign manufacturers. A majority are purchased directly
by the Company from manufacturers in 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.
Customers
The Company has made available to its franchisees a fee reduction program
whereby a franchisee is entitled to a reduction in the royalty rate on gross
revenue from the Sugarloaf Toy and Treasure Shoppes of one percentage point on
gross revenue for a future six-month period based upon the franchisee meeting
certain performance standards during the most recently completed six-month
period. One of the performance standards relates to the purchase of 30%, up to a
maximum of $250,000, of product used in the Sugarloaf Toy Shoppe program from
the Company. Three franchisees represent 17.7% of the Company's product sales to
franchisees, which is included in franchise and other revenue in 1997.
During the year ended December 31, 1997, one customer accounted for 33.5%
of the Company's revenue.
14. UNAUDITED PRO FORMA INFORMATION
The computation of pro forma total revenue, net earnings and earnings per
share for the year ended December 31, 1995 were prepared on the basis as if the
Reorganization had occurred on January 1, 1995 with an adjustment in the level
of commissions and royalties to related parties that were not paid after the
Reorganization, an adjustment for interest expense related to shareholder loans
converted to common stock in conjunction with the Company's initial public
offering of common stock on October 12, 1995 and the
F-20
<PAGE> 107
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recording of income tax expense to reflect the conversion of the Company from an
S corporation to a taxable entity on October 12, 1995 follows:
<TABLE>
<S> <C>
Historical total revenue.................................... $25,714,000
Revenue of Sugarloaf Marketing through the date of
acquisition............................................... 3,941,000
Pro forma adjustment to eliminate intercompany revenue...... (712,000)
-----------
Pro forma total revenue..................................... $28,943,000
===========
Historical earnings before income taxes..................... $ 2,904,000
Pro forma adjustments:
Net loss of Sugarloaf Marketing through the date of
acquisition............................................ (57,000)
Adjust for change in level of commissions and royalties to
related parties........................................ 1,182,000
Adjust for interest related to stockholder loans converted
to equity.............................................. 61,000
Eliminate minority interest and equity interest through
the date of acquisition as a result of acquiring
remaining ownership interest in affiliated entities.... 107,000
Record amortization of cost in excess of assets
acquired............................................... (68,000)
Increase depreciation for assets acquired from non-control
group.................................................. (18,000)
-----------
Total adjustments to earnings before taxes........ 1,207,000
-----------
Pro forma earnings before income taxes...................... 4,111,000
Pro forma earnings tax expense at 38%....................... 1,562,000
-----------
Pro forma net earnings...................................... $ 2,549,000
===========
Pro forma basic earnings per share.......................... $ 0.59
Pro forma diluted earnings per share........................ $ 0.55
Pro forma basic weighted average shares outstanding(1)...... 4,299,000
Pro forma diluted weighted average shares outstanding(1).... 4,669,000
</TABLE>
- ---------------
(1) Shares used in computing pro forma earnings per share are based upon
3,503,120 weighted average shares outstanding, common equivalent shares of
370,332, and 96,571 shares issued in connection with the conversion of
certain stockholder loans at the initial public offering price of $7.00 per
share and 699,149 shares issued to pay distributions in conjunction with the
Reorganization. Common equivalent shares consist of stock options,
determined using the treasury stock method. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued at prices below the anticipated public offering price during a
12-month period prior to the proposed offering have been included in the
calculation as if they were outstanding for the entire year (using the
treasury stock method and the average price of the common stock from October
16, 1995 through December 31, 1995) and the shares issued in the initial
public offering whose proceeds were used to pay distributions to Control
Group stockholders in connection with the Reorganization have been included
in the calculation (using the initial public offering price) as if they were
outstanding for the entire year.
F-21
<PAGE> 108
AMERICAN COIN MERCHANDISING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
1996 1996 1996 1997 1997 1997 1997 1998 1998
------- -------- ------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue.................. $8,403 $9,634 $12,216 $12,357 $13,790 $14,676 $18,261 $18,761 $20,962
Total cost of revenue.......... 6,085 6,743 8,489 8,551 9,800 10,342 12,780 13,294 14,627
------ ------ ------- ------- ------- ------- ------- ------- -------
Gross profit................. 2,318 2,891 3,727 3,806 3,990 4,334 5,481 5,467 6,335
General and administrative
expenses..................... 1,671 1,827 2,023 2,296 2,429 2,523 3,066 3,526 3,862
------ ------ ------- ------- ------- ------- ------- ------- -------
Operating earnings........... 647 1,064 1,704 1,510 1,561 1,811 2,415 1,941 2,473
Interest expense............... 45 136 148 111 156 217 128 118 361
------ ------ ------- ------- ------- ------- ------- ------- -------
Earnings before income
Taxes...................... 602 928 1,556 1,399 1,405 1,594 2,287 1,823 2,112
Provision for income Taxes..... 229 352 422 518 521 588 629 638 739
------ ------ ------- ------- ------- ------- ------- ------- -------
Net earnings................. $ 373 $ 576 $ 1,134 $ 881 $ 884 $ 1,006 $ 1,658 $ 1,185 $ 1,373
====== ====== ======= ======= ======= ======= ======= ======= =======
Basic earnings per share....... $ 0.07 $ 0.11 $ 0.22 $ 0.17 $ 0.16 $ 0.18 $ 0.27 $ 0.18 $ 0.21
Diluted earnings per share..... 0.07 0.11 0.21 0.16 0.16 0.18 0.26 0.18 $ 0.21
Basic weighted average common
shares....................... 5,082 5,094 5,123 5,251 5,394 5,450 6,158 6,457 6,469
Diluted weighted average common
shares....................... 5,449 5,459 5,449 5,425 5,452 5,633 6,388 6,649 6,678
</TABLE>
F-22
<PAGE> 109
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Suncoast Toys, Inc., NW Toys Co., and Oregon Coin Company
We have audited the accompanying combined balance sheets of Suncoast Toys,
Inc., NW Toys Co., and Oregon Coin Company as of December 31, 1996 and 1997, and
the related combined statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Companies' 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Suncoast
Toys, Inc., NW Toys Co., and Oregon Coin Company as of December 31, 1996 and
1997, and the combined results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
As discussed in Note 8 to the combined financial statements, in May 1998
the Companies and their stockholders entered into an agreement with American
Coin Merchandising, Inc. providing for the sale of certain assets and the
business operations of the Companies to American Coin Merchandising, Inc.
PricewaterhouseCoopers LLP
Tampa, Florida
May 20, 1998
F-23
<PAGE> 110
SUNCOAST TOYS, INC., NW TOYS CO., AND OREGON COIN COMPANY
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------ JUNE 12,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $3,334,872 $ 5,916,750 $ 6,335,367
Trade accounts and other receivables................. 491,673 254,100 338,722
Inventories.......................................... 3,006,576 2,264,543 1,533,189
Prepaid expenses and other current assets............ 261,635 267,198 247,701
Note receivable...................................... 0 500,000 350,000
---------- ----------- -----------
Total current assets......................... 7,094,756 9,202,591 8,804,979
Property and equipment, net............................ 1,938,690 1,857,354 1,526,754
Other assets........................................... 43,015 43,015 43,015
---------- ----------- -----------
Total assets................................. $9,076,461 $11,102,960 $10,374,748
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 46,930 $ 605,750 $ 654,226
Accrued expenses..................................... 488,855 452,364 184,428
---------- ----------- -----------
Total current liabilities.................... 535,785 1,058,114 838,654
---------- ----------- -----------
Commitments (Note 5)
Stockholders' equity:
Common stock......................................... 53,200 53,200 53,200
Additional paid-in capital........................... 19,800 19,800 19,800
Retained earnings.................................... 8,467,676 9,971,846 9,463,094
---------- ----------- -----------
Total stockholders' equity................... 8,540,676 10,044,846 9,536,094
---------- ----------- -----------
Total liabilities and stockholders' equity... $9,076,461 $11,102,960 $10,374,748
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-24
<PAGE> 111
SUNCOAST TOYS, INC., NW TOYS CO., AND OREGON COIN COMPANY
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JANUARY 1, 1998
ENDED TO
1995 1996 1997 JUNE 30, 1997 JUNE 12, 1998
----------- ----------- ----------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Vending..................... $18,462,142 $18,714,470 $18,725,699 $9,386,285 $8,566,494
Other....................... 778,721 1,964,667 1,155,842 593,374 129,252
----------- ----------- ----------- ---------- ----------
Total revenues...... 19,240,863 20,679,137 19,881,541 9,979,659 8,695,746
----------- ----------- ----------- ---------- ----------
Cost of revenues:
Vending..................... 12,224,715 12,985,261 12,795,243 6,386,271 5,979,849
Other....................... 528,868 354,844 490,352 254,115 91,448
----------- ----------- ----------- ---------- ----------
Total cost of
revenues.......... 12,753,583 13,340,105 13,285,595 6,640,386 6,071,297
----------- ----------- ----------- ---------- ----------
Gross profit................ 6,487,280 7,339,032 6,595,946 3,339,273 2,624,449
Selling, general and
administrative expenses..... 1,990,110 2,381,848 2,522,954 1,118,213 2,195,620
----------- ----------- ----------- ---------- ----------
Income from
operations........ 4,497,170 4,957,184 4,072,992 2,221,060 428,829
Interest income............... 168,212 189,427 336,178 139,732 187,419
----------- ----------- ----------- ---------- ----------
Net income.......... $ 4,665,382 $ 5,146,611 $ 4,409,170 $2,360,792 $ 616,248
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-25
<PAGE> 112
SUNCOAST TOYS, INC., NW TOYS CO., AND OREGON COIN COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1995....................... $53,200 $19,800 $ 4,205,683 $ 4,278,683
Net income................................... 0 0 4,665,382 4,665,382
Stockholder distributions.................... 0 0 (1,580,000) (1,580,000)
------- ------- ----------- -----------
Balance, December 31, 1995..................... 53,200 19,800 7,291,065 7,364,065
Net income................................... 0 0 5,146,611 5,146,611
Stockholder distributions.................... 0 0 (3,970,000) (3,970,000)
------- ------- ----------- -----------
Balance, December 31, 1996..................... 53,200 19,800 8,467,676 8,540,676
Net income................................... 0 0 4,409,170 4,409,170
Stockholder distributions.................... 0 0 (2,905,000) (2,905,000)
------- ------- ----------- -----------
Balance, December 31, 1997..................... 53,200 19,800 9,971,846 10,044,846
Net income................................... 0 0 616,248 1,308,075
Stockholder distributions.................... 0 0 (1,125,000) (1,125,000)
------- ------- ----------- -----------
Balance, June 12, 1998 (unaudited)............. $53,200 $19,800 $ 9,463,094 $ 9,536,094
======= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-26
<PAGE> 113
SUNCOAST TOYS, INC., NW TOYS CO., AND OREGON COIN COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, SIX MONTHS JANUARY 1, 1998
--------------------------------------- ENDED TO
1995 1996 1997 JUNE 30, 1997 JUNE 12, 1998
----------- ----------- ----------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................... $24,665,382 $ 5,146,611 $ 4,409,170 $ 2,360,792 $ 616,248
Adjustments to reconcile net
income to net cash provided
by Operating activities:
Depreciation............... 667,754 795,074 791,824 317,618 342,393
Changes in operating assets
and liabilities:
Trade accounts and other
receivables........... 630,373 (296,821) 237,573 207,703 (84,622)
Inventories.............. (1,238,644) (612,582) 742,033 75,800 731,354
Prepaid expenses and
other current
assets................ 14,157 (249,918) (5,563) 10,147 19,497
Accounts payable......... (326,914) (4,660) 558,820 357,724 48,476
Accrued expenses......... 92,570 (127,476) (36,491) (377,246) (267,936)
----------- ----------- ----------- ----------- -----------
Net cash provided by
operating
activities.......... 4,504,678 4,650,228 6,697,366 2,947,538 1,405,410
----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities:
Purchases of property and
equipment, net............. (1,321,173) (743,084) (710,488) (339,458) (11,793)
(Additions) payments note
receivable................. 16,740 0 (500,000) (500,000) 150,000
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities.......... (1,304,433) (743,084) (1,210,488) (839,458) 138,207
----------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Stockholder distributions..... (1,580,000) (3,970,000) (2,905,000) (1,755,000) (1,125,000)
Payment of note payable....... (136,472) 0 0 0 0
----------- ----------- ----------- ----------- -----------
Net cash used in
financing
activities.......... (1,716,472) (3,970,000) (2,905,000) (1,755,000) (1,125,000)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents.......... 1,483,773 (62,856) 2,581,878 353,080 418,617
Cash and cash equivalents,
beginning of period........... 1,913,955 3,397,728 3,334,872 3,334,872 5,916,750
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end
of period..................... $ 3,397,728 $ 3,334,872 $ 5,916,750 $ 3,687,952 $ 6,335,367
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-27
<PAGE> 114
SUNCOAST TOYS, INC., NW TOYS CO., AND OREGON COIN COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Description of Business -- Suncoast Toys, Inc., NW Toys Co., and Oregon
Coin Company (collectively, the Companies) own and operate coin-operated
skill-crane machines that dispense stuffed animals, plush toys, watches, jewelry
and other items. The Companies' machines are placed in supermarkets, mass
merchandisers, bars, restaurants, warehouse clubs and similar locations in
franchised territories in Florida, Washington, and Oregon.
Basis of Presentation -- The accompanying financial statements present the
combined financial statements of the Companies. The Companies operate under
common ownership and their financial statements have been combined to provide a
more meaningful presentation of the financial position, results of operations
and cash flows of these entities. All significant intercompany balances and
transactions have been eliminated in combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenues -- 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 and royalties paid to retail locations and
the Companies' franchisor. Other revenue represents bulk product sales to third
parties which are recognized upon shipment.
Franchise Expenses -- The Companies are required to pay continuing
royalties of 2.5-3.5% of gross machine revenues (subject to certain maximums and
other adjustments as provided in the franchise agreement) to the franchisor.
Royalties were approximately $300,000, $318,000, and $350,000 for the years
ended December 31, 1995, 1996, and 1997, respectively. In addition, the
Companies purchased from the franchisor vending products of approximately
$1,102,000, $689,000, and $610,000 during the years ended December 31, 1995,
1996, and 1997, respectively.
Cash and Cash Equivalents -- The Companies consider all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Inventories -- Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method. Inventories consist of
purchased items ready for resale or use in vending operations.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using accelerated methods, based upon estimated useful
lives of five to seven years. Expenditures for maintenance and repairs are
charged to expense as incurred, whereas major betterments are capitalized. Gains
and losses on sales and retirements are included in other income and expense,
respectively.
Income Taxes -- The Companies have each elected to be taxed as an "S"
corporation for federal and state income tax purposes. Accordingly, the
stockholders are liable for federal and state income taxes.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
Interim Financial Information -- The financial statements of the Companies
as of June 12, 1998 and for the six months ended June 30, 1997 and for the
period from January 1, 1998 to June 12, 1998 are unaudited. All adjustments and
accruals (consisting only of normal recurring adjustments) have been recorded
that, in the opinion of management, are necessary for a fair presentation.
Results of operations for the interim period are not necessarily indicative of
the results for the full year.
F-28
<PAGE> 115
SUNCOAST TOYS, INC., NW TOYS CO., AND OREGON COIN COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTE RECEIVABLE:
The note receivable consists of a $500,000 demand note entered into in 1997
with one of the Companies' suppliers. Interest is accrued at 10% and the
principal balance is payable on demand.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at the following dates:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Vending equipment.......................................... $ 3,868,046 $ 4,360,896
Vehicles................................................... 277,142 412,138
Furniture, fixtures and equipment.......................... 80,564 92,791
----------- -----------
4,225,752 4,865,825
Less accumulated depreciation.............................. (2,287,062) (3,008,471)
----------- -----------
$ 1,938,690 $ 1,857,354
=========== ===========
</TABLE>
Depreciation expense was approximately $668,000, $795,000, and $792,000 for
the years ended December 31, 1995, 1996, and 1997, respectively.
5. COMMITMENTS:
Certain properties used in the Companies' operations are leased under
operating leases. Total rent expense under operating leases was approximately
$90,000, $84,000, and $70,000 for the years ended December 31, 1995, 1996, and
1997, respectively. Future minimum rentals under operating leases with terms of
more than one year as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998...................................................... $75,213
1999...................................................... 29,835
2000...................................................... 9,235
</TABLE>
6. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES:
Concentrations of Credit Risk -- Financial instruments which potentially
subject the Companies to concentrations of credit risk consist principally of
cash and cash equivalents and trade accounts and note receivables.
The Companies place substantially all of their cash and cash equivalents
with Wells Fargo Bank. At December 31, 1997, the Companies had approximately
$5,349,000, including amounts representing outstanding checks, deposited with
Wells Fargo Bank.
Concentrations of credit risk with respect to trade accounts and note
receivables exist as a result of transactions with a small number of entities in
the same business as the Companies. Accordingly, management evaluates each
entity's credit worthiness before extending them credit.
Current Vulnerability Due to Certain Concentrations
Suppliers -- Substantially all of the plush toys and other products dispensed
from the machines are produced by foreign manufacturers. A majority are
purchased directly by the Companies from manufacturers in the People's Republic
of China (China). The Companies purchase their other products indirectly from
vendors and the Companies' franchisor who obtain a significant percentage of
such products from foreign manufacturers. As a result, the Companies are subject
to changes in governmental policies, the imposition of tariffs, import and
export controls, transportation delays and
F-29
<PAGE> 116
SUNCOAST TOYS, INC., NW TOYS CO., AND OREGON COIN COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 Companies which could have a material adverse effect on the
Companies' financial performance.
7. COMMON STOCK:
Common stock consisted of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
SHARES SHARES
AUTHORIZED ISSUED
---------- ------
<S> <C> <C>
Suncoast Toys, Inc., $1.00 par.............................. 1,000 200
NW Toys Co., no par......................................... 10,000 100
Oregon Coin Company, no par................................. 500 100
</TABLE>
8. SUBSEQUENT EVENT:
In May 1998, the Companies and their stockholders entered into an agreement
with American Coin Merchandising, Inc. providing for the sale of certain assets
and the business operations of the Companies to American Coin Merchandising,
Inc. The sale is expected to close in June 1998.
F-30
<PAGE> 117
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL INFORMATION
Our report on the audits of the combined financial statements of Suncoast
Toys, Inc., NW Toys Co., and Oregon Coin Company as of December 31, 1996 and
1997 and for each of the three years in the period ended December 31, 1997
appears on page F-23. These audits were conducted for the purpose of forming an
opinion on the basic financial statements taken as a whole. The combining
balance sheet and combining statement of income as of and for the year ended
December 31, 1997 are presented for purposes of additional analysis and are not
a required part of the basic combined financial statements. Such information has
been subjected to the auditing procedures applied in the audit of the basic
combined financial statements and, in our opinion, is fairly stated, in all
material respects, in relation to the basic combined financial statements taken
as a whole. This information should be read in conjunction with the last
paragraph of our report on page F-23.
PricewaterhouseCoopers LLP
Tampa, Florida
May 20, 1998
F-31
<PAGE> 118
SUNCOAST TOYS, INC., NW TOYS CO., AND OREGON COIN COMPANY
COMBINING BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
OREGON
SUNCOAST COIN ELIMINATION
TOYS, INC. NW TOYS CO. COMPANY ENTRIES COMBINED
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..... $ 660,903 $4,017,814 $1,238,033 $ 0 $ 5,916,750
Trade accounts and other
receivables................ 863,021 57,933 1,427 (668,281) 254,100
Inventories................... 1,854,138 269,950 157,169 (16,714) 2,264,543
Prepaid expenses and other
current assets............. 17,218 227,628 22,352 0 267,198
Note receivable............... 500,000 0 0 0 500,000
---------- ---------- ---------- --------- -----------
Total current
assets.............. 3,895,280 4,573,325 1,418,981 (684,995) 9,202,591
Property and equipment, net..... 703,079 736,446 417,829 0 1,857,354
Other assets.................... 43,015 0 0 0 43,015
---------- ---------- ---------- --------- -----------
Total assets.......... $4,641,374 $5,309,771 $1,836,810 $(684,995) $11,102,960
========== ========== ========== ========= ===========
CURRENT LIABILITIES:
Accounts payable.............. $ 433,456 $ 492,360 $ 333,959 $(654,025) $ 605,750
Accrued expenses.............. 419,564 17,291 15,509 0 452,364
---------- ---------- ---------- --------- -----------
Total current
liabilities......... 853,020 509,651 349,468 (654,025) 1,058,114
---------- ---------- ---------- --------- -----------
Stockholders' equity:
Common stock.................. 200 1,000 52,000 0 53,200
Additional paid-in capital.... 19,800 0 0 0 19,800
Retained earnings............. 3,768,354 4,799,120 1,435,342 (30,970) 9,971,846
---------- ---------- ---------- --------- -----------
Total stockholders'
equity.............. 3,788,354 4,800,120 1,487,342 (30,970) 10,044,846
---------- ---------- ---------- --------- -----------
Total liabilities and
stockholders'
equity.............. $4,641,374 $5,309,771 $1,836,810 $(684,995) $11,102,960
========== ========== ========== ========= ===========
</TABLE>
F-32
<PAGE> 119
SUNCOAST TOYS, INC., NW TOYS CO., AND OREGON COIN COMPANY
COMBINING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
OREGON
SUNCOAST COIN ELIMINATION
TOYS, INC. NW TOYS CO. COMPANY ENTRIES COMBINED
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Vending.................... $ 4,563,364 $9,759,035 $4,403,300 $ 0 $18,725,699
Other...................... 7,525,617 6,411 2,116 (6,378,302) 1,155,842
----------- ---------- ---------- ----------- -----------
Total revenues..... 12,088,981 9,765,446 4,405,416 (6,378,302) 19,881,541
----------- ---------- ---------- ----------- -----------
Cost of revenues:
Vending.................... 3,330,448 6,395,942 3,068,853 0 12,795,243
Other...................... 5,005,419 0 0 4,515,067 490,352
----------- ---------- ---------- ----------- -----------
Total cost of
revenues......... 8,335,867 6,395,942 3,068,853 4,515,067 13,285,595
----------- ---------- ---------- ----------- -----------
Gross profit....... 3,753,114 3,369,504 1,336,563 (1,863,235) 6,595,946
Selling, general and
administrative expenses.... 1,730,716 1,652,263 1,014,614 1,874,639 2,522,954
----------- ---------- ---------- ----------- -----------
Income from
operations....... 2,022,398 1,717,241 321,949 11,404 4,072,992
Interest income.............. 119,404 172,947 43,827 0 336,178
----------- ---------- ---------- ----------- -----------
Net income......... $ 2,141,802 $1,890,188 $ 365,776 $ 11,404 $ 4,409,170
=========== ========== ========== =========== ===========
</TABLE>
F-33
<PAGE> 120
PROSPECTUS
$100,000,000
AMERICAN COIN MERCHANDISING, INC.
JUNIOR SUBORDINATED DEBENTURES
---------------------
AMERICAN COIN MERCHANDISING TRUST I
AMERICAN COIN MERCHANDISING TRUST II
AMERICAN COIN MERCHANDISING TRUST III
AMERICAN COIN MERCHANDISING TRUST IV
TRUST PREFERRED SECURITIES
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
AMERICAN COIN MERCHANDISING, INC.
---------------------
American Coin Merchandising, Inc., a Delaware corporation (the "Company"),
may from time to time offer its junior subordinated debt securities (the "Junior
Subordinated Debentures") in one or more series and in amounts, at prices and on
terms to be determined at the time of the offering. The Junior Subordinated
Debentures when issued will be unsecured obligations of the Company. The
Company's obligations under the Junior Subordinated Debentures will be
subordinate and junior in right of payment to certain other indebtedness of the
Company, as may be described in an accompanying Prospectus Supplement (the
"Prospectus Supplement").
American Coin Merchandising Trust I, American Coin Merchandising Trust II,
American Coin Merchandising Trust III and American Coin Merchandising Trust IV,
(each, an "ACMI Trust"), each a statutory business trust formed under the laws
of Delaware, may from time to time offer trust preferred securities evidencing
undivided beneficial interests in the assets of the respective ACMI Trust
("Trust Preferred Securities"). The payment of periodic cash distributions
("distributions") with respect to Trust Preferred Securities of each of the ACMI
Trusts, out of monies held by each of the ACMI Trusts, and payments on
liquidation, redemption or otherwise with respect to such Trust Preferred
Securities will be guaranteed by the Company to the extent described herein
(each, a "Trust Preferred Securities Guarantee"). The Company's obligations
under the Guarantees will be subordinate and junior in right of payment to all
Senior Debt and Subordinated Debt (each as defined in an accompanying Prospectus
Supplement) of the Company. Junior Subordinated Debentures may be issued and
sold from time to time in one or more series by the Company to an ACMI Trust in
connection with the investment of the proceeds from the Offering of Trust
Preferred Securities and Common Securities (as defined herein) of such ACMI
Trust. The Junior Subordinated Debentures subsequently may be distributed pro
rata to holders of Trust Preferred Securities and Common Securities in
connection with the termination of such ACMI Trust upon the occurrence of
certain events as may be described in the Prospectus Supplement.
Specific terms of the particular Junior Subordinated Debentures of any
series, the Trust Preferred Securities of any ACMI Trust and the related
Guarantee in respect of which this Prospectus is being delivered (the "Offered
Securities") will be set forth in the accompanying Prospectus Supplement with
respect to such series of Junior Subordinated Debentures or such Trust Preferred
Securities, which will describe, without limitation and where applicable, the
following: (i) in the case of Junior Subordinated Debentures, the specific
designation, aggregate principal amount, denomination, maturity, premium, if
any, interest rate (or the method of determining such rate), dates on which
premium, if any, and interest, if any, will be payable, any redemption
provisions, any sinking fund provisions, the initial public offering price, the
subordination terms, any listing on a securities exchange and any other terms
and (ii) in the case of Trust Preferred Securities, the specific designation,
number of Trust Preferred Securities, distribution rate (or the method of
determining such rate), dates on which distributions will be payable,
liquidation amount, voting rights, any redemption provisions, terms for any
conversion into or exchange for other securities, the initial public offering
price, any listing on a securities exchange and any other rights, preferences,
privileges, limitations and restrictions.
The Offered Securities may be offered in amounts, at prices and on terms to
be determined at the time of offering; provided, however, that the aggregate
initial public offering price of all Offered Securities shall not exceed
$100,000,000. The Prospectus Supplement relating to any series of Offered
Securities will contain information concerning certain United States federal
income tax considerations applicable to such Offered Securities.
---------------------
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. THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES
OF SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
The date of this Prospectus is September 23, 1998
<PAGE> 121
The Offered Securities will be sold directly or through agents,
underwriters or dealers as designated from time to time, or through a
combination of such methods. If agents or any underwriters or dealers are
involved in the sale of the Offered Securities in respect of which this
Prospectus is being delivered, the names of such agents, underwriters or dealers
and any applicable commissions or discounts will be set forth in or may be
calculated from the Prospectus Supplement related to such Offered Securities.
No dealer, salesperson or any other individual has been authorized by the
Company or any of the ACMI Trusts to give any information or to make any
representation other than those contained or incorporated by reference in this
Prospectus or any accompanying Prospectus Supplement and, if given or made, such
information or representation must not be relied upon as having been authorized.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company or any of the ACMI Trusts since the
date hereof.
AVAILABLE INFORMATION
The ACMI Trusts and the Company have filed with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), a combined
registration statement on Form S-3 (herein, together with all amendments and
exhibits, referred to as the "Registration Statement") relating to the Junior
Subordinated Debentures, the Trust Preferred Securities and the Guarantees. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby made
to the Registration Statement. Statements or extracts presented in this
Prospectus from financial statements, contracts, agreements or other documents
included as exhibits to the Registration Statement are not necessarily complete.
With respect to each such financial statement, contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is hereby
made to such exhibit for a more complete description of the matter involved.
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"). Such reports, proxy
statements and other information concerning the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
Regional Offices at Seven World Trade Center, 13th Floor, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Room of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. The SEC maintains a World Wide
Website that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the SEC's World Wide Website is http://www.sec.gov.
No separate financial statements of the ACMI Trusts have been included
herein. The Company does not believe that such financial statements would be
material to holders of the Trust Preferred Securities because the ACMI Trusts
are newly-formed special purpose entities, have no operating history, have no
independent operations and are not engaged in, and do not propose to engage in,
any activity other than the issuance of the Trust Securities (as defined herein)
and holding as trust assets the Junior Subordinated Debentures of the Company.
The ACMI Trusts are not currently subject to the informational reporting
requirements of the Exchange Act. The ACMI Trusts will become subject to such
requirements upon the effectiveness of the Registration Statement of which this
Prospectus forms a part, and will seek and expect to receive exemptions
therefrom.
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<PAGE> 122
INCORPORATION OF DOCUMENTS BY REFERENCE
The Company hereby incorporates in this Prospectus by reference the
following documents filed by the Company with the Commission (Commission File
No. 000-26580): (i) its Definitive Proxy Statement filed with the Commission on
March 31, 1998; (ii) its Annual Report on Form 10-K for the year ended December
31, 1997, as amended on Form 10-K/A dated August 17, 1998; (iii) its Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998;
and (iv) its Current Reports on Form 8-K dated June 2, 1998, July 10, 1998,
August 20, 1998 and August 21, 1998. All documents filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date hereof and prior to the termination of the Offering of the
securities offered hereby shall be deemed to be incorporated herein by reference
and to be a part hereof from the respective dates of the filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a Prospectus
is delivered, on the written or oral request of any such person, a copy of any
or all of the documents incorporated by reference herein, other than certain
exhibits to such documents. Such requests should be addressed to W. John Cash,
Vice President and Chief Financial Officer, American Coin Merchandising, Inc.,
5660 Central Avenue, Boulder, Colorado 80301; telephone (303) 444-2559.
THE COMPANY
The Company is engaged in the ownership, placement, operation and
acquisition of skill-crane machines ("Shoppes") that dispense stuffed animals,
plush toys, watches, jewelry and other items. The Company is a leading owner,
operator and franchiser of Shoppes through a national network of skill-crane
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 order of prevalence, in supermarkets, mass
merchandisers, restaurants, bowling centers, bingo halls, bars and similar
locations to take advantage of the regular customer traffic at these locations.
The Company has expanded into complementary vending businesses, including kiddie
rides, bulk vending (candy, gum, novelty items, etc.) and video games.
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 AMERICAN COIN MERCHANDISING TRUSTS
Each of American Coin Merchandising Trust I, American Coin Merchandising
Trust II, American Coin Merchandising Trust III and American Coin Merchandising
Trust IV is a statutory business trust formed under Delaware law pursuant to (i)
a separate trust agreement, dated as of July 22, 1998, executed by the Company,
as depositor and the ACMI Trustees (as defined herein) as of the date of such
trust and (ii) the filing of a separate certificate of trust with the Delaware
Secretary of State on July 22, 1998. Prior to the offering of any Trust
Preferred Securities by any ACMI Trust, the trust agreement of each ACMI Trust
will be amended and restated in its entirety (as so amended and restated, the
"Trust Agreement") substantially in a form to be filed (prior to any such
offering) as an exhibit to the Registration Statement of which this Prospectus
forms a part. Each ACMI Trust exists for the exclusive purposes of (i) issuing
the Trust Preferred Securities and Common Securities representing undivided
beneficial interests in the assets of such Trust (the "Common Securities" and,
together with the Trust Preferred Securities, the "Trust Securities"), (ii)
investing the gross proceeds of the Trust Securities in a series of Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary or incidental thereto. All of the Common Securities will
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<PAGE> 123
be directly or indirectly owned by the Company. The Common Securities will rank
pari passu, and payments will be made thereon pro rata, with the Trust Preferred
Securities except that upon the event of default under the Trust Agreement
resulting from an event of default under the indenture governing a particular
series of subordinated Debentures (an "Indenture"), the rights of the holders of
the Common Securities to payment in respect of distributions and payments upon
liquidation, redemption and otherwise will be subordinated to the rights of the
holders of the Trust Preferred Securities. The Company will, directly or
indirectly, acquire Common Securities in an aggregate liquidation amount equal
to 3% of the total capital of each ACMI Trust. Each ACMI Trust has a perpetual
existence but may be terminated as provided in the applicable Trust Agreement.
Each ACMI Trust's business and affairs will be conducted by the trustees (the
"ACMI Trustees") appointed by the Company as the direct or indirect holder of
all the Common Securities. The holder of the Common Securities will be entitled
to appoint, remove or replace any of, or increase or reduce the number of, the
ACMI Trustees of a ACMI Trust. The duties and obligations of such ACMI Trustees
shall be governed by the Trust Agreement of such ACMI Trust. A majority of the
ACMI Trustees (the "Regular Trustees") of each ACMI Trust will be persons who
are employees or officers of or affiliated with the Company. One ACMI Trustee of
each ACMI Trust will be a financial institution which will be unaffiliated with
the Company and which shall act as property trustee and as indenture trustee for
purposes of the Trust Indenture Act of 1939 (the "Trust Indenture Act"),
pursuant to the terms set forth in a Prospectus Supplement (the "Property
Trustee"). In addition, unless the Property Trustee maintains a principal place
of business in the State of Delaware, and otherwise meets the requirements of
applicable law, another ACMI Trustee of each ACMI Trust will have its principal
place of business or reside in the State of Delaware (the "Delaware Trustee").
The Company will pay all fees and expenses related to the ACMI Trusts and the
offering of Trust Securities. The office of the Delaware Trustee for each ACMI
Trust in the State of Delaware is c/o Wilmington Trust Company, Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attn:
Corporate Trust Administration. The principal place of business of each ACMI
Trust shall be c/o American Coin Merchandising, 5660 Central Avenue, Boulder,
Colorado 80301 (Telephone: (303) 444-2559).
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth the ratio of earnings to combined fixed
charges and preferred stock dividends of the Company for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- -----------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges and
preferred stock dividends(1)................. 3.5x 5.1x 7.6x 9.3x 9.6x 9.0x 7.7x
</TABLE>
- ---------------
(1) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes, plus fixed charges. Fixed charges
consist of the interest expense on all indebtedness, the estimated
representative interest factor of rental expense and losses of less than
50%-owned affiliates.
USE OF PROCEEDS
Each ACMI Trust will invest all proceeds received from the sale of its
Trust Securities in Junior Subordinated Debentures.
The Company will use the net proceeds from the sale of the Junior
Subordinated Debentures for general corporate purposes, including the repayment
of outstanding indebtedness, acquisitions or for such other purposes as may be
specified in an accompanying Prospectus Supplement.
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<PAGE> 124
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
Each ACMI Trust may issue, from time to time, only one series of Trust
Preferred Securities having terms described in the Prospectus Supplement
relating thereto. The Trust Agreement of each ACMI Trust authorizes the
Administrative Trustees of such ACMI Trust to issue on behalf of such ACMI Trust
one series of Trust Preferred Securities. Each Trust Agreement will be qualified
as an indenture under the Trust Indenture Act. The Trust Preferred Securities
will have such terms, including distributions, redemption, voting, liquidation
rights and such other preferred, deferred or other special rights or such
restrictions as shall be set forth in each Trust Agreement or made part of each
Trust Agreement by the Trust Indenture Act. Reference is made to the Prospectus
Supplement relating to the Trust Preferred Securities of an ACMI Trust for
specific terms, including (i) the distinctive designation of such Trust
Preferred Securities; (ii) the number of Trust Preferred Securities issued by
such ACMI Trust; (iii) the annual distribution rate (or method of determining
such rate) for Trust Preferred Securities issued by such ACMI Trust and the date
or dates upon which such distributions shall be payable; provided, however, that
distributions on such Trust Preferred Securities shall be payable on a quarterly
basis to holders of such Trust Preferred Securities as of a record date in each
quarter during which such Trust Preferred Securities are outstanding; (iv)
whether distributions on Trust Preferred Securities issued by such ACMI Trust
shall be cumulative, and, in the case of Trust Preferred Securities having such
cumulative distribution rights, the date or dates or method of determining the
date or dates from which distributions on Trust Preferred Securities issued by
such ACMI Trust shall be cumulative; (v) the amount or amounts which shall be
paid out of the assets of such ACMI Trust to purchase or redeem Trust Preferred
Securities issued by such ACMI Trust and the price or prices at which, the
period or periods within which, and the terms and conditions upon which, Trust
Preferred Securities issued by such ACMI Trust shall be purchased or redeemed,
in whole or in part, pursuant to such obligation; (vi) the voting rights, if
any, of Trust Preferred Securities issued by such ACMI Trust in addition to
those required by law, including any requirement for the approval by the holders
of Trust Preferred Securities, or of Trust Preferred Securities issued by one or
more ACMI Trusts, or of both, as a condition to specified action or amendments
to the Trust Agreement of such ACMI Trust; and (vii) any other relevant rights,
preferences, privileges, limitations or restrictions of Trust Preferred
Securities issued by such ACMI Trust not inconsistent with the Trust Agreement
of such ACMI Trust or with applicable law. All Trust Preferred Securities
offered hereby will be guaranteed by the Company to the extent set forth below
under "Description of the Guarantees." Any applicable United States federal
income tax considerations applicable to any offering of Trust Preferred
Securities will be described in the Prospectus Supplement relating thereto.
In connection with the issuance of the Trust Preferred Securities, each
ACMI Trust will issue one series of Common Securities. The Trust Agreement of
each ACMI Trust authorizes the Administrative Trustees of such trust to issue on
behalf of such ACMI Trust one series of Common Securities having such terms
including distributions, redemption, voting, liquidation rights or such
restrictions as shall be set forth therein. The terms of the Common Securities
issued by an ACMI Trust will be substantially identical to the terms of the
Trust Preferred Securities issued by such ACMI Trust and the Common Securities
will rank pari passu, and payments will be made thereon pro rata, with the Trust
Preferred Securities except that, upon an event of default under the Trust
Agreement resulting from an event of default under the Indenture, the rights of
the holders of the Common Securities to payment in respect of distributions and
payments upon liquidation, redemption and otherwise will be subordinated to the
rights of the holders of the Trust Preferred Securities. All of the Common
Securities of an ACMI Trust will be directly or indirectly owned by the Company.
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<PAGE> 125
DESCRIPTION OF THE GUARANTEES
Set forth below is a summary of information concerning the Guarantees which
will be executed and delivered by the Company for the benefit of the holders
from time to time of Trust Preferred Securities. Each Guarantee will be
qualified as an indenture under the Trust Indenture Act. Wilmington Trust
Company will act as indenture trustee under each Guarantee (the "Guarantee
Trustee"). The terms of each Guarantee will be those set forth in the Guarantee
and those made part of such Guarantee by the Trust Indenture Act. The following
summary does not purport to be complete and is subject in all respects to the
provisions of, and is qualified in its entirety by reference to, the form of
Guarantee, which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part, and the Trust Indenture Act. Each Guarantee will be
held by the Guarantee Trustee for the benefit of the holders of the Trust
Preferred Securities of the applicable ACMI Trust.
GENERAL
Pursuant to each Guarantee, the Company will irrevocably unconditionally
agree to pay in full on a subordinated basis, to the extent set forth therein,
the Guarantee Payments (as defined below) to the holders of the Trust Preferred
Securities, as and when due, regardless of any defense, right of set-off or
counterclaim that the Trust may have or assert, other than the defense of
payment. The following payments with respect to the Trust Preferred Securities,
to the extent not paid by or on behalf of the Trust (the "Guarantee Payment"),
will be subject to the Guarantee: (i) any accumulated and unpaid Distributions
required to be paid on the Trust Preferred Securities, to the extent that the
Trust has funds on hand available therefor at such time, (ii) the redemption
price with respect to any Trust Preferred Securities called for redemption, to
the extent that the Trust has funds on hand available therefor at such time, and
(iii) upon a voluntary or involuntary dissolution, winding up or liquidation of
the Trust (unless the Junior Subordinated Debentures are distributed to holders
of the Trust Preferred Securities), the lesser of (a) the Liquidation
Distribution and (b) the amount of assets of the Trust remaining available for
distribution to holders of Trust Preferred Securities, after satisfaction of
liabilities to creditors of the Trust as required by law. The Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Company to the holders of the Trust Preferred Securities
or by causing the Trust to pay such amounts to such holders.
Each Guarantee will be an irrevocable guarantee on a subordinated basis of
each ACMI Trust's obligations under the Trust Preferred Securities, but will
apply only to the extent that the applicable ACMI Trust has funds sufficient to
make such payments, and is not a guarantee of collection. If the Company does
not make interest payments on the Junior Subordinated Debentures held by an ACMI
Trust, such ACMI Trust will not be able to pay Distributions on the Trust
Preferred Securities and will not have funds legally available therefor. See
"Description of the Junior Subordinated Debentures -- Certain Covenants."
Status of the Guarantees
The Guarantees will constitute unsecured obligations of the Company and
will rank subordinate and junior in right of payment to all Senior Debt and
Subordinated Debt in the same manner as the Junior Subordinated Debentures. The
Guarantees will constitute a guarantee of payment and not of collection. For
example, the guaranteed party may institute a legal proceeding directly against
the Company to enforce its rights under a Guarantee without first instituting a
legal proceeding against any other person or entity. Each Guarantee will be held
for the benefit of the holders of the Trust Preferred Securities of a particular
ACMI Trust. A Guarantee will not be discharged except by payment of the
Guarantee Payment in full to the extent not paid by the particular ACMI Trust or
upon distribution of the Junior Subordinated Debentures related to a particular
ACMI Trust to the holders of the Trust Preferred Securities of such ACMI Trust.
The Guarantees do not place a limitation on the amount of additional Senior Debt
and Subordinated Debt that may be incurred by the Company. The Company expects
from time to time to incur additional indebtedness constituting Senior Debt and
Subordinated Debt.
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<PAGE> 126
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Trust Preferred Securities (in which case no vote
will be required), each Guarantee may not be amended without the prior approval
of the holders of not less than a majority of the aggregate Liquidation Amount
of such outstanding Trust Preferred Securities issued by the applicable ACMI
Trust. The manner of obtaining such approval of holders of such Trust Preferred
Securities will be as set forth in an accompanying Prospectus Supplement. All
guarantees and agreements contained in a Guarantee shall bind the successors,
assigns, receivers, trustees and representatives of the Company and shall inure
to the benefit of the holders of the Trust Preferred Securities then outstanding
of the applicable ACMI Trust.
Events of Default
An Event of Default under a Guarantee Agreement will occur upon the failure
of the Company to perform any of its payment or other obligations thereunder
and, except for a default in payment of a Guarantee Payment, the Guarantor shall
have received notice of default and shall not have cured such default within 90
days after receipt of such notice.
The holders of not less than a majority in aggregate Liquidation Amount of
the Trust Preferred Securities relating to such Guarantee have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of such Guarantee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under such
Guarantee. Any holder of the Trust Preferred Securities relating to such
Guarantee may institute a legal proceeding directly against the Company to
enforce its rights under such Guarantee without first instituting a legal
proceeding against the relevant ACMI Trust, the Guarantee Trustee or any other
person or entity.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default with respect to a Guarantee, and after curing all Events of Default
that have occurred under a Guarantee, has undertaken to perform only such duties
as are specifically set forth in a Guarantee and, after the occurrence of an
event of default under a Guarantee, must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to this provision, the Guarantee Trustee is under no obligation
to exercise any of the powers vested in it by a Guarantee at the request of any
holder of Trust Preferred Securities unless it is offered adequate security and
indemnity as would satisfy a reasonable person in the position of the Guarantee
Trustee against the costs, expenses and liabilities that might be incurred
thereby.
TERMINATION OF THE GUARANTEE
Each Guarantee will terminate as to the Trust Preferred Securities issued
by the applicable ACMI Trust and be of no further force and effect upon full
payment of the Redemption Price of all Trust Preferred Securities of such ACMI
Trust, upon full payment of the amounts payable upon liquidation of such ACMI
Trust or upon distribution of Junior Subordinated Debentures held by such ACMI
Trust to the holders of the Trust Preferred Securities of such ACMI Trust. Each
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time any holder of the Trust Preferred Securities issued by the
applicable ACMI Trust must restore payment of any sums paid under such Trust
Preferred Securities or such Guarantee.
GOVERNING LAW
The Guarantee Agreement will be governed by and construed in accordance
with the laws of the State of California.
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<PAGE> 127
EXPENSE AGREEMENT
Pursuant to the Expense Agreement to be entered into between the Company
and each ACMI Trust under the applicable ACMI Trust Agreements, the Company will
irrevocably and unconditionally guarantee to each person or entity to whom such
ACMI Trust becomes indebted or liable, the full payment of any costs, expenses
or liabilities of such ACMI Trust (including, without limitation, expenses
relating to the Offering of the Trust Preferred Securities of such ACMI Trust
and any expenses the Property Trustee may incur relating to the enforcement of
the rights of the holders of the Trust Preferred Securities or the Junior
Subordinated Debentures related to such ACMI Trust pursuant to the applicable
Trust Agreement and the Indenture, respectively), other than obligations of an
ACMI Trust to pay to the holders of the Trust Preferred Securities or other
similar interests in such ACMI Trust the amounts due such holders pursuant to
the terms of the Trust Preferred Securities or such other similar interest, as
the case may be. The Expense Agreement may be enforced against the Company by
any person or entity to whom an ACMI Trust is or becomes indebted or liable.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
Junior Subordinated Debentures may be issued from time to time in one or
more series under an Indenture between the Company and Wilmington Trust Company,
as Indenture Trustee. The terms of the Junior Subordinated Debentures will
include those stated in the Indenture and in a Supplemental Indenture (as
defined below) and those made part of the Indenture by reference to the Trust
Indenture Act. The following summary does not purport to be complete and is
subject in all respects to the provision of, and is qualified in its entirety by
reference to, the Indenture, which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part, and the Trust Indenture Act.
Whenever particular provisions or defined terms in the Indenture are referred to
herein, such provisions or defined terms are incorporated by reference herein.
GENERAL
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Debt and Subordinated Debt
of the Company. The Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of the Company, including Senior Debt and Subordinated
Debt, whether under the Indenture or any existing or other indenture that the
Company may enter into in the future or otherwise. The Indenture does not limit
the aggregate principal amount of Junior Subordinated Debentures which may be
issued thereunder and provides that the Junior Subordinated Debentures may be
issued from time to time in one or more series. The Junior Subordinated
Debentures are issuable in one or more series pursuant to an indenture
supplemental to the Indenture or a resolution of the Company's Board of
Directors or a special committee thereof (each, a "Supplemental Indenture").
In the event Junior Subordinated Debentures are issued to an ACMI Trust or
a trustee of such trust in connection with the issuance of Trust Preferred
Securities by such ACMI Trust, such Junior Subordinated Debentures subsequently
may be distributed pro rata to the holders of such Trust Preferred Securities in
connection with termination of such ACMI Trust upon the occurrence of certain
events described in the Prospectus Supplement relating to such Trust Preferred
Securities. Only one series of Junior Subordinated Debentures will be issued to
an ACMI Trust or a trustee of such trust in connection with the issuance of
Trust Preferred Securities by such ACMI Trust.
Reference is made to the accompanying Prospectus Supplement for the
following terms of the series of Junior Subordinated Debentures being offered
thereby: (i) the specific title of such Junior Subordinated Debentures; (ii) any
limit on the aggregate principal amount of such Junior Subordinated Debentures;
(iii) the date or dates on which the principal of such Junior Subordinated
Debentures is payable and the right, if any, to extend such date or dates; (iv)
the rate or rates at which such Junior Subordinated Debentures will bear
interest or the method of determination of such rate or rates; (v) the date or
dates from which such interest shall accrue, the interest payment dates on which
such interest will be payable or the manner of determination of such interest
payment dates and the record dates for the determination of holders to whom
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<PAGE> 128
interest is payable on any such interest payment dates; (vi) the right, if any,
to extend the interest payment periods and the duration of such extension; (vii)
the period or periods within which, the price or prices at which, and the terms
and conditions upon which, such Junior Subordinated Debentures may be redeemed,
in whole or in part, at the option of the Company; (viii) the right and/or
obligation, if any, of the Company to redeem or purchase such Junior
Subordinated Debentures pursuant to any sinking fund or analogous provisions or
at the option of the holder thereof and the period or periods during which, the
price or prices at which, and the terms and conditions upon which, such Junior
Subordinated Debentures shall be redeemed or purchased, in whole or in part,
pursuant to such right and/or obligation; (ix) the terms of subordination; (x)
if other than denominations of $10 or any integral multiple thereof, the
denominations in which such Junior Subordinated Debentures are issuable in a
global security, and in such case, the identity of the depositary.
The Indenture does not contain any provisions that afford holders of Junior
Subordinated Debentures protection in the event of a highly leveraged
transaction involving the Company.
SUBORDINATION
The Junior Subordinated Debentures will be subordinated and junior in right
of payment to certain other indebtedness of the Company to the extent set forth
in the accompanying Prospectus Supplement.
REGISTRATION, DENOMINATION AND TRANSFER
Junior Subordinated Debentures of each series will be issued in registered
form and in either certificated form or represented by one or more global
securities. Junior Subordinated Debentures of each series will initially be
registered in the name of the Property Trustee. If the Junior Subordinated
Debentures are distributed to holders of Trust Preferred Securities of an ACMI
Trust, it is anticipated that the depository arrangements for such series of
Junior Subordinated Debentures will be substantially identical to those in
effect for the Trust Preferred Securities of such ACMI Trust set forth in an
accompanying Prospectus Supplement.
Payments on any series of Junior Subordinated Debentures, whether
represented by a global certificate or issued in certificated form, will be made
in the manner described in the accompanying Prospectus Supplement relating to
such series of Junior Subordinated Debentures, as described under "Description
of the Trust Preferred Securities -- Global Trust Preferred Securities."
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations and of a
like aggregate principal amount.
Junior Subordinated Debentures of each series may be presented for exchange
as provided above, and may be presented for registration of transfer (with the
form of transfer endorsed thereon, or a satisfactory written instrument of
transfer, duly executed), at the office of the securities registrar (the
"Securities Registrar") appointed under the applicable Indenture or at the
office of any transfer agent designated by the Company for such purpose without
service charge and upon payment of any taxes and other governmental charges as
described in the applicable Indenture. The Company will appoint the Indenture
Trustee under the Indenture as the Securities Registrar for each series of
Junior Subordinated Debentures. The Company may at any time designate additional
transfer agents with respect to any series of Junior Subordinated Debentures.
In the event of any redemption, neither the Company nor the Indenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures of such series during a period beginning at the
opening of business 15 days before the day of selection for redemption of the
Junior Subordinated Debentures of such series to be redeemed and ending at the
close of business on the date of mailing of the relevant notice of redemption or
(ii) transfer or exchange any Junior Subordinated Debentures so selected for
redemption, except in the case of any Junior Subordinated Debentures being
redeemed in part, any portion thereof not to be redeemed.
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<PAGE> 129
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal of and premium, if any, on any Junior Subordinated Debentures will
be made at the office of the Indenture Trustee, except that at the option of the
Company payment of any interest may be made (i) except in the case of Global
Junior Subordinated Debentures, by check mailed to the address of the person
entitled thereto as such address shall appear in the Securities Register, (ii)
by transfer to an account maintained by the person entitled thereto as specified
in the Securities Register, provided that proper transfer instructions have been
received by the regular record date or (iii) if the Junior Subordinated
Debentures are held by the Property Trustee, by agreement between the Company
and the Property Trustee. Payment of any interest on any Junior Subordinated
Debentures will be made to the person in whose name such Junior Subordinated
Debenture is registered at the close of business on the regular record date for
such interest. The Company may at any time designate additional Paying Agents or
rescind the designation of any Paying Agent; however, the Company will at all
times be required to maintain a Paying Agent in each place of payment for the
Junior Subordinated Debentures of each series. Any monies deposited with the
Indenture Trustee or any Paying Agent, or then held by the Company in trust, for
the payment of the principal of (and premium, if any) or interest on any Junior
Subordinated Debentures and remaining unclaimed for two years after such
principal, premium or interest has become due and payable shall, at the request
of the Company, be repaid to the Company and the holder of such Junior
Subordinated Debenture shall thereafter look, as a general unsecured creditor,
only to the Company for payment thereof.
GLOBAL SECURITIES
If any Junior Subordinated Debentures of a series are represented by one or
more global securities (each, a "Global Security"), the applicable Prospectus
Supplement will describe the circumstances, if any, under which beneficial
owners of interests in any such Global Security may exchange such interests for
Junior Subordinated Debentures of such series and of like tenor and principal
amount in any authorized form and denomination. Principal of and premium, if
any, and interest on a Global Security will be payable in the manner described
in the applicable Prospectus Supplement.
The specific terms of the depositary arrangement with respect to any
portion of a series of Junior Subordinated Debentures to be represented by a
Global Security will be described in the applicable Prospectus Supplement.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Indenture
Trustee, with the consent of the holders of not less than a majority in
principal amount of the Junior Subordinated Debentures of each series which are
affected by the modification, to modify the Indenture or any supplemental
indenture affecting that series or the rights of the holders of that series of
Junior Subordinated Debentures; provided that no such modification may, without
the consent of the holder of each outstanding Junior Subordinated Debenture
affected thereby, (i) change or extend the fixed maturity of any Junior
Subordinated Debentures of any series, or reduce the principal amount thereof,
or reduce the rate or extend the time of payment of interest thereon, or reduce
any premium payable upon the redemption thereof, without the consent of the
holder of each Junior Subordinated Debenture so affected or (ii) reduce the
percentage of principal amount of Junior Subordinated Debentures the holders of
which are required to consent to any such supplemental indenture.
In addition, the Company and the Indenture Trustee may execute, without the
consent of any holder of Junior Subordinated Debentures, amend, waive or
supplement the Indenture for certain other specified purposes, including the
creation of any new series of Junior Subordinated Debentures.
DEBENTURE EVENTS OF DEFAULT
With respect to a particular series of Junior Subordinated Debentures, the
Indenture provides (or the Supplemental Indenture for such series will provide)
that any one or more of the following described events
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<PAGE> 130
which has occurred and is continuing constitutes a "Debenture Event of Default"
with respect to such series of Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures of that series, when due (subject to the deferral of any due
date in the case of an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated
Debentures of that series when due whether at maturity, upon redemption, by
declaration or otherwise; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Indenture (other than those specifically
relating to another series) for 90 days after written notice to the Company
from the Indenture Trustee or to the Company and the Indenture Trustee by
the holders of at least 25% in aggregate outstanding principal amount of
the Junior Subordinated Debentures of that series; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of any
series of Junior Subordinated Debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Indenture Trustee for the series. The Indenture Trustee or the holders of not
less than 25% in aggregate outstanding principal amount of the Junior
Subordinated Debentures of that series may declare the principal due and payable
immediately upon a Debenture Event of Default. If the Indenture Trustee or the
holders of the Junior Subordinated Debentures of that series fail to make such
declaration, the holders of at least 25% in aggregate Liquidation Amount of the
Trust Preferred Securities of that series shall have such right. The holders of
a majority in aggregate outstanding principal amount of the Junior Subordinated
Debentures of that series may annul such declaration and waive the default if
the default (other than the non-payment of the principal of the Junior
Subordinated Debentures of that series which has become due solely by such
acceleration) has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Indenture Trustee. Should the holders of the Junior
Subordinated Debentures of that series fail to annul such declaration and waive
such default, the holders of a majority in aggregate Liquidation Amount of the
Trust Preferred Securities of the ACMI Trust related to that series of Junior
Subordinated Debentures shall have such right.
The holders of a majority in aggregate outstanding principal amount of any
series of Junior Subordinated Debentures affected thereby may, on behalf of the
holders of all the Junior Subordinated Debentures of that series, waive any past
default, except a default in the payment of principal or interest (unless such
default has been cured and a sum sufficient to pay all matured installments of
interest and principal due otherwise than by acceleration has been deposited
with the Indenture Trustee) or a default in respect of a covenant or provision
which under the Indenture cannot be modified or amended without the consent of
the holder of each outstanding Junior Subordinated Debenture of such series.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest, principal
or premium (if any) on a series of Junior Subordinated Debentures on the date
such interest, principal or premium is otherwise payable, a holder of Trust
Preferred Securities of the ACMI Trust related to that series of Junior
Subordinated Debentures may institute a legal proceeding directly against the
Company for enforcement of payment to such holder of the principal of or
interest on such Junior Subordinated Debentures having a principal amount equal
to the aggregate premium (if any) or Liquidation Amount of the Trust Preferred
Securities of such holder (a "Direct Action"). The Company may not amend the
Indenture to remove the foregoing right to bring a Direct Action without the
prior written consent of the holders of all of the Trust Preferred Securities
outstanding. The Company shall have the right under the Indenture to set off any
payment made to such holder of Trust Preferred Securities by the Company in
connection with a Direct Action.
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<PAGE> 131
The holders of the Trust Preferred Securities will not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures unless there
shall have been an event of default under the Trust Agreement.
CONSOLIDATION, MERGER AND SALE
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, and no Person shall consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless (i) in case the Company
consolidates with or merges into another Person or conveys, transfers or leases
its properties and assets substantially as an entirety to any Person, the
successor Person is organized under the laws of the United States or any state
or the District of Columbia, and such successor Person expressly assumes the
Company's obligations on the Junior Subordinated Debentures of any series issued
under the Indenture; (ii) immediately after giving effect thereto, no Debenture
Event of Default, and no event which, after notice or lapse of time or both,
would become a Debenture Event of Default, shall have occurred and be
continuing; and (iii) certain other conditions as prescribed in the Indenture
are met.
The general provisions of the Indenture do not afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged or other
similar transaction involving the Company that may adversely affect holders of
the Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures of a series not previously delivered to the Indenture
Trustee for cancellation (i) have become due and payable or (ii) will become due
and payable at their Stated Maturity within one year, and the Company deposits
or causes to be deposited with the Indenture Trustee funds, in trust, for the
purpose and in an amount in the currency or currencies in which the Junior
Subordinated Debentures of such series are payable sufficient to pay and
discharge the entire indebtedness on the Junior Subordinated Debentures of such
series not previously delivered to the Indenture Trustee for cancellation, for
the principal and interest to the date of the deposit or to the Stated Maturity,
as the case may be, then the Indenture will cease to be of further effect
(except as to the Company's obligations to pay all other sums due pursuant to
the Indenture with respect to such series of Junior Subordinated Debentures and
to provide the officers' certificates and opinions of counsel described therein)
and the Company will be deemed to have satisfied and discharged the Indenture
with respect to such series.
COVENANTS OF THE COMPANY
The Company will covenant in the Indenture, as to the Junior Subordinated
Debentures of a series, that if and so long as (i) the Property Trustee on
behalf of an ACMI Trust is the holder of all such Junior Subordinated
Debentures, (ii) a Tax Event in respect of such ACMI Trust has occurred and is
continuing and (iii) the Company has elected, and has not revoked such election,
to pay Additional Sums in respect of the Trust Preferred Securities of such ACMI
Trust, the Company will pay to such ACMI Trust such Additional Sums. The Company
also will covenant, as to the Junior Subordinated Debentures of each series, (i)
to maintain directly or indirectly 100% ownership of the Common Securities of
such ACMI Trust to which any series of Junior Subordinated Debentures have been
issued, provided that certain successors which are permitted to do so pursuant
to the Indenture may succeed to the Company's ownership of the Common
Securities, (ii) not to voluntarily dissolve, wind up or liquidate such ACMI
Trust, except (a) in connection with a distribution of Junior Subordinated
Debentures to the holders of the Trust Preferred Securities of such ACMI Trust
in liquidation of such ACMI Trust or (b) in connection with certain mergers,
consolidations, or amalgamations permitted by the Trust Indenture and (iii) to
use its reasonable efforts, consistent with the terms and provisions of the
Trust Indenture, to cause such ACMI Trust to remain classified as a grantor
trust and not an association taxable as a corporation for United States federal
income tax purposes.
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<PAGE> 132
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of the State of California, except
that the immunities and standard of care of the Indenture Trustee will be
governed by Delaware law.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures of a series, unless
offered reasonable indemnity by such holder against the costs, expenses and
liabilities which might be incurred thereby. The Indenture Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Indenture Trustee reasonably
believes that repayment or adequate indemnity is not reasonably assured to it.
PLAN OF DISTRIBUTION
The Company may sell any series of Junior Subordinated Debentures and the
ACMI Trusts may sell the Trust Preferred Securities in one or more of the
following ways from time to time: (i) to or through underwriters or dealers,
(ii) directly to purchasers or (iii) through agents. The Prospectus Supplement
with respect to any Offered Securities will set forth (i) the terms of the
offering of such Offered Securities, including the name or names of any
underwriters, dealers or agents, (ii) the purchase price of such Offered
Securities and the proceeds to the Company or the applicable ACMI Trust, as the
case may be, from such sale, (iii) any underwriting discounts and commissions or
agency fees and other items constituting underwriters' or agents' compensation,
(iv) any initial public offering prices, (v) any discounts or concessions
allowed or reallowed or paid to dealers and (vi) any securities exchange or
other securities market on which such Offered Securities may be listed.
If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The Offered Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. The underwriter or underwriters with
respect to a particular underwritten offering of Offered Securities will be
named in the Prospectus Supplement relating to such offering and, if any
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of the Prospectus Supplement. Unless otherwise set forth
in the Prospectus Supplement relating thereto, the obligations of the
underwriters to purchase the Offered Securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all the
Offered Securities if any are purchased.
If dealers are utilized in the sale of Offered Securities, the Company or
the applicable ACMI Trust will sell such Offered Securities to the dealers as
principals. The dealers may then resell such Offered Securities to the public at
varying prices to be determined by such dealers at the time of resale. The names
of the dealers and the terms of the transaction will be set forth in the
Prospectus Supplement relating thereto.
Any series of Junior Subordinated Debentures may be sold from time to time
either directly by the Company or through agents designated by the Company. Any
series of Trust Preferred Securities may be sold from time to time either
directly by the applicable ACMI Trust or by agents of the applicable ACMI Trust
designated by such ACMI Trust. Any agent involved in the offer or sale of the
Offered Securities in respect to which this Prospectus is delivered will be
named, and any commissions payable by the Company or the applicable ACMI Trust
to such agent will be set forth, in the Prospectus Supplement relating thereto.
Unless otherwise indicated in the Prospectus Supplement, any such agent will be
acting on a best efforts basis for the period of its appointment.
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<PAGE> 133
The Junior Subordinated debentures may be sold directly by the Company and
the Trust Preferred Securities may be sold directly by the applicable ACMI Trust
to institutional investors or others who may be deemed to be underwriters within
the meaning of the Securities Act with respect to any resale thereof. The terms
of any such sales will be described in the Prospectus Supplement relating
thereto.
If so indicated in the Prospectus Supplement, the Company or the applicable
ACMI Trust will authorize agents, underwriters or dealers to solicit offers from
certain types of institutions to purchase Offered Securities from the Company or
such ACMI Trust at the public offering price set forth in the Prospectus
Supplement pursuant to delayed delivery contracts providing for payment and
delivery on a specified date in the future. Such contracts will be subject only
to those conditions set forth in the Prospectus Supplement, and the Prospectus
Supplement will set forth the commission payable for solicitation of such
contracts.
Underwriters, dealers and agents may be entitled under agreements entered
into with the Company or the applicable ACMI Trust (or both) to indemnification
by the Company or such ACMI Trust (or both) against certain civil liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which such underwriters, dealers or agents may be required to make
in respect thereof. Underwriters, dealers and agents may be customers of, engage
in transactions with, or perform services for the Company and its affiliates in
the ordinary course of business.
Each series of Offered Securities will be a new issue of securities and
will have no established trading market. Any underwriters to whom Offered
Securities are sold by the Company or by an ACMI Trust for public offering and
sale may make a market in such Offered Securities, but such underwriters will
not be obligated to do so and may discontinue any market making at any time
without notice. The Offered Securities may or may not be listed on a national
securities exchange. No assurance can be given that there will be a market for
the Offered Securities.
LEGAL MATTERS
The validity of the Guarantees and the Junior Subordinated Debentures will
be passed upon for the Company by Cooley Godward LLP, counsel to the Company.
Certain matters of Delaware law relating to the validity of the Trust Preferred
Securities, the enforceability of the Trust Agreement and the creation of the
Trust will be passed upon by Richards, Layton & Finger, P.A., Wilmington,
Delaware, special Delaware counsel to the Company and the Trust. Richards,
Layton & Finger, P.A., will also pass on certain matters on behalf of Wilmington
Trust Company in connection with the offering. Cooley Godward LLP will rely on
the opinions of Richards, Layton & Finger, P.A. as to certain matters of
Delaware law. Certain matters relating to United States federal income tax
considerations will be passed upon for the Company by Cooley Godward LLP.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the years in the three-year period ended December 31, 1997 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.
The Combined Balance Sheets of Suncoast Toys, Inc., NW Toys Co. and Oregon
Coin Company as of December 31, 1996 and 1997 and the Combined Statements of
Income, Stockholders' Equity and Cash Flows for each of the three years in the
period ended December 31, 1997 included in the Prospectus Supplement have been
included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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Inside back cover: American Coin Merchandising, Inc. logo; caption "Kiddie
Rides" over a picture of a kiddie ride shaped like an apple and a picture of
another kiddie ride shaped like Spiderman over the caption "Examples of the
Company's Licensed Kiddie Rides."
Picture of a bulk vending machine with various items inside the machines over
the caption "Electronic Bulk Vending Machines."
<PAGE> 135
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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 SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY AMERICAN COIN MERCHANDISING, INC., AMERICAN COIN MERCHANDISING TRUST I OR THE
UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN
THE SECURITIES OFFERED BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY THE
SECURITIES 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 SUPPLEMENT OR THE
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 SUPPLEMENT
Prospectus Summary............................ S-5
Risk Factors.................................. S-14
Use of Proceeds............................... S-24
Accounting Treatment.......................... S-24
Capitalization................................ S-25
Selected Financial and Operating Data......... S-26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. S-29
Business...................................... S-36
Management.................................... S-46
Principal Stockholders........................ S-49
Description of the Trust Preferred
Securities.................................. S-51
Description of the Junior Subordinated
Debentures.................................. S-63
Book-Entry Issuance........................... S-71
Description of the Guarantee.................. S-72
Expense Agreement............................. S-74
Relationship among the Trust Preferred
Securities, the Junior Subordinated
Debentures and the Guarantee................ S-75
Material Federal Income Tax Consequences...... S-77
ERISA Considerations.......................... S-81
Underwriting.................................. S-83
Legal Matters................................. S-84
Experts....................................... S-84
Index to Financial Statements................. F-1
PROSPECTUS
Available Information......................... 2
Incorporation of Documents by Reference....... 3
The Company................................... 3
The American Coin Merchandising Trusts........ 3
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends............... 4
Use of Proceeds............................... 4
Description of the Trust Preferred
Securities.................................. 5
Description of the Guarantees................. 6
Expense Agreement............................. 8
Description of the Junior Subordinated
Debentures.................................. 8
Plan of Distribution.......................... 13
Legal Matters................................. 14
Experts....................................... 14
</TABLE>
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1,700,000 TRUST PREFERRED SECURITIES
AMERICAN COIN
MERCHANDISING
TRUST I
ASCENDING RATE CUMULATIVE TRUST
TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER
TRUST PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY
GUARANTEED BY
AMERICAN COIN LOGO
--------------------
PROSPECTUS SUPPLEMENT
--------------------
EVEREN SECURITIES, INC.
SEPTEMBER 23, 1998
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