<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-26580
AMERICAN COIN MERCHANDISING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1093721
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5660 CENTRAL AVENUE, BOULDER, COLORADO 80301
(Address of principal executive offices)
(Zip Code)
(303) 444-2559
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OCTOBER 28, 1998
----- ----------------
Common Stock, $0.01 par value 6,470,403 shares
<PAGE> 2
AMERICAN COIN MERCHANDISING, INC.
INDEX
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION. PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
September 30, 1998 and December 31, 1997..................................... 3
Consolidated Condensed Statements of Earnings for the Three Months and
Nine Months Ended September 30, 1998 and 1997................................ 4
Consolidated Condensed Statement of Stockholders' Equity for the
Nine Months Ended September 30, 1998......................................... 5
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997................................ 6
Notes to Consolidated Condensed Financial Statements........................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 9
PART II OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K.................................................... 13
</TABLE>
2
<PAGE> 3
AMERICAN COIN MERCHANDISING, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 3,438,000 $ 1,929,000
Trade accounts and other receivables ................................................ 823,000 979,000
Inventories ......................................................................... 12,144,000 5,625,000
Prepaid expenses and other assets ................................................... 1,856,000 365,000
------------- -------------
Total current assets ............................................................ 18,261,000 8,898,000
------------- -------------
Property and equipment, at cost:
Vending machines .................................................................... 43,643,000 22,829,000
Vehicles ............................................................................ 7,164,000 4,652,000
Office equipment, furniture and fixtures ............................................ 2,468,000 1,242,000
------------- -------------
53,275,000 28,723,000
Less accumulated depreciation ....................................................... (11,642,000) (7,557,000)
------------- -------------
Property and equipment, net ..................................................... 41,633,000 21,166,000
------------- -------------
Placement fees, net of accumulated amortization of $334,000 in 1998 and $155,000 in 1997 648,000 281,000
Cost in excess of assets acquired and other intangible assets, net of accumulated
amortization of $1,183,000 in 1998 and $393,000 in 1997 ............................. 48,957,000 6,682,000
Other assets, net of accumulated amortization of $91,000 in 1998 ....................... 893,000 50,000
------------- -------------
Total assets .................................................................... $ 110,392,000 $ 37,077,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ................................................... $ 1,910,000 $ 945,000
Current portion of notes payable to Control Group ................................... -- 674,000
Income taxes payable ................................................................ 441,000 317,000
Accounts payable .................................................................... 10,897,000 1,680,000
Accrued commissions ................................................................. 1,353,000 1,001,000
Other accrued expenses .............................................................. 487,000 655,000
------------- -------------
Total current liabilities ....................................................... 15,088,000 5,272,000
Long-term debt, net of current portion ................................................. 44,080,000 1,292,000
Other liabilities ...................................................................... 2,000,000 --
Deferred income taxes .................................................................. 421,000 421,000
------------- -------------
Total liabilities ............................................................... 61,589,000 6,985,000
------------- -------------
Company obligated mandatorily redeemable preferred securities of subsidiary trust
holding solely junior subordinated debentures ....................................... 15,618,000 --
Stockholders' equity:
Preferred stock, $.10 par value (Authorized 500,000 shares; none issued) ............ -- --
Common stock, $.01 par value (Authorized 20,000,000 shares; issued 6,470,403
in 1998 and 6,452,904 in 1997) .................................................. 65,000 65,000
Additional paid-in-capital .......................................................... 21,963,000 22,352,000
Unearned stock option compensation .................................................. (4,000) (21,000)
Retained earnings ................................................................... 11,161,000 7,696,000
------------- -------------
Total stockholders' equity ...................................................... 33,185,000 30,092,000
------------- -------------
Total liabilities and stockholders' equity ...................................... $ 110,392,000 $ 37,077,000
============= =============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
AMERICAN COIN MERCHANDISING, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Vending.................................................... $26,462,000 $13,503,000 $64,170,000 $36,151,000
Franchise and other ........................................ 981,000 1,173,000 2,996,000 4,672,000
----------- ----------- ----------- -----------
Total revenue .......................................... 27,443,000 14,676,000 67,166,000 40,823,000
----------- ----------- ----------- -----------
Cost of revenue:
Vending .................................................... 18,586,000 9,637,000 45,255,000 25,679,000
Franchise and other ........................................ 604,000 705,000 1,856,000 3,014,000
----------- ----------- ----------- -----------
Total cost of revenue .................................. 19,190,000 10,342,000 47,111,000 28,693,000
----------- ----------- ----------- -----------
Gross profit ........................................... 8,253,000 4,334,000 20,055,000 12,130,000
General and administrative expenses ........................... 5,632,000 2,523,000 13,019,000 7,248,000
----------- ----------- ----------- -----------
Operating earnings ..................................... 2,621,000 1,811,000 7,036,000 4,882,000
Interest expense, related parties ............................. 4,000 18,000 23,000 63,000
Interest expense, other, net .................................. 1,226,000 199,000 1,686,000 421,000
----------- ----------- ----------- -----------
Earnings before income taxes ........................... 1,391,000 1,594,000 5,327,000 4,398,000
Provision for income taxes .................................... 485,000 588,000 1,862,000 1,627,000
=========== =========== =========== ===========
Net earnings........................................... $ 906,000 $ 1,006,000 $ 3,465,000 $ 2,771,000
=========== =========== =========== ===========
Basic earnings per share of common stock................ $ 0.14 $ 0.18 $ 0.54 $ 0.52
Diluted earnings per share of common stock.............. $ 0.14 $ 0.18 $ 0.52 $ 0.51
Basic weighted average common shares ................... 6,470,000 5,450,000 6,465,000 5,365,000
Diluted weighted average common shares ................. 6,636,000 5,633,000 6,649,000 5,440,000
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
AMERICAN COIN MERCHANDISING, INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNEARNED
STOCK TOTAL
ADDITIONAL OPTION STOCK-
COMMON PAID-IN COMPEN- RETAINED HOLDERS'
STOCK CAPITAL SATION EARNINGS EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997 .................. $ 65,000 $ 22,352,000 $ (21,000) $ 7,696,000 $ 30,092,000
Acquisition of 70,000 warrants to
purchase common stock ......... -- (492,000) -- -- (492,000)
Amortization of deferred
compensation .................. -- -- 15,000 -- 15,000
Termination of employee stock
options ....................... -- (2,000) 2,000 -- --
Exercise of employee stock
options ....................... -- 105,000 -- -- 105,000
Net earnings .................... -- -- -- 3,465,000 3,465,000
------------ ------------ ------------ ------------ ------------
SEPTEMBER 30, 1998 ................. $ 65,000 $ 21,963,000 $ (4,000) $ 11,161,000 $ 33,185,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
AMERICAN COIN MERCHANDISING, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net earnings ................................................. $ 3,465,000 $ 2,771,000
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization ............................ 5,291,000 2,230,000
Compensation expense related to stock options ............ 15,000 16,000
Changes in operating assets and liabilities:
Trade accounts and other receivables ................. 113,000 28,000
Inventories .......................................... (3,611,000) (1,598,000)
Prepaid expenses and other assets .................... (2,338,000) (195,000)
Income taxes payable ................................. 124,000 245,000
Accounts payable and accrued expenses ................ 8,901,000 1,463,000
------------ ------------
Net cash provided by operating activities .............. 11,960,000 4,960,000
------------ ------------
Investing activities:
Acquisitions of property and equipment, net .................. (19,709,000) (8,552,000)
Acquisition of franchisees and others ........................ (43,026,000) (993,000)
Placement fees ............................................... (536,000) (215,000)
------------ ------------
Net cash used in investing activities .................. (63,271,000) (9,760,000)
------------ ------------
Financing activities:
Issuance of company obligated manditorily redeemable preferred
securities, net of discount and issuance costs ............. 15,618,000 --
Net borrowings on credit facility ............................ 39,310,000 5,187,000
Principal payments on long-term debt ......................... (1,047,000) (322,000)
Principal payments on notes payable to Control Group ......... (674,000) (675,000)
Acquisition of warrants ...................................... (492,000) --
Exercise of employee stock options ........................... 105,000 31,000
------------ ------------
Net cash provided by financing activities .............. 52,820,000 4,221,000
------------ ------------
Net increase (decrease) in cash and cash equivalents ... 1,509,000 (579,000)
Cash and cash equivalents at beginning of period ................ 1,929,000 771,000
============ ============
Cash and cash equivalents at end of period ...................... $ 3,438,000 $ 192,000
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE> 7
AMERICAN COIN MERCHANDISING, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
American Coin Merchandising, Inc., d/b/a Sugarloaf Creations, Inc. and
American Coin Merchandising Trust I (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, kiddie rides and video equipment that are located
primarily in supermarkets and mass merchandisers. At September 30, 1998, the
Company had 41 field offices operating in 41 states and there were 16 Company
franchises in operation.
The accompanying consolidated condensed financial statements have been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Certain amounts for prior periods have been reclassified to conform
to the September 30, 1998 presentation. Although the Company believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these consolidated condensed financial statements be read in
connection with the financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
In the opinion of the Company, the accompanying consolidated condensed
financial statements include all adjustments (consisting of normal recurring
accruals and adjustments) required to present fairly the Company's financial
position at September 30, 1998 and December 31, 1997, and the results of its
operations for each of the three month and nine month periods ended September
30, 1998 and 1997, and the cash flows for each of the nine month periods then
ended.
The operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998.
2. SUPPLEMENTAL DISCLOURES OF CASH FLOW INFORMATION
A schedule of supplemental cash flow information follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Cash paid during the period:
Interest paid............................................................ $1,599,000 $ 511,000
Income taxes paid........................................................ 1,734,000 1,382,000
Significant noncash investing and financing activity:
Notes payable issued for acquisition of franchisees and others........... 5,490,000 825,000
</TABLE>
3. MANDATORILY REDEEMABLE PREFERRED SECURITITES
In September 1998, American Coin Merchandising Trust I (the "Trust"), the
Company's wholly-owned subsidiary trust created under the laws of the State of
Delaware, completed a public of offering of $17 million of Ascending Rate
Cumulative Trust Preferred Securities (the "Trust Preferred Securities"). The
sole assets of the Trust are American Coin Merchandising, Inc. Ascending Rate
Junior Subordinated Debentures (the "Subordinated Debentures") due September 15,
2028. The obligations of the Trust related to the Trust Preferred Securities are
fully and unconditionally guaranteed by the Company. Distributions on the Trust
Preferred Securities are payable quarterly by the Trust. The Trust Securities
are subject to mandatory redemption upon the repayment of the Subordinated
Debentures at their stated maturity at $10 per Trust Preferred Security.
The Company may cause the Trust to defer the payment of distributions for
successive periods up to eight consecutive quarters. During such periods,
accrued distributions on the Trust Preferred Securities will compound quarterly
and the Company may not declare or pay distributions on its common stock or debt
securities that rank equal or junior to the Trust Preferred Securities.
Issuance costs of approximately $1.4 million related to the Trust Preferred
Securities are deferred and are being amortized over the period until mandatory
redemption at September 15, 2028.
7
<PAGE> 8
AMERICAN COIN MERCHANDISING, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3. 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 weighted average number
of shares used in the computation of basic earnings per share were 6,470,039 and
5,449,676 for the three months ended September 30, 1998 and 1997 and 6,465,389
and 5,365,474 for the nine months ended September 30, 1998 and 1997,
respectively. The weighted average number of shares used in the computation of
diluted earnings per share were 6,636,472 and 5,633,213 for the three months
ended September 30, 1998 and 1997 and 6,649,333 and 5,440,304 for the nine
months ended September 30, 1998 and 1997, respectively.
4. INCOME TAXES
Quarterly income taxes are computed using the anticipated effective tax
rate for the year.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Statements in this report that are not purely historical are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements with respect to the financial condition
and results of operations of the Company involve risks and uncertainties related
to the increase in expenses related to acquisitions and the Company's ability to
integrate acquired businesses. These factors are more fully discussed in the
Company's Prospectus dated September 23, 1998, under the headings "Risk
Factors-Growth and Management of Growth" and "Risk Factors-Integration of
Acquisitions." In addition, the Company's results could also be affected by a
number of other risks and uncertainties which are more fully discussed under the
headings "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Prospectus dated September
23, 1998.
GENERAL
Substantially all of the Company's revenue and gross profit is derived from
Company-owned Shoppes. The Company's revenue and gross profit in a particular
period is directly related to the number of Shoppes in operation during the
period. Management believes that the Company's business is somewhat seasonal,
with average revenue per machine per week greater during the Easter and
Christmas periods. Vending revenue represents cash receipts from customers using
vending machines and is recognized when collected. The cost of vending revenue
is comprised of the cost of vended product, 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 franchisees. Product sold to the franchisees consists of
goods to vend in Shoppes. Equipment sales to the franchisees have been done on a
pass-through basis from the Company's main suppliers. The Company anticipates
that franchise and other revenue will decline in the future as a result of the
Company's acquisition of franchises.
REVENUE
Total revenue for the first nine months of 1998 increased 64.5% to $67.2
million from $40.8 million for the same period in 1997. For the third quarter of
1998, total revenue increased 87.0% to $27.4 million as compared to $14.7
million for the same period in 1997.
Vending revenue increased $28.0 million or 77.5% for the first nine months
of 1998 to $64.2 million from $36.2 million for the comparable period in 1997 as
a result of a 72.7% increase in the average number of Shoppes in place during
the first nine months of 1998 compared to the average number in place during the
same period in 1997. For the third quarter of 1998, vending revenue increased
$13.0 million or 96.0% to $26.5 million as compared to the same period in 1997.
The average number of machines in place during the third quarter of 1998
increased by 88.9% as compared to the third quarter of 1997. The average number
of Shoppes in place during the three months and nine months ended September 30,
1998 includes the acquisition of the operating assets (including approximately
1,380 Shoppes) of a significant franchisee that occurred on June 12, 1998 and
another franchisee that occurred on September 16, 1998.
The Company has recently experienced substantial growth, however, there can
be no assurance that the Company will continue to grow at historical rates or at
all. The Company's ability to generate increased revenue and achieve higher
levels of profitability will depend upon its ability and the ability of its
franchisees to place additional Shoppes as well as to maintain or increase the
average financial performance of the Shoppes. The Company's ability to place
additional Shoppes depends on a number of factors beyond the Company's control,
including general business and economic conditions. Installation of additional
Shoppes will also depend, in part, upon the Company's ability to secure
additional national and regional supermarket, mass merchandiser and restaurant
chain accounts and to obtain approval to place additional Shoppes in individual
locations of such accounts. The Company, its franchisees and their suppliers
also may be unable to place and adequately service additional Shoppes.
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
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED).
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.
Franchise and other revenue decreased $1.7 million or 35.9% to $3.0 million
for the first nine months of 1998 as compared to the same period in 1997 due to
the acquisition of franchises by the Company and a reduction in the number of
machines sold to the franchisees. For the third quarter of 1998, franchise and
other revenue decreased $192,000 or 16.4% to $981,000 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 nine months of 1998 increased
$19.6 million or 76.2% to $45.3 million from $25.7 million for the comparable
period in 1997. The vending operation's contribution to gross profit for the
first nine months of 1998 increased to $18.9 million, which represents an 80.6%
increase over gross profit from vending operations realized in the same period
in 1997. Vending gross profit realized during the first nine months of 1998 was
29.5% of vending revenue, as compared to 29.0% for the same period in 1997. For
the third quarter of 1998, the cost of vending increased $8.9 million or 92.9%
to $18.6 million from $9.6 million for the comparable period in 1997. Vending
gross profit realized during the third quarter of 1998 was $7.9 million or 29.8%
of vending revenue as compared to $3.9 million or 28.6% for the third quarter of
1997.
During the third quarter of 1998, the Company found it necessary to handle
its own plush product warehousing in the Seattle area due to increased product
requirements and insufficient space available at the public warehouse previously
used by the Company. Approximately 90% of the additional cost associated with
moving product from two warehouse facilities will negatively affect vending
gross profit during the fourth quarter of 1998. The remaining 10% of additional
cost will negatively affect gross profit on franchise and other revenue.
Substantially all the Company's plush toys and other products dispensed
from the Shoppes are produced by foreign manufacturers. A majority are purchased
directly by the Company from manufacturers in the People's Republic of China
("China"). The Company purchases its other products indirectly from vendors who
obtain a significant percentage of such products from foreign manufacturers. As
a result, the Company is subject to changes in governmental policies, the
imposition of tariffs, import and export controls, transportation delays and
interruptions, political and economic disruptions and labor strikes which could
disrupt the supply of products from such manufacturers. Among other things, the
loss of China's "most favored nation" status under U.S. tariff laws could result
in a substantial increase in the import duty of certain products manufactured in
China, which could result in substantially increased costs for certain products
purchased by the Company which could have a material adverse effect on the
Company's financial condition and results of operations.
Gross profit on franchise and other revenue for the first nine months of
1998 decreased to $1.1 million or 38.1% of franchise and other revenue, which is
2.6 percentage points higher than the gross margin achieved for the same period
in 1997. For the third quarter of 1998, gross profit on franchise and other
revenue decreased to $377,000 or 38.4% of franchise and other revenue, as
compared to $468,000 or 39.9% of franchise and other revenue for the third
quarter of 1997. The decrease in gross profit resulted primarily from a
reduction in franchise royalties.
OPERATING EXPENSE
General and administrative expenses for the first nine months of 1998
increased $5.8 million to $13.0 million or 19.4% of total revenue, as compared
to $7.2 million or 17.8% of total revenue for the comparable period in 1997. The
increase in general and administrative expenses result primarily from additional
operating and satellite offices opened by the Company during the past year and
the amortization of goodwill and other general and administrative expenses
related to the acquisitions made by the Company during the second and third
quarters of 1998. The Company anticipates higher general and administrative
expenses to continue during the fourth quarter and into 1999. The higher general
and administrative expenses also reflect redundant accounting and management
information functions associated with the Company's recent acquisitions. The
Company plans to integrate and absorb these separate functions and eliminate
certain duplicative costs during the first quarter of 1999.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED).
OPERATING EARNINGS
Operating earnings for the first nine months of 1998 increased 44.1% to
$7.0 million, or 10.5% of total revenue, as compared to $4.9 million, or 12.0%
of total revenue for the comparable period in 1997. The increase in operating
earnings results primarily from the 72.7% increase in the average number of
Shoppes in place during the first nine months of 1998 compared to the average
number in place for the comparable period in 1997 offset by increases in general
and administrative expenses.
NON OPERATING INCOME (EXPENSE)
Interest expense for the first nine months of 1998 increased $1.2 million
to $1.7 million as compared to the same period in 1997. Interest expense for the
third quarter of 1998 increased $1.0 million to $1.2 million primarily as a
result of the increase in debt resulting from the acquisitions made by the
Company during 1998. 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 nine months of 1998 increased 25.0% to $3.5
million, or 5.2% of total revenue, as compared to net earnings of $2.8 million
for the comparable period in 1997. Diluted earnings per share for the first nine
months of 1998 increased 2% to $0.52, as compared to $0.51 for the comparable
period in 1997. Diluted weighted average common shares for the first nine months
of 1998 increased 22.2% to 6,649,333, as compared to 5,440,304 for the
comparable period in 1997.
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 investment in
skill-crane machines and other amusement devices, the acquisition of franchisees
and other amusement vending businesses and payment of long-term borrowings.
Net cash provided by operating activities was $12.0 million and $5.0
million for the nine months ended September 30, 1998 and 1997, respectively. 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 Company's credit facility
or the sale of securities.
Net cash used in investing activities was $63.3 million and $9.8 million
for the nine months ended September 30, 1998 and 1997, respectively. Capital
expenditures for the nine months ended September 30, 1998 and 1997 amounted to
$19.7 million and $8.6 million, respectively, of which $16.4 million and $6.4
million was represented by the acquisition of skill-crane and other machines.
The acquisition of franchisees and other amusement vending businesses in 1998
and 1997 used $43.0 million and $993,000, respectively.
Net cash provided by financing activities was $52.8 million and $4.2
million for the nine months ended September 30, 1998 and 1997, respectively. In
1998, financing activities consist primarily of the issuance of trust preferred
securities, advances on the Company's credit facility and other debt obligations
and the repurchase of warrants.
In September 1998, American Coin Merchandising Trust I (the "Trust"), the
Company's wholly-owned subsidiary trust created under the laws of the State of
Delaware, completed a public of offering of $17 million of Ascending Rate
Cumulative Trust Preferred Securities (the "Trust Preferred Securities"). The
sole assets of the Trust are American Coin Merchandising, Inc. Ascending Rate
Junior Subordinated Debentures (the "Subordinated Debentures") due September 15,
2028. The obligations of the Trust related to the Trust Preferred Securities are
fully and unconditionally guaranteed by the Company. Distributions on the Trust
Preferred Securities are payable quarterly by the Trust. The Trust Securities
are subject to mandatory redemption upon the repayment of the Subordinated
Debentures at their stated maturity at $10 per Trust Preferred Security.
The Company may cause the Trust to defer the payment of distributions for
successive periods up to eight consecutive quarters. During such periods,
accrued distributions on the Trust Preferred Securities will compound quarterly
and the Company may not declare or pay distributions on its common stock or debt
securities that rank equal or junior to the Trust Preferred Securities.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED).
Issuance costs of approximately $1.4 million related to the Trust Preferred
Securities are deferred and are being amortized over the period until mandatory
redemption at September 15, 2028. Approximately $14.5 million of the proceeds
were used to repay a portion of the indebtedness outstanding under the Company's
Credit Facility.
Under its current reducing revolving loan agreement (the "Credit
Facility"), the Company may borrow up to $55.0 million, less an interest reserve
of $2.2 million, at the bank's prime interest rate (8.0% at September 30, 1998)
or, at the Company's option, an interest rate based on the current LIBOR rate.
The interest reserve will be reduced quarterly, as interest payments are made on
the Trust Preferred Securities. The Credit Facility is available through July
13, 2001 and at September 30, 1998 there was a principal amount of approximately
$39.3 million outstanding. The Credit Facility 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 September 30, 1998.
The Company may use a portion of its capital resources to effect
acquisitions. Because the Company cannot predict the timing or nature of
acquisition opportunities, or the availability of acquisition financing, the
Company cannot determine the extent to which capital resources may be used.
Company management believes the Company's financial condition is strong and that
funds generated from operations and borrowings available under its Credit
Facility and the Company's ability to negotiate additional and enhanced credit
agreements and to sell additional equity securities will be sufficient to meet
the Company's foreseeable operating and capital expenditure needs.
YEAR 2000 COMPLIANCE
The Year 2000 issue refers to the fact that certain management information
systems use two digit date 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). When the year 2000 occurs, these systems could interpret the year as
1900 versus 2000, which in turn, could result in system failures or
miscalculations causing disruptions to the Company and its suppliers.
To address the issue, the Company has established a compliance team that
includes outside consulting staff. The team has instituted a multi-phase plan
that includes; inventorying all computer systems, software and business
equipment to assess the impact of the Year 2000; obtaining documentation from
each software vendor to ascertain their compliance; developing solution plans
related to upgrading, modifying or replacing affected systems; and obtaining
documentation from significant suppliers stating their Year 2000 readiness.
The compliance team has determined that the Company's critical operating
systems, accounting systems, computer systems and business equipment are the
major resources that are affected by the Year 2000 issue. While certain of these
systems will need to be upgraded or replaced, the identified systems and or
programs are primarily "off the shelf" products with Year 2000 updates
available. The Company expects to have these systems fully compliant by June 30,
1999.
As part of its Year 2000 plan, the Company is in the process of contacting
its significant suppliers to determine the extent to which the systems of such
suppliers are Year 2000 compliant. The Company will continue to contact its
suppliers in an effort to minimize any potential Year 2000 compliance impact,
however, it is not possible to guarantee their compliance.
The total cost for the Year 2000 plan has been and is expected to be
minimal.
Management believes that it has an effective plan in place to adequately
address the Year 2000 issue in a timely manner. Nevertheless, failure of third
parties upon which the Company's business relies could result in disruption of
the Company's supply of equipment and other general problems related to daily
operations. In addition, disruptions in the economy generally resulting from
Year 2000 issues could adversely affect the Company. Although, the Company
believes its Year 2000 plan will adequately address the Company's internal
issues, the overall risks associated with the Year 2000 issue cannot be fully
identified until the Company receives more responses from significant suppliers.
Accordingly, the amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
12
<PAGE> 13
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
11.1 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed with the SEC on July 10, 1998
reporting the completion of the Company's Purchase of the
assets of Suncoast Toys, Inc., Oregon Coin Company and NW
Toys Co.
A report on Form 8-K was filed with the SEC on August 20,
1998 reporting the filing of Amendment No. 1 to its
Registration Statement on Form S-3 that corrected the
Company's pro forma ratios of earnings to fixed charges for
the year ended December 31, 1997 and for the six months
ended June 30, 1998.
A report on Form 8-K was filed with the SEC on August 21,
1998 disclosing that the Company had been informed that a
third party had filed a lawsuit against Plush 4 Play which,
among other things, sought to prevent the Company's
acquisition of the assets of Plush 4 Play.
13
<PAGE> 14
AMERICAN COIN MERCHANDISING, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
AMERICAN COIN MERCHANDISING, INC.
November 13, 1998 By: /s/ Jerome M. Lapin
------------------------- ----------------------------------------------------
Date Jerome M. Lapin
President and Chief Executive Officer
November 13, 1998 By: /s/ W. John Cash
------------------------- ----------------------------------------------------
Date W. John Cash
Vice President, Chief Financial Officer
</TABLE>
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
11.1 Statement re: Computation of Per Share Earnings.................... 16
27 Financial Data Schedule............................................ 17
</TABLE>
15
<PAGE> 1
EXHIBIT 11.1
AMERICAN COIN MERCHANDISING, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings ................................... $ 906,000 $1,006,000 $3,465,000 $2,771,000
========== ========== ========== ==========
Common shares outstanding at beginning of period 6,468,903 5,447,904 6,452,904 5,123,274
Effect of shares issued during the period . 1,136 1,772 12,485 242,200
---------- ---------- ---------- ----------
Basic weighted average common shares ........... 6,470,039 5,449,676 6,465,389 5,365,474
Incremental shares from assumed conversions:
Stock options ............................. 140,708 137,405 155,131 61,413
Warrants .................................. 25,257 46,132 28,813 13,417
---------- ---------- ---------- ----------
Diluted weighted average common shares ......... 6,636,472 5,633,213 6,649,333 5,440,304
========== ========== ========== ==========
Basic earnings per share .................. $ 0.14 $ 0.18 $ 0.54 $ 0.52
Diluted earnings per share ................ $ 0.14 $ 0.18 $ 0.52 $ 0.51
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,438
<SECURITIES> 0
<RECEIVABLES> 823
<ALLOWANCES> 0
<INVENTORY> 12,144
<CURRENT-ASSETS> 18,261
<PP&E> 53,275
<DEPRECIATION> 11,642
<TOTAL-ASSETS> 111,774
<CURRENT-LIABILITIES> 15,088
<BONDS> 0
0
0
<COMMON> 65
<OTHER-SE> 33,120
<TOTAL-LIABILITY-AND-EQUITY> 111,774
<SALES> 63,830
<TOTAL-REVENUES> 67,166
<CGS> 13,698
<TOTAL-COSTS> 47,111
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,709
<INCOME-PRETAX> 5,327
<INCOME-TAX> 1,862
<INCOME-CONTINUING> 3,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,465
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.52
</TABLE>