American Coin Merchandising, Inc.



397 South Taylor Ave.
Louisville, Colorado 80027
U.S.A.

Telephone: (303) 444-2559
Fax: (303) 247-0480
Web site: http://www.sugarloaf-usa.com

Wholly Owned Subsidiary of Coinstar, Inc.
Incorporated: 1988
Employees: 1,157 (2003)
Sales: $201.4 million (2003)
NAIC: 45421 Vending Machine Operators; 421920 Toys Wholesaling

American Coin Merchandising, Inc., which does business as Sugarloaf Creations, Inc., is the largest business of its kind in the United States. It owns and operates more than 140,000 coin-operated skill-crane machines, bulk vending dispensers, kiddie rides, and video games throughout the United States. The crane machines, called "Shoppes," dispense stuffed animals, plush toys, watches, jewelry, and other items. Bulk vending machines sell gumballs, candy, nuts, and novelties. The company's machines are placed in major supermarkets, mass merchandisers, bowling centers, bingo halls, bars, restaurants, warehouse clubs, and other high-traffic locations, including AMF Bowling Centers, Bonanza Steak Houses, Brunswick Bowling Centers, Cub Foods stores, Denny's restaurants, Flying J Truckstops, Fred Meyer Stores, Kmart stores, Kroger supermarkets, Ponderosa Steak Houses, Safeway/Vons supermarkets, 76 Truckstops, Truckstops of America, and Wal-Mart outlets. The company pays the stores where its machines are located roughly 25 percent of each machine's gross revenue.

Early Growth through Franchising

American Coin Merchandising was formed in Colorado in July 1988 by a group of four businessmen, who among them owned Southwest Coin, Omaha Coin, Colorado Coin, and T.R. Baron & Associates. Under the leadership of Richard Jones andJ. Gregory Theisen, the goal of the new company was to support and add to the license, sale, and setup agreements of its predecessor businesses. Shortly thereafter, American Coin began to combine the buying power of its affiliated businesses to purchase products and skill-crane machines at lower prices. By 1990, it was creating its own territories and, in 1994, it hired Jerome M. Lapin, cofounder in 1958 of International House of Pancakes, to be its chief executive officer. It was reincorporated in Delaware in 1995. When Lapin became chairman in 1995, he brought all the companies under one roof and took the company public, raising net proceeds of $10.1 million. To expand operations, the company subsequently purchased substantially all of the inventory, property, and equipment of its original affiliated entities for a purchase price of $9 million.

Skill-crane machines have been in operation since the 1920s in the United States, but the new company sought to invent something different and better: to offer an alternative way to sell retail products, to sell toys instead of time. It incorporated what it considered to be several improvements and refinements into its Shoppes, increasing the size of its machines to enhance their visibility and to display and vend more products; creating bright and distinctive signage to attract customer attention; and improving the exterior and interior lighting of machines to focus customer attention on the products in the Shoppes. In addition, the company upgraded machine operating mechanisms to achieve consistency of play and reliability of performance.

The SugarLoaf Toy Shoppe, in operation since the company's inception, featured a play price of 50 cents and dispensed stuffed animals, plush toys, and other toys. In 1993, the company introduced the SugarLoaf Fun Shoppe, which featured a play price of 25 cents and dispensed small toys, novelties, and candy. The SugarLoaf Treasure Shoppe came along in 1994 and, for a play price of 50 cents, dispensed jewelry, watches, bolo ties, and belt buckles. Between 1994 and 1996, American Coin Merchandising increased the number of machines it owned from 168 to 3,800; it controlled another 3,200 machines operated through franchises. In 1994, total profit for the company was $1.1 million. During 1995, overall revenues totaled $25.7 million on the company's net income of $2.6 million. In that year, approximately six million stuffed toys were dispensed from SugarLoaf machines. The SugarLoaf Treasure Shoppe dispensed approximately 250,000 watches and 500,000 bracelets, necklaces, and other items.

As the defining force in its market ("We are the market," Jerry Lapin liked to boast of American Coin Merchandising), the company installed 856 new crane machines and opened seven new offices during the first six months of 1996. Revenues for the first half of 1996 increased 37.8 percent over the same period a year earlier. By the end of the year, that number was up to 50 percent. In the final quarter of 1996, the company gained its first major contract and established itself as Wal-Mart's principal skill-crane supplier, a move that brought another 700 Shoppes on board by November with more installations planned for 1997. This step was only a first in the direction of developing customer accounts in new markets, such as the chain restaurant industry. In 1997, American Coin Merchandising signed a three-year agreement with Safeway that made it the supermarket chain's domestic skill-crane operator and another three-year contract with AMF Bowling, Inc. to service approximately half of the latter's locations.

Buying Back Franchises in the Mid-1990s

At about this point, the company changed its approach, instituting a strategy of buying back the remaining franchise offices around the country so that profits would stay within the company. American Coin Merchandising realized only about three cents on the dollar in the form of franchise royalties, whereas it made about a 29 cent profit per dollar for every machine it owned. The first buyback occurred in January 1996 with the $500,000 purchase of the Indiana-based operations and territory of Hoosier Coin Company, responsible for generating about $1.4 million in revenue in 1995. In July, it added its Utah territory to its operations with the $938,000 purchase of SugarLoaf of Utah, which had 1995 revenue of $1.9 million. In September, for $1.65 million, it acquired SugarLoaf, Inc., which operated 202 machines in Louisiana and Oklahoma and parts of Missouri, Illinois, and Texas. American Coin Merchandising rounded out the year with the December purchase of Creative Coin of Arizona for $1.46 million, bringing its Arizona territory back to the fold.

American Coin Merchandising was now five times larger than its largest competitor, and its vending machine empire continued to grow by the quarter. With just 14 percent of the skill-crane market under its control, the possibilities for its future growth loomed large. By September 1997 the company had added another 2,000 machines to its roster, and its share price had risen to a 52-week high of almost $18. It sold off another one million shares at $15 per share, increasing its outstanding shares to 18 percent, and used the money raised to repay debt, purchase additional skill-crane machines, and fund acquisitions of other companies. Business Week named American Coin Merchandising number 54 in its list of Hot Growth Companies for 1997, based on its three-year results in sales growth, earnings, and return on invested capital. Forbes ranked American Coin Merchandising number 13 in 1997 in its list of the 200 best small companies, those with sales of at least $5 million but not more than $350 million, based upon its 44.7 percent five-year average return on investment and revenues of $48 million for its latest 12 months.

The company's acquisition trend continued into 1998 with the addition of the Texas-based operations of Tejas Toy Corporation and control of American Coin Merchandising's Texas territory for $2.23 million; R&T Marketing, Inc, with its 370 skill-crane machines in American Coin Merchandising's northern California territory for $2.14 million; and NW Toys Co., Oregon Coin Company, and Suncoast Toys, Inc. for an aggregate purchase price of approximately $30 million. The latter three purchases brought the Washington, Oregon, and central Florida territories of American Coin Merchandising under company control and added another 1,300 skill-crane machines to its inventory. In a move to no longer limit itself to the skill-crane business, American Coin Merchandising also acquired McCathren Vending Corporation, a Colorado-based bulk vending business that operated close to 5,000 pieces of vending equipment in Colorado, Utah, and Wyoming. The company had earlier bought Quality Amusement Corp. and Quality Entertainment in late 1997, part of a natural expansion, since those locations that housed SugarLoaf skill-crane machines often housed bulk vending machines and kiddie rides as well. The new direction came after Wal-Mart stores suggested that American Coin Merchandising put other kinds of machines in its stores. With the number of remaining franchisees down to 16, Jerry Lapin announced in the Rocky Mountain News that his company's growth strategy would not depend on its ability to buy out its franchisees; instead, it would go after new markets and its competition.

Related Acquisitions in the Late 1990s

American Coin Merchandising operated more than 10,000 skill-crane machines by the middle of 1998. Its share price was in the upper teens after a setback that analysts regarded as temporary when it missed its earnings projections by a few cents. As a result, its stock tumbled 23 percent from its previous high of almost $23. The company, which earlier had been laughed at by analysts, was receiving high recommendations and experiencing great potential for growth as a result of the expansion of the big national chains with which it was allied. Business Week again named it to its list of the Hot Growth Companies, although this time it came in at only number 90. Forbes placed it number 60, down from its former ranking as number 13, in its list of the 200 best small companies.

Company Perspectives:

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 United States by offering a selected mix of high quality products; maintaining readily identifiable, attractive, well-maintained "Shoppes" marked with the SugarLoaf logo in locations which have a reputation for quality and a high level of foot traffic; controlling product cost; closely monitoring the vend ratio or revenue per product dispensed; providing training and support services to retail accounts, franchisees and managers.

American Coin Merchandising's next purchase enabled it to branch out into the amusement video and simulator game business, an industry with late 1990s revenues in excess of a billion dollars. For a purchase price of $4 million, the company acquired the privately held Chilton Vending Co. in mid-1998, thereby gaining a significant presence in Kansas and Missouri and expertise in the amusement video business. The acquisition added approximately 1,800 simulator and traditional video game machines, as well as some skill-crane and redemption equipment. Chilton, which had installations at Family Golf Centers, Inc., AMF Bowling Centers, and Worlds of Fun Amusement Park, had 1997 revenues of $4.5 million. Randy Chilton, third-generation management of Chilton, came on board with the acquisition to become American Coin Merchandising's new vice-president of Amusement Games Development.

In October 1998, with the acquisition of Plush 4 Play, American Coin Merchandising obtained placement agreements with Shoney's, Inc. and Friendly Ice Cream Corporation. The purchase, which cost American Coin $6.8 million plus a contingent earn-out of up to $2.7 million, was part of its plan to branch further into the restaurant industry. Plush 4 Play also sold prepackaged plush toys and animals to the skill-crane industry.

Planning for Continued Success

As American Coin Merchandising closed out 1998, it claimed about 23 percent of the more than 50,000 skill cranes in retail outlets in the United States, of which it owned 10,671, an increase of about 73 percent from the end of 1997. Since 1995, it had averaged greater than a 50 percent increase in annual revenues. It had completed ten acquisitions since October 1997 and had expanded into complementary vending operations, adding approximately 6,800 other vending and amusement machines at retail operations. Its revenues for the year rose 65.4 percent to a record $97.7 million, although net earnings decreased 12 percent to $3.9 million. This was due in part to higher interest and administrative costs related to the 1998 acquisitions.

As it entered 1999, American Coin Merchandising expected to acquire at least four more companies and had its sights on another ten to 12 related businesses. The immediate aim of the company was to integrate its acquisitions into its national network. Its larger plan was to consolidate the industry as a whole, a goal that management judged to be within its reach.

Fighting the Expansion Blues

In the third quarter of 1998, the road to industry consolidation turned rocky. Although revenues for the quarter increased 87 percent to a record $27.4 million, net earnings for the period fell 9.9 percent to $906,000. The company's stock, which had reached a high of more than $22 per share in May 1998, plummeted more than 73 percent to a year-end low of $5.88. Steven Barnard, senior vice-president at Everen Securities Inc. in Chicago told Carly Schulaka of the Boulder, Colorado, Daily Camera (December 31, 1998) that a lack of "standout" merchandise contributed to the slump. "There was no hot item this year. In the past [American Coin Merchandising] had Lion King and Space Jam merchandise, but there was not really a must-have, signature item this year."

Officials at American Coin Merchandising concurred with Barnard's judgment. As the company's downturn continued into 1999, its leadership attributed the drop in earnings to administrative costs incurred as a result of the company's rapid expansion and to a combination of slowing foot traffic in retail outlets and a poor merchandise mix in its vending machines. Senior vice-president of operations Randy Fagundo pointed to an overall slowing of the toy industry as one reason for the company's drop in earnings per machine and indicated that American Coin Merchandising's burst of acquisitions activity in 1998 was a source of lingering expenses. "We did a lot last year and probably put a little stress on the system," he remarked to Vicky Uhland of the Rocky Mountain News (February 14, 1999). CEO Jerome Lapin echoed this statement, opining that revenues would "continue to be depressed into 1999." Fagundo noted that its 1998 acquisitions doubled the company's number of skill cranes and employees and created redundancies in accounting and management computing and warehouse operations.

Key Dates:

1988:
The owners of Southwest Coin, Omaha Coin, Colorado Coin, and T.R. Baron & Associates found American Coin Merchandising Inc.
1994:
The company hires Jerome M. Lapin, who co-founded International House of Pancakes in 1958, as CEO.
1995:
The company reincorporates and goes public.
1996:
American Coin Merchandising signs its first major contracts to supply skill cranes to major retailers, including Wal-Mart and Safeway; the company begins to buy back its franchise businesses.
1997:
The company is listed number 54 among Business Week 's Hot Growth Companies and ranked number 13 on Forbes ' list of the 200 best small companies; American Coin Merchandising purchases the bulk vending and kiddie rides of Quality Amusement Corp. and Quality Entertainment.
1998:
The company acquires video game business Chilton Vending Co. and Plush 4 Play, a toy supplier to the vending industry; in the third quarter, American Coin Merchandising experiences a drop in net earnings.
1999:
American Coin Merchandising addresses business problems by consolidating businesses, fixing its merchandise mix, and investing in a computing system and a new warehouse.
2001:
Wellspring Capital llc and Knightsbridge Holdings llc purchase American Coin Merchandising for $125 million and take the company private.
2004:
Coinstar purchases American Coin Merchandising from Wellspring.

During 1999, American Coin Merchandising addressed these problems, purchasing a new computer system with online accounting report functions, consolidating its warehousing into a 100,000-square-foot facility in Seattle, and turning its attention toward fixing its merchandising weaknesses. The company also pursued the aim of "lobby domination," so that it would own and service every vending machine, ride, and game in its clients' lobbies. Randy Fagundo told Vicky Uhland, "Wal-Mart and other national chain accounts don't want to have two to three vendors coming in to service machines, so they came to us."

By June 2001, the company's fortunes seemed to be turning around. At the end of the first six months of 2001, revenues reached $69.4 million, and the company's stock held at about $6 per share. American Coin Merchandising estimated that vending revenues for the year would yield between $136 million and $143 million. The company even managed to weather a general economic decline in 2001 without suffering the slowdown that affected other U.S. businesses.

"A Classic Public Orphan"

American Coin Merchandising's performance attracted the attention of Wellspring Capital llc, a leveraged-buyout firm, which partnered with the investment firm Knightsbridge Holdings llc to purchase the company for $125 million, a sum five times its projected cash flow for 2001, plus the assumption of $50 million in debt. Wellspring and Knightsbridge offered shareholders $8.50 per share in cash for their outstanding common stock, about $2.50 above the market price of the shares at the time. The purchase was Wellspring's first public-to-private transaction. William F. Dawson, Jr., a partner at the buyout firm, told a reporter from Buyouts in September 2001, adding, "Right now market conditions are unfavorable in general," adding that his company intended to "double the business to make it much more attractive for an IPO," or for sale to an appropriate buyer, by 2006. Dawson noted, "This company is what I would call a classic public orphan that's too small to be public. It's a quirky business, but they are growing strongly, and we think it has a lot of upside potential." American Coin Merchandising's leadership was equally sanguine about the buyout, which they expected to give the company access to new capital to fund expansion, acquisitions, and product development. Because the company's stock had not been liquid enough to attract investors, the stock was undervalued on the market despite American Coin Merchandising's strong cash flow and growth potential. The amount of capital necessary to pursue the company's goals was not forthcoming from the stock market. In addition, going private promised to improve American Coin Merchandising's competitive edge. "We're the only public company in the industry, so all our competitors and customers know a lot more about our business than we know about them," Fagundo told Buyouts.

Wellspring's investment paid off far more quickly than projected. In May 2004, Bellevue, Washington-based Coinstar purchased American Coin Merchandising from Wellspring for $235 million in cash, funding the purchase with debt. Even though Coinstar did not assume any of American Coin Merchandising's $100 million existing debt, which was to be paid down with the proceeds of the sale, Wellspring realized nearly two and a half times its original investment of $125 million. Coinstar, which operated 11,000 coin-counting machines that converted change into bills for a fee of 7 percent of the value of coins counted, looked to American Coin Merchandising to bring it additional markets and greater route density in both urban and rural areas. Coinstar hoped that the increased territory would provide new venues for its coin-counting machines, which were located primarily in grocery stores, and bolster its emerging e-payment business, including electronic payroll services and prepaid Master Cards, wireless airtime, and long-distance plans. As of March 2004, American Coin Merchandising's revenues totaled $220 million. The company employed 1,150 people and operated 28,000 skill cranes and 112,000 candy and toy vending machines, kiddie rides, and video games in 50 states and Puerto Rico.

Principal Competitors

A & A Global Industries; All Star Vending; Innovative Concepts in Entertainment; Lieberman Companies Inc.; Theisen Vending Company.

Further Reading

"American Coin's Revenues Jump 87% but Earnings Slip," Denver Post , November 12, 1998, p. C-05.

Barrett, William P., "Brotherly Love," Forbes , July 28, 1997, p. 74.

Batsell, Jake, "Coinstar Banks on Amusement," Seattle Times , May 25, 2004.

Branaugh, Matt, "Shareholders Approve Acquisition of American Coin," Daily Camera (Boulder, Colorado), February 6, 2002.

——, "Louisville-Colo.-Based Vending Machine Company to Buy New York-Based Outfit," Daily Camera (Boulder, Colorado), March 18, 2003.

"Coinstar Announces Completion of American Coin Acquisition," Business Wire , July 7, 2004.

"Coinstar to Acquire American Coin Merchandising Inc.," Business Wire , May 24, 2004, item 5470.

Draper, Heather, "American Coin OKs Buyout," Rocky Mountain News (Denver, Colorado), p. 8B.

Eaton, John, "Little Cranes, Big Bucks," Denver Post , October 14, 1998, p. C-01.

Gray, Ellen, "They're Not Just Playing Games," Colorado Business Magazine , February 1998, p. 39.

Holman, Kelly, "Wellspring, Knightsbridge to Buy American Coin," Daily Deal , September 10, 2001.

——, "Wellspring Flips American Coin," Daily Deal, May 25, 2004.

Lewis, Al, "Toy Dispenser Claws Way to Top," Rocky Mountain News (Denver, Colorado), June 2, 1998, p. 1B.

Narvaes, Emily, "Toying with Success," Denver Post , September 2, 1996, p. F-01.

Paton, James, "American Coin to be Sold," Rocky Mountain News (Denver, Colorado), May 25, 2004, p. 2B.

Pearce, Dennis, "American Coin Merchandising Buys Wichita, Kan.-Based Chilton Vending," Knight-Ridder/Tribune Business News , June 11, 1998, item OKRB981620E7.

Romero, Christine L., "Boulder, Colorado-Based American Coin Grabs 'Hot' Listing," Daily Camera (Boulder, Colorado), June 19, 1998.

Schulaka, Carly, "Business Analysts Give Colorado's American Coin Merchandising High Marks," Daily Camera (Boulder, Colorado), June 16, 1997.

——, "Boulder, Colo.-Based Crane Amusement Firm Continues Slide," Daily Camera (Boulder, Colorado), December 31, 1998.

Svaldi, Aldo, "Bellevue, Wash.-Based Coin Machine Operator to Buy Amusement Firm," Denver Post , May 25, 2004.

Sweeney, Patrick, "American Coin," Denver Business Journal , March 10, 2000, p. 15A.

Uhland, Vicky, "Skill-Crane Firm Hopes Business Picks Up," Rocky Mountain News (Denver, Colorado), February 14, 1999, p. 3G.

"Wellspring Acquires American Coin," Buyouts , September 24, 2001, item 1274006.

—Carrie Rothburd —update: Jennifer Gariepy



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