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Interlott Reports Mixed Results

For the year ended December 31, 2001, revenue was $42.7 million, essentially unchanged from the year ago level. Net income was $1.9 million, or 30 cents per diluted share, compared with the record $3.6 million, or 56 cents, in 2000. Expenses for 2001 included a pre-tax charge of $666,000 for amortization of goodwill and lease acquisition costs from the On-Point purchase.

Interlott is the nation's leading manufacturer of Instant Ticket Vending Machines (ITVMs), Pull-Tab/Break-Open Ticket Vending Machines (PTVMs) and other high-security vending products, supplying ITVMs to 29 of the 38 domestic lottery jurisdictions.

As anticipated, results for the second half of 2001 were affected by the timing of contract awards and of fulfillment for the various lottery jurisdictions. These factors were amplified this past fall given the trying economic conditions that were only exacerbated by the tragic events of September 11.

``Quarterly fluctuations in sales and shipments of ITVMs and PTVMs are part of our business. We worked carefully to manage our resources to maximize cash flow and maintain profitability for a record 28th consecutive quarter,'' commented David F. Nichols, president and chief executive officer.

Nichols added, ``Since November of last year, we have received orders and awards from California, Illinois, Kentucky, Oregon and the District of Columbia for more than 1,300 ITVMs and PTVMs. While the majority of these units will be shipped in 2002, we began to fulfill several contracts in December.''

Nichols stressed, ``All in all, 2001 was a very good year for Interlott although it did not match the record performance of 2000. We have entered 2002 with excellent momentum and are excited about the potential for the business. Lottery jurisdictions and others continue to show interest in our core product line; we see good prospects for new products, such as our new CounterPoint(TM) countertop ITVM; and, 2002 will benefit from a full year's contribution from the contracts acquired in the On-Point transaction. Together, these should help contribute to top and bottom line strength.''

On-Point Contracts Contribute to Revenue

For the year, revenue from the sale of ITVMs, PTVMs and other units was $19.4 million compared with $22.0 million last year. The comparison reflects a record purchase of ITVMs for one state lottery that was produced and shipped over the first three quarters of 2000. In 2001, a large sale was completed during the first two quarters while smaller orders were produced during the third and fourth quarter.

Revenue from operating leases increased 2 percent for the year to $18.3 million from $18.0 million as a result of the addition of leases included in the On-Point purchase, which added $1.7 million during 2001. Other revenue, which includes service contracts, rose 88 percent to $5.0 million from $2.7 million, because of the addition of On-Point service contracts.

Nichols observed that the company's lease and service revenue, which accounted for 55 percent of 2001 total revenue, was up 13.2 percent for the year. ``These recurring revenues provide a stable base as we face the fluctuations of product sales inherent to our business.''

Nichols noted, ``As of December 31, we had a total of 11,086 ITVMs, PTVMs and other units deployed under operating and sales type leases. In the aggregate, Interlott has sold or leased more than 27,000 ITVMs, PTVMs and other units under agreements with 29 domestic and 14 international lotteries and their licensees or contractors, as well as to both domestic and international vendors of prepaid telephone calling cards, up from approximately 23,000 a year ago and 20,000 a year earlier.''

Expense Management Leads to Profitable Quarter and Year

Gross profit for the year was $11.8 million compared with $13.5 million a year ago with operating income at $4.9 million compared with $7.4 million. Increased service and installation costs due to additional staffing and maintenance costs incurred to service the On-Point contracts and deployment costs for machines being delivered on new lease contracts contributed to the lower gross and operating profit.

Notwithstanding costs associated with the absorption of assets and personnel in the On-Point acquisition, selling, general and administrative expenses were held to $5.9 million compared with $5.4 million a year ago, the increase being primarily due to increases in wages, benefits, travel expenses and legal and professional fees. Net interest expense rose to $2.0 million from $1.6 million, reflecting increased overall borrowing under the company's credit facility due primarily to the On-Point acquisition as well as the financing of new lease contracts.

The company recorded a tax benefit of $249,000 in the fourth quarter, due to the ability to deduct amortization for patents acquired in 1991, lowering the company's effective tax rate for 2001 to 32 percent from 38 percent in 2000.

2002 Beginning Strong

Nichols commented, ``The orders and awards we have received since November represent key elements of our growth plan, with contract extensions, new relationships and purchases or leases of our more advanced 16-, 20- and 24-bin units.

``The new orders and awards included the Washington State, Oregon and Kentucky Lotteries choosing to extend their relationships with Interlott, indicative of the partnerships we seek to establish with all of our clients. The Washington D.C. Lottery awarded Interlott its second ITVM order in January 2002,'' Nichols said. ``In January, we also announced that the California Lottery ordered 500 ITVMs to begin upgrading their network of 4,000 older units. And, the Illinois Lottery recently placed its second order with us since that contract was acquired by Interlott through the On-Point purchase.

``While always mindful of the need to carefully manage our business to absorb the expected fluctuations in sales, we believe that we are well-positioned to benefit from continued growth of instant lottery ticket sales. Our ITVMs provide key advantages in terms of security, monitoring, ease of use and customer satisfaction. They are the natural choice for lottery organizations worldwide,'' Nichols concluded.

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