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WMS Industries Q2 Report

Revenues from continuing operations increased $15.6 million or 30% to $67.4 million for the December 2000 quarter compared with $51.8 million in the prior year period.

Net income for the quarter ended December 31, 2000 was also $0.34 per diluted share, or $11.0 million, which reflected two offsetting, unusual items. First, the Company recorded $2.5 million of pre-tax charges related to the previously announced relocation of the Company's manufacturing, distribution, warehousing and corporate offices to Waukegan, Illinois which amounted to $0.05 per diluted share, of which $0.04 per share were non-cash write-downs of facilities and equipment.

Consistent with its previous announcement, the Company anticipates total relocation charges for fiscal 2001 of $0.07 to $0.09 per diluted share. Second, during the December 2000 quarter, the Company recorded $0.05 of earnings per diluted share from the reversal of excess accruals recorded in the September 1999 quarter for discontinuing the pinball and cabinet operations.

For the quarter ended December 31, 1999, net income was $15.6 million, or $0.50 per diluted share, which included the pre-tax recovery of $13.2 million, or $0.26 per diluted share, related to the reversal of an excess accrual due to a litigation settlement.

Earnings before interest, taxes, depreciation and amortization (EBITDA), prior to the unusual items in both periods, were $20.9 million in the December 2000 quarter, up $6.1 million or 41% from $14.8 million in the December 1999 quarter.

EBITDA increased primarily due to the increase in revenues and gross margin partially offset by increased research and development costs related to new products and technology and higher selling and administrative expenses to support the 30% growth in revenues.

Operating income, prior to the unusual items in both periods, was $16.5 million in the December 2000 quarter, up a significant 50% compared to $11.0 million in the prior year quarter. The increase in operating income resulted from continued growth in EBITDA despite higher non-cash depreciation and amortization charges related to the 50% increase in the installed base of participation games from December 31, 1999.

The fiscal 2001 second quarter revenue growth was attributable to a 16% increase in the sale of gaming devices to 5,004 units in the December 2000 quarter versus 4,301 units sold in the December 1999 quarter, as well as a 9% increase in the average selling price of games sold to $8,332.

Revenue growth was also fueled by an increase in the installed base of MONOPOLY and JUMBLE brand participation games that provide the Company with recurring revenues and cash flow. Revenue from participation and leases increased $4.8 million or 28% to $21.8 million in the December 2000 quarter compared to $17.0 million in the prior year period.

The average installed base of participation gaming devices increased by 42% to 4,784 units in the December 2000 quarter from 3,371 units in the December 1999 quarter due to the continued growth in MONOPOLY brand games and the aggressive rollout of the JUMBLE brand game.

The actual installed base of participation games rose 19% since September 30, 2000 despite the Company delaying the introduction of the newest version of MONOPOLY, Money Grab(TM), in order to accommodate the launch of JUMBLE. At December 31, 2000 the Company had a total of 5,268 MONOPOLY and JUMBLE brand participation gaming devices installed, a 50% gain over the December 31, 1999 installed base.

The average daily revenue per participation device was $42.98 in the December 2000 quarter compared to $45.76 in the December 1999 quarter. This decrease results primarily from the impact of first introducing JUMBLE in the state of Nevada, which accounted for a majority of the JUMBLE revenues in the quarter, and which, in the Company's experience, has the lowest average daily revenue rate of any domestic gaming jurisdiction. WMS currently has a backlog of customer requests for over 500 additional participation gaming machines.

Total gross profit increased 34% to $38.2 million for the December 2000 quarter, up from $28.5 million in the December 1999 quarter. Fiscal 2001 second quarter gross profit margin on sales of gaming machines increased to 42% from 38% in the prior year quarter primarily due to the increase in average sales prices.

Gross profit margin on participation and lease revenues decreased slightly in the quarter ended December 31, 2000 to 87% due to lower average net win per day as well as a government mandated decrease in the net win percentage earned by gaming equipment suppliers from gaming machines placed in Delaware and Rhode Island.

``The 50% expansion of our participation game installed base since December 31, 1999 contributed to our 47% gain in earnings per share, and bodes well for continued earnings growth in future periods,'' stated Brian Gamache, President and Chief Operating Officer.

``Our participation revenues grew 28% over the December 1999 quarter and 11% sequentially over the September 2000 quarter providing $18.9 million of gross margin, up 24% from the December 1999 quarter. Our latest MONOPOLY game, Money Grab, is now approved in Nevada and will be launched next week. We expect Money Grab to help fuel expansion of our overall installed base of participation games.''

``With the success of our MONOPOLY and JUMBLE brand participation games, WMS is capturing and retaining significant marketshare in the participation game business,'' continued Gamache. ``In the last six months alone we have increased the installed base of our participation games by 1,312 units or 33%.

"With our recently announced licenses for the rights to PAC-MAN and HOLLYWOOD SQUARES, we intend to be a dominant player in this important, growing and profitable segment of the recurring revenue market. We have also taken steps to increase the number of branded game themes that we will introduce for direct sale over the next eighteen months.

``During the December quarter we successfully relocated our manufacturing, distribution and warehousing operations and our corporate administrative staff to our Waukegan facility without any impact on production or shipping. Our Waukegan facility provides tremendous flexibility and room for growth and manufacturing efficiency.

"As we implement our new manufacturing methodology over the next six months, we expect to reduce the lead-time for games. We believe improved `time-to-market' will be a significant competitive advantage. In addition, we are implementing other strategies with an intent to reduce our cost of sales and further increase our profit margin on game sales.

``We have taken great strides to continue our growth and profitability while continuing to improve the infrastructure necessary to grow our business in the future,'' concluded Gamache. ``With growing base game sales and participation game placements, new licensed brands, a focus on manufacturing quality and efficiency in our Waukegan facility and an `investment grade' balance sheet supporting our growth and expansion plans, we are well positioned to continue enhancing the value of our stock.''

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