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March 18, 2013

IL Lottery Announces Private Manager Owes State $20M for FY12 Net Income Shortfall

SPRINGFIELD—Illinois Lottery officials announced today that Northstar fell short of its net income target in FY2012 by only generating $757 million in net income according to the Private Management Agreement ("PMA").  This net income shortfall entitles the State to a $20 million payment from Northstar.  

“The PMA is the contract that governs the relationship between the Illinois Lottery and Northstar.  It contains provisions that reward Northstar for exceeding certain income levels and compensates the State when Northstar fails to reach certain net income targets set by itself in the bidding process,” said Lottery Superintendent Michael Jones. “Northstar won the private manager contract by projecting a net income of $851.2 million in FY12, but failed to reach this goal, consequently triggering a $20 million net income shortfall payment to the state.  Northstar missed their initial net income commitment by $94 million. Our agreement requires Northstar be held accountable for this shortfall.” 

As provided under the PMA, Jones says the Lottery plans to recoup this shortfall by withholding the future monthly payments that Northstar regularly receives as part of its management fee for operating the day-to-day operations of the Lottery.

“We look forward to continuing to work closely with the new team at Northstar to continue the creative marketing and brand-transformation efforts over the last six to eight months that broadened the lottery’s player base and generated new sales and profits,” said Jones. 

Northstar is a consortium of Lottery industry vendors Gtech and Scientific Games, and was paid a total of $85.1 million for FY12 services.
Background to the reduced Net Income Target
The $757 million net income figure announced today by the Lottery is the key figure used in FY12 calculations to determine whether Northstar is entitled to any performance bonuses or is required to provide shortfall payments to the State.  In obtaining the first contract to manage a US Lottery, Northstar committed to reach $851.2 million in net income for FY12. However, this net income target was eventually reduced over the strenuous objections of the Illinois Lottery.  Under provisions of the PMA, Northstar initiated a series of letters to the Lottery last July, the first month of FY12, seeking downward adjustments to PMA net income targets in an amount of $262.9 million over five years.

Pursuant to the PMA’s dispute resolution provisions, a third party professional reviewed Northstar’s requests.  This professional ultimately agreed with the State on many of its arguments and determined that only $28.4 million of the $119.2 million sought in FY12 downward adjustments should stand (only $2.9 million of the $143.7 million sought in FY13-16 downward adjustments were allowed to stand). As a result, Northstar has only been held to a $822.8 million net income target for FY12 as opposed to the original $851.2M million Northstar originally bid.

Calculation of FY12 Net Income Pursuant to the Illinois Lottery Private Management Agreement

Profit and Loss Category*
Total Revenues
Total Net Prizes
Retail Agents Remuneration
Northstar Management Fee
Total Lottery Expenses
Employee Use Agreement Expenses
Provision for Bad and Doubtful Debts
Net Income Pursuant to the PMA

*Deductions from Total Revenues shown in brackets

Profit and Loss Category Details

Profit and Loss Category
Draw Based Game Sales
Instant Game Sales
Other Income
Total Revenues
Instant Prizes
Draw Based
Unclaimed Prizes
Total Net Prizes
Retail Agents Remuneration
Northstar Management Fee
Lottery Expenses
Gaming System Operations & Communications
Instant Tickets
Advertising and Promotions
Additional rebranding fees paid to Northstar
Adjustment to Lottery expenses due to lower sales
Total Lottery Expenses
Total Northstar Payments
Employee Use Agreement Expenses
Provision for Bad and Doubtful Debts
Net Income Pursuant to the PMA

Calculation of FY12 Net Income Shortfall Payment Pursuant to the
Illinois Lottery Private Management Agreement
**Calculation reflects Net Income Target adjustment of Third Party Professional

Net Income Target
Actual Net Income Achieved
Net Income Shortfall
Net Income Shortfall x .50
Incentive Compensation for Performance
Net Income Shortfall Payment to State


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