Lots Of Good For Michigan!

Instant Game 2 Million Dollar DrawingsThe Lottery conducted three separate instant game 2 million grand prizedrawings in December, March, and July of fiscal 2007. Players who win 1,000 on any 20 instant game are entered in the drawingsautomatically. The March and December drawings were conducted at thePalace of Auburn Hills during halftime at Detroit Pistons games. The Julydrawing was conducted at the International Freedom Festival in Detroit.New Raffle GameA new online game called Millionaire and Super Raffle was introduced inNovember of this fiscal year. The game’s design follows a traditionalraffle game concept in which a limited number of raffle tickets are sold.Overall odds to win the top prize are better when compared to othertraditional lotto style games. Raffle has been a great success generating 56.3 million in sales in its first year.Budgetary System and ControlsThe Lottery works with the Department of Management and Budget, Office of the Budgetand the Legislature to create an annual appropriated budget for the administrative costsfor the Lottery. The proposed budget is approved by the Legislature annually. Thisapproved budget becomes a spending cap for administrative expenses and ticketrevenues provide funding for operations. Revenue and net income forecasts areprepared throughout the fiscal year comparing estimates and forecasts to actual salesand expenses. This information is provided to the Office of the Budget with appropriateaction taken as needed.Economic Condition and Financial InformationLocal EconomyMichigan’s economy continues to struggle. Michigan’s employment forecasts show acontinued decline in overall employment in 2007 and 2008. Although there is minimalgrowth in some job sectors, particularly services, the manufacturing and governmentemployment sectors continue to decline. Michigan’s economy relies heavily on theperformance of the manufacturing sector in general and the auto industry specifically.Even with job growth in other sectors, Michigan’s unemployment rate is forecast to riseto 7.5% in 2007 and 7.7% in 2008, well above the national average forecast of 4.6% for2007 and 4.8% for 2008.In addition to both steady job losses and high unemployment the continued downturn inthe housing market causes additional concern. These issues and uncertainties in theeconomy will impact spending patterns and could impact Lottery sales.Financial InformationThe sale of Lottery tickets provides all funding for operations and the net income isdisbursed to the School Aid Fund for K-12 education. The operations involve sale oftickets, determination of winning tickets, payment of prizes, compensation to retailers,and administrative functions. The Lottery also provides 1 million a year to theDepartment of Community Health for gambling addiction programs.-5-

The Lottery’s Commissioner is responsible to the Governor, Legislature and the citizensof the State for Lottery operations.The Lottery’s goals and objectives ensure there is an ongoing effort to achieveoperational efficiencies to not only maximize revenues but maximize profits for theSchool Aid Fund. Operational results are included in the Financial and StatisticalSections.The Charitable Gaming Division’s net proceeds are dedicated to the state’s GeneralFund. These activities are discussed in the MD&A.Accounting Systems and PoliciesAs an enterprise fund of the State of Michigan, the Lottery operates as a business withinstate government structure. The Lottery uses the accrual basis of accounting, followinggenerally accepted accounting principles (GAAP) and governmental accountingstandards board (GASB) pronouncements.Internal ControlsThe Michigan Lottery and the State of Michigan policies and procedures tightly controlassets, inventory, computer systems, drawing studios and accounting. Separation ofduties, internal controls, ongoing monitoring and evaluation of information as well asstringent employee, retailer and contractor standards all minimize risk of loss or theft. Allemployees, retailers and contractor employees must pass a security background checkprior to being hired.Debt AdministrationLong-term liabilities for the Lottery are for payments owed to Lotto, Mega Millions andInstant Game grand prize installment winners. These prize liabilities are funded byinvestments in U. S. Treasury zero-coupon bonds which are held to maturity.Cash ManagementCash due from retailers for Lottery transactions is collected weekly by automatedclearing house (ACH) electronic funds transfer. Monthly net income from Lotteryoperations is transferred to the School Aid Fund. Any excess cash is maintained in anaccount managed by the Michigan Department of Treasury. Short-term cash in thecommon cash fund is invested by Treasury following its policies and guidelines.Risk ManagementThe Michigan Department of Management and Budget (DMB) controls risk managementthrough two internal service funds administratively established during fiscal year 19891990. These funds are self-insured for most general liability, property losses, portions ofemployee insurance benefit, employee bonding programs, employee theft, workerscompensation and unemployment compensation claims. The Lottery is assessedannual premiums by DMB for risk management.Long-term Financial PlanningThe Lottery continues to work on new ways to attract players and increase sales.Maximizing net revenues for the School Aid Fund is the driving element of the marketingplan. New games as well as variations of play on existing games are being researched.Promotions, ongoing retailer recruitment, and retailer incentive promotions for the ClubGames segment will continue in the next fiscal year.-6-

Promotions through the online player community Player City encourage newmembership and player awareness. Instant game variety, promotion of base games andretailer sales incentive bonus are all part of the strategy to grow sales.A new gaming system will be implemented in 2009. The actual conversion for thesystem will begin in 2008. This will limit new game development for 2008; thereforepromotions, retailer incentives and player awareness will be very important to maintainsales. This new system will bring a state of the art gaming system to the Lottery and its’retailers and includes new retailer terminals, new communications network, and all newcomputer systems. The benefits will be seen in 2009 with more game flexibility, betterpotential for revenue generation, more efficient operations and reduced vendorcommission costs. For 2008, it is anticipated that no new games will be implementedbecause of the gaming system conversion. Because of the conversion, currenteconomic conditions, and generally unfavorable retail climate in Michigan, only modestsales gains are anticipated.Awards and AcknowledgementsAwardsThe Government Finance Officers Association of the United States and Canada (GFOA)awarded a Certificate of Achievement for Excellence in Financial Reporting to the Lotteryfor its comprehensive annual financial report for the fiscal year ended September 30,2006. This was the second consecutive year that the Lottery has achieved thisprestigious award. In order to be awarded a Certificate of Achievement, a governmentmust publish an easily readable and efficiently organized comprehensive annualfinancial report. The report must satisfy both generally accepted accounting principlesand applicable legal requirements.A Certificate of Achievement is valid for a period of one year. We believe that ourcurrent comprehensive annual financial report continues to meet the Certificate ofAchievement Program’s requirements and we are submitting it to the GFOA todetermine its eligibility for another certificate.AcknowledgementsPreparation of this report would not be possible without the efficient and dedicatedefforts of the Accounting Division of the Lottery. Their teamwork has greatly contributedto the success of this informative document.Respectfully submitted,Margery S. RehDeputy Commissioner for AdministrationThomas M. WeberActing Commissioner-7-

Certificate ofAchievementfor Excellencein FinancialReportingPresented toBureau of State LotteryMichiganFor its Comprehensive AnnualFinancial Reportfor the Fiscal Year EndedSeptember 30, 2006A Certificate of Achievement for Excellence in FinancialReporting is presented by the Government Finance OfficersAssociation of the United States and Canada togovernment units and public employee retirementsystems whose comprehensive annual financialreports (CAFRs) achieve the higheststandards in government accountingand financial reporting.PresidentExecutive Director-8-

Bureau of State LotteryOrganization Chart and Principal OfficialsSeptember 2007ACTINGCOMMISSIONERThomas Margery RehPLANNING &OPERATIONSConnie SouzaMARKETINGThomas HARITABLEGAMINGMike PetersenINFORMATIONMANAGEMENTINSTANT GAMEDEVELOPMENTPUBLICRELATIONSSECURITY &INVESTIGATIONSDEPARTMENTSERVICESDEPARTMENT OFINFORMATIONTECHNOLOGYGAMINGADVERTISING RDS&DATABASECLUB CES-9-

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FINANCIAL SECTIONThe Michigan Lottery’s second goal is toprovide fun and entertaining games ofchance.The Lottery’s business partners, Michiganretailers, provide a unique form ofentertainment and excitement for theircustomers by selling Lottery tickets whileearning over 172.7 million in commissionsduring fiscal year 2007.

6639 Centurion Drive, Suite 170Lansing, MI 48917Phone (517) 323-9500Fax (517) 323-8360Independent Auditors’ ReportMr. Thomas M. Weber, Acting Lottery CommissionerBureau of State Lottery, State of MichiganandMr. Thomas H. McTavish, Auditor GeneralState of MichiganWe have audited the accompanying financial statements of the business-type activities of theBureau of State Lottery, State of Michigan (the “Lottery”), a proprietary fund of the State ofMichigan, as of and for the six month periods and years ended, September 30, 2007 and2006, which collectively comprise the Lottery’s basic financial statements as listed in thetable of contents. These financial statements are the responsibility of the Lottery’smanagement. Our responsibility is to express opinions on these financial statements basedon our audits.We conducted our audits in accordance with auditing standards generally accepted in theUnited States of America and the standards applicable to financial audits contained inGovernment Auditing Standards, issued by the Comptroller General of the United States.Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.As discussed in Note 1, the financial statements of the Bureau of State Lottery, State ofMichigan, and are intended to present the financial position and the changes in financialposition and cash flows of only that portion of the business-type activities of the State ofMichigan that is attributable to the Bureau of State Lottery. They do not purport to, and donot, present fairly the financial position of the State of Michigan, as of September 30, 2007and 2006, and the changes in its financial position or where applicable, its cash flows for theyears then ended in conformity accounting principles generally accepted in the United Statesof America.In our opinion, the financial statements referred to above present fairly, in all materialrespects, the financial position of the business-type activities of the Lottery, as of September30, 2007 and 2006, and the changes in its financial position and its cash flows for the sixmonth periods and years then ended in conformity with accounting principles generallyaccepted in the United States of America.- 11 -

In accordance with Government Auditing Standards, we have also issued our report datedNovember 29, 2007, on our consideration of the Lottery’s internal control over financialreporting and our tests of its compliance with certain provisions of laws, regulations,contracts, and grant agreements and other matters. The purpose of that report is to describethe scope of our testing of internal control over financial reporting and compliance and theresults of that testing, not to provide an opinion on the internal control over financial reportingor on compliance. That report is an integral part of an audit performed in accordance withGovernment Auditing Standards and should be considered in assessing the results of ouraudit.The management’s discussion and analysis presented on pages 13 through 22 is not arequired part of the basic financial statements but is supplementary information required byaccounting principles generally accepted in the United States of America. We have appliedcertain limited procedures, which consisted principally of inquiries of management regardingthe methods of measurement and presentation of the required supplementary information.However, we did not audit the information and express no opinion on it.Our audit was conducted for the purpose of forming an opinion on the financial statementsthat collectively comprise the Lottery’s basic financial statements. The accompanyingsupplementary schedules, as listed in the foregoing table of contents, are presented for thepurpose of additional analysis and are not a required part of the basic financial statements.The supplementary schedules have been subjected to the auditing procedures applied in theaudit of the basic financial statements, and in our opinion, are fairly stated in all materialrespects in relation to the basic financial statements taken as a whole.The introductory section and statistical section have not been subjected to the auditingprocedures applied in the audit of the basic financial statements and, accordingly, weexpress no opinion on them.Lansing, MichiganNovember 29, 2007- 12 -

Management’s Discussion and AnalysisThe following discussion of the Michigan Bureau of State Lottery’s (Lottery’s) financialperformance provides an overview of the Lottery’s financial activities for the fiscal year endedSeptember 30, 2007. Please read it in conjunction with the financial statements, which begin onpage 24.Using This ReportThe Lottery is accounted for as an enterprise activity/proprietary fund, reporting on all of theactivity’s assets and liabilities using the accrual basis of accounting, much like a privatebusiness entity. As such, this semi-annual report consists of a series of financial statements,along with explanatory notes to the financial statements and supplementary schedules. TheStatement of Net Assets on page 24 and the Statement of Revenues, Expenses and Changesin Fund Net Assets on page 25, report the Lottery’s net assets and changes in them.By law, the Lottery is required to deposit all of its net income each fiscal year to either the StateSchool Aid Fund (for income related to Lottery gaming activities) or the General Fund (forincome related to Charitable Gaming activities). As a result, the net assets of the Lotteryconsist largely of capital assets (leasehold improvements and equipment) and investments heldto fund future payments due on Lottery prizes that are annuities. To assess the Lottery’sfinancial position and financial health, the reader of these statements should pay particularattention to changes in the components of assets and liabilities as set forth in the Statement ofNet Assets, and in changes in operating revenues, expenses, and disbursement expenses toother funds as set forth in the Statement of Revenues, Expenses, and Changes in Fund NetAssets. In addition the reader should also refer to the accompanying notes to the financialstatements.Financial Highlights 2006 to 2007 Gross revenues for Lottery gaming activities set a record for the fourth consecutive yearsurpassing the 2.3 billion mark. These revenues increased by 130.8 million, or 5.9%.Total revenues for all activities (including non-operating) increased 144.0 million or6.4%.Non-operating revenues increased by 13.2 million. There was an unrealized loss of 4.2 million in 2007, as well as an unrealized loss of 16.3 million in 2006. Therefore,the increase in net non-operating revenues is attributable to a much smaller unrealizedloss on investments held to fund future payments due to annuity prizes winners.Total operating expenses for 2007 increased 71.3 million, or 4.6%. Of this increase,prize awards (net of unclaimed prizes) related to operating revenues from gamingactivities increased by 60.9 million, or 4.8%, retailer and vendor commissions increased 10.4 million, or 5.0%, while other operating expenses were the same as 2006.Total expenses (including non-operating) for all activities increased 131.8 million or5.8%.- 13 -

Back-to-back record setting disbursements were made to the School Aid Fund in fiscalyears 2006 and 2007. Disbursements to the School Aid Fund were 688.0 million in2006 and 748.9 million in 2007, an increase of 60.9 million or 8.9%. Net incomedisbursed to the General Fund related to Charitable Gaming activities increased by .3million or 2.9%.Net AssetsA summary of the Lottery’s net assets is presented below:Table 1 - Net Assets(in millions)Current and other assetsInvestments - noncurrentCapital assets(net of accumulated depreciation)Total assets Current liabilitiesLong-term liabilitiesTotal liabilitiesNet assetsInvested in capital assetsRestricted for unrealized gainson investmentsUnrestricted (deficit)Total net assets September 30,20072006515.3 546.8295.5350.8 )31.936.1(0.4)36.152.4(0.5)52.4 As shown in Table 1 above, the Lottery’s net assets decreased from 52.4 million in September2005 to 31.9 million in September 2007. The steady decrease is attributable to the decreasein investment holdings as well as a decrease in market value of investments the Lottery holds tofund future payments due on annuitized lottery prizes.Capital assets consist of equipment and leasehold improvements. During fiscal year 2007, netcapital assets decreased by approximately .1 million since September 2006 and .2 millionfrom September 2005. It should be noted that the Lottery conducted a thorough analysis of allequipment and leasehold improvement assets. Additional detailed information on capital assetsmay be found in Note 4 in the accompanying financial statements.Accounting principles dictate that the Lottery record in t

Player City Internet Club . Club Games . Club Games were introduced in October 2003. Club Games are played by patrons of bars, restaurants and bowling centers. Club Games consist of an online Club Keno game, Lucky Streak and Pull Tab games. To play Club Keno, players select up to 10 numbers from a pool of 80.